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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the year ended December 31, 1999, or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 the voting stock held by non-affiliates of
the registrant, based upon the last reported sales price on the Nasdaq National
Market on March 28, 2000 is $25,569,888. As of March 28, 2000, there were
8,849,909 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on June 29, 2000 is incorporated by reference in Part
III, Items 10, 11, 12 and 13.
FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-K
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For the Year Ended December 31, 1999
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
SIGNATURES
PART I
Item 1. Business
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General
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First Cash Financial Services, Inc. (the "Company") is the nation's third
largest publicly traded pawnshop operator and currently owns 114 pawn stores in
Texas, Oklahoma, Washington, D.C., Maryland, Missouri, South Carolina, Virginia
and Mexico. The Company's pawn stores engage in both consumer finance and
retail sales activities. The Company's pawn stores provide a convenient source
for consumer loans, lending money against pledged tangible personal property
such as jewelry, electronic equipment, tools, sporting goods and musical
equipment. These pawn stores also function as retailers of previously-owned
merchandise acquired in forfeited pawn transactions and over-the-counter
purchases from customers. The Company's pawn stores also offer short-term,
unsecured advances ("payday advances").
The Company also currently owns 33 check cashing and payday advance stores
in California, Washington, Oregon, Illinois and Washington D.C. These stores
provide a broad range of consumer financial services, including check cashing,
money order sales, wire transfers, bill payment services and payday advances.
The Company also owns Answers, etc., a company which provides computer hardware
and software to over 1,900 third party check cashing and payday advance
operators throughout the country, as well as ongoing technical support. In
addition, the Company is a 50% partner in Cash & Go, Ltd., a joint venture which
owns financial services kiosks located inside convenience stores. For the
fiscal year ended December 31, 1999, the Company's revenues were derived 54%
from retail activities, 42% from lending activities, and 4% from other sources,
including check-cashing fees.
Management believes the pawnshop industry is highly fragmented with
approximately 15,000 stores in the United States and is in the early stages of
achieving greater efficiencies through consolidation. The five publicly traded
pawnshop companies operate less than 7% of the total pawnshops in the United
States. Management believes significant economies of scale, increased operating
efficiencies, and revenue growth are achievable by increasing the number of
stores under operation and introducing modern merchandising techniques, point
of-sale systems, improved inventory management and store remodeling. The
Company's objectives are to increase consumer loans and retail sales through new
store openings and to enhance operating efficiencies and productivity. In
addition, management believes that revenues and operating income of its existing
pawn stores can be enhanced by continuing to add consumer financial services,
such as payday advances, which will attract new customers to its pawn stores,
and provide a broader array of services to its existing customer base. During
the year ended December 31, 1999, the five months ended December 31, 1998, and
the years ended July 31, 1998 and July 31, 1997, the Company added 10, 20, 29
and 7 pawn stores to its network, respectively.
The Company made its initial entry into the check cashing and payday
advance business during the twelve months ended July 31, 1998, with the purchase
of 11 stores in California and Washington. Management estimates there are
approximately 7,000 such check cashing and payday advance locations throughout
the United States. This industry is experiencing very rapid growth and the
Company is currently positioning itself to take maximum advantage of the growth
in this industry as both a store-front operator, and as a service-provider to
third-party operators via its wholly-owned software company, Answers, etc.
During the year ended December 31, 1999, the five months ended December 31,
1998, and the year ended July 31, 1998, the Company added 4, 16 and 11 check
cashing and payday advance stores to its network, respectively.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as otherwise
indicated, the term "Company" includes its wholly owned subsidiaries, American
Loan & Jewelry, Inc., Famous Pawn, Inc., JB Pawn, Inc., Miraglia, Inc., One Iron
Ventures, Inc., Capital Pawnbrokers, Inc., Silver Hill Pawn, Inc., Elegant
Floors, Inc. and First Cash, S.A. De C.V. The Company's principal executive
offices are located at 690 East Lamar Blvd., Suite 400, Arlington, Texas 76011,
and its telephone number is (817)460-3947.
Industry
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The pawnshop industry in the United States is an established industry, with
the highest concentration of pawnshops being in the Southeast and Southwest.
The operation of pawnshops is governed primarily by state laws, and accordingly,
states that maintain pawn laws most conducive to profitable operations have
historically seen the greatest development of pawnshops. The Company believes
that the majority of pawnshops are owned by individuals operating one to three
locations. Management further believes that the highly fragmented nature of the
industry is due in part to 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, several pawn operators have begun to develop multi-unit
chains through acquisitions and new store openings. As of March 28, 2000, the
five publicly traded pawnshop companies operated approximately 940 stores in the
United States. Accordingly, management believes that the industry is in the
early stages of consolidation.
