U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(Amendment No. 2 to Form SB-2)
Easy Money Holding Corporation
(Name of Small Business Issuer in its Charter)
Virginia 6141 54-1875786
(State or other juris- (Primary Standard (I.R.S. Employer
diction of incorporation Industrial Classifi- Identification No.)
or organization) cation) Code Number)
5295 Greenwich Road, Suite 108
Virginia Beach, VA 23462
757-499-1126
(Address and telephone number of principal executive offices, principal
place of business or intended place of business)
Mr. David Greenberg
President and Chief Executive Officer
Easy Money Holding Corporation
5295 Greenwich Road, Suite 108
Virginia Beach, VA 23462
757-499-1126
(Name, address and telephone number of agent for service)
With a copy to:
Mr. John Paris, Esq.
Williams, Mullen, Clark & Dobbins, P.C.
One Columbus Center
Virginia Beach, VA 23462
Approximate date of proposed sale to the public: As soon as practicable from
time to time after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act of 1933 registration number of the earlier registration
statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration number of the earlier registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration number of the earlier registration statement for the same
offering. [_]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box [_].
CALCULATION OF REGISTRATION FEE
===============================================================================
Proposed Proposed
Number maximum maximum
Title of of shares offering aggregate
shares to be to be price per offering Registration
registered registered (1) share (2) price fee (2)
===============================================================================
Common Stock,
$.01 par value
per share
Minimum amount 100,000 $2.50 $ 250,000 $ 63.00
- --------------
Maximum amount 2,000,000 $2.50 $5,000,000 $1,250.00(3)
- --------------
____________
(1) There is no current market for the shares, and the offering price per share
of $2.50 is an estimate based on the offering price of the shares to be
sold by us.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Previously paid.
The registrant may amend this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that the registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be
changed. The holders may not sell these securities until the registration
statement filed with the SEC is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
Initial public offering prospectus.
Subject to completion dated March 29, 2002.
PROSPECTUS
EASY MONEY HOLDING CORPORATION
COMMON STOCK
This is an initial public offering of our common stock. The offering is on
a best efforts basis. There is no underwriter and the officers and directors are
selling the offering of 100,000 to 2,000,000 shares of our common stock at $2.50
per share, a price arbitrarily determined by our board of directors. Until we
sell a minimum of 100,000 shares, we will deposit all proceeds in an escrow
account. If we do not sell the minimum within 180 days of the date of this
prospectus, we will return all proceeds without interest. It is possible that
persons affiliated with us will purchase an undetermined number of shares to
assist us in reaching the minimum. We will not extend the offering.
Minimum Maximum
------- -------
Per Share Total Per Share Total
--------- ----- --------- -----
Public offering price $2.50 $250,000 $2.50 $5,000,000
Proceeds to us (before expenses) $2.50 $250,000 $2.50 $5,000,000
There is no public market for our common stock. We have applied for listing
on the OTC Bulletin Board under the symbol "EMHC."
Please read the risk factors on page 3 before subscribing for any common
stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March 29, 2002.
TABLE OF CONTENTS
Page No.
Prospectus Summary ..................................................................... 1
Summary Financial Data ................................................................. 2
Risk Factors ........................................................................... 3
Prior S Corporation Status ............................................................. 10
Use of Proceeds ........................................................................ 11
Penny Stock Considerations ............................................................. 12
Dividend Policy ........................................................................ 13
Determination of the Offering Price .................................................... 13
Dilution ............................................................................... 14
Capitalization ......................................................................... 16
Selected Historical Financial and Operating Data ....................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations .. 19
Forward-Looking Statements ............................................................. 25
Business ............................................................................... 26
Government Regulation .................................................................. 35
Management ............................................................................. 39
Our Principal Shareholders ............................................................. 42
Market For Our Shares .................................................................. 43
Plan of Distribution ................................................................... 44
Description of Securities .............................................................. 45
Legal Matters .......................................................................... 47
Federal Tax Aspects .................................................................... 47
Certain Relationships and Related Transactions ......................................... 47
Experts ................................................................................ 48
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ... 48
Indemnification of Officers and Directors .............................................. 49
Additional Information ................................................................. 49
Recent Sales of Unregistered Securities ................................................ 50
Dealer Prospectus Delivery Obligation .................................................. 52
Index to Financial Statements .......................................................... F-1
PROSPECTUS SUMMARY
Easy Money
We are a specialty financial services company that advances cash to
customers by obtaining an authorization to draft their personal checking account
and agreeing to delay the draft until the contract is redeemed by them or until
a short holding period has expired which, on average, is 18 days. We target
customers who are currently employed and have an active checking account. In
some of our stores, we also provide customers with other financial products,
including traditional check cashing services, title advances, money orders and
Western Union payments. We recently introduced an electronic advance program
that enables us to initiate and service a customer cash advance so that the
customer need not go to a store.
Incorporated in Virginia in December 1997, Easy Money Holding Corporation
was the product of a merger of several commonly-owned corporations. We have
numerous subsidiaries and an affiliate set forth in an exhibit to this
prospectus. Our principal executive offices are located at 5295 Greenwich Road,
Suite 108, Virginia Beach, VA 23462 and our telephone number is 757.499.1126.
The Offering
. Common stock offered A minimum of 100,000 shares and a
maximum of 2,000,000 shares
. Shares outstanding prior to the 10,000,000
offering
. Common stock to be outstanding after 10,720,000 (assuming sales at the
this offering minimum) and 12,620,000 (assuming
sales at the maximum)
. Common stock to be outstanding 14,206,000
assuming all shares sold in the
offering and all outstanding warrants
and options are exercised
. Use of proceeds To support our continued growth
and for general corporate
purposes. See "Use of Proceeds."
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of December 31, 2001
and includes 25,000 shares of common stock issuable on exercise of outstanding
stock options on the effective date of this offering and 1,561,000 shares of
common stock issuable on exercise of outstanding warrants with a weighted
average exercise price of approximately $0.83 per share. We will also issue
620,000 shares to certain consultants and others on the effective date of the
registration statement in return for assisting us in becoming a publicly traded
company. The offering may be terminated at any time after the minimum is
reached.
Prospective investors should carefully consider the matters set forth under
"Risk Factors" beginning on page 3.
SUMMARY FINANCIAL DATA
The summary financial and other data of our business set forth below should
be read in conjunction with our audited consolidated financial statements and
notes to those financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus. The operations data for the years ended December 31, 1999 and 2000,
and the balance sheet data as of December 31, 2000 are derived from our audited
consolidated financial statements included elsewhere in this prospectus, audited
by KPMG, LLP, independent accountants. The operations data for the nine months
ended September 30, 2000 and 2001 and the balance sheet data as of September 30,
2001 are derived from our unaudited financial statements, that reflect all
adjustments (consisting of normal recurring accruals) we consider necessary for
a fair presentation of our financial position and results of operations. The pro
forma income tax expense (benefit) represents the estimated taxes that we would
have recorded had we been a C corporation for income tax purposes for each
period. See "Prior S Corporation Status." See "Selected Financial and Operating
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------
1999 2000 2000 2001
---- ---- ---- ----
(in thousands, except per share amounts)
(unaudited)
Operating Data:
Revenues $ 19,546 $ 14,993 $ 11,837 $ 8,327
Expenses:
Provision for credit losses 5,077 3,191 2,650 1,367
Salaries and benefits 6,486 5,836 4,738 2,816
Other operating expenses 6,073 5,484 3,265
Loss on disposal of property and equipment - 82 - 12
Net loss on dissolution of joint ventures - 447 191 -
Interest expense 884 952 715 490
Amortization of goodwill and other 89 51 37 30
-----------------------------------------------------------
18,609 16,043 12,896 7,980
Net income (loss) 937 (1,050) (1,059) 347
Pro forma income tax expense (benefit) 375 (420) (424) 139
-----------------------------------------------------------
Pro forma net income (loss) $ 562 ($630) $ (635) $ 208
============ ============ ============ ============
Historical net income (loss) per share-basic and
diluted $ 0.09 $ (0.11) $ (0.11) $ 0.03
============ ============ ============ ============
Pro forma net income (loss) per share-basic
and diluted $ 0.06 $ (0.06) $ (0.06) $ 0.02
============ ============ ============ ============
Weighted average Shares for calculating
historical and pro forma diluted net income
(loss) per share 10,208,438 10,000,000 10,000,000 10,911,770
============ ============ ============ ============
2
December 31, September 30,
2000 2001
---- ----
(amounts in thousands)
(unaudited)
Balance Sheet Data:
Cash $ 570 $ 318
Amounts due from customers for advances, net 2,953 2,543
Deficiency in working capital (3,419) (1,845)
Property and equipment, net 1,282 1,045
Receivable from related party 1,352 170
Total assets 6,765 4,662
Line of credit facilities 2,706 1,587
Current installments of long-term debt and capital
lease obligations 1,131 715
Accounts payable and accrued liabilities 1,495 1,052
Payables to related parties 263 101
Payables to officers 1,696 1,626
Capital lease obligations, excluding current installments 429 198
Total liabilities 7,722 5,279
Stockholders' equity (deficit) (957) (617)
RISK FACTORS
You should carefully consider the risks described below before investing in
our common stock. If any of the following risks actually occur, our business
could be harmed. This could cause the price of our stock to decline, and you may
lose part or all of your investment. This prospectus contains forward-looking
statements that involve risks and uncertainties, including statements about our
future plans, objectives, intentions and expectations. Many factors, including
those described below, could cause actual results to differ materially from
those discussed in forward-looking statements.
Risks Related to the Offering
We arbitrarily determined the offering price of our common stock in the
offering. The price exceeds the book value of our shares. Investors may be
unable to recoup their investment if the value of our shares falls below the
offering price.
Before this offering, there was no public market for our common stock. Our
board of directors arbitrarily determined the offering price. Because we have no
underwriter to offer the common stock, our negotiations with an underwriter did
not determine the offering price as is customary in underwritten public
offerings. The offering price bears no relationship whatsoever to our assets,
earnings, book value or other objective standard of value. Investors will be
unable to recoup their investment if the value of our common stock falls below
the offering price. As of September 30, 2001, we had a net tangible book value
of ($829,000) (after deducting goodwill of $212,000) or ($0.08) per share. If we
sell the maximum of 2,000,000 shares (including the issuance of 620,000 shares
to our selling shareholders), our book value per share, after the offering, will
be $0.33 per share (or ($0.06) per share if we sell the minimum of 100,000
shares)(including the issuance of 620,000 shares to our selling shareholders).
3
Our common stock may be thinly traded and its price volatile, both of
which may make it difficult for investors to sell their common stock.
Because of the way we have chosen to establish a public market for our
shares, we may have significant difficulty in gaining recognition by market
makers, analysts, and individual investors. See "Market for Our Shares."
Because our common stock has not previously been publicly traded, and
there is no underwriter with market-making capability, we do not know if we will
ever be successful in attracting or maintaining market makers or if we will ever
develop a meaningful market for our common stock. We do not have the support of
an underwriter that could help us in gaining recognition with individual
investors and provide analysts to institute coverage of us. Both of these
factors are important in establishing a liquid trading market for our common
stock. The absence of any meaningful market in our Shares will adversely effect
your ability to sell our common stock in the future. See "Market for our
Shares."
From time to time during and after this offering, there may be
significant volatility in the market price for our common stock. The market
price for the shares purchased by this offering may well decline below the
initial offering price. The stock market has from time to time experienced
significant price and volume fluctuations, that have particularly affected the
market prices of securities of financial services companies, and that may be
unrelated to the operating performance. General market conditions, including
changes in interest rates, could materially effect the market price of our
common stock. The market price of our shares could also be subject to
significant fluctuations in response to, and may be adversely effected by among
other factors, government regulatory actions, variations in our quarterly
operating results, changes in our earnings estimates, developments in the cash
advance industry and general stock market conditions. Any future shortfall in
our revenues or earnings from levels expected by securities analysts could have
an immediate and significant adverse effect on the trading price of our shares
in any given period.
Further, because we will be subject to the penny stock rules, the level
of trading activity in our stock may be reduced which may make it difficult for
investors in our common stock to sell their shares. Broker-dealer practices in
connection with transactions in penny stocks are regulated by certain penny
stock rules adopted by the Securities and Exchange Commission. Penny stocks
generally are equity securities with a price of less than $5.00 other than
securities registered on certain national securities exchanges or quoted on
NASDAQ. The penny stock rules may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules and investors in our common stock may find it difficult to
sell their shares. See "Penny Stock Considerations."
If you buy our common stock in this offering, you will experience
immediate dilution.
The initial public offering price of our common stock is substantially
higher than the current tangible book value per share of our outstanding common
stock. If you invest in the offering, you will incur immediate and substantial
dilution in the tangible book value per share of your shares, and existing
shareholders will receive a material increase in the tangible book value per
share of their common stock. At an assumed initial public offering price of
$2.50 per share, if you purchase shares, you will incur immediate and
substantial
4
dilution of approximately $2.17 per share in the tangible book value of your
shares from the price they pay for the shares if 2,000,000 shares are sold by us
($2.56 per share if 100,000 shares are sold by us). In addition, investors
purchasing Shares from us and the selling shareholders will incur additional
dilution if outstanding warrants are exercised. See "Dilution." Our arrangements
with certain consultants will cause additional dilution not reflected in the
dilution table. See "Certain Relationships and Related Transactions."
We do not anticipate paying cash dividends in the foreseeable future.
Certain of our credit agreements restrict us from paying cash dividends.
After this offering, we anticipate that we will return all our
earnings, if any, for development and expansion of our business. We do not
anticipate paying any cash dividends in the foreseeable future. In addition,
certain of our credit agreements prohibit the payment of cash dividends without
the lender's consent.
Because our principal stockholders will control stockholder votes, the
premium over the market prices that an acquiror may otherwise pay for our common
stock may be reduced and any merger or takeover may be delayed.
If we sell the maximum number of 2,000,000 shares, David Greenberg, our
President and Chief Executive Officer and members of his family, and Tami Van
Gorder (Mr. Greenberg's sister), our Secretary/Treasurer and members of her
family, will beneficially own approximately 70.4% of our outstanding common
stock. In that event, Mr. Greenberg and Ms. Van Gorder, voting together, will
control, or at a minimum, exercise significant influence over, all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. If we sell less than 2,000,000 shares,
our principal shareholders will have even more control. This ownership
concentration also may have the effect of delaying or preventing a change in
control of our company. Purchasers in this offering will become minority
stockholders and will have no control over our management or our business
policies. See "Principal Stockholders" and "Description of Capital Stock."
The large number of shares eligible for future sale after this offering
could cause a decline in the price of our shares.
Future sales, or the availability for future sale, of a significant
number of shares of the common stock could adversely effect the prevailing
market price of the shares purchased in this offering. The shares offered by us
and the selling shareholders will be eligible for immediate sale in the public
market without restriction, except for any shares purchased by our "affiliates,"
as such term is defined in Rule 144 of the SEC. Of the remaining 10,000,000
shares outstanding, all are held by our principal officers and founders. With
the exception of shares sold pursuant to this offering, substantially all such
shares will be eligible for sale in the public market subject to compliance with
certain volume limitations and other conditions of Rule 144 under the Securities
Act. Following this offering, sales, or the availability for future sale, of a
significant number of shares not only would have the potential to cause a
material decrease in the trading price of the shares but also could impair our
future ability to raise capital at favorable prices or on favorable terms.
In addition, we have outstanding options to purchase 25,000 shares of
common stock and warrants to purchase 1,561,000 shares at a weighted average
exercise price of $0.83 per share. The warrant agreement provides the holders
with certain registration rights that, if exercised, will result in the
registration and public sale of these shares. This may cause the price of our
5
common stock to fall. In addition, exercise of this registration right in a
subsequent public offering could have a material and adverse effect on our
ability to raise needed capital. Such warrants expire six months after an IPO
and have anti-dilution rights. See "Our Principal Shareholders."
Risks of Our Business
During 2000, we incurred a net loss and closed a significant number of
stores during the year. If we cannot generate significant operating profits from
our remaining stores, we may have to further curtail operations.
In 2000, we had a net loss of $1,050,000. We also closed 58 stores,
primarily those with low volume and low profit margins. In 2001, we closed an
additional 9 stores. We continue to evaluate the performance of each of our
stores, some of which are not profitable, and may close additional stores during
2002. If we cannot generate profits from our remaining stores we may have to
further curtail our operations which would have a material and adverse effect on
our future business operations.
Our operations require substantial amounts of capital. Additional
financing may be too expensive or not available.
Our operations involve primarily cash advances to customers requiring
substantial amounts of capital. As of September 30, 2001, we had two credit
lines totaling only $1,587,000. Outstanding borrowings under one of our lines of
credit amounted to $1,211,000 as of September 30, 2001. The terms of the loan
agreement permit the lender to terminate the agreement at any time. If
terminated, our obligations to the lender become due and payable, which could
have a material and adverse effect on our business. Further, we can give no
assurance that we will have access to the capital markets in the future for
equity or debt financings on acceptable terms to satisfy our cash requirements.
In addition, before we can make additional borrowings, we must obtain approval
from our banks. Any inability to access the capital markets or obtain acceptable
additional lines of credit or other financing could have a material and adverse
effect on our business, operating results, financial condition and growth. In
the event we cannot obtain additional financing within the time frames estimated
for implementing our growth strategy, we will extend those time frames while
striving to maintain profitability.
If we do not implement our operating procedures and internal controls
effectively, our business could be harmed.
On-site personnel manage the operations of our stores. They decide
whether a customer will receive cash advances. We have established operating
procedures and internal controls to guide our employees in the credit
decision-making process. There can be no assurance that our operating procedures
and internal controls will result in sound employee decisions or prevent fraud,
employee theft or other abuses. In addition, there can be no assurance that our
training programs will result in the proper implementation and execution of our
operating procedures or internal controls. Our business, operating results and
financial condition would be adversely affected if our operating procedures,
internal controls or training programs prove to be inadequate or improperly
implemented. See "Business--Organizational Structure and Procedures."
We do not require that our customers provide collateral for cash
advances and we are susceptible to substantial risks of non-payment.
Generally, we do not require customers to provide collateral to secure
our cash advances or to satisfy traditional credit criteria. In addition, our
customers have little or no limited liquidity. As a result, we are more
susceptible to the risk that customers will not repay the loans than consumer
lenders or finance companies that have more stringent underwriting criteria and
6
typically collateral for their loan. In 2000 and for the nine months ended
September 30, 2001, our provision for credit losses was $3,190,000 (21.3% of
revenues) and $1,367,000 (16.4% of revenues), respectively. There can be no
assurance that the rate of our delinquencies and defaults will not increase in
the future.
Our business is highly concentrated in a number of states and would be
adversely affected if there is a economic slowdown or other negative conditions
in the states where we have a high concentration of stores.
Our stores are, and will likely continue to be, highly concentrated in
Louisiana (34), New Mexico (9) and Nevada (5). As a result, the prevailing
economic, demographic, regulatory and competitive conditions of these states
control our future prospects. For example, in 2001 we generated approximately
69% of our revenues in Louisiana.
Our operations may be negatively impacted if we cannot successfully
manage acquisitions.
