<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9733
---------------------
CASH AMERICA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 75-2018239
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
1600 WEST 7TH STREET
FORT WORTH, TEXAS 76102-2599
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (817) 335-1100
---------------------
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.10 par value per share New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of 24,213,052 shares of the registrant's common
stock held by nonaffiliates on March 8, 2000 was approximately $284,503,400.
At March 8, 2000 there were 25,259,601 shares of the registrant's Common
Stock, $.10 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual Report to Shareholders for the year ended December
31, 1999 and the definitive Proxy Statement pertaining to the 2000 Annual
Meeting of Shareholders are incorporated herein by reference into Parts II and
IV, and Part III, respectively.
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Item 14 of the registrant's Annual Report on Form 10-K for the year
ended December 31, 1999 is amended and restated as set forth below, and the
indicated financial statements of innoVentry Corp. are included herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) The following financial statements of the Company and Report of
Independent Accountants are contained in the Annual Report and are
incorporated herein by reference.
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
(2) The following financial statement schedule of the Company, as well as
the following financial statements of innoVentry Corp. and its
predecessor, Mr. Payroll Corporation, are included herein.
Schedule II -- Allowance for Valuation of Inventory.
Report of Independent Accountants on Financial Statement Schedule.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or the
required information is included elsewhere in the financial
statements.
Separate Financial Statements of Fifty Percent or Less Owned Persons-
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS OF INNOVENTRY CORP.:
<S> <C>
Balance Sheet as of December 31, 1999
Statement of Operations for the Year Ended December 31, 1999
Statement of Stockholders' Equity (Deficit) for the Year Ended
December 31, 1999
Statement of Cash Flows for the Year Ended December 31, 1999
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
</TABLE>
FINANCIAL STATEMENTS OF MR. PAYROLL CORPORATION:
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statements of Operations for the Years Ended December 31,
1998 and 1997
Consolidated Statements of Shareholder's Equity (Deficit) for the
Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
(3) The exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index.
(4) During the fourth quarter ended December 31, 1999, the Company did not
file any reports on Form 8-K.
2
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on July 10, 2000.
CASH AMERICA INTERNATIONAL, INC.
By: /s/ DANIEL R. FEEHAN
--------------------------------
Daniel R. Feehan
Chief Executive Officer
and President
3
<PAGE> 4
innoVentry Corp.
Balance Sheet
December 31, 1999
(In thousands, except share data)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,892
Short-term investments in marketable securities
(amortized cost of $1,001) 997
Accounts receivable, net of allowance of $120 680
Prepaid expenses 268
----------
Total current assets 32,837
Property, equipment, internal use software, and leasehold improvements,
net of accumulated depreciation and amortization of $3,364 25,645
Capitalized software development costs, net of accumulated amortization of
$4,114 10,222
Intangible assets, net of accumulated amortization of $481 2,449
Other assets 586
----------
Total assets $ 71,739
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,566
Accounts payable to stockholder and affiliate 7,865
Borrowings under line of credit with affiliate 2,348
Due to affiliate under contract cash arrangement 12,951
Current portion of capital lease obligations with affiliate 885
Other current liabilities 525
----------
Total current liabilities 34,140
Note and interest payable to stockholder 3,053
Capital lease obligations with affiliate, net of current portion 4,816
Other noncurrent liabilities 671
----------
Total liabilities 42,680
Stockholders' equity:
Convertible preferred stock, $0.0001 par value; 62,241,759 shares authorized,
issued and outstanding; aggregate liquidation preference of $84,000 6
Common stock, $0.0001 par value; 100,000,000 shares authorized;
8,200,000 shares issued and outstanding 1
Additional paid-in capital 84,997
Accumulated other comprehensive loss (4)
Deferred stock compensation (4,321)
Notes receivable from stockholders (1,432)
Accumulated deficit (50,188)
----------
Total stockholders' equity 29,059
----------
Total liabilities and stockholders' equity $ 71,739
==========
</TABLE>
See accompanying notes
4
<PAGE> 5
innoVentry Corp.
Statement of Operations
Year ended December 31, 1999
(In thousands)
<TABLE>
<S> <C>
Revenue:
Financial services vending fees $ 15,379
Check cashing fees 2,362
Credit card cash advance fees 1,548
----------
19,289
Revenue sharing (10,172)
----------
Total net revenue 9,117
Expenses:
Operations 15,467
Depreciation and amortization 7,701
Sales and marketing 4,821
General and administrative 18,432
Impairment loss on RPM equipment 4,727
Amortization of deferred stock compensation 1,270
----------
Total expenses 52,418
----------
Loss from operations (43,301)
Interest expense (769)
Other income, net 241
----------
Loss before income taxes (43,829)
Income tax benefit 2,787
----------
Net loss $ (41,042)
==========
</TABLE>
See accompanying notes.
