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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___ to ___
Commission File Number 1-9733
(Exact name of registrant as specified in its charter)
| Texas (State or other jurisdiction of incorporation or organization) |
75-2018239 (I.R.S. Employer Identification No.) |
|
| 1600 West 7th Street Fort Worth, Texas (Address of principal executive offices) |
76102 – 2599 (Zip Code) |
Registrant’s telephone number, including area code:
(817) 335-1100
(817) 335-1100
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, $.10 par value per share | New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock Purchase Rights
Common Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of 28,453,000 shares of the registrant’s Common Stock held by non-affiliates on June 30, 2006 was approximately $910,504,000.
At February 14, 2007 there were 29,737,412 shares of the registrant’s Common Stock, $.10 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement pertaining to the 2007 Annual Meeting of Shareholders are incorporated herein by reference into PART III of this
Form 10-K.
CASH AMERICA INTERNATIONAL, INC.
YEAR ENDED DECEMBER 31, 2006
INDEX TO FORM 10-K
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PART I
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 operations and expanded its financial services offerings so that, as of December 31,
2006, it was the nation’s largest provider of pawn loans and, it believes, is the largest operator
of pawnshops in the world. As of that date, the Company provided its specialty financial services
through 918 locations, including 487 pawnshops in 22 states (including 12 pawnshops that are
franchises), 295 stand-alone cash advance locations and 136 check cashing locations, and via the
internet.
Most of the Company’s pawnshops operate under the “Cash America” trade name; 42 pawnshops
(located in Arizona, California, Nevada and Washington) operate under the “SuperPawn” trade name.
The Company offers unsecured cash advances to individuals through most of its pawnshops, in 91
standalone Cash America Payday Advance locations, in 204 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.
The Company, through its wholly-owned subsidiary Mr. Payroll corporation (“Mr. Payroll”),
offers check cashing services through 131 franchised and 5 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.
Since 2003, the Company has pursued a similar strategy for acquiring and establishing cash advance
locations. 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. 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”. The
Company paid an initial purchase price of approximately $35.9 million in cash and transaction costs
of approximately $2.9 million, and 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
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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. Substantially all of these supplemental payments will be accounted for as
goodwill. The first supplemental payment of approximately $33.8 million, which was paid in cash in
February 2007, was determined as of December 31, 2006 and reflects 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.
The Company added 21 pawnshops and closed two during 2006. The Company also added 12 cash
advance locations and closed three. In addition to its owned pawnshops, the Company offers and
sells franchises to third parties for their independent ownership and operation of “Cash America”
or “SuperPawn” pawnshops. The Company added four franchised locations in 2006. As of December 31,
2006, there were 12 franchised pawnshop locations in operation.
On September 7, 2004, the Company sold its pawn lending operations in the United Kingdom and
Sweden (the “foreign pawn lending operations”) in order to dedicate its strategic efforts and
resources on the growth opportunities of pawn lending and cash advance activities in the United
States. As a result of this sale, all discussions and financial information below have excluded
the effect of the Company’s foreign pawn lending operations, as they have been classified as
discontinued operations.
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
the 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
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agreement” involving the actual sale of the property with an option to repurchase it. 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 21.6%
of the Company’s total revenue in 2006, 23.5% in 2005 and 23.6% in 2004.
The pawn ticket 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 finance and service charge; the maturity date;
the total amount that must be paid to redeem the pledged goods on the maturity date; and the annual
percentage rate.
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 generally is one month with an automatic thirty to sixty-day
redemption period (see “Regulation” for exceptions in certain states), unless earlier repaid,
renewed or extended. 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 2006, 2005 and 2004,
the Company experienced profit margins on disposition of merchandise of 38.9%, 39.0% and 38.5%,
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, 2006, the Company had approximately 1.2 million outstanding pawn loans
totaling $127.4 million, with an average balance of approximately $107 per loan.
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Presented below is information with respect to pawn loans made, acquired, and forfeited for
the pawn lending operations for the years ended December 31, 2006, 2005 and 2004 ($ in thousands):
| 2006 | 2005 | 2004 | ||||||||||
Loans made, including loans renewed |
$ | 474,046 | $ | 438,955 | $ | 336,021 | ||||||
Loans acquired |
4,365 | 3,631 | 26,781 | |||||||||
Loans repaid |
(210,177 | ) | (202,015 | ) | (157,624 | ) | ||||||
Loans renewed |
(78,942 | ) | (77,878 | ) | (46,008 | ) | ||||||
Loans forfeited for disposition |
(177,188 | ) | (156,766 | ) | (130,971 | ) | ||||||
Net increase in pawn loans outstanding |
$ | 12,104 | $ | 5,927 | $ | 28,199 | ||||||
Merchandise Disposition Activities. The Company sells merchandise that has been forfeited to
the Company when a pawn loan is not repaid. It sells merchandise principally 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. The Company also sells in its pawnshops 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, 2006, $219.3 million of merchandise was added to
merchandise held for disposition, of which $177.2 million was from loans not repaid, $39.2 million
was purchased from customers and vendors, and $2.9 million was added through acquisitions of
pawnshops. Proceeds from disposition of merchandise contributed 48.4% of the Company’s total
revenue in 2006, 50.7% in 2005 and 53.3% in 2004.
While the Company offers refunds and exchanges for certain merchandise items, it generally
does not provide its customers with 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, 2006, the Company held
approximately $7.5 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 and age of merchandise on hand. At December 31, 2006, total pawn operations
merchandise on hand was $87.1 million, after deducting an allowance for valuation and shrinkage of
merchandise of $1.9 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 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 arranges
for customers to obtain cash advances from independent non-bank third-party lenders in others. In
addition, with the acquisition of CashNetUSA, the Company offers cash advances over the internet.
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.
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The Company offers cash advances in which it lends its own funds and cash advances originated
by independent non-bank third-party lenders under a program introduced on July 1, 2005 under 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. If a customer obtains 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.
The Company offers short-term unsecured cash advances in most 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, 2006, a cash advance product
was available in 425 pawnshop locations and 295 stand-alone cash advance locations, and CashNetUSA
had cash advances outstanding in 29 states. Cash advance products offered under the CSO program
were available at 314 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
28.1% of the Company’s total revenue in 2006, 23.9% in 2005 and 21.1% in 2004.
The Company initiated the CSO program in Texas, Michigan and Florida in response to revisions
made by the Federal Deposit Insurance Corporation (“FDIC”) to its guidelines under which financial
institutions under the FDIC’s supervision could offer cash advance programs that significantly
limited the ability of the third party banks to offer cash advance products. During the initial
period of the CSO program, the Company offered bank-originated cash advance products (the “Bank
products”) and the CSO program. The Company elected to discontinue offering Bank products to its
Michigan consumers in July 2005 and to its Texas, Florida and North Carolina customers in January
2006. The Company discontinued the CSO program in Michigan in February 2007 and now offers only
cash advances underwritten by the Company to customers in that state.
During the third quarter of 2005, the Company ceased offering single payment cash advances
originated by third-party banks in California and began offering Company-originated cash advances
under applicable state law. As an additional service alternative to its customers, during the
fourth quarter of 2005 the Company introduced third-party commercial bank originated multi-payment
installment cash advances in California and Georgia. The Company discontinued offering single and
multi-payment Bank products in Georgia during the second quarter of 2006 and discontinued offering
the multi-payment Bank product in California during July 2006 due principally to its third-party
commercial banks’ response to concerns that the FDIC raised to FDIC-supervised banks in late
February 2006 regarding the FDIC’s perception of risks associated with FDIC supervised banks’
origination of certain cash advance products with the assistance of third-party marketers and
servicers. Since discontinuing offering the Bank products in California, the Company has been
serving cash advance consumers in California by continuing to offer a Company-originated cash
advance product pursuant to state law.
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 and recognizes
it in income 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, 2006, $124.2 million of combined gross cash advances was
outstanding, including $24.7 million owned by the third-party lenders that is not included in the
Company’s consolidated balance sheet.
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An allowance for losses of $19.5 million has been provided
in the consolidated financial statements. The Company also provided accrued losses for third-party
owned portfolios of $1.2 million at December 31, 2006, 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, 2006, 2005 and 2004:
| 2006 | 2005 | 2004 | ||||||||||
Locations offering cash advances at end of year |
720 | 727 | 678 | |||||||||
On behalf of the Company |
406 | 352 | 312 | |||||||||
On behalf of the third-party lenders |
314 | 340 | 366 | |||||||||
On behalf of both the Company and the third-party lenders |
— | 35 | — | |||||||||
Amount of cash advances written (in thousands) |
$ | 1,177,763 | $ | 930,335 | $ | 647,746 | ||||||
On behalf of the Company |
$ | 817,186 | $ | 573,916 | $ | 408,872 | ||||||
On behalf of the third-party lenders |
$ | 360,577 | $ | 356,419 | $ | 238,874 | ||||||
Amount of cash advances assigned by the third-party lenders
(in thousands) |
$ | 33,760 | $ | 67,555 | $ | 45,895 | ||||||
Average cash advance amount written |
$ | 387 | $ | 359 | $ | 336 | ||||||
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 locations. Other financial services include
stored value cards, money orders, money transfers and auto insurance, among others. As of December
31, 2006, Mr. Payroll’s operations consisted of 131 franchised and 5 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 204 of its cash advance locations. Aggregate check cashing fees, royalties
and other income were 1.9% of the Company’s total revenue in 2006 and 2005 and 2.0% in 2004.
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 18 of “Notes to Consolidated Financial Statements.”
Operations
Unit Management. Each physical 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. As of December 31, 2006, the Company’s pawn lending operating
division was managed by an Executive Vice President. 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.
The cash advance operating division has a similar geographic operating structure. Cashland
locations are managed under the supervision of Cashland’s Senior Vice President – Chief Operating
Officer, and the Cash America Payday Advance locations are managed under the supervision of Vice
President of
Cash America Payday Advance, each of whom report to an Executive Vice President of the
Company. Each Cash America Payday Advance Market Manager reports to the Vice President of Cash
America Payday Advance. Cashland’s two Operations Directors oversee Cashland’s geographic
operating regions and report to its Senior Vice President – Chief Operating Officer. Each Cashland
Market Manager reports to one of the two Cashland Operations Directors.
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CashNetUSA, unlike the physical lending locations, is managed by its President, who is also an
Executive Vice President of the Company. Management personnel responsible for different areas of
CashNetUSA’s operations report to its President, who reports directly to the Company’s Chief
Executive Officer.
Trade Names. The Company operates its locations under the trade names “Cash America,” “Payday
Advance,” “Cashland,” “Mr. Payroll,” “SuperPawn,” and “CashNetUSA.” The Company’s marks “Cash
America,” “Cashland,” “SuperPawn,” “Cash When It Counts,” and “Mr. Payroll” are registered with the
United States Patent and Trademark Office.
Personnel. At December 31, 2006, the Company employed 5,152 persons in its operations. Of
these employees 423 were in executive and administrative functions.
Training. The Company provides extensive training to its store employees through training
programs that combine classroom instruction, video and online presentations, and on-the-job
training tailored to the needs of coworkers of both the pawn and cash advance lending locations. A
new employee is introduced to the business through an orientation program and through training
programs that include 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.
With the 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 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
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established pawnshops have ranged from $385,000
to $410,000, with an average estimated cost per location of approximately $400,000 in 2006. 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 2006. 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 this
report in Item 1A – “Risk Factors.” Among the primary factors that could affect the Company’s
future planned expansion are:
| • | Statutory Requirements. The Company’s ability to add start-up pawnshop locations in Texas counties having a population of more than 250,000 is limited by a law that restricts the establishment of new pawnshops within a certain distance of existing pawnshops. In addition, the current statutory and regulatory environment of some states renders expansion into those states impractical. See “Business – Regulation.” |
| • | Availability of Real Estate. The Company’s ability to add start-up locations is subject to locating satisfactory real estate sites on terms and conditions acceptable to the Company. Factors that could limit the availability of acceptable real estate sites could include changes in general economic conditions, increases in real estate values or market rents, increases in competition for suitable real estate, changing demographics in surrounding areas, restrictive zoning or sign ordinances, limited visibility or accessibility to public streets, and excessive finish-out costs, among other factors. |
| • | Competition. Several competing pawnshop and cash advance companies are also pursuing expansion and acquisition programs. A number of smaller companies and private equity firms have also entered the market, particularly for cash advance businesses. While the Company believes that it is the largest pawnshop operator in the United States, and one of the largest cash advance operators, there can be no assurance that it will be more successful than its competitors in pursuing acquisition opportunities and securing attractive start-up locations. Increased competition could also increase prices for attractive acquisition candidates, and could also adversely affect the performance of potential acquisition targets. |
| • | Availability of Qualified Unit Management Personnel. The Company’s ability to expand may also be limited by the availability of qualified unit management personnel. While the Company seeks to train its existing personnel to enable those capable to assume management positions, there can be no assurance that sufficient qualified personnel will be available to satisfy the Company’s needs with respect to its planned expansion. |
| • | Capital Requirements. In some states, the Company is required by law to maintain a minimum amount of certain unencumbered net assets (currently $150,000 in Texas) for each pawnshop location. The Company’s expansion plans will therefore be limited in these states to the extent the Company is able to maintain these required levels of unencumbered net assets. At present, these requirements do not limit the Company’s growth opportunities. |
Competition
While pawnbroking is a time-honored industry, the pawnshop industry in the United States
remains very fragmented, with approximately 10,000 to 15,000 stores nationwide. Most pawnshops are
owned by
independent operators. The three largest publicly traded pawnshop companies operate approximately
850 total pawnshops in the United States. Management continues to believe that the Company can
achieve economies of scale and increased operating efficiencies by increasing the number of stores
under operation and utilizing modern point-of-sale systems and proven operating methods.
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While the less fragmented cash advance industry has grown at a rapid rate in the past several
years, its growth has begun to moderate and the Company has begun to observe some consolidation.
Nonetheless, competition for customers and for desirable locations remains strong. According to
the investment banking firm Stephens, Inc., the overall annual growth rate for the cash advance
industry is 8% to 12% per year. Despite the concentration of major competitors in the cash advance
industry, management believes that significant opportunities for growth remain in this business.
Regulation
The Company’s operations are subject to extensive regulation, supervision and licensing under
various federal, state and local statutes, ordinances and regulations. (For a geographic breakdown
of operating locations, see “Properties”.)
Pawnshop regulations
Although pawnshop regulations vary from state to state to a considerable degree, the
regulations summarized below are representative of the regulatory frameworks affecting the Company
in the states in which its pawnshops are located. The following states are those in which the
Company operates the preponderance of its pawnshops.
Texas. The Texas Pawnshop Act provides the Office of Consumer Credit Commissioner with primary
responsibility for the regulation of pawnshops and enforcement of laws relating to pawnshops in
Texas. The Company is required to furnish the Texas Consumer Credit Commissioner with copies of
information, documents and reports that it is required to file with the Securities and Exchange
Commission.
The Texas Pawnshop Act establishes the maximum allowable service charge rates based on the
amount financed per pawn loan. It does this by prescribing the maximum allowable rates of pawn
service charges that pawnbrokers in Texas may charge for the lending of money within each of four
stratified range of loan amounts. The maximum allowable rates for the various stratified loan
amounts for the years ended June 30, 2007, 2006 and 2005, are as follows:
| Year Ending June 30, 2007 | Year Ended June 30, 2006 | Year Ended June 30, 2005 | ||||||||||||||||||||||||||||||||||||
| Maximum | Maximum | Maximum | ||||||||||||||||||||||||||||||||||||
| Amount | Allowable | Amount | Allowable | Amount | Allowable | |||||||||||||||||||||||||||||||||
| Financed Per | Annual | Financed Per | Annual | Financed Per | Annual | |||||||||||||||||||||||||||||||||
| Pawn Loan | Percentage Rate | Pawn Loan | Percentage Rate | Pawn Loan | Percentage Rate | |||||||||||||||||||||||||||||||||
$ 1 |
to | $ | 168 | 240 | % | $ | 1 | to | $ | 162 | 240 | % | $ | 1 | to | $ | 156 | 240 | % | |||||||||||||||||||
169 |
to | 1,120 | 180 | 163 | to | 1,080 | 180 | 157 | to | 1,040 | 180 | |||||||||||||||||||||||||||
1,121 |
to | 1,680 | 30 | 1,081 | to | 1,620 | 30 | 1,041 | to | 1,560 | 30 | |||||||||||||||||||||||||||
1,681 |
to | 14,000 | 12 | 1,621 | to | 13,500 | 12 | 1,561 | to | 13,000 | 12 | |||||||||||||||||||||||||||
The Office of Consumer Credit Commissioner annually reviews and resets the ceiling
amounts for stratification of the loan amounts, including the maximum pawn loan amount, each July 1
in relation to the Consumer Price index. Currently, a Texas pawn loan may not exceed $14,000. The
maximum allowable service charge rates were established when the Texas Pawnshop Act was enacted in
1971 and have not been changed since. In addition to establishing maximum allowable service charge
rates and loan ceilings, the Texas Pawnshop Act also governs the licensing of pawnshops and
pawnshop employees. To be eligible for a pawnshop license in Texas, an applicant must (i) be of
good moral character; (ii) have net assets of at least $150,000 readily available for use in
conducting the business of each licensed pawnshop; (iii) show that the
pawnshop will be operated lawfully and fairly in accordance with the Texas Pawnshop Act; (iv) show
that the applicant has the financial responsibility, experience, character, and general fitness to
command the confidence of the public in its operations; and (v) in the case of a business entity,
the good moral character requirement shall apply to each officer, director and holder of 5% or more
of the entity’s outstanding shares.
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During the license application process, any existing pawnshop licensee who would be affected
by the granting of the proposed application may request a public hearing at which to appear and
present evidence for or against the application. For new license applications in a county with a
population of 250,000 or more, the proposed facility must not be located within two miles of an
existing licensed pawnshop.
The Texas Consumer Credit Commissioner may, after notice and hearing, suspend or revoke any
license for a Texas pawnshop upon finding, among other things, that (i) any fees or charges have
not been paid; (ii) the licensee violates (whether knowingly or unknowingly without due care) any
provisions of the Texas Pawnshop Act or any regulation or order thereunder; or (iii) any fact or
condition exists which, if it had existed at the time the original application was filed for a
license, would have justified the Commissioner in refusing such license.
Under the Texas Pawnshop Act, a pawnbroker may not accept a pledge from a person under the age
of 18 years; make any agreement requiring the personal liability of the borrower; accept any waiver
of any right or protection accorded to a pledgor under the Texas Pawnshop Act; fail to exercise
reasonable care to protect pledged goods from loss or damage; fail to return pledged goods to a
pledgor upon payment of the full amount due; make any charge for insurance in connection with a
pawn transaction; enter into any pawn transaction that has a maturity date of more than one month;
display for disposition in storefront windows or sidewalk display cases, pistols, swords, canes,
blackjacks and similar weapons; operate a pawnshop between the hours of 9:00 p.m. and 7:00 a.m.; or
purchase used or secondhand personal property or certain building construction materials unless a
record is established containing the name, address and identification of the seller, a complete
description of the property, including serial number, and a signed statement that the seller has
the right to sell the property.
Florida. The Florida Pawnbroking Act, adopted in 1996, provides for the licensing and bonding
of pawnbrokers in Florida and for the Department of Agriculture and Consumer Services’ Division of
Consumer Services to investigate the general fitness of applicants and generally to regulate
pawnshops in the state. The statute limits the pawn service charge that a pawnbroker may collect
to a maximum of 25% of the amount advanced in the pawn for each 30-day period of the transaction.
The law also requires pawnbrokers to maintain detailed records of all transactions and to deliver
such records to the appropriate local law enforcement officials. Among other things, the statute
prohibits pawnbrokers from falsifying or failing to make entries on pawn transaction forms,
refusing to allow appropriate law enforcement officials to inspect their records, failing to
maintain records of pawn transactions for at least two years, making any agreement requiring the
personal liability of a pledgor, failing to return pledged goods upon payment in full of the amount
due (unless the pledged goods had been taken into custody by a court or law enforcement officer or
otherwise lost or damaged), or engaging in title loan transactions at licensed pawnshop locations.
It also prohibits pawnbrokers from entering into pawn transactions with a person who is under the
influence of alcohol or controlled substances, a person who is under the age of 18, or a person
using a name other than his own name or the registered name of his business.
Nevada. The Nevada statute governing pawnbrokers establishes a maximum allowable interest
rate of 10% per month for pawn transactions and allows an initial charge of $5 in addition to
interest. All pledged property must be held for redemption for at least 120 days before it can be
offered for sale to the public. The statute also (i) requires that certain bookkeeping records be
maintained; (ii) requires that pawn transaction information be reported to local law enforcement
agencies, and (iii) establishes a procedure for law enforcement officials to place a hold on
property alleged to be related to criminal activity. The Nevada law also prohibits pawnbrokers from
making false entries in their books or records, making false reports to law enforcement agencies,
removing pledged property from their business premises unless specifically authorized under the
statute, and receiving pledged property from certain persons, including a person who is under age
18 or intoxicated.
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Tennessee. Tennessee state law provides for the licensing of pawnbrokers in that state. It
also (i) requires that pawn transactions be reported to local law enforcement agencies; (ii)
requires pawnbrokers to maintain insurance coverage on the property held on pledge for the benefit
of the pledgor; (iii) establishes certain hours during which pawnshops may be open for business;
and (iv) requires that certain bookkeeping records be maintained. Tennessee law prohibits
pawnbrokers from selling, redeeming or disposing of any goods pledged or pawned to or with them
within 48 hours after making their report to local law enforcement agencies. The Tennessee statute
establishes a maximum allowable interest rate of 24% per annum; however, the pawnshop operator may
charge an additional fee of up to one-fifth of the amount of the loan per month for investigating
title, storing and insuring the security and various other expenses.
Louisiana. Louisiana law provides for the licensing and bonding of pawnbrokers in that state.
In addition, the act requires that pawn transactions be reported to local law enforcement
agencies, establishes hours during which pawnbrokers may be open for business and requires certain
bookkeeping practices. Louisiana state law establishes maximum allowable rates of interest on pawn
loans of 10% per month. In addition, Louisiana law provides that the pawnbroker may charge a
service charge not to exceed 10% per month for all other services. Under the Louisiana statute, no
pawnbroker may sell any pledged collateral until the lapse of three months from the time the loan
was made. Various municipalities and parishes in the state of Louisiana have adopted additional
ordinances and regulations pertaining to pawnshops.
Georgia. Georgia law requires pawnbrokers to maintain detailed permanent records concerning
pawn transactions and to keep them available for inspection by duly authorized law enforcement
authorities. The Georgia statute prohibits pawnbrokers from failing to make entries of material
matters in their permanent records; making false entries in their records; falsifying,
obliterating, destroying, or removing permanent records from their places of business; refusing to
allow duly authorized law enforcement officers to inspect their records; failing to maintain
records of each pawn transaction for at least four years; accepting a pledge or purchase from a
person under the age of 18 or who the pawnbroker knows is not the true owner of the property;
making any agreement requiring the personal liability of the pledgor or seller or waiving any of
the provisions of the Georgia statute; or failing to return or replace pledged goods upon payment
of the full amount due (unless pledged goods have been taken into custody by a court or a law
enforcement officer). If pledged goods are lost or damaged while in the possession of the
pawnbroker, the pawnbroker must replace the lost or damaged goods with like kinds of merchandise.
Under Georgia law, total interest and service charges may not, during each 30-day period of the
loan, exceed 25% of the principal amount advanced in the pawn transaction (except that after ninety
days from the original date of the loan, the maximum rate declines to 12.5% for each subsequent
30-day period). The statute provides that municipal authorities may license pawnbrokers, define
their powers and privileges by ordinance, impose taxes upon them, revoke their licenses, and
exercise such general supervision as will ensure fair dealing between the pawnbroker and its
customers.
Although pawnshop regulations vary from state to state to a considerable degree, the
regulations summarized above are representative of the regulatory frameworks affecting the Company
in the various states in which its operating units are located.
Cash Advance Regulations
The Company offers cash advance products in most of its pawnshops, in all of its cash advance
locations and over the internet. Each state in which the Company originates cash advance products,
including cash advances made online, has specific laws dealing with the conduct of this business.
The same regulations generally apply to cash advances made both in physical lending locations and
online. These laws and regulations typically restrict the amount of finance and service charges
that may be assessed and limit the customer’s ability to renew or extend these cash advances. In
many instances, the regulations also limit the aggregate amount that a provider may advance (and,
in some cases, the number of cash advances the provider may make) to any one customer at one time.
Providers typically must obtain a separate license from the state licensing authority in order to
offer this product. Some states, such as Alabama, Indiana, Illinois, Michigan, New Mexico,
Oklahoma, and North Dakota, require cash advance lenders to report their
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customers’ cash advance activities to a state-wide database, and such lenders are generally
restricted from making cash advance loans to customers who may have a certain amount of cash
advances outstanding with other lenders. Also, the federal government and many states have
codified military best practices that require cash advance lenders to provide certain rights to
borrowers in the military, some of which include, among other things, rate restrictions, not
conducting collection activities when the military customer is deployed to combat, not garnishing
military wages, not contacting a service member’s chain of command in an effort to collect a cash
advance, and honoring a base commander’s directives regarding the ability of service members under
his/her command to patronize certain cash advance locations. The Company must also comply with the
various disclosure requirements under the Federal Truth in Lending Act (and Federal Reserve
Regulation Z under that Act) in connection with the cash advance transactions. The cash advance
business is also subject to various laws, rules and guidelines relating to the procedures and
disclosures needed for debiting a debtor’s checking account for amounts due via an ACH transaction.