Although our growth strategy does not focus on acquisitions, we may
consider acquiring other consumer finance companies. There can be no assurance
that we will complete an acquisition in a timely manner or successfully
integrate it into our operations. Once integrated, it may not achieve levels of
revenues, profitability or productivity comparable to our existing stores or
otherwise perform as expected. Acquisitions also involve special risks,
including those associated with unanticipated liabilities and contingencies,
diversion of management attention and possible adverse effects on earnings,
increased interest costs, the issuance of additional securities, some or all of
which could have a material adverse effect on our business, operating results
and financial condition. We cannot predict whether or when we might identify any
prospective acquisition candidate or complete any acquisition. The value of our
common stock may decline if we issue additional common stock to complete an
acquisition.
If we cannot secure additional capital, or if available capital is too
expensive, we cannot implement our plans to open additional stores and improve
our electronic advance program. If we cannot, our future prospects will be
seriously diminished.
Opening more stores and improving an electronic advance program will
require a significant capital investment. Debt or equity financing may not be
available for us to do so, or if available may be too expensive to incur. To
open our average store requires an investment of approximately $50,000, and we
anticipate 6 months of operational losses at approximately $5,000 per month
before an average store generates cash flow for operations. If favorable
economic conditions permit (and financing is available), we hope to open and
possibly acquire new stores in 2002. We estimate that to improve, expand and
market our electronic advance program will require an investment of
approximately $600,000 in the next year.
If we expand our operations and fail to manage growth effectively, our
business will be harmed.
Although we plan to open new stores, during 2000 we had to curtail our
growth plans and closed 58 unprofitable or low-margin stores. During 2002, we
expect to grow our business in selected markets with our electronic advance
program or through acquisitions. There can be no assurance that we will succeed.
Our growth strategy is subject to significant risks. In addition to expanding
7
operations in our existing markets, we intend to enter new markets where the
regulatory climate is favorable to our business. There can be no assurance that
we will be able to expand our market presence in our existing markets or
successfully enter new markets. Factors that will affect our growth strategy
include:
. the success of our electronic advance program
. adequate financing
. the prevailing state laws and regulatory environment
. adapting our internal controls and operating procedures to
accommodate growth
. recruiting, training and retaining qualified personnel,
particularly store managers
. obtaining required regulatory approvals or any government permits
and licenses
There can be no assurance that our systems, procedures and controls will be
adequate to support the expansion of our operations. Significant growth will
place managerial demands on all aspects of our operations. Our future operating
results will substantially depend on our ability to manage changing business
conditions and to implement and improve our technical, administrative, financial
controls and reporting systems. In addition, there can be no assurance that we
can implement our business strategy profitably in states where we do not
currently operate.
If we are cannot effectively market our cash advance services, we will not
attract customers.
Our success will depend on several factors, including consumer perception
of our role in the financial community and market acceptance of our services, as
well as the regulatory environment for our business. We believe that market
acceptance of our services depends on several factors, including ease of use,
price, convenience of locations and the effectiveness of our marketing efforts.
There can be no assurance that our services will achieve broad market
acceptance. A decline in the demand for our consumer finance services, our
failure to achieve market acceptance of our services or adverse regulations of
our business would have a material and adverse effect on our business, operating
results and financial condition.
Changing economic conditions may adversely affect our business. The risks
associated with our business may become more significant in an economic slowdown
or recession. During 2002, although we may experience an increase in demand for
our services, we may also suffer an increase in delinquency rates and loan
write-offs. Our delinquency rates and frequency and severity of losses may be
higher under adverse economic conditions than those experienced by the financial
services industry generally because of our limited credit requirements, the fact
that each transaction is the result of a customer's short-term financial need
and the overall nature of our business. Any sustained period of economic
slowdown or recession could have a material and adverse effect on our business,
operating results and financial condition.
Our quarterly operating results may fluctuate significantly and any failure
to meet financial expectations for any fiscal quarter may disappoint investors
and could cause the price of our common stock to fall.
8
Our quarterly operating results are likely to fluctuate for many reasons,
including general economic conditions and the ever-changing regulatory
environment in states where we operate, as well as other factors beyond our
control. Because our expenses are largely independent of our revenues in any
particular period, we cannot accurately forecast our operating results. If our
revenues are below expectations in any quarter, our inability to adjust spending
in a timely manner to compensate for the revenue shortfall may magnify its
negative effect. Because of the possibility of fluctuations in our revenues and
expenses, we believe that quarter-to quarter comparisons of our operating
results are not a good indication of our future performance. In addition, our
operating results in a future fiscal quarter may not meet the expectations of
market analysts and investors. In that case, our stock price will likely decline
and investors will experience a decline in the value of their investment.
Further, assuming an offering price of $2.50 per share, we will record an
operating expense of approximately $1,625,000 in connection with this offering
and a concurrent offering by certain selling shareholders. This expense is
expected to be recorded in the second quarter of 2002.
The loss of key executives could have a significant negative effect on our
business.
Our success largely depends on the continued employment of our executive
officers and other key personnel, including David Greenberg, President and Chief
Executive Officer, Michael Wright, Chief Operating Officer, Tami Van Gorder,
Secretary/Treasurer and David Kilby, Chief Financial Officer. We have an
employment agreement with Mr. Kilby but we do not have one with any other
officers. The loss of one or more of these officers could have a material and
adverse effect on our business, operating results and financial condition. We
also plan to hire, train and retain highly qualified management and marketing
personnel. If we cannot, our business will suffer.
We owe our principal shareholders significant amounts. This might cause our
Board of Directors to have a conflict of interest.
As of September 30, 2001, we owed our founding shareholders, Mr. Greenberg
and Ms. Van Gorder, $985,000 and $641,000, respectively, under demand notes. Our
principal credit agreement restricts repayment of principal on these loans.
Although the founders' equity ownership encourages them to act in the best
interests of all shareholders, circumstances could arise where the founders will
be in a position of allocating available cash in a manner that may not be in the
best interests of other shareholders. This could have a material adverse effect
on our business, operating results and financial condition.
Risks of Our Industry
States closely regulate our industry. Several lawsuits have challenged cash
advance transactions as violations of state usury laws. If such lawsuits are
successful with states in which we operate, or if state laws were changed to
prevent making cash advance loans, we will be required to change the manner in
which we conduct our business.
Several lawsuits have challenged cash advance transactions as violating
state usury laws, as unauthorized small loan lending or violations of consumer
protection laws. We are a named defendant in three material lawsuits that allege
that we engaged in transactions that violate various federal and state statutes
and regulations. Plaintiffs have obtained class certification in one suit and
seek certification in one other. We intend to vigorously defend these claims. We
cannot predict the outcome of the litigation. If we cannot successfully defend
these and any similar suit that may be filed in the future, we may no longer be
9
able to transact our business in the states in which the litigation is pending
in the manner we currently conduct our business. See "Business-Legal
Proceedings."
There can be no assurance that we will not be materially and adversely
affected by future litigation, new state or federal regulation or consumer
initiatives directed against us or the cash advance industry in general. Several
states have also raised questions related to the proper regulatory framework for
cash advance transactions. Each state where we operate regulates our business by
consumer protection and lending practices laws (such as truth-in-lending and
usury). These laws and regulations, among other things, establish licensing
requirements, regulate our credit approval and application procedures, establish
maximum fees and late charges, require specified disclosures to customers and
govern collection practices. Any adverse change in or interpretation of existing
laws or regulations or our failure to comply with any such laws and regulations
could result in fines, class-action litigation or interruption or cessation of
certain of our business activities. Any of these events could have a material
and adverse effect on our business, operating results and financial condition.
In addition, there can be no assurance that amendments to, or renewals of, laws
and regulations in the states where we operate, or new or more restrictive laws
or regulations or their interpretations will not be adopted that may make
compliance more difficult or expensive, further limit or restrict our fees and
other charges, curtail our current operations, restrict our ability to operate
or otherwise materially and adversely effect our business, operating results and
financial condition. See "Business-Government Regulation."
We face significant competition from other cash advance and other companies
that provide short-term advances to our target customers.
Besides other cash advance companies, we compete with banks, credit card
issuers, pawnshops, title pawn establishments and other financial services
entities and retail businesses that provide short-term advances. We believe that
the cash advance industry will become more competitive as the industry
consolidates, and we could face additional competition as increasing numbers of
traditional check cashers, pawn shops, commercial banks and other retail credit
outlets add cash advance services and overdraft lines of credit to their
financial product offerings. The entry of such competitors into our markets
could have a material adverse effect on our business, operating results and
financial condition. Commercial banks could also lower demand for our services
by reducing fees for "insufficient funds" transactions. Many of our competitors
have larger and more established customer bases and substantially greater
financial, marketing and other resources than us. See "Business--Industry
Background" and "Competition."
PRIOR S CORPORATION STATUS
Because we have been an S corporation for federal and certain state income
tax purposes, our income has been allocated to our individual shareholders
rather than to us. Our S corporation status will terminate on the effective date
of the registration statement and we will thereafter be taxed as a C corporation
for federal and state income tax purposes. Before we end our S corporation
status, we do not expect to declare a distribution to our stockholders who have
agreed to indemnify us for any federal, state and other income taxes (including
interest and penalties and other additions to tax) incurred by us for the period
for which we reported our taxable income as an S corporation.
10
In addition, as a result of the termination of our S corporation status, we
will record a non-recurring income tax benefit and a corresponding deferred
income tax asset. The deferred tax asset would have been approximately $140,000
if the termination of our S corporation status had occurred on September 30,
2001, but the actual amount will be adjusted based on the tax effect of
differences in the bases in assets and liabilities for financial reporting and
income tax purposes as of the date of the termination of our S corporation
status.
Throughout this prospectus, in presenting our financial results, we have
included a pro forma income tax expense or benefit. Pro forma income tax expense
(benefit) is calculated at 40% of actual net income (loss). The 40% is comprised
of a 34% federal income tax rate and a 6% state income tax rate. Because we are
currently operating as an S-corporation, all income/(losses) are passed through
to our shareholders, who are responsible for all income tax liabilities. Based
on historical and current period earnings, all income tax benefits have been
realized by the shareholders. Had we been a C corporation, the company would
have recognized the pro forma tax benefit based on historical and current period
earnings. A large portion of the accumulated deficit of the company is
attributable to distributions made to the shareholders to pay taxes.
We will record an income tax benefit at the time we convert to a C
corporation due to the difference in carrying the value of the assets for
financial reporting purposes versus income tax purposes. The majority of this
asset is attributable to us using the cash method of accounting for tax purposes
versus the accrual method of accounting for financial reporting purposes. Sec.
481 of the Internal Revenue Code mandates that S corporations converting into C
corporations recognize the benefit of a change in accounting, due to such change
in entity structure, over four equal annual periods. Based on current period and
projected earnings, management believes they will recognize the full value of
the tax benefit and that there is no material risks that the tax benefit will be
disallowed.
USE OF PROCEEDS
Minimum Shares Sold Maximum Shares Sold
------------------- -------------------
Gross Proceeds $250,000 $5,000,000
Expenses ($200,000) ($ 200,000)
--------- -----------
Net Proceeds $ 50,000 $4,800,000
Working Capital $ 50,000 $1,000,000
Expand Business -0- $3,800,000
========= ===========
We intend to use the net proceeds primarily for working capital purposes
unless we are able to generate proceeds in excess of approximately $1,000,000.
Working capital purposes include increasing cash deposits in our bank accounts
to limit the daily expense of funding the stores, reducing current outstanding
operational payables and taking advantage of vendor discounts associated with
current billings. If we are able to generate net proceeds in excess of
$1,000,000, we will use them to expand our business. We plan to accelerate the
expansion of our electronic advance program by increasing our advertising
budgets and growing our portfolio. We also plan to open new stores and acquire
existing stores. We anticipate opening or acquiring up to 60 new locations if we
raise in excess of $2,000,000 and we find appropriate locations or
organizations. We expect each new location to cost $100,000, with an average
outstanding portfolio
11
of $40,000. We expect to fund, on average, 40% of the purchase price with cash
and the remaining balance on agreeable term note arrangements. We may, if the
opportunity arises, use a portion of the proceeds to acquire or invest in
complementary businesses, products or technologies. Until we need the funds, we
intend to invest the proceeds in short-term, interest-bearing, investment-grade
securities.
PENNY STOCK CONSIDERATIONS
Shares of our common stock are subject to rules adopted by the Securities
and Exchange Commission that regulate broker-dealer practices in connection with
penny stocks. Penny stocks are generally equity securities with a price of less
than $5.00, subject to certain exceptions. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document prepared by the
Securities and Exchange Commission which contains the following:
. A description of the nature and level of risk in the market for penny
stocks in both public offerings and secondary trading
. A description of the broker's or dealer's duties to the customer and of
the rights and remedies available to the customer with respect to
violation to such duties or other requirements of securities laws
. A brief, clear, narrative description of the dealer market, including
bid and ask prices for penny stocks and the significance of the spread
between the bid and ask price
. A toll-free telephone number for inquiries on disciplinary actions
. Definition of significant terms in the disclosure document or in the
conduct of trading in penny stocks and
. Such other information in such form, including language, type, size and
format as the Securities and Exchange Commission shall require by rule
or regulation.
Prior to effecting any transaction in penny stock, the broker-dealer must
also provide the customer the following:
. The bid and offer quotations for the penny stock
. The compensation of the broker-dealer and its sales person in the
transaction
. The number of shares to which such bid and ask prices apply or other
comparable information relating to the depth and liquidity of the market
for such stock and
. Monthly account statements showing the market value of each penny stock
held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from the rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
12
the purchaser and received the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock that is subject to the penny stock
rules. Holders of shares of our common stock may have difficulty selling their
shares because our common stock will likely be subject to the penny stock rules.
DIVIDEND POLICY
Because we intend to use available funds to expand our business, we do not
anticipate declaring or paying cash dividends in the foreseeable future. We have
not paid any cash dividends in the past, other than payment of the prior S
corporation dividends. See "Prior S Corporation Status." The payment of cash
dividends, if any, in the future will depend on our earnings, financial
condition, capital requirements, cash flow and long range plans. Additionally,
our credit agreements prohibit us, without the prior written consent of the
lenders, from paying cash dividends.
DETERMINATION OF THE OFFERING PRICE
Before this offering, there was no public market for our common stock. Our
board of directors arbitrarily determined the offering price. As of September
30, 2001, we had a deficiency in assets of $829,000 (after deducting goodwill of
$212,000) or ($0.08) per Share. If the maximum of 2,000,000 shares are sold by
us and assuming the issuance of the 620,000 shares to certain selling
shareholders, which are contingently issuable to them on the effective date of
the registration statement relating to this prospectus, our tangible book value
per share after the offering will be $0.33 per share. If the minimum of 100,000
shares are sold by us we would have a deficiency in our tangible book value per
share, after the offering of ($0.06) per share.
The reason for the discrepancy between our net tangible book value per
share and the per share offering price is because the offering price of the
shares has been arbitrarily determined by our board of directors and the shares
are being sold on the basis of our future earnings potential.
After reviewing the above, potential investors should consider whether or
not the offering price for the shares is appropriate at the present stage of our
development.
We reserve the right to reject any subscription in full or in part, and to
terminate the offering at any time. No person, individual or group has been
authorized to give any information or to make any representations in connection
with this offering other than those contained in this prospectus and, if given
or made, such information or representation must not be relied upon as having
been authorized by us or our officers or directors. This prospectus is not an
offer to sell, or a solicitation of an offer to buy, any shares being offered by
us or the individuals selling shares pursuant to a separate offering to any
person in any jurisdiction in which that offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that the information in this prospectus is
correct as of any date later than the date of this prospectus.
13
DILUTION
As of September 30, 2001, we had 10,000,000 shares outstanding and a
deficiency in our net tangible book value of approximately $829,000 (after
deducting $212,000 in goodwill) or approximately ($0.08) per share. The
deficiency in net tangible book value per share represents the amount of our
total liabilities less our total tangible assets at September 30, 2001, divided
by the number of shares outstanding. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of our shares in this offering and the net tangible book value of our shares
immediately afterwards. After giving effect to (i) the sale of the maximum of
2,000,000 shares by us at an assumed price per share (net of expenses of the
offering of $200,000), (ii) the issuance of 620,000 shares to certain
individuals selling shares in a contemporaneous offering, contingently issuable
to them on the effective date of the registration statement of which this
prospectus is a part, and (iii) recognition of deferred tax asset of $140,000
caused by the change in our income tax status from an S corporation to a C
corporation, our net tangible book value would approximate $4,111,000 or $0.33
per share. If we sell the minimum of 100,000 shares, we will have a deficiency
in our net tangible book value of approximately $639,000 or ($0.06) per share.
As a result, the pro forma net tangible book value of our common stock owned by
shareholders immediately before this offering will be increased by approximately
$0.41 per share if we sell 2,000,000 shares and will increase by $0.02 per share
if we sell 100,000 shares, without any additional investment on their part. The
investors in this offering will incur an immediate and substantial dilution of
the pro forma net tangible book value of their shares of approximately $2.17 per
share if we sell 2,000,000 shares and $2.56 per share if we sell 100,000 shares.
The following table illustrates this dilution.
Maximum Number of Shares
- ------------------------
Initial public offering price per share ..................................... $ 2.50
Deficiency in assets per share as of September 30, 2001 ................... $(0.08)
Increase per share attributable to new investors .......................... $ 0.41
Pro forma net tangible book value per share after the offering .............. $ 0.33
------
Dilution in net tangible book value per share to new investors .............. $ 2.17
======
Minimum Number of Shares
- ------------------------
Initial public offering price per share ..................................... $ 2.50
Deficiency in assets per share as of September 30, 2001 ................... $(0.08)
Increase per share attributable to new investors .......................... $ 0.02
Pro forma net tangible book value per share after the offering .............. $(0.06)
------
Dilution in net tangible book value per share to new investors .............. $ 2.56
======
14
The following table sets forth, as of September 30, 2001, assuming the
issuance of 620,000 shares to our selling shareholders, the differences between
the number of shares purchased from us, the total price paid and the average
price per share paid by existing shareholders and by new investors each at the
initial offering price of $2.50 per share, before deducting offering expenses.
Shares Purchased Total Consideration Average Price
---------------- -------------------
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
Maximum
- -------
Existing Investors 10,000,000 79.1% $ 679,000 12.0% $ 0.07
Selling Shareholders 620,000 4.9 -- -- --
New Investors 2,000,000 16.0 5,000,000 88.0 2.50
---------- ----- ---------- -----
Total 12,620,000 100.0% $5,679,000 100.0% .45
========== ===== ========== =====
Minimum
- -------
Existing Investors 10,000,000 93.3% $ 679,000 73.1% $ 0.07
Selling Shareholders 620,000 5.8 -0- -- --
New Investors 100,000 0.9 250,000 26.9% 2.50
--------- ----- ---------- -----
Total 10,720,000 100.0% $ 929,000 100.0% .09
========== ===== ========== =====
15
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 2001:
. on an actual basis;
. on a pro forma basis, after giving effect to (1) the change in our income
tax status from an S corporation to a C corporation and the corresponding
recognition of a deferred tax asset of $140,000 (2) the issuance of the
620,000 shares to our selling shareholders that will result in a charge to
operations of $1,550,000, based on the $2.50 offering price (3) the sale of
the minimum (100,000) and maximum (2,000,000) number of shares by us at
$2.50 per share (4) a charge to operations and a credit to stockholders
equity of $75,000 associated with the value of options granted to an
officer that will become effective on the date of this prospectus and (5)
estimated expenses of $200,000.
You should read this table with our financial statements and the notes to
those statements, included in this prospectus.