5
<PAGE> 6
innoVentry Corp.
Statement of Stockholders' Equity
Year ended December 31, 1999
(In thousands, except share data)
<TABLE>
<CAPTION>
CONVERTIBLE ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER
----------------------- -------------------------- PAID-IN COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL LOSS
--------- ---------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 10,000 $ 10 10,000,000 $ 2,000 $ 34,165 $ --
Net loss
Unrealized loss from
investments, net of tax (4)
Comprehensive income
Capital contributions and
cancellation of convertible
preferred stock by Cash
America International, Inc. (10,000) (10) 34,175 (34,165)
Issuance of Series A convertible
preferred stock in exchange
for cash, common stock, note
payable, assets acquired, and
tax benefits acquired 54,000,000 5 (10,000,000) (36,175) 47,606
Issuance of Series B convertible
preferred stock for cash 8,241,759 1 29,999
Issuance of common stock for
cash, notes receivable, and
services rendered 8,200,000 1 1,801
Deferred stock compensation 5,591
Amortization of deferred stock
compensation
----------- ----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 62,241,759 $ 6 8,200,000 $ 1 $ 84,997 $ (4)
=========== =========== =========== =========== =========== ===========
<CAPTION>
NOTES
DEFERRED RECEIVABLE
STOCK FROM ACCUMULATED DUE FROM
COMPENSATION STOCKHOLDERS DEFICIT STOCKHOLDER TOTAL
------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ -- $ -- $ (9,146) $ (6,637) $ 20,392
Net loss (41,042) (41,042)
Unrealized loss from
investments, net of tax (4)
-----------
Comprehensive income (41,046)
-----------
Capital contributions and
cancellation of convertible
preferred stock by Cash
America International, Inc. --
Issuance of Series A convertible
preferred stock in exchange
for cash, common stock, note
payable, assets acquired, and
tax benefits acquired 6,637 18,073
Issuance of Series B convertible
preferred stock for cash 30,000
Issuance of common stock for
cash, notes receivable, and
services rendered (1,432) 370
Deferred stock compensation (5,591) --
Amortization of deferred stock
compensation 1,270 1,270
----------- ----------- ----------- ----------- -----------
Balances at December 31, 1999 $ (4,321) $ (1,432) $ (50,188) $ -- $ 29,059
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE> 7
innoVentry Corp.
Statement of Cash Flows
Year ended December 31, 1999
(In thousands)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (41,042)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 7,701
Impairment loss on RPM equipment 4,727
Amortization of deferred stock compensation 1,270
Changes in assets and liabilities:
Accounts receivable 189
Prepaid expenses (170)
Other assets (320)
Accounts payable and accrued expenses 6,191
Accounts payable to stockholder and affiliate 8,390
Due to affiliate under contract cash arrangement 12,951
Note and interest payable due to stockholder 153
Other current liabilities (50)
Other noncurrent liabilities (2,580)
----------
Net cash used in operating activities (2,590)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investments in marketable securities (4,212)
Proceeds from the sale and maturity of investments in marketable securities 3,010
Purchase of property, equipment, internal use software, and leasehold
improvements (30,973)
----------
Net cash used in investing activities (32,175)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings on line of credit with affiliate 25,665
Proceeds from borrowings on capital lease obligations with affiliate 5,815
Repayment of borrowings on line of credit with affiliate (23,317)
Repayment of capital lease obligations with affiliate (200)
Proceeds from the issuance of common stock 370
Proceeds from capital contribution 2,046
Proceeds from the issuance of convertible preferred stock 50,975
----------
Net cash provided by financing activities 61,354
----------
Net increase in cash and cash equivalents 26,589
Cash and cash equivalents, beginning of year 4,303
----------
Cash and cash equivalents, end of year $ 30,892
==========
SUPPLEMENTAL DISCLOSURE
Interest paid during the period $ 537
==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for note receivable $ 1,482
Deferred stock compensation $ 5,591
==========
</TABLE>
See accompanying notes.
7
<PAGE> 8
innoVentry Corp.
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND BUSINESS
innoVentry Corp. ("innoVentry"), formerly known as Mr. Payroll
Corporation ("Mr. Payroll"), develops and provides the necessary infrastructure
to operate unmanned electronic transaction devices, which are generally marketed
under the brand name RPM, that combine automated check cashing, credit card cash
advance, debit card withdrawal, multimedia advertising, and facial biometric
customer identification capabilities with traditional automated teller machine
functionality. innoVentry operates owned and leased RPMs, and sells RPMs to
third parties. At December 31, 1999, innoVentry operated RPMs in 18 states.
