This document constitutes part of a prospectus covering securities that have
been registered under the Securities Act of 1933, as amended. The date of this
documents is September 26, 2002.
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________
Commission file number 333-81722.
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)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Company's revenues for fiscal 2001 were $11,218,000.
Aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. ___$0____
As of May 15, 2002, there were 10,635,000 shares of registrant's common stock,
$.01 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III is incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002.
Transitional Small Business Disclosure Format (Check one): Yes ____; No __X__
2
EASY MONEY HOLDING CORPORATION
2001 FORM 10-KSB
TABLE OF CONTENTS
PART I
Item 1. Business........................................................... 4
Item 2. Properties......................................................... 14
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 18
PART II
Item 5. Market for Common Equity and Related Stockholder Matters........... 18
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 19
Item 7. Financial Statements............................................... 24
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 24
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons....... 24
Item 10. Executive Compensation............................................. 26
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................ 27
Item 12. Certain Relationships and Related Transactions..................... 28
Item 13. Exhibits and Reports on Form 8-K................................... 29
Signatures................................................................... 30
Exhibit List................................................................. 31
3
PART I
This report contains "forward-looking statements" as defined in Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
and Exchange Act of 1934, as amended, and is subject to the safe harbor created
by such acts. Any statements contained in this report that are not statements of
historical fact are forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," "seeks" and similar
expressions are intended to identify forward-looking statements. The important
factors discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this report and those presented elsewhere by management from time to time.
Please refer to the cautionary statement that appears at the beginning of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Item 1. 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. We recently introduced an innovative electronic program that
enables us to initiate and service a variety of products, including cash
advances, without having to establish a presence in the markets we want to
service. Installment payment arrangements on all of our services 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 cash
advance 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,
2000 and 2001, respectively, we had 61 stores and 52 stores in operation, not
including our electronic advance program.
Although we have closed a number of our stores during the past 18
months, we still intend to grow our business by:
o further developing and marketing our electronic advance program in
areas that meet our customers' demographics
4
o expanding and developing our internet presence to broaden our
geographic diversity and reduce overhead
o opening new stores and acquiring existing stores in strategic
locations
o aggressively marketing our services in those areas where we are
currently operating store/branch locations to increase our market
share.
Our Services
Historically, individuals have satisfied their short-term cash needs by
choosing from among the following alternatives:
o charge cards, credit cards, home equity loans and bank lines of
credit
o unsecured loans from banks and finance companies
o loans from friends and family members
o payroll advances
o title pawn loans or pawn shop transactions
o sales of personal assets
o 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:
o dislike the associated complexity, inconvenience or lead time
o do not want to borrow the minimum amount required or dislike the
repayment or other terms
o are ineligible because of their credit rating or other criteria
o do not want or cannot pay the high costs of not sufficient funds and
overdraft fees charged by banks and merchants
o 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
5
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.
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:
o Expand Our Electronic Program. We plan to aggressively market and
develop our electronic 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 program
through direct mailings and informed of the benefits of using the "Easy
Money" debit card. Our electronic program enables us to initiate and
service a
6
customer without the customer having to go to a branch location. The
customer can initiate services 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 program began in
March 2000. As of December 31, 2001 we had approximately $534,000 in
outstanding advances under the program. We hope to have a portfolio of
$750,000 by September 30, 2002. We estimate the cost of growing this
program to be $250,000. We plan to internally fund this project.
o 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 September 30, 2002 at an estimated cost of $100,000. We
plan to fund this project using current period earnings.
o 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.
o 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 years ended December
31, 2000 and December 31, 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.
o Increase Same Store Revenues. We believe that there is additional
growth potential in most of our existing markets through advertising
and
7
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 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.
o 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:
Year Ended Year Ended Year Ended
# of December 31 # of December 31 # of December 31
Location Stores 1999 Stores 2000 Stores 2001
--------- ------ ---- ------ ----- ------ ----
California 5 7.02% 2 3.71% 1 2.61%
Colorado 11 3.85% - - - -
Indiana 8 2.99% 1 2.48% - -
Kansas 1 0.83% 1 1.09% 1 1.26%
Kentucky 19 16.40% - 15.14% - -
Louisiana 47 40.00% 36 52.91% 34 68.98%
Nevada 5 8.83% 5 6.03% 5 8.07%
New Mexico 13 10.38% 9 11.03% 9 14.58%
Tennessee 4 3.58% 1 3.57% 1 3.36%
Texas 5 5.39% 5 3.32% - -
Utah 1 0.73% 1 0.72% 1 1.13%
----------------------------------------------------------------
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
8
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.
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.
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, 2001, 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,
9
radio and direct-mail advertising explains how to use our services and
emphasizes our quality of service, convenience and competitive rates.
The Customer Transaction
Based on trade group information and studies made available to the
public, we believe our core customer is approximately 35 years old, almost 1/3
own their own home, their average term of employment is approximately 4 years,
all have a job (or regular income) and an active checking account. We believe
they often pay their bills with money orders and prefer the speed and
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
10
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
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 December 31, 2001 a staff of ten people were servicing a
portfolio of approximately $467,000 in advances (approximately 1,500 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.
In December of 2001, we expanded our electronic business further by
offering membership contracts for phone service nationwide. The underwriting
criteria for the membership transaction is the same as the electronic
transaction. The customer must be employed and have a current checking account.
We have several levels of the "Club Memberships" that the customer can elect to
join ranging from Club level A (100 minutes for $29.95 a month) to Club level E
(500 minutes for $149.75 per month). The memberships run for a period of one
year with an instant cash back rebate of $100 for each 100 minutes. Each month
we debit the customer's personal checking account for the membership fee and
allow the customer access to their agreed service. In December, 2001, we had a
portfolio of approximately $67,000. We anticipate it
11
will cost approximately $250,000 to grow the portfolio to $500,000 by the end
of 2002.
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 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 $3,190,000 for the year ended December
31, 2000 (21.3% of revenues), $1,783,000 for the year ended December 31, 2001
(15.8% of revenues). Charge-offs, net of recoveries, were approximately
$3,307,000 and $1,796,000, respectively, for the years ended December 31, 2000
and 2001. As of December 31, 2001, we had approximately $91,441 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
12
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.
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 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.
Regulation
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
13
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.
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.
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.
In addition to state regulations, our advance activities are also
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 December 31, 2001, we had 199 employees (179 full-time and 20
part-time). 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.
Item 2. 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
14
contain termination clauses if the state enacts legislation that negatively
impacts our business.
Item 3. 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.
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
15
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.
o 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.
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.
16
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.
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. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the shareholders of the Company
during the fourth quarter of fiscal 2001.
17
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
We are attempting to encourage certain market makers to apply 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 six shareholders of record for our shares. 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.