Additionally the Company must comply with the Federal Fair Debt Collection Practices Act and
similar state collection practices laws with respect to its collection activities related to cash
advances. Furthermore, with respect to online cash advances, the Company is subject to various
state and federal e-signature rules mandating that certain disclosures be made and certain steps be
followed in order to obtain and authenticate e-signatures.
As of December 31, 2006 the Company made available cash advance products offered by
third-party lenders in 314 of its 720 locations. Further, certain states require that the Company
must have a license under state law in order to perform the administrative services that it
performs for the third party lenders.
Because the regulatory environment related to cash advances has come under increased scrutiny
by regulators and legislators, the Company expects that legislation currently pending or that could
later be introduced in some state legislatures could, if enacted, further limit or eliminate the
availability of the cash advance product in some states, despite the significant demand for it.
While the Company, along with other leaders of the cash advance industry, opposes such overly
restrictive regulation and legislation, it is possible that some combination of federal and state
regulation and legislation could be enacted that could restrict or eliminate the availability of
cash advance products at some or all of the Company’s locations.
In order to continue to meet the demand of consumers for cash advance products and in response
to the above-described FDIC regulatory actions that led the Company to discontinue offering the
Bank products, the Company began offering the CSO program in Texas, Michigan and Florida in July
2005. The Company discontinued the CSO program in Michigan in February 2007 and now offers only
cash advances underwritten by the Company to customers in that state.
The Texas Credit Services Organization law governs the CSO program in Texas. Pursuant to this
law, an affiliate of the Company, on a location by location basis, must register as a Credit
Services Organization with the Texas Secretary of State, pay a registration fee and post a $10,000
surety bond. The Credit Services Organization may, for a fee, help a consumer obtain an extension
of credit from an independent third-party lender. The Credit Services Organization must provide
the consumer with a disclosure statement and a credit services agreement that describe in detail,
among other things, the services the Credit Services Organization will provide to the consumer, the
fees the consumer will be charged by the Credit Services Organization for these services, the
details of the surety bond and the availability of the surety bond if the consumer believes the
Credit Services Organization has violated the law, the consumer’s right to review his or her file,
the procedures a consumer may follow to dispute information contained in his or her file, and the
availability of non-profit credit counseling services. Additionally, the Credit Services
Organization must give a consumer the right to cancel the credit services agreement without penalty
within 3 days after the agreement is signed. The Company’s CSO program in Florida is substantially
similar to the Company’s CSO program in Texas and the credit services organization law in Florida
is generally similar to the credit services organization law in Texas.
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Check Cashing Regulations
The Company offers check cashing services at many of its pawnshops and cash advance locations.
Some states require check cashing companies to meet minimum bonding or capital requirements and to
comply with record-keeping requirements. Some states require check cashers to be licensed and the
Company maintains licenses in each state that requires check cashing licenses. Additionally, some
states have adopted ceilings on check cashing fees, those ceilings are in excess of or equal to the
fees charged by the Company. Depending upon the severity of a violation, failure to observe a
state’s legal requirements for check cashing companies could result, among other things, in a loss
of the check cashing license in that state, the imposition of fines, and other civil and/or
criminal penalties. In addition to state regulations applicable to check cashing companies, the
Company’s check cashing activities also must comply with applicable federal regulations. The
principal federal regulations governing check cashing operations include the Bank Secrecy Act, the
USA PATRIOT Act and the Gramm-Leach-Bliley Act, each of which are described in Other Regulatory
Matters below.
Other Regulatory Matters
Each pawnshop that sells firearms must comply with the Brady Handgun Violence Prevention Act
(the “Brady Act”). The Brady Act requires that federally licensed firearms dealers conduct a
background check in connection with any disposition of handguns. In addition, the Company must
comply with the regulations of the U.S. Department of Justice–Bureau of Alcohol, Tobacco and
Firearms that require each pawnshop dealing in guns to maintain a permanent written record of all
receipts and dispositions of firearms.
Under the federal Gramm-Leach-Bliley Act and its underlying regulations as well as under
various state laws and regulations relating to privacy and data security, the Company must disclose
to its customers its privacy policy and practices, including those relating to the sharing of
customers’ nonpublic personal information with third parties. This disclosure must be made to
customers when the customer relationship is established and, in some cases, at least annually
thereafter. These regulations also require the Company to ensure that its systems are designed to
protect the confidentiality of customers’ nonpublic personal information and many of these
regulations dictate certain actions the Company must take to notify consumers if their personal
information is disclosed in an unauthorized manner.
The federal Equal Credit Opportunity Act (“ECOA”) prohibits discrimination against any credit
applicant on the basis of any protected category, such as race, color, religion, national origin,
sex, marital status, or age, and requires the Company to notify credit applicants of any action
taken on the individual’s credit application. The Company must provide a loan applicant a Notice of
Adverse Action (“NOAA”) when the Company denies an application for credit. The NOAA must inform the
applicant of: the action taken regarding the credit application; a statement of the ECOA’s
prohibition on discrimination; the name and address of both the creditor and the federal agency
that monitors compliance with the ECOA; and the applicant’s right to learn the specific reasons for
the denial of credit and the contact information for the parties the applicant can contact to
obtain those reasons. The Company provides NOAA letters and maintains records of all such letters
as required by the ECOA and its implementing regulations.
Under the USA PATRIOT Act enacted in 2001, the Company must maintain an anti-money laundering
compliance program covering certain of its business activities. The program must include: (1) the
development of internal policies, procedures, and controls; (2) designation of a compliance
officer; (3) an ongoing employee training program; and (4) an independent audit function to test
the program. The United States Department of the Treasury is expected to issue regulations
clarifying the requirements for anti-money laundering compliance programs for the pawnbroking and
cash advance industries, but as of February 1, 2007 these regulations had not yet been issued.
Under the Bank Secrecy Act and regulations of the U.S. Department of the Treasury, the Company
must report transactions occurring in a single day involving currency in an amount greater than
$10,000, and
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also must retain records for five years for purchases of monetary instruments for cash in
amounts from $3,000 to $10,000. In addition, multiple currency transactions must be treated as
single transactions if the financial institution has knowledge that the transactions are by, or on
behalf of, any person or entity and result in either cash in or cash out totaling more than $10,000
during any one day. In addition, federal regulations require the Company to report suspicious
transactions involving at least $2,000 in a single day to the Financial Crimes Enforcement Network
of the Treasury Department (“FinCen”). The regulations generally describe three classes of
reportable suspicious transactions—one or more related transactions that the business knows,
suspects, or has reason to suspect (1) involve funds derived from illegal activity or are intended
to hide or disguise such funds, (2) are designed to evade the requirements of the Bank Secrecy Act,
or (3) appear to serve no legitimate business or lawful purpose. Management believes that the
Company’s point-of-sale system, transaction monitoring systems and employee-training programs
permit it to effectively comply with the foregoing requirements.
The Company is registered as a money services business with the U.S. Treasury Department
and must re-register with FinCEN by December 31, 2007, and at least every two years thereafter. The
Company must also maintain a list of names and addresses of, and other information about, the
Company’s stores and must make that list available to any requesting law enforcement agency. The
store list must be updated at least annually.
During 2006, the United States Congress enacted legislation that caps the annual percentage
rate charged on loans made to active military personnel at 36%; this legislation becomes effective
in October 2007. As of the date of this report, the 36% annual percentage rate cap applies to most
loan products, including cash advances and pawn loans. The Company does not have any loan products
bearing an interest rate of 36% per annum or less, nor does the Company intend to develop any such
product, as the Company believes the losses and servicing costs associated with lending to the
Company’s traditional customer base would exceed the revenue produced at that rate. The Company
does not expect this new legislation to have a material adverse effect on the Company’s financial
condition or results of operations.
In addition to the federal and state statutes and regulations described above, many of the
Company’s operating units are subject to municipal ordinances that may require, for example, local
licenses or permits and specified recordkeeping procedures, among other things. Most of the
Company’s pawnshops voluntarily, or pursuant to applicable laws, provide to a law enforcement
department having jurisdiction daily information on all transactions involving pawn loans and
over-the-counter purchases. These information reports are designed to provide the local law
enforcement with a detailed description of the goods involved, including serial numbers (if any)
and the name and address of the owner obtained from a valid identification card. This information
is provided to local law enforcement agencies for processing to determine conflicting claims of
rightful ownership. The Company also voluntarily participates with other pawn lenders to provide
similar information to a national database available to law enforcement in multiple jurisdictions.
Goods held to secure pawn loans or goods purchased that are determined to belong to an owner other
than the borrower or seller are subject to recovery by the rightful owner. However, the Company
historically has not experienced a material number of claims of this nature, and the claims
experienced have not had a material adverse effect on the Company’s results of operations.
Casualty insurance, including burglary coverage, is maintained for each of the Company’s
locations, and fidelity coverage is maintained on each of the Company’s employees.
Management of the Company believes its operations are conducted in material compliance with
all federal, state and local laws and ordinances applicable to its business.
The Company’s franchising activities may be subject to various state regulations that, among
other things, mandate disclosures to prospective franchisees and other requirements.
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Executive Officers of the Registrant
The Company elects its executive officers annually. The following sets forth, as of February
26, 2007, information about the executive officers. There is no family relationship between any of
the executive officers.
| Name | Age | Position | ||||
Daniel R. Feehan
|
56 | Chief Executive Officer and President | ||||
Thomas A. Bessant, Jr.
|
48 | Executive Vice President – Chief Financial Officer | ||||
Robert D. Brockman
|
52 | Executive Vice President – Administration | ||||
Jerry D. Finn
|
60 | Executive Vice President – Pawn Operations | ||||
Michael D. Gaston
|
62 | Executive Vice President – Business Development | ||||
Albert Goldstein
|
26 | Executive Vice President – Internet Lending | ||||
J. Curtis Linscott
|
41 | Executive Vice President – General Counsel and Secretary | ||||
James H. Kauffman
|
62 | Executive Vice President – Financial Services | ||||
Jerry A. Wackerhagen
|
51 | Executive Vice President – Chief Information Officer | ||||
Daniel R. Feehan has been Chief Executive Officer and President since February 2000. He
served as the Company’s President and Chief Operating Officer from January 1990 until February
2000, except that he served as Chairman and Co-Chief Executive Officer of Mr. Payroll Corporation
from February 1998 to February 1999 before returning to the position of President and Chief
Operating Officer of the Company.
Thomas A. Bessant, Jr. has been the Company’s Executive Vice President – Chief Financial
Officer since July 1998. He joined the Company in May 1993 as Vice President – Finance and
Treasurer and was elected Senior Vice President – Chief Financial Officer in July 1997. Prior to
joining the Company, Mr. Bessant was a Senior Manager in the Corporate Finance Consulting Services
Group of Arthur Andersen & Co., S.C. in Dallas, Texas from June 1989 to April 1993. Prior to that,
Mr. Bessant was a Vice President in the Corporate Banking Division of NCNB Texas, N.A., and its
predecessor banking corporations, beginning in 1981.
Robert D. Brockman joined the Company in July 1995 as Executive Vice President –
Administration. Prior to that, he served as Vice President – Human Resources of THORN Americas,
Inc., the then-operator of the Rent-A-Center chain of rent-to-own stores, from December 1986 to
June 1995.
Jerry D. Finn has been Executive Vice President – Pawn Operations since April 1998. He joined
the Company in August 1994 and has served in various operations management positions since then,
including Division Vice President from January 1995 to July 1997 and Division Senior Vice President
from July 1997 to April 1998. Before joining the Company, he served as District Supervisor for
Kelly-Moore Paint Co. from March 1981 to August 1994.
Michael D. Gaston joined the Company in April 1997 as Executive Vice President – Business
Development. Prior to joining the Company, Mr. Gaston served as President of The Gaston
Corporation, a private consulting firm, from 1984 to April 1997, and Executive Vice President of
Barkley & Evergreen, an advertising and consulting agency, from 1991 to April 1997.
Albert Goldstein, CFA, joined the Company in September 2006 as Executive Vice President –
Internet Lending, as part of the Company’s acquisition of CashNetUSA. Mr. Goldstein founded
CashNetUSA in 2004 and was President and CEO from inception of the business until its sale to the
Company. Prior to that, Mr. Goldstein was part of Deutsche Bank’s Leveraged Finance practice in
New York and worked on various secured and unsecured leveraged debt transactions. Mr. Goldstein
received a Bachelor of Science in Finance from the University of Illinois in 2002.
J. Curtis. Linscott became Executive Vice President-General Counsel & Corporate Secretary in
May 2006. He was appointed Vice President, General Counsel and Corporate Secretary in May 2005.
Mr.
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Linscott joined the Company in 1995, serving as Associate General Counsel and Vice President -
Associate General Counsel. Before joining the Company, he was in private law practice with Kelly,
Hart & Hallman, P.C., Fort Worth, Texas, for five years. He received his law degree from the
University of Kansas School of Law in 1990.
James H. Kauffman has been the Company’s Executive Vice President – Financial Services
since September 2004. He joined the Company in July 1996 as Executive Vice President – Chief
Financial Officer. He served as President – Cash America Pawn from 1997 to July 1998, and as Chief
Executive Officer of Rent-A-Tire, Inc. from July 1998 until August 2002, and as Executive Vice
President – International Operations from October 1999 to September 2004. Before joining the
Company, Mr. Kauffman served as President of Keystone Steel & Wire Company, a wire products
manufacturer, from July 1991 to June 1996.
Jerry A. Wackerhagen joined the Company in June 2005 as Executive Vice President – Chief
Information Officer. Prior to joining the Company, Mr. Wackerhagen served as Chief Executive
Officer of EFT Services, Inc., a consumer financial services company based in Columbia, South
Carolina from 2001 to 2005. In 2000, he was Vice President of Sales for Trade Management Company,
a joint venture between International Business Machines Corporation, Fluor Corporation and the
Royal Bank of Canada. From 1999 to 2000, Mr. Wackerhagen was Vice President and Chief Information
Officer at AGL Resources. Prior to that, he served as a Principal at IBM Global Services from 1996
to 1999 and as the Vice President and Chief Information Officer of CMI Industries, Inc. from 1991
to 1996.
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.
| • | 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 guidelines published by regulatory agencies which have a direct or indirect effect on the governance of the Company and the products it offers. |
| • | 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 have a negative effect on the Company’s business activities. In particular, short-term consumer loans have come under increased scrutiny and increasingly restrictive regulation in recent years. Some regulatory activity may limit the number of short-term loans that customers may receive or have outstanding, such as the limits prescribed by the FDIC in March 2005 and supplemented in February 2006, 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 |
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| 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 regulation or legislation could restrict, or even eliminate, the availability of cash advance products at some or all of the Company’s locations. |
| • | 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 loan underwriting. 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 also relies on third parties to provide other services that facilitate lending over the internet. 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. |
| • | Uncertainty regarding online delivery channel for cash advance product. CashNetUSA began operations in January 2004 and launched its online operations in May 2004. The Company may encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries, such as the online cash advance industry. Some of these risks relate to its ability to attract and retain customers on a cost-effective basis; attract and retain qualified personnel in a competitive market for such personnel; operate, support, expand and develop its operations, its website, its software, communications and other systems; manage customer service and collections for geographically dispersed borrowers; respond to technological changes; respond to regulatory changes or demands; and respond to competitive market conditions, including the development and maintenance of provider relationships to enhance new customer opportunities. If the Company is unsuccessful in addressing these risks or in executing its business strategy, its online business, financial condition or results of its online operations may suffer. |
| • | The success of the Company’s online business depends on the growth of the online cash advance industry. CashNetUSA’s online cash advances and related revenues will not grow as planned if consumer acceptance of the online cash advance product or the use of the Internet as a medium of commerce for consumer financial products does not continue to grow or grows more slowly than expected. |
| • | The Company’s online business depends on the uninterrupted operation of CashNetUSA’s facilities, systems and business functions, including its information technology and other business systems. The Company’s 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 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 |
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| 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 CashNetUSA’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 online business.
| • | The Company may be unable to protect its proprietary technology or keep up with that of its competitors. The success of the Company’s 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 online business. |
| • | 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 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. |
| • | 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. |
| • | 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 a 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 |
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| such a slowdown, the Company could be required to tighten its underwriting standards, which would reduce cash advance balances, and would 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. |
| • | 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. |
| • | 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. |
| • | 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. |
| • | 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. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
As of December 31, 2006, the Company owned the real estate and buildings for eight 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 building located in Chicago, Illinois
under a non-cancelable operating lease. Cashland’s operations are based in a leased office
facility in an office building located in Dayton, Ohio. 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, 2006, 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.
| Cash | Internet | |||||||||||
| Pawnshop | Advance | Lending | ||||||||||
| Locations | Locations | Presence | ||||||||||
Alabama |
9 | — | Y | |||||||||
Alaska |
5 | — | Y | |||||||||
Arizona |
11 | — | Y | |||||||||
California |
1 | 37 | Y | |||||||||
Colorado |
5 | — | Y | |||||||||
Delaware |
— | — | Y | |||||||||
Florida |
67 | — | Y | |||||||||
Georgia |
17 | — | — | |||||||||
Hawaii |
— | — | Y | |||||||||
Idaho |
— | — | Y | |||||||||
Illinois |
12 | 7 | Y | |||||||||
Indiana |
13 | 32 | — | |||||||||
Kansas |
— | — | Y | |||||||||
Kentucky |
10 | 16 | — | |||||||||
Louisiana |
20 | — | Y | |||||||||
Michigan |
— | 12 | — | |||||||||
Minnesota |
— | — | Y | |||||||||
Missouri |
16 | — | Y | |||||||||
Montana |
— | — | Y | |||||||||
Nevada |
25 | — | Y | |||||||||
New Mexico |
— | — | Y | |||||||||
North Carolina |
10 | — | — | |||||||||
North Dakota |
— | — | Y | |||||||||
Ohio |
6 | 137 | Y | |||||||||
Oklahoma |
15 | — | Y | |||||||||
Oregon |
— | — | Y | |||||||||
Pennsylvania |
— | — | Y | |||||||||
Rhode Island |
— | — | Y | |||||||||
South Carolina |
6 | — | — | |||||||||
South Dakota |
— | — | Y | |||||||||
Tennessee |
21 | — | — | |||||||||
Texas |
194 | 54 | Y | |||||||||
Utah |
7 | — | Y | |||||||||
Washington |
5 | — | Y | |||||||||
Wisconsin |
— | — | Y | |||||||||
Wyoming |
— | — | Y | |||||||||
Total |
475 | 295 | — | |||||||||
Total states |
21 | 7 | 29 | |||||||||
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.
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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. 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 has been making 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 CSB is not the true lender with respect to the loans made to
Georgia borrowers and that its 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. The parties are currently in dispute over the scope
of the discovery requests made by the plaintiffs, and Cash America has appealed a recent State
Court discovery ruling on this issue. Cash America is also seeking enforcement of the arbitration
provisions and has filed a Motion to Stay and Compel Arbitration with the State Court. The Company
believes that the plaintiffs’ claims in this suit are without merit and is vigorously defending
this lawsuit. There is also a related federal court action pending, wherein Cash America and CSB
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 have appealed the dismissal of their complaint to the U.S Court of Appeals for the 11th
Circuit. Oral arguments on this appeal took place in November 2006 and Cash America is awaiting
the appellate court’s decision. The Strong litigation is still at a very 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.
The Company is a defendant in lawsuits encountered in the ordinary course of its business.
Certain of these matters are covered to an extent by insurance. In the opinion of management, the
resolution of these matters will not have a material adverse effect on the Company’s financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company’s security holders during the fourth quarter
ended December 31, 2006.
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PART II
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 655 stockholders of record (not
including individual participants in security listings) as of February 14, 2007. 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 2006 and 2005 were as follows:
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
2006 |
||||||||||||||||
High |
$ | 30.05 | $ | 34.87 | $ | 40.00 | $ | 47.98 | ||||||||
Low |
22.80 | 28.76 | 30.67 | 37.77 | ||||||||||||
Close |
30.02 | 32.00 | 39.08 | 46.90 | ||||||||||||
Cash dividend declared per share |
0.025 | 0.025 | 0.025 | 0.025 | ||||||||||||
2005 |
||||||||||||||||
High |
$ | 29.95 | $ | 23.55 | $ | 21.84 | $ | 24.55 | ||||||||
Low |
21.40 | 13.45 | 19.00 | 19.40 | ||||||||||||
Close |
21.93 | 20.12 | 20.75 | 23.19 | ||||||||||||
Cash dividend declared per share |
0.025 | 0.025 | 0.025 | 0.025 | ||||||||||||
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(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 2006:
| Total Number of | Maximum Number | |||||||||||||||
| Total Number | Average | Shares Purchased as | of Shares that May | |||||||||||||
| of Shares | Price Paid | Part of Publicly | Yet Be Purchased | |||||||||||||
| Period | Purchased | Per Share | Announced Plan | Under the Plan (1) | ||||||||||||
January 1 to January 31 |
3,280 | (2) | $ | 23.67 | — | 1,321,200 | ||||||||||
February 1 to February 28 |
6,167 | (2) | 26.65 | — | 1,321,200 | |||||||||||
March 1 to March 31 |
514 | (2) | 29.19 | — | 1,321,200 | |||||||||||
Total first quarter |
9,961 | 25.80 | — | |||||||||||||
April 1 to April 30 |
418 | (2) | 32.35 | — | 1,321,200 | |||||||||||
May 1 to May 31 |
46,410 | (2) | 31.59 | 45,500 | 1,275,700 | |||||||||||
June 1 to June 30 |
70,357 | (2) | 30.30 | 70,000 | 1,205,700 | |||||||||||
Total second quarter |
117,185 | 30.82 | 115,500 | |||||||||||||
July 1 to July 31 |
448 | (2) | 34.47 | — | 1,205,700 | |||||||||||
August 1 to August 31 |
35,258 | (2) | 33.48 | 35,000 | 1,170,700 | |||||||||||
September 1 to September 30 |
306 | (2) | 37.50 | — | 1,170,700 | |||||||||||
Total third quarter |
36,012 | 33.52 | 35,000 | |||||||||||||
October 1 to October 31 |
308 | (2) | 40.88 | — | 1,170,700 | |||||||||||
November 1 to November 30 |
107,145 | (2) | 43.74 | 106,000 | 1,064,700 | |||||||||||
December 1 to December 31 |
289 | (2) | 46.04 | — | 1,064,700 | |||||||||||
Total fourth quarter |
107,742 | 43.74 | 106,000 | |||||||||||||
Total 2006 |
270,900 | $ | 36.13 | 256,500 | ||||||||||||
| (1) | 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 and terminated the open market purchase authorization established in 2002. Maximum number of shares that may yet be purchased represents the shares under the 2005 authorization. | |
| (2) | Includes shares purchased on behalf of participants relating to the Company’s Non-Qualified Savings Plan of 423; 1,645; 514; 418; 910; 357; 448; 258; 306; 308; 1,145 and 289 for each of the twelve months in 2006, respectively. Also includes 2,857 and 4,522 shares received as partial tax payments for shares issued under stock-based compensation plans for the months of January and February, respectively. |
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ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Consolidated Financial Data of Continuing Operations
(dollars in thousands, except per share data)
(Unaudited)
(dollars in thousands, except per share data)
(Unaudited)
| Year Ended December 31, | ||||||||||||||||||||
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Statement of Income Data (a) |
||||||||||||||||||||
Total revenue |
$ | 693,214 | $ | 594,346 | $ | 469,478 | $ | 388,635 | $ | 350,501 | ||||||||||
Income from operations |
$ | 104,019 | $ | 80,712 | $ | 61,413 | $ | 41,819 | $ | 27,872 | ||||||||||
Income from continuing operations before
income taxes (b) |
$ | 96,168 | $ | 70,882 | $ | 55,023 | $ | 34,325 | $ | 19,313 | ||||||||||
Income from continuing operations |
$ | 60,940 | $ | 44,821 | $ | 34,965 | $ | 22,030 | $ | 11,917 | ||||||||||
Income from continuing operations per share: |
||||||||||||||||||||
Basic |
$ | 2.05 | $ | 1.53 | $ | 1.23 | $ | 0.86 | $ | 0.49 | ||||||||||
Diluted |
$ | 2.00 | $ | 1.48 | $ | 1.18 | $ | 0.83 | $ | 0.48 | ||||||||||
Dividends declared per share |
$ | 0.10 | $ | 0.10 | $ | 0.37 | $ | 0.07 | $ | 0.05 | ||||||||||
Weighted average shares: |
||||||||||||||||||||
Basic |
29,676 | 29,326 | 28,468 | 25,649 | 24,491 | |||||||||||||||
Diluted |
30,532 | 30,206 | 29,584 | 26,688 | 24,841 | |||||||||||||||
Balance Sheet Data at End of Year (a) |
||||||||||||||||||||
Pawn loans |
$ | 127,384 | $ | 115,280 | $ | 109,353 | $ | 81,154 | $ | 78,615 | ||||||||||
Cash advances, net |
$ | 79,975 | $ | 40,704 | $ | 36,490 | $ | 28,401 | $ | 2,639 | ||||||||||
Merchandise held for disposition, net |
$ | 87,060 | $ | 72,683 | $ | 67,050 | $ | 49,432 | $ | 49,564 | ||||||||||
Working capital |
$ | 259,813 | $ | 232,556 | $ | 209,463 | $ | 156,142 | $ | 118,619 | ||||||||||
Total assets |
$ | 776,244 | $ | 598,648 | $ | 555,165 | $ | 377,194 | $ | 287,006 | ||||||||||
Total debt |
$ | 219,749 | $ | 165,994 | $ | 166,626 | $ | 148,040 | $ | 137,000 | ||||||||||
Stockholders’ equity |
$ | 440,728 | $ | 374,716 | $ | 333,936 | $ | 276,493 | $ | 192,335 | ||||||||||
Ratio Data at End of Year (a) |
||||||||||||||||||||
Current ratio |
3.2 | x | 4.8 | x | 4.6 | x | 4.3 | x | 4.0 | x | ||||||||||
Debt to equity ratio |
49.9 | % | 44.3 | % | 49.9 | % | 53.5 | % | 71.2 | % | ||||||||||
Owned and Franchised Locations at Year End (a) |
||||||||||||||||||||
Pawn lending operations |
487 | 464 | 452 | 405 | 409 | |||||||||||||||
Cash advance operations (c) |
295 | 286 | 253 | 154 | 2 | |||||||||||||||
Check cashing operations (d) |
136 | 136 | 134 | 135 | 135 | |||||||||||||||
Total |
918 | 886 | 839 | 694 | 546 | |||||||||||||||
| (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. In addition, in September 2001, the Company announced plans to exit the rent-to-own business. The amounts for 2002 also reflect the reclassified rent-to-own business 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 from termination of a lease contract in 2006, the details of discontinued operations for years 2003 through 2005 and the gain from disposal of asset for 2003. | |
| (c) | Includes cash advance locations only. | |
| (d) | Mr. Payroll locations only. |
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides specialty financial services to individuals in the United States. 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 on behalf of independent third party lenders over the internet in
November 2006. Prior to September 7, 2004, the Company also provided financial services to
individuals in the United Kingdom and Sweden (the “foreign pawn lending operations”). In September
2004, the Company sold its foreign pawn lending operations. The results of the foreign pawn
lending operations have been reclassified as discontinued operations for all of the periods
presented. See discussions of Discontinued Operations below and at Note 17 of Notes to
Consolidated Financial Statements.