The check cashing and payday advance industry is a relatively new industry,
and management estimates that there are approximately 7,000 check cashing and
payday advance locations throughout the United States. Some states have enacted
formal check cashing laws which 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". Management believes that at least half of the
check cashing locations in the United States are operated by individuals owning
from one to ten locations. Management further believes that this fragmented
nature of the industry is due among other factors to the lack of qualified
management personnel, the difficulty of developing adequate financial controls
and reporting systems, and the lack of financial resources.
Business Strategy
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The Company's primary business plan is to significantly expand its payday
advance operations by opening new stores in Texas and other states, by
accelerating growth of its joint venture, Cash & Go, Ltd, which operates payday
advance and check cashing kiosks inside convenience stores, and by expanding its
payday advance operations in its existing pawn stores. The Company also plans
to expand operations of its computer software subsidiary, Answers, etc., by
offering off-site data processing and storage to its existing customer base, and
by facilitating the introduction of payday advances to this same customer base.
Secondarily, the Company also plans to open new pawn stores in selective
markets, including Mexico, and to selectively acquire check cashing and payday
advance stores.
New Store Openings
The Company has opened 18 new pawn stores and seven new check
cashing/payday advance stores since its inception and currently intends to open
additional pawn and check cashing/payday advance stores in locations where
management believes appropriate demand and other favorable conditions exist. In
addition, the Company's joint venture, Cash & Go, Ltd., has opened 17 financial
services kiosks inside convenience stores since its inception in August 1999.
Management seeks to locate new stores where demographics are favorable and
competition is limited. It is the Company's experience that after a suitable
location has been identified and a lease and licenses are obtained, a new store
can be ready for business within six weeks. The investment required to open a
new pawn store includes inventory, funds available for pawn loans, store
fixtures, security systems, computer equipment, and start-up losses. Although
the total investment varies and is difficult to predict for each location, it
has been the Company' experience that between $200,000 and $300,000 is required
to fund a new pawn store for the first six months of operation. Because
existing pawn stores already have an established customer base, loan portfolio,
and retail-sales business, acquisitions generally contribute more quickly to
revenues than do start-up stores. The Company estimates that approximately
$100,000 to $150,000 is required to fund a new check cashing/payday advance
store for the first six months of operation, which includes investments for
leasehold improvements, equipment, store operating cash, and start-up losses.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and the
check cashing/payday advance industry, as well as the availability of "mom &
pop" sole proprietor pawnshops willing to sell their stores, the Company
believes that acquisition opportunities as well as favorable new store locations
exist.
The timing of any future acquisitions is based on identifying suitable
stores and purchasing them on terms that are viewed as favorable to the Company.
Before making an acquisition, management typically studies a demographic
analysis of the surrounding area, considers the number and size of competing
stores, and researches regulatory issues. Specific pawn store acquisition
criteria include an evaluation of the volume of annual loan transactions,
outstanding loan balances, historical redemption rates, the quality and quantity
of inventory on hand, and location and condition of the facility, including
lease terms. Factors involved in evaluating the acquisition of check
cashing/payday advance stores include the annual volume of transactions,
location and condition of facilities, and a demographic evaluation of the
surrounding area to determine the potential for the Company's payday advance
product.
Store Clusters
Whether acquiring an existing store or opening a new store, the Company
seeks to establish clusters of several stores in a specific geographic area in
order to achieve certain economies of scale relative to supervision, purchasing
and marketing. In Texas, such clusters have been established in the Dallas/Fort
Worth metroplex, the Rio Grande Valley area, the Corpus Christi area and the El
Paso area. Store clusters have also been established in the St. Louis, Missouri
area, the Oklahoma City, Oklahoma area, in Washington D.C. and its surrounding
Maryland suburbs, in Baltimore, Maryland, in Northern California, in the
Chicago, Illinois area, in South Carolina, and in the Pacific Northwest. The
Company currently plans to continue its expansion in existing markets in Texas,
Northern California, the Pacific Northwest and Mexico, and to enter new markets
in other states with favorable demographics and regulatory environments.
Enhance Productivity of Existing and Acquired Stores
The primary factors affecting the profitability of the Company's existing
store base are the level of loans outstanding, the volume of retail sales and
gross profit on retail sales, the volume of check cashing and related consumer
financial services, and the control of store expenses. To increase customer
traffic, which management believes is a key determinant to increasing its
stores' profitability, the Company has taken several steps to distinguish its
stores from traditional pawn and check cashing/payday advance stores and to make
customers feel more comfortable. In addition to well-lit parking facilities,
several of the stores' exteriors display an attractive and distinctive awning
similar to those used by contemporary convenience and video rental stores. The
Company also has upgraded or refurbished the interior of certain of its stores
and improved merchandise presentation by categorizing items into departments,
improving the lighting and installing better in-store signage.