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.
Our authorized capitalization consists of 50,000,000 shares of common
stock, $.01 par value per share, with 10,635,000 shares issued and outstanding,
and 5,000,000 shares of preferred stock, $.01 par value per share, with none
issued and outstanding.
As of December 31, 2001, 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 May 31, 2002. Mr. Kilby recently exercised an
option to purchase 25,000 shares under a stock option, and he loaned $75,000
back to the Company under a note bearing interest at a rate of 18%. The note is
payable on demand.
Under the terms of an agreement between us and Deville Investment
Corporation, we issued 10,000 shares and we satisfied our $50,000 debt to
Deville Investment Corporation.
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 issued the shares on April 1, 2002.
18
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 issued the shares on April 1, 2002.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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 2000 and 2001 we had 61 stores and 52 stores, respectively, in operation. The
number of stores we open or close in any quarterly period significantly impacts
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. Beginning in December 2001, we further leveraged this
business model to diversify our product base whereby we offered a prepaid phone
service program. 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 revenues, reduced overhead
and increased profitability. As of December 31, 2001 a staff of approximately
ten people serviced an electronic advance portfolio of approximately $467,000
consisting of 1,500 accounts, and a prepaid phone card program of approximately
$67,000.
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 and 2001 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
19
in the portfolio performance. The allowance is based on two major factors, how
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.
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
December 31,
2000 2001
---- ----
Revenues 100.0% 100.0%
====== ======
Expenses:
Provision for credit losses 21.28% 15.77%
Salaries and benefits 38.92% 33.39%
Other operating expenses 36.58% 40.19%
Net loss on dissolution of joint ventures 2.98% 0.00%
Interest expense 6.35% 6.04%
Other 0.89% 0.11%
------- -----
107.00% 95.50%
Net Income (loss) (7.00)% 4.50%
------- -----
Pro forma Income tax expense (benefit) (2.80)% 1.80%
------- -----
Pro forma net income (loss) (4.20)% 2.70%
======= =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 2001
Revenues: Revenues decreased $3,681,000 from $14,993,000 in 2000 to
$11,312,000 in 2001. The decrease was primarily because we liquidated
unprofitable or underperforming stores towards the end of 2000 and redirected
20
capital to reduce debt and expand profitable stores including our electronic
program. Our stores decreased from 61 at December 31, 2000 to 52 at December 31,
2001. The decrease of 9 stores was mostly in low volume or low profit margin
locations. Average revenues per store, excluding the electronic division, for
the year ended December 31, 2000 and December 31, 2001 were $167,000 and
$200,000, respectively.
Provision for Credit Losses: For the year ended December 31, 2000 our
provision for credit losses was $3,190,000 (21.3% of revenues) compared to
$1,783,000 (15.8% of revenues) for the year ended December 31, 2001. The
decrease was a result of a reengineering of our collections systems to take
advantage of technological and software improvements within our industry and a
management focus on strict compliance with underwriting guidelines. Our net
charge-offs as a percentage of gross advances for the December 31, 2001 period
as compared to the December 31, 2000 period was 2.93% versus 5.09%. The
percentage of our allowance for credit losses as compared to our total advances
outstanding at December 31, 2001 versus December 31, 2000 was 5.05% compared to
5.4%. The decrease from December 31, 2000 to December 31, 2001 was a result of
better controls in our systems and a stronger performing portfolio at December
31,2001.
Salaries and Benefits: Salaries and benefits decreased $2,058,000 for
the period ended December 31, 2001 as compared to December 31, 2000. Salaries
and benefits were $ 5,835,000(38.9% of revenues) for the year ended December 31,
2000 and $3,777,000 (33.4% of revenues) for the year ended December 31, 2001.
This decrease is a result of fewer stores, manual processes being replaced by
technology and a company wide focus to increase individual productivity.
Other Operating Expenses: Other operating expenses decreased by
$937,000 to $4,547,000 during the year ended December 31, 2001, compared to
$5,484,000 for the year ended December 31, 2000, primarily because of the
closing of stores in the latter part of 2000.
Net Loss on Dissolution of Joint Ventures: During 2000, 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 decreased $269,000 during 2001
compared to 2000 primarily due to better collections and underwriting guidelines
resulting in a reduction of the credit line.
Historical and Pro Forma Net Income (Loss): We had a net loss of
$1,050,000 for the year ended December 31, 2000, compared to net income of
$447,000 for the year ended December 31, 2001. After a pro forma income tax
benefit of $420,000 and expense of $179,000 in 2000 and 2001, respectively, we
had pro forma 2000 net loss of $630,000 compared to a pro forma 2001 net income
of $268,000. The increase in income from 2000 to 2001 was primarily due to (1)
software and technology improvements at storefront locations and managerial
systems, (2) a stronger portfolio as discussed in the provision for credit
losses, (3) and the introduction of our electronic program.
21
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
cash are funds generated by our operations and borrowings from financial
institutions.
Cash Flows from Operating Activities: For the year ended December 31,
2000, net cash provided by operating activities was $2,577,000. For the year
ended December 31, 2001, we had net cash provided by operating activities of
$298,000. 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: For the year ended December 31,
2000 we had net cash provided by investing activities of $873,000 versus net
cash used of $46,000 for the year ended December 31, 2001. This reduction in
investing activities was due to proceeds from the sale of closed stores in 2000
as compared to 2001.
Cash Flows from Financing Activities: For the year ended December 31,
2000, we had net cash used in financing activities of $3,087,000. For the year
ended December 31, 2001, we had net cash used from financing activities of
$631,000. These reductions of cash flow used in financing activities represent a
focused effort in 2000 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 December 31, 2001, was $2,300,000. The lender may
increase or decrease the advance limit in its discretion. Borrowings under the
line of credit bear interest at a base rate (as specified by the lender), plus
10%, payable monthly. 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. Outstanding borrowings under the line of credit as of December 31,
2001, amounted to $1,613,000.
We recently amended this financing agreement to reduce the line of
credit facility advance limit to $1,300,000 with a subsequent reduction of
$54,167 each month for a successive twenty-four (24) month period commencing on
July 1, 2002 and terminating on June 1, 2004.
At December 31, 2000, we maintained a second financing agreement with
a commercial bank that permitted the Company to borrow up to $400,000. The
outstanding amount on this line of credit facility as of December 31, 2000 and
December 31, 2001 was $399,590 and $351,399, respectively. During 2001, this
line of credit facility's outstanding balance was refinanced through a long-
term note payable to the bank.
We have a deficiency in working capital of $1,504,000. Nonetheless, we
believe that by renegotiating our lines of credit with our financial
22
institutions as we have historically done (as of December 31, 2001, we had
$1,613,000 drawn against this facility), limiting payments to shareholders for
paydown of shareholder debt (as of December 31, 2001, the amount of shareholder
debt was $1,650,000) 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.