Mr. Payroll was incorporated and commenced operations as a check
cashing service in August 1990. In 1994, Cash America International, Inc. ("Cash
America") paid $2,000,000 for a 49% interest in Mr. Payroll. Effective December
31, 1996, Cash America acquired the remaining 51% in a purchase transaction. Mr.
Payroll operated as a wholly owned subsidiary of Cash America until March 9,
1999. References in these Notes to Financial Statements to innoVentry include
Mr. Payroll, unless the context requires otherwise.
innoVentry and Wells Fargo Cash Centers, Inc. ("Cash Centers"), a
wholly owned subsidiary of Wells Fargo Bank, N.A. ("Wells Fargo") entered into a
joint venture, innoVisions, LLC ("innoVisions"), to develop and distribute a new
generation of RPMs targeted at the entertainment industry. Cash Centers
contributed its entertainment-related assets, including approximately 200 RPMs
operating in entertainment establishments and an initial $1,000,000 working
capital line of credit. innoVentry agreed to contribute transaction services and
technology support, including a royalty-free license of its intellectual
property rights used in the technology to operate the RPMs. innoVentry also
agreed to provide RPMs to innoVisions at cost. During the period from May 1998
to March 9, 1999, these assets were operated through the joint venture. In March
1999, innoVisions was dissolved.
In March 1999, Cash Centers obtained 27,000,000 shares of new Series A
convertible preferred stock in exchange for cash consideration of $20,975,000
and certain net assets formerly used by innoVisions. Concurrent with that
transaction, innoVentry issued 27,000,000 shares of new Series A convertible
preferred stock to Cash America in exchange for 10,000,000 shares of common
stock, representing all of the then-currently-issued and outstanding common
stock of innoVentry. Subsequently, Cash America assigned 10% of its shares to
third parties. Upon completion of these transactions, Cash Centers and Cash
America owned 45.0% and 40.5%, respectively, of the outstanding stock of
innoVentry.
In October 1999, innoVentry issued 8,241,759 shares of new Series B
convertible preferred stock to Cash Centers, Cash America, and a strategic
supplier, in exchange for cash consideration of $30,000,000.
8
<PAGE> 9
innoVentry Corp.
Notes to Financial Statements (continued)
1. ORGANIZATION AND BUSINESS (CONTINUED)
At December 31, 1999, Cash Centers, Cash America, and the supplier
owned 42.2%, 38.4%, and 3.9%, respectively, of the outstanding stock of
innoVentry.
The financial statements have been prepared on a going concern basis.
innoVentry has experienced operating losses since 1996 and had a working capital
deficit and net capital deficit at December 31, 1999. innoVentry expects to
incur substantial losses for at least the next year and has insufficient cash to
continue its operations through December 31, 2000 at its projected level of
operations. innoVentry's ability to continue as a going concern for at least the
next year is dependent upon it successfully raising additional capital through
equity or debt financings. Management is currently in the process of
renegotiating its line of credit and master lease facility with Wells Fargo and
has initiated efforts to raise additional capital through a private equity
placement. However, there is no assurance that additional funding will be
available to innoVentry on acceptable terms, if at all. The accompanying
financial statements have been prepared assuming innoVentry will continue as a
going concern and do not include any adjustments that might result from the
outcome of this uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States that require
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. These estimates are based on
information available as of the date of the financial statements. Actual results
could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash held by third
party vendors for RPM operations, and cash held by the Company under a contract
cash arrangement. At December 31, 1999, cash held by third party vendors was
$5,464,000 and cash held under a contract cash arrangement totaled $12,951,000
(see Note 4 - Debt Obligations). innoVentry considers all highly liquid
investments with a maturity of three months or less from the date of purchase to
be cash equivalents. The carrying amount reported in the balance sheet for cash
and cash equivalents approximates fair value.
Short-Term Investments in Marketable Securities
Short-term investments in marketable securities consist of government
agency securities maturing in less than one year. In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," innoVentry has classified its
investments in marketable securities as "available-for-sale." Available-for-sale
securities are recorded at fair value, with unrealized losses included on a
net-of-tax basis as a separate component of stockholders' equity in "Accumulated
other comprehensive loss."
9
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innoVentry Corp.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Equipment, Internal Use Software, and Leasehold Improvements
Property, equipment, internal use software, and leasehold improvements
are recorded at the lower of cost or fair value, less accumulated depreciation
and amortization. Depreciation on property and equipment, including assets held
under capital lease obligations, is computed using the straight-line method over
the estimated useful lives of the assets, which range from 3 to 7 years.