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 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’s consolidated financial statements include the operating
results of CashNetUSA from the date of acquisition. The Company has 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. Each supplemental payment
will be reduced by amounts previously paid. The supplemental payments are to be paid in cash; 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. Substantially all of these
supplemental payments will be accounted for as goodwill. The terms and method of calculating these
supplemental payments are described more fully in the asset purchase agreement. 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.
In December 2004, the Company acquired the pawn operating assets of Camco, Inc., which
operated under the tradename “SuperPawn” in four states in the western United States. SuperPawn
was a 41-store chain based in Las Vegas, Nevada at the time of the acquisition. This transaction
provided the Company its initial entry into the western United States for pawn lending activities.
See Note 3 of Notes to Consolidated Financial Statements. Effective August 1, 2003, the Company,
through its wholly-owned subsidiary, Cashland Financial Services, Inc. (“Cashland”), purchased
substantially all of the assets of Cashland, Inc., a privately-owned consumer finance company based
in Dayton, Ohio, with 121 cash advance locations at the time of the acquisition.
As of December 31, 2006, the Company had 918 total locations offering products and services to
its customers. The Company operates in three segments: pawn lending, cash advance (including
CashNetUSA) and check cashing.
As of December 31, 2006, the Company’s pawn lending operations consisted of 487 pawnshops,
including 475 Company-owned units and 12 unconsolidated franchised units located in 22 states in
the United States. During the three year period ended December 31, 2006, the Company acquired 70
operating
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units, established 12 locations, and combined or closed 5 locations for a net increase in owned
pawn lending units of 77. In addition, it acquired or opened 10 franchise locations, and either
terminated or converted five locations to Company-owned locations.
At December 31, 2006, the Company’s cash advance operations operated 295 cash advance
locations in seven states. For the three year period ended December 31, 2006, the Company acquired
33 operating units, established 118 locations, and combined or closed 10 locations for a net
increase in cash advance locations of 141. CashNetUSA serves multiple markets through its internet
distribution channel and had cash advances outstanding in 29 states as of December 31, 2006.
As of December 31, 2006, the Company’s check cashing operations consisted of 131 franchised
and five company-owned check cashing centers in 18 states.
DISCONTINUED OPERATIONS
In September 2004, in order to dedicate its strategic efforts and resources on the growth
opportunities of its pawn lending and cash advance activities in the United States, the Company
sold its foreign pawn lending operations in the United Kingdom and Sweden to Rutland Partners LLP
and received approximately $104.9 million in cash after paying off the outstanding balance of the
multi-currency line of credit, and notes receivable valued at $8.0 million. The Company realized a
gain on the sale of $19.0 million ($15.4 million net of related tax). The results of the foreign
pawn lending operations have been reclassified as discontinued operations for all periods presented
in accordance with the Statement of Financial Accounting Standards No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets” in the accompanying consolidated financial statements.
Income from discontinued operations was $6.5 million (excluding gain on the sale) for 2004. See
Note 17 of Notes to Consolidated Financial Statements. Income from discontinued operations of
$197,000 for 2005 principally represents a change in the U.S. tax provision on the sale resulting
from the final tax adjustments to the 2004 foreign pawn lending operations’ tax returns.
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
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. Loan transactions may conclude based upon redemption, renewal, or forfeiture of the
loan collateral. The gathering of this empirical data allows the Company to analyze the
characteristics of its outstanding pawn
26
Table of Contents
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 2006, $146.6 million, or 98.1%, of recorded finance and service charges represented
cash collected from customers and the remaining $2.8 million, or 1.9%, 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 $25.4 million of
finance and service charges receivable. Assuming the year-end accrual of finance and service
charges revenue was over estimated by 10%, finance and service charges revenue would decrease by
$2.5 million in 2007 and net income would decrease by $1.6 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, and include 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 $1.9 million, representing 2.1% of the balance
of merchandise held for disposition at December 31, 2006. 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 primarily serves a customer
base of non-prime borrowers. 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, the performance of cash advances made twelve months
ago and portfolio collection history 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, 2006, allowance for losses on cash advances was $19.5 million and accrued losses on
third-party lender-owned cash advances were $1.2 million, in aggregate representing 16.6% of the
combined cash advance portfolio.
During fiscal year 2006, the cash advance loss provision for the combined cash advance
portfolio, which increases the allowance for loan losses, was $59.6 million and reflects 5.1% of
gross combined cash advances written by the Company and third-party lenders. If future loss rates
increased, or decreased, by 10% (0.51%) from 2006 levels, the cash advance loss provision would
increase, or decrease, by $6.0 million
27
Table of Contents
and net income would decrease, or increase, by $3.9 million, assuming the same volume of cash
advances written in 2006.
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
sheet. 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.
Management judgment is required in determining the provision for income taxes, the deferred
tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.
The valuation allowance is based on Company estimates of capital gains expected to be recognized
during the period over which the capital losses may be used to offset such gains. If the Company
were to determine that it could not realize all or part of its other net deferred tax assets in the
future, it would have to charge an adjustment to the deferred tax assets to the provision for
income taxes in the period that such determination was made. Likewise, should the Company determine
that it could in the future realize its deferred tax assets in an amount exceeding the net recorded
amount, it could adjust the deferred tax assets to reduce the provision for income taxes in the
period that such determination was made.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2006, Financial Accounting Standards Board (“FASB”) issued 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. It requires that the new
standard be applied to the balances of assets and liabilities as of the beginning of the period of
adoption and that a corresponding adjustment be made to the opening balance of retained earnings.
FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Company is
evaluating the potential effect of FIN 48, but does not expect it to have a material effect on the
Company’s consolidated financial position or results of operations.
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. The
Company does not expect SFAS 157 to have a material effect on the Company’s consolidated financial
position or results of operations, but anticipates additional disclosures when it becomes
effective.
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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.
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Revenue |
||||||||||||
Finance and service charges |
21.6 | % | 23.5 | % | 23.6 | % | ||||||
Proceeds from disposition of merchandise |
48.4 | 50.7 | 53.3 | |||||||||
Cash advance fees |
28.1 | 23.9 | 21.1 | |||||||||
Check cashing fees, royalties and other |
1.9 | 1.9 | 2.0 | |||||||||
Total Revenue |
100.0 | 100.0 | 100.0 | |||||||||
Cost of Revenue |
||||||||||||
Disposed merchandise |
29.6 | 30.9 | 32.8 | |||||||||
Net Revenue |
70.4 | 69.1 | 67.2 | |||||||||
Expenses |
||||||||||||
Operations |
35.5 | 37.1 | 36.9 | |||||||||
Cash advance loss provision |
8.6 | 7.2 | 5.0 | |||||||||
Administration |
7.4 | 7.3 | 8.5 | |||||||||
Depreciation and amortization |
3.9 | 3.9 | 3.7 | |||||||||
Total Expenses |
55.4 | 55.5 | 54.1 | |||||||||
Income from Operations |
15.0 | 13.6 | 13.1 | |||||||||
Interest expense |
(1.7 | ) | (1.8 | ) | (1.7 | ) | ||||||
Interest income |
0.3 | 0.3 | 0.1 | |||||||||
Foreign currency transaction (loss) gain |
— | (0.2 | ) | 0.2 | ||||||||
Gain from termination of contract |
0.3 | — | — | |||||||||
Income from Continuing Operations before
Income Taxes |
13.9 | 11.9 | 11.7 | |||||||||
Provision for income taxes |
5.1 | 4.4 | 4.3 | |||||||||
Income from Continuing Operations |
8.8 | % | 7.5 | % | 7.4 | % | ||||||
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The following tables set forth certain selected consolidated financial and non-financial data
as of December 31, 2006, 2005 and 2004, and for each of the three years then ended ($ in thousands
unless noted otherwise) related to the Company’s continuing operations.
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
PAWN LENDING OPERATIONS: |
||||||||||||
Pawn loans |
||||||||||||
Annualized yield on pawn loans |
123.6 | % | 124.8 | % | 131.1 | % | ||||||
Total amount of pawn loans written and renewed |
$ | 474,046 | $ | 438,955 | $ | 336,021 | ||||||
Average pawn loan balance outstanding |
$ | 120,930 | $ | 112,031 | $ | 84,283 | ||||||
Average pawn loan balance per average location in operation |
$ | 262 | $ | 251 | $ | 211 | ||||||
Ending pawn loan balance per location in operation |
$ | 268 | $ | 253 | $ | 248 | ||||||
Average pawn loan amount at end of year (not in thousands) |
$ | 107 | $ | 95 | $ | 89 | ||||||
Profit margin on disposition of merchandise as a percentage of proceeds from
disposition of merchandise |
38.9 | % | 39.0 | % | 38.5 | % | ||||||
Average annualized merchandise turnover |
2.7 | x | 2.7 | x | 3.0 | x | ||||||
Average balance of merchandise held for disposition per average location in
operation |
$ | 165 | $ | 151 | $ | 130 | ||||||
Ending balance of merchandise held for disposition per location in operation |
$ | 183 | $ | 159 | $ | 151 | ||||||
Pawnshop locations in operation – |
||||||||||||
Beginning of year, owned |
456 | 441 | 398 | |||||||||
Acquired |
19 | 9 | 42 | |||||||||
Start-ups |
2 | 7 | 3 | |||||||||
Combined or closed |
(2 | ) | (1 | ) | (2 | ) | ||||||
End of year, owned |
475 | 456 | 441 | |||||||||
Franchise locations at end of year |
12 | 8 | 11 | |||||||||
Total pawnshop locations at end of year |
487 | 464 | 452 | |||||||||
Average number of owned pawnshop locations in operation |
462 | 447 | 399 | |||||||||
Cash advances (b) |
||||||||||||
Pawn locations offering cash advances at end of year |
425 | 441 | 425 | |||||||||
Average number of pawn locations offering cash advances |
425 | 430 | 391 | |||||||||
Amount of cash advances written at pawn locations: |
||||||||||||
Funded by the Company |
$ | 66,952 | $ | 64,184 | $ | 37,527 | ||||||
Funded by third-party lenders (a) (d) |
207,732 | 211,191 | 182,776 | |||||||||
Aggregate amount of cash advances written at pawn locations (a) (f) |
$ | 274,684 | $ | 275,375 | $ | 220,303 | ||||||
Number of cash advances written at pawn locations (not in thousands): |
||||||||||||
By the Company |
213,467 | 223,639 | 138,386 | |||||||||
By third-party lenders (a) (d) |
480,649 | 574,442 | 536,622 | |||||||||
Aggregate number of cash advances written at pawn locations (a) (f) |
694,116 | 798,081 | 675,008 | |||||||||
Cash advance customer balances due at pawn locations (gross): |
||||||||||||
Owned by Company (c) |
$ | 8,448 | $ | 9,657 | $ | 11,733 | ||||||
Owned by third-party lenders (a) |
11,202 | 9,697 | 6,585 | |||||||||
Aggregate cash advance customer balances due (gross) at pawn locations
(a) (f) |
$ | 19,650 | $ | 19,354 | $ | 18,318 | ||||||
(Continued on Next Page)
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| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
CASH ADVANCE OPERATIONS (e): |
||||||||||||
Amount of cash advances written: |
||||||||||||
By the Company |
$ | 750,234 | $ | 509,732 | $ | 371,346 | ||||||
By third-party lenders (a) (d) |
152,845 | 145,228 | 56,097 | |||||||||
Aggregate amount of cash advances written (a) (f) |
$ | 903,079 | $ | 654,960 | $ | 427,443 | ||||||
Number of cash advances written (not in thousands): |
||||||||||||
By the Company |
2,097,176 | 1,442,816 | 1,101,923 | |||||||||
By third-party lenders (a) (d) |
298,831 | 347,772 | 150,254 | |||||||||
Aggregate number of cash advances written (a) (f) |
2,396,007 | 1,790,588 | 1,252,177 | |||||||||
Cash advance customer balances due (gross): |
||||||||||||
Owned by Company (c) |
$ | 91,040 | $ | 37,706 | $ | 29,788 | ||||||
Owned by third-party lenders (a) |
13,485 | 7,215 | 3,564 | |||||||||
Aggregate cash advance customer balances due (gross) (a) (f) |
$ | 104,525 | $ | 44,921 | $ | 33,352 | ||||||
Cash advance locations in operation –
|
||||||||||||
Beginning of year |
286 | 253 | 154 | |||||||||
Acquired |
— | 1 | 32 | |||||||||
Start-ups |
12 | 34 | 72 | |||||||||
Combined or closed |
(3 | ) | (2 | ) | (5 | ) | ||||||
End of year |
295 | 286 | 253 | |||||||||
Average number of cash advance locations in operation |
290 | 271 | 192 | |||||||||
CONSOLIDATED CASH ADVANCE PRODUCT SUMMARY (a) (b) (e) : |
||||||||||||
Amount of cash advances written: |
||||||||||||
Funded by the Company |
$ | 817,186 | $ | 573,916 | $ | 408,873 | ||||||
Funded by third-party lenders (a) (d) |
360,577 | 356,419 | 238,873 | |||||||||
Aggregate amount of cash advances written (a) (f) |
$ | 1,177,763 | $ | 930,335 | $ | 647,746 | ||||||
Number of cash advances written (not in thousands): |
||||||||||||
By the Company |
2,310,643 | 1,666,455 | 1,240,309 | |||||||||
By third-party lenders (a) (d) |
779,480 | 922,214 | 686,876 | |||||||||
Aggregate number of cash advances written (a) (f) |
3,090,123 | 2,588,669 | 1,927,185 | |||||||||
Average amount per cash advance written (not in thousands): |
||||||||||||
Funded by the Company |
$ | 354 | $ | 344 | $ | 330 | ||||||
Funded by third-party lenders (a) (d) |
463 | 386 | 348 | |||||||||
Aggregate average amount per cash advance(a) (f) |
$ | 381 | $ | 359 | $ | 336 | ||||||
Cash advance customer balances due (gross): |
||||||||||||
Owned by the Company (c) |
$ | 99,488 | $ | 47,363 | $ | 41,521 | ||||||
Owned by third-party lenders (a) |
24,687 | 16,912 | 10,149 | |||||||||
Aggregate cash advance balances due (gross) (a) (f) |
$ | 124,175 | $ | 64,275 | $ | 51,670 | ||||||
Total locations offering cash advances at end of year |
720 | 727 | 678 | |||||||||
Average total locations offering cash advances |
715 | 701 | 642 | |||||||||
(Continued on Next Page)
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Table of Contents
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
CHECK CASHING OPERATIONS (Mr. Payroll): |
||||||||||||
Centers in operation at end of year: |
||||||||||||
Company-owned locations |
5 | 5 | 6 | |||||||||
Franchised locations (a) |
131 | 131 | 128 | |||||||||
Combined centers in operation at end of year (a) |
136 | 136 | 134 | |||||||||
Revenue from Company-owned locations |
$ | 569 | $ | 565 | $ | 607 | ||||||
Revenue from franchise royalties and other |
3,356 | 3,254 | 2,979 | |||||||||
Total revenue (c) |
$ | 3,925 | $ | 3,819 | $ | 3,586 | ||||||
Face amount of checks cashed: |
||||||||||||
Company-owned locations |
$ | 38,446 | $ | 38,699 | $ | 39,171 | ||||||
Franchised locations (a) |
1,269,724 | 1,181,682 | 1,093,456 | |||||||||
Combined face amount of check cashed (a) |
$ | 1,308,170 | $ | 1,220,381 | $ | 1,132,627 | ||||||
Fees collected from customers: |
||||||||||||
Company-owned locations (c) |
$ | 569 | $ | 565 | $ | 607 | ||||||
Franchised locations (a) |
17,889 | 16,399 | 15,053 | |||||||||
Combined fees collected from customers (a) |
$ | 18,458 | $ | 16,964 | $ | 15,660 | ||||||
Fees as a percentage of check cashed: |
||||||||||||
Company-owned locations |
1.5 | % | 1.5 | % | 1.5 | % | ||||||
Franchised locations (a) |
1.4 | 1.4 | 1.4 | |||||||||
Combined fees as a percentage of check cashed (a) |
1.4 | % | 1.4 | % | 1.4 | % | ||||||
Average check cashed (not in thousands): |
||||||||||||
Company-owned locations |
$ | 393 | $ | 386 | $ | 376 | ||||||
Franchised locations (a) |
421 | 386 | 372 | |||||||||
Combined average check cashed (a) |
$ | 420 | $ | 386 | $ | 372 | ||||||
| (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. | |
| (e) | Includes cash advance activities at the Company’s cash advance 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. |
32
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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 pawn related net revenue, consisting of finance and service charges from pawn loans
plus profit from the disposition of merchandise; cash advance fees and other revenue which is
comprised mostly of check cashing fees but includes royalties and 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 2006, 2005 and 2004. The growth in cash
advance fees is primarily attributable to higher average balances owed by customers, the addition
of new units and the recent addition of cash advances made over the internet beginning in
mid-September of 2006. While lower as a percent of total net revenue, pawn related net revenue
remains the largest component of net revenue at 57.4%, 62.7% and 65.6% for 2006, 2005 and 2004,
respectively. Management believes that the inclusion of the online cash advance business for a
full twelve months in 2007 will cause cash advance fees to be the largest component of net revenue
next year. The following graphs show consolidated net revenue and depicts the mix of the
components of net revenue for the years ended December 31, 2006, 2005 and 2004:
2006
|
2005 | 2004 | ||||||
$488.3 million
|
$410.5 million | $315.6 million | ||||||
|
|
|
||||||
33
Table of Contents
Contribution to Increase in Net Revenue Cash advance fees, including cash advance fees generated
in pawn lending locations, have increased primarily because of higher average balances owed by
customers, the growth and development of newly opened cash advance locations and the recent
addition of cash advances made over the internet. As illustrated below, these increases
represented 68.2% of the overall increase from 2005 to 2006 and 45.2% of the Company’s overall
increase in net revenue from 2004 to 2005. The increase in pawn related net revenue in the
aggregate, combined finance and service charges and profit from the disposition of merchandise,
represented 29.1% of the overall increase in net revenue from continuing operations for 2006
compared to 53.2% of the overall increase in net revenue in 2005. Other revenue accounted for 2.7%
and 1.6% of the overall increase in net revenue in 2006 and 2005, respectively. These trends are
depicted in the following graphs:
2006 over 2005
|
2005 over 2004 | |
$77.7 million
|
$94.9 million | |
|
 |
Year Ended 2006 Compared to Year Ended 2005
Consolidated Net Revenue. Consolidated net revenue increased $77.7 million, or 18.9%, to
$488.3 million during 2006 from $410.5 million during 2005. The following table sets forth 2006 and
2005 net revenue by operating segment ($ in thousands):
| 2006 | 2005 | Increase | ||||||||||||||
Pawn lending operations |
$ | 323,771 | $ | 298,880 | $ | 24,891 | 8.3 | % | ||||||||
Cash advance operations |
160,589 | 107,848 | 52,741 | 48.9 | ||||||||||||
Check cashing operations |
3,925 | 3,819 | 106 | 2.8 | ||||||||||||
Consolidated net revenue |
$ | 488,285 | $ | 410,547 | $ | 77,738 | 18.9 | % | ||||||||
Higher revenue from the cash advance product, higher finance and service charges from pawn
loans and higher profit from the disposition of merchandise primarily accounted for the increase in
net revenue. Pawn lending operations include cash advance fees from activities within pawn
locations.
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 $12.9 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 $2.1
million.
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Table of Contents
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 is 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 that was
offset by a $1.4 million decrease resulting from the lower annualized yield of the pawn loan
portfolio 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 and slightly lower redemption rates. Finance and
service charges from same stores (stores that have been open for at least twelve months) increased
$5.1 million, or 3.6%, in 2006 compared to 2005.
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. Management believes this decrease 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 needed to achieve their needs.
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):
| Year Ended December 31, | ||||||||||||||||||||||||
| 2006 | 2005 | |||||||||||||||||||||||
| Merchan- | Refined | Merchan- | Refined | |||||||||||||||||||||
| dise | Gold | Total | dise | Gold | Total | |||||||||||||||||||
Proceeds from
disposition |
$ | 257,054 | $ | 78,498 | $ | 335,552 | $ | 244,659 | $ | 56,843 | $ | 301,502 | ||||||||||||
Profit on disposition |
$ | 106,738 | $ | 23,885 | $ | 130,623 | $ | 102,289 | $ | 15,414 | $ | 117,703 | ||||||||||||
Profit margin |
41.5 | % | 30.4 | % | 38.9 | % | 41.8 | % | 27.1 | % | 39.0 | % | ||||||||||||
Percentage of total profit |
81.7 | % | 18.3 | % | 100.0 | % | 86.9 | % | 13.1 | % | 100.0 | % | ||||||||||||
The total proceeds from disposition of merchandise and refined gold increased $34.1 million,
or 11.3%, and the total profit from the disposition of merchandise and refined gold increased $12.9
million, or 11.0%, primarily due to higher levels of retail sales and disposition of refined gold.
Overall gross profit margin decreased slightly from 39.0% in 2005 to 38.9% in 2006. Excluding the
effect of the disposition of refined gold, the profit margin on the disposition of merchandise
(including jewelry sales) decreased to 41.5% in 2006 from 41.8% 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 is generally in line with the increase in pawn loan
balances for the period. Proceeds from disposition of merchandise, excluding refined gold,
increased $12.4 million, or 5.1%, 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. 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 of refined gold sales, which typically
have lower gross profit margins.
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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).
| 2006 | 2005 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
Merchandise held for 1 year or less – |
||||||||||||||||
Jewelry |
$ | 52,087 | 58.6 | % | $ | 42,139 | 56.6 | % | ||||||||
Other merchandise |
28,302 | 31.8 | 24,787 | 33.3 | ||||||||||||
| 80,389 | 90.4 | 66,926 | 89.9 | |||||||||||||
Merchandise held for more than 1 year – |
||||||||||||||||
Jewelry |
5,280 | 5.9 | 4,684 | 6.3 | ||||||||||||
Other merchandise |
3,261 | 3.7 | 2,873 | 3.8 | ||||||||||||
| 8,541 | 9.6 | 7,557 | 10.1 | |||||||||||||
Total merchandise held for disposition |
$ | 88,930 | 100.0 | % | $ | 74,483 | 100.0 | % | ||||||||
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 since 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 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) 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):
| 2006 | 2005 | Increase | ||||||||||||||
Cash advance operations |
$ | 151,429 | $ | 100,663 | $ | 50,766 | 50.4 | % | ||||||||
Pawn lending operations |
43,676 | 41,405 | 2,271 | 5.5 | ||||||||||||
Total |
$ | 195,105 | $ | 142,068 | $ | 53,037 | 37.3 | % | ||||||||
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 is 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 are $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 $6.3 million has been provided in the consolidated financial statements for December
31, 2006 and 2005, respectively, which is netted against the outstanding cash advance amounts on
the Company’s consolidated balance sheets.