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.
Item 7. Financial Statements.
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 13.
23
Item 8. 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 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 LLP as our
independent accountants. There have been no disagreements concerning matters of
accounting principals or financial statement disclosure between the company and
Cherry, Bekaert & Holland LLP requiring disclosure hereunder.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
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.
24
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. Mr.
Kilby recently exercised this option, and he loaned $75,000 back to the Company
under a note bearing interest at a rate of 18%. The note is payable on demand.
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.
Directors Compensation
Our directors do not receive any compensation for serving on the board
of directors.
Item 10. Executive Compensation.
David Greenberg, our Chief Executive Officer, received a base salary of
$82,400 for the year ended December 31, 2001. Other than David Kilby, Chief
Financial Officer, no other employee received in excess of $100,000 in
25
compensation for the year ended December 31, 2001. Mr. Kilby's compensation for
the year ended December 31, 2001 amounted to $102,000.
Summary Compensation Table
Fiscal Bonus Other Annual All Other
------ ----- ------------ ---------
Name and Principal Position Year Salary Paid Compensation Compensation
- --------------------------- ---- ------ ---- ------------ ------------
David Greenberg, Chief 2001 $ 82,400 -0- -0- -0-
Executive Officer
David M. Kilby, Chief 2001 $102,000 -0- -0- -0-
Financial Officer
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
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.
26
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
As of May 15, 2002 there were 10,635,000 shares issued and outstanding.
The following table sets forth information known to us with respect to the
beneficial ownership of our shares on May 15, 2002, by
o each person who owns beneficially 5% or more of our outstanding shares
o each of our directors
o each of our executive officers
o 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
warrants. An additional 610,000 shares were issued to our selling shareholders
on April 1, 2002.
Unless otherwise indicated, the address for each individual listed is
5295 Greenwich Road, Suite 108, Virginia Beach, Virginia 23462.
Shares
Beneficially Owned (1)
-----------------------
Beneficial Owner Number Percent (2)
- ---------------- ------ -----------
David Greenberg 5,000,000 40.99%
Tami Van Gorder 5,000,000 40.99%
David Kilby 25,000 .20%
Love Savings Holding Company (3) 793,350 6.50%
(1) Does not include 400,000 shares reserved for issuance upon the exercise
of a warrant.
(2) Based on 12,196,000 shares outstanding on the date of this filing and
includes the issuance of 1,561,000 shares upon the exercise of
outstanding warrants.
(3) 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.
Item 12. 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.
27
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, 2000 and 2001, expenses of $1,200,000, and $459,000,
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 2001, we had receivables
from EMH of approximately $1,352,000 and $245,000 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 2001, net amounts borrowed by us from
officers/shareholders amounted to $1,696,000 and $1,655,000 respectively. As of
December 31, 2001, we owed Mr. Greenberg $998,000 and Ms. Van Gorder $657,000.
These amounts are due on demand and accrue interest at a rate of 11.5%. For the
years ended December 31, 2000 and 2001, interest on amounts due to
officers/shareholders amounted to approximately $187,000 and $222,000
respectively. As of December 31, 2000 and 2001, we had net amounts owed to
related parties of approximately $263,000 and $104,000, respectively. These net
payables are due on demand and accrue interest at a rate of 11.5%. For the years
ended December 31, 2000 and 2001, interest on net payables to related companies
amounted to $37,000 and $21,000, respectively.
Under the terms of an agreement between us and Deville Investment
Corporation, we recently issued 10,000 shares and satisfied our $50,000 debt to
Deville Investment Corporation.
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 issued the shares on April 1,
2002. In connection with the amended agreement, Condor and Red Oak agreed not to
sell 25% of the shares during the 180-day period after April 1, 2002 and 25% of
the shares during the 270-day period after April 1, 2002. The remaining 50% may
be sold at any time thereafter.
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 issued the shares on April 1, 2002. In connection with the
amended agreement, Novacorp has agreed not to sell the shares before April 1,
2003.
28
Item 13. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements: Page:
Independent Auditors' Report - Cherry, Bekaert & Holland LLP F-1
Independent Auditors' Report - KPMG LLP F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Income (Loss)
for the years ended December 31, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Deficit
for the years ended December 31, 2001 and 2000 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7 through F-16
(b) During fiscal year 2001, the Company filed no reports on Form 8-K.
(c) Exhibits
The exhibits listed on the accompanying Exhibit Index are filed or
incorporated by reference as part of this Form 10-KSB and such Exhibit Index is
incorporated by reference.
29
SIGNATURES
In accordance with the requirements of the Securities Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned in
the City of Virginia Beach, State of Virginia, on May 22, 2002.
(Registrant)
Easy Money Holding Corporation
By: /s/
------------------------
David Greenberg, President
(principal executive officer)
In accordance with the requirements of the Securities Act of 1934, the
registration statement was signed by the following persons in the capacities and
on the date stated:
By: /s/ May 22, 2002
-----------------------------------------------------------
David Greenberg
President and Director
By: /s/ May 22, 2002
-----------------------------------------------------------
David M. Kilby
Chief Financial Officer
(principal financial and accounting officer)
By: /s/ May 22, 2002
-----------------------------------------------------------
Tami Van Gorder
Secretary/Treasurer
30
EXHIBIT INDEX
Exhibit No. Description of Exhibits
- ----------- -----------------------
3.1 Amended and Restated Articles of Incorporation of Easy Money
Holding Corporation (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission
File No. 333-81722, previously filed with the Commission on
March 29, 2002)
3.2 Amended and Restated Bylaws of Easy Money Holding Corporation
(incorporated by reference to the Registrant's Registration
Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002)
4.1 Specimen Common Stock Certificate (incorporated by reference
to the Registrant's Registration Statement on Form SB-2,
Commission File No. 333-81722, previously filed with the
Commission on March 29, 2002)
4.2 $992,233 Demand Note payable to David Greenberg (incorporated
by reference to the Registrant's Registration Statement on
Form SB-2, Commission File No. 333-81722, previously filed
with the Commission on March 29, 2002)
4.3 $673,321 Demand Note payable to Tami Van Gorder (incorporated
by reference to the Registrant's Registration Statement on
Form SB-2, Commission File No. 333-81722, previously filed
with the Commission on March 29, 2002)
(a)4.4 $75,000 Demand Note payable to David Kilby
10.1 Employment Agreement dated July 7, 1998 between Easy Money
Holding Corporation, David Greenberg, Tami Van Gorder and
David Kilby (incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Commission File No.
