Cash America 2001 Annual Report Download - page 29

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4. Investment in innoVentry
In March 1999, Wells Fargo Cash Centers, Inc. (“Cash Centers”), a wholly owned
subsidiary of Wells Fargo Bank, N.A. (“Wells Fargo”), contributed $20,975,000 of
cash and operating assets valued at $6,025,000 to innoVentry and received newly
issued shares of innoVentry’s Series A preferred stock representing 45% of
innoVentry’s voting interest. Wells Fargo also agreed to provide innoVentry a
revolving credit facility, equipment lease financing, and cash for use in its check
cashing machines. The Company exchanged all of innoVentry’s then outstanding
common stock for newly issued shares of Series A preferred stock representing
45% of innoVentry’s voting interest and immediately assigned 10% of its shares
to the former owners of innoVentry’s predecessor in consideration for the termi-
nation of certain option rights. Additionally, certain members of innoVentry’s
newly constituted management subscribed for newly issued shares of common
stock of innoVentry, representing the remaining 10% of its voting interest.
Following the transactions, innoVentry was deconsolidated and the Company
began using the equity method of accounting for its investment and its share of
the results of innoVentry’s operations after March 9, 1999. In conjunction with
these transactions, innoVentry issued a $2,900,000 note payable to the Company
bearing interest at 7%.
In October 1999, the Company, Cash Centers, and a third party each pur-
chased $10,000,000 of innoVentry’s newly issued convertible Series B voting pre-
ferred stock. After the issuance of Series A and B preferred stock and other com-
mon stock sold by innoVentry in 1999 and 2000, the Company’s voting interest
at December 31, 2000, was 37.9%. The Company recognized pre-tax gains of
$136,000 and $5,222,000 for the years ended December 31, 2000 and 1999,
respectively, as a result of issuances of innoVentry preferred and common stock.
Summarized financial information for innoVentry at December 31, 2000,
and 1999, and for the years ended December 31, 2000, and 1999 follows
(in thousands):
2000 1999
Total current assets $ 19,810 $ 32,837
Property, equipment, computer software
and leasehold improvements, net 67,140 35,867
Non-current assets 4,484 3,035
Total assets $ 91,434 $ 71,739
Total current liabilities $ 145,066 $ 34,140
Non-current liabilities 31,365 8,540
Total stockholders’ (deficit) equity (84,997) 29,059
Total liabilities and equity $ 91,434 $ 71,739
Total net revenue $ 16,574 $ 9,117
Expenses including net interest expense (140,364) (52,946)
Income tax (expense) benefit (21) 2,787
Net loss $(123,811) $(41,042)
innoVentry sold $115.7 million of newly issued shares of senior convertible
Series C voting preferred stock in a private placement completed as of February
2, 2001. The Company participated in the placement by canceling its $2.9 mil-
lion note receivable from innoVentry plus accrued interest of $.4 million in
exchange for 2,269,066 shares of the Series C preferred stock. Upon completion
of the transactions, the Company owned 19.3% of the ownership and voting
interest in innoVentry and began using the cost method of accounting for
its investment.
In September 2001, innoVentry announced a plan to cease business opera-
tions, sell all of its assets, and pay the proceeds received to innoVentry’s creditors.
The Company anticipates that no proceeds will be available for payment to
innoVentry’s shareholders. The Company’s investment in and advances to
innoVentry were written down to zero during fiscal 2000. innoVentry’s decision
to cease operations had no effect on the Company’s consolidated financial posi-
tion or results of operations.
5. Small Consumer Cash Advances and
Allowance for Losses
Small consumer cash advances are generally offered for a term of 7 to 31 days,
depending on the customer’s next payday. In addition to the advances originated
by the Company in some of its locations, advances are offered in other locations
by a third-party financial institution (the “Bank”). Under the terms of the
Company’s agreement with the Bank, the Bank assigns each advance that remains
unpaid after its maturity date to the Company at a discount from the amount
owed by the borrower. Balances associated with the Company’s small consumer
cash advance portfolio are included in “Other receivables and prepaid expenses”
in the accompanying consolidated balance sheet. The balances outstanding at
December 31, 2001 and 2000 were as follows (in thousands):
2001 2000
Advances and fees outstanding $ 2,406 $ 1,054
Less: Allowance for losses 711 243
Net advances and fees outstanding $ 1,695 $ 811
Changes in the allowance for losses were as follows (in thousands):
2001 2000
Balance at beginning of year $ 243 $15
Provision for loan losses 2,301 477
Charge-offs (2,135) (252)
Recoveries 302 3
Balance at end of year $ 711 $ 243
6. Derivative Instruments and Hedging Activities
The Company adopted SFAS No. 133 “Accounting for Derivative Instruments
and Hedging Activities” on January 1, 2001. SFAS No. 133 requires an entity to
recognize each derivative instrument as either an asset or liability on the balance
sheet, measure it at fair value, and recognize the changes in its fair value imme-
diately in earnings unless it qualifies as a hedge. The Company’s only derivative
instruments are interest rate cap agreements that it designates and uses as cash
flow hedges to protect against the risks associated with market fluctuations in
interest rates on a portion of its variable interest rate borrowings. The Company
performs prospective assessments of each agreement’s hedge effectiveness, as
defined by SFAS No. 133, at the beginning of each quarter. The final determina-
tion of hedge effectiveness is completed following the end of each quarter.
The accompanying consolidated statements of operations include losses
from derivative valuation fluctuations of $557,000 during the year ended
December 31, 2001. The loss during the year resulted from two adjustments.
As of January 1, 2001, the Company adjusted the carrying value of each of its
interest rate cap agreements to fair value and recorded a loss of $259,000 (before
applicable income tax benefit of $87,000), which represented the cumulative
effect of adopting the new standard. The Company also recorded an additional
loss of $298,000 during the year due to the determination that the interest rate
cap agreements were ineffective as hedges (as defined by SFAS No. 133) during
2001, and due to the decreases in the fair values of the agreements resulting
from the prevailing interest rate environment. In prior years, the amortization of
these interest rate caps was included in interest expense. The fair values of the
interest rate cap agreements as of December 31, 2001, total $173,000 and are
included in “Other receivables and prepaid expenses” in the accompanying con-
solidated balance sheet.
Notes to Consolidated Financial Statements — Continued