The following table summarizes cash advances outstanding at December 31, 2006 and 2005 and
contains certain non-Generally Accepted Accounting Principles (“non-GAAP”) measures with respect to
the
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cash advances owned by third-party lenders that are not included in the Company’s consolidated
balance sheets. The Company believes that presenting these non-GAAP measures is meaningful and
necessary because management evaluates and measures the cash advance portfolio performance on an
aggregate basis ($ in thousands).
| 2006 | 2005 | |||||||
Funded by the Company (a) |
||||||||
Active cash advances and fees receivable |
$ | 69,489 | $ | 32,207 | ||||
Cash advances and fees in collection |
24,499 | 7,510 | ||||||
Total funded by the Company (a) |
93,988 | 39,717 | ||||||
Funded by third-party lenders (b) (c) |
||||||||
Active cash advances and fees receivable |
24,721 | 19,548 | ||||||
Cash advances and fees in collection |
5,466 | 5,010 | ||||||
Total funded by third-party lenders (b) (c) |
30,187 | 24,558 | ||||||
Combined gross portfolio (b) (d) |
124,175 | 64,275 | ||||||
Less: Elimination of cash advances owned by third-party lenders |
24,687 | 16,912 | ||||||
Less: Discount on cash advances assigned by third-party lenders |
— | 350 | ||||||
Company-owned cash advances and fees receivable, gross |
99,488 | 47,013 | ||||||
Less: Allowance for losses |
19,513 | 6,309 | ||||||
Cash advances and fees receivable, net |
$ | 79,975 | $ | 40,704 | ||||
Allowance for loss on Company-owned cash advances |
$ | 19,513 | $ | 6,309 | ||||
Accrued losses on third-party lender owned cash advances |
1,153 | 874 | ||||||
Combined allowance for losses and accrued third-party lender losses |
$ | 20,666 | $ | 7,183 | ||||
Combined allowance for losses and accrued third-party lender losses as a % of combined
gross portfolio (b) |
16.6 | % | 11.2 | % | ||||
| (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. |
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
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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.
As a result of the revised FDIC guidelines, the Company elected to discontinue offering
third-party bank originated cash advances to Michigan customers in July 2005, and to consumers in
Texas, Florida and North Carolina in January 2006. Consumer demand for bank-originated cash
advances in Michigan, Florida and Texas was effectively satisfied by replacing the bank originated
cash advance program in those states with the CSO program instituted by the Company in July 2005.
The Company discontinued the CSO program in Michigan in February 2007, and now offers only cash
advances underwritten by the Company to customers in that state.
During the third quarter of 2005, the Company ceased offering single payment cash advances
originated by third-party banks in California and began offering Company-originated cash advances
under applicable state law. As an additional service alternative to its customers, during the
fourth quarter of 2005 the Company introduced third-party commercial bank originated multi-payment
installment cash advances in California and Georgia. The Company discontinued offering
multi-payment bank products in Georgia during the second quarter of 2006 and in California during
July 2006 due principally to its third-party commercial banks’ response to concerns that the FDIC
raised to FDIC-supervised banks in late February 2006 regarding the FDIC’s perception of risks
associated with FDIC supervised banks’ origination of certain cash advance products with the
assistance of third-party marketers and servicers. These changes had the effect of lowering the
average amount per loan available to customers in California which led to lower levels of cash
advance balances in California during the last half of 2006 and caused reduced profitability in
those locations year over year. This trend in lower profits in California locations is expected to
continue for the first half of 2007 unless offset by an increase in demand and higher balances
outstanding.
Management anticipates continued growth in consolidated cash advance fees for fiscal 2007 due
to increased consumer awareness and demand for the cash advance product, higher outstanding
balances at December 31, 2006 compared to December 31, 2005, the addition of the internet
distribution channel through CashNetUSA, the growth of balances from new units opened in 2006, and
planned openings in 2007.
Check Cashing Fees, Royalties and Other. Check cashing fees, royalties and other income increased
$2.1 million to $13.1 million in 2006, or 18.9%, from $11.0 million in 2005 due to the growth in
cash advance units. These revenues for the cash advance segment and check cashing segment were
$9.2 million and $3.9 million in 2006, and were $7.2 million and $3.8 million in 2005,
respectively. The components of these fees are as follows (in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
| 2006 | 2005 | |||||||||||||||||||||||
| Cash | Check | Cash | Check | |||||||||||||||||||||
| Advance | Cashing | Total | Advance | Cashing | Total | |||||||||||||||||||
Check cashing fees |
$ | 6,057 | $ | 569 | $ | 6,626 | $ | 5,339 | $ | 565 | $ | 5,904 | ||||||||||||
Royalties |
¯ | 3,173 | 3,173 | — | 3,116 | 3,116 | ||||||||||||||||||
Other |
3,103 | 183 | 3,286 | 1,846 | 138 | 1,984 | ||||||||||||||||||
| $ | 9,160 | $ | 3,925 | $ | 13,085 | $ | 7,185 | $ | 3,819 | $ | 11,004 | |||||||||||||
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Operations Expenses. Consolidated operations expenses, as a percentage of total revenue, were
35.5% in 2006 compared to 37.1% in 2005. These expenses increased $25.5 million, or 11.6%, in 2006
compared to 2005. Pawn lending operating expenses increased $10.9 million, or 6.5%, primarily due
to the net addition of 19 pawnshop locations in 2006. Cash advance operating expenses increased
$14.7 million, or 28.5%, primarily as a result of increased advertising expenditures, growth in
expenses in the Company’s collection centers, the acquisition of CashNetUSA and the net
establishment of 9 locations, which resulted in higher staffing levels.
As a multi-unit operator in the consumer finance industry, the Company’s operations expenses
are predominately related to personnel and occupancy expenses. Personnel expenses include base
salary and wages, performance incentives, and benefits. Occupancy expenses include rent, property
taxes, insurance, utilities, and maintenance. The combination of personnel and occupancy expenses
represents 82.8% of total operations expenses in 2006 and 84.4% in 2005. The comparison is as
follows ($ in thousands):
| % of | % of | |||||||||||||||
| 2006 | Revenue | 2005 | Revenue | |||||||||||||
Personnel |
$ | 138,943 | 20.0 | % | $ | 125,661 | 21.1 | % | ||||||||
Occupancy |
64,557 | 9.3 | 60,376 | 10.2 | ||||||||||||
Other |
42,385 | 6.2 | 34,320 | 5.8 | ||||||||||||
Total |
$ | 245,885 | 35.5 | % | $ | 220,357 | 37.1 | % | ||||||||
The increase in personnel expenses is mainly due to unit additions since 2005, an increase in
staffing levels, including at the collection centers, the acquisition of CashNetUSA and normal
recurring salary adjustments. The increase in occupancy expense is primarily due to unit
additions, higher utility costs and property taxes.
Administration Expenses. Consolidated administration expenses, as a percentage of total revenue,
were 7.4% in 2006 compared to 7.3% in 2005. The components of administration expenses are as
follows ($ in thousands):
| % of | % of | |||||||||||||||
| 2006 | Revenue | 2005 | Revenue | |||||||||||||
Personnel |
$ | 35,097 | 5.1 | % | $ | 29,708 | 5.0 | % | ||||||||
Other |
16,409 | 2.3 | 13,519 | 2.3 | ||||||||||||
Total |
$ | 51,506 | 7.4 | % | $ | 43,227 | 7.3 | % | ||||||||
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
channels 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.
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 $2.0 million decrease as a result of lower
loss rates. The loss provision as a percentage of cash advance fees increased to 30.5% in 2006
from 30.2% in 2005. Going forward management believes that this ratio
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Table of Contents
could increase as the composition mix of the portfolio becomes more heavily weighted to cash
advances from online customers which historically have resulted in higher loss rates than customers
receiving loans in lending locations.
Total charge-offs less recoveries divided by total cash advances written decreased in 2006 to
3.9% compared to 4.3% in 2005. The decrease was partially related to underwriting changes made in
late 2005 which resulted in lower loss rates which offset the reduction in year-over-year growth
rates in cash advances written in 2006 compared to prior years. The loss provision expense as a
percentage of cash advances written was higher in 2006, increasing to 5.1% compared to 4.6% in the
prior year mostly due to a significant increase in cash advance receivable balances as of year-end
and the inclusion of the cash advance balance from online customers which carry a higher expected
loss rate.
The following table summarizes the cash advance loss provision and combined allowance for
losses and accrued third-party lender losses for the years ended and at December 31, 2006 and 2005,
and contains certain non-GAAP measures with respect to the cash advances written by third-party
lenders that are not included in the Company’s consolidated balance sheets and related statistics.
The Company believes that presenting these non-GAAP measures is meaningful and necessary because
management evaluates and measures the cash advance portfolio performance on an aggregate basis
including its evaluation of loss provision for the Company-owned portfolio and the third-party
lender-owned portfolio that the Company guarantees ($ in thousands).
| Year Ended December 31, | ||||||||
| 2006 | 2005 | |||||||
Cash advance loss provision: |
||||||||
Loss provision on Company-owned cash advances |
$ | 59,284 | $ | 42,302 | ||||
Loss provision on third-party owned cash advances |
279 | 532 | ||||||
Combined cash advance loss provision |
$ | 59,563 | $ | 42,834 | ||||
Charge-offs, net of recoveries |
$ | 46,080 | $ | 40,351 | ||||
Cash advances written: |
||||||||
By the Company (a) |
$ | 817,186 | $ | 573,916 | ||||
By third-party lenders (b) (c) |
360,577 | 356,419 | ||||||
Combined cash advances written (b) (d) |
$ | 1,177,763 | $ | 930,335 | ||||
Combined cash advance loss provision as a % of combined
cash advances written (b) |
5.1 | % | 4.6 | % | ||||
Charge-offs (net of recoveries) as a % of combined cash
advances written (b) |
3.9 | % | 4.3 | % | ||||
| (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%
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during 2006 compared to 4.7% during 2005) which was partially offset by the decrease in the
weighted average amount of borrowings. 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. In future periods management expects higher levels of debt
associated with the potential funding requirements of the CashNetUSA supplemental acquisition
payments.
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.
Interest income will be lower in 2007 due to the repayment during 2006 of a total of $2.5 million
in notes receivable from officers.
Foreign Currency Transaction Gain (Loss). The Company holds 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. Management is seeking an alternative location
to open a replacement shop in 2007.
Income Taxes. The Company’s effective tax rate for continuing operations for 2006 was 36.6% as
compared to 36.8% for 2005. Management anticipates that its effective tax rate will increase in
2007 as a result of changes in Texas tax laws.
Income from Continuing Operations. Income from continuing operations was $60.9 million and $44.8
million for 2006 and 2005, respectively, up 36.0%. Diluted income from continuing operations per
share was $2.00 for 2006, as compared to $1.48 for 2005, reflecting a 35.1% increase.
Year Ended 2005 Compared to Year Ended 2004
Consolidated Net Revenue. Consolidated net revenue increased $94.9 million, or 30.1%, to
$410.5 million during 2005 from $315.6 million during 2004. The following table sets forth 2005 and
2004 net revenue by operating segment ($ in thousands):
| 2005 | 2004 | Increase | ||||||||||||||
Pawn lending operations |
$ | 298,880 | $ | 239,872 | $ | 59,008 | 24.6 | % | ||||||||
Cash advance operations |
107,848 | 72,154 | 35,694 | 49.5 | ||||||||||||
Check cashing operations |
3,819 | 3,586 | 233 | 6.5 | ||||||||||||
Consolidated net revenue |
$ | 410,547 | $ | 315,612 | $ | 94,935 | 30.1 | % | ||||||||
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Higher revenue from the cash advance product, higher finance and service charges from pawn
loans and higher profit from the disposition of merchandise primarily accounted for the increase in
net revenue. The increase in net revenue from pawn lending operations of 24.6% was partially due
to the consolidation of the operating results of SuperPawn for the full year in 2005. Excluding
the impact of SuperPawn, consolidated net revenue for 2005 was up $49.0 million, or 15.7%, compared
to 2004. The growth in net revenue from cash advance operations was enhanced by the growth and
development of newly opened cash advance locations and the related increase in cash advance
balances within those locations.
The components of net revenue are finance and service charges from pawn loans, which increased
$29.3 million; profit from the disposition of merchandise, which increased $21.3 million; cash
advance fees generated both from pawn locations and cash advance locations, which increased $42.8
million; and check cashing fees, royalties and other income generated both from cash advance
locations and check cashing locations, which increased $1.5 million.
Finance and Service Charges. Finance and service charges increased $29.3 million, or 26.5%, from
$110.5 million in 2004 to $139.8 million in 2005. The increase was primarily due to higher loan
balances attributable to the addition of SuperPawn in December 2004. An increase in the average
balance of pawn loans outstanding contributed $36.4 million of the increase that was offset by a
$7.1 million decrease resulting from the lower annualized yield of the pawn loan portfolio 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. The inclusion of the geographic areas of operation of
SuperPawn for all of 2005 resulted in a blended yield on pawn loans lower than the prior year.
Finance and service charges from same stores increased $1.5 million in 2005 compared to 2004.
The average balances of pawn loans outstanding were 32.9% higher in 2005 than in 2004. The
increase in the average balance of pawn loans outstanding was driven by a 27.3% increase in the
average number of pawn loans outstanding during 2005 coupled with a 4.4% increase in the average
amount per loan. Pawn loan balances at December 31, 2005 were $5.9 million, or 5.4%, higher than
at December 31, 2004. Annualized loan yield was 124.8% in 2005, compared to 131.1% in 2004 mostly
due to the acquisition of SuperPawn locations which operate in markets with lower statutory rates
than the Company’s other locations. Excluding SuperPawn, annualized loan yield would have been up
slightly to 131.9%. Same store pawn loan balances at December 31, 2005 were $1.9 million, or 2.3%,
higher than at December 31, 2004.
Profit from the Disposition of Merchandise. The following table summarizes the proceeds from the
disposition of merchandise and the related profit for 2005 as compared to 2004 ($ in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
| 2005 | 2004 | |||||||||||||||||||||||
| Merchan- | Refined | Merchan- | Refined | |||||||||||||||||||||
| dise | Gold | Total | dise | Gold | Total | |||||||||||||||||||
Proceeds from
disposition |
$ | 244,659 | $ | 56,843 | $ | 301,502 | $ | 208,571 | $ | 41,720 | $ | 250,291 | ||||||||||||
Profit on disposition |
$ | 102,289 | $ | 15,414 | $ | 117,703 | $ | 83,396 | $ | 13,029 | $ | 96,425 | ||||||||||||
Profit margin |
41.8 | % | 27.1 | % | 39.0 | % | 40.0 | % | 31.2 | % | 38.5 | % | ||||||||||||
Percentage of total profit |
86.9 | % | 13.1 | % | 100.0 | % | 86.5 | % | 13.5 | % | 100.0 | % | ||||||||||||
While the total proceeds from disposition of merchandise and refined gold increased $51.2
million, or 20.5%, the total profit from the disposition of merchandise and refined gold increased
$21.3 million, or 22.1%, primarily due to higher profit margins on the disposition of merchandise.
Excluding the effect of the disposition of refined gold, the profit margin on the disposition of
merchandise (including jewelry sales) increased to 41.8% in 2005 from 40.0% in 2004 due
predominately to a heavier mix of jewelry sales resulting from the addition of SuperPawn. The
profit margin on the disposition of refined gold decreased to 27.1% in 2005 compared to 31.2% in
2004 due primarily to a higher average cost that more than offset a
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higher gold price received on dispositions. Proceeds from disposition of merchandise, excluding
refined gold, increased $36.1 million, or 17.3%, in 2005 due primarily to the December 2004
acquisition of SuperPawn and higher levels of merchandise available for disposition. Proceeds from
disposition of refined gold increased $15.1 million, or 36.2%, due primarily to higher market
prices for gold and an increase in the volume of refined gold sold. The consolidated merchandise
turnover rate decreased to 2.7 times during 2005 from 3.0 times during 2004 primarily as a result
of a heavier mix of jewelry items in inventory which historically have a slower turnover rate than
other merchandise.
The table below summarizes the age of merchandise held for disposition before valuation
allowance of $1.8 million and $1.4 million, respectively, at December 31, 2005 and 2004 ($ in
thousands).
| 2005 | 2004 | |||||||||||||||
| Amount | % | Amount | % | |||||||||||||
Merchandise held for 1 year or less – |
||||||||||||||||
Jewelry |
$ | 42,139 | 56.6 | % | $ | 38,268 | 55.9 | % | ||||||||
Other merchandise |
24,787 | 33.3 | 22,828 | 33.3 | ||||||||||||
| 66,926 | 89.9 | 61,096 | 89.2 | |||||||||||||
Merchandise held for more than 1 year – |
||||||||||||||||
Jewelry |
4,684 | 6.3 | 4,924 | 7.2 | ||||||||||||
Other merchandise |
2,873 | 3.8 | 2,475 | 3.6 | ||||||||||||
| 7,557 | 10.1 | 7,399 | 10.8 | |||||||||||||
Total merchandise held for disposition |
$ | 74,483 | 100.0 | % | $ | 68,495 | 100.0 | % | ||||||||
Cash Advance Fees. Cash advance fees increased $42.8 million, or 43.2%, to $142.0 million in
2005 as compared to $99.2 million in 2004. The increase was primarily due to the growth and
development of new cash advance units and higher average cash advance balances outstanding during
2005. The acquisition of 33 cash advance units since late third quarter of 2004 also contributed
to the increase in cash advance fees. As of December 31, 2005, a cash advance product was
available in 727 lending locations, which included 441 pawnshops and 286 cash advance locations.
These lending locations included 375 units that arrange for customers to obtain cash advance
products from the independent third-party lenders for a fee. Cash advance fees from same stores
increased $29.2 million, or 29.9%, to $126.9 million in 2005 compared to $97.7 million in 2004.
Cash advance fees include revenue from the cash advance portfolio owned by the Company and fees
paid to the Company for credit services rendered to customers in connection with arranging for
customers to obtain cash advances from independent third-party lenders. See further discussion in
Note 4 of Notes to Consolidated Financial Statements.
The following table sets forth cash advance fees by operating segment for the years ended
December 31, 2005 and 2004 ($ in thousands):
| 2005 | 2004 | Increase | ||||||||||||||
Cash advance operations |
$ | 100,663 | $ | 66,250 | $ | 34,413 | 51.9 | % | ||||||||
Pawn lending operations |
41,405 | 32,952 | 8,453 | 25.7 | ||||||||||||
Total |
$ | 142,068 | $ | 99,202 | $ | 42,866 | 43.2 | % | ||||||||
While cash advance fees in the cash advance operating segment increased 51.9% and 25.7% in the
pawn segment, mostly due to the addition of new locations and higher average balances outstanding,
increases in expenses, including the cash advance loss provision, impacted both segments in 2005.
The increased expenses offset a portion of the revenue growth.
The amount of cash advances written increased $282.6 million, or 43.6% to $930.3 million in
2005 from $647.7 million in 2004. Included in the amount of cash advances written in 2005 and 2004
were $356.4 million and $238.9 million, respectively, extended to customers by all independent
third-party lenders. The average amount per cash advance increased to $359 from $336 mostly due to
changes in permitted loan amounts and adjustments to underwriting. The outstanding combined
portfolio balance of
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cash advances increased $12.6 million, or 24.4%, to $64.3 million at December 31, 2005 from $51.7
million at December 31, 2004. Included in those amounts were $47.0 million and $40.8 million for
2005 and 2004, respectively, which are included in the Company’s consolidated balance sheets. An
allowance for losses of $6.3 million and $4.4 million was provided in the consolidated financial
statements for December 31, 2005 and 2004, respectively, which was netted against the outstanding
cash advance amounts on the Company’s consolidated balance sheets.
Cash advance fees related to cash advances originated by all third-party lenders (bank and
non-bank) were $52.6 million in 2005 on $356.4 million in cash advances originated by third-party
lenders, representing 34.9% of combined cash advance revenue. The cash advance loss provision
expense associated with these cash advances was $17.3 million, direct operating expenses, excluding
allocated administrative expenses, were $20.6 million, and depreciation and amortization expense
was $2.1 million in 2005. Therefore, management estimates that the approximate contribution before
interest and taxes on cash advances originated by all third-party lenders in 2005 was $12.6
million. This estimate does not include shared operating costs in pawn locations where the product
is offered.
During the third quarter, the Company discontinued offering single payment cash advances
originated by third-party banks in California, representing 35 lending locations at December 31,
2005, and began offering Company-originated cash advances under applicable state law. As an
additional service alternative to its customers, during the fourth quarter of 2005 the Company
introduced third-party commercial bank originated multi-payment installment cash advances in
California and Georgia. As of December 31, 2005, the outstanding principal balance of these bank
originated multi-payment installment cash advances was $2.2 million in California and $39,000 in
Georgia. The Company discontinued offering bank products in Georgia and California during the
second and third quarters of 2006, respectively, due principally to its third-party commercial
banks’ reaction to concerns that the FDIC raised to FDIC-supervised banks in late February 2006
concerning the FDIC’s perception of risks associated with FDIC supervised banks’ origination of
certain cash advance products with the assistance of third-party marketers and servicers.
The 35 California locations generated $2.4 million in cash advances written and $487,000
(before loss provision) in revenue related to the multi-payment bank-originated cash advances for
the fourth quarter ended December 31, 2005. These locations also generated $13.9 million in cash
advances written and $1.5 million in revenue related to the Company-originated cash advances during
the fourth quarter.
In North Carolina, represented by 10 pawn lending locations at December 31, 2005, the Company
discontinued offering cash advances on behalf of third-party banks in January 2006, but continued
to offer its core pawn services from all of these North Carolina lending locations. In Georgia,
represented by 17 pawn lending locations at December 31, 2005, the Company did not offer an
alternative cash advance product upon the discontinuance of the third-party bank cash advance
program, however, the Company continued to offer its core pawn services from all of these Georgia
lending locations. The Georgia and North Carolina markets represented $24.9 million in total
revenue for the fiscal year ending December 31, 2005, of which only $1.7 million was attributable
to cash advance revenue generated on $16.2 million of cash advances originated by third-party banks
during such fiscal year. Pawn related revenue in these markets could increase as customers seek
alternative sources of needed credit due to the elimination of cash advance activities.
Check Cashing Fees, Royalties and Other. These fees increased $1.5 million to $11.0 million in
2005, or 16.0%, from $9.5 million in 2004 due to the growth in cash advance units at the Company’s
Cashland locations. Check cashing revenues for the cash advance segment and check cashing segment
were $7.2 million and $3.8 million in 2005, and were $5.9 million and $3.6 million in 2004,
respectively.
Operations Expenses. Consolidated operations expenses, as a percentage of total revenue, were
37.1% in 2005 compared to 36.9% in 2004. These expenses increased $47.1 million, or 27.2%, in 2005
compared to 2004. Pawn lending operating expenses increased $32.4 million, or 24.0%, primarily due
to the addition of
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SuperPawn stores in December 2004. Cash advance operating expenses increased $14.7 million, or
39.8%, primarily as a result of the net establishment and acquisition of 33 locations which
resulted in higher staffing levels. In addition, increased advertising expenditures for the cash
advance products both at the pawnshops and the cash advance locations and growth in expenses in the
Company’s collection centers also contributed to the expense increase.
The combination of personnel and occupancy expenses represents 84.4% of total operations
expenses in 2005 and 84.2% in 2004. The comparison is as follows ($ in thousands):
| % of | % of | |||||||||||||||
| 2005 | Revenue | 2004 | Revenue | |||||||||||||
Personnel |
$ | 125,661 | 21.1 | % | $ | 99,267 | 21.1 | % | ||||||||
Occupancy |
60,376 | 10.2 | 46,691 | 9.9 | ||||||||||||
Other |
34,320 | 5.8 | 27,319 | 5.9 | ||||||||||||
Total |
$ | 220,357 | 37.1 | % | $ | 173,277 | 36.9 | % | ||||||||
Of the $26.4 million, or 26.6%, increase in personnel expense from 2004 to 2005, $13.8 million
was attributable to the acquisition of SuperPawn in December 2004. The balance of the increase is
mainly due to unit additions during the year, an increase in staffing levels mainly in the
collection centers and normal recurring salary adjustments. Of the $13.7 million, or 29.3%,
increase in occupancy expenses from 2004 to 2005, $6.9 million is due to the acquisition of
SuperPawn. The balance of the increase is primarily due to unit additions. The increase in
expenses in the collection centers accounted for $1.4 million, $183,000 and $811,000 of the
increase in personnel, occupancy and other operating expenses, respectively.
Administration Expenses. Consolidated administration expenses, as a percentage of total revenue,
were 7.3% in 2005 compared to 8.5% in 2004. The components of administration expenses are as
follows ($ in thousands):
| % of | % of | |||||||||||||||
| 2005 | Revenue | 2004 | Revenue | |||||||||||||
Personnel |
$ | 29,708 | 5.0 | % | $ | 27,781 | 5.9 | % | ||||||||
Other |
13,519 | 2.3 | 12,402 | 2.6 | ||||||||||||
Total |
$ | 43,227 | 7.3 | % | $ | 40,183 | 8.5 | % | ||||||||
The increase in administration expenses was principally attributable to increased staffing
levels, annual salary adjustments and net unit additions. The increase was partially offset by a
decrease of $1.7 million in employee incentive accruals, which are based on the Company’s
performance relative to its business plan, and a gain of $408,000 from the settlement of an
insurance claim filed in 2004.