September 30, 2001 September 30, 2001
------------------ ------------------
Actual Pro forma
Minimum Maximum
(in thousands)
Liabilities:
Line of credit facilities $ 1,587 $ 1,587 $ 1,587
Current installments of long-term debt 454 454 454
Payables to related parties and officers 1,727 1,727 1,727
------- ------- -------
Total liabilities 3,768 3,768 3,768
Stockholders' equity (deficit):
Common Stock, $.01 par value;
50,000,000 shares authorized;
10,000,000 shares issued at
September 30, 2001; 10,720,000
shares issued and outstanding if we
sell the minimum of 100,000 shares;
12,620,000 shares issued and outstanding
if we sell the maximum
of 2,000,000 shares (1) 100 107 126
Additional paid-in capital 579 2,247 6,978
Accumulated deficit (1,295) (2,781) (2,781)
------- ------- -------
Total stockholders' equity (deficit) (617) (427) 4,323
------- ------- -------
Total capitalization $ 3,152 $ 3,342 $ 8,092
======= ======= =======
(1) Does not include 1,561,000 shares reserved for issuance on exercise of
warrants and 25,000 shares issuable to an officer on the exercise of an
option contingently issuable on the date of this prospectus or within 90
days thereafter.
16
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
You should read the following selected historical financial data
together with Management's Discussion and Analysis of Financial Condition and
Results of Operations and our financial statements and notes included elsewhere
in this prospectus. The statement of operations data for each of the years ended
December 31, 1999 and 2000 and the balance sheet data as of December 31, 2000,
are derived from our financials statements audited by KPMG LLP, independent
accountants. The statement of operations data for the nine months ended
September 30, 2000 and 2001 and the balance sheet data as of September 30, 2001,
are derived from our unaudited financial statements. These unaudited financial
statements reflect all adjustments (consisting of normal recurring accruals)
that we consider necessary for a fair presentation of our financial position and
results of operations. The historical results of operations do not necessarily
indicate the results expected in the future. Before this offering, we were an S
corporation for income tax purposes. The pro forma income tax expense (benefit)
described below represents the estimated taxes that we would have recorded had
we been a C corporation for income tax purposes for each of the years ended
December 31, 1999 and 2000 and for the nine months ended September 30, 2000 and
2001. See "Prior S Corporation Status."
Nine Months Ended
Year Ended December 31, September 30,
----------------------- ------------------
1999 2000 2000 2001
---- ---- ---- ----
(in thousands, except per share amounts)
(unaudited)
Statement of Operations Data:
Revenues:
Fees and other income $ 19,473 $ 14,657 $ 11,679 $ 8,236
Gain on sale of closed store assets - 223 - 68
Other 73 113 158 23
-----------------------------------------------------------
Total revenue 19,546 14,993 11,837 8,327
Expenses:
Provision for credit losses 5,077 3,191 2,650 1,367
Salaries and benefits 6,486 5,835 4,738 2,816
Other operating expenses 6,072 5,484 4,565 3,265
Net loss on dissolution of joint ventures - 447 191 -
Interest expense 884 952 715 490
Other 90 134 37 42
-----------------------------------------------------------
Total Expenses 18,609 16,043 12,896 7,980
-----------------------------------------------------------
Net income (loss) 937 (1,050) (1,059) 347
Pro forma income tax expense (benefit) 375 (420) (424) 139
-----------------------------------------------------------
Pro forma net income (loss) $ 562 $ (630) $ (635) $ 208
============ ============ ============ ============
Historical net income (loss) per share -
basic and diluted $ 0.09 $ (0.11) $ (0.11) $ 0.03
Pro forma net income (loss) per share ============ ============ ======= ========
basic and diluted $ 0.06 $ (0.06) $ (0.06) $ 0.02
============ ============ ============ ============
Weighted average number of shares and
potential dilutive shares outstanding 10,208,438 10,000,000 10,000,000 10,911,770
============ ============ ============ ============
17
December 31, September 30,
2000 2001
---- ----
(in thousands)
Balance Sheet Data:
Cash $ 570 $ 318
Amounts due from customers for advances, net 2,953 2,543
Deficiency in working capital (3,419) (1,845)
Property and equipment, net 1,282 1,045
Receivable from related party 1,352 170
Total assets 6,764 4,662
Line of credit facilities 2,706 1,587
Current installments of long-term debt
and capital lease obligations 1,132 715
Accounts payable and other accrued liabilities 1,495 1,052
Payables to related parties 263 101
Payables to officers 1,696 1,626
Capital lease obligations, excluding current installments 429 198
Total liabilities 7,722 5,279
Stockholders' deficit (957) (617)
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion of our financial condition and results
of operations together with the financial statements and notes. With the
exception of historical information, this discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those we anticipate in these forward looking statements for many
reasons, including the risks described in "Risk Factors" and elsewhere in this
prospectus.
Overview
We provide specialty financial services by advancing cash to customers
and obtaining an authorization to draft their personal checking account and
agreeing to delay the draft until they redeem their contract with us or until a
short holding period has expired, which on average is 18 days. In exchange for
our service, we receive a fee ranging from approximately 15% to 30% of the
amount of cash advanced to the customer. In addition, through a limited number
of our branches we also provide check cashing services and advances that are
secured by the borrower's car title.
We were formed in December 1997 when several pre-existing separately
incorporated companies with common ownership became our subsidiaries. At the end
of 1999 and 2000 we had 119 stores and 61 stores, respectively, in operation.
The number of stores we open or close in any quarterly period significantly
impact our revenues and expenses.
We have made a significant investment in electronic systems and funding
methodologies. Beginning in March 2000, we established a centralized processing
center that initiates and services "electronic" advances without the need for a
storefront location. This innovation has allowed us to enter markets not
previously served and where we encountered little or reduced competition. The
reduced competition has allowed us to aggressively price our services and
strengthen our credit guidelines and has resulted in an increase in fee
revenues, reduced overhead and increased profitability. As of September 30, 2001
a staff of approximately ten people serviced an electronic advance portfolio of
approximately $600,000 consisting of 2,000 accounts.
Revenues. We recognize revenues on a level yield basis over the term of
the advance. Our revenues are primarily fees charged to customers for deferred
presentation transactions. These fees range from approximately 15% to 30% of the
amount of cash advanced. In California and Tennessee we charge up to 15% of the
amount advanced, and in Nevada and New Mexico up to 23% of the amount advanced.
To increase revenues we must expand our electronic advance program and increase
the number of transactions in existing stores. Our electronic advance program
and its higher profit margins has resulted in a redirection of our capital
resources from low profit margin store-front locations to this service. The
success of our electronic advance program resulted in a decision to close
several of our stores in 2000 to increase our focus on this program.
Provision for Credit Losses. Our provision for credit losses is based
on our historical bad debt experience. Based on the short term of our advances,
we are afforded recent and accurate information on how current advances are
performing. We use this information on a recurring basis to determine if
adjustments to the provision are necessary based on current or expected changes
in the portfolio performance. The allowance is based on two major factors, how
19
the current outstanding portfolio will perform and an estimated value for what
will be collected on charged off customers. Our policy is to charge off a
customer's account if they do not redeem their advance on a timely basis and
their electronic draft is returned without payment from their financial
institution. We historically collect 50% of what is charged off. Historical
calculations and current performance indicate that 20% of our customers will not
redeem their advance and we will have to initiate an electronic draft of their
account. We estimate 50% of the drafts that we initiate will be returned without
payment. We anticipate collecting at least 50% of those that get returned
without payment.
Other Operating Expenses. Our operating expenses consist of store
occupancy costs, other store expenses and general and administrative expenses
not directly attributable to store operations, including legal and professional
expenses, depreciation and amortization, and occupancy, maintenance, utility and
telephone charges related to the corporate office, as well as general
advertising, travel and insurance. Store rent, including maintenance and utility
charges, constitutes the greatest portion of other operating expenses. Other
store expenses consist of store-level advertising, depreciation and
amortization, small equipment expense, travel and expenses in connection with
the opening and closing of stores. Store opening costs are expensed as incurred.
On the effective date of this offering, an additional 25,000 shares of
common stock will be issuable on exercise of outstanding stock options. We will
also issue 620,000 shares to certain consultants and others on the effective
date of this registration statement in return for assisting us in becoming a
publicly traded company. As a result, assuming an offering price of $2.50 per
share, we will record an operating expense of approximately $1,625,000. This
expense is expected to be recorded in the second quarter of 2002.
Termination of S Corporation Status. When we terminate our S
corporation status, we expect to record a deferred tax asset. The amount of the
deferred tax asset has not been calculated, but it would have been approximately
$140,000 if the termination had occurred on September 30, 2001. The actual
amount will be adjusted based on the tax effect of differences in the bases in
assets and liabilities for financial reporting and income tax purposes as of the
date of the termination.
Results of Operations
This table sets forth, for the periods indicated, the components of our
statements of operations expressed as a percentage of revenues:
Year Ended Nine Months Ended
December 31, September 30,
------------ -------------
1999 2000 2000 2001
----- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
====== ===== ====== =====
Expenses:
Provision for credit losses 25.97 21.28 22.37 16.42
Salaries and benefits 33.18 38.92 40.04 33.82
Other operating expenses 31.07 36.58 38.57 39.202
Net loss on dissolution of joint ventures - 2.98 1.61 -
Interest expense 4.52 6.35 6.05 5.89
Other 0.46 0.89 0.31 0.50
----------------------------
95.20 107.00 108.95 95.83
----------------------------
Net Income (loss) 4.80 (7.00) (8.95) 4.16
Pro forma Income tax expense (benefit) 1.92 (2.80) (3.58) 1.66
----------------------------
Pro forma net income (loss) 2.88 (4.20) (5.37) 2.50
==== ===== ===== ====
20
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
2001.
Revenues: Revenues decreased $3,510,000 from $11,837,000 for the nine
months ended September 30, 2000 to $8,327,000 for the nine months ended
September 30, 2001. The decrease was primarily because of store closings in late
2000. The number of our stores decreased from 88 at September 30, 2000 to 52 at
September 30, 2001. Average store revenues for the nine months ended September
30, 2000 and September 30, 2001 were $134,000 and $160,000, respectively. This
increase in per store revenues indicates our commitment to expanding and
maintaining our existing stores, redirection of capital into our profitable
operations and continued expansion of our electronic advance program.
Provision for Credit Losses: For the nine months ended September 30,
2000, our provision for credit losses amounted to $2,650,000 (22.4% of revenues)
compared to $1,367,000 (16.4% of revenues) for the nine months ended September
30, 2001. The decrease is due to stronger underwriting guidelines and increased
reliance on our computerized systems to improve collection on customer accounts.
Our net charge-offs as a percentage of gross advances for the nine months ended
September 30, 2001 as compared to September 30, 2000 was 3.06% versus 4.14%. The
increase in our compliance management because of our software and management
information system improvements helped us to insure that advances made were in
accordance with our stipulated underwriting guidelines. This underwriting
improvement led to more credit-worthy advances and decreases in customer
charge-offs. The percentage of our allowance for held checks as compared to our
total advances outstanding at December 31, 2000 versus September 30, 2001 was
5.4% compared to 5.6%.
Salaries and Benefits: Salaries and benefits decreased $1,922,000 for
the nine months ended September 30, 2001 as compared to September 30, 2000.
Salaries and benefits amounted to $4,738,000 (40.03% of revenues) for the period
ending September 30, 2000 and $2,816,000 (33.81% of revenues) for the period
ending September 30, 2001. The decrease in salaries and benefits is a result of
a combination of the closure of low volume stores in 2000, development of
software and technologies that have taken advantage of electronic stores in
2000, development of software and technologies that have taken advantage of
electronic banking mechanisms and allowed us to drastically reduce personnel in
the areas of compliance, cash management, collections and middle management. In
addition, the electronic advance program and its associated technology has
allowed us to increase our volume with limited increases in personnel.
Other Operating Expenses: Other operating expenses decreased by
$1,300,000 to $3,265,000 (39.20% of revenues) for the nine months ended
September 30, 2001, compared to $4,565,000 (38.56% of revenues) for the nine
months ended September 30, 2000. Start up costs associated with our electronic
loan program and costs associated with the continued consolidation of our store
locations largely limited our ability to reduce overhead.
Net Loss on Dissolution of Joint Ventures: During 1999, we contributed
certain assets and liabilities to form two retail financial services joint
ventures with an unrelated party. In the first quarter of 2000, by mutual
agreement, one of the joint ventures was dissolved and assets with a net
realizable value of $74,000 were distributed back to us. In the first nine
months in 2000, we recorded a loss of approximately $191,000 on the dissolution
of this joint venture.
21
Interest Expense: During the nine months ended September 30, 2001,
interest expense decreased $224,000, or 31.33%, as compared to the nine months
ended September 30, 2000. The decrease was primarily a result of decreased
borrowings under our credit facilities.
Historical and Pro Forma Net income (Loss): We had a net loss of
$1,059,000 for the nine months ended September 30, 2000, compared to net income
of $347,000 for the nine months ended September 30, 2001. After a pro forma
income tax expense (benefit) of ($424,000) and $139,000 in 2000 and 2001,
respectively, we had a pro forma net loss of $635,000 for the nine months ended
September 30, 2000, compared to a pro forma net income of $208,000 for the nine
months ended September 30, 2001. This increase is a result of our continued
expansion in profitable markets, the growth of our electronic advance program
and ongoing efforts to reduce our operational overhead.
Year Ended December 31, 1999 Compared to Year Ended December 31, 2000
Revenues: Revenues decreased $4,553,000 or 23.3% from $19,546,000 in
1999 to $14,992,000 in 2000. The decrease was primarily because we closed
unprofitable stores or stores in undesirable locations in 2000. Our stores
decreased from 119 at December 31, 1999 to 61 at December 31, 2000. The decrease
of 58 stores was mostly in low volume or low profit margin locations. Average
revenues per store for the year ended December 31, 1999 and December 31, 2000
were $164,000 and $243,000, respectively.
Provision for Credit Losses: For the year ended December 31, 1999 our
provision for credit losses was $5,077,000 (26% of revenues) compared to
$3,190,000 (21.3% of revenues) for the year ended December 31, 2000. The
decrease resulted in a decrease in the volume of transactions and a
reengineering of our collections systems to take advantage of technological and
software improvements within our industry. Our net charge-offs as a percentage
of gross advances for the December 31, 2000 period as compared to the December
31, 1999 period was 3.75% versus 5.09%. The percentage of our allowance for
credit losses as compared to our total advances outstanding at December 31, 2000
versus December 31, 1999 was 5.4% compared to 4.8%. The increase from December
31, 1999 to December 31, 2000 was a result of increased concern over the
collectability of charged off customers.
We have invested a significant amount of money and time in developing
an internal software program known as the "ACH Wizard" that allows us to debit
customer accounts through the National Automated Clearinghouse. This software
collects the necessary data from our separate customer databases, combines the
information for the different originating centers and transfers it to our
contracted processor. This process was formerly a manual and intensive paper
process. It is now automatic and paperless. If a customer draft is returned to
us without payment, information is communicated electronically from the
processor to our ACH Wizard. The customer record is updated by our centralized
customer service center as received and can be viewed immediately by our store
customer service representatives. This innovative software has afforded us the
following:
. 2-day notification of advances not paid instead of 10 days
with our manual system. This allows us to start the collection
process sooner and limits the possibility of making another
loan to the customer while a return is in transit.
22
. The customer files are marked electronically thereby limiting human
error and theft.
. Return items can be resent immediately to the clearinghouse without
being re-input manually.
. We are able to track and react much sooner to adverse location or
region trends.
. Allows more work to be performed by fewer employees.
. Employees have more time to collect returned items and develop
additional business.
Salaries and Benefits: Salaries and benefits decreased $651,000 for the
period ended December 31, 2000 as compared to December 31, 1999. Salaries and
benefits were $6,486,000 (33.2% of revenues) for the year ended December 31,
1999 and $5,835,000 (38.9% of revenues) for the year ended December 31, 2000.
Although the total of these expenses decreased by $651,000 in 2000, because of
store closings and the necessity to maintain personnel during transition periods
without corresponding revenues, salaries increased as a percentage of revenue.
Other Operating Expenses: Other operating expenses decreased by $588,000 to
$5,484,000 during the year ended December 31, 2000, compared to $6,072,000 for
the year ended December 31, 1999, primarily because of the closing of the 58
stores in 2000.
Net Loss on Dissolution of Joint Ventures: During 1999, we contributed
certain assets and liabilities to form two retail financial services joint
ventures with an unrelated party. In the first quarter in 2000, by mutual
agreement, one of the joint ventures was dissolved and assets with a net
realizable value of $74,000 were distributed back to us. In the first nine
months of 2000, we recorded a loss of approximately $191,000 on the dissolution
of this joint venture. In the fourth quarter in 2000, the other joint venture
was dissolved and assets with a net realizable value of $271,000 were
distributed back to us. In the last three months of 2000, we recorded a loss of
$256,000 on the dissolution of that joint venture.
Interest Expense: Interest expense increased $68,000, or 7.7%, during 2000
compared to 1999. This increase was primarily a result of increased borrowings
under our credit facilities.
Historical and Pro Forma Net Income (Loss): We had net income of $937,000
for the year ended December 31, 1999, compared to a net loss of $1,050,000 for
the year ended December 31, 2000. After a pro forma income tax expense (benefit)
of $375,000 and ($420,000) in 1999 and 2000, respectively, we had pro forma 1999
net income of $562,000, compared to a pro forma 2000 net loss of $630,000. The
reduction in income from 1999 to 2000 was primarily due to losses from closed
stores, the loss on the dissolution of the joint ventures and higher overhead
associated with low profit margin and unprofitable operations.
Liquidity, Capital Resources and Financial Condition
We use our cash to fund advances to customers, operating costs for payroll,
occupancy, general and administrative expenses, and investments in capital
equipment primarily to upgrade our system capabilities. Our sources of
23
cash are funds generated by our operations and borrowings from financial
institutions.
Cash Flows from Operating Activities: During the nine month period ending
September 30, 2000 net cash provided by operating activities was $2,996,000. For
the nine month period ending September, 2001 we had net cash provided by
operating activities of $445,000. This decrease in net cash provided by
operating activities was because of significant reduction in our accounts
payable during 2001 and increased cash needs to fund our electronic loan
business.
Cash Flows from Investing Activities: During the nine month period ending
September 30, 2000 we had net cash used by investing activities of $0 versus net
cash used of $29,000 during the nine month period ending September 30, 2001.
There was no significant difference between the two periods.
Cash Flows from Financing Activities: During the nine month period ending
September 30, 2000 we had net cash used in financing activities of $2,523,000.
During the nine month period ending September 30, 2001 we had net cash used from
financing activities of $667,000. These reductions of cash flow used in
financing activities represent a focused effort to substantially reduce third
party debt obligations and related party receivables.
We have a credit line facility that permits us to borrow up to an advance
limit, which as of September 30, 2001, was $1,300,000. The lender may increase
or decrease the advance limit in its discretion. Borrowings under the line of
credit bear interest at the greater of 17% or at a base rate (as specified by
the lender), plus 10%, payable monthly. The rate charged on the line at
September 30, 2001 was 17%. We collateralized these borrowings by a security
interest in funds due from customers for advances and our property and equipment
and general intangibles. The financing agreement, among other things, requires
the consent of the lender for mergers, consolidations and acquisitions,
restricts changes in the nature of our business, allows the lender to terminate
the agreement and accelerate the debt at any time, restricts stockholder
distributions to amounts related to state and federal income taxes owed by them
and restricts repayment of principal on the loans made to us by our
shareholders. See "Certain Relationships and Related Transactions." Outstanding
borrowings under the line of credit as of September 30, 2001, amounted to
$1,211,000.