Internal use software is accounted for in accordance with Statement of Position
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP No. 98-1") issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants and is
amortized on a straight-line basis over estimated useful lives of 3 to 5 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the asset's useful life or corresponding lease term.
Capitalized Software Development Costs
innoVentry accounts for software development costs in accordance with
SFAS No. 86, "Accounting for the Cost of Computer Software to Be Sold, Leased,
or Otherwise Marketed," under which certain computer software development costs
incurred subsequent to the establishment of technological feasibility are
capitalized and amortized over the estimated lives of the related products.
Technological feasibility is established upon the completion of a working model.
Amortization of capitalized computer software development costs begins when a
project is available for use and is computed using the straight-line method, on
a project-by-project basis, over the remaining estimated economic life of the
software. For the year ended December 31, 1999, innoVentry capitalized
$7,238,000 of costs related to software development and recorded related
amortization of $4,114,000. During 1999, innoVentry changed the estimated useful
life of certain capitalized software development costs from 5 years to 2 years,
which increased the related amortization expense by approximately $1,463,000 for
the year ended December 31, 1999.
Revenue Recognition
innoVentry recognizes fee revenue from transactions conducted through
innoVentry and third party-owned RPMs. Automated teller machine fees are based
on a flat usage fee or a percentage of transaction value. Check cashing fees and
credit card cash advance fees are based on a percentage of the transaction
value. All fee revenue is recognized at the time service is rendered. innoVentry
allocates a portion of its revenue to channel partners under the terms of
revenue sharing arrangements based on the volume and nature of transactions
conducted by innoVentry through RPMs located on the channel partner's premises.
innoVentry sells machines to third parties and receives fees related to
services provided to purchasers of these machines, including postcontract
customer support. Machine sales revenue less the cost of the machines is
deferred and amortized over the contractual service period. During the year
ended December 31, 1999, innoVentry did not have significant machine sales.
10
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innoVentry Corp.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but
does not require companies to record compensation cost for stock-based employee
compensation plans at fair value. innoVentry has chosen to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Opinion No. 25") and related interpretations. For equity
instruments granted to non-employees, innoVentry follows the guidance provided
by Emerging Issues Task Force Issue No. 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF Issue No. 96-18").
Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas, and major customers.
innoVentry has determined that it has one operating and reportable segment,
which is the development, operation, and sale of RPMs that provide check
cashing, credit card cash advance, debit card withdrawal and other financial
services. innoVentry markets its products in the United States through its
direct sales force. Revenues are generated by users in the United States.
Advertising Expenses
innoVentry expenses the costs of advertising, including promotional
expenses, as incurred. For the year ended December 31, 1999, innoVentry
recognized advertising expenses of $613,000, which were included in "Sales and
marketing" expenses in the accompanying Statement of Operations.
Income Taxes
innoVentry uses the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are recognized
for the expected future tax consequences attributable to differences between the
financial reporting and tax reporting bases of existing assets and liabilities,
as well as for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax expense represents the net change in the
deferred tax asset or liability balance during the year. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. This amount, together with income
taxes currently payable or refundable for the current year, represents the total
income tax expense for the year.
For the periods to March 9, 1999, innoVentry was included in the
consolidated federal income tax return, and in certain consolidated and combined
state and local income tax returns, filed by Cash America. For periods beginning
March 9, 1999,
11
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innoVentry Corp.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
innoVentry has filed separate federal and certain separate state and local tax
returns according to the taxable activity of its operations. Pursuant to the
terms of innoVentry's tax matters agreement with Cash America, any reduction of
consolidated federal income tax liability that Cash America realizes as a result
of innoVentry's net operating losses prior to March 9, 1999 are not to be
treated as a benefit payable from Cash America to innoVentry.
Concentration of Credit Risk
Financial instruments, which potentially expose innoVentry to
concentrations of credit risk, consist primarily of cash investments and trade
accounts receivable. innoVentry invests cash which is not required for immediate
operating needs in a diversified portfolio of financial instruments issued by
institutions with investment-grade credit ratings. innoVentry limits the amount
of credit exposure to any one institution and to any one type of investment.
Investments generally mature within one year. innoVentry has not realized any
significant losses on these investments nor has it realized any significant
credit losses from its accounts receivable.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that derivatives be recognized in the balance sheet at fair value and
specifies the accounting for changes in fair value. In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133 - an
amendment to FASB Statement No. 133," to defer the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. Management does not
anticipate that the adoption of the new statement will have a significant impact
on earnings or the financial position of innoVentry.