Operating Controls
The Company has an organizational structure that it believes is capable of
supporting a larger, multi-state store base. Moreover, the Company has
installed an employee training program for both store and corporate-level
personnel that stresses productivity and professionalism. Each store is
monitored on a daily basis from corporate headquarters via an online, real-time
computer network, and the Company has strengthened its operating and financial
controls by increasing its internal audit staff as well as the frequency of
store audit visits. Management believes that the current operating and
financial controls and systems are adequate for the Company's existing store
base and can accommodate reasonably foreseeable growth in the near-term.
Pawn Lending Activities
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The Company's pawn stores loan money against the security of pledged goods.
The pledged goods are tangible personal property generally consisting of
jewelry, electronic equipment, tools, sporting goods and musical equipment. The
pledged goods provide security to the Company for the repayment of the loan, as
pawn loans cannot be made with personal liability to the borrower. Therefore,
the Company does not investigate the creditworthiness of the borrower, relying
instead on the marketability and sale value of pledged goods as a basis for its
credit decision. The Company contracts for a pawn service charge in lieu of
interest to compensate it for the loan. The statutory service charges on loans
at its Texas stores range from 12% to 240% on an annualized basis depending on
the size of the loan, and from 36% to 240% on an annualized basis at the
Company's Oklahoma stores. Loans made in the Maryland stores bear service
charges of 144% to 240% on an annualized basis, while loans in Virginia earn
120% to 180% annually. In Washington, D.C., a flat $2 charge per month applies
to all loans of up to $40, and a 48% to 60% annualized service charge applies to
loans of greater than $40. In Missouri, loans bear a total service and storage
charge of 240% on an annualized basis, and South Carolina rates range from 60%
to 300%. As of December 31, 1999, the Company's average loan per pawn ticket
was approximately $89. Service charges from pawn loans during the year ended
December 31, 1999, the five months ended December 31, 1998, the year ended July
31, 1998 and the year ended July 31, 1997 accounted for approximately 42%, 47%,
58% and 61%, respectively, of the Company's total gross profit.
At the time a pawn transaction is entered into, a pawn loan agreement,
commonly referred to as a pawn ticket, is delivered to the borrower that sets
forth, among other items, the name and address of the pawnshop, borrower's name,
borrower's identification number from his/her driver's license or other
identification, date, identification and description of the pledged goods,
including applicable serial numbers, amount financed, pawn service charge,
maturity date, total amount that must be paid to redeem the pledged goods on the
maturity date, and the annual percentage rate.
The amount the Company is willing to finance typically is based on a
percentage of the estimated sale value of the collateral. There are no minimum
or maximum loan to fair market value restrictions in connection with the
Company's lending activities. The basis for the Company's determination of the
sale value include such sources as catalogs, blue books and newspapers. The
Company also utilizes its computer network to recall recent selling prices of
similar merchandise in its own stores. These sources, together with the
employees' experience in selling similar items of merchandise in particular
stores, influence the determination of the estimated sale value of such items.
The Company does not utilize a standard or mandated percentage of estimated sale
value in determining the amount to be financed. Rather, the employee has the
authority to set the percentage for a particular item and to determine the ratio
of loan amount to estimated sale value with the expectation that, if the item is
forfeited to the pawnshop, its subsequent sale should yield a gross profit
margin consistent with the Company's historical experience. It is the Company's
policy to value merchandise on a conservative basis to avoid the risks
associated with over-valuation. The pledged property is held through the term
of the loan, which is 30 days in Texas, South Carolina, Missouri, Virginia,
Oklahoma and Maryland, with an automatic extension period of 15 to 60 days
depending on state laws, unless the loan is earlier paid or renewed. In
Washington, D.C., pledged property is held for 30 days. In the event the
borrower does not pay or renew a loan within 90 days in Texas, South Carolina
and Missouri, 60 days in Oklahoma, 45 days in Maryland and Virginia, and 30 days
in Washington, D.C., the unredeemed collateral is forfeited to the Company and
becomes inventory available for general liquidation or sale in one of the
Company's stores. The Company does not record loan losses or charge-offs
because if the loan is not paid, the principal amount loaned plus the 30 days of
accrued pawn service charges becomes the carrying cost of the forfeited
collateral ("inventory") that is recovered by sale.
The recovery of the principal and accrued pawn service charge as well as
realization of gross profit on sales of inventory is dependent on the Company's
initial assessment of the property's estimated sale value. Improper assessment
of the sale value of the collateral in the lending function can result in
reduced marketability of the property and sale of the property for an amount
less than the principal plus accrued pawn service charge. For the year ended
December 31, 1999, the five months ended December 31, 1998, the year ended July
31, 1998 and the year ended July 31, 1997, the Company's annualized yield on
average pawn loan balance was 145%, 142%, 136% and 134%, respectively.