We also have a second credit line up to $400,000. These borrowings bear
interest at 12.5%, payable monthly. We collateralized borrowings by a mortgage,
deposit account, securities and commercial guarantees from our officers and
investors. Outstanding borrowings under this line of credit were $370,000 as of
September 30, 2001.
We have a deficiency in working capital of $1,845,000. Nonetheless, we
believe that by renegotiating our lines of credit with our financial
institutions as we have historically done (as of September 30, 2001, we had
$1.59 million drawn against this facility), limiting payments to shareholders
for paydown of shareholder debt (as of September 30, 2001, the amount of
shareholder debt was $1.63 million) and reinvesting current and future period
earnings, that we will have sufficient cash flow to meet our working capital
needs. Our working capital and customer growth plans beyond the next 12 months
may require additional debt and/or equity financing. The estimate of the time
that our funding sources will be sufficient to meet our current needs is a
forward looking statement that is subject to risks and uncertainties. Actual
results and working capital needs may differ materially from our estimates.
24
Operating Trends
Our business is seasonal to the extent of the impact of tax refunds
received by our customers. Advances by us have historically had a low demand
during the first quarter of the calendar year due to tax refunds being received
across the nation. The highest demand for our advances occurs during the forth
quarter of the calendar year due to the holiday season and the demand for funds
for shopping and other holiday costs.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible
Assets. Statement 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. Statement 142 will
require that goodwill no longer be amortized, but instead tested for impairment
at least annually in accordance with the provisions of Statement 142. We must
adopt Statement 141 and Statement 142. Furthermore, any goodwill that is
acquired in a purchase business combination after June 30, 2001 will not be
amortized. Goodwill and intangible assets acquired in business combinations
completed before July 1, 2001 will continue to be amortized before the adoption
of Statement 142. The adoption of Statement 141 did not have a material effect
on our operating results or financial condition. We are currently assessing the
impact of Statement 142 on our operating results and financial condition.
In June 2001, the Board issued Statement No. 143, Accounting for Asset
Retirement Obligations, that addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. We adopt the provisions of Statement No. 143
effective January 1, 2003. We do not expect the adoption of Statement 143 to
have a material effect on our operating results or financial condition.
On October 3, 2001, the Board issued Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. We must adopt
the provisions of Statement No. 144. We do not expect the adoption of Statement
144 to have a material effect on our operating results or financial condition.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements. We have identified
forward-looking statements in this prospectus using words such as "believes,"
"intends," "expects," "may," "will," "should," "plan," "projected,"
"contemplates," "anticipates," or similar words. These statements are based on
our beliefs, as well as assumptions we made using current available information.
Because they reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Actual future results
may differ significantly from the results discussed in the forward-looking
statements. Some, but not all, of the factors that may cause these differences
include those discussed in the risk factors section beginning on page 3 of this
prospectus. You should not place undue reliance on these forward-looking
statements, that apply only as of the date of this prospectus.
25
BUSINESS
The Company
We are a specialty financial services company that advances cash to
individuals after we secure an authorization to draft their personal checking
account. We agree to delay the draft until the contract is redeemed by them or
until a short holding period has expired which, on average, is 18 days. The
maximum term under our program is 31 days. Customers, depending on statutory
regulations, are required to either pay off the entire advance or extend their
advance for a fee. Installment payment arrangements are only utilized in the
event a customer's account has been charged off. We target customers who are
currently employed and have an active checking account. To initiate a
relationship, a customer must provide us with proof of income, proof of an
active personal checking account, proof of residence and proper identification.
Typically, we limit the cash advance to $500 per transaction and prohibit a
customer from having more than two outstanding. Generally we do not make
advances for more than 33% of the gross monthly income. For our services, we
receive a fee ranging from approximately 15% to 30% of the cash advanced to the
customers. For example, if a customer borrows $100 in a 15% state, the customer
pays a fee of $15. We also provide our customers with other financial products
through a limited number of our stores.
We were incorporated in Virginia in December, 1997. At December 31, 1999
and 2000 and at September 30, 2001, respectively, we had 119 stores, 61 stores
and 52 stores in operation, not including our electronic advance program. In
2000 we began to curtail our operations in certain markets and closed 58 of our
under performing stores.
Although we have closed a significant number of our stores during the past
18 months, we still intend to grow our business by:
. further developing and marketing our electronic advance program in areas
that meet our customers' demographics
. expanding and developing our internet presence to broaden our geographic
diversity and reduce overhead
. opening new stores and acquiring existing stores in strategic locations
. aggressively marketing our services in those areas where we are currently
operating store/branch locations to increase our market share.
For the year ended December 31, 1999, our revenues amounted to $19,546,000
million. Because of the store closings and other factors, our revenues declined
to $14,993,000 during the year ended December 31, 2000. For the nine months
ended September 30, 2001 our revenues amounted to $8,327,000 compared to
$11,837,000 for the nine months ended September 30, 2000. Average store revenues
from stores open for at least 12 months at the beginning of 1999 and 2000, was
approximately $181,000 (96 stores) and approximately $195,000 (55 stores).
During the year ended December 31, 2000, we completed approximately 305,000
transactions attributable to approximately 33,000 customers. As of December 31,
2000 and September 30, 2001, we had approximately 12,000 and 10,600 outstanding
advances
26
with a gross amount due from customers of $3,400,000 and $3,000,000,
respectively.
Our Services
Historically, individuals have satisfied their short-term cash needs by
choosing from among the following alternatives:
. charge cards, credit cards, home equity loans and bank lines of credit
. unsecured loans from banks and finance companies
. loans from friends and family members
. payroll advances
. title pawn loans or pawn shop transactions
. sales of personal assets
. overdrawing their personal bank accounts.
We believe these traditional financing alternatives have not adequately
satisfied the needs of many individuals. Accordingly, specialty financial
services businesses have developed in response to various shortcomings and
disadvantages of these financing alternatives. Specifically, we believe these
financing methods are unattractive because many consumers:
. dislike the associated complexity, inconvenience or lead time
. do not want to borrow the minimum amount required or dislike the
repayment or other terms
. are ineligible because of their credit rating or other criteria
. do not want or cannot pay the high costs of not sufficient funds and
overdraft fees charged by banks and merchants
. fear the personal embarrassment that may result from the denial of credit
or from approaching friends and family members for money.
Unlike these traditional sources, we provide our customers with a simple,
convenient, confidential means of quickly obtaining small amounts of short-term
cash, for a single up-front fee with the payment due date generally coinciding
with their next paycheck. Our service is different from the services provided by
traditional check cashing companies who offer many consumer financial products
and services including third-party check cashing, money orders, money transfers,
consumer loans, insurance and bill payments, vehicle registrations and in some
cases serve as distribution centers for public assistance benefits and food
stamps under government contracts.
In contrast, we provide advances only to individuals who can prove that
they are employed, work or reside in the area where the store is located and
have an active personal checking account. We orally verify a customer's personal
information every time they initiate a transaction. In addition, we require
documented evidence of employment, residence and an active personal checking
account every six months. We believe that our customers prefer the option of
redeeming their checks and paying the one-time fee charged by us as opposed to
the ongoing finance charges associated with other sources. Moreover, because we
generally do not require our customers to collateralize their advances or to
satisfy traditional credit criteria, we believe that our financing alternative
eliminates the consumer's fear of credit denial. We further believe that a
primary reason for the growth in our business is the high cost of bounced checks
assessed by both banks and merchants, as well as the convenience and
accessibility of our product.
27
Industry Background
In the United States, the cash advance alternative has recently become an
established industry, with the highest concentration of check cashing stores
located in the Southeast and Southwest. We estimate that there are approximately
7,000 check cashing locations throughout the United States. Check cashing
operations are governed primarily by state laws, and accordingly, states that
maintain check cashing/loan laws most conducive to profitable operations have
historically seen the greatest increase in check cashing stores. Some states
have enacted formal check cashing/loan laws that regulate the amount of fees
that operators may charge for cashing checks, and in some cases states have
regulated the amount of service charges that may be charged on small consumer
advances, commonly referred to as "payday advances". We believe that at least
half of the check cashing locations in the United States are owned by
individuals operating between one to ten locations. Further, we believe that the
highly fragmented nature of the industry is due to, among other factors, the
lack of qualified management personnel, the difficulty of developing adequate
financial controls and reporting systems, and the lack of financial resources.
In recent years, pursuant to trade group information, several check cashing
operators have begun to develop multi-unit chains through acquisitions and new
store openings. While there is limited public information available, we believe
that there are 10 check cashing companies operating over 100 stores. The
remaining check cashing companies operate under 50 stores, with the majority of
companies operating fewer than 10 stores. Accordingly, we believe that the
industry is in the early stages of consolidation.
We believe the deregulation of the banking and savings and loan industry
has increased the role played by check cashing stores in providing basic
financial transaction services to low and middle income consumers. At the same
time, competition, regulatory scrutiny and complexity are contributing to
consolidation within the industry. Our strategy is to position ourselves to
benefit from industry consolidation and the competitive advantages available to
large operators of specialty retail financial services.
Growth Strategy
We intend to grow our business through the implementation of the following
strategies:
. Expand Our Electronic Advance Program. We plan to aggressively market and
develop our electronic advance program through a variety of different
marketing campaigns. First we are sending all of our past and present
customers a debit card. The debit card is branded with the "Easy Money"
name and contact information and enables our customers to obtain funds
anywhere in the world. A customer is introduced to our electronic advance
program through direct mailings and informed of the benefits of using the
"Easy Money" debit card. Our electronic advance program enables us to
initiate and service an advance for a customer without the customer having
to go to a branch location. The customer can initiate an advance request
from his home or from work and immediately receive the proceeds through an
ATM machine or by making a withdrawal from his personal account. Our
electronic advance program began in March 2000. As of September 30, 2001 we
had approximately $600,000 in outstanding advances under the program. We
hope to have a portfolio of $1,000,000 by June 30, 2002. We estimate
28
the cost of growing this program to be $600,000. We plan to internally fund
this project.
. Develop and Expand our Internet Presence. We have built and developed an
Internet platform that will allow customers to apply for advances through
our website. We are also developing an interface of our website with our
home office systems so customers will have the ability to service all
aspects of their advances through the Internet at any time. We have
marketed our product on the Internet and have generated substantial
interest in the service and have conducted a substantial number of
transactions utilizing this medium. We plan to implement this strategy by
June 30, 2002 at an estimated cost of $250,000. We plan to fund this
project using current period earnings.
. Expand in Existing Markets and Enter New Markets. We seek to identify
stores in existing markets, to build upon our brand reputation and to
achieve economies of scale. We only enter a new market where there are
favorable consumer finance laws, widespread demand for our services,
concentrated populations and agreeable demographics. We attempt to develop
new markets in a progressive "clustered" fashion, initially opening a
sufficient number of stores in a given area to maximize the effectiveness
and efficiency of store opening costs, recruiting and training costs and
advertising and promotional efforts. We believe the convenience of a
store's location is extremely important to our customers and most of them
reside within a five-mile radius of the store they visit. Our stores are
typically located in middle-income neighborhoods in high traffic shopping
centers or strip malls. Following entry into a new market, we open
additional stores within the area to further develop the cluster and to
capture greater market share. We have no planned acquisitions or mergers at
this time. If store acquisitions or mergers are identified, we would
finance the transactions through seller financing and/or equity sharing at
a price to be determined during negotiations.
. Emphasize High Standards of Customer Service. Fast, personalized service
is critical to our ability to generate repeat and referral business. We
emphasizes courteous service and encourage our employees to develop good
relationships with their customers. We believe that our service-oriented
strategy has been successful in generating repeat customers or referrals
from existing customers. Our emphasis on customer service also reinforces
our credibility, builds customer loyalty and minimizes customer complaints.
For the year ended December 31, 2000 and the nine months ended September
30, 2001, approximately 85% and 90%, respectively, of our transactions were
with repeat customers. We believe that our success in attracting repeat
customers is due to the professional manner in which our employees approach
each transaction. We are currently funding this project using existing cash
flow.
. Increase Same Store Revenues. We believe that there is additional growth
potential in most of our existing markets through advertising and
promotional campaigns and through the development of new consumer finance
products. We continue to seek additional financial products which provide
financing alternatives for our customer base. In adding new products, we
focus on structuring products which provide attractive higher risk-adjusted
returns. In five of our stores in Louisiana we offer traditional check
cashing services and in each of our stores in Nevada and New Mexico we
offer Title Advances. By adding new products we believe we can leverage our
29
existing customer base, our systems and our strong customer relations to
expand our portfolio of earning assets. We plan to grow our same store
revenues by 10% during calendar year 2002. We plan to fund this project
using existing cash flow.
. Develop Brand Awareness. We seek to establish brand name awareness of our
stores and services in order to establish a long-term franchise value. We
use aggressive advertising campaigns to promote our business in the markets
we service. We also believe that providing fast, personalized and courteous
service in a clean and professional environment promotes our image and
leads to customer referrals. We plan to implement this strategy by
continuing to invest an amount equal to approximately 7% of our fee revenue
on a yearly basis.
Our Stores
We currently operate 52 stores in the following states: California (1
store), Kansas (1 store), Louisiana (34 stores), New Mexico (9 stores), Nevada
(5 stores), Tennessee (1 store) and Utah (1 store). The following table provides
a breakdown of (i) the number of stores located in each state at the end of the
period indicated, and (ii) the percent of revenues attributable to stores in
such states, for each of the periods:
Nine Months
Year Ended Year Ended Ended
# of December 31 # of December 31 # of September 30
Location Stores 1999 Stores 2000 Stores 2001
--------- ------ ---- ------ ----- ------ ----
California 5 7.02% 2 3.71% 1 2.45%
Colorado 11 3.85% - - - -
Indiana 8 2.99% 1 2.48% - 0.96%
Kansas 1 0.83% 1 1.09% 1 1.18%
Kentucky 19 16.40% - 15.14% - -
Louisiana 47 40.00% 36 52.91% 34 68.94%
Nevada 5 8.83% 5 6.03% 5 7.20%
New Mexico 13 10.38% 9 11.03% 9 13.26%
Tennessee 4 3.58% 1 3.57% 1 3.11%
Texas 5 5.39% 5 3.32% - 1.87%
Utah 1 0.73% 1 0.72% 1 1.03%
-------------------------------------------------- --------
119 100.00% 61 100.00% 52 100.00%
=== ====== === ====== === ======
Our stores are generally between 1,200-2,000 square feet, consisting of a
waiting area, service counter and a small office. The stores are well lighted
and decorated to provide a professional and comfortable atmosphere. We believe
that most of our customers reside or work within a five-mile radius of the store
they visit and that the convenience of a store's location is extremely important
to consumers. As a result, our stores are within three miles of the market area
we serve. Our stores are typically located in shopping centers or strip malls
which usually contain a supermarket or major discount retail store, and other
compatible tenants such as auto parts retailers, drugstores, convenience stores
and fast food outlets. The surrounding area is typically populated with a high
concentration of middle-income families.
30
Organizational Structure and Procedures
Our stores are organized into districts. From 4 to 8 store managers report
to each district manager who reside in the areas they supervise. District
managers are experienced store managers and report directly to Michael Wright,
Chief Operating Officer. Each store is typically staffed with a manager and
either an assistant manager or a store clerk. Store managers are responsible for
customer relations, development of new accounts, cash entries, collections,
staffing and training. Personnel at our corporate offices direct and coordinate
planning and controls, advertising and marketing and personnel matters.
Operations personnel at our corporate offices evaluate the performance of each
store using on-site reviews and daily reports on operations.
As of September 30, 2001, we had 188 employees (168 full-time and 20
part-time). All of our employees receive written procedures and policies
covering all aspects of store-level operations. These policies and procedures
have been established to minimize the operating risks inherent in our cash
advance business and to maintain uniformity in operations on a national basis.
We are also committed to providing our employees with formal, supervised
training. Store managers and other store personnel must complete formal training
programs. Training of new hires is generally conducted at the largest office in
each district by trained personnel from the corporate office. Store employees
(other than store managers) typically receive 2 to 3 days of initial orientation
followed by 4 to 6 week(s) of supervised on-the-job training. Store managers are
trained at one of our stores for approximately 16 to 20 weeks prior to
assignment to their store. After such assignment, new store managers are closely
monitored for two to three months. A key objective of our training programs is
to teach new store employees how to identify risks associated with providing
advances to customers and the steps that can be taken to reduce these risks.
We have structured compensation arrangements to provide district and store
managers with incentives to increase store revenue and profits. Store managers
receive a monthly commission based on their store's performance as measured by:
(i) growth in the number of advances, (ii) delinquency rates and (iii)operating
income. District managers receive commissions based on the performance of the
group of stores for which they are responsible.
At the end of each business day store cash is deposited in a local bank and
reconciled against the transactions reported by each store. In addition,
district managers perform periodic internal audits. We also employ two full-time
auditors who perform cash audits on a random basis. We have also implemented
various programs and systems (including alarms and security cameras) to reduce
the risk of third party theft and to provide security for our facilities and
employees. We also maintain insurance coverage against theft.
Marketing
We market our services primarily through radio, television, print, yellow
pages, direct-mail and billboard advertising and through our customer referral
program. For the year ended December 31, 2000, we believe that approximately 5%
of our new business came from customer referrals, 5% from direct location
signage, 5% from radio advertising, 2% from television advertising, 58% from
yellow page advertising and 10% from direct mail advertising. Our television,
radio and direct-mail advertising explains how to use our services and
emphasizes our quality of service, convenience and competitive rates. We provide
a credit of up to $10.00 towards the fee on the referring customer's next
transaction in exchange for successfully referring a new customer to us.
31
The Customer Transaction
We believe that our core customer group is comprised primarily of
individuals whose average age is approximately 35 and who rent their house or
apartment and hold a wide variety of jobs in the service sector or are clerical
workers, craftsmen, or laborers. These individuals tend to change residences
more often than average, have annual family incomes under $35,000, often pay
their bills with money orders, and prefer the availability of immediate cash
provided by our stores.
A typical new transaction begins when a customer needs short-term cash and
visits one of our stores. The customer is required to provide us with the
following items: (i) a valid driver's license or other acceptable form of
identification, (ii) a copy of their most recent bank statement which must
reflect that the customer has a local active checking account, and (iii) a
recent payroll stub or other acceptable proof of income which could include
social security payments, alimony, child support payments or other sources of
income. In addition, each customer must satisfy two of the following three
criteria: reside, work or bank locally. The customer also completes an
information statement, which requires certain demographic, employment and other
information including home and business addresses and telephone numbers. Our
store employee then completes a customer approval checklist to ensure that we
have not overlooked any step in the approval process or obtained the required
information for approval. Following this approval process, a customer file is
created and a computer-generated account number is assigned.
The store employee then explains the terms of the transaction to the
customer and has the customer sign a disclosure agreement for the advance. The
disclosure agreement, which is a standard form developed by us, is generated by
our computerized system and is customized to comply with state regulatory
requirements. The system requires each portion of the disclosure agreement to be
completed. The disclosure agreement provides for the customer to deliver an
electronic draft agreement to us, with the face amount generally equal to the
sum of (i) the cash advanced and (ii) a prescribed fee, calculated according to
guidelines established by us for each state in which we operate. The amount of
cash advanced to the customer generally may not exceed 33% of the customer's
gross monthly income. In exchange for the draft agreement, we advance cash to
the customer and agree to hold the draft agreement until it is redeemed by the
customer or until a short holding period has expired. The holding period, on
average, extends from the date the advance is issued to the date of the
customer's next paycheck, but generally does not exceed 18 days.