3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS
The following is a summary of property, equipment, internal use
software, and leasehold improvements at December 31, 1999 (in thousands):
<TABLE>
<S> <C>
RPM equipment $ 11,731
RPM - work-in-process 8,295
Computer equipment, office equipment, and vehicles 3,829
Leasehold improvements 3,169
Internal use computer software 1,985
--------
29,009
Accumulated depreciation and amortization (3,364)
--------
$ 25,645
========
</TABLE>
12
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innoVentry Corp.
Notes to Financial Statements (continued)
3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS
(CONTINUED)
Computer equipment, office equipment, vehicles, and RPM equipment
include assets held under capital lease obligations with a cost basis of
$5,958,000. Accumulated depreciation and amortization includes depreciation
related to capital leased assets of $417,000.
At December 31, 1999, RPM - work in process includes subassembly
components for RPMs that are available-for-sale or use by innoVentry which have
not yet been put into service. As such, no depreciation expense has been
recorded related to this equipment.
For the year ended December 31, 1999, innoVentry capitalized $624,000
of costs related to internal use software and recognized related amortization of
$75,000.
innoVentry periodically evaluates the carrying amount of its long-lived
assets and applies the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
During 1999, innoVentry determined certain RPM equipment and RPM
work-in-progress would not support future technological requirements. innoVentry
expects to trade in those assets with the manufacturer during the third quarter
of the year ended December 31, 2000. Therefore, innoVentry recognized the
impairment of those assets and adjusted the cost basis of the equipment
scheduled for trade-in to reflect current market value and has recorded expense
of $4,727,000 during the year ended December 31, 1999.
4. DEBT OBLIGATIONS
Line of Credit with Affiliate
Under a revolving secured credit agreement with Wells Fargo, innoVentry
can borrow up to $8,000,000. Interest is payable monthly at the rate of 1% below
the prime rate on the first $5,000,000 of outstanding balances and 7.75% above
the prime rate on amounts outstanding in excess of $5,000,000. The credit
facility matures in February 2000 and is guaranteed by Wells Fargo & Co. At
December 31, 1999, there was $2,348,000 outstanding on the line of credit.
Effective February 25, 2000, innoVentry and Wells Fargo amended the
existing credit agreement to increase the aggregate amount of borrowings
available under the line of credit from $8,000,000 to $25,000,000 and extend the
maturity to February 2001. In consideration for this amendment, innoVentry
granted Wells Fargo & Co., or its assigns, a warrant to purchase up to 885,989
shares of innoVentry common stock at $0.01 per
13
<PAGE> 14
innoVentry Corp.
Notes to Financial Statements (continued)
4. DEBT OBLIGATIONS (CONTINUED)
share and paid an arrangement fee of $225,000 to Wells Fargo. Under the terms of
the amended agreement, interest is payable monthly at one of the following
rates, at the option of innoVentry: base rate (the greater of 1% below the prime
rate or 0.5% below the Federal funds rate), one-month LIBOR, three-month LIBOR,
or six-month LIBOR.
Due to Affiliate Under Contract Cash Arrangement
Under a contract cash arrangement, Wells Fargo supplies all cash
requirements for RPMs in substantially all locations where Wells Fargo is able
to transact operations. The cash remains the property of Wells Fargo until
dispensed from the machine through cash withdrawal transactions. Once the
customer transactions are processed by various third party processors with which
innoVentry contracts, reimbursements of amounts withdrawn and related fees are
deposited by the third party processors into innoVentry's demand deposit
accounts. innoVentry then reimburses Wells Fargo for the amounts withdrawn. The
arrangement expires in June 2000 and is renewable by either party for one-year
intervals. The arrangement is cancelable with 90-day notice after the initial
term by either innoVentry or Wells Fargo. The arrangement requires monthly
interest payments based on rates ranging from 1% to 6% per annum of the average
daily cash in use by innoVentry. At December 31, 1999, cash in innoVentry's
demand deposit accounts due but not yet remitted to Wells Fargo under the
arrangement was $12,951,000. For the year ended December 31, 1999, interest
expense incurred related to the arrangement was $389,000 and is included in
"Interest expense" in the accompanying Statement of Operations.
Note Payable to Stockholder
During 1999, innoVentry executed a note payable in the amount of
$2,900,000 to Cash America. The note accrues interest at 7.0% annually.
Principal and interest are payable the earlier of April 2004 or the sale of
innoVentry's common stock in an underwritten initial public offering yielding a
minimum of $25,000,000. At December 31, 1999, accrued interest related to the
note payable to stockholder of $153,000 was included within "Note and interest
payable to stockholder" in the accompanying Balance Sheet.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
innoVentry leases facilities and equipment under noncancelable
agreements which expire through October 2010. For the year ended December 31,
1999, innoVentry recorded rent expense of $1,320,000 included in "Operations"
expense in the accompanying Statement of Operations. Certain operating leases
entered into by innoVentry contain options that may extend the lease term beyond
the initial commitment period, subject to terms agreed to at lease inception.