Payday Advance Activities
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The Company's check cashing/payday advance stores make unsecured, short
term advances in which the customer writes the store a personal check in
exchange for cash, net of a transaction fee. Fees for payday advances may be
regulated by state law and are generally 15% to 18% of the amount advanced per
transaction. The term of these advances is thirty days or less. Service
charges from payday advances during the year ended December 31, 1999, the five
months ended December 31, 1998, and the years ended July 31, 1998 and 1997
accounted for approximately 24%, 12%, 2% and 0%, respectively, of the Company's
total gross profit.
To qualify for a payday advance, customers generally must have proof of
steady income, a checking account with a minimum of returned items within a
specified period, and valid identification. Upon completing an application and
subsequent approval, the customer writes a check on their personal checking
account for the amount of the advance, plus applicable fees. At maturity, the
customer may either return to the store and pay off the advance with cash, in
which case the check is returned to the customer, or the store can deposit the
check into its checking account. A significant amount of payday advance checks
deposited by the Company are returned by the bank; however, a large percentage
of these bad debts are subsequently collected by the Company through various
means. The profitability of the Company's check cashing stores is dependent
upon adequate collection of these returned items.
Retail Activities
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The Company acquires merchandise inventory primarily through forfeited pawn
loans and purchases of used goods from the general public. Sales of inventory
during the year ended December 31, 1999, the five months ended December 31,
1998, and the years ended July 31, 1998 and 1997 accounted for approximately
54%, 60%, 64% and 66%, respectively, of the Company's total revenues for these
periods. For the year ended December 31, 1999, the five months ended December
31, 1998, and the years ended July 31, 1998 and 1997, the Company realized gross
profit margins on merchandise sales of 32%, 36%, 33% and 31%, respectively.
By operating multiple stores, the Company is able to transfer inventory
between stores to best meet consumer demand. The Company has established the
necessary internal financial controls to implement such inter-store transfers.
Merchandise acquired by the Company through defaulted pawn loans is carried
in inventory at the amount of the related pawn loan plus service charges accrued
for only the initial 30-day term. Management believes that this practice
lessens the likelihood that the Company will incur significant, unexpected
inventory devaluations.
The Company does not provide financing to purchasers of its merchandise nor
does it give the prospective buyer any warranties on the merchandise purchased.
Nevertheless, the Company may, at its discretion, refund purchases if
merchandise is returned because it was damaged or not in good working order when
purchased. The Company permits its customers to purchase inventory on a
"layaway" plan. Should the customer fail to make a required payment, the item
is returned to inventory and previous payments are forfeited to the Company.
Pawnshop Operations
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The typical Company store is a free-standing building or part of a small
retail strip shopping center with adequate, well-lit parking. Management has
established a standard store design intended to distinguish the Company's stores
from the competition. The design consists of a well-illuminated exterior with a
distinctive awning and a layout similar to a contemporary convenience store or
video rental store. The Company's stores are typically open six to seven days a
week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.
The Company's computer system permits a store manager or clerk to recall
rapidly the cost of an item in inventory, the date it was purchased as well as
the prior transaction history of a particular customer. It also facilitates the
timely valuation of goods by showing values assigned to similar goods in the
past. The Company has networked its stores to permit the Company's headquarters
to more efficiently monitor each store's operations, including sales, interest
income, loans written and redeemed, and changes in inventory.
The Company attempts to attract retail shoppers seeking bargain prices
through the use of seasonal promotions, special discounts for regular customers,
prominent display of impulse purchase items such as jewelry and tools, tent
sales and sidewalk sales, and a layaway purchasing plan. The Company attempts
to attract and retain pawn loan customers by lending a competitively large
percentage of the estimated sale value of items presented for pledge and by
providing quick loan, renewal and redemption service in an appealing atmosphere.