Cash Advance Loss Provision. The cash advance loss provision increased $19.3 million to $42.8
million in 2005, compared to $23.5 million in 2004. Of the total increase, $10.2 million was
attributable to the increased volume of cash advances written and $9.1 million was attributable to
the increase in loss rate. In addition, the Company transitioned certain customers out of one
product into another product in some markets during the last six months of 2005. The Company also
adjusted the terms of its underwriting related to these loans at the end of 2004 to broaden the
number of customers who would qualify for a cash advance. Management believed this change led to
higher loss rates in 2005. The loss provision as a percentage of cash advances written increased
to 4.6% in 2005 from 3.6% in 2004 while actual net charge-offs (charge-offs less recoveries) were
4.3% in 2005 compared to 3.4% in 2004. The loss provision as a percentage of cash advance fees
increased to 30.2% in 2005 from 23.7% in 2004.
Depreciation and Amortization. Depreciation and amortization expense as a percentage of total
revenue was 3.9% in 2005 compared to 3.7% in 2004. Total depreciation and amortization expenses
increased $6.2
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million, or 36.1%, primarily due to the increase in operating locations and the amortization of
certain intangible assets acquired in the SuperPawn and other acquisitions.
Interest Expense. Interest expense as a percentage of total revenue increased to 1.8% in 2005 from
1.7% in 2004. Interest expense increased $2.5 million, or 30.2%, to $10.6 million in 2005 as
compared to $8.1 million in 2004. The increase was due to an increase in average debt levels
during the year partially due to the acquisition of SuperPawn in December 2004 and also because the
Company repaid all debt balances in 2004 under its line of credit following the sale of its
European businesses and did not re-borrow until the purchase of SuperPawn. The average amount of
debt outstanding increased during 2005 to $168.3 million from $130.0 million during 2004. The
effective blended borrowing cost was 6.3% in both 2005 and 2004.
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 beginning December 2010. Net
proceeds received under this agreement were used to reduce the amount outstanding under the $250.0
million bank line of credit.
Interest Income. Interest income increased $972,000 from $642,000 in 2004 to $1.6 million in 2005.
Interest income totaling $1.5 million and $473,000 for 2005 and 2004, respectively, was recorded
on the subordinated notes received in the sale of the Company’s foreign pawn lending operations.
Foreign Currency Transaction Gain (Loss). Exchange rate changes between the United States dollar
and the Swedish kronor resulted in a net loss of $834,000 in 2005 and a gain of $1.1 million in
2004. The 2005 net loss includes offsetting gains of $731,000 resulting from the foreign currency
forward contracts totaling 62 million Swedish kronor (approximately $8.0 million at maturity) that
were established by the Company in 2005 to minimize the financial impact of currency market
fluctuations.
Income Taxes. The Company’s effective tax rate for continuing operations for 2005 was 36.8% as
compared to 36.5% for 2004.
Income from Continuing Operations. Income from continuing operations was $44.8 million and $35.0
million for 2005 and 2004, respectively, up 28.2%. Diluted income from continuing operations per
share was $1.48 for 2005, as compared to $1.18 for 2004, reflecting a 25.4% increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash flows and other key indicators of liquidity are summarized as follows ($ in
thousands):
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Operating activities cash flows |
$ | 161,812 | $ | 123,320 | $ | 76,952 | ||||||
Investing activities cash flows: |
||||||||||||
Pawn loans |
(26,359 | ) | (19,697 | ) | (10,274 | ) | ||||||
Cash advances |
(77,349 | ) | (45,828 | ) | (28,466 | ) | ||||||
Acquisitions |
(64,927 | ) | (19,937 | ) | (122,413 | ) | ||||||
Property and equipment additions |
(46,355 | ) | (27,255 | ) | (28,491 | ) | ||||||
Proceeds from insurance claims |
1,934 | 530 | — | |||||||||
Proceeds from termination of contract and
disposition of assets |
2,198 | 486 | — | |||||||||
Financing activities cash flows |
55,917 | (7,870 | ) | 10,928 | ||||||||
Working capital, excluding discontinued operations |
$ | 259,813 | $ | 232,556 | $ | 209,463 | ||||||
Current ratio |
3.2 | x | 4.8 | x | 4.6 | x | ||||||
Merchandise turnover |
2.7 | x | 2.7 | x | 3.0 | x | ||||||
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Cash flows from operating activities. Net cash provided by operating activities from continuing
operations was $161.8 million for 2006, an increase of 31.2% compared to the prior year. Net cash
generated (used) by the Company’s pawn lending operations, cash advance operations and check
cashing operations were $89.1 million, $72.8 million and $(68,000), respectively. The improvement
in cash flows from operating activities in 2006 as compared to 2005 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. Higher lending activities led to increases in the Company’s
investment in pawn loans and cash advances during 2006 that used cash of $26.4 million and $77.3
million, respectively. In addition, the acquisition of CashNetUSA and the assets of 19 pawnshops
consumed $64.9 million of cash. The Company also invested $46.4 million in property and equipment
in 2006 for the establishment of 2 new pawnshop locations, 12 new cash advance locations, the
remodeling of selected operating units and ongoing enhancements to the information technology
infrastructure, including the current period investment in the multi-year project to upgrade the
Company’s point-of-sale system, and other property additions. In addition, the Company received
proceeds of $2.2 million from the termination of a lease contract and $1.9 million from a partial
insurance settlement in 2006 related to hurricanes in 2005.
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’s consolidated financial statements include the operating
results of CashNetUSA from the date of acquisition.
The Company
has 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 is to 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. Each supplemental payment will be 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. Substantially all of these supplemental
payments will be accounted for as goodwill. The terms and method of calculating these supplemental
payments are described more fully in the asset purchase agreement. 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 the first measurement date of December 31, 2006 and reflects adjustments for amounts previously paid. There are two additional measurement dates in 2007, March 31
and September 30. To the extent that the defined multiple of consolidated earnings attributable to
CashNetUSA’s business exceeds the total amounts paid through those dates, as defined in the asset
purchase agreement, the Company will make additional payments to the sellers. At this time
management cannot accurately estimate the magnitude of such payments due to the uncertainties of
growth rates in this business. In the event of high growth and profitability of the CashNetUSA
online business, these payments would be large.
Management anticipates that capital expenditures for 2007 will be approximately $45 to $55
million, primarily to establish or acquire approximately 20 to 30 new lending locations, to remodel
and relocate selected operating units, and for enhancements to communications and information
systems,
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including the current period investment in the multi-year project to upgrade the Company’s
point-of-sale system. The additional capital required to pursue acquisition opportunities is not
included in the estimate of capital expenditures because of the uncertainties surrounding any
potential transaction of this nature at this time.
Cash flows from financing activities. During 2006, the Company borrowed a net of $10.5 million
under its revolving bank line of credit, including $38.8 million for the initial payment related to
the acquisition of CashNetUSA, and 19 pawnshops during the year. The Company reduced its long-term
debt by $16.8 million through scheduled principal payments on senior unsecured notes.
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 bank
line of credit and for general corporate purposes.
Additional uses of cash included $261,000 of debt issuance costs, $3.0 million for dividends
paid and $9.6 million for the purchase of treasury shares (including $50,000 net purchases on
behalf of participants relating to the Non-Qualified Savings Plan and $188,000 of shares purchased
as partial payment of taxes for shares issued under stock-based compensation plans). 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”). During 2006, the Company purchased 256,500
shares for an aggregate amount of $9.4 million under the 2005 authorization. Management expects to
continue to purchase shares of the Company from time to time in the open market, and funding is
expected to come from operating cash flow.
During 2006, the Company officers, employees and former directors exercised stock options for
an aggregate 662,828 shares. These option exercises generated proceeds of $7.2 million of
additional equity. From November 2005 through June 2006, the Company’s Chief Executive Officer
exercised stock options and sold Company shares pursuant to 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 in accordance with the Company’s policies with respect to insider sales.
The Chief Executive Officer used the proceeds from the sales of shares under his 10b5-1 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. 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 in 2006.
The line of credit agreement and the senior unsecured notes require the Company to maintain
certain financial ratios. The Company is in compliance with all covenants and other requirements
set forth in its debt agreements. A significant decline in demand for the Company’s 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. An uncured violation of the credit agreements could result in an acceleration of the
Company’s debt and increase the Company’s borrowing costs and could even adversely affect the
Company’s ability to renew existing credit facilities, or obtain access to new credit facilities in
the future. The Company does not anticipate a significant decline in demand for its services and
has historically been successful in maintaining compliance with and renewing its debt agreements.
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The following table summarizes the Company’s contractual obligations of its continuing
operations at December 31, 2006, and the effect such obligations are expected to have on its
liquidity and cash flow in future periods (in thousands):
| 2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | Total | ||||||||||||||||||||||
Bank line of credit |
$ | — | $ | — | $ | — | $ | 81,677 | $ | — | $ | — | $ | 81,677 | ||||||||||||||
Other long-term debt |
16,786 | 12,786 | 8,500 | 6,667 | 8,940 | 84,393 | 138,072 | |||||||||||||||||||||
Interest on other
long-term debt
(1) |
8,750 | 7,508 | 6,744 | 6,132 | 5,724 | 18,237 | 53,095 | |||||||||||||||||||||
Non-cancelable leases |
34,473 | 28,397 | 21,905 | 12,910 | 8,498 | 18,168 | 124,351 | |||||||||||||||||||||
Total |
$ | 60,009 | $ | 48,691 | $ | 37,149 | $ | 107,386 | $ | 23,162 | $ | 120,798 | $ | 397,195 | ||||||||||||||
| (1) | Excludes interest obligations under the line of credit agreement. See Note 8 of Notes to Consolidated Financial Statements. |
Management believes that borrowings available ($165.5 million at December 31, 2006) under
the bank line of credit, cash generated from operations and current working capital of $260.7
million should be sufficient to meet the Company’s anticipated future capital requirements.
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, 2006, the CSO program was
available to consumers in 314 of the Company’s lending locations located in the states of Michigan,
Florida and Texas and online to borrowers in 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 now offers only cash advances underwritten by the Company to customers in that state.
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, 2006, the outstanding amount of active cash advances originated by third
party lenders was $24.7 million.
Since the Company may not be successful in collection of these delinquent accounts, 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 $1.2 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
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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
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 business 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from changes in interest
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 2005, the Company entered into an
interest rate cap agreement with a notional amount of $15.0 million of the Company’s outstanding
floating rate line of credit for a term of 24 months at a fixed LIBOR rate of 4.5%. This interest
rate cap agreement was perfectly effective at December 31, 2006. The Company had net variable rate
borrowings outstanding of $81.7 million and $71.1 million at December 31, 2006 and 2005,
respectively. Interest rates on $15.0 million of the net variable rate borrowings at December 31,
2006 and 2005, respectively, were capped at 4.5%. If prevailing interest rates were to increase
100 basis points over the rates at December 31, 2006 and 2005, respectively, and the variable rate
borrowings outstanding remained constant, the Company’s interest expense would increase by $667,000
and $561,000, and net income after taxes would decrease by $433,000 and $365,000 in 2006 and 2005,
respectively. If prevailing interest rates were to decrease 100 basis points from the rates at
December 31, 2006 and 2005, respectively, the combined fair values of the Company’s outstanding
fixed rate debt ($137.2 million and $96.0 million, respectively) would increase by $6.9 million and
$3.5 million as of December 31, 2006 and 2005, 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 Exchange Risk. The notes receivable received in the sale of the Company’s foreign
operations are subject to the risk of unexpected change in Swedish kronor exchange rates. As a
result of fluctuations in Swedish kronor, the Company recorded foreign currency transaction gains
of $296,000 (including a loss of $1.1 million on the foreign currency forward contracts) and loss
of $834,000 (net of a gain of $731,000 on the foreign currency forward contracts) in 2006 and 2005,
respectively. As a result of the establishment of
50
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the 68 million Swedish kronor currency forward contracts since mid-year 2005 to minimize the effect
of market fluctuations, substantially all of the impact of a potential decline in the exchange rate
of the Swedish kronor would be offset by the gains realized on those forward contracts. A
hypothetical 10% decline in the exchange rate of the Swedish kronor at December 31, 2006 would have
decreased net income by $106,000.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
| 53 | ||||
| 55 | ||||
| 56 | ||||
| 57 | ||||
| 58 | ||||
| 58 | ||||
| 59 | ||||
| 60 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cash America International, Inc.:
Cash America International, Inc.:
We have completed integrated audits of Cash America International, Inc.’s consolidated financial
statements and of its internal control over financial reporting as of December 31, 2006, in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Our opinions, based on our audits, are presented below.
Consolidated financial statements
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, 2006 and December 31, 2005, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2006 in conformity
with accounting principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying Report of Management on
Internal Control Over Financial Reporting, that the Company maintained effective internal control
over financial reporting as of December 31, 2006 based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on the criteria established in
Internal Control – Integrated Framework issued by the COSO. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express opinions on management’s assessment and on the effectiveness of the Company’s internal
control over financial reporting based on our audit. We conducted our audit of internal control
over financial reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides 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
53
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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.
As described in the Report of Management on Internal Control over Financial Reporting, management
has excluded Cash America Net Holdings, LLC (“CashNetUSA”) from its assessment of internal control
over financial reporting as of December 31, 2006, because its assets were acquired by the Company
in a purchase business combination during the third quarter of 2006. We have also excluded
CashNetUSA from our audit of internal control over financial reporting. CashNetUSA is a
wholly-owned subsidiary whose total assets and total revenues represent less than 6% and 5%,
respectively, of the related consolidated financial statement amounts as of and for the year ended
December 31, 2006.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
February 26, 2007
February 26, 2007
54
Table of Contents
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, 2006. 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, 2006, the Company’s
internal control over financial reporting is effective based on those criteria. Management has
excluded Cash America Net Holdings, LLC (“CashNetUSA”) from its assessment of internal control over
financial reporting as of December 31, 2006, because its assets were acquired by the Company in a
purchase business combination during the third quarter of 2006. CashNetUSA’s total assets and
total revenue were less than 6% and 5%, respectively, of the related consolidated financial
statement amounts as of and for the year ended December 31, 2006.
Management’s assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears in this Form 10-K.
/s/ DANIEL R. FEEHAN
|
/s/ THOMAS A. BESSANT, JR.
|
|||||
President and Chief Executive Officer
|
Executive Vice President and Chief Financial Officer |
|||||
February 26, 2007
|
February 26, 2007 |
55
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(in thousands, except share data)
| December 31, | ||||||||
| 2006 | 2005 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 25,723 | $ | 18,852 | ||||
Pawn loans |
127,384 | 115,280 | ||||||
Cash advances, net |
79,975 | 40,704 | ||||||
Merchandise held for disposition, net |
87,060 | 72,683 | ||||||
Finance and service charges receivable |
25,377 | 22,048 | ||||||
Other receivables and prepaid expenses |
16,128 | 13,406 | ||||||
Deferred tax assets |
16,324 | 11,274 | ||||||
Total current assets |
377,971 | 294,247 | ||||||
Property and equipment, net |
119,261 | 94,856 | ||||||
Goodwill |
238,499 | 174,987 | ||||||
Intangible assets, net |
27,477 | 23,391 | ||||||
Other assets |
13,036 | 11,167 | ||||||
Total assets |
$ | 776,244 | $ | 598,648 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 91,217 | $ | 37,217 | ||||
Customer deposits |
7,464 | 6,239 | ||||||
Income taxes currently payable |
2,691 | 1,449 | ||||||
Current portion of long-term debt |
16,786 | 16,786 | ||||||
Total current liabilities |
118,158 | 61,691 | ||||||
Deferred tax liabilities |
12,770 | 11,344 | ||||||
Other liabilities |
1,625 | 1,689 | ||||||
Long-term debt |
202,963 | 149,208 | ||||||
Total liabilities |
335,516 | 223,932 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Stockholders’ equity: |
||||||||
Common stock, $.10 par value per share,
80,000,000 shares authorized, 30,235,164 shares
issued |
3,024 | 3,024 | ||||||
Additional paid-in capital |
161,683 | 156,557 | ||||||
Retained earnings |
287,962 | 229,975 | ||||||
Accumulated other comprehensive income (loss) |
20 | (5 | ) | |||||
Notes receivable secured by common stock |
(18 | ) | (2,488 | ) | ||||
Treasury shares, at cost (565,840 shares and
999,347 shares December 31, 2006 and 2005,
respectively) |
(11,943 | ) | (12,347 | ) | ||||
Total stockholders’ equity |
440,728 | 374,716 | ||||||
Total liabilities and stockholders’ equity |
$ | 776,244 | $ | 598,648 | ||||
See Notes to Consolidated Financial Statements.
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Revenue |
||||||||||||
Finance and service charges |
$ | 149,472 | $ | 139,772 | $ | 110,495 | ||||||
Proceeds from disposition of merchandise |
335,552 | 301,502 | 250,291 | |||||||||
Cash advance fees |
195,105 | 142,068 | 99,202 | |||||||||
Check cashing fees, royalties and other |
13,085 | 11,004 | 9,490 | |||||||||
Total Revenue |
693,214 | 594,346 | 469,478 | |||||||||
Cost of Revenue |
||||||||||||
Disposed merchandise |
204,929 | 183,799 | 153,866 | |||||||||
Net Revenue |
488,285 | 410,547 | 315,612 | |||||||||
Expenses |
||||||||||||
Operations |
245,885 | 220,357 | 173,277 | |||||||||
Cash advance loss provision |
59,563 | 42,834 | 23,529 | |||||||||
Administration |
51,506 | 43,227 | 40,183 | |||||||||
Depreciation and amortization |
27,312 | 23,417 | 17,210 | |||||||||
Total Expenses |
384,266 | 329,835 | 254,199 | |||||||||
Income from Operations |
104,019 | 80,712 | 61,413 | |||||||||
Interest expense |
(11,945 | ) | (10,610 | ) | (8,148 | ) | ||||||
Interest income |
1,631 | 1,614 | 642 | |||||||||
Foreign currency transaction gain (loss) |
296 | (834 | ) | 1,116 | ||||||||
Gain from termination of contract |
2,167 | — | — | |||||||||
Income from Continuing Operations before Income Taxes |
96,168 | 70,882 | 55,023 | |||||||||
Provision for income taxes |
35,228 | 26,061 | 20,058 | |||||||||
Income from Continuing Operations |
60,940 | 44,821 | 34,965 | |||||||||
(Loss) income from discontinued operations before
income taxes (including loss on disposal of $56
for 2005 and gain of $19,023 for 2004) |
— | (56 | ) | 28,284 | ||||||||
Provision for income (taxes) benefit (including
taxes on gain from disposal of $253 for 2005 and
$(3,608) for 2004) |
— | 253 | (6,414 | ) | ||||||||
Income from discontinued operations |
— | 197 | 21,870 | |||||||||
Net Income |
$ | 60,940 | $ | 45,018 | $ | 56,835 | ||||||
Earnings Per Share: |
||||||||||||
Basic – |
||||||||||||
Income from continuing operations |
$ | 2.05 | $ | 1.53 | $ | 1.23 | ||||||
Income from discontinued operations |
$ | — | $ | 0.01 | $ | 0.77 | ||||||
Net income |
$ | 2.05 | $ | 1.54 | $ | 2.00 | ||||||
Diluted – |
||||||||||||
Income from continuing operations |
$ | 2.00 | $ | 1.48 | $ | 1.18 | ||||||
Income from discontinued operations |
$ | — | $ | 0.01 | $ | 0.74 | ||||||
Net income |
$ | 2.00 | $ | 1.49 | $ | 1.92 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
29,676 | 29,326 | 28,468 | |||||||||
Diluted |
30,532 | 30,206 | 29,584 | |||||||||
Dividends declared per common share |
$ | 0.10 | $ | 0.10 | $ | 0.37 | ||||||
See Notes to Consolidated Financial Statements.
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(in thousands, except share data)
| Year Ended December 31, | ||||||||||||||||||||||||
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||
Common stock |
||||||||||||||||||||||||
Balance at end of year |
30,235,164 | $ | 3,024 | 30,235,164 | $ | 3,024 | 30,235,164 | $ | 3,024 | |||||||||||||||
Additional paid-in capital |
||||||||||||||||||||||||
Balance at beginning of year |
156,557 | 154,294 | 141,867 | |||||||||||||||||||||
Reissuance of treasury shares |
— | — | 7,298 | |||||||||||||||||||||
Shares issued under stock-based plans |
(2,765 | ) | (445 | ) | 210 | |||||||||||||||||||
Stock-based compensation expense |
2,623 | 1,677 | 1,199 | |||||||||||||||||||||
Excess tax benefit from stock-based
compensation |
5,268 | 1,031 | 3,720 | |||||||||||||||||||||
Balance at end of year |
161,683 | 156,557 | 154,294 | |||||||||||||||||||||
Retained earnings |
||||||||||||||||||||||||
Balance at beginning of year |
229,975 | 187,860 | 141,642 | |||||||||||||||||||||
Net income |
60,940 | 45,018 | 56,835 | |||||||||||||||||||||
Dividends declared |
(2,953 | ) | (2,903 | ) | (10,617 | ) | ||||||||||||||||||
Balance at end of year |
287,962 | 229,975 | 187,860 | |||||||||||||||||||||
Accumulated other comprehensive income
(loss) |
||||||||||||||||||||||||
Balance at beginning of year |
(5 | ) | — | 7,995 | ||||||||||||||||||||
Unrealized derivatives gain (loss) |
25 | (5 | ) | — | ||||||||||||||||||||
Foreign currency translation gain |
— | — | (1,741 | ) | ||||||||||||||||||||
Sale of subsidiaries |
— | — | (6,254 | ) | ||||||||||||||||||||
Balance at end of year |
20 | (5 | ) | — | ||||||||||||||||||||
Notes receivable secured by common stock |
||||||||||||||||||||||||
Balance at beginning of year |
(2,488 | ) | (2,488 | ) | (2,488 | ) | ||||||||||||||||||
Payments on notes receivable |
2,470 | — | — | |||||||||||||||||||||
Balance at end of year |
(18 | ) | (2,488 | ) | (2,488 | ) | ||||||||||||||||||
Treasury shares at cost |
||||||||||||||||||||||||
Balance at beginning of year |
(999,347 | ) | (12,347 | ) | (938,386 | ) | (8,754 | ) | (2,040,180 | ) | (15,547 | ) | ||||||||||||
Purchases of treasury shares |
(258,063 | ) | (9,602 | ) | (298,210 | ) | (6,239 | ) | (184,198 | ) | (4,328 | ) | ||||||||||||
Reissuance of treasury shares |
— | — | — | — | 578,793 | 5,264 | ||||||||||||||||||
Shares issued under stock-based plans |
691,570 | 10,006 | 237,249 | 2,646 | 707,199 | 5,857 | ||||||||||||||||||
Balance at end of year |
(565,840 | ) | (11,943 | ) | (999,347 | ) | (12,347 | ) | (938,386 | ) | (8,754 | ) | ||||||||||||
Total Stockholders’ Equity |
$ | 440,728 | $ | 374,716 | $ | 333,936 | ||||||||||||||||||
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Net income |
$ | 60,940 | $ | 45,018 | $ | 56,835 | ||||||
Other comprehensive loss –
|
||||||||||||
Unrealized derivative gain (loss), net of tax expense (benefit) of $14 and $(3) |
25 | (5 | ) | — | ||||||||
Foreign currency translation loss, net of taxes of $-0- |
— | — | (1,741 | ) | ||||||||
Total Comprehensive Income |
$ | 60,965 | $ | 45,013 | $ | 55,094 | ||||||
See notes to consolidated financial statements.