For operating leases that contain predetermined fixed escalations of minimum
rentals, innoVentry recognizes the related rental expense on a straight-line
basis and records the difference between the recognized rental expense and
amounts payable under the leases as deferred rent. At December 31,
14
<PAGE> 15
innoVentry Corp.
Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
1999, this liability amounted to $147,000 and is included in "Other noncurrent
liabilities" in the accompanying Balance Sheet.
A facility lease beginning August 2000 is secured by a $2,800,000
irrevocable letter of credit issued by Wells Fargo. In conjunction with the
facility lease, innoVentry agreed to transfer 268,000 shares of common stock to
the lessor. On January 1, 2000, the shares were placed into escrow and will
transfer to the lessor upon delivery of the building to innoVentry.
innoVentry leases office space from Cash America pursuant to an
operating lease expiring on the earlier of December 2000 or 120 days from notice
by innoVentry of its intention to vacate. The rental commitment under the lease
totals $152,000 through December 2000. For the year ended December 31, 1999,
innoVentry paid $154,000 in rental expense to Cash America included in
"Operations" expense in the accompanying Statement of Operations.
innoVentry has entered into a master lease facility with Wells Fargo
Equipment Finance, Inc., guaranteed by Wells Fargo & Co., which provides for the
sale to Wells Fargo Equipment Finance, Inc. and lease back of up to $17,000,000
of RPM equipment by innoVentry. The lease arrangements are secured by pledges of
all equipment leased under the arrangements. Principal and interest are payable
monthly at rates ranging between 1% to 2% above the 5-year treasury note rate
and are fixed at the time of financing for 5 year terms each. During the year
ended December 31, 1999, $5,751,000 of equipment to be used by innoVentry in
ongoing operations was sold and leased back under this facility. The
transactions resulted in a net gain of $544,000, which has been deferred and
will be recognized as a reduction of depreciation expense over the life of the
related lease
The following is a summary of future minimum rental commitments for
noncancelable leases at December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
2000 $ 1,385 $ 2,277
2001 1,247 3,710
2002 1,247 3,810
2003 1,247 3,916
2004 2,023 3,906
Thereafter -- 16,197
-------- --------
7,149 $ 33,816
========
Less: Amount representing interest (1,448)
--------
Present value of net minimum capital
lease payments $ 5,701
========
</TABLE>
15
<PAGE> 16
innoVentry Corp.
Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Purchase Commitments
During the year ended December 31, 1999, innoVentry purchased
$14,088,000 of RPM components and services from a supplier that is a significant
investor in innoVentry's Series B convertible preferred stock that was issued in
October 1999. At December 31, 1999, $7,777,000 was due to the supplier and is
included in "Accounts payable to stockholder and affiliate" in the accompanying
Balance Sheet. At December 31, 1999, innoVentry had remaining purchase
commitments of approximately $26,853,000 with the supplier. Additionally, at
December 31, 1999, innoVentry had firm purchase commitments with various other
suppliers of equipment totaling $7,290,000.
6. STOCKHOLDERS' EQUITY
Effective January 1, 1999, Cash America returned 1,500 shares of Series
A preferred stock, and 8,500 shares of Series B preferred stock to innoVentry.
This represented all of the issued and outstanding preferred stock of
innoVentry, and the return of this preferred stock was recorded as additional
paid-in capital on the common stock held by Cash America. No additional shares
of common stock were issued in exchange for the contributed preferred stock.
In March 1999, innoVentry's Board of Directors eliminated the
then-existing designation of Series A and Series B preferred stock. The Board of
Directors of innoVentry authorized new Series A and Series B convertible
preferred stock on March 9, 1999, and September 29, 1999, respectively. Both new
convertible preferred series are convertible at the option of preferred
stockholders immediately after the date of issuance into common stock of
innoVentry on a one-for-one basis subject to adjustment for subsequent common
stock splits, dividends, distributions, or subdivisions. The new preferred
shares will automatically convert into common stock, on the same basis as a
voluntary conversion, upon the occurrence of the earlier of an initial public
offering yielding gross proceeds to innoVentry in excess of $25,000,000, the
liquidation, winding up or dissolution of innoVentry whereby the proceeds are
$75,000,000 or more, or the date specified by agreement of the holders of at
least 66 2/3% of voting power of the then-outstanding shares of the new Series
A or Series B convertible preferred stock. The number of voting rights of
preferred stock is equal to the resulting number of common shares if the new
preferred shares were converted to common stock.