As of March 28, 2000, the Company operated pawn stores in the following
markets:
Number of
Locations
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Texas:
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Dallas/Fort Worth metropolitan area............ 27
Corpus Christi................................. 8
South Texas.................................... 15
El Paso........................................ 6
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56
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Missouri:
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St. Louis metropolitan area.................... 3
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3
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Oklahoma:
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Oklahoma City.................................. 5
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5
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South Carolina:
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South Carolina................................. 13
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13
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Mexico:
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Mexico......................................... 5
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5
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Mid Atlantic:
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Baltimore, Maryland............................ 7
Washington, D.C. and surrounding Maryland
suburbs....................................... 23
Virginia....................................... 2
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32
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Total.......................................... 114
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Each pawnshop employs a manager, one or two assistant managers, and between
one and eight sales personnel, depending upon the size, sales volume and
location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to an
area supervisor who typically oversees four to seven store managers. Each area
supervisor reports to one of four regional vice-presidents.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make loans that achieve
optimum redemption rates, to be effective sales people and to provide prompt and
courteous service. Therefore, the Company trains its employees through direct
instruction and on-the-job loan and sales experience. The new employee is
introduced to the business through an orientation and training program that
includes on-the-job training in lending practices, layaways, merchandise
valuation and general administration of store operations. Certain experienced
employees receive training and an introduction to the fundamentals of management
to acquire the skills necessary to advance into management positions within the
organization. Management training typically involves exposure to income
maximization, recruitment, inventory control and cost efficiency. The Company
maintains a performance-based compensation plan for all store employees, based,
among other factors, on sales, gross profits and special promotional contests.
Check Cashing/Payday Advance Operations
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The Company's check cashing/payday advance locations are typically part of
a small retail strip shopping center with adequate, well-lit parking.
Management has established a standard store design intended to distinguish the
Company's stores from the competition. The design consists of a well
illuminated exterior with a lighted sign, and distinctive, conservative window
signage. The interiors usually feature an ample lobby, separated from employee
work areas by floor-to-ceiling teller windows. The Company's stores are
typically open six to seven days a week from 9:00 a.m. to between 6:00 p.m. and
9:00 p.m.
Computer operating systems in the Company's check cashing/payday advance
stores allow a store manager or clerk to recall rapidly customer check cashing
histories, payday advance histories, and other vital information. The Company
attempts to attract customers primarily through television advertisements and
yellow page advertisements.
As of March 28, 2000, the Company operated check cashing/payday advance
stores in the following markets:
Number of
Locations
---------
Chicago, Illinois........................ 11
Washington, D.C.......................... 2
Oregon................................... 2
Northern California...................... 15
Washington............................... 3
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33
===
Each check cashing store employs a manager, an assistant manager, and
between three and eight tellers, depending upon the size, sales volume and
location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to a
district manager who typically oversees two to five store managers.
Competition
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The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may adversely
affect the Company's revenues, profitability and ability to expand.
The Company competes primarily with other pawn store operators and check
cashing/payday advance operators. Both the pawnshop and check cashing/payday
advance industries are characterized by a large number of independent owner
operators, some of whom own and operate multiple locations. The Company
believes that the primary elements of competition in these businesses are store
location, the ability to lend competitive amounts on both pawn loans and payday
advances, customer service, and management of store employees. In addition, the
Company competes with financial institutions, such as consumer finance
companies, which generally lend on an unsecured as well as on a secured basis.
Other lenders may and do lend money on terms more favorable than those offered
by the Company. Many of these competitors have greater financial resources than
the Company.
In its retail operations, the Company's competitors include numerous retail
and wholesale stores, including jewelry stores, gun stores, discount retail
stores, consumer electronics stores and other pawnshops. Competitive factors in
the Company's retail operations include the ability to provide the customer with
a variety of merchandise items at attractive prices. Many retailers have
significantly greater financial resources than the Company.
In addition, the Company faces competition in its acquisition program.
There are several other publicly held pawnshop and check cashing companies,
including Cash America International, Inc., ACE Cash Express, Inc. and EZCORP,
Inc., that have announced active expansion and acquisition programs as well.
Management believes that the increased competition for attractive acquisition
candidates may increase acquisition costs.
Regulation
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General
The Company is subject to extensive regulation in several jurisdictions in
which it operates, including jurisdictions that regulate pawn lending, payday
advance fees and check cashing fees. The Company is also subject to federal and
state regulation relating to the reporting and recording of certain currency
transactions. There can be no assurance that additional state or federal
statutes or regulations will not be enacted at some future date which could
inhibit the ability of the Company to expand, significantly decrease the service
charges for lending money, or prohibit or more stringently regulate the sale of
certain goods, any of which could cause a significant adverse effect on the
Company's future prospects.
State Regulations
The Company operates in seven states that have licensing and/or fee
regulations on pawn loans, including Texas, Oklahoma, Maryland, Virginia, South
Carolina, Washington DC, and Missouri. The Company is licensed in each of the
states in which a license is currently required for it to operate as a pawn
lender. The Company's fee structures are at or below the applicable rate
ceilings adopted by each of these states. In addition, the Company is in
compliance with the net asset requirements in states where it is required to
maintain certain levels of liquid assets for each pawn store it operates in the
applicable state.
