Cash America 2001 Annual Report Download - page 26

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1. Nature of the Company
History and Operations • Cash America International, Inc. (the “Company”) is
a provider of specialty financial services to individuals in the United States,
United Kingdom, and Sweden. The Company offers secured non-recourse loans,
commonly referred to as pawn loans, to individuals through its lending opera-
tions. As an alternative to a pawn loan, the Company offers small consumer cash
advances in selected lending locations and on behalf of a third-party financial
institution in other locations. A related but secondary activity of the lending
operations is the disposition of merchandise, primarily collateral from unre-
deemed pawn loans. As of December 31, 2001, the Company’s lending opera-
tions consisted of 473 lending units, including 404 owned units and 13 fran-
chised units in the United States, and 56 owned units in Europe.
The Company also provides check cashing services through its franchised
and company owned Mr. Payroll manned check cashing centers. As of December
31, 2001, Mr. Payroll operated 127 franchised and 7 company owned manned
check cashing centers in 20 states.
2. Summary of Significant Accounting Policies
Basis of Presentation • The consolidated financial statements include the
accounts of the Company’s majority owned subsidiaries. All significant intercom-
pany accounts and transactions have been eliminated in consolidation.
In March 1999, the Company disposed of a majority interest in innoVentry
Corp. (“innoVentry”), its automated check cashing machine business. The
Company deconsolidated innoVentry and began using the equity method of
accounting for its investment and its share of the results of innoVentry’s opera-
tions. In February 2001, innoVentry sold additional voting preferred stock,
reducing the Company’s ownership and voting interest to 19.3%. Thereafter, the
Company began using the cost method of accounting for its investment in
innoVentry. innoVentry ceased business operations in September 2001 due to its
inability to raise additional financing. Since the company’s investment in and
advances to innoVentry were written down to zero in 2000, innoVentry’s decision
to cease operations had no effect on the Company’s consolidated financial posi-
tion or results of operations. See Note 4.
In September 2001, the Company announced plans to exit the rent-to-own
business in order to focus on its core business of lending activities. The consoli-
dated financial statements of the Company have been reclassified to reflect the
planned disposal of the rental business segment. See Note 3.
Use of Estimates • The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial state-
ments and the reported amounts of revenue and expenses during the reporting
periods. On an on-going basis, management evaluates its estimates and judg-
ments, including those related to revenue recognition, merchandise held for dis-
position, allowance for losses on advances, long-lived and intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for mak-
ing judgments about the carrying values of assets and liabilities that are not read-
ily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
Foreign Currency Translation • The functional currencies for the Company’s
foreign subsidiaries are the local currencies. The assets and liabilities of those
subsidiaries are translated into U.S. dollars at the exchange rates in effect at each
balance sheet date, and resulting adjustments are accumulated in other compre-
hensive income (loss) as a separate component of stockholders’ equity. Revenue
and expenses are translated at the monthly average exchange rates occurring
during each year.
Cash and Cash Equivalents • The Company considers cash on hand in units,
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 (“loans”) are made on the pledge of tangible
personal property. The Company accrues finance and service charges revenue on
all loans that the Company deems collectible based on historical loan redemption
statistics. For loans not repaid, the carrying value of the forfeited collateral
(“merchandise held for disposition”) is stated at the lower of cost (cash amount
loaned) or market.
Revenue is recognized at the time of disposition of merchandise. Interim cus-
tomer payments for layaway sales are recorded as deferred revenue and subsequently
recognized as revenue during the period in which final payment is received.
Small consumer cash advances (“advances”) provide customers with cash in
exchange for a promissory note or other repayment agreement supported by that
customer’s check for the amount of the cash advanced plus a service fee. The
Company holds the check for a short period, typically less than 17 days. To
repay the advance, customers may redeem their checks by paying cash or they
may allow the checks to be processed for collection. The Company accrues fees
and interest revenue on advances on a constant yield basis rateably over the period
of the advance. For those locations that offer small consumer cash advances from
a third-party financial institution (the “Bank”), the Company receives an adminis-
trative agency fee for services provided on the Bank’s behalf. These fees are
recorded in revenue when earned.
The Company records fees derived from its owned check cashing locations
in the period in which the service is provided. Royalties derived from franchise
locations are recorded on the accrual basis.
Allowance for Losses on Small Consumer Cash Advances • The Company’s
cash advance product primarily services a customer base of non-prime borrowers.
Increased defaults and credit losses may result from a national or regional eco-
nomic downturn, or for other reasons. In order to effectively manage these risks,
the Company utilizes a credit scoring system, monitors the performance of the
portfolio, and maintains an allowance for losses.
An allowance for losses is provided for advances, fees and interest that the
Company deems to be uncollectible based on historical loss experience. The
Company stratifies the outstanding portfolio by age, delinquency, and stage of
collection when assessing the adequacy of the allowance. The allowance is
increased by charges to operating expenses and decreased by charge-offs, as
required. The Company charges off all advances once they are 60 days past due
or sooner, if deemed uncollectible. Recoveries on losses previously charged to
the allowance are credited to the allowance at the time the recovery is collected.
Merchandise Held for Disposition and Cost of Disposed Merchandise •
Merchandise held for disposition includes merchandise acquired from unre-
deemed loans, merchandise purchased directly from the public and merchandise
purchased from vendors. Merchandise held for disposition is stated at the lower
of cost (specific identification) or market. The Company provides an allowance
for shrinkage and valuation based on management’s evaluation of the merchan-
dise. The allowance deducted from the carrying value of merchandise held for
disposition amounted to $1,589,000 and $2,012,000 at December 31, 2001 and
2000, respectively.
The cost of merchandise, computed on the specific identification basis, is
removed from merchandise held for disposition and recorded as a cost of revenue
at the time of disposition.
Notes to Consolidated Financial Statements