333-81722, previously filed with the Commission on March 29,
2002)
10.2 Warrant and Warrant Agreement dated December 18, 1997 between
Love Savings Holding Company, William S. Fagan and Easy Money
Holding Corporation (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission
File No. 333-81722, previously filed with the Commission on
March 29, 2002)
10.3 Registration Rights Agreement dated December 18, 1997 between
Love Savings Holding Company, William S. Fagan and Easy Money
Holding Corporation (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission
File No. 333-81722, previously filed with the Commission on
March 29, 2002)
10.4 Option to Purchase Common Stock dated June 23, 1997 between
Easy Money of Virginia, Inc. and James R. Erbes (incorporated
by reference to the Registrant's Registration Statement on
Form SB-2, Commission File No. 333-81722, previously filed
with the Commission on March 29, 2002)
10.5 Agreement of Contract and Sale dated June 23, 1997 between
James Erbes, Sunnybrook, Inc., and Easy Money of Virginia,Inc.
(incorporated by reference to the Registrant's Registration
Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002)
10.6 Modification of Agreement and Contract of Sale dated September
12, 2000 between Easy Money Holding Corporation and James R.
Erbes (incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Commission File No.
333-81722, previously filed with the Commission on March 29,
2002)
10.7 Easy Money Holding Corporation 2001 Stock Plan dated October
1, 2001 (incorporated by reference to the Registrant's
Registration
31
Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002)
10.8 Loan, Security and Service Agreement dated December 12, 1996
w/ Sterling Financial Services Co., together with amendments
(incorporated by reference to the Registrant's Registration
Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002)
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 (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission
File No. 333-81722, previously filed with the Commission on
March 29, 2002)
10.10 Investment Agreement dated August 1, 2000 with DeVille
Investment Corporation (incorporated by reference to the
Registrant's Registration Statement on Form SB-2, Commission
File No. 333-81722, previously filed with the Commission on
March 29, 2002)
10.11 Consulting Agreement dated May 2, 2000 between Condor
Investment Trust, Red Oak Financial Corp., Novacorp, LLC and
Easy Money Holding Corporation (incorporated by reference to
the Registrant's Registration Statement on Form SB-2,
Commission File No. 333-81722, previously filed with the
Commission on March 29, 2002)
10.12 Hold Back Agreement dated October 1, 2001 between Condor
Investment Trust, Red Oak Financial Corp., Novacorp, LLC and
Easy Money Holding Corporation (incorporated by reference to
the Registrant's Registration Statement on Form SB-2,
Commission File No. 333-81722, previously filed with the
Commission on March 29, 2002)
10.13 Escrow Agreement with SunTrust Bank (incorporated by reference
to the Registrant's Registration Statement on Form SB-2,
Commission File No. 333-81722, previously filed with the
Commission on March 29, 2002)
10.14 Management Fee Agreement between Easy Money of Virginia, Inc.
and affiliates (incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Commission File No.
333-81722, previously filed with the Commission on March 29,
2002)
(a)10.15 Amended Investment Agreement with DeVille Investment
Corporation
(a)10.16 Amended Loan, Security and Service Agreement with Sterling
Financial Services Co.
16 Letter from KPMG, LLP regarding its concurrence with the
Company's statements regarding the change in accountants
(incorporated by reference to the Registrant's Registration
Statement on Form SB-2, Commission File No. 333-81722,
previously filed with the Commission on March 29, 2002)
21 List of Subsidiaries and Affiliate of Easy Money Holding
Corporation (incorporated by reference to the Registrant's
Registration Statement on Form SB-2, Commission File No.
333-81722, previously filed with the Commission on March 29,
2002)
(a) Filed herewith.
32
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
DECEMBER 31, 2001
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Contents
Page
Independent Auditors' Report - Cherry, Bekaert & Holland LLP F-1
Independent Auditors' Report - KPMG LLP F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Income (Loss)
for the years ended December 31, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Deficit
for the years ended December 31, 2001 and 2000 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7 through F-16
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, 2001, and
the related consolidated statements of income (loss), stockholders' equity
(deficit) and cash flows for the year ended December 31, 2001. 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 audit. The financial statements of Easy Money
Holding Corporation and subsidiaries as of December 31, 2000, were audited by
other auditors whose report dated February 16, 2001, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides 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, 2001, and the results of their operations and their cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Cherry, Bekaert & Holland LLP
Chesapeake, Virginia
April 2, 2002
F-2
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 loss, stockholders' equity (deficit) and
cash flows for the year 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 audit.
We conducted our audit 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 audit provides 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
the year 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
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-3
Consolidated Balance Sheets
For the years ended December 31, 2001 and 2000
Assets 2001 2000
----------- -----------
Current assets
Cash $ 190,327 $ 569,803
Amounts due from customers for advances, net 2,970,236 2,952,951
Prepaid expenses and other current assets 531,777 351,598
----------- -----------
Total current assets 3,692,340 3,874,352
Investment in joint ventures - 28,415
Property and equipment, net 987,904 1,282,047
Receivable from related party 245,353 1,352,063
Goodwill, net of accumulated amortization of $210,286
in 2001 and $173,475 in 2000 195,929 228,035
----------- -----------
Total assets $ 5,121,526 $ 6,764,912
=========== ===========
Liabilities and Stockholders' Deficit
Current liabilities
Line of credit facilities - short term $ 1,612,626 $ 2,706,029
Current installments of long-term debt 438,342 840,297
Current installments of capital lease obligations 241,904 291,409
Accounts payable 768,918 1,138,702
Accrued salaries and benefits 282,273 265,715
Other accrued liabilities 92,089 90,906
Payables to related parties 104,629 263,369
Payables to officers 1,655,453 1,696,426
----------- -----------
Total current liabilities 5,196,234 7,292,853
Long term debt 263,057 -
Capital lease obligations, excluding current installments 179,628 429,440
----------- -----------
Total liabilities 5,638,919 7,722,293
----------- -----------
Stockholders' deficit
Common stock, $.01 par value. Authorized 50,000,000
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 (1,196,600) (1,636,588)
----------- -----------
Total stockholders' deficit (517,393) (957,381)
Commitments and contingencies
----------- -----------
Total liabilities and stockholders' deficit $ 5,121,526 $ 6,764,912
=========== ===========
See accompanying notes to consolidated financial statements.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-4
Consolidated Statements of Income (Loss)
For the years ended December 31, 2001 and 2000
2001 2000
------------ ------------
Revenues
Fees and other income $ 11,218,113 $ 14,656,638
Equity in income of joint ventures - 45,101
Gain on sale of closed store assets - 223,247
Other 94,264 67,921
------------ ------------
11,312,377 14,992,907
------------ ------------
Expenses
Provision for credit losses 1,783,417 3,190,477
Salaries and benefits 3,777,421 5,835,359
Other operating expenses 4,546,686 5,484,078