The Company also operates in states which have licensing and/or fee
regulations on check cashing and payday advances, including California,
Washington, Missouri, South Carolina, Oregon, Illinois and Washington DC. The
Company is licensed in each of the states in which a license is currently
required for it to operate as a check casher and/or payday lender. In addition,
in some jurisdictions, check cashing companies or money transmission agents are
required to meet minimum bonding or capital requirements and are subject to
record-keeping requirements.
Federal Regulations
Under the Bank Secrecy Act regulations of the U.S. Department of the
Treasury (the "Treasury Department"), transactions involving currency in an
amount greater than $10,000 or the purchase of monetary instruments for cash in
amounts from $3,000 to $10,000 must be recorded. In general, every financial
institution, including the Company, must report each deposit, withdrawal,
exchange of currency or other payment or transfer, whether by, through or to the
financial institution, that involves currency in an amount greater than $10,000.
In addition, multiple currency transactions must be treated as single
transactions if the financial institution has knowledge that the transactions
are by, or on behalf of, any person and result in either cash in or cash out
totaling more than $10,000 during any one business day.
Other
In jurisdictions that do not have favorable payday lending laws, the
Company has entered into agreements with out-of-state federally insured
financial institutions to act as a loan servicer for such banks in that
jurisdiction. The Company receives a fee from the financial institution for
acting as that institution's loan servicer.
With respect to firearms and ammunition sales, each pawn store must comply
with the regulations promulgated by the Department of the Treasury-Bureau of
Alcohol, Tobacco and Firearms which require each pawn store dealing in firearms
to maintain a permanent written record of all firearms received or disposed of
and a similar record for all ammunition sales. The Company does not currently
sell handguns to the public.
Under some municipal ordinances, pawn stores must provide the police
department having jurisdiction copies of all daily transactions involving pawn
loans and over-the-counter purchases. These daily transaction reports are
designed to provide the local police with a detailed description of the goods
involved including serial numbers, if any, and the name and address of the owner
obtained from a valid identification card. If these ordinances are applicable,
a copy of the transaction ticket is provided to local law enforcement agencies
for processing by the National Crime Investigative Computer to determine
rightful ownership. Goods held to secure pawn loans or goods purchased which
are determined to belong to an owner other than the borrower or seller are
subject to recovery by the rightful owners.
In connection with pawnshops operated by the Company, there is a risk that
acquired merchandise may be subject to claims of rightful owners. Historically,
the Company has not found these claims to have a material adverse effect upon
results of operations. The Company does not maintain insurance to cover the
costs of returning merchandise to its rightful owners.
There can be no assurance that additional local, state or federal
legislation will not be enacted or that existing laws and regulations will not
be amended which could have a material adverse effect on the Company's
operations and financial condition.
Employees
- ---------
The Company had approximately 1,065 employees as of March 19, 2000,
including approximately 30 persons employed in executive, administrative and
accounting functions. None of the Company's employees are covered by collective
bargaining agreements. The Company considers its employee relations to be
satisfactory.
Insurance
- ---------
The Company maintains fire, casualty, theft and public liability insurance
for each of its pawn store and check cashing/payday advance locations in amounts
management believes to be adequate. The Company maintains workers' compensation
insurance in Maryland, Missouri, California, Virginia, Washington, Oregon, South
Carolina, Illinois, Washington, D.C. and Oklahoma, as well as excess employer's
indemnification insurance in Texas. The Company is a non-subscriber under the
Texas Workers' Compensation Act and does not maintain other business risk
insurance.
Item 2. Properties
- -------------------
The Company currently owns the real estate and buildings for three of its
pawn stores and leases 144 pawn store and check cashing/payday advance
locations. Leased facilities are generally leased for a term of two to ten
years with one or more options to renew. The Company's existing leases expire
on dates ranging between 2000 and 2014. All current leases provide for
specified periodic rental payments ranging from approximately $500 to $9,100 per
month. Most leases require the Company to maintain the property and pay the
cost of insurance and property taxes. The Company believes that termination of
any particular lease would not have a material adverse effect on the Company's
operations. The Company's strategy is generally to lease, rather than purchase,
space for its pawnshop and check cashing locations unless the Company finds what
it believes is a superior location at an attractive price. The Company believes
that the facilities currently owned and leased by it as pawn store and check
cashing/payday advance locations are suitable for such purpose. The Company
considers its equipment, furniture and fixtures to be in good condition.
The Company currently leases approximately 12,000 square feet in Arlington,
Texas for its executive offices. The lease, which expires November 2001,
currently provides for monthly rental payments of approximately $16,000. In
addition, the Company leases approximately 9,200 square feet in Concord,
California for the headquarters of Answers, etc., its software company which
provides computer hardware and software for third-party check cashing/payday
advance stores.