After we establish a relationship with a customer, the procedures for a
subsequent transaction are less burdensome. Repeat customers do not need to be
re-approved and are only required to give us a draft and execute a new
disclosure agreement. Our computerized information system requires store
employees to verify and update the information contained in a customer's file
every six months before doing business with that customer again.
Electronic Advance Program
We have made a significant investment in electronic systems and funding
methodologies. Beginning in March 2000, we established a centralized processing
center that initiates and services "electronic" advances without the need for a
storefront location. We are using a number of advertising campaigns to market
our electronic advance program and attract customers in targeted geographical
32
areas. We have established a toll-free number for customers to call to qualify
for short-term advances. If a customer meets our flexible underwriting
requirements, a contract is sent by way of facsimile transmission. The customer
signs the contract and returns it to us by facsimile. Once the customer
qualifies for an advance, we send an "Easy Money" debit card or if the customer
elects, we can deposit the advance directly into a personal checking account.
The debit card is assigned a unique pin number and can be utilized at ATM
machines in the United States. If the customer wants to conduct future
transactions with us we are able to either fund their debit card instantaneously
or electronically deposit funds into their personal checking account. Currently
most customers desiring an advance would have to live in a large populated area
that can support the overhead of a retail storefront. With the implementation of
our electronic advance program we can service a customer anywhere, so long as
they have access to a fax machine and qualify for the advance. This innovation
has allowed us to enter markets that have not previously been served and
therefore, we have encountered little or no competition. The lack of competition
has allowed us to aggressively price our services and strengthen underwriting
guidelines. This has resulted in an increase in fee revenues, reduced overhead
and increased profitability. Our electronic systems and funding methodologies
provides our customers with a number of benefits including, the ability to
obtain advances from us from anywhere and at anytime and the ability to utilize
their debit cards for telephone calls, internet shopping and purchases at retail
stores. The debit card also establishes customer loyalty.
Our electronic system digitally scans and stores all contract information
as image files and assigns a unique identification number to a contract that
coincides with the customers' account number. Once a signed contract and
disclosure is returned to us, we immediately fund the customer according to his
preference. Approximately 3 to 4 days prior to the payment date of an advance, a
courtesy call is made to the customer to determine if the customer wants to
extend the payment date or pay it off. An electronic debit will deduct either
the extension fee or the full amount of the advance from the customer's bank
account.
As of September 30, 2001 a staff of ten people were servicing a portfolio
of approximately $600,000 in advances (approximately 2,000 accounts). The
combination of reduced personnel, reduced overhead and the ability to penetrate
markets otherwise unserviceable by costly retail stores has been successful on a
financial and operational basis. We are pleased with the systems and operations
of our electronic advance program and intend to commit additional resources in
the future.
Servicing and Collections
We emphasize a professional collection approach that is designed to
maintain a positive public image. We have established a coordinated servicing
effort between our individual stores and our home office, which controls the
servicing of advances and enhances internal controls over customer agreements.
Two days prior to the expiration of the holding period (the "pickup date"), if
the customer has not redeemed the agreement, we place a courtesy call to the
customer as a reminder that the outstanding agreement will become due shortly.
If the customer fails to redeem the agreement on the pickup date, we place
another call to the customer as a notification that the advance is due.
Four days after the "pick-up" date, the customer's bank account is
electronically drafted to close out the transaction. If the draft is returned
due to non-sufficient funds, the advance is charged off as a bad debt and one of
our
33
store employees begins collection efforts. A store employee telephones the
customer daily as a reminder of the payment obligation and are instructed to
politely encourage the customer to redeem the advance. Outstanding advances are
serviced at the store level for thirty days. During this time, phone calls are
supplemented by a series of letters designed to inform the customer about the
ramifications of default. After sixty days, unpaid advances are turned over to
an outside collection agency for servicing. Once an advance has been charged
off, the customer's account is removed permanently from the store's eligible
customer list. Every store is provided with the identity of customers whose
advances have been charged off. Given the volume of advances made by the
Company, we believe that our strict chargeoff policy aids management in quickly
identifying impaired accounts and helps to assure that our advance file is
current. We do recover a substantial portion of gross chargeoffs and this
recovery percentage is considered in determining the necessary allowance for
credit losses. The average collection period of accounts recovered is 10 days.
We incurred bad debt expense of $5,077,000 for the year ended December 31,
1999 (26.0% of revenues), $3,190,000 for the year ended December 31, 2000 (21.3%
of revenues) and $1,367,000 for the nine months ended September 30, 2001 (16.4%
of revenues). Charge-offs, net of recoveries, were approximately $5,107,000,
$3,307,000 and $1,385,000, respectively, for the years ended December 31, 1999
and 2000 and for the nine months ended September 30, 2001. As of September 30,
2001, we had approximately $42,000 of receivables that were more than four days
past due that were not charged off as bad debt for various reasons.
Management Information Systems
We use our management information systems and internal reporting processes
to monitor the daily operations of each store and to gather key daily, weekly,
monthly and year-to-date operational statistics. These systems have enabled us
to maintain a high degree of control over revenues, expenses and customer
transactions. We believe that the following reporting procedures that have been
implemented provide us with a significant competitive advantage over small local
cash advance providers.
At the end of each business day, each store manager delivers to his
district manager (i) a report summarizing the store's transactions for the day,
the amount of outstanding advances and current cash position, and (ii) a
past-due report detailing the status of each past-due account and collection
efforts that have been made. In addition, each store manager faxes copies of any
deposit slips to the corporate office. On a weekly basis, store managers send
their district managers an outstanding advance summary, employee time sheets and
a past-due summary report. On a monthly basis, store managers send their
district managers all expense reports and copies of all correspondence with
customers.
Each of our stores has a computer to record transactions. Store employees
create an account for each customer and record each transaction that is made as
well as each collection action that is taken. We use a real-time centralized
computer system to verify the written reports regularly delivered by the store
managers. In addition, these records are used by our internal auditors who
regularly conduct audits at each store.
Competition
The cash advance industry is highly fragmented and highly competitive, and
there is significant competition within each of the markets in which we operate.
We believe that competition is primarily based on store location, convenience
and
34
customer service. Most of our competitors are small, owner-operated stores that
operate in a limited geographic area. We believe that most store owners operate
fewer than 20 stores and, in many cases, are operated by individuals who lack
the capital resources and marketing expertise to expand their business and
compete effectively with larger cash advance companies. We also believe that the
larger cash advance companies are able to operate more efficiently and provide a
higher level of customer service than smaller companies.
We believe that these competitive advantages are the result of greater
managerial and financial resources as well as economies of scale related to
systems and marketing expenses. These factors present an opportunity for
well-capitalized companies to open additional stores, offer additional consumer
finance related services and create a high level of brand recognition and
customer loyalty. We face competition from at least three large privately held
cash advance companies. In addition, several large publicly held and privately
held check cashing companies are beginning to provide cash advance services.
In addition to other cash advance operators, we compete with banks, credit
card issuers, pawn shops, title pawn establishments and other financial services
entities and retail business that provide short-term loans to individuals. We
may face additional competition as an increasing number of traditional check
cashing companies, pawn shops, banks and other retail establishments add cash
advance services to their financial product portfolios.
GOVERNMENT REGULATION
State Regulations
Our operations are regulated in each state where we operate as (i) a
consumer lender; (ii) a provider of deferred deposit services; or (iii) a lender
or deferred depositor, as authorized pursuant to the state's check cashing
statute. Before commencing operations in a state we are required to go through a
licensing application process and have to obtain a separate license for each of
our locations. We are also required to comply with certain federal regulations
governing consumer protection and lending practices. In each state where we
operate we are licensed by the state agency having general supervisory authority
over financial institutions and are required to maintain a minimum amount of
capital for each location in the state. We are also required to maintain our
records for a designated period and are subject to regular audits by the state
regulatory agency. Each state statute generally establishes a schedule of the
allowable fees we may charge customers and limits the size and number of
transactions that we may have with any one customer at any given time. In
addition, we are required to provide customers with certain disclosures, such as
the amount of the advance, the fees we charge, the annual interest rate and the
due date of the advance. These state statutes also regulate the nature and
content of our advertising and promotion and certain states prohibit us from
enforcing transactions with our customers by use of the state's criminal bad
check laws.
State Deferred Deposit Laws. In Kansas, New Mexico and Tennessee, each of
our branches is licensed as a provider of delayed, or deferred deposit, or
presentment services. In these states we are authorized to accept or cash checks
and hold them for a designated period of time, within which, it can be redeemed
by the customer prior to being deposited by us.
35
State Check Cashing Laws. In California, Louisiana, Nevada and Utah we are
regulated as a check casher. In these states we are authorized to defer the
deposit of personal checks that we cash, or accept, for a designated fee.
Federal Regulations
Our advance activities are subject to certain federal regulations,
including the Truth-in-Lending Act ("TILA"), the Equal Credit Opportunity Act
("ECOA"), the Fair Credit Reporting Act ("FCRA") and the regulations promulgated
for each. In addition, some state statutes require that TILA disclosures be
given to consumers who use these services. These laws require us to provide our
customers with disclosures of the principal terms of each transaction, prohibit
misleading advertising, protect against discriminatory lending practices and
prohibit unfair credit practices. TILA and Regulation Z promulgated thereunder
require, among other things, disclosure of pertinent elements of consumer credit
transactions, including the amount of the finance charges and that charge
expressed in terms of an annual percentage rate. The ECOA prohibits creditors
from discriminating against applicants on the basis of race, sex, age or marital
status. Pursuant to Regulation B promulgated under the ECOA, creditors are
required to make certain disclosures regarding consumer rights and advise those
whose credit is not approved of the reasons for the rejection. The FCRA requires
creditors to provide certain information to consumers whose credit applications
are not approved on the basis of a report obtained from a consumer reporting
agency.
Employees
As of September 30, 2001, we had 188 employees (168 full-time and 20
part-time), including 43 corporate and administrative employees, 9 district
managers and 136 store personnel. None of our employees are covered by a
collective bargaining agreement and we have never experienced a work stoppage.
We believe that our relationship with our employees is satisfactory.
Properties
Our corporate headquarters at 5295 Greenwich Road, Suite 108, Virginia
Beach, VA 23462 consists of approximately 8,750 square feet that we lease from a
third party for $7,000 per month. The lease expires in December 2003 and we have
an option to renew the lease on a year-to-year basis.
All of our store locations are leased from third parties, typically for a
term of one to three years. Each store generally consists of between 1,000 to
2,000 square feet at an average monthly lease rate ranging from $500 to $1,600.
The store leases expire at various dates through the year 2004. Most of our
store leases contain renewal options for an additional period at rental rates
adjusted according to agreed upon formulas. In addition most of the leases
contain termination clauses if the state enacts legislation that negatively
impacts our business.
Legal Proceedings
We have been named as a defendant in two material class action lawsuits and
one other material lawsuit:
Elaine Steward Greene, et al. v. Easy Money of Kentucky, Inc., et al.
---------------------------------------------------------------------
36
Name of court or agency where proceeding is pending: United States District
Court for the Eastern District of Kentucky, Lexington Division.
Date proceeding began: The original complaint was filed on July 1, 1999.
The second amended complaint was filed on October 6, 2000.
Principal parties: Elaine Steward Greene and Helen Mitchell, individually
and on behalf of others similarly situated (plaintiffs) v. Easy Money of
Kentucky, Inc., Easy Money of Virginia, Inc., Easy Money Holding Corporation,
David L. Greenberg, Tami Van Gorder, Jerome Greenberg, John Murphy, Sterling
Financial Bank and unknown individuals and entities (defendants).
Description of facts underlying the proceeding: The suit alleges that the
defendants violated the Kentucky Interest and Usury Statute, that defendants
violated the Kentucky Consumer Loans Act, that defendants violated the Racketeer
Influenced and Corrupt Organization Act, that the defendants violated the
Kentucky Consumer Protection Act, and that the defendants engaged in fraud. The
plaintiffs brought this action as a class action claiming defendants charged and
collected from plaintiffs and other customers similarly situated usurious
interest rates for consumer loans. The complaint alleges defendants illegally
coerced payment of monies from plaintiffs and other class members by threatening
to pursue collection of the debts. The complaint also charges that defendants
were not properly licensed under Kentucky state law. The court has certified the
class of plaintiffs in this case.
Relief Sought: Plaintiffs have requested the following relief: (i) twice
the interest paid by plaintiffs in connection with certain loans made by
plaintiffs, forfeiture of all unpaid interest, actual damages sustained,
statutory damages and civil penalties allowed by law, including all loan charges
and twice the amount of interest or fines collected and damages in the amount
twice the finance charge and punitive damages jointly and severally from
defendants Easy Money of Kentucky, Easy Money of Virginia, Easy Money Holding
Corporation, David Greenberg, Tami Van Gorder and Jerome Greenberg; (ii)
attorneys' fees, expenses and costs; (iii) injunctive relief prohibiting
plaintiffs from continuing to engage in illegal conduct as alleged; (iv)
pursuant to Kentucky Consumer Loan Act, the transactions between plaintiffs and
defendants be declared void and plaintiffs be awarded all sums paid to
defendants, including but not limited to, principal, interest and fees for each
and every transaction jointly and severally from defendants Easy Money of
Kentucky, Easy Money of Virginia, Easy Money Holding Corporation, David
Greenberg, Tami Van Gorder and Jerome Greenberg; (v) pursuant to the RICO claim,
plaintiffs ask for triple damages, costs and attorneys' fees from all defendants
named in the RICO count; (vi) pursuant to the common law fraud claims,
plaintiffs ask for actual damages plus punitive damages from all defendants
named in the common law fraud count; (vii) pursuant to the Kentucky Consumer
Protection Act, plaintiffs ask for actual damages, equitable relief and punitive
damages from all defendants named in the Kentucky Consumer Protection Act count;
(viii) plaintiffs ask for pre-judgment and post-judgment interest; and (ix)
plaintiffs ask that defendants be ordered to cease their efforts from plaintiffs
and class members through threats of criminal prosecution or otherwise.
The range of possible loss in this case is between $0 and the plaintiffs'
demand of $40,000,000. We have not been advised that a loss is probable in this
case. Our experience in cases such as this is that we are able to settle these
cases for nominal sums, although we cannot offer assurance that we will be able
to settle this case consistent with our prior experience.
. Shelia Bellizan and Johnette McMahon, et al. v. Easy Money of Louisiana,
------------------------------------------------------------------------
et al.
- ------
Name of court or agency where proceeding is pending: United States District
Court for the Eastern District of Louisiana.
37
Date proceeding began: October 4, 2000.
Principal parties: Shelia Bellizan and Johnette McMahon and others
similarly situated (plaintiffs) v. Easy Money of Louisiana, Inc., Easy Money
Holdings, Inc., Easy Money of Virginia, Inc., David L. Greenberg, Tami Van
Gorder and Jerome Greenberg (defendants).
Description of facts underlying the proceedings: Plaintiffs brought this
action claiming that defendants violated the Racketeer Influenced Corrupt
Organization Act and the Louisiana Usury laws. Plaintiffs amended the original
complaint upon direction from the court. Plaintiffs brought this action on
behalf of a class. The court has not certified a class in this case. Plaintiff's
complaint alleges defendants offered to loan money to consumers at usurious
rates. Plaintiffs also allege defendants charged duplicate fees in connection
with certain rollover loan transactions.
Relief sought: Plaintiffs request that the court issue an injunction
against continued violations of the laws set forth in the complaint. Plaintiffs
request adequate and reasonable damages and damages trebled for the losses and
expenses both past and future described in the complaint in addition to any
other economic or general damages to be shown at trial. Plaintiffs request costs
and disbursements incurred in connection with the action, including reasonable
attorneys' fees, expert witness fees and other costs. Plaintiffs further ask for
interest as allowed by law.
We have filed a motion to dismiss this case. The motion is pending with the
court.
. Cash Today of Denton, Inc., et al. v. Jerry Greenberg, et al.
-------------------------------------------------------------
Name of court or agency where proceeding is pending: District Court of
Gregg County, Texas.
Date proceeding began: The original petition was filed on May 8, 2000. The
first amended petition was filed on May 18, 2001.
Principal parties: Cash Today of Denton, Inc. and Cash Today of the USA,
Inc. (plaintiffs) v. Jerry Greenberg, David Greenberg, Mike Wright, David
Kitchens, Tami Van Gorder, David Kilby, The Easy Money Group, Easy Money Holding
Corporation, Easy Money of Virginia, Inc., Easy Money of Co., Inc., The Loan
Alternative Corporation, and Wackenhut Services, Inc. (defendants)
Description of facts underlying the proceedings: Plaintiffs claim that
defendants have illegally converted property belonging to plaintiffs (checks,
cash business assets and equipment) by assuming dominion and control over said
items without legal authority. Plaintiffs also claim that defendants have
tortiously interfered with the business relations between the plaintiffs and
their customers. Plaintiffs also claim that defendants have tortiously
interfered with the prospective business relations of plaintiffs and the
potential customers that come to plaintiffs' stores each day. Plaintiffs claim
that defendants have trespassed upon the property and business of plaintiffs
without legal authority or consent. Plaintiffs also claim that defendants have
committed fraud by fraudulently and intentionally misrepresenting that the
bankruptcy court had ordered the seizures of plaintiffs' property when no such
authority or authorization existed in law or in fact.
38
Relief sought: In connection with the conversion claim, plaintiffs
request damages in an amount equal to the value of the assets alleged converted
together with punitive damages. In connection with the tortious interference
with business relations charge, plaintiffs request damages and punitive damages.
In connection with the tortious interference with prospective business relations
charge, the trespass charge, the theft charge, and the fraud charge, plaintiffs
request damages and punitive damages. Plaintiffs also request that the court
grant a declaratory judgment that plaintiffs are the owners of the assets
alleged converted and that they are entitled to possession of the same.
Plaintiffs also request that the defendants be held jointly and severally liable
to plaintiffs for all damages alleged. Plaintiffs also request reasonable
attorneys' fees and costs as well as post-judgment and pre-judgment interest.
The Loan Alternative Corporation filed for Chapter 11 bankruptcy
protection on April 21, 2000. The bankruptcy proceeding was dismissed on July 9,
2001.
We intend to vigorously defend these claims. The defense of these
claims is costly and is reflected in other operating expenses in our financial
statements. See "Risk Factors - Risks of Our Industry." Due to the procedural
status of these cases, we are unable to predict the outcome of the litigation.
Additionally, from time to time, we are a defendant (actual or
threatened) in certain other lawsuits encountered in the ordinary course of our
business, the resolution of which, in our opinion, should not have a material
adverse effect on our financial position, results of operations or cash flows.
MANAGEMENT
The following table sets forth the names, positions and ages of our
executive officers and directors.
Name Age Position
- ---- --- --------
David Greenberg 37 President and Chief Executive
Officer and Director
Michael Wright 35 Chief Operating Officer
Tami Van Gorder 40 Secretary/Treasurer and Director
David M. Kilby 33 Chief Financial Officer
David Greenberg
- ---------------
Mr. Greenberg is one of our founders and principal shareholders. He has been
President, Chief Executive Officer and Director since our founding in 1994.