Loss on disposal of property and equipment - 82,357
Net loss on dissolution of joint ventures - 447,084
Interest expense 683,387 952,270
Amortization of goodwill 41,242 43,507
Other 33,657 7,841
------------ ------------
10,865,810 16,042,973
------------ ------------
Net income (loss) $ 446,567 ($ 1,050,066)
============ ============
Pro forma data (unaudited)
Net income(loss) as reported $ 446,567 $ (1,050,066)
Pro forma income tax expense (benefit) 179,000 (420,000)
------------ ------------
Pro forma net income (loss) $ 267,567 ($ 630,066)
============ ============
Historical net income (loss) per share-basic $ 0.04 $ (0.11)
============ ============
Historical net income (loss) per share-diluted $ 0.04 $ (0.11)
============ ============
Pro forma net income (loss) per share-basic $ 0.03 $ (0.06)
============ ============
Pro forma net income (loss) per share-diluted $ 0.02 $ (0.06)
============ ============
See accompanying notes to consolidated financial statements.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit F-5
For the years ended December 31, 2001 and 2000
Additional Total
Common Stock paid-in Accumulated stockholders'
---------------------------------
Shares Amount capital deficit deficit
--------------- ---------------- ---------------- ----------------- ----------------
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 - - - 446,567 446,567
Distributions to stockholders - - - (6,579) (6,579)
--------------- ---------------- ---------------- ----------------- ----------------
Balance at December 31, 2001 10,000,000 $100,000.00 $ 579,207 $ (1,196,600) $ (517,393)
=============== ================ ================ ================= ================
See accompanying notes to consolidated financial statements.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-6
Consolidated Statements of Cash Flows
For the years ended December 31, 2001 and 2000
2001 2000
----------- -----------
Cash flows from operating activities:
Net income (loss) $ 446,567 $(1,050,066)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Provision for credit losses 1,783,417 3,190,477
Depreciation and amortization 360,201 355,970
Gain on sale of closed store assets - (223,247)
Loss on disposal of property and equipment 12,054 82,357
Equity in income (loss) of joint ventures 28,415 (45,101)
Loss on disposition of joint ventures - 447,084
Changes in assets and liabilities increasing (decreasing)
cash flows from operations:
Amounts due from customers for advances (1,800,702) (1,092,415)
Prepaid expenses and other current assets (180,179) 225,544
Accounts payable and accrued expenses (352,043) 665,540
Other assets - 20,904
----------- -----------
Net cash provided by operating activities 297,730 2,577,047
----------- -----------
Cash flows from investing activities:
Additions to goodwill (4,705) -
Additions to property and equipment (41,301) (19,426)
Net cash received from (contributed to) joint ventures - 9,687
Proceeds from sale of closed store assets - 882,812
----------- -----------
Net cash provided by (used in) investing activities (46,006) 873,073
----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under line of credit facilities (1,093,403) 311,782
Net borrowings from (repayments to) related parties 947,970 (2,208,989)
Net borrowings from (repayments to) officers (40,973) 98,324
Proceeds from issuance of long-term debt - 50,000
Principal repayments on long-term debt (138,898) (920,659)
Repayments of obligations under capital leases (299,317) (356,501)
Distributions to stockholders (6,579) (61,312)
----------- -----------
Net cash used in financing activities (631,200) (3,087,355)
----------- -----------
Net increase (decrease) in cash (379,476) 362,765
Cash at beginning of year 569,803 207,038
----------- -----------
Cash at end of year $ 190,327 $ 569,803
=========== ===========
Supplemental disclosures:
Cash paid during the period for interest $ 490,079 $ 952,270
=========== ===========
Supplemental noncash investing and financing activities:
Assets acquired under capital leases $ 20,108 $ 395,288
=========== ===========
See accompanying notes to consolidated financial statements.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-7
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 1- Summary of significant accounting policies
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, 2001, the Company
owned and operated 52 stores in 7 states and is headquartered in Virginia Beach,
Virginia.
Principles of consolidation - Easy Money Holding Corporation (the Company) was
formed on December 18, 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 inter-company 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.
Income recognition - Fee income is recognized as revenue on a level yield basis
over the term of the advance or loan.
Allowance for credit losses - 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 non-sufficient funds, it is
considered impaired and the advance is charged off. Recoveries on charge-off
advances are credited in the period when the recovery is received. The Company
maintains the 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.
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 the property 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. 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.
Goodwill - In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets as well as how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. SFAS No. 142 changes the accounting for
goodwill from an amortization method to an impairment only approach. Goodwill
acquired prior to June 30, 2001 is required to be amortized throughout the
remainder of 2001. On January 1, 2002, Goodwill should not be amortized but
should be tested for impairment at least quarterly. Effective January 1, 2002
the Company will adopt SFAS No. 142. Management has not assessed the impact of
the adoption of SFAS No. 142 on future periods.
(Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-8
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 1- Summary of significant accounting policies (concluded)
Goodwill, which represents the excess of 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.
Amortization expense related to goodwill was $41,242 and $43,507 for the years
ended 2001 and 2000, respectively.
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 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 2001 and 2000.
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.
Advertising and promotion - Costs associated with advertising and promotions are
charged to expense when incurred. Advertising and promotion expenses were
$500,198 and $1,469,734 in 2001 and 2000, respectively, and are included in
other operating expenses in the accompanying consolidated statements of income
(loss).
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 accounting principles
generally accepted in the United States of America. Actual results could differ
from those estimates.
Reclassifications - Certain reclassifications have been made to the 2000
financial statements to conform to the 2001 financial statement presentation.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-9
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 2 - Amount 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, 2001 and 2000 are as follows:
2001 2000
----------- -----------
Gross amounts due from customers for advances $ 3,370,608 $ 3,380,478
Allowance for credit losses (170,216) (183,105)
Unearned advance fees (230,156) (244,422)
----------- -----------
$ 2,970,236 $ 2,952,951
=========== ===========
Changes in the allowance for credit losses were as follows for 2001 and 2000:
2001 2000
----------- -----------
Balance at beginning of year $ 183,105 $ 299,790
Provision for credit losses 1,783,417 3,190,477
Advances charged off, net of recoveries of $4,203,844
and $5,769,657 in 2001 and 2000, respectively (1,796,306) (3,307,162)
----------- -----------
Balance at end of year $ 170,216 $ 183,105
=========== ===========
During 2001 and 2000, the face value of cash advances and loans made by the
Company was $60,796,097 and $81,893,842, respectively.