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(in thousands)
| Year Ended December 31, | ||||||||||||
| 2006 | 2005 | 2004 | ||||||||||
Cash Flows from Operating Activities of Continuing Operations: |
||||||||||||
Net income |
$ | 60,940 | $ | 45,018 | $ | 56,835 | ||||||
Income from discontinued operations |
— | (197 | ) | (21,870 | ) | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
27,312 | 23,417 | 17,210 | |||||||||
Cash advance loss provision |
59,563 | 42,834 | 23,529 | |||||||||
Stock-based compensation expense |
2,623 | 1,677 | 1,199 | |||||||||
Foreign currency transaction (gain) loss |
(296 | ) | 834 | (1,116 | ) | |||||||
Gain on termination of contract |
(2,167 | ) | — | — | ||||||||
Changes in operating assets and liabilities – |
||||||||||||
Merchandise held for disposition |
7,128 | 12,499 | 4,830 | |||||||||
Finance and service charges receivable |
(4,579 | ) | (1,861 | ) | (1,359 | ) | ||||||
Other receivables and prepaid expenses |
(4,981 | ) | (3,191 | ) | (2,569 | ) | ||||||
Accounts payable and accrued expenses |
17,969 | 4,264 | (5,723 | ) | ||||||||
Customer deposits, net |
696 | 461 | 714 | |||||||||
Current income taxes, net |
6,510 | 229 | 3,918 | |||||||||
Excess income tax benefit from stock-based compensation |
(5,268 | ) | (1,031 | ) | (3,720 | ) | ||||||
Deferred income taxes, net |
(3,638 | ) | (1,633 | ) | 5,074 | |||||||
Net cash provided by operating activities of continuing operations |
161,812 | 123,320 | 76,952 | |||||||||
Cash Flows from Investing Activities of Continuing Operations: |
||||||||||||
Pawn loans made |
(395,104 | ) | (361,077 | ) | (290,013 | ) | ||||||
Pawn loans repaid |
210,177 | 202,015 | 157,624 | |||||||||
Principal recovered on forfeited loans through dispositions |
158,568 | 139,365 | 122,115 | |||||||||
Cash advances made, assigned or purchased |
(759,822 | ) | (624,303 | ) | (447,113 | ) | ||||||
Cash advances repaid |
682,473 | 578,475 | 418,647 | |||||||||
Acquisitions, net of cash acquired |
(64,927 | ) | (19,937 | ) | (122,413 | ) | ||||||
Purchases of property and equipment |
(46,355 | ) | (27,255 | ) | (28,491 | ) | ||||||
Proceeds from insurance claims |
1,934 | 530 | — | |||||||||
Proceeds from disposition of assets and termination of contract |
2,198 | 486 | — | |||||||||
Net cash used by investing activities of continuing operations |
(210,858 | ) | (111,701 | ) | (189,644 | ) | ||||||
Cash Flows from Financing Activities of Continuing Operations: |
||||||||||||
Net borrowings (repayments) under bank line of credit |
10,540 | (21,346 | ) | 24,372 | ||||||||
Issuance of long-term notes |
60,000 | 40,000 | — | |||||||||
Debt issuance costs paid |
(261 | ) | (1,328 | ) | — | |||||||
Payments on notes payable and other obligations |
(16,786 | ) | (19,286 | ) | (8,286 | ) | ||||||
Payments on notes receivable secured by common stock |
2,470 | — | — | |||||||||
Proceeds from exercise of stock options |
7,241 | 2,202 | 6,067 | |||||||||
Excess income tax benefit from stock-based compensation |
5,268 | 1,031 | 3,720 | |||||||||
Treasury shares purchased |
(9,602 | ) | (6,240 | ) | (4,328 | ) | ||||||
Dividends paid |
(2,953 | ) | (2,903 | ) | (10,617 | ) | ||||||
Net cash provided (used) by financing activities of continuing operations |
55,917 | (7,870 | ) | 10,928 | ||||||||
Cash Flows from Discontinued Operations: |
||||||||||||
Net cash provided by operating activities of discontinued operations |
— | — | 9,022 | |||||||||
Net cash provided by investing activities of discontinued operations |
— | — | 97,791 | |||||||||
Net cash used by financing activities of discontinued operations |
— | — | (1,905 | ) | ||||||||
Net cash provided by discontinued operations |
— | — | 104,908 | |||||||||
Net increase in cash and cash equivalents |
6,871 | 3,749 | 3,144 | |||||||||
Cash and cash equivalents at beginning of year |
18,852 | 15,103 | 11,959 | |||||||||
Cash and cash equivalents at end of year |
$ | 25,723 | $ | 18,852 | $ | 15,103 | ||||||
See notes to consolidated financial statements.
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Table of Contents
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 in the United States. 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 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.
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 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, 2006, the Company had 918 total locations and an internet-based subsidiary
offering products and services to its customers. The pawn lending operations consisted of 487
pawnshops, including 475 owned units and 12 unconsolidated franchised units in 22 states. The cash
advance operations consisted of 295 locations in 7 states, and CashNetUSA which serves multiple
markets through its internet distribution channel and had cash advances outstanding in 29 states.
The check cashing operations consisted of 136 total locations, including 131 franchised and 5
company-owned check cashing centers in 18 states.
Prior to September 7, 2004, the Company also provided financial services to individuals in the
United Kingdom and Sweden (the “foreign pawn lending operations”). In order to dedicate its
strategic efforts and resources on the growth opportunities of pawn lending and cash advance
activities in the United States, the Company sold its foreign pawn lending operations on September
7, 2004. The results of the foreign pawn lending operations have been reclassified as discontinued
operations for all periods presented in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” See Note 17.
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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 translated into U.S. dollars at the exchange rates in effect at the balance sheet
date. Interest income on the notes is translated at the monthly average exchange rates. All
realized and unrealized transaction gains and losses are included in determining net income for the
reporting period.
For the periods prior to the sale of its foreign pawn lending operations, the functional
currencies for the foreign subsidiaries were the local currencies. The assets and liabilities of
those subsidiaries were translated into U.S. dollars at the exchange rates in effect at each
balance sheet date, and the resulting adjustments were accumulated in other comprehensive income
(loss) as a separate component of stockholders’ equity. Revenue and expenses were 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 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 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. To repay the cash advance, a customer may pay cash, or, as applicable,
allow the check to be presented for collection, or allow 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. For
those locations that offer cash advances from third-party lenders, the Company receives a credit
services fee for services provided on their behalf and on behalf of borrowers. These fees are
deferred and amortized over the term of the loan.
During 2005, the Company started providing a cash advance product in some markets under a
credit services organization program, whereby 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,
a portion of the CSO fees is accounted for in accordance with Financial Accounting Standards Board
(“FASB”) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others.” The CSO fees are deferred and amortized
over the term of the loan and recorded as cash advance
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The Company records fees derived from its owned check cashing locations and many of its
lending locations in the period in which the service is provided. Royalties derived from franchise
locations are recorded on an accrual basis. Other revenues 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.
Cash advances written during each calendar month are aggregated and tracked to develop a
performance history. The Company stratifies the outstanding combined portfolio by age,
delinquency, and stage of collection when assessing the adequacy of the allowance for losses.
Historical collection performance adjusted for recent portfolio performance trends is utilized to
develop expected loss rates 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 allowance deducted from the carrying value of cash advances was $19.5 million and $6.3
million at December 31, 2006 and 2005, respectively. The accrual for losses on third-party
lender-owned cash advances was $1.2 million and $874,000 at December 31, 2006 and 2005,
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 $1.9 million and $1.8 million at
December 31, 2006 and 2005, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
Buildings and building improvements (1) |
7 to 40 years | |||
Leasehold improvements (2) |
2 to 10 years | |||
Furniture, fixtures and equipment |
2 to 7 years | |||
Computer software |
3 to 5 years |
| (1) | Structural components are depreciated over 30 to 40 years and the remaining building systems and features are depreciated over 7 to 20 years. | |
| (2) | Leasehold improvements are depreciated over the terms of the lease agreements with a maximum of 10 years. |
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 and an estimated useful life varying 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 2004, 2005 and
2006. 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.
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 September 2005, 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
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AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2005 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 fine gold that is produced in the normal course of business from the Company’s liquidation
of forfeited gold merchandise. These contracts are not accounted for as derivatives because they
meet the criteria for the normal purchases and normal sales scope exception in SFAS 133.
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 and oversight of 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.
Advertising Costs • Costs of advertising are expensed at the time of first occurrence.
Advertising expense for continuing operations was $18.5 million, $12.9 million and $11.2 million
for the years ended December 31, 2006, 2005, and 2004, 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 financial statements
for the years ended December 31, 2005 and 2004, which were 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 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 2005 and 2004 (in thousands,
except per share amounts).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in the pro forma amounts below for 2004 is the effect of the vesting of 576,547
shares which accelerated pursuant to the original terms of the options due to price performance of
the underlying Company shares. As a result, the pro forma compensation expense of those option
shares is reflected in 2004, rather than in future years had scheduled vesting occurred during the
years 2005 through 2007. No accelerated vesting of stock options occurred during 2005.
| 2005 | 2004 | |||||||
Income from continuing operations – as reported |
$ | 44,821 | $ | 34,965 | ||||
Deduct: Stock option compensation expense (a) |
65 | 1,005 | ||||||
Income from continuing operations – pro forma |
$ | 44,756 | $ | 33,960 | ||||
Net income – as reported |
$ | 45,018 | $ | 56,835 | ||||
Deduct: Total stock-based employee compensation expense (a) |
65 | 1,005 | ||||||
Net income – pro forma |
$ | 44,953 | $ | 55,830 | ||||
Net income per share – |
||||||||
Basic: |
||||||||
Income from continuing operations – as reported |
$ | 1.53 | $ | 1.23 | ||||
Income from continuing operations – pro forma |
$ | 1.53 | $ | 1.20 | ||||
Net income – as reported |
$ | 1.54 | $ | 2.00 | ||||
Net income – pro forma |
$ | 1.54 | $ | 1.97 | ||||
Diluted: |
||||||||
Income from continuing operations – as reported |
$ | 1.48 | $ | 1.18 | ||||
Income from continuing operations – pro forma |
$ | 1.48 | $ | 1.14 | ||||
Net income – as reported |
$ | 1.49 | $ | 1.92 | ||||
Net income – pro forma |
$ | 1.48 | $ | 1.88 | ||||
| (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)
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, 2006, 2005 and 2004 (in
thousands, except per share amounts):
| 2006 | 2005 | 2004 | ||||||||||
Numerator: |
||||||||||||
Income from continuing operations available to
common stockholders |
$ | 60,940 | $ | 44,821 | $ | 34,965 | ||||||
Income from discontinued operations available to
common stockholders |
— | 197 | 21,870 | |||||||||
Net income available to common shareholders |
$ | 60,940 | $ | 45,018 | $ | 56,835 | ||||||
Denominator: |
||||||||||||
Weighted average common shares outstanding |
29,519 | 29,215 | 28,401 | |||||||||
Weighted average vested restricted stock units |
98 | 47 | 1 | |||||||||
Weighted average shares in non-qualified savings plan |
59 | 64 | 66 | |||||||||
Total weighted average basic shares |
29,676 | 29,326 | 28,468 | |||||||||
Effect of shares applicable to stock option plans |
488 | 528 | 780 | |||||||||
Effect of restricted stock unit compensation plans |
368 | 352 | 336 | |||||||||
Total weighted average diluted shares |
30,532 | 30,206 | 29,584 | |||||||||
Basic earnings per share: |
||||||||||||
Income from continuing operations |
$ | 2.05 | $ | 1.53 | $ | 1.23 | ||||||
Income from discontinued operations |
— | 0.01 | 0.77 | |||||||||
Net income |
$ | 2.05 | $ | 1.54 | $ | 2.00 | ||||||
Diluted earnings per share: |
||||||||||||
Income from continuing operations |
$ | 2.00 | $ | 1.48 | $ | 1.18 | ||||||
Income from discontinued operations |
— | 0.01 | 0.74 | |||||||||
Net income |
$ | 2.00 | $ | 1.49 | $ | 1.92 | ||||||
The shares held in the Company’s non-qualified savings plan have been reclassified to the
basic earnings per share computation as the distribution of those shares is not contingent upon
future services. All prior periods presented have been restated to reflect this reclassification.
There is no impact on the previously reported basic earnings per share from this reclassification.
There were no anti-dilutive shares for the years ended December 31, 2006, 2005 and 2004.
Recent Accounting Pronouncements • In June 2006, the FASB issued 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. It requires that the new
standard be applied to the balances of assets and liabilities as of the beginning of the period of
adoption and that a corresponding adjustment be made to the opening balance of retained earnings.
FIN 48 will be effective for fiscal years beginning after December 15, 2006. The Company is
evaluating the potential effect of FIN 48, but does not expect it to have a material effect on the
Company’s consolidated financial position or results of operations.
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,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2007 and interim periods within those fiscal years. The
Company does not expect SFAS 157 to have a material effect on the Company’s consolidated financial
position or results of operations, but anticipates additional disclosures when it becomes
effective.
Reclassifications • Certain amounts in the consolidated financial statements for 2005 and
2004 have been reclassified to conform to the presentation format adopted in 2006. These
reclassifications have no effect on net income previously reported.
Revised Consolidated Statements of Cash Flows • The Company revised the consolidated
statements of cash flows for the years ended December 31, 2005 and 2004, to include the proceeds
from the sale of the assets of the discontinued foreign pawn lending operations in the summary of
“Cash flows from discontinued operations” section. Previously, these proceeds were classified in
cash flows from investing activities of continuing operations. This revision has no effect on
total cash flows from operating, investing and financing activities as previously reported but the
proceeds from sale of the Company’s foreign pawn lending operations have been revised to be
included in cash flows from discontinued operations. This revision does not impact the net change
in cash and cash equivalents for the years ended December 31, 2005 and 2004.
3. Acquisitions
CashNetUSA • 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 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. In determining the purchase price reached in
negotiations leading to the purchase, the Company considered, in addition to the cost of the assets
acquired, management’s assessment of CashNetUSA’s future earnings potential and the anticipated
rate of return from the investment in CashNetUSA. The portion of the purchase price that exceeds
the value of the tangible assets and defined life intangible assets acquired has been recognized as
goodwill. The Company’s consolidated financial statements include the operating results of
CashNetUSA from the date of acquisition. The Company has 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. Each supplemental payment
will be reduced by amounts previously paid. The supplemental payments are to be paid in cash; 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. Substantially all of these
supplemental payments will be accounted for as goodwill. The terms and method of calculating these
supplemental payments are described more fully in the asset purchase agreement. 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. Goodwill recorded in connection with the acquisition is deductible for
tax purposes. (See Note 20 for pro forma financial information.)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Under the purchase method of accounting, the net assets of TCG were recorded at their
respective fair values as of the purchase date. Fair values were determined by internal studies
and independent third-party appraisals. Intangible assets acquired in this transaction,
principally non-competition agreements, lead provider relationships and customer relationships,
will be amortized over a period based on their estimated useful lives. The excess of the cost of
acquired assets over the net amounts assigned to assets acquired and liabilities assumed was
recognized as goodwill. The purchase price of CashNetUSA, including the contingent payment as of
December 31, 2006, was allocated as follows (in thousands):
Cash advances |
$ | 18,677 | ||
Property and equipment |
1,562 | |||
Goodwill |
46,871 | |||
Intangible assets |
6,264 | |||
Other assets (liabilities), net |
9 | |||
Net assets acquired |
73,383 | |||
Cash considerations payable |
(33,761 | ) | ||
Acquisition costs payable |
(844 | ) | ||
Total cash paid for acquisition |
$ | 38,778 | ||
Future supplemental payments under the asset purchase agreement will be recorded as
goodwill.
Other Acquisitions • Pursuant to the Company’s business strategy of acquiring
existing pawnshop and/or cash advance locations that can benefit from the Company’s centralized
management and standardized operations, 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 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 21. In December 2004, the Company acquired
substantially all of the pawn operating assets of Camco, Inc., which operated under the trade name
“SuperPawn” in four states in the western United States. The transaction provided the Company its
initial entry into the western United States for pawn lending activities. The initial aggregate
purchase consideration and costs totaled $118.4 million, which consisted of $104.8 million in cash
and a payable for $1.5 million that was to be reconciled upon post transaction accounting, 578,793
shares of the Company’s stock valued at $12.6 million and acquisition costs of $1.0 million. After
the post transaction accounting reconciliation, the payable for $1.5 million was adjusted and
settled for $850,000 in 2005, reducing the final aggregate purchase consideration and costs to
$117.7 million. Also in 2004, the Company acquired, in two distinct transactions, the operating
assets of 32 cash advance locations in southern California for $14.6 million in cash, and a
pawnshop in Florida in November 2004 for $589,000.
All of the amounts of goodwill recorded in the acquisitions are expected to be deductible for
tax purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information concerning the other acquisitions made by the
Company’s continuing operations during 2006, 2005 and 2004 ($ in thousands):
| 2006 | 2005 | 2004 | ||||||||||
Number of stores acquired: |
||||||||||||
Pawnshops |
19 | 9 | 42 | |||||||||
Cash advance locations |
— | 1 | 32 | |||||||||
Purchase price allocated to: |
||||||||||||
Pawn loans |
$ | 4,365 | $ | 3,631 | $ | 26,781 | ||||||
Finance and service charges receivable |
467 | 383 | 3,715 | |||||||||
Cash advances and fees receivable |
810 | 34 | 2,302 | |||||||||
Merchandise held for disposition, net |
2,885 | 1,283 | 13,592 | |||||||||
Property and equipment |
178 | 189 | 7,165 | |||||||||
Goodwill |
16,668 | 11,386 | 65,285 | |||||||||
Intangible assets |
1,475 | 2,170 | 20,824 | |||||||||
Other assets, net of accrued liabilities |
367 | (78 | ) | (679 | ) | |||||||
Total purchase price, net of cash acquired |
27,215 | 18,998 | 138,985 | |||||||||
Stock issued in acquisitions |
— | — | (12,562 | ) | ||||||||
Note issued in acquisition (a) |
— | — | (2,500 | ) | ||||||||
Final cash settlement for prior year acquisition |
— | 850 | — | |||||||||
Purchase price adjustments for prior year
acquisition |
— | 159 | — | |||||||||
Cash consideration payable |
(1,066 | ) | (70 | ) | (1,510 | ) | ||||||
Total cash paid for acquisitions |
$ | 26,149 | $ | 19,937 | $ | 122,413 | ||||||
| (a) | Note issued in settlement of earn-out agreement related to the acquisition of Cashland in August 2003 which was repaid in 2005. |
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 and most of its
pawnshops. Since its acquisition of CashNetUSA in September 2006, the Company also offers cash
advances through an internet distribution channel. 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 in other locations arranges for customers to obtain cash advances from
independent third-party lenders. 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”). 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. 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2006, the CSO program was offered in Texas, Florida and, on a limited
basis, Michigan. The Company discontinued the CSO program in Michigan in February 2007, and now
offers only cash advances underwritten by the Company to customers in that state.
If the Company collects a customer’s delinquent amount that exceeds the amount paid to the
third- party lender pursuant to the terms of the guaranty, the Company is entitled to the excess
and recognizes it in income when collected. 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
payment third party bank-originated cash advances to its Michigan customers in July 2005 and to its
California customers in August 2005, 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, 2006 and 2005, were as follows (in thousands):
| 2006 | 2005 | |||||||
Funded by the Company: |
||||||||
Active cash advances and fees receivable |
$ | 69,489 | $ | 32,207 | ||||
Cash advances and fees in collection |
24,499 | 7,510 | ||||||
Total Funded by the Company |
93,988 | 39,717 | ||||||
Purchased by the Company from third-party lenders |
5,500 | 7,296 | ||||||
Company-owned cash advances and fees receivable, gross |
99,488 | 47,013 | ||||||
Less: Allowance for losses |
19,513 | 6,309 | ||||||
Cash advances and fees receivable, net |
$ | 79,975 | $ | 40,704 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the allowance for losses for Company-owned portfolio and the accrued loss for
third-party lender-owned portfolio for the years ended December 31, 2006, 2005 and 2004 were as
follows (in thousands):
| 2006 | 2005 | 2004 | ||||||||||
Company-owned cash advances |
||||||||||||
Balance at beginning of year |
$ | 6,309 | $ | 4,358 | $ | 3,393 | ||||||
Cash advance loss provision |
59,284 | 42,302 | 23,242 | |||||||||
Charge-offs |
(56,276 | ) | (50,145 | ) | (29,833 | ) | ||||||
Recoveries |
10,196 | 9,794 | 7,556 | |||||||||
Balance at end of year |
$ | 19,513 | $ | 6,309 | $ | 4,358 | ||||||
Accrual for third-party lender-owned cash advances |
||||||||||||
Balance at beginning of year |
$ | 874 | $ | 342 | $ | 55 | ||||||
Increase in loss provision |
279 | 532 | 287 | |||||||||
Balance at end of year |
$ | 1,153 | $ | 874 | $ | 342 | ||||||
Cash advances assigned to the Company for collection were $33.8 million, $67.6 million
and $45.9 million during 2006, 2005 and 2004, respectively. The Company’s participation interest
in third-party lender originated cash advances at December 31, 2006, 2005 and 2004 was $-0-, $2.6
million and $7.4 million, respectively.
5. Property and Equipment
Major classifications of property and equipment at December 31, 2006 and 2005 were as follows
(in thousands):
| 2006 | 2005 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Cost | Depreciation | Net | Cost | Depreciation | Net | |||||||||||||||||||
Land |
$ | 4,955 | $ | — | $ | 4,955 | $ | 5,014 | $ | — | $ | 5,014 | ||||||||||||
Buildings and
leasehold
improvements |
130,230 | (64,520 | ) | 65,710 | 116,307 | (57,228 | ) | 59,079 | ||||||||||||||||
Furniture, fixtures
and equipment |
79,931 | (48,272 | ) | 31,659 | 67,076 | (40,910 | ) | 26,166 | ||||||||||||||||
Computer software |
35,358 | (18,421 | ) | 16,937 | 21,229 | (16,632 | ) | 4,597 | ||||||||||||||||
Total |
$ | 250,474 | $ | (131,213 | ) | $ | 119,261 | $ | 209,626 | $ | (114,770 | ) | $ | 94,856 | ||||||||||
The Company recognized depreciation expense of $23.7 million, $20.1 million and $15.9
million during 2006, 2005 and 2004, 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, 2006
and 2005 were as follows (in thousands):
| Pawn | Cash | Check | ||||||||||||||
| Lending | Advance | Cashing | Consolidated | |||||||||||||
Balance as of January 1, 2006,
net of amortization of $20,788 |
$ | 125,059 | $ | 44,618 | $ | 5,310 | $ | 174,987 | ||||||||
Acquisitions |
16,668 | 46,871 | — | 63,539 | ||||||||||||
Adjustments |
(27 | ) | — | — | (27 | ) | ||||||||||
Balance as of December 31, 2006 |
$ | 141,700 | $ | 91,489 | $ | 5,310 | $ | 238,499 | ||||||||
Balance as of January 1, 2005,
net of amortization of $20,788 |
$ | 114,341 | $ | 44,422 | $ | 5,310 | $ | 164,073 | ||||||||
Acquisitions |
11,196 | 190 | — | 11,386 | ||||||||||||
Adjustments |
(478 | ) | 6 | — | (472 | ) | ||||||||||
Balance as of December 31, 2005 |
$ | 125,059 | $ | 44,618 | $ | 5,310 | $ | 174,987 | ||||||||
Acquired Intangible Assets • Acquired intangible assets that are subject to amortization
as of December 31, 2006 and 2005, were as follows (in thousands):
| 2006 | 2005 | |||||||||||||||||||||||
| Accumulated | Accumulated | |||||||||||||||||||||||
| Cost | Depreciation | Net | Cost | Depreciation | Net | |||||||||||||||||||
Non-competition agreements |
$ | 11,065 | $ | (3,403 | ) | $ | 7,662 | $ | 8,555 | $ | (1,888 | ) | $ | 6,667 | ||||||||||
Customer relationships |
9,674 | (5,017 | ) | 4,657 | 6,644 | (3,098 | ) | 3,546 | ||||||||||||||||
Lead provider relationships |
1,877 | (125 | ) | 1,752 | — | — | — | |||||||||||||||||
Other |
526 | (120 | ) | 406 | 269 | (91 | ) | 178 | ||||||||||||||||
Total |
$ | 23,142 | $ | (8,665 | ) | $ | 14,477 | $ | 15,468 | $ | (5,077 | ) | $ | 10,391 | ||||||||||
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, 2006 and 2005, tradenames of $5.3
million and licenses of $7.7 million obtained in the acquisitions are not subject to amortization.
Amortization • Amortization expense for the acquired intangible assets is as follows (in
thousands):
Actual amortization expense for the year ended December 31: |
||||
2006 |
$ | 3,653 | ||
2005 |
3,230 | |||
2004 |
1,315 | |||
Estimated future amortization expense for the years ended December 31: |
||||
2007 |
$ | 4,431 | ||
2008 |
3,956 | |||
2009 |
3,032 | |||
2010 |
1,311 | |||
2011 |
858 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2006 and 2005, were as follows (in
thousands):
| 2006 | 2005 | |||||||
Trade accounts payable |
$ | 16,248 | $ | 7,989 | ||||
Accrued taxes, other than income taxes |
3,850 | 3,912 | ||||||
Accrued payroll and fringe benefits |
21,326 | 16,784 | ||||||
Accrued interest payable |
1,456 | 1,854 | ||||||
Purchase consideration payable |
33,761 | 70 | ||||||
Accrual for losses on third-party lender-owned cash advances |
1,153 | 874 | ||||||
Acquisition costs payable |
844 | — | ||||||
Other accrued liabilities |
12,579 | 5,734 | ||||||
Total |
$ | 91,217 | $ | 37,217 | ||||
8. Long-term Debt
The Company’s long-term debt instruments and balances outstanding at December 31, 2006 and
2005, were as follows (in thousands):
| 2006 | 2005 | |||||||
Line of credit due 2010 |
$ | 81,677 | $ | 71,137 | ||||
6.21% senior unsecured notes due 2021 |
25,000 | — | ||||||
6.09% senior unsecured notes due 2016 |
35,000 | — | ||||||
6.12% senior unsecured notes due 2015 |
40,000 | 40,000 | ||||||
7.20% senior unsecured notes due 2009 |
25,500 | 34,000 | ||||||
7.10% senior unsecured notes due 2008 |
8,572 | 12,857 | ||||||
8.14% senior unsecured notes due 2007 |
4,000 | 8,000 | ||||||
Total debt |
219,749 | 165,994 | ||||||
Less current portion |
16,786 | 16,786 | ||||||
Total long-term debt |
$ | 202,963 | $ | 149,208 | ||||
At December 31, 2006 and 2005, 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 2010, 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 bank
line of credit and for general corporate purposes.