Currently, Mr. Greenberg is President, Chief Executive Officer, Director and
principal stockholder of EMH which is commonly owned and managed by us. Mr.
Greenberg received a degree in Business Management from TCC in Virginia Beach,
VA.
39
Michael Wright
- --------------
Mr. Wright has been our Chief Operating Officer since July 2000. From April 1998
to June 2000 he owned and operated four payday and title loan offices under a
franchise agreement with Dollar Express, Inc. From 1994 to March 1998, Mr.
Wright was Management Information Systems Manager and Operations Manager of one
of our subsidiaries, Easy Money of Virginia, Inc.
Tami Van Gorder
- ---------------
Ms. Van Gorder is one of our founders and principal shareholders. She has been
Secretary/Treasurer and Director since our founding. Currently she is a
principal stockholder, Director and Secretary/Treasurer of EMH. Ms. Van Gorder
has an accounting degree from Princess Anne Business College. Ms. Van Gorder is
the sister of David Greenberg.
David M. Kilby
- --------------
Mr. Kilby, a Certified Public Accountant has been our Chief Financial Officer
since June 1998. From June 1991 to May 1998 he was employed by KPMG, LLP and was
a Senior Manager from June 1997 to May 1998. Mr. Kilby is also the Chief
Financial Officer of EMH. Mr. Kilby received a BS Degree in Accounting from Old
Dominion University.
Committees of the Board of Directors
We have not established any committees of the board of directors.
Employment Agreements
In July 1998, we entered into an employment agreement with Mr. Kilby,
which provides for an annual base salary of $100,000, plus benefits customarily
provided to our other executive officers. Unless either party gives the other
party 30 days prior written notice of termination before the end of a renewal
term, the agreement will automatically renew for 12-month periods. The
employment agreement provides that if any of our shares of common stock become
publicly traded, Mr. Kilby is entitled to receive an option to purchase up to
25,000 of our shares at $1.00 per share at the time of the public offering or
within 90 days thereafter. The agreement further provides that in the event the
value of the shares is less than $4.00 per share at the time of the public
offering, our principal shareholders will pay Mr. Kilby the difference. We do
not have employment agreements with any of our other key employees. We do not
have any intention at the present time to enter into employment agreements with
any of our executive officers subsequent to the date that this registration
statement becomes effective.
Executive Compensation
David Greenberg, our Chief Executive Officer, received a base salary of
$80,000 for the year ended December 31, 2000. Other than David Kilby, Chief
Financial Officer, no other employee received in excess of $100,000 in
compensation for the year ended December 31, 2000. Mr. Kilby's compensation for
the year ended December 31, 2000 amounted to $102,000.
40
Summary Compensation Table
--------------------------
Fiscal Bonus Other Annual All Other
Name and Principal Position Year Salary Paid Compensation Compensation
- --------------------------- ---- ------ ---- ------------ ------------
David Greenberg, Chief 2000 $ 80,000 -0- -0- -0-
Executive Officer
David M. Kilby, Chief 2000 $102,000 -0- -0- -0-
Financial Officer
Directors Compensation
Our directors do not receive any compensation for serving on the board
of directors.
Stock Option Plan
We adopted the Easy Money Holding Corporation 2001 Stock Plan on
October 1, 2001. The 2001 plan provides for a maximum number of 1,000,000 shares
that may be subject to option. The plan provides for the issuance of incentive
stock options and non-statutory stock options to our key employees and
directors. The plan will remain in effect, unless terminated by the board of
directors, for a term of ten (10) years from the later of (i) the effective date
of the plan, or (ii) the date of the most recent board approval of an increase
in the number of shares reserved for issuance under the plan. Any amendment,
alteration, suspension or termination of the plan shall not, without the consent
of the employee, affect the employee's rights under an option previously
granted. We have reserved a total of 1,000,000 shares of our common stock for
issuance under the plan.
The 2001 plan provides for the granting of incentive stock options to
employees within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended. If an employee would have the right in any calendar year to
exercise for the first time incentive stock options for shares having an
aggregate fair market value in excess of $100,000, any such excess options shall
be treated as non statutory stock options. The plan shall be administered by the
board or a committee appointed by the board. The board or the committee
determines the terms of the options granted under the plan, including the number
of shares subject to an option, the exercise price, and the term and
exercisability of the option. The exercise price of all incentive stock options
shall not be less than the fair market value of the shares on the day the option
is granted. The board or the committee has the authority to grant non statutory
stock options at option prices equal to 100% of the fair market value of the
shares at the date of grant.
Payment of the purchase price of upon exercise of stock options may be
made in cash or any consideration and method of payment authorized by the board
or the committee. Generally, options granted under the plan have a term of three
(3) years and are nontransferable. The board or the committee determines the
vesting terms of all options. In no event may an option be exercised following
the option expiration date. In the event that we undergo a change in control, we
expect that outstanding options will be assumed or equivalent awards substituted
41
by our acquiror. If an acquiror does not agree to assume or substitute awards,
the vesting of outstanding options will accelerate in full prior to consummation
of the transaction.
Pursuant to his employment agreement, Mr. Kilby will receive an option
to purchase up to 25,000 shares at the time our shares become publicly traded.
The option expires 90 days after the shares become publicly traded and is
exercisable at $1.00 per share.
Insofar as indemnification or liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers or controlling persons
by these, or otherwise, we have been advised that in the opinion of the SEC,
this indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification against
liabilities, other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit or proceeding, is asserted by a director, officer or controlling
person in connection with the Shares being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
indemnification by us is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
OUR PRINCIPAL SHAREHOLDERS
As of September 30, 2001 there were 10,000,000 shares issued and
outstanding. The following table sets forth information known to us with respect
to the beneficial ownership of our shares on September 30, 2001, and as adjusted
to reflect the sale of the shares under this prospectus, by
. each person who owns beneficially 5% or more of our outstanding shares
. each of our directors
. each of our executive officers
. all of our directors and executive officers as a group.
Except as indicated in the footnotes to this table and subject to
community property laws, where applicable, the persons named in the table have
sole voting and investment power with respect to all Shares shown as beneficial
owned by them. Beneficial ownership and percentage ownership are determined in
accordance with the rules of the SEC. The table below includes the shares
issuable upon conversion of convertible debt and the exercise of outstanding
options and warrants which are convertible or exercisable within 60 days of the
date of this prospectus. An additional 620,000 shares will be issued to our
selling shareholders once the registration statement, of which this prospectus
is a part, is declared effective by the Securities and Exchange Commission.
Unless otherwise indicated, the address for each individual listed is
5295 Greenwich Road, Suite 108, Virginia Beach, Virginia 23462.
42
Shares
Beneficially Owned Percentage Owned
Before the Offering (1) After the Offering
----------------------- ------------------
Beneficial Owner Number Percent (2) Minimum (3) Maximum (4)
- ---------------- ------ ----------- ----------- -----------
David Greenberg 5,000,000 43.25% 36.56%(5) 31.67%(5)
Tami Van Gorder 5,000,000 43.25% 36.56%(5) 31.67%(5)
David Kilby - - 0.20% 0.17%
Love Savings Holding Company (6) 793,350 6.86% 6.45% 5.58%
(1) Does not include 620,000 shares that are contingently issuable to
consultants and others on the effective date of the registration statement,
400,000 shares reserved for issuance upon the exercise of a warrant and
25,000 shares issuable to Mr. Kilby upon the exercise of an option that is
exercisable on the effective date of the registration statement. See
"Certain Relationships and Related Transactions."
(2) Based on 11,561,000 shares outstanding before the offering and includes the
issuance of 1,561,000 shares upon the exercise of outstanding warrants.
(3) Based on 12,306,000 shares outstanding if the minimum of 100,000 shares are
sold. Includes 620,000 shares issuable to certain consultants and others,
1,161,000 shares upon the exercise of outstanding warrants, 400,000 shares
reserved for issuance upon the exercise of a warrant and 25,000 shares that
are issuable to Mr. Kilby upon the exercise of an option on the effective
date of the registration statement or within 90 days thereafter.
(4) Based on 14,206,000 shares outstanding if the maximum of 2,000,000 shares
are sold. Includes 620,000 shares that are issuable to certain consultants
and others, 1,161,000 shares upon the exercise of outstanding warrants,
400,000 shares reserved for issuance upon the exercise of a warrant and
25,000 shares issuable to Mr. Kilby upon the exercise of an option on the
effective date of the registration statement or within 90 days thereafter.
(5) Assuming the sale of all shares offered by the selling shareholder.
(6) Love Savings Holdings Company is the holder of warrants to acquire 793,350
shares at an exercise price of $.8613 per share, subject to certain
antidilution provisions. The address of Love Savings Holding Company is 212
South Central Avenue, St. Louis, MO 63105.
MARKET FOR OUR SHARES
There has previously been no market for our shares. We have made
application to The NASDAQ Stock Market, Inc. for listing of our shares on the
OTC Bulletin Board under the symbol "EMHC". Rule 6530 adopted by NASDAQ requires
all companies which trade on the OTCBB to file an SEC disclosure document (Form
10-SB) and become a fully reporting public company in accord with the Securities
Exchange Act of 1934. In conjunction with the application, we are attempting to
identify the market makers for our securities. There can be no assurances that
any meaningful trading market in our shares will be developed or sustained.
We have two shareholders of record for our shares.
PLAN OF DISTRIBUTION
43
The offering price of our common stock will not change until completion
of the public offering. We do not intend to employ any underwriter or other
broker/dealer to place or sell our common stock. If we do use an underwriter or
a broker/dealer or other agents to sell this offering, we will file a
post-effective amendment to this registration statement and make no sales until
that amendment is declared effective. We believe we can sell the limited number
of shares through our directors and management group who will not be paid any
compensation. In a separate offering, certain of our shareholders are attempting
to sell their shares. These shareholders include the two members of the board.
These individuals have agreed to only sell their shares in that offering after
this offering is either completely sold out or terminated.
We anticipate that our officers and directors will be primarily
responsible for the sale of the common stock in this offering to various
business contacts and acquaintances. There is no guarantee that we will complete
this offering, even at the minimum level of 100,000 shares. There will be an
indirect benefit to management, because they are our principal shareholders, if
this offering is successful because they realize an increase in the value of
their shares and have potentially an active market for their common stock.
All our officers, directors and affiliated persons may purchase common
stock in this offering for cash at the offering price without restriction. There
is no limitation on the number of shares they may purchase. All common stock
purchased in this offering by an officer, director, or person who controls us
will not be freely tradeable, but subject to restrictions on resales, and must
be purchased for investment purposes, requiring, in most instances, a holding
period.
We will deposit the proceeds from this offering, up to the minimum
amount, in a segregated subscription account with SunTrust Bank and will not use
any proceeds for any business purpose until the minimum number of shares is sold
within the offering term of 180 days. If we cannot sell the minimum number of
shares within that offering period, then we will end this offering and return
all proceeds without deduction for costs or addition of any interest. We will
obtain an address from each subscriber and will return all proceeds within 10
days of the end of our offering to that address. We will retain any interest
earned on the deposited funds to pay for the costs of this offering.
We reserve the right to close this offering at any time within the
offering term of 180 days whenever we have received the minimum offering, even
if less than the maximum offering has not been reached. Factors that may
influence our decision to end the offering will be the effort required to
continue sales and the rate at which subscriptions were obtained. The offering
may be terminated at any time after the minimum is reached. We will not sell
more than the maximum number of shares and will close the offering when we sell
the maximum number of shares.
The shares offered in this offering are eligible for sale only in
certain states, and, in some of those states, may be offered or sold only to
"institutional investors", as defined under applicable state securities law. No
sales or distributions, other than as described in this prospectus, may be
effected after it has been amended or supplemented. No person or group has made
any commitment to purchase any or all of the shares and therefore, we cannot
state how many shares will be sold.
44
If we sell the maximum of 2,000,000 shares, we will have 12,620,000
shares outstanding, including the 620,000 shares to be issued to our selling
shareholders on the effective date of this offering (10,720,000 shares
outstanding if we sell the minimum of 100,000 shares). The shares will be freely
tradable without restriction or further registration under the Securities Act
except for any shares purchased by an "affiliate" of us, and they may be sold
only while the registration statement of which this Prospectus is a part (or
another registration statement covering sales by those affiliates)is effective,
or in accordance with Rule 144 or private sales exemptions. An affiliate is a
person controlling, controlled by or under common control with us.
Minimum Offering Amount
We have established a minimum offering amount of $250,000. We will
promptly deposit all investor money pending sale of the minimum-offering amount
into an escrow account with our escrow agent. In the event the minimum-offering
amount is not raised within 180 days from the effective date of this offering,
we will promptly return all investor money without any interest accrued or
penalties assessed. Upon receipt of the minimum amount, each subscription for
the Shares in this offering that is accepted by us will be credited immediately
to our cash amount, and such funds may be disbursed by us at our discretion,
without any waiting period or other contingency.
DESCRIPTION OF SECURITIES
Our authorized capitalization consists of 50,000,000 shares of common
stock, $.01 par value per share, with 10,000,000 shares issued and outstanding,
and 5,000,000 shares of preferred stock, $.01 par value per share, with none
issued and outstanding. In connection with certain consulting agreements, we
agreed to issue 620,000 shares to our selling shareholders on the effective date
of this offering for assisting us in becoming a publicly traded company. See
"Certain Relationships and Related Transactions." As of September 30, 2001, we
have reserved 1,161,000 shares issuable on the exercise of warrants, 400,000
shares issuable on the exercise of a warrant that terminates 6 months after a
loan to James Erbes has been satisfied or 60 days after this offering, and
25,000 shares issuable on the exercise of an outstanding option that will be
granted and will be exercisable on the effective date of this offering or within
90 days thereafter.
Common Stock
Holders of our common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. Under our
amended and restated articles of incorporation, all elections for directors are
decided by a plurality vote of shareholders at their annual meeting. The
directors may from time to time declare dividends in the manner and on the terms
and conditions provided by law. Under Virginia law, on a liquidation,
dissolution or winding up of our company, the assets legally available for
distribution to shareholders are distributable among the holders of common stock
according to their interests after discharging or making provision for
discharging liabilities. Each outstanding share is, and all common stock to be
outstanding upon completion of this offering will be duly authorized, fully paid
and non-assessable. Our articles of incorporation do not allow for preemptive
rights.
Common Stock Warrants and Options
45
As of the date of this prospectus, we had outstanding warrants
exercisable for 1,161,000 shares. We issued the warrants in connection with the
sale of our senior subordinated notes. Each warrant entitles the holder to
purchase one share at $0.8613 per share. The number of shares underlying the
warrants and exercise price is subject to adjustment upon the occurrence of
certain events, including, among other things, any recapitalization,
reclassification, stock dividend, stock split, merger or consolidation and the
issuance for consideration of rights, options or warrants (other than rights to
purchase shares issued to stockholders generally) to acquire our common stock.
Holders of the warrants are not entitled to any rights as a stockholder until
the warrants are exercised. Holders of the warrants exercisable for 1,161,000
shares have registration rights.
Further, we have outstanding warrants exercisable for 400,000 shares
issuable to James Erbes. The warrants terminate 6 months after the loan to Mr.
Erbes has been satisfied or 60 days after this offering. We also have an
outstanding option for 25,000 shares, exercisable by Mr. Kilby on the effective
date of this offering or within 90 days thereafter.
Shares eligible for future sale
As of the date of this prospectus, an aggregate of 10,000,000
outstanding shares of common stock are restricted securities within the meaning
of the federal securities laws, and in the future may be sold in compliance with
Rule 144 adopted under the Securities Act of 1933, assuming a public market
exists for the shares. Rule 144 provides, in part, that a person, not our
affiliate, who holds restricted securities for a period of one year may sell all
or part of the securities in ordinary brokerage transactions, in compliance with
volume limitations and the availability of current public information about us.
Assuming a public market develops for our common stock, our
shareholders are not contractually prohibited from selling any of their shares,
if permitted by Rule 144. We cannot predict the effect, if any, that any sales
of our common stock, or the availability of our common stock for sale, may have
on the market value of the common stock prevailing from time to time. Sales of
substantial amounts of our common stock by shareholders, particularly if they
are our affiliates, could have a material adverse effect on the market value of
the shares in this offering.
Registration Rights
Under an agreement, holders of warrants exercisable for 1,161,000
shares have the right, subject to various conditions and limitations, to include
their shares in registration statements for our securities. Registration of any
shares would result their becoming freely tradable without restriction under the
Securities Act of 1933, immediately on effectiveness of the registration
statement. By exercising their registration rights and causing a large number of
shares to be registered and sold in the public market, these holders may cause
the price of our common stock to fall. In addition, any demand to include these
shares in our registrations could have a material and adverse effect on our
ability to raise needed capital.
Transfer agent
Our transfer agent is Continental Stock Transfer and Trust Company, 17
Battery Place, New York, New York 10004.
46
LEGAL MATTERS
The validity of the shares offered hereby will be passed on by
Williams, Mullen, Clark & Dobbins, P.C., One Columbus Center, Virginia Beach, VA
23462.
FEDERAL TAX ASPECTS
Potential investors are encouraged to have their own personal tax
consultant review the tax aspects of an investment in this offering.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We were formed in December, 1997. At the time of our formation, several
pre-existing, separately incorporated companies with common ownership became our
subsidiaries. In exchange for equal ownership in our company, the founders
transferred their ownership interests in the separately owned companies in a
tax-free reorganization.
Easy Money of Virginia, Inc., our subsidiary, provides various
management services to our stores and to EM Holdings, Inc, our affiliate. In
addition to management services, Easy Money of Virginia processes transactions
and handles various operational matters including human resources, billing,
accounting and legal matters. In order to be reimbursed for these costs, Easy
Money of Virginia allocates a management fee to all stores and to EMH based on
monthly gross advances. The management fee is generally 5% of these gross
advances, but may vary to allow Easy Money of Virginia to break even. The
management fee agreement automatically renews on an annual basis unless
terminated in writing at least 30 days prior to year-end. For the years ended
December 31, 1999 and 2000 and for the nine months ended September 30, 2001,
expenses of $500,000, $1,800,000 and $440,000, respectively, were allocated to
EMH. These amounts are included as a reduction of other operating expenses in
our consolidated statements of income (loss) for the respective periods. As of
December 31, 2000 and September 30, 2001, we had receivables from EMH of
approximately $1,352,000 and $170,000, respectively. Amounts due us by EMH have
no formally stated repayment terms and do not bear interest. They represent net
advances made by us to EMH as well as amounts due for allocated expenses,
described above.
EMH is a similar business operating in three states: Hawaii,
Mississippi and Nevada. Nevada is the only state in which EMH competes with us.
We have systems in place to insure that customers are not conducting multiple
transactions with both companies. Other than Nevada, we do not intend to enter
markets where EMH has a presence.
As of December 31, 2000 and September 30, 2001, net amounts borrowed by
us from officers/shareholders amounted to $1,696,000 and $1,626,000,
respectively. As of September 30, 2001, we owed Mr. Greenberg $985,000 and Ms.
Van Gorder $641,000. These amounts are due on demand and accrue interest at a
rate of 11.5%. For the years ended December 31, 1999 and 2000 and for the nine
months ended September 30, 2001, interest on amounts due to
officers/shareholders amounted to approximately $178,000, $187,000 and $98,000,
respectively. As of
47
December 31, 2000 and September 30, 2001, we had net amounts owed to related
companies of approximately $263,000 and $101,000, respectively. These net
payables are due on demand and accrue interest at a rate of 11.5%. For the years
ended December 31, 1999 and 2000 and for the nine months ended September 30,
2001, interest on net payables to related companies amounted to $31,000, $37,000
and $8,000, respectively.