Note 3 - Property and equipment, net
Property and equipment, net at December 31, 2001 and 2000, respectively,
consists of the following:
2001 2000
---------- ----------
Office and computer equipment $1,747,969 $1,741,179
Signs 64,268 66,995
Leasehold improvements 117,197 118,781
---------- ----------
1,929,434 1,926,955
Less accumulated depreciation and amortization 941,530 644,908
---------- ----------
Property and equipment, net $ 987,904 $1,282,047
========== ==========
Depreciation expense totaled $323,390 and $312,463 for the years ended 2001 and
2000 respectively.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-10
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 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 was accounted for
using the equity method. In 2001 the investment in joint venture was transferred
to EMH in exchange for an increase to the net receivable from EMH. There was no
gain or loss resulting from this transaction.
During 1999, the Company contributed certain assets and liabilities to form two
retail financial services joint ventures with an unrelated party. In 2000, the
Company and the other party decided to dissolve the joint ventures and the
remaining net assets in the joint ventures were distributed back to each of the
parties. In 2000, Easy Money recorded a loss of approximately $447,000 on the
dissolution of the joint ventures.
Note 5 - Line of credit facilities
The Company maintained a financing agreement with a commercial bank that
permitted the Company to borrow up to $2,300,000 at December 31, 2001 and 2000,
respectively, subject to certain borrowing base limitations. The facility bears
interest at a base rate (as specified by the lender) plus 10%, payable monthly.
The rate charged on the facility at December 31, 2001 and 2000 was 15.75% and
19.75% respectively. 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, 2001 and 2000 was $1,336,039 and $2,306,439
respectively. On March 20, 2002 the Company amended this financing agreement
that reduces the line of credit facility's advance limit by $54,167 each month
for a successive twenty-four (24) month period commencing on July 1, 2002 and
terminating on June 1, 2004.
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-11
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 6 - Long-term debt and warrants
Long-term debt at December 31, 2001 and 2000 consisted of the following:
2001 2000
--------- ---------
Note payable to bank, interest at 12.5%, monthly payments
of $10,604 through May 2005 $ 351,399 $ --
Note payable to individual, interest payable at 11.5%,
due December 2002, guaranteed by a stockholder 300,000 300,000
Note payable to corporation, interest payable at 7%, due date
extended to the earlier of an initial public offering
or December 31, 2002 50,000 50,000
Convertible note payable to individual, interest payable at 8%,
balance paid January 2001 -- 36,934
Senior subordinated notes payable to bank, interest payable at
11.5%, paid off during 2001 -- 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
--------- ---------
Total 701,399 840,297
Less current portion (438,342) (840,297)
--------- ---------
Total Long Term Debt $ 263,057 $ -
========= =========
At December 31, 2000 the Company maintained a second financing agreement with a
commercial bank that permitted the Company to borrow up to $400,000. The
outstanding amount on this line of credit facility as of December 31, 2000 was
$399,590. During 2001 this line of credit facility's outstanding balance was
refinanced through a term note payable that at December 31, 2001 balance was
$351,399.
Certain of the above debt agreements contain various covenants including the
restrictions and limitations on additional borrowings and investments. The
Company has complied with the covenants required in the debt agreements as
revised.
In connection with the issuance of the senior subordinated notes payable and
certain acquisitions, the Company at December 31, 2001, 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-dilutive rights.
(Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-12
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 6 - Long-term debt and warrants (concluded)
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.
A schedule of maturities of long-term debt is as follows
Years ending December 31, Amount
- ------------------------- --------
2002 $438,342
2003 100,040
2004 113,287
2005 49,730
--------
Total $701,399
========
Note 7 - Leases
The Company has several non-cancelable operating leases for office facilities
and store locations that expire over the next three 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 2001 and 2000 was $672,006 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, 2001 has a cost of $1,244,257 and related accumulated amortization of
$329,566.
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments at December 31, 2001 are as follows:
Capital Operating
Year ending December 31, leases leases
-------------------- --------------------
2002 $ 287,926 $ 682,690
2003 119,028 298,570
2004 61,403 61,976
2005 10,304 -
-------------------- --------------------
Total future minimum lease payments 478,661 $ 1,043,236
====================
Less amount representing interest (72,166)
--------------------
Present value of net minimum capital lease payments 406,495
Residual value, guaranteed 15,037
--------------------
Capital lease obligations 421,532
Less current installments of capital lease obligations (241,904)
--------------------
Capital lease obligations, excluding current installments $ 179,628
====================
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-13
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 8 - Pro Forma Data (unaudited)
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:
2001 2000
--------- ---------
Federal $ 152,000 $(326,000)
State 27,000 (94,000)
--------- ---------
Total pro forma income tax expense (benefit) $ 179,000 $(420,000)
========= =========
A reconciliation of the statutory federal income tax rate and the pro forma
effective rate is as follows:
2001 2000
--------- ---------
Statutory rate 34% 34%
Effect of state income taxes, net of federal tax
effect 6% 6%
--------- ---------
Pro forma effective rate 40% 40%
========= =========
(Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-14
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Net Income per Share - Basic Net Income per Share excludes dilution and is
computed by dividing net income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted Net
Income per Share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock, or resulted in the issuance of common stock that then shared in the
earnings of the entity.
The table below sets forth the calculation of pro forma basic and diluted net
income (loss) per share.
2001 2000
------------ ------------
Numerator for pro forma diluted net income (loss) per share:
Pro forma net income (loss) for calculating pro forma
basic and diluted earnings per share $ 267,569 $ (630,066)
============ ============
Denominator for pro forma diluted net income (loss) per share:
Weighted-average common shares for calculating
pro forma basic earnings per share 10,000,000 10,000,000
Effect of dilutive securities -
Warrants 924,270 --
------------ ------------
Weighted-average common shares for calculating pro forma
diluted net income (loss) per share 10,924,270 10,000,000
============ ============
The Company had a loss for the year ended December 31, 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.
Note 9 - Related Party Transactions
Included in non-current assets at December 31, 2001 and 2000 is a net amount of
$245,353 and $1,352,063, respectively, due from a related corporation, EMH,
which is commonly owned and managed with the Company. This 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.
The Company allocates expenses for administrative and management services
provided to EMH. In 2001 and 2000, expenses of $459,000 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, 2001 and 2000 are net amounts borrowed
from related parties other than EMH of $104,629 and $263,369. These net payables
are due on demand and accrue interest at varying rates. Total interest expense
related to net payables to related parties was approximately $14,000 and $37,000
in 2001 and 2000, respectively.
(Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-15
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
Note 9 - Related Party Transactions (concluded)
Included in liabilities at December 31, 2001 and 2000 are net amounts borrowed
from officers (also stockholders) of $1,655,453 and $1,696,426. These net
payables are due on demand and accrue interest at varying rates. Total interest
expense related to net payables to officers was approximately $222,000 and
$187,000 in 2001 and 2000, respectively.