In February 2005, the Company amended and restated the existing line of credit agreement to
increase the credit limit to $250 million and extend the maturity to February 2010. 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 1.875% (1.125% at
December 31, 2006), depending on the Company’s cash flow leverage ratios as defined in the amended
agreement. The Company also pays
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
a fee on the unused portion ranging from 0.25% to 0.30% (0.25% at
December 31, 2006) based on the Company’s cash flow leverage ratios. The weighted average interest
rate (including margin) on the line of credit at December 31, 2006 was 6.5%. On September 30,
2005, the Company entered into an interest rate cap agreement with a notional amount of $15.0
million of the Company’s outstanding floating rate line of credit for a term of 24 months at a
fixed rate of 4.5%. This interest rate cap agreement has been determined to be a perfectly
effective cash flow hedge. See Note 13.
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 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, 2006, annual maturities of the outstanding long-term debt, including the
Company’s line of credit, for each of the five years after December 31, 2006 are as follows (in
thousands):
2007 |
$ | 16,786 | ||
2008 |
12,786 | |||
2009 |
8,500 | |||
2010 |
88,344 | |||
2011 |
8,940 | |||
Thereafter |
84,393 | |||
| $ | 219,749 | |||
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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, 2006
and 2005, were as follows (in thousands):
| 2006 | 2005 | |||||||
Deferred tax assets: |
||||||||
Allowance for valuation of merchandise held for disposition |
$ | 427 | $ | 402 | ||||
Tax over book accrual of finance and service charges |
5,511 | 4,752 | ||||||
Allowance for cash advance losses |
7,351 | 2,515 | ||||||
Valuation of notes receivable – sale of discontinued operations |
947 | 1,565 | ||||||
Deferred compensation |
4,193 | 3,037 | ||||||
Net capital losses |
20 | 180 | ||||||
Other |
1,640 | 1,089 | ||||||
Total deferred tax assets |
20,089 | 13,540 | ||||||
Valuation allowance for deferred tax assets |
— | (65 | ) | |||||
Deferred tax assets, net |
20,089 | 13,475 | ||||||
Deferred tax liabilities: |
||||||||
Amortization of acquired intangibles |
11,524 | 8,505 | ||||||
Property and equipment |
3,717 | 4,169 | ||||||
Other |
1,294 | 871 | ||||||
Total deferred tax liabilities |
16,535 | 13,545 | ||||||
Net deferred tax assets (liabilities) |
$ | 3,554 | $ | (70 | ) | |||
Balance sheet classification: |
||||||||
Current deferred tax assets |
$ | 16,324 | $ | 11,274 | ||||
Non-current deferred tax liabilities |
(12,770 | ) | (11,344 | ) | ||||
Net deferred tax assets (liabilities) |
$ | 3,554 | $ | (70 | ) | |||
The components of the provision for income taxes and the income to which it relates for
the years ended December 31, 2006, 2005 and 2004 are shown below (in thousands):
| 2006 | 2005 | 2004 | ||||||||||
Income from continuing operations before income taxes |
$ | 96,168 | $ | 70,882 | $ | 55,023 | ||||||
Current provision: |
||||||||||||
Federal |
$ | 36,582 | $ | 26,291 | $ | 13,887 | ||||||
State and local |
2,284 | 1,401 | 1,097 | |||||||||
| 38,866 | 27,692 | 14,984 | ||||||||||
Deferred (benefit) provision: |
||||||||||||
Federal |
(3,203 | ) | (1,845 | ) | 5,008 | |||||||
State and local |
(435 | ) | 214 | 66 | ||||||||
| (3,638 | ) | (1,631 | ) | 5,074 | ||||||||
Total provision |
$ | 35,228 | $ | 26,061 | $ | 20,058 | ||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
| 2006 | 2005 | 2004 | ||||||||||
Tax provision computed at the federal statutory income
tax rate |
$ | 33,659 | $ | 24,809 | $ | 19,258 | ||||||
State and local income taxes, net of federal tax benefits |
1,203 | 1,050 | 756 | |||||||||
Valuation allowance |
(65 | ) | (123 | ) | (166 | ) | ||||||
Other |
431 | 325 | 210 | |||||||||
Total provision |
$ | 35,228 | $ | 26,061 | $ | 20,058 | ||||||
Effective tax rate |
36.6 | % | $ | 36.8 | % | 36.5 | % | |||||
As of December 31, 2006, the Company had net capital loss carryovers of $54,000. These
losses may only be used to offset net capital gains. Any unused losses expire in 2007. The
deferred tax valuation allowance at December 31, 2005 was provided 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 $160,000, 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 (see Note
17).
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):
2007 |
$ | 34,473 | ||
2008 |
28,397 | |||
2009 |
21,905 | |||
2010 |
12,910 | |||
2011 |
8,498 | |||
Thereafter |
18,168 | |||
Total |
$ | 124,351 | ||
Rent expense for continuing operations was $34.0 million, $32.6 million and $24.7 million
for 2006, 2005 and 2004, 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 third-party lenders. At
December 31, 2006, the amount of cash advances guaranteed by the Company was $24.7 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 $1.2 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 $544,000 at December 31, 2006. This amount is reduced
dollar-for-dollar by future
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 has been
making 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 CSB is not the true lender with respect to
the loans made to Georgia borrowers and that its 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. The parties are currently in
dispute over the scope of the discovery requests made by the plaintiffs, and Cash America has
appealed a recent State Court discovery ruling on this issue. Cash America is also seeking
enforcement of the arbitration provisions and has filed a Motion to Stay and Compel Arbitration
with the State Court. The Company believes that the plaintiffs’ claims in this suit are without
merit and is vigorously defending this lawsuit. There is also a related federal court action
pending, wherein Cash America and CSB 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 have appealed the dismissal of their complaint to the
U.S Court of Appeals for the 11th Circuit. Oral arguments on this appeal took place in November
2006 and Cash America is awaiting the appellate court’s decision. The Strong litigation is still at
a very 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.
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.
11. Stockholders’ Equity
During 2006 and 2005, the Company received net proceeds totaling $7.2 million and $2.2 million
from the exercise of stock options for 662,828 and 225,134 shares, respectively. The Company
issued 578,793 treasury shares valued at $12.6 million in connection with the acquisition of
SuperPawn in 2004.
The Company received 7,379 shares and 2,588 shares during 2006 and 2005, respectively, of its
common stock valued at $188,000 and $67,000, respectively, as partial payment of taxes for shares
issued under stock-based compensation plans and 5,605 shares during 2004 valued at $130,000 for the
payment of stock exercise price.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The
following table summarizes the aggregate shares purchased under these plans during each of the
three years ended December 31:
| 2006 | 2005 | 2004 | ||||||||||
Shares purchased: |
||||||||||||
Under 2002 authorization |
— | 122,000 | 173,200 | |||||||||
Under 2005 authorization |
256,500 | 178,800 | — | |||||||||
Total shares purchased |
256,500 | 300,800 | 173,200 | |||||||||
Aggregate amount (in thousands) |
$ | 9,366 | $ | 6,130 | $ | 3,976 | ||||||
Average price paid per share |
$ | 36.51 | $ | 20.38 | $ | 22.96 | ||||||
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:
| 2006 | 2005 | 2004 | ||||||||||
Purchases: |
||||||||||||
Number of shares |
7,021 | 11,463 | 13,355 | |||||||||
Aggregate amount (in thousands) |
$ | 235 | $ | 258 | $ | 315 | ||||||
Distributions and transfers to 401(k) savings plan: |
||||||||||||
Number of shares |
12,837 | 16,441 | 8,162 | |||||||||
Aggregate amount (in thousands) |
$ | 185 | $ | 215 | $ | 83 | ||||||
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 is pledged
to the Company in support of the obligation. Interest accrues at 6% per annum. The entire unpaid
balance of principal and interest on these loans is due and payable on July 24, 2007. Amounts due
under the Program are reflected as a reduction of stockholders’ equity in the accompanying
consolidated balance sheets.
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 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $1.6 million, $1.1
million and $1.0 million in 2006, 2005 and 2004, 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 $561,000, $510,000 and $513,000 for
contributions to the SERP during 2006, 2005 and 2004, respectively.
Amounts included in the consolidated balance sheets relating to the Nonqualified Savings Plan
and the SERP were as follows (in thousands):
| As of December 31, | ||||||||
| 2006 | 2005 | |||||||
Other receivables and prepaid expenses |
$ | 7,211 | $ | 5,399 | ||||
Accounts payable and accrued expenses |
7,764 | 5,909 | ||||||
Other liabilities |
913 | 869 | ||||||
Treasury shares |
950 | 900 | ||||||
13. Derivative Instruments and Hedging Activities
On September 30, 2005, the Company entered into an interest rate cap agreement with a notional
amount of $15.0 million to hedge a portion of the Company’s outstanding floating rate line of
credit for a term of 24 months at a fixed rate of 4.5%. This interest rate cap agreement has been
determined to be a perfectly effective cash flow hedge. The change in the fair value of the
effective portion of hedge is recorded in accumulated other comprehensive income ($20,000 at
December 31, 2006) and reclassified into earnings when the hedged interest payment impacts earnings
($48,000 during 2006). The estimated net amount to be reclassified into earnings as interest
expense through the end of the contract is $54,000. 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 of $85,000 at December 31, 2006 is included in “Other receivables
and prepaid expenses” of the accompanying consolidated balance sheet.
During 2005, the Company entered into foreign currency contracts totaling 68 million Swedish
kronor (approximately $9.9 million at maturity) with respect to a portion of the expected principal
to be received under two notes received upon the sale of the foreign pawn lending operations, to
minimize the effect of market fluctuations. Under the contracts, the Company will receive fixed
total payments of $9.9 million and will pay the counter parties a total of 68 million Swedish
kronor upon maturity (March 31, 2007) unless the contracts are effectively extended through the
establishment of a new contract maturing in the future. These contracts resulted in a net loss of
$1.1 million during 2006 and a net gain of $731,000 during 2005. These gains and losses are netted
in the foreign currency transaction gain (loss) in the consolidated statement of income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Stock Purchase Rights
In August 1997, the Board of Directors declared a dividend distribution of one Common Stock
Purchase Right (the “Rights”) for each outstanding share of its common stock. The Rights become
exercisable in the event a person or group acquires 15% or more of the Company’s common stock or
announces a tender offer, the consummation of which would result in ownership by a person or group
of 15% or more of the common stock. If any person becomes a 15% or more shareholder of the Company,
each Right (subject to certain limits) will entitle its holder (other than such person or members
of such group) to purchase, for $37.00, the number of shares of the Company’s common stock
determined by dividing $74.00 by the then current market price of the common stock. The Rights
will expire on August 5, 2007.
15. Stock-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, 2006, 1,269,598 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 2006,
256,500 shares were purchased on the open market with an average purchase price of $36.51 per
share.
Stock
Options • Stock options currently outstanding under the Plans have contractual terms of
up to 10 years and have 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 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 include provisions that accelerate vesting if specified share
price appreciation criteria are 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.
During 2004, 576,547 shares vested due to the acceleration provisions. No accelerated vesting of
stock options occurred in 2005. At December 31, 2006, there was no unrecognized stock option
expense.
A summary of the Company’s stock option activity for each of the three years ended December 31
is as follows (shares in thousands):
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Exercise | Exercise | Exercise | ||||||||||||||||||||||
| Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||
Outstanding at beginning
of year |
1,403 | $ | 10.31 | 1,633 | $ | 10.26 | 2,342 | $ | 9.75 | |||||||||||||||
Exercised |
(663 | ) | 10.93 | (225 | ) | 9.78 | (707 | ) | 8.58 | |||||||||||||||
Forfeited |
— | — | (5 | ) | 17.14 | (2 | ) | 10.13 | ||||||||||||||||
Outstanding at end of year |
740 | $ | 9.76 | 1,403 | $ | 10.31 | 1,633 | $ | 10.26 | |||||||||||||||
Exercisable at end of year |
740 | $ | 9.76 | 1,358 | $ | 10.09 | 1,583 | $ | 10.04 | |||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock options outstanding and exercisable as of December 31, 2006, are summarized below
(shares in thousands):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Weighted Average | Weighted | |||||||||||||||||||
| Weighted | Years of | Average | ||||||||||||||||||
| Range of | Number | Average | Remaining | Number | Exercise | |||||||||||||||
| Exercise Prices | Outstanding | Exercise Price | Contractual Life | Exercisable | Price | |||||||||||||||
$ 5.94 to $ 9.41 |
156 | $ | 7.85 | 5.0 | 156 | $ | 7.85 | |||||||||||||
$ 9.42 to $12.63 |
553 | 9.96 | 3.9 | 553 | 9.96 | |||||||||||||||
$12.64 to $17.14 |
31 | 15.92 | 4.2 | 31 | 15.92 | |||||||||||||||
$ 5.94 to $17.14 |
740 | $ | 9.76 | 4.1 | 740 | $ | 9.76 | |||||||||||||
The outstanding stock options (all exercisable) at December 31, 2006 had an aggregate
intrinsic value of $27.5 million and the stock options exercised during 2006 had an aggregate
intrinsic value of $15.3 million. Income tax benefits realized from the exercise of stock options
for the year ended December 31, 2006 and 2005 were $5.4 million and $1.0 million, respectively.
The portion of tax benefits recorded as increases to additional paid-in capital was $5.3 million
for the year ended December 31, 2006, which represented the tax benefits realized upon exercise of
stock options in excess of the amounts recognized in the financial statements for 2006. No
compensation expense related to the stock options was recorded for 2005 and 2004, therefore, all of
the tax benefits recorded upon exercise of stock options were recorded as increases to additional
paid-in capital.
Restricted
Stock Units• In January 2004, the Company changed its approach to
equity based compensation awards and, in lieu of stock options, granted restricted stock units
(“RSUs” or singularly, “RSU”) to its officers under the provisions of the 1994 Long-Term Incentive
Plan. In April 2004, the Company adopted the 2004 Long-Term Incentive Plan and has since granted
RSUs to company officers and to the non-management members of the Board of Directors annually.
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, 2006, 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 of those awards following the grant dates.
Compensation expense totaling $2.2 million ($1.5 million net of related taxes), $1.7 million
($1.1 million net of related taxes) and $1.2 million ($779,000 net of related taxes) was recognized
for 2006, 2005 and 2004, respectively, for all of the above restricted stock units granted. Total
unrecognized compensation cost related to restricted units at December 31, 2006 was $6.2 million
which will be recognized over a weighted average period of approximately 4.9 years.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the restricted stock unit activity during 2006, 2005 and 2004:
| 2006 | 2005 | 2004 | ||||||||||||||||||||||
| Weighted | Weighted | Weighted | ||||||||||||||||||||||
| Average | Average | Average | ||||||||||||||||||||||
| Fair Value | Fair Value | Fair Value | ||||||||||||||||||||||
| at Date of | at Date of | at Date of | ||||||||||||||||||||||
| Units | Grant | Units | Grant | Units | Grant | |||||||||||||||||||
Outstanding at beginning
of year |
395,591 | $ | 21.30 | 342,798 | $ | 20.31 | 233,223 | $ | 19.23 | |||||||||||||||
Units granted |
106,248 | 24.87 | 100,061 | 24.99 | 114,749 | 22.63 | ||||||||||||||||||
Shares issued |
(28,742 | ) | 25.57 | (12,115 | ) | 22.46 | — | — | ||||||||||||||||
Units forfeited |
(2,068 | ) | 25.18 | (35,153 | ) | 21.75 | (5,174 | ) | 22.84 | |||||||||||||||
Outstanding at end of year |
471,029 | $ | 21.83 | 395,591 | $ | 21.30 | 342,798 | $ | 20.31 | |||||||||||||||
Units vested at end of year |
127,267 | $ | 19.56 | 74,901 | $ | 20.12 | 26,111 | $ | 19.23 | |||||||||||||||
The outstanding RSUs had an aggregate intrinsic value of $22.1 million and the
outstanding vested RSUs had an aggregate intrinsic value of $6.0 million at December 31, 2006.
Income tax benefits realized from the issuance of common stock for the vested RSUs for the year
ended December 31, 2006 and 2005 were $259,000 and $111,000, respectively. The portions of these
benefits recorded as increases to additional paid-in capital were $2,000 and $15,000 for the year
ended December 31, 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 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):
| 2006 | 2005 | 2004 | ||||||||||
Cash paid during the year for — |
||||||||||||
Interest |
$ | 12,311 | $ | 11,153 | $ | 8,274 | ||||||
Income taxes |
32,355 | 27,464 | 11,067 | |||||||||
Non-cash investing and financing activities — |
||||||||||||
Pawn loans forfeited and transferred to
merchandise held for disposition |
$ | 177,188 | $ | 156,766 | $ | 130,971 | ||||||
Pawn loans renewed |
78,942 | 77,878 | 46,008 | |||||||||
Cash advances renewed |
89,427 | 14,336 | 7,404 | |||||||||
Notes payable issued in acquisition |
— | — | 2,500 | |||||||||
Notes receivable received from sale of subsidiaries |
— | — | 7,962 | |||||||||
Common stock issued in acquisitions |
— | — | 12,562 | |||||||||
Liabilities assumed in acquisitions |
536 | 172 | 950 | |||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Discontinued Operations
In order to dedicate its strategic efforts and resources to the growth opportunities of pawn
lending and cash advance activities in the United States, the Company sold its foreign pawn lending
operations in the United Kingdom and Sweden to Rutland Partners LLP in September 2004. After
paying off the outstanding balance of the multi-currency line of credit, the Company received
$104.9 million cash and two separate subordinated notes receivable valued at $8.0 million. The
Company realized a gain of $19.0 million ($15.4 million net of related taxes) upon the sale of the
discontinued operations. The amount of goodwill included in the determination of the gain was
$18.5 million. In connection with the sale, the Company declared a special dividend of $0.30 per
share to its shareholders that was paid in December 2004. The special dividend reflects a share of
the significant gain realized on the sale.
The two subordinated notes received are the obligation of the company that acquired the
Swedish pawn lending operations and are both subordinated as to rights and payment terms to certain
senior lenders in the transaction. The senior subordinated note received in the maximum principal
amount of SEK 80.4 million (approximately $10.7 million face value at the date of sale with a
discounted value after currency translation adjustment of $8.8 million at December 31, 2006) bears
a coupon rate of 8.33% per annum (effective yield of 16.4% per annum) payable quarterly with
scheduled principal payments due between 2007 and 2011 subject to terms of the senior indebtedness.
The convertible junior subordinated note received in the amount of SEK 13.4 million (approximately
$1.8 million face value at the date of sale with discounted value after currency translation
adjustment of $912,000 at December 31, 2006) bears a coupon rate of 10.0% per annum (effective
yield of 25.5% per annum) payable quarterly with the entire principal or remaining unconverted
principal due in 2014.
As the issuer of the two subordinated notes is heavily leveraged with minimal equity, and due
to the subordination feature and the payment structure of the two notes, the Company has valued the
notes based on comparable yields for securities of this nature and discounted the senior
subordinated note with 8.33% coupon rate and face value of $10.7 million to $7.2 million at the
date of sale to yield 16.4% per annum, and the junior subordinated convertible note with 10.0%
coupon rate and face value of $1.8 million to $765,000 at the date of sale to yield 25.5% per
annum. Foreign currency transaction gains (losses) of $296,000, $(834,000) and $1.1 million on the
U.S. dollar equivalent value of the subordinated notes and the accrued interest receivable for
2006, 2005 and 2004, respectively, were recognized in the Company’s consolidated statements of
income when incurred. These foreign currency transaction gains (losses) include offsetting losses
of $1.1 million for 2006 and gains of $731,000 for 2005 recognized on foreign currency forward
contracts totaling 68 million SEK (or approximately $9.9 million at maturity of these contracts)
that the Company established in 2005 to minimize the financial impact of currency market
fluctuations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The summarized financial information for the discontinued operations for the years ended
December 31, 2005 and 2004 is as follows (in thousands, except per share amounts):
| Year Ended | ||||||||
| December 31 | ||||||||
| 2005(2) | 2004(1) | |||||||
Revenue- |
||||||||
Finance and service charges |
$ | — | $ | 23,820 | ||||
Proceeds from disposition of merchandise |
— | 15,433 | ||||||
Check cashing royalties and fees |
— | 1,771 | ||||||
Total Revenue |
— | 41,024 | ||||||
Cost of Revenue |
||||||||
Disposed merchandise |
— | 11,140 | ||||||
Net Revenue |
— | 29,884 | ||||||
Expenses |
||||||||
Operations |
— | 13,865 | ||||||
Administration |
— | 4,365 | ||||||
Depreciation and amortization |
— | 1,963 | ||||||
Total Expenses |
— | 20,193 | ||||||
Income from Operations |
— | 9,691 | ||||||
Interest expense and other, net |
— | 430 | ||||||
Income before Income Taxes |
— | 9,261 | ||||||
Provision for income taxes |
— | 2,806 | ||||||
Income from Operations before Gain on Disposal |
— | 6,455 | ||||||
Gain on disposal of discontinued operations,
net of applicable of income (taxes) benefits
of $253 for 2005 and $(3,608) for 2004 |
197 | 15,415 | ||||||
Income from Discontinued Operations |
$ | 197 | $ | 21,870 | ||||
Diluted Income Per Share from Discontinued
Operations |
$ | 0.01 | $ | 0.74 | ||||
| (1) | For period from January 1, 2004 through September 7, 2004 (the date of sale). | |
| (2) | The 2005 income tax benefit from discontinued operations represents the tax benefits resulting from final tax adjustments to the 2004 foreign operations tax returns. |
18. 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. To more
accurately estimate the administrative expenses associated with each operating segment, the Company
began in the second quarter of 2006 to allocate its aggregate administrative expenses on a
different basis. Management believes that the current methodology creates a more balanced
allocation among the segments based on the time, resources and activities associated with the
Company’s administrative activities of each operating segment. All prior periods in the tables
below have been revised to reflect this change in the allocation of administrative burden. The
revised allocation has not changed the consolidated performance of the Company for any period.