Item 3. Legal Proceedings
- --------------------------
The Company is aware of no material legal proceedings pending to which it
is a party, or its property is subject. From time to time the Company is a
defendant (actual or threatened) in certain 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.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1999.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market under the symbol "FCFS". The following
table sets forth the quarterly high and low last sales prices per share for the
Common Stock, as reported by the Nasdaq National Market.
Common Stock
Price Range
------------
High Low
---- ---
Year Ended July 31, 1998
Quarter Ended October 31, 1997............. $ 8.50 $ 5.88
Quarter Ended January 31, 1998............. 8.50 6.69
Quarter Ended April 30, 1998............... 9.13 7.13
Quarter Ended July 31, 1998................ 17.00 9.00
Five Months Ended December 31, 1998
Quarter Ended October 31, 1998............. $ 13.88 $ 9.00
Two Months Ended December 31, 1998......... 14.31 9.31
Year Ended December 31, 1999
Quarter Ended March 31, 1999............... $ 14.38 $ 9.13
Quarter Ended June 30, 1999................ 11.63 9.00
Quarter Ended September 30, 1999........... 12.75 9.75
Quarter Ended December 31, 1999............ 11.00 7.00
On March 28, 2000, the last sales price for the Common Stock as reported by
the Nasdaq National Market was $6.50 per share. On March 28, 2000, there were
approximately 88 stockholders of record of the Common Stock.
No cash dividends have been paid by the Company on its Common Stock, and
the Company does not currently intend to pay cash dividends on its Common Stock.
The current policy of the Company's Board of Directors is to retain earnings, if
any, to provide funds for operation and expansion of the Company's business.
Such policy will be reviewed by the Board of Directors of the Company from time
to time in light of, among other things, the Company's earnings and financial
position and limitations imposed by its revolving line of credit with its
syndicate of commercial lenders (the "Credit Facility"). Pursuant to the terms
of its agreement with its lenders, the Company is prohibited from paying any
dividends until payment in full of its obligations under the Credit Facility.
Item 6. Selected Financial Data
- --------------------------------
The information below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 and the Company's Consolidated Financial Statements and
related notes thereto required by Item 8.
Year Five Months
Ended Ended Year Ended July 31,
Dec. 31, Dec. 31, ----------------------------------
1999 1998 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
(in thousands, except per share amounts and certain
operating data)
Income Statement Data:
Revenues:
Merchandise sales......... $ 52,977 $ 20,418 $ 37,998 $ 32,628 $ 24,823 $ 20,709
Service charges........... 40,630 12,434 20,332 16,517 13,149 11,298
Check cashing fees........ 2,184 754 255 - - -
Other..................... 1,960 472 419 286 51 177
-------- -------- -------- -------- -------- --------
97,751 34,078 59,004 49,431 38,023 32,184
-------- -------- -------- -------- -------- --------
Cost of goods sold and
expenses:
Cost of goods sold........ 36,260 13,157 25,463 22,502 16,714 13,648
Operating expenses........ 39,243 12,335 19,608 15,774 12,573 10,678
Interest expense.......... 2,602 1,122 2,031 2,340 2,124 2,116
Depreciation.............. 1,590 475 922 717 540 506
Amortization.............. 1,500 563 783 636 565 531
Administrative expenses... 6,867 2,249 4,134 3,831 3,150 3,013
-------- -------- -------- -------- -------- --------
88,062 29,901 52,941 45,800 35,666 30,492
-------- -------- -------- -------- -------- --------
Income before income taxes.. 9,689 4,177 6,063 3,631 2,357 1,692
Provision for income taxes.. 3,211 1,608 2,265 1,337 917 592
-------- -------- -------- -------- -------- --------
Net income.................. $ 6,478 $ 2,569 $ 3,798 $ 2,294 $ 1,440 $ 1,100
======== ======== ======== ======== ======== ========
Basic earnings per share.... $ .75 $ .32 $ .74 $ .60 $ .39 $ .30
Diluted earnings per share.. $ .70 $ .29 $ .59 $ .46 $ .35 $ .30
Operating Data:
Locations in operation:
Beginning of the period... 133 97 57 50 43 36
Acquisitions.............. 4 34 38 7 7 5
Opened.................... 10 2 2 - 1 2
Consolidated.............. - - - - (1) -
-------- -------- -------- -------- -------- --------
End of the period......... 147 133 97 57 50 43
======== ======== ======== ======== ======== ========
Receivables................. $ 24,451 $ 20,392 $ 17,054 $ 12,877 $ 11,701 $ 9,158
Average receivables balance
per store.................. $ 166 $ 153 $ 176 $ 226 $ 234 $ 213
Average inventory per
pawn store................. $ 182 $ 164 $ 154 $ 176 $ 175 $ 178
Annualized inventory
turnover................... 1.9x 2.1x 2.2x 2.4x 2.1x 2.0x
Gross profit percentage on
merchandise sales.......... 31.6% 35.6% 33.0% 31.0% 32.7% 34.1%
Balance Sheet Data:
Working capital............. $ 56,925 $ 39,421 $ 31,987 $ 23,616 $ 21,098 $ 17,027
Total assets................ 131,439 113,325 91,128 56,677 51,945 43,755
Long-term liabilities....... 55,560 42,699 34,533 26,892 28,655 22,964
Total liabilities........... 62,324 52,617 39,611 30,398 31,362 24,808
Stockholders' equity........ 69,115 60,708 51,517 26,279 20,583 18,947
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
General
- -------
The Company's pawn store revenues are derived primarily from service
charges on pawn loans, service charges from short term, unsecured advances
("payday advances"), and the sale of unredeemed goods, or "merchandise sales."