Note 10 - 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.
Note 11 - 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.
Note 12 - 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 to 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 plaintiff's 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 lawsuits.
(Continued)
EASY MONEY HOLDING CORPORATION AND SUBSIDIARIES F-16
Notes to Consolidated Financial Statements
December 31, 2001 and 2000
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.
Note 12 - Contingencies (concluded)
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 Securities and Exchange
Commission. 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 these agreements are described below.
In July 1998, in connection with an employee's employment agreement, the Company
agreed that if it were successful in becoming a public company registered with
the Securities and Exchange Commission, it would 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
Securities and Exchange Commission, 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 Securities and
Exchange Commission, this party would receive share of stock with a value of
$50,000. In January 2002, the Company renegotiated this agreement such that this
party will receive shares of stock with a value of $25,000. An expense of
$25,000 will be recognized immediately subsequent to the completion of a public
registration.
Exhibit 4.4
DEMAND NOTE
$75,000.00 Virginia Beach, VA
May 9, 2002
FOR VALUE RECEIVED, EASY MONEY HOLDING CORPORATION, a Virginia Corporation
("Maker"), promises to pay to David M. Kilby ("Holder"), ON DEMAND, at 3505 Byrn
Brae Drive, Virginia Beach, Virginia 23464, or at such other place as the holder
of this Demand Note (the "Note") may designate from time to time in writing, the
principal sum of SEVENTY FIVE THOUSAND DOLLARS ($75,000.00), together with
interest from the date hereof on the unpaid principal balance of this Note at
the rate, and on the terms and conditions, set forth below.
The unpaid principal balance of this Note will bear interest at the rate of
eighteen percent (18%) per annum until all sums due under this Note are paid in
full. Maker will pay to Holder monthly interest only payments on the fifth day
of each month beginning June 5, 2002 until all sums due under this Note are paid
in full. The entire unpaid principal balance, all accrued and unpaid interest
and any other sums due under this Note ("Balance Due") shall be due and payable
in installments as set forth below on the earlier of (i) written demand by
Holder to Maker or (ii) a transfer, sale or assignment of more than twenty
percent (20%) of Maker's assets or shares of common stock ("Payment Event").
Payment by Maker of the Balance Due, plus all accrued interest thereon, shall be
made in installments pursuant to the following terms: one-third (1/3) of the
Balance Due, plus accrued interest, shall be paid on or before thirty (30) days
after a Payment Event, one-half (1/2) of the remaining Balance Due, plus accrued
interest, shall be paid on or before sixty (60) days after a Payment Event, and
the remaining Balance Due, plus accrued interest, shall be paid in full on or
before sixty (90) days after a Payment Event. Interest will be calculated and
paid based on the actual number of days elapsed and on a year of 365 days.
An event of default ("Event of Default") under this Note shall occur if any
installment or payment of principal and/or interest due and payable under this
Note is not paid within twenty-five (25) days after the date when any such
installment or payment first becomes due and payable.
On the occurrence, and during the continuance, of any Event of Default, at
the option of Holder and without notice to Maker, the Balance Due, and any
accrued interest thereon, shall bear interest thereafter until paid at an annual
rate (the "Default Rate") equal to the lesser of (i) twenty-three percent (23%)
per annum or (ii) the maximum rate of interest allowed to be charged under
applicable law (the "Maximum Rate"). All such interest shall be paid at the time
of and as a condition precedent to the curing of any such Event of Default. Upon
the curing of any such Event of Default, the Balance Due will bear interest at
the rate of eighteen percent (18%) per annum pursuant to the terms of this Note.
Any payment described above shall be applied first to interest and then to
principal and shall be made in immediately usable funds which are lawful money
of the United States of
1
America.
Maker may prepay the Note, in whole or in part, at any time without penalty
or premium.
This Note may be modified by a written agreement signed by Maker and
Holder.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the Commonwealth of Virginia, except
to the extent that federal law may be applicable to the determination of the
Maximum Rate.
EASY MONEY HOLDING CORPORATION, a
Virginia corporation
By: /s/ David Greenberg
----------------------------
Its: President
----------------------------
GUARANTORS:
- --------------------------------
/s/ David Greenberg
- --------------------------------
/s/ Tami Van Gorder
2
Exhibit 10.15
EMG
EASY MONEY GROUP
5295 Greenwich Road, Suite 108
Virginia Beach, VA 23462
February 20, 2002
Mr. Paul Bunnell
Edens-Tower Plaza
790 Frontage Road
Northfield, IL 60093
Re: AMENDMENT TO THE ORIGINAL LOAN AGREEMENT DATED AUGUST 1, 2000 BETWEEN
DEVILLE INVESTMENT CORPORATION AND EASY MONEY HOLDINGS CORPORATION
Dear Mr. Bunnell:
The following letter is meant to amend the original loan agreement dated August
1, 2000 between Deville Investment Corporation and Easy Money Holdings
Corporation. The parties agree to the following amendment.
Easy Money Holdings Corporation will satisfy the $50,000 note payable to Deville
Corporation by making full payment on the note under the following terms. It is
the intent of the parties to make three installments: first installment amount
of $10,000 and which includes accrued interest due upon signing document no
later than February 5, 2002. Second installment due February 22, 2002 in the
amount of $23,000. Third installment due March 15, 2002 shall include the
remaining balance of the note including any accrued interest. In the event that
these payments are not made in a timely fashion (within 5 days of their due
dates), Deville, upon notification to the Easy Money Holdings Corporation
(certified mailing only) and the failure of the Easy Money Holdings Corporation
to cure the deficiency within 6 business days of notification, will have the
right to accelerate the entire loan balance and make demand of the full note
immediately. IN consideration of the above mentioned payment terms, Deville
Investment Corporation has agreed to surrender 50% of all rights to current and
future warrants, options or equity interest in Easy Money Holdings Corporation
or affiliates. Specifically, Deville Investment Corporation has agreed to
surrender their 50% right in certain warrants referred to in the original loan
agreement dated August 1, 2000. If the Easy Money Holdings Corporation fails to
satisfy this obligation under these terms, the warrants will not expire until
the obligation is paid in full.
This will be the entire amendment to the original loan agreement dated August 1,
2000.
As authorized agents or representatives of the respectful parties, the following
individual agrees to the above referenced terms.
/s/ David Greenberg /s/ Paul Bunnell
- -------------------------------------- ----------------------------------
David Greenberg, President Dated Paul Bunnell, Agent Dated
Easy Money Holdings Corporation Deville Investment Corp.