The preferred shares may vote along with the holders of common stock as
a single class on all matters on which the common stockholders are entitled to
vote.
16
<PAGE> 17
innoVentry Corp.
Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (CONTINUED)
During 1999, innoVentry sold 8,200,000 shares of common stock to
certain members of management and advisors to innoVentry at prices ranging from
$0.20 to $1.82 per share. Of these 8,200,000 shares, 6,600,000 shares were
financed using notes receivable from stockholders. These full recourse notes
receivable bear interest at a range from 4.83% to 5.22% and are due the earlier
of five years after grant, voluntary resignation, sale or liquidation of holder,
or one year after an initial public offering. The notes receivable related to
these stock purchases are classified as "Notes receivable from stockholders" in
the accompanying Balance Sheet.
7. STOCK-BASED COMPENSATION
Under the 1999 Stock Plan (the "Plan"), innoVentry grants restricted
common stock purchase rights and options to purchase shares of its common stock
to employees, officers and directors of innoVentry. At December 31, 1999,
innoVentry has reserved 17,700,000 shares of common stock for issuance through
the Plan. At December 31, 1999, 9,862,000 shares were available for future
grants under the Plan. The Board of Directors administers the Plan and may award
a number of forms of stock-based compensation to eligible participants including
incentive and nonqualified stock options which vest over a four-year period and
have a ten-year contractual life. Restricted stock purchase rights may also be
granted under the Plan and these rights vest over a three-year period.
The following summarizes stock option activity and related information
during the period from Plan inception to December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES EXERCISE PRICE PRICE
--------- -------------- ---------
<S> <C> <C> <C> <C>
Outstanding at March 9, 1999 (Plan inception) -- $ -- $ --
Granted 8,271,000 $0.20 - $1.82 $0.51
Forfeited (433,000) $0.20 - $1.82 $0.21
--------- ----- ----- -----
Outstanding at December 31, 1999 7,838,000 $0.20 - $1.82 $0.53
========= ===== ===== =====
</TABLE>
17
<PAGE> 18
innoVentry Corp.
Notes to Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
Exercise prices for stock options outstanding as of December 31, 1999, and the
weighted average remaining contractual life were as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
--------------- ----------- ---------------------
<S> <C> <C>
$0.20 6,241,000 9.29 years
$1.82 1,597,000 9.88 years
---------
7,838,000
=========
</TABLE>
None of the options outstanding are exercisable at December 31, 1999.
As discussed in Note 2, innoVentry has elected to follow APB Opinion No. 25 and
related interpretations in accounting for its employee and director stock-based
awards. Under APB Opinion No. 25, innoVentry does not recognize compensation
expense with respect to such awards if the exercise price equals or exceeds the
fair value of the underlying security on the date of grant and other terms are
fixed.
The fair value of options awarded for the purpose of the alternative fair value
disclosures required by SFAS No. 123 was estimated as of the dates of grant. For
the purposes of innoVentry's pro forma disclosures, the fair value of options
granted during the year ended December 31, 1999, was determined using the
Black-Scholes model with risk-free interest rates ranging from 5.28% to 6.38%,
expected lives of 7 years, expected volatility of 60%, and a dividend yield of
zero. The weighted average fair value of the options granted during 1999 was
$0.75. The estimated fair value of the options is amortized to expense over the
options' vesting periods. For the year ended December 31, 1999, pro forma net
loss would have increased to $41,442,000 if compensation cost associated with
innoVentry's stock-based compensation plans had been determined using the
Black-Scholes model described above.
In connection with stock option grants to employees and restricted
stock granted to directors during the year ended December 31, 1999, innoVentry
recorded deferred stock compensation of $5,591,000 representing the difference
between the exercise price and the deemed fair value of innoVentry common stock
on the date such stock options and restricted stock were granted. Such amount is
included as a reduction of stockholders' equity and is being amortized to
operations on a graded vesting method over the related vesting period of each
respective option or purchase right. During the year ended December 31, 1999,
innoVentry recorded amortization of deferred stock compensation expense of
$1,270,000. At December 31, 1999, $4,321,000 of deferred stock compensation
remained unamortized.
During 1999, innoVentry also issued to non-employees stock purchase
rights for 1,100,000 shares of common stock outside of the Plan. These purchase
rights were fully vested, nonforfeitable and fully exercisable upon grant.
innoVentry recorded stock
18
<PAGE> 19
innoVentry Corp.
Notes to Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
compensation in the amount of $98,000 based upon the fair value at the date of
issuance calculated in accordance with EITF Issue No. 96-18. At December 31,
1999, $876,000 of deferred stock compensation remained unamortized.