Under the terms of an August, 2000 agreement between us and Deville
Investment Corporation, we agreed to issue $50,000 in registered tradable
shares, calculated at the opening market price of the shares on the effective
date of a registration statement, in connection with a loan of $50,000. The loan
is payable on the later of the effective date of a registration statement or
April 30, 2001. We borrowed $50,000 to partly fund the costs of this offering.
We are required to issue the shares when our common stock becomes publicly
traded.
In May, 2000, we entered into a consulting agreement with Condor
Investment Trust and Red Oak Financial Corp. for financial services in exchange
for 2% (each) of our outstanding common stock. We are required to issue the
shares when our common stock becomes publicly traded. In connection with the
amended agreement, Condor and Red Oak agreed not to sell 25% of the shares
during the 180-day period after the effective date of this offering and 25% of
the shares during the 270-day period after the effective date of this offering.
The remaining 50% may be sold at any time thereafter. Our current shareholders
do not control Condor Investment Trust or Red Oak Financial Corp.
In May, 2000, we entered into a consulting agreement with Novacorp, LLC
for financial services in exchange for $12,000 in cash and 2% of our outstanding
common stock. We are required to issue the shares when our common stock becomes
publicly traded. In connection with the amended agreement, Novacorp has agreed
not to sell the shares for 12 months after the effective date of this offering.
Our current shareholders do not control Novacorp, LLC.
EXPERTS
The consolidated financial statements of Easy Money Holding Corporation
and Subsidiaries as of December 31, 2000, and for each of the years in the
two-year period ended December 31, 2000, have been included herein in reliance
upon the report of KPMG LLP, independent accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On October 2, 2001, KPMG LLP declined to stand for re-election as our
independent accountants for the year ended December 31, 2001.
KPMG LLP's report on our financial statements for 1999 and 2000 did not
contain an adverse opinion or a disclaimer of opinion, nor was it modified as to
uncertainty, audit scope or accounting principles.
During the years ended December 31, 1999 and December 31, 2000 and
through January 23, 2002, there were no disagreements between us and KPMG LLP on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, that, if not resolved to the satisfaction of
KPMG
48
LLP would have caused it to make a reference to the subject matter of the
disagreements in connection with their reports.
On January 24, 2002, we appointed Cherry, Bekaert & Holland as our
independent accountants.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our organizational documents provide for the indemnification of our
directors, officers, employees and other agents. Virginia law provides that a
corporation may indemnify its directors against liability incurred in a
proceeding in which the director was made a party because of his or her service
as a director, except:
. any transaction from which the director derived an improper personal
benefit for which the director was adjudged liable; and
. proceedings by or in the right of the corporation in which the
director was adjudges liable to the corporation.
We indemnify our officers, employees and agents to the same extent.
Virginia law provides for mandatory indemnification of directors and officers
who prevail in the defense of any proceeding because of his or her position
against reasonable expenses incurred. With the exception of certain lawsuits
described in this prospectus, there is no litigation or proceeding involving any
of our directors or officers in which indemnification is required or permitted
and we are not aware of any threatened litigation or proceeding that may result
in a claim for indemnification.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2 under the Securities Act of 1933, with
respect to the shares offered hereby. This prospectus constitutes a part of the
registration statement and does not contain all of the information in the
registration statement. The rules and regulations of the SEC permit us to omit
certain parts from this prospectus. Statements in this prospectus about the
contents of any contract, agreement or any other document are not necessarily
complete and, where that document is an exhibit to the registration statement,
each statement is qualified in all respects by the provisions of that exhibit,
to which reference is made for all of the provisions. For further information
with respect to our company and the shares, we refer you to the registration
statement and to its exhibits.
The registration statement and its exhibits may be inspected, without
charge and copies can be obtained, at prescribed rates, at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary
Plaza, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Information
about the operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330. The registration statement is also available to the public from
commercial document retrieval services, or via EDGAR on the SEC's web site at
www.sec.gov. In addition, copies of the registration statement and its exhibits
- -----------
may be obtained by mail, at prescribed rates, from the Public Reference Branch
of the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
49
On effectiveness of the registration statement, we will begin filing
quarterly, annual and other reports with the SEC. We intend to furnish our
stockholders with annual reports, that will include financial statements audited
by our independent accountants, and other periodic reports as we may choose to
provide, or as we are required by law.
We have not authorized any dealer, salesperson or other person to
provide any information or make any representations about us, except the
information or representations contained in this prospectus. You should not rely
on any additional information or representation.
This prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, any securities:
. except the shares offered by this Prospectus;
. in any jurisdiction in which the offer or solicitation is not
authorized;
. in any jurisdiction where the dealer or other salesperson is
not qualified to make the offer or solicitation;
. to any person to whom it is unlawful to make the offer or
solicitation; or
. to any person who is not a United States resident or who is
outside the jurisdiction of the United States.
The delivery of this Prospectus or any accompanying information does
not imply that:
. there have been no changes in our affairs after the date of
this Prospectus; or
. the information contained in this Prospectus is correct after
the date of this Prospectus.
RECENT SALES OF UNREGISTERED SECURITIES
We have agreed to issue 20,000 shares to Deville Investment Corporation
in connection with a loan of $50,000. We are required to issue the shares when
our stock becomes publicly traded.
We have a consulting agreement with Condor Investment Trust and Red Oak
Financial Corp. for financial services in exchange for 200,000 shares (each) of
our outstanding common stock. We are required to issue the shares when our
common stock becomes publicly traded.
We have a consulting agreement with Novacorp, LLC for financial
services in exchange for $12,000 in cash and 200,000 shares of our outstanding
common stock. We are required to issue the shares when our common stock becomes
publicly traded.
50
The section of the Securities Act and the rule of the Commission under
which we claimed exemption from registration are Section 4(2) and Rule 506,
respectively. No principal underwriters were used in these sales.
51
DEALER PROSPECTUS DELIVERY OBLIGATION
Until June 26, 2002, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
52
EASY MONEY HOLDINGS CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2000
and September 30, 2001 (unaudited) F-3
Consolidated Statements of Income (Loss) for the years
ended December 31, 1999 and 2000 and the nine months
ended September 30, 2000 and 2001 (unaudited) F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1999 and 2000 and the
nine months ended September 30, 2001 (unaudited) F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1999 and 2000 and the nine months
ended September 30, 2000 and 2001 (unaudited) F-6
Notes to Consolidated Financial Statements F-7
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
Easy Money Holding Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Easy Money
Holding Corporation and subsidiaries (the Company) as of December 31, 2000, and
the related consolidated statements of income (loss), stockholders' equity
(deficit) and cash flows for each of the years in the two-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2000, and the results of their operations and their cash flows for
each of the years in the two-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Norfolk, Virginia
February 16, 2001
F-2
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, September 30,
Assets (Notes 5 and 6) 2000 2001
------------ -------------
(unaudited)
Current assets:
Cash $ 569,803 318,309
Amounts due from customers for advances, net (note 2) 2,952,951 2,542,528
Prepaid expenses and other current assets 351,598 374,419
------------ -------------
Total current assets 3,874,352 3,235,256
Investment in joint ventures (note 4) 28,415 -
Property and equipment, net (notes 3 and 7) 1,282,047 1,044,813
Receivable from related party (note 10) 1,352,063 169,792
Goodwill, net of accumulated amortization of $173,475 in 2000
and $201,083 in 2001 228,035 212,402
------------ -------------
Total assets $ 6,764,912 4,662,263
============ =============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Line of credit facilities (note 5) $ 2,706,029 1,587,250
Current installments of long-term debt (note 6) 840,297 453,833
Current installments of capital lease obligations (note 7) 291,409 260,806
Accounts payable 1,138,702 729,870
Accrued salaries and benefits 265,715 225,763
Other accrued liabilities 90,906 95,884
Payables to related parties (note 10) 263,369 101,066
Payables to officers (note 10) 1,696,426 1,626,167
------------ -------------
Total current liabilities 7,292,853 5,080,639
Capital lease obligations, excluding current installments (note 7) 429,440 198,131
------------ -------------
Total liabilities 7,722,293 5,278,770
------------ -------------
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized 20,000,000 shares; issued
and outstanding 10,000,000 shares in 2000 and 2001 100,000 100,000
Additional paid-in capital 579,207 579,207
Accumulated deficit (1,636,588) (1,295,714)
------------ -------------
Total stockholders' equity (deficit) (957,381) (616,507)
Commitments and contingencies (notes 7 and 13)
------------ -------------
Total liabilities and stockholders' equity (deficit) $ 6,764,912 4,662,263
============ =============
See accompanying notes to consolidated financial statements.
F-3
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Nine months
Years ended December 31, ended September 30,
------------------------------- -----------------------------
1999 2000 2000 2001
------------- ------------ -------------- -----------
(unaudited)
Revenues:
Fees and other income $ 19,472,488 14,656,638 11,699,200 8,235,554
Equity in income (loss) of joint ventures (note 4) 44,000 45,101 79,200 -
Gain on sale of closed store assets - 223,247 - 68,210
Other 29,145 67,921 58,761 23,260
------------- ------------ -------------- -----------
19,545,633 14,992,907 11,837,161 8,327,024
------------- ------------ -------------- -----------
Expenses (note 10):
Provision for credit losses (note 2) 5,076,974 3,190,477 2,650,444 1,366,691
Salaries and benefits 6,486,021 5,835,359 4,738,020 2,816,482
Other operating expenses 6,072,318 5,484,078 4,565,363 3,264,542
Loss on disposal of property and equipment - 82,357 - 11,953
Net loss on dissolution of joint ventures (note 4) - 447,084 190,536 -
Interest expense 883,865 952,270 714,873 490,079
Amortization of goodwill 72,746 43,507 37,306 29,823
Other 16,701 7,841 - -
------------- ------------ -------------- -----------
18,608,625 16,042,973 12,896,542 7,979,570
------------- ------------ -------------- -----------
Net income (loss) 937,008 (1,050,066) (1,059,381) 347,454
Pro forma income tax expense (benefit) (note 8) 375,000 (420,000) (424,000) 139,000
------------- ------------ -------------- -----------
Pro forma net income (loss) (note 8) $ 562,008 (630,066) (635,381) 208,454
============= ============ ============== ===========
Historical net income (loss) per share (note 9) -
basic and diluted $ 0.09 (0.11) (0.11) 0.03
============= ============ ============== ===========
Pro forma net income (loss) per share (note 9) -
basic and diluted $ 0.06 (0.06) (0.06) 0.02
============= ============ ============== ===========
See accompanying notes to consolidated financial statements.
F-4
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Total
Common Stock Additional Total
--------------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
----------- ------------ -------------- -------------- ----------------
Balance at December 31, 1998 10,000,000 $ 100,000 579,207 (545,031) 134,176
Net income - - - 937,008 937,008
Distributions to stockholders - - - (917,187) (917,187)
----------- ------------ -------------- -------------- ----------------
Balance at December 31, 1999 10,000,000 100,000 579,207 (525,210) 153,997
Net loss - - - (1,050,066) (1,050,066)
Distributions to stockholders - - - (61,312) (61,312)
----------- ------------ -------------- -------------- ----------------
Balance at December 31, 2000 10,000,000 100,000 579,207 (1,636,588) (957,381)
Net income (unaudited) - - - 347,454 347,454
Distributions to stockholders
(unaudited) - - - (6,580) (6,580)
----------- ------------ -------------- -------------- ----------------
Balance at September 30, 2001
(unaudited) 10,000,000 $ 100,000 579,207 (1,295,714) (616,507)
=========== ============ ============== ============== ================
See accompanying notes to consolidated financial statements.
F-5
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months
Years ended December 31, ended September 30,
---------------------------- -------------------------
1999 2000 2000 2001
----------- ----------- ---------- ------------
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 937,008 (1,050,066) (1,059,381) 347,454
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for credit losses 5,076,974 3,190,477 2,650,444 1,366,691
Depreciation and amortization 280,533 355,970 308,200 270,104
Gain on sale of closed store assets - (223,247) - (68,210)
Loss on disposal of property and equipment - 82,357 - 11,953
Equity in income (loss) of joint ventures (44,000) (45,101) (79,200) -
Loss on disposition of joint ventures - 447,084 190,536 -
Non-cash interest expense - amortization of warrant discount 80,870 - - -
Changes in assets and liabilities increasing (decreasing)
cash flows from operations:
Amounts due from customers for advances (5,881,196) (1,092,415) (148,711) (992,011)
Prepaid expenses and other current assets (101,278) 225,544 271,196 (22,822)
Accounts payable and accrued expenses (447,130) 665,540 863,182 (468,573)
Other assets (20,904) 20,904 - -
----------- ----------- ----------- ------------
Net cash provided by operating activities (119,123) 2,577,047 2,996,266 444,586
----------- ----------- ----------- ------------
Cash flows from investing activities:
Additions to goodwill - - - (11,975)
Additions to property and equipment (104,746) (19,426) - (17,215)
Net cash received from (contributed to) joint ventures (20,614) 9,687 - -
Proceeds from sale of closed store assets - 882,812 - -
----------- ----------- ----------- ------------
Net cash provided by (used in) investing activities (125,360) 873,073 - (29,190)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit facilities 925,440 311,782 406,661 (1,118,780)
Net borrowings from (repayments to) related parties 317,584 (2,208,989) (1,855,796) 1,088,353
Net borrowings from (repayments to) officers 143,898 98,324 58,664 (70,259)
Proceeds from issuance of long-term debt - 50,000 50,000 -
Principal repayments on long-term debt (76,830) (920,659) (878,890) (297,713)
Repayments of obligations under capital leases (168,043) (356,501) (303,430) (261,910)
Distributions to stockholders (917,187) (61,312) - (6,581)
----------- ----------- ----------- ------------
Net cash provided by (used in) financing activities 224,862 (3,087,355) (2,522,791) (666,890)
----------- ----------- ----------- ------------
Net increase (decrease) in cash (19,621) 362,765 473,475 (251,494)
Cash at beginning of year 226,659 207,038 207,038 569,803
----------- ----------- ----------- ------------
Cash at end of year $ 207,038 569,803 680,513 318,309
=========== =========== =========== ============
Supplemental disclosures:
Cash paid during the period for interest $ 883,865 952,270 714,873 490,079
=========== =========== =========== ============
Supplemental noncash investing and financing activities:
Assets acquired under capital leases $ 489,651 395,288 395,288 -
=========== =========== =========== ============
Net assets (other than cash) contributed to joint ventures $ 646,583 - - -
=========== =========== =========== ============
See accompanying notes to consolidated financial statements.
F-6
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(1) Summary of Significant Accounting Policies
(a) Organization and Business
The Easy Money Holding Corporation and its wholly owned
subsidiaries (the Company) provide retail financial services, such
as short-term cash advances, single installment loans, check
cashing and other transactional services to customers for a fee.
On December 31, 2000, the Company owned and operated 61 stores in
9 states and is headquartered in Virginia Beach, Virginia.
(b) Principles of Consolidation
Easy Money Holding Corporation (the Company) was formed on
December 8, 1997. At that time, several pre-existing separately
incorporated companies with common ownership were established as
subsidiaries of Easy Money Holding Corporation. The consolidated
financial statements include the accounts of Easy Money Holding
Corporation and its subsidiaries. All significant intercompany
transactions have been eliminated. The accounts of E M Holdings,
Inc. and its subsidiaries (EMH), which are in a business similar
to the Company's, are not included in these consolidated financial
statements. The Company and EMH are commonly owned and managed.
(c) Income Recognition
Fee income is recognized as revenue on a level yield basis over
the term of the advance or loan.
(d) Allowance for Credit Losses
The Company maintains an allowance for credit losses at a level
which, in management's opinion, is adequate to cover losses
expected to occur in the existing advances portfolio. The
allowance is increased by charges to income for the provision for
credit losses and decreased by charge-offs (net of recoveries).
Management's periodic evaluation of the adequacy of the allowance
is based on the Company's historical percentage of advances made
that are ultimately written off. Generally, if an advance is not
repaid within four days after its due date, the customer's bank
account is drafted to close out the transaction. If the draft is
returned due to nonsufficient funds, the advance is charged off.
Recoveries on charge-off advances are credited in the period when
the recovery is received.
(e) Property and Equipment
Property and equipment are recorded at cost and depreciated over
their estimated useful lives which primarily range from three to
seven years. The majority of property and equipment is being
depreciated using the straight-line method. Leasehold improvements
are amortized over the shorter of the lease term, including
anticipated renewals, or estimated useful life of the asset.
F-7
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Equipment under capital leases is stated at the lower of fair
value or the present value of minimum lease payments. Equipment
held under capital leases is amortized over its estimated useful
life.
(f) Goodwill
Goodwill, which represents the excess of the aggregate purchase
price over the estimated fair value of net assets acquired, is
amortized on a straight-line basis over the expected periods to be
benefited, generally 10 years. Evaluation of the recoverability of
goodwill is assessed at the state level. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can
be recovered through undiscounted future operating cash flows
generated in the state of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(g) Income Taxes
The Company has elected to be taxed under the provisions of
Subchapter S of the Internal Revenue Code, whereby any income or
loss is allocated to the individual stockholders. Accordingly,
income taxes are not reflected in the accompanying consolidated
financial statements. However, the financial statements do include
certain estimated pro forma income tax-related disclosures as if
the Company had been a C corporation and subject to income taxes.
Such pro forma information presented does not purport to represent
the income tax of the Company if it had been a C corporation or to
project income taxes for any future period.
(h) Advertising and Promotion
Costs associated with advertising and promotion are charged to
expense when incurred. Advertising and promotion expenses were
approximately $888,000 and $1,470,000 in 1999 and 2000,
respectively, and are included in other operating expenses in the
accompanying consolidated statements of income (loss).
(i) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to
F-8
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. No impairment of long-lived assets
was recorded in 1999 and 2000.
(j) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities and the
reporting of revenues and expenses to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(k) Reclassifications
Certain reclassifications have been made to the 1999 financial
statements to conform to the 2000 financial statement
presentation.
(l) Interim Financial Results
The financial statements as of September 30, 2001 and for the
periods ended September30, 2000 and 2001 are unaudited and do not
include all disclosures and footnotes required by generally
accepted accounting principles in the United States of America for
complete financial statements. Such interim period financial
statements should be read in conjunction with the Company's
December 31, 1999 and 2000 audited financial statements.
However in the opinion of management, the financial statements as
of September 30, 2001 and for the periods ended September 30, 2000
and 2001, include all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows for such
interim periods. Operating results for the period ended September
30, 2001 are not necessarily indicative of the results that may be
expected for the full year.
(2) Amounts Due from Customers for Advances, net
Amounts due from customers for advances arising from single installment
loans and short-term advances of cash at December 31, 2000 are as
follows:
Gross amounts due from customers for advances $ 3,380,478
Allowance for credit losses (183,105)
Unearned advance fees (244,422)
--------------
$ 2,952,951
==============
F-9
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
Changes in the allowance for credit losses were as follows for 1999 and
2000:
1999 2000
------------------ ------------------
Balance at beginning of year $ 329,375 299,790
Provision for credit losses 5,076,974 3,190,477
Advances charged off (10,865,743) (9,076,819)
Recoveries 5,759,184 5,769,657
------------------ -----------------
Balance at end of year $ 299,790 183,105
================== =================
During 1999 and 2000, the face value of cash advances and loans made by the
Company was approximately $99,319,000 and $81,894,000, respectively.