There are no other changes to the segment results other than to the administrative expense
allocation. A comparison of the expense allocations under the current and previous methodologies
are found in Note 19.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As described in Note 17, the results of operations of its foreign lending operations business
has been classified as discontinued operations. These operations were previously reported as a
separate operating segment. The segment data included below has been restated to exclude amounts
related to these discontinued operations. Information concerning the operating segments is set
forth below (in thousands):
| Pawn | Cash | Check | ||||||||||||||
| Lending | Advance | Cashing | Consolidated | |||||||||||||
Year Ended December 31, 2006: |
||||||||||||||||
Revenue |
||||||||||||||||
Finance and service charges |
$ | 149,472 | $ | — | $ | — | $ | 149,472 | ||||||||
Proceeds from disposition of merchandise |
335,552 | — | — | 335,552 | ||||||||||||
Cash advance fees |
43,676 | 151,429 | — | 195,105 | ||||||||||||
Check cashing fees, royalties and other |
— | 9,160 | 3,925 | 13,085 | ||||||||||||
Total revenue |
528,700 | 160,589 | 3,925 | 693,214 | ||||||||||||
Cost of revenue — disposed merchandise |
204,929 | — | — | 204,929 | ||||||||||||
Net revenue |
323,771 | 160,589 | 3,925 | 488,285 | ||||||||||||
Expenses
|
||||||||||||||||
Operations |
178,143 | 66,438 | 1,304 | 245,885 | ||||||||||||
Cash advance loss provision |
15,377 | 44,186 | — | 59,563 | ||||||||||||
Administration |
28,520 | 21,494 | 1,492 | 51,506 | ||||||||||||
Depreciation and amortization |
18,579 | 8,357 | 376 | 27,312 | ||||||||||||
Total expenses |
240,619 | 140,475 | 3,172 | 384,266 | ||||||||||||
Income from operations |
$ | 83,152 | $ | 20,114 | $ | 753 | $ | 104,019 | ||||||||
Expenditures for property and equipment |
$ | 37,645 | $ | 8,274 | $ | 436 | $ | 46,355 | ||||||||
As of December 31, 2006: |
||||||||||||||||
Total assets |
$ | 545,593 | $ | 223,131 | $ | 7,520 | $ | 776,244 | ||||||||
Year Ended December 31, 2005: |
||||||||||||||||
Revenue |
||||||||||||||||
Finance and service charges |
$ | 139,772 | $ | — | $ | — | $ | 139,772 | ||||||||
Proceeds from disposition of merchandise |
301,502 | — | — | 301,502 | ||||||||||||
Cash advance fees |
41,405 | 100,663 | — | 142,068 | ||||||||||||
Check cashing fees, royalties and other |
— | 7,185 | 3,819 | 11,004 | ||||||||||||
Total revenue |
482,679 | 107,848 | 3,819 | 594,346 | ||||||||||||
Cost of revenue — disposed merchandise |
183,799 | — | — | 183,799 | ||||||||||||
Net revenue |
298,880 | 107,848 | 3,819 | 410,547 | ||||||||||||
Expenses |
||||||||||||||||
Operations |
167,272 | 51,706 | 1,379 | 220,357 | ||||||||||||
Cash advance loss provision |
15,663 | 27,171 | — | 42,834 | ||||||||||||
Administration |
25,751 | 16,325 | 1,151 | 43,227 | ||||||||||||
Depreciation and amortization |
15,786 | 7,299 | 332 | 23,417 | ||||||||||||
Total expenses |
224,472 | 102,501 | 2,862 | 329,835 | ||||||||||||
Income from operations |
$ | 74,408 | $ | 5,347 | $ | 957 | $ | 80,712 | ||||||||
Expenditures for property and equipment |
$ | 19,961 | $ | 7,086 | $ | 208 | $ | 27,255 | ||||||||
As of December 31, 2005: |
||||||||||||||||
Total assets |
$ | 475,527 | $ | 115,778 | $ | 7,343 | $ | 598,648 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| Pawn | Cash | Check | ||||||||||||||
| Lending | Advance | Cashing | Consolidated | |||||||||||||
Year Ended December 31, 2004: |
||||||||||||||||
Revenue |
||||||||||||||||
Finance and service charges |
$ | 110,495 | $ | — | $ | — | $ | 110,495 | ||||||||
Proceeds from disposition of merchandise |
250,291 | — | — | 250,291 | ||||||||||||
Cash advance fees |
32,952 | 66,250 | — | 99,202 | ||||||||||||
Check cashing fees, royalties and other |
— | 5,904 | 3,586 | 9,490 | ||||||||||||
Total revenue |
393,738 | 72,154 | 3,586 | 469,478 | ||||||||||||
Cost of revenue — disposed merchandise |
153,866 | — | — | 153,866 | ||||||||||||
Net revenue |
239,872 | 72,154 | 3,586 | 315,612 | ||||||||||||
Expenses |
||||||||||||||||
Operations |
134,878 | 36,982 | 1,417 | 173,277 | ||||||||||||
Cash advance loss provision |
8,750 | 14,779 | — | 23,529 | ||||||||||||
Administration |
24,430 | 14,553 | 1,200 | 40,183 | ||||||||||||
Depreciation and amortization |
11,984 | 4,754 | 472 | 17,210 | ||||||||||||
Total expenses |
180,042 | 71,068 | 3,089 | 254,199 | ||||||||||||
Income from operations |
$ | 59,830 | $ | 1,086 | $ | 497 | $ | 61,413 | ||||||||
Expenditures for property and equipment |
$ | 14,107 | $ | 14,269 | $ | 115 | $ | 28,491 | ||||||||
As of December 31, 2004: |
||||||||||||||||
Total assets |
$ | 442,420 | $ | 105,650 | $ | 7,095 | $ | 555,165 | ||||||||
19. Supplemental Disclosure of Operating Segment Information
As described in Note 18 above, the Company revised the method of allocating its aggregate
administrative expenses in the second quarter of 2006. The following tables provide comparative
information by operating segment showing the current and previous allocation methods for each of
the three years ended December 31, 2006 (in thousands):
| Pawn Lending | Cash Advance | Check Cashing | ||||||||||||||||||||||
| Current | Previous | Current | Previous | Current | Previous | |||||||||||||||||||
| Method | Method | Method | Method | Method | Method | |||||||||||||||||||
Year Ended December 31, 2006: |
||||||||||||||||||||||||
Total revenue |
$ | 528,700 | $ | 528,700 | $ | 160,589 | $ | 160,589 | $ | 3,925 | $ | 3,925 | ||||||||||||
Net revenue |
323,771 | 323,771 | 160,589 | 160,589 | 3,925 | 3,925 | ||||||||||||||||||
Administration |
28,520 | 38,937 | 21,494 | 11,323 | 1,492 | 1,246 | ||||||||||||||||||
All other expenses |
212,099 | 212,099 | 118,981 | 118,981 | 1,680 | 1,680 | ||||||||||||||||||
Income from operations |
83,152 | 72,735 | 20,114 | 30,285 | 753 | 999 | ||||||||||||||||||
Year Ended December 31, 2005: |
||||||||||||||||||||||||
Total revenue |
$ | 482,679 | $ | 482,679 | $ | 107,848 | $ | 107,848 | $ | 3,819 | $ | 3,819 | ||||||||||||
Net revenue |
298,880 | 298,880 | 107,848 | 107,848 | 3,819 | 3,819 | ||||||||||||||||||
Administration |
25,751 | 32,769 | 16,325 | 9,503 | 1,151 | 955 | ||||||||||||||||||
All other expenses |
198,721 | 198,721 | 86,176 | 7,299 | 1,711 | 1,711 | ||||||||||||||||||
Income from operations |
74,408 | 67,390 | 5,347 | 12,169 | 957 | 1,153 | ||||||||||||||||||
Year Ended December 31, 2004: |
||||||||||||||||||||||||
Total revenue |
$ | 393,738 | $ | 393,738 | $ | 72,154 | $ | 72,154 | $ | 3,586 | $ | 3,586 | ||||||||||||
Net revenue |
239,872 | 239,872 | 72,154 | 72,154 | 3,586 | 3,586 | ||||||||||||||||||
Administration |
24,430 | 30,034 | 14,553 | 9,178 | 1,200 | 971 | ||||||||||||||||||
All other expenses |
155,612 | 155,612 | 56,515 | 56,515 | 1,889 | 1,889 | ||||||||||||||||||
Income from operations |
59,830 | 54,226 | 1,086 | 6,461 | 497 | 726 | ||||||||||||||||||
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Pro Forma Financial Information
The initial purchase price with the first contingent payment measured as of December 31, 2006
for the acquisition of CashNetUSA was less than 10% of the Company’s total assets at December 31,
2005. However, management anticipates that with the future contingent earn-out payments during the
next 24 months, this acquisition may have a material impact on the Company’s financial position and
results of operations. 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):
| Year Ended | Year Ended | |||||||||||||||
| December 31, 2006 | December 31, 2005 | |||||||||||||||
| As Reported | Pro Forma (a) | As Reported | Pro Forma (a) | |||||||||||||
Total revenue |
$ | 693,214 | $ | 730,794 | $ | 594,346 | $ | 603,506 | ||||||||
Net revenue |
488,285 | 525,865 | 410,547 | 419,707 | ||||||||||||
Total expenses |
384,266 | 418,941 | 329,835 | 342,094 | ||||||||||||
Net income |
60,940 | 61,908 | 44,821 | 41,731 | ||||||||||||
Net income per share: |
||||||||||||||||
Basic |
$ | 2.05 | $ | 2.09 | $ | 1.53 | $ | 1.43 | ||||||||
Diluted |
$ | 2.00 | $ | 2.03 | $ | 1.48 | $ | 1.38 | ||||||||
| (a) | Pro forma adjustments reflect: | |
| (i) | the inclusion of operating results of CashNetUSA for the period January 1, 2006 through September 15, 2006, the date of acquisition, for the 2006 pro forma and the twelve months operating results for the 2005 pro forma; | ||
| (ii) | the adjustments of depreciable asset bases and lives for property and equipment and amortization of intangible assets acquired by the Company; | ||
| (iii) | the additional interest incurred in the acquisition of CashNetUSA’s operating assets; and | ||
| (iv) | the tax effect of CashNetUSA’s earnings and net pro forma adjustments at the statutory rate of 35%. |
21. 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, and $54,000 in 2004.
Under the Company’s now discontinued officer stock loan program, the Company recorded interest
income of $36,000, $149,000 and $150,000, respectively, in 2006, 2005 and 2004. At December 31,
2006 and 2005, the outstanding balance on these notes was $18,000, and $2.5 million, and accrued
interest on these notes was $5,000 and $585,000, respectively.
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
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Officer and another executive officer also paid a total of $985,000 (including accrued
interest) to fully repay similar officer stock loans.
22. Fair Values of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31, 2006
and 2005 were as follows (in thousands):
| 2006 | 2005 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| Value | Fair Value | Value | Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 25,723 | $ | 25,723 | $ | 18,852 | $ | 18,852 | ||||||||
Pawn loans |
127,384 | 127,384 | 115,280 | 115,280 | ||||||||||||
Cash advances, net |
79,975 | 79,975 | 40,704 | 40,704 | ||||||||||||
Subordinated notes receivable |
9,760 | 9,889 | 7,994 | 8,270 | ||||||||||||
Interest rate cap |
85 | 85 | 93 | 93 | ||||||||||||
Foreign currency forward contracts |
(2 | ) | (2 | ) | 77 | 77 | ||||||||||
Financial liabilities: |
||||||||||||||||
Bank line of credit |
$ | 81,677 | $ | 81,677 | $ | 71,137 | $ | 71,137 | ||||||||
Senior unsecured notes |
138,072 | 137,158 | 94,857 | 96,026 | ||||||||||||
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 is 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.
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.
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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. 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 the highest and consistent with heavier disposition of merchandise activities
compared to the other two quarters. The following is a summary of the quarterly results of
operations for the years ended December 31, 2006 and 2005 (in thousands, except per share data):
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
2006 |
||||||||||||||||
Total revenue |
$ | 162,618 | $ | 149,607 | $ | 165,596 | $ | 215,393 | ||||||||
Cost of revenue |
52,742 | 42,886 | 46,281 | 63,020 | ||||||||||||
Net revenue |
109,876 | 106,721 | 119,315 | 152,373 | ||||||||||||
Net income (1) |
15,388 | 10,913 | 12,941 | 21,698 | ||||||||||||
Diluted net income per share (1) |
$ | 0.51 | $ | 0.36 | $ | 0.42 | $ | 0.71 | ||||||||
Diluted weighted average common shares |
30,385 | 30,569 | 30,548 | 30,561 | ||||||||||||
2005 |
||||||||||||||||
Total revenue |
$ | 144,989 | $ | 133,569 | $ | 144,773 | $ | 171,015 | ||||||||
Cost of revenue |
47,955 | 38,939 | 40,863 | 56,042 | ||||||||||||
Net revenue |
97,034 | 94,630 | 103,910 | 114,973 | ||||||||||||
Income from continuing operations |
11,902 | 6,900 | 9,563 | 16,456 | ||||||||||||
Income from discontinued operations (2) |
— | — | — | 197 | ||||||||||||
Net income |
11,902 | 6,900 | 9,563 | 16,653 | ||||||||||||
Diluted income per share — |
||||||||||||||||
Income from continuing operations |
$ | 0.39 | $ | 0.23 | $ | 0.32 | $ | 0.55 | ||||||||
Income from discontinued operations |
— | — | — | 0.01 | ||||||||||||
Net income |
$ | 0.39 | $ | 0.23 | $ | 0.32 | $ | 0.55 | ||||||||
Diluted weighted average common shares |
30,396 | 30,079 | 30,142 | 30,169 | ||||||||||||
| (1) | The second quarter results include a $2,167 ($1,409 net of related taxes), or $0.05 per share, gain from termination of a lease contract. | |
| (2) | The Company sold its foreign pawn lending operations in 2004. This income principally represents change in the U.S. tax provision on the disposal resulting from the final tax adjustments to the 2004 foreign pawn lending operations’ tax returns. |
89
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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, 2006 (“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 by us 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 our 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, 2006, 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. 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 2007 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.
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Table of Contents
In 2006, 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. 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. 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” and “Executive Compensation — Equity Compensation Plan Information” in the Proxy
Statement is incorporated into this report by reference in response to this Item 12.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information contained under the caption “Executive Compensation” in the Proxy Statement is
incorporated into this report by reference in response to this Item 13.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption “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. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| (a) (1) | Financial Statements: See Item 8, “Financial Statements and Supplementary Data,” on pages 52 through 89 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 93 through 94. | ||
| Report of Independent Registered Public Accounting Firm on Financial Statement
Schedule (page 93) Schedule II — Valuation Accounts (page 94) |
|||
| All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements. | |||
| (3) | 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 95 through 97. |
91
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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 26, 2007.
| CASH AMERICA INTERNATIONAL, INC. |
||||
| By: | /s/ DANIEL R. FEEHAN | |||
| Daniel R. Feehan | ||||
| Chief Executive Officer and President | ||||
Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been
signed by the following persons on February 26, 2007 on behalf of the registrant and in the
capacities and on the dates indicated.
| Signature | Title | Date | ||
/s/ JACK R. DAUGHERTY
|
Chairman of the Board | February 26, 2007 | ||
Jack R. Daugherty
|
Of Directors | |||
/s/ DANIEL R. FEEHAN
|
Chief Executive Officer, | February 26, 2007 | ||
Daniel R. Feehan
|
President
and Director (Principal Executive Officer) |
|||
/s/ THOMAS A. BESSANT, JR.
|
Executive Vice President and | February 26, 2007 | ||
Thomas A. Bessant, Jr.
|
Chief
Financial Officer (Principal Financial and Accounting Officer) |
|||
/s/ DANIEL E. BERCE
|
Director | February 26, 2007 | ||
Daniel E. Berce |
||||
/s/ A. R. DIKE
|
Director | February 26, 2007 | ||
A. R. Dike |
||||
/s/ JAMES H. GRAVES
|
Director | February 26, 2007 | ||
James H. Graves |
||||
/s/ B. D. HUNTER
|
Director | February 26, 2007 | ||
B. D. Hunter |
||||
/s/ TIMOTHY J. McKIBBEN
|
Director | February 26, 2007 | ||
Timothy J. McKibben |
||||
/s/ ALFRED M. MICALLEF
|
Director | February 26, 2007 | ||
Alfred M. Micallef |
92
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Cash America International, Inc.
Cash America International, Inc.
Our audits of the consolidated financial statements, of management’s assessment of the
effectiveness of internal control over financial reporting and of the effectiveness of internal
control over financial reporting referred to in our report dated February 26, 2007 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 26, 2007
February 26, 2007
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Table of Contents
SCHEDULE II
CASH AMERICA INTERNATIONAL, INC.
VALUATION ACCOUNTS
For the Three Years Ended December 31, 2006
(dollars in thousands)
VALUATION ACCOUNTS
For the Three Years Ended December 31, 2006
(dollars in thousands)
| Additions | ||||||||||||||||||||
| Balance at | Charged | Charged | Balance at | |||||||||||||||||
| Beginning | To | To | End | |||||||||||||||||
| Description | of Period | Expense | Other | Deductions | of Period | |||||||||||||||
Allowance for losses on cash advances —
|
||||||||||||||||||||
Year Ended: |
||||||||||||||||||||
December 31, 2006 |
$ | 6,309 | $ | 59,284 | $ | 10,196 | (a) | $ | 56,276 | $ | 19,513 | |||||||||
December 31, 2005 |
$ | 4,358 | $ | 42,302 | $ | 9,794 | (a) | $ | 50,145 | $ | 6,309 | |||||||||
December 31, 2004 |
$ | 3,393 | $ | 23,242 | $ | 7,556 | (a) | $ | 29,833 | $ | 4,358 | |||||||||
Accrual for losses on third-party
lender-owned cash advances — |
||||||||||||||||||||
Year Ended: |
||||||||||||||||||||
December 31, 2006 |
$ | 874 | $ | 279 | $ | — | $ | — | $ | 1,153 | ||||||||||
December 31, 2005 |
$ | 342 | $ | 532 | $ | — | $ | — | $ | 874 | ||||||||||
December 31, 2004 |
$ | 55 | $ | 287 | $ | — | $ | — | $ | 342 | ||||||||||
Allowance for valuation of inventory —
|
||||||||||||||||||||
Year Ended: |
||||||||||||||||||||
December 31, 2006 |
$ | 1,800 | $ | 1,098 | $ | — | $ | 1,028 | (b) | $ | 1,870 | |||||||||
December 31, 2005 |
$ | 1,445 | $ | 1,070 | $ | — | $ | 715 | (b) | $ | 1,800 | |||||||||
December 31, 2004 |
$ | 1,410 | $ | 542 | $ | — | $ | 507 | (b) | $ | 1,445 | |||||||||
Allowance for valuation of deferred
tax assets — |
||||||||||||||||||||
Year Ended: |
||||||||||||||||||||
December 31, 2006 |
$ | 65 | $ | (65 | ) | $ | — | $ | — | $ | — | |||||||||
December 31, 2005 |
$ | 225 | $ | (123 | ) | $ | — | $ | 37 | $ | 65 | |||||||||
December 31, 2004 |
$ | 7,204 | $ | (166 | ) | $ | — | $ | 6,813 | $ | 225 | |||||||||
Allowance for valuation of discontinued
operations (c) — |
||||||||||||||||||||
Year Ended: |
||||||||||||||||||||
December 31, 2006 |
$ | 211 | $ | 13 | $ | — | $ | (31 | ) | $ | 255 | |||||||||
December 31, 2005 |
$ | 325 | $ | 19 | $ | — | $ | 133 | $ | 211 | ||||||||||
December 31, 2004 |
$ | 389 | $ | 30 | $ | — | $ | 94 | $ | 325 | ||||||||||
| (a) | Recoveries. | |
| (b) | Deducted from allowance for write-off or other disposition of merchandise. | |
| (c) | Represents amounts related to business discontinued in 2001. |
94
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EXHIBIT INDEX
The following documents are filed as a part of this report. Those exhibits previously filed
and incorporated herein by reference are identified by reference to the list of prior filings after
the list of exhibits. Exhibits not required for this report have been omitted.
| Exhibit | Description | |
3.1
|
Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on October 4, 1984. (a) (Exhibit 3.1) | |
3.2
|
Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on October 26, 1984. (a) (Exhibit 3.2) | |
3.3
|
Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on September 24, 1986. (a) (Exhibit 3.3) | |
3.4
|
Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on September 30, 1987. (b) (Exhibit 3.4) | |
3.5
|
Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on April 23, 1992 to change the Company’s name to “Cash America International, Inc.” (c) (Exhibit 3.5) | |
3.6
|
Articles of Amendment to the Articles of Incorporation of Cash America International, Inc. filed in Office of the Secretary of State of Texas on May 21, 1993. (d) (Exhibit 3.6) | |
3.7
|
Bylaws of Cash America International, Inc. (e) (Exhibit 3.5) | |
3.8
|
Amendment to Bylaws of Cash America International, Inc. dated effective September 26, 1990. (f) (Exhibit 3.6) | |
3.9
|
Amendment to Bylaws of Cash America International, Inc. dated effective April 22, 1992. (c) (Exhibit 3.8) | |
4.1
|
Form of Stock Certificate. (c) (Exhibit 4.1) | |
10.1
|
Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of July 7, 1995. (g) (Exhibit 10.1) | |
10.2
|
First Supplement (November 10, 1995) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (h) (Exhibit 10.2) | |
10.3
|
Second Supplement (December 30, 1996) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (i) (Exhibit 10.16) | |
10.4
|
Third Supplement (December 30, 1997) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (j) (Exhibit 10.20) | |
10.5
|
Fourth Supplement (December 31, 1998) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (k) (Exhibit 10.23) | |
10.6
|
Fifth Supplement (September 29, 1999) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (l) (Exhibit 10.2) | |
10.7
|
Sixth Supplement (June 30, 2000) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (m) (Exhibit 10.2) | |
10.8
|
Seventh Supplement (September 30, 2001) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (n) (Exhibit 10.26) | |
10.9
|
Eighth Supplement (September 7, 2004) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (o) (Exhibit 10.1) | |
10.10
|
Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein for the issuance of the Company’s 7.10% Senior Notes due January 2, 2008 in the aggregate principal amount of $30,000,000. (j) (Exhibit 10.23) | |
10.11
|
First Supplement (December 31, 1998) to Note Agreement dated as of December 1, 1997 among the Company and the purchasers named therein. (k) (Exhibit 10.29) | |
10.12
|
Second Supplement (September 29, 1999) to Note Agreement dated as of December 1, 1997 among the Company and the purchasers named therein. (l) (Exhibit 10.1) |
95
Table of Contents
| Exhibit | Description | |
10.13
|
Third Supplement (June 30, 2000) to Note Agreement dated as of December 1, 1997 among the Company and the purchasers named therein. (m) (Exhibit 10.1) | |
10.14
|
Fourth Supplement (September 30, 2000) to Note Agreement dated as of December 1, 1997 among the Company and the purchasers named therein. (n) (Exhibit 10.38) | |
10.15
|
Fifth Supplement (September 7, 2004) to Note Agreement dated as of December 1, 1997 among the Company and the purchasers named therein. (o) (Exhibit 10.1) | |
10.16
|
Note Agreement dated as of August 12, 2002 among the Company and the Purchasers named therein for the issuance of the Company’s 7.20% Senior Notes due August 12, 2009 in the aggregate principal amount of $42,500,000. (p) (Exhibit 10.1) | |
10.17
|
Amendment No. 1 (September 7, 2004) to Note Agreement dated as of August 12, 2002 among the Company and the purchasers named therein. (o) (Exhibit 10.1) | |
10.18
|
Supplemental Executive Retirement Plan dated effective January 1, 2003. (q) (Exhibit 10.32) | |
10.19
|
Form of Executive Change-in-Control Severance Agreement dated December 22, 2003 between the Company and each of its Executive Vice Presidents (Thomas A. Bessant, Jr., Robert D. Brockman, Jerry D. Finn, Michael D. Gaston, William R. Horne, James H. Kauffman) (q) (Exhibit 10.31) | |
10.20
|
Amended and Restated Executive Employment Agreement between the Company and Mr. Feehan dated as of January 21, 2004. (q) (Exhibit 10.30) | |
10.21
|
2004 Long-Term Incentive Plan (r) (Exhibit 10.21) | |
10.22
|
First Amended and Restated Credit Agreement among the Company, certain lenders named therein, and Wells Fargo Bank, National Association, as Administrative Agent dated as of February 24, 2005. (r) (Exhibit 10.22) | |
10.23
|
Administrative Credit Services Agreement, dated July 1, 2005, by and between Cash America Financial Services, Inc. and NCP Finance Limited Partnership. (s) (Exhibit 10.1) | |
10.24
|
Administrative Credit Services Agreement, dated July 1, 2005, by and between Cash America Financial Services, Inc. and NCP Finance Michigan, LLC. (s) (Exhibit 10.2) | |
10.25
|
Administrative Credit Services Agreement, dated July 1, 2005, by and between Cash America Financial Services, Inc. and NCP Finance Florida, LLC. (s) (Exhibit 10.3) | |
10.26
|
Administrative Credit Services Agreement, dated July 1, 2005, by and between Cash America Financial Services, Inc. and Midwest R&S Corporation. (s) (Exhibit 10.4) | |
10.27
|
Guaranty dated July 1, 2005 by Cash America International, Inc. for the benefit of NCP Finance Limited Partnership. (s) (Exhibit 10.5) | |
10.28
|
Guaranty dated July 1, 2005 by Cash America International, Inc. for the benefit of NCP Finance Michigan, LLC. (s) (Exhibit 10.6) | |
10.29
|
Guaranty dated July 1, 2005 by Cash America International, Inc. for the benefit of NCP Finance Florida. (s) (Exhibit 10.7) | |
10.30
|
Guaranty dated July 1, 2005 by Cash America International, Inc. for the benefit of Midwest R&S Corporation. (s) (Exhibit 10.8) | |
10.31
|
Amendment One (January 25, 2006) to the Cash America International, Inc. 2004 Long-Term Incentive Plan. (t) (Exhibit 10.31) | |
10.32
|
Note Agreement dated as of December 28, 2005 among the Company and the Purchasers named therein for the issuance of the Company’s 6.12% Senior Notes due December 28, 2015 in the aggregate principal amount of $40,000,000. (t) (Exhibit 10.32) | |
10.33
|
Executive Change-in-Control Severance Agreement dated May 23, 2006 between the Company and Jerry Wackerhagen (u) (Exhibit 10.1) | |
10.34
|
Executive Change-in-Control Severance Agreement dated July 17, 2006 between the Company and J. Curtis Linscott.(u) (Exhibit 10.2) | |
10.35
|
Note Agreement dated as of December 19, 2006 among the Company and the Purchasers named therein for the issuance of the Company’s 6.09% Series Senior Notes due December 19, 2016 in the aggregate principal amount of $35,000,000 and 6.21% Series B Senior Notes due December 19, 2021 in the aggregate principal amount of $25,000,000. (v) (Exhibit 10.1) |
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Table of Contents
| Exhibit | Description | |
10.36
|
Letter agreement dated January 25, 2006 extending Amended and Restated Executive Employment Agreement between the Company and Mr. Feehan dated January 21, 2004. | |
10.37
|
Supplement No. 9 (December 31, 2006) to Note Agreement dated as July 7, 1995, among the Company and the purchasers named therein. | |
10.38
|
Supplement No. 6 (December 31, 2006) to Note Agreement dated as of December 1, 1997, among the Company and the purchasers named therein. | |
10.39
|
Amendment No. 2 (December 31, 2006) to Note Agreement dated as of August 12, 2002, among the Company and the purchasers named therein. | |
14
|
Code of Ethics. The Company’s Code of Business Conduct and Ethics may be accessed via the Company’s website at www.cashamerica.com. | |
21
|
Subsidiaries of Cash America International, Inc. | |
23
|
Consent of PricewaterhouseCoopers LLP. | |
31.1
|
Certification of Chief Executive Officer. | |
31.2
|
Certification of Chief Financial Officer. | |
32.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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. |
97