Exhibit 10.16
500 SEVENTH AVENUE-10TH FLOOR
NEW YORK, NY 10018-4502
PHONE 212-575-5219
FAX 212-575-5228
len.imperiale@sterlingbancorp.com
---------------------------------
Leonard M. Imperiale
STERLING FINANCIAL SERVICES CO., INC. Administrative Vice President
March 20, 2002
David Greenberg, President
Easy Money Group et al
5295 Greenwich Road, Suite 108
Virginia Beach, VA 23462
Re: Loan, Security and Service Agreement ("Agreement") made this 12th day of
December, 1996, and amended from time to time between Sterling Financial
Services Company, Inc. (formerly known as Sterling Financial Services Co.)
as Lender, and the corporations listed on Exhibit A attached hereto
individually and collectively as Borrower
Dear Mr. Greenberg:
Section 1.1(b)(i) of the captioned Agreement is amended in its entirety as
follows:
Definition of Advance Limit. The term "Advance Limit" shall mean the amount of
- ---------------------------
the Revolving Loan which the Lender may, in its sole and absolute discretion,
from time to time make to Borrower, up to the lesser of One Million Three
Hundred Thousand Dollars ($1,300,000) or 35% of the amount of the Borrower's
"Eligible Receivables" (as hereinafter defined). The amount of the Revolving
Loan shall decrease by $54,167 each month for a successive twenty-four (24)
month period commencing on July 1, 2002 and terminating on June 1, 2004 as set
forth in Schedule 1 attached hereto.
All other terms of the Loan, Security and Service Agreement shall remain
unchanged.
Please signify your agreement to the foregoing by executing the enclosed two (2)
copies of this letter and return them to us at your earliest convenience.
Very truly yours,
Leonard M. Imperiale
cc: J. Gallo, President, Sterling Financial Services Company, Inc.
SIGNATURE PAGE TO LETTER AGREEMENT DATED MARCH 20, 2002
Agreed To And Accepted:
BORROWER:
Easy Advances of MS, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money Holdings Corporation By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of California, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Colorado, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Indiana, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Kansas, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Kentucky, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Louisiana, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Maryland, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Nevada, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of NM, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Tennessee, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
Easy Money of Utah, Inc. By: /s/ David Greenberg
-----------------------------------
David Greenberg, President
2
(Continued) SIGNATURE PAGE TO LETTER AGREEMENT DATED MARCH 20, 2002
Agreed To And Accepted:
BORROWER (continued):
Easy Money of Virginia, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
EM Holdings, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Fast Cash, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Gulf Investment Group, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Lone Star Endeavors, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Loan Alternative Corporation, The By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Money Express Leasing, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of Arizona, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of Hawaii, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of MD, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of Mississippi, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of Missouri, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Sunnybrook of North Florida, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
3
(Continued) SIGNATURE PAGE TO LETTER AGREEMENT DATED MARCH 20, 2002
Agreed To And Accepted:
BORROWER (continued):
Money Network Financial Services, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
The Cheyenne Servicing Corporation, LTD By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Easy Money Auto Sales, Inc. By: /s/ David Greenberg
---------------------------------------
as successor to Easy Money Title Loans, Inc. David Greenberg, President
Easy Money Check Cashing, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
EM Consumer Services of MD, Inc. By: /s/ David Greenberg
---------------------------------------
formerly Dollar Express, Inc. David Greenberg, President
JHF Enterprises, Inc. By: /s/ David Greenberg
---------------------------------------
d/b/a Easy Money David Greenberg, President
JHF Enterprises, Inc. By: /s/ David Greenberg
---------------------------------------
d/b/a Cash 2 U David Greenberg, President
Tidewater Services of Delaware, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
Payday Check Cashing, Inc. By: /s/ David Greenberg
---------------------------------------
David Greenberg, President
4
EXHIBIT A TO LOAN SECURITY AND SERVICE AGREEMENT DATED
DECEMBER 12, 1996 AND AMENDED FROM TIME TO TIME BETWEEN
STERLING FINANCIAL SERVICES COMPANY, INC. (formerly known as Sterling
Financial Services Co.) AND THE FOLLOWING BORROWING CORPORATIONS:
CORPORATE NAME STATE OF INCORPORATION
Cheyenne Servicing Corporation, Ltd, The DE
Easy Advances of MS, Inc. MS
Easy Money Check Cashing, Inc. NV
Easy Money Holding Corporation VA
Easy Money, Inc. VA
Easy Money of California, Inc. CA
Easy Money of Colorado, Inc. CO
Easy Money of Indiana, Inc. IN
Easy Money of Kansas, Inc. KS
Easy Money of Kentucky, Inc. KY
Easy Money of Louisiana, Inc. LA
Easy Money of Maryland, Inc. MD
Easy Money of Nevada, Inc. NV
Easy Money of NM, Inc. NM
Easy Money of Tennessee, Inc. TN
Easy Money of Utah, Inc. UT
Easy Money of Virginia, Inc. VA
Easy Money Auto Sales, Inc. (as successor to FL
Easy Money Title Loans, Inc.)
EM Consumer Services, Inc. CO
EM Consumer Services of MD, Inc. MD
EM Holdings, Inc. VA
Fast Cash, Inc. LA
Gulf Investment Group, Inc. MS
JHF Enterprises, Inc. (d/b/a Easy Money & Cash 2 U) FL
Lone Star Endeavors, Inc. TX
Loan Alternative Corporation, The TX
Money Express Leasing, Inc. MD
Money Network Financial Services, Inc. NV
Payday Check Cashing, Inc. LA
Sunnybrook, Inc. NM
Sunnybrook of Arizona, Inc. AZ
Sunnybrook of Hawaii, Inc. HI
Sunnybrook of MD, Inc. MD
Sunnybrook of Mississippi, Inc. MS
Sunnybrook of Missouri, Inc. MO
Sunnybrook of North Florida, Inc. FL
Tidewater Services of Delaware DE
5
SCHEDULE 1: REVOLVING LOAN AMORTIZATION SCHEDULE
Period Amortization Balance
1,300,000
July, 2002 54,167 1,245,833
August, 2002 54,167 1,191,666
September, 2002 54,167 1,137,499
October, 2002 54,167 1,083,332
November, 2002 54,167 1,029,165
December, 2002 54,167 974,998
January, 2003 54,167 920,831
February, 2003 54,167 866,664
March, 2003 54,167 812,497
April, 2003 54,167 758,330
May, 2003 54,167 704,163
June, 2003 54,167 649,996
July, 2003 54,167 595,829
August, 2003 54,167 541,662
September, 2003 54,167 487,495
October, 2003 54,167 433,328
November, 2003 54,167 379,161
December, 2003 54,167 324,994
January, 2004 54,167 270,827
February, 2004 54,167 216,660
March, 2004 54,167 162,493
April, 2004 54,167 108,326
May, 2004 54,167 54,159
June, 2004 54,159 0
6