(3) Property and Equipment, Net
Property and equipment, net at December 31, 2000 consists of the
following:
Office and computer equipment $ 1,741,179
Signs 66,995
Leasehold improvements 118,781
-------------------
1,926,955
Less accumulated depreciation and amortization 644,908
-------------------
Property and equipment, net $ 1,282,047
===================
(4) Investment in Joint Ventures
Investment in joint ventures at December 31, 2000 consists of a 50%
ownership interest in an unincorporated joint venture with Currency
Exchange of Texas, Inc. (Exchange), a payday lending company. The
investment is accounted for using the equity method.
In June 2000, the Company contributed cash of $30,000 and advances with a
book value of approximately $38,000 in exchange for its 50% ownership
interest. No gain or loss was recognized on this exchange. In the first
quarter of 2001, the investment in joint venture with a current book value
of $28,415 was transferred to EMH in exchange for an increase to the net
receivable from EMH for the same amount. The carrying value of our joint
venture decreased from $68,000 as of June 30, 2000 to $28,415 as of the
first quarter of 2001 as a result of recording our share of the losses
incurred by the joint venture during this period.
F-10 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
In July 1999, the Company contributed assets and liabilities related to two
locations in Florida with a net book value of approximately $51,000 in
exchange for a 50% ownership interest in an unincorporated joint venture
with an unrelated third party. The net assets consisted primarily of
advances with a book value of approximately $448,000 offset by payables with
a book value of approximately $397,000.
In the first quarter of 2000, the Company and the other party decided to
dissolve the Florida joint venture, and the Company received assets
(consisting primarily of advances) with a book value of approximately
$74,000. However, in exchange for this asset, the Company wrote off its
investment in the joint venture with a current book value of approximately
$50,000 and wrote off a receivable from the joint venture of approximately
$215,000. This resulted in a loss of approximately $191,000.
In December 1999, the Company contributed assets and liabilities related to
locations in Texas and Colorado with a net book value of approximately
$617,000 in exchange for a 40% ownership interest in an unincorporated joint
venture with an unrelated third party. The net assets contributed consisted
of cash of $25,000, advances with a book value of approximately $492,000,
fixed assets with a net book value of approximately $44,000, and goodwill
with a net book value of approximately $56,000.
In the fourth quarter of 2000, the joint venture was officially dissolved
and the Company received back fixed assets and advances with a book value of
approximately $271,000. In exchange for these assets the Company wrote off
its investment in the joint venture with a current book value of
approximately $527,000. This resulted in a loss of approximately $256,000.
(5) Line of Credit Facilities
The Company maintains a financing agreement with a commercial bank that
permits the Company to borrow up to $2,300,000 at December 31, 2000 subject
to certain borrowing base limitations. The facility bears interest at the
greater of 17%, or a base rate (as specified by the lender) plus 10%,
payable monthly. The rate charged on the facility at December 31, 2000 was
18.75%. Borrowings are collaterized by a security interest in the Company's
advances, furniture and fixtures and general intangibles. The facility,
among other things, requires the lender's consent for mergers,
consolidations and acquisitions, restricts changes in the nature of the
Company's business and restricts stockholder distributions to amounts
related to state and federal income taxes. The outstanding amount on this
line of credit facility as of December 31, 2000 was $2,306,439. The lender
has the right to increase or decrease the amount of the advance limit at any
time and the outstanding balance is payable on demand by the lender.
The Company also maintains a second financing agreement with a commercial
bank that permits the Company to borrow up to $400,000 at December 31, 2000.
The facility bears interest at 2.125% above the prime rate as published in
the Wall Street Journal, payable monthly. The rate charged on the facility
at December 31, 2000 was 11.625%. Borrowings are collateralized by a deposit
account, certain assets owned by an individual and stockholders, and
commercial guarantees from officers and stockholders of the Company. The
outstanding amount on this line of credit facility as of December 31, 2000
was $399,590.
F-11 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(6) Long-Term Debt and Warrants
Long-term debt at December 31, 2000 consists of the following:
Note payable to individual, interest payable at 11.5%,
due December 2001, guaranteed by a stockholder $ 300,000
Convertible note payable to individual, interest payable at
8%, balance paid January 2001, secured by assets of stores
purchased 36,934
Senior subordinated notes payable to bank, interest payable at
11.5%, due date extended to October 2001, secured by second
lien on all assets 366,666
Note payable to bank, interest at 11%, balance paid February
2001 53,035
Note payable to bank, interest payable monthly at prime plus
2.75%, balance paid February 2001 33,662
Note payable to corporation, interest payable at 7%, due date
extended to the earlier of an initial public offering or
December 31, 2001 50,000
----------
Total long-term debt, current installments $ 840,297
==========
The above note payable that is identified as convertible at December 31,
2000 is convertible into a maximum of 36,934 shares of Easy Money Holding
Corporation's common stock for a conversion price of $1.00 per share.
Certain of the above debt agreements contain various covenants, including
the maintenance of certain ratios and restrictions and limitations on
additional borrowings and investments.
In connection with the issuance of the senior subordinated notes payable and
certain acquisitions, the Company at December 31, 2000 has outstanding
detachable warrants to purchase up to 1,561,000 shares of common stock at
prices ranging from $.75 per share to $.86 per share. The majority of the
warrants were exercisable at the earlier of an Initial Public Offering,
conversion by the Company to a C corporation, or June 2000. Such warrants
expire six months after an Initial Public Offering. The warrant holders have
anti-dilution rights.
Upon their issuance, the value of these warrants was determined to be
approximately $161,750 based on the relative fair value of the warrants to
debt issued. As a result, additional paid-in capital was increased and a
discount of $161,750 was recorded against the debt which has been amortized
as additional interest expense. These potential shares are in addition to
the potential shares associated with convertible debt as described above.
F-12 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(7) Leases
The Company has several noncancelable operating leases for office facilities
and store locations that expire over the next four years. These leases
generally contain renewal options for periods ranging from one to three
years and require the Company to pay all executory costs, such as
maintenance and insurance. Rental expense for 1999 and 2000 was $1,234,841
and $1,132,944, respectively.
The Company leases office and computer equipment from unaffiliated entities
under capital leases. The equipment under these capital leases as of
December 31, 2000 has a cost of $1,244,257 and related accumulated
amortization of $329,566.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments at December 31, 2000 are as follows:
Capital Operating
Year ending December 31, leases leases
-------------------------- ----------------- -------------------
2001 $ 375,912 533,446
2002 280,301 189,822
2003 111,402 34,691
2004 53,779 4,653
2005 7,763 -
----------------- -------------------
Total future minimum lease payments 829,157 $ 762,612
===================
Less amount representing interest (149,108)
-----------------
Present value of net minimum capital lease payments 680,049
Residual value, guaranteed 40,800
-----------------
Capital lease obligations 720,849
Less current installments of capital lease obligations (291,409)
-----------------
Capital lease obligations, excluding current installments $ 429,440
=================
F-13 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(8) Income Taxes
The pro forma income tax expense (benefit) presented on the consolidated
statements of income (loss) represents the estimated taxes that would have
been recorded had the Company been a C corporation for income tax purposes
for each of the years presented. The pro forma income tax expense (benefit)
is as follows:
Pro forma
------------------------
1999 2000
---------- -----------
Federal $ 291,000 (326,000)
State 84,000 (94,000)
---------- -----------
Total pro forma income tax expense (benefit) $ 375,000 (420,000)
========== ===========
The Company will become a C corporation in the event that it is successful
in becoming a public company registered with the Securities and Exchange
Commission (SEC).
Based upon the level of historical taxable income and projections for
future taxable income, management believes it is more likely than not that
the Company, were it a C corporation, would realize the pro forma income
tax benefits.
A reconciliation of the statutory federal income tax rate and the pro forma
effective rate is as follows:
1999 2000
-------- -------
Statutory rate 34% 34%
Effect of state income taxes, net of federal tax effect 6% 6%
-------- -------
Pro forma effective rate 40% 40%
======== =======
F-14 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(9) Net Income per Share
The table below sets forth the calculation of historical and pro forma
basic and diluted net income (loss) per share.
Nine months
Years ended December 31, ended September 30,
---------------------------------- --------------------------------
1999 2000 2000 2001
------------ ------------ ------------ ------------
(unaudited)
Numerator for historical basic
and diluted net income (loss)
per share:
Net income (loss) $ 937,008 (1,050,066) (1,059,381) 347,454
Pro forma income tax
expense (benefit) 375,000 (420,000) (424,000) 139,000
------------ ------------ ------------ ------------
Numerator for pro forma basic
and diluted net income (loss)
per share -
Pro forma net income (loss) $ 562,008 (630,066) (635,381) 208,454
============ ============ ============ ============
Denominator for historical and pro
forma diluted net income (loss)
per share:
Weighted-average common
shares for calculating historical
and pro forma basic earnings
per share $ 10,000,000 10,000,000 10,000,000 10,000,000
Effect of dilutive securities -
Warrants 208,438 - - 911,770
------------ ------------ ------------ ------------
Weighted-average common
shares for calculating historical
and pro forma diluted net
income (loss) per share $ 10,208,438 10,000,000 10,000,000 10,911,770
============ ============ ============ ============
The Company had a loss for the year ended December 31, 2000 and for the
nine months ended September 30, 2000 and accordingly, potential common
shares associated with convertible debt and warrants have been excluded
from the above computations because their inclusion would have been
anti-dilutive.
(10) Related Party Transactions
Included in assets at December 31, 2000 is a net amount of $1,352,063 due
from a related corporation, EMH, which is commonly owned and managed with
the Company. This unsecured net receivable has no formally stated repayment
terms and does not bear interest. It represents net advances (cash and
contributed assets) made by the Company to EMH, as well as amounts due for
allocated expenses and expenditures made on its behalf, as discussed below.
F-15 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
The Company allocates expenses for administrative and management services
provided to EMH. In 1999 and 2000, expenses of $500,000 and $1,200,000,
respectively, were allocated to EMH. These amounts are included as a
reduction of other operating expenses in the accompanying consolidated
statements of income (loss). In 2000, the Company also paid $600,000 of
expenditures on behalf of EMH.
Included in liabilities at December 31, 2000 are net amounts borrowed from
related parties other than EMH of $263,369. These net payables are due on
demand and accrue interest at 11.50%. Total interest expense related to net
payables to related companies was approximately $31,000 and $37,000 in 1999
and 2000, respectively.
Included in liabilities at December 31, 2000 are net amounts borrowed from
officers (also stockholders) of $1,696,426. These net payables are due on
demand and accrue interest at 11.50%. Total interest expense related to net
payables to officers was approximately $178,000 and $187,000 in 1999 and
2000, respectively.
(11) Gain on Sale of Closed Store Assets
During 2000, the Company sold certain assets associated with stores that
were closed to unrelated third parties. The assets sold were predominately
customer advances with a book value of approximately $655,000. The
remaining assets sold had a book value of approximately $5,000. Cash
proceeds of approximately $883,000 were received in exchange for assets
sold resulting in a gain of approximately $223,000.
(12) Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash, accounts receivable, accounts payable, accrued salaries and benefits,
other accrued liabilities: The carrying amounts approximate fair value
because of the short maturity of these items.
Receivable from related party, payables to related parties and payables to
officers: It is not practicable to estimate fair value because the time of
settlement has not been determined.
Line of credit facilities: The carrying amounts approximate fair value, as
the obligations have recently been renegotiated at similar terms and bear
interest at a rate that fluctuates with the market.
Long-term debt, including current installments: It is not practicable to
estimate the fair value of long-term debt due to the lack of quoted market
prices for similar issues and the difficulty in determining an incremental
borrowing rate for the Company, given the wide range of interest rates paid
by the Company.
F-16 (Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
(13) Contingencies
In certain states, the Company's operations are regulated under state laws
which establish, among other things, maximum loan, advance and fee amounts
that may be charged. The Company believes that its procedures conform with
the applicable laws and regulations in all states in which it operates.
The Company has been named in four lawsuits that allege that the Company
engaged in deferred presentment transactions which violate the Federal
Racketeering Influenced and Corrupt Organizations Act and various state
statutes and regulations. Class certification has been obtained in one of
these suits. The range of loss on this suit is zero to the plaintiffs
demand of $40 million. Although there is a possibility of a loss in the
remaining suits, management is unable to estimate the range of loss due to
the procedural status of these cases and given the absence of precedent
related to significant rulings on cases of this nature. The Company intends
to vigorously defend these claims. No accrual of a loss contingency has
been recorded by the Company related to these lawsuits because the Company
believes that it is not probable that a loss will be incurred related to
these suits.
Additionally, the Company is, from time to time, a defendant (actual or
threatened) in certain other lawsuits encountered in the ordinary course of
its business, the resolution of which, in the opinion of management, should
not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
The Company has granted to certain non-employees and one employee, in
exchange for services they have and will provide to the Company, the right
to receive shares of the Company's stock in the event that the Company is
successful in becoming a public company registered with the SEC. Because
the issuance of shares is contingent on the occurrence of a future event,
no cost has been recognized in these financial statements for these
transactions. The terms of the agreements are described below.
In July 1998, in connection with an employee's employment agreement, the
Company agreed that if it is successful in becoming a public company
registered with the SEC, it will grant the employee the option to purchase
up to 25,000 shares at $1.00 per share. The agreement further provided that
in the event the value of the shares sold in the offering is less than
$4.00, the employee will be paid the difference. Compensation cost of at
least $75,000 will be recognized immediately subsequent to the completion
of a public registration.
In May 2000, the Company entered into consulting agreements with three
unrelated third parties who agreed to provide certain services to the
Company . If the Company is successful in becoming a public company
registered with the SEC, these parties will receive a total of 600,000
shares of stock. An expense will be measured and recognized immediately
subsequent to the completion of a public registration based on the market
price of the stock at that date. Based on an estimated market price of
$2.50 per share, an expense of $1,500,000 will be recorded.
In August 2000, the Company entered into an agreement with an unrelated
third party which agreed to loan the Company $50,000. In addition, if the
Company is successful in becoming a public company registered with the SEC,
this party will receive shares of stock with a value of $50,000. An expense
of $50,000 will be recognized immediately subsequent to the completion of a
public registration.
F-17
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 2000
F-18
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and resale of the securities offered by this
Prospectus. We are responsible for the payment of all expenses set forth below.
Registration fee $ 1,250.00
Blue Sky filing fees and expenses 6,000.00*
Printing and engraving expenses 20,000,00*
Legal fees and expenses 86,375.00*
Accounting fees and expenses 86,375.00*
Miscellaneous --
-----------
Total $200,000.00
===========
* These fees were incurred on a shared basis for this offering and
the concurrent shareholder offering.
ITEM 3. UNDERTAKINGS
(a) We undertake:
(1) To file, during any period in which we offer or sell
securities, a post-effective amendment to the Registration
Statement:
(i) To include any Prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
which, individually or together, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any additional or changed material
information with respect to the plan of distribution.
2) For determining any liability under the Securities Act of
1933, as amended, treat each post-effective amendment as a
new Registration Statement relating to the securities
offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) To file a post-effective amendment to remove any of the
securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
II-1
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
None
ITEM 5. EXHIBITS.
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 *** Amended and Restated Articles of Incorporation of Easy Money
Holding Corporation
3.2 *** Amended and Restated Bylaws of Easy Money Holding
Corporation
4.1 *** Specimen Common Stock Certificate
4.2 *** $992,233 Demand Note payable to David Greenberg
4.3 *** $673,321 Demand Note payable to Tami Van Gorder
5 ** Opinion of Williams, Mullen, Clark & Dobbins, P.C.
10.1 *** Employment Agreement dated July 7, 1998 between Easy Money
Holding Corporation, David Greenberg, Tami Van Gorder and
David Kilby
10.2 *** Warrant and Warrant Agreement dated December 18, 1997
between Love Savings Holding Company, William S. Fagan and
Easy Money Holding Corporation
10.3 *** Registration Rights Agreement dated December 18, 1997
between Love Savings Holding Company, William S. Fagan and
Easy Money Holding Corporation
10.4 *** Option to Purchase Common Stock dated June 23, 1997 between
Easy Money of Virginia, Inc. and James R. Erbes
10.5 *** Agreement of Contract and Sale dated June 23, 1997 between
James Erbes, Sunnybrook, Inc., and Easy Money of Virginia,
Inc.
10.6 *** Modification of Agreement and Contract of Sale dated
September 12, 2000 between Easy Money Holding Corporation
and James R. Erbes
10.7 *** Easy Money Holding Corporation 2001 Stock Plan dated October
1, 2001
10.8 *** Loan, Security and Service Agreement dated December 12, 1996
w/ Sterling Financial Services Co., together with amendments
10.9 *** Promissory Note and Notice of Final Agreement dated May 3,
2001, by Easy Money Holding Corporation and James Erbes,
jointly and severally as Borrower, and First National Bank
in Alamogordo as Lender
10.10 *** Investment Agreement dated August 1, 2000 with DeVille
Investment Corporation
10.11 *** Consulting Agreement dated May 2, 2000 between Condor
Investment Trust, Red Oak Financial Corp., Novacorp, LLC and
Easy Money Holding Corporation
10.12 *** Hold Back Agreement dated October 1, 2001 between Condor
Investment Trust, Red Oak Financial Corp., Novacorp, LLC and
Easy Money Holding Corporation,
10.13 *** Escrow Agreement with SunTrust Bank
10.14 *** Management Fee Agreement between Easy Money of Virginia,
Inc. and affiliates
16 ** Letter from KPMG, LLP regarding its concurrence with the
Company's statements regarding the change in accountants
21 *** List of Subsidiaries and Affiliate of Easy Money Holding
Corporation
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23.1 ** Consent of KPMG LLP, Independent Auditors
23.2 ** Consent of Williams, Mullen, Clark & Dobbins, P.C. is
included in Exhibit 5
* To be filed.
** Filed herewith.
*** Previously filed.
DELIVERY OF PROSPECTUS BY DEALERS
Dealers may be required to deliver a prospectus to anyone wishing to
purchase registered shares within 90 days after the effective date of this
prospectus regardless of whether they are participating in this distribution.
This is in addition to the dealer's obligation to deliver a prospectus when
acting as underwriters to their unsold allotments or subscriptions.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the company or by the underwriters. This prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the securities to which it relates or an offer to sell or
the solicitation of an offer to buy such securities in any jurisdiction where,
or to any person to whom, it is unlawful to make such offer or solicitation.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create an implication that there has been no change in the
affairs of the company since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
Prior to investing, prospective investors should read the entire
prospectus.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized the registration
statement to be signed on its behalf by the undersigned in the City of Virginia
Beach, State of Virginia, on March 29, 2002.
(Registrant)
Easy Money Holding Corporation
By: /s/
------------------------
David Greenberg, President
(principal executive officer)
In accordance with the requirements of the Securities Act of 1933, the
registration statement was signed by the following persons in the capacities and
on the date stated:
By: /s/ March 29, 2002
---------------------------------------------------------------
David Greenberg
President and Director
By: /s/ March 29, 2002
---------------------------------------------------------------
David M. Kilby
Chief Financial Officer
(principal financial and accounting officer)
By: /s/ March 29, 2002
---------------------------------------------------------------
Tami Van Gorder
Secretary/Treasurer
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