8. INCOME TAXES
For the year ended December 31, 1999 the significant components of the
benefit for income taxes are as follows (in thousands):
<TABLE>
<S> <C>
Current:
Federal $ 321
State 143
-------
464
Deferred:
Federal (3,251)
State --
-------
(3,251)
-------
Total income tax benefit $(2,787)
=======
</TABLE>
The 1999 benefit for income taxes results in an effective tax rate that
differs from the federal statutory rate primarily due to non-deductible goodwill
amortization, non-deductible deferred stock compensation expense, and an
increase in the valuation allowance amortization for deferred tax assets. The
deferred tax benefit results from a reduction in beginning of the year net
deferred tax liability balances.
At December 31, 1999, the significant components of the deferred tax
liabilities and assets were as follows (in thousands):
<TABLE>
<S> <C>
Deferred tax liabilities:
Property and equipment $ 474
Software development costs 4,300
--------
Total deferred tax liabilities 4,774
--------
Deferred tax assets:
Net operating loss carryforwards 15,126
Reserves and allowances 1,378
Intangible assets 129
Other, net 245
--------
Total deferred tax assets 16,878
Valuation allowance (12,104)
--------
Net deferred tax assets 4,774
--------
Net deferred tax liabilities $ --
========
</TABLE>
19
<PAGE> 20
innoVentry Corp.
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Deferred tax assets are recognized to the extent management believes,
based on available evidence, that it is more likely than not that they will be
realized. Due to the uncertainty surrounding innoVentry's ability to realize
benefits associated with its net operating losses, a valuation allowance was
established against its net deferred tax assets. During the year ended December
31, 1999, the valuation allowance increased by $10,994,000.
At December 31, 1999, innoVentry had federal net operating loss
carryforwards of approximately $41,042,000, which expire in the years 2009 to
2019. innoVentry has state net loss carryforwards of lesser amounts which expire
in the years 2004 to 2019.
9. RETIREMENT SAVINGS PLAN
innoVentry maintains an employee savings and retirement plan which is
intended to be qualified under Section 401(k) of the Internal Revenue Code and
is available to substantially all full-time employees of innoVentry. The plan
provides for tax-deferred salary deductions and after-tax employee
contributions. Contributions include employee salary deferral contributions and
discretionary employer contributions. For the year ended December 31, 1999,
employer discretionary contributions totaled $104,000 and are included in
"General and administrative" expenses in the accompanying Statement of
Operations.
10. LEGAL PROCEEDINGS
innoVentry is party to various claims, investigations, and legal
proceedings arising out of the normal course of its business. While there can be
no assurance that an adverse determination of any such matters could not have a
material adverse impact in any future period, management does not believe, based
upon information known to it, that the final resolution of any of these matters
will have a material adverse effect upon innoVentry's financial position and
annual results of operations and cash flows.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1999, the carrying value of certain of innoVentry's
financial instruments approximated their fair values. These financial
instruments include cash and cash equivalents, short-term investments in
marketable securities, accounts receivable, accounts payable and accrued
expenses, accounts payable to stockholder and affiliate, borrowings under the
line of credit with affiliate, amounts due to affiliate under contract cash
arrangement, and certain other assets and liabilities that are considered
financial instruments. Carrying values were estimated to approximate fair values
for these financial instruments as they are short-term in nature and are
receivable or payable on demand.
The fair value of innoVentry's note and interest payable to stockholder
and capital lease obligations with affiliate were estimated using a discounted
cash flow model and a discount rate based on yields appropriate for the risks
related to the financial
20
<PAGE> 21
innoVentry Corp.
Notes to Financial Statements (continued)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
instruments. The fair value of the line of credit with affiliate at December 31,
1999 was $1,472,000. The fair values of the capital lease obligations with
affiliate approximate their carrying values.
12. YEAR 2000 (UNAUDITED)
Although year 2000 risks may decrease with the passage of time and
innoVentry has experienced no year 2000 related issues to date, innoVentry will
continue to monitor the implications of year 2000.
21
<PAGE> 22
Report of Independent Auditors
Board of Directors
innoVentry Corp.
We have audited the accompanying balance sheet of innoVentry Corp. as of
December 31, 1999, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of innoVentry Corp. at December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.
As discussed in Note 1 to the financial statements, innoVentry's recurring
losses from operations, working capital deficit and net capital deficiency raise
substantial doubt about its ability to continue as a going concern. Management's
plans as to these matters are also described in Note 1. The 1999 financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
San Francisco, California
January 24, 2000
except for Note 4, as to which the date is
February 25, 2000
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.1 Consent of PriceWaterhouseCoopers LLP
23.2 Consent of Ernst & Young LLP
</TABLE>