Pawn loans are made for a 30-day term with an automatic extension of 60 days in
Texas, South Carolina and Missouri, 30 days in Oklahoma and 15 days in Maryland
and Virginia. Pawn loans made in Washington, D.C. are made for a 120 day term
with no automatic extension. All pawn loans are collateralized by tangible
personal property placed in the custody of the Company. The annualized service
charge rates on pawn loans are set by state laws and range between 12% and 240%
in Texas and 36% and 240% in Oklahoma, depending on the size of the loan.
Service charge rates are 144% to 240% on an annualized basis in Maryland, with a
$6 monthly minimum charge. In Washington, D.C., loans up to $40 bear a flat $2
charge per month, while loans over $40 bear a 48% to 60% annualized rate.
Missouri pawn loans bear service and storage charges totaling 240% per year, and
in Virginia rates range from 120% to 180% annually. Annualized rates in South
Carolina range from 60% to 300%. Pawn service charge income is recognized on a
constant yield basis during the initial loan period. Pawn service charge income
applicable to the remaining term and/or extension period is not recognized until
the loan is repaid or renewed. If a loan is not repaid prior to the expiration
of the automatic extension period, if applicable, the property is forfeited to
the Company and transferred to inventory at a value equal to the loan principal
plus one month of accrued interest. Service charges from payday advances, which
range from 15% to 18% of the amount advanced, are recognized on a constant-yield
basis over the life of the advance, which is generally 30 days or less.
Revenues at the Company's check cashing and payday advance stores are
derived primarily from check cashing fees, fees on payday advances, and fees
from the sale of money orders and wire transfers. Payday advances carry a 15%
to 18% service charge. The Company recognizes service charge income on payday
advances on a constant-yield basis over the life of the advance, which is
generally 30 days or less. The Company charges operating expense for the
estimated net potential losses on returned checks in the same period in which
revenues from the payday advances are recognized.
Although the Company has had significant increases in revenues due
primarily to acquisitions and secondarily to new store openings, the Company has
also incurred increases in operating expenses attributable to the additional
stores and increases in administrative expenses attributable to building a
management team and the support personnel required by the Company's growth.
Operating expenses consist of all items directly related to the operation of the
Company's stores, including salaries and related payroll costs, rent, utilities,
equipment depreciation, advertising, property taxes, licenses, supplies,
security and net returned checks (bad debts). Administrative expenses consist
of items relating to the operation of the corporate office, including the
salaries of corporate officers, area supervisors and other management,
accounting and administrative costs, liability and casualty insurance, outside
legal and accounting fees and stockholder-related expenses.
Presented below are selected consolidated data for the Company. The
following table, as well as the discussion following, should be read in
conjunction with Selected Financial Data included in Item 6 and the Consolidated
Financial Statements and notes thereto of the Company required by Item 8.
Year Five Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Income statement items as a
percent of total revenues:
Revenues:
Merchandise sales.......... 54.2% 59.9% 64.4% 66.0%
Service charges............ 41.6 36.5 34.5 33.4
Check cashing fees......... 2.2 2.2 .4 -
Other...................... 2.0 1.4 .7 .6
Expenses:
Operating expenses......... 40.1 36.2 33.2 31.9
Interest expense........... 2.7 3.3 3.4 4.7
Depreciation............... 1.6 1.4 1.6 1.5
Amortization............... 1.5 1.7 1.3 1.3
Administrative expenses.... 7.0 6.6 7.0 7.8
Gross profit as a percent
of merchandise sales........ 31.6 35.6 33.0 31.0
The Company has three primary operating segments: pawn lending stores,
check cashing/payday advance stores, and a software and hardware provider. The
Company's pawn stores offer non-recourse loans on the collateral of pledged
tangible personal property. The Company's check cashing and payday advance
stores provide check cashing services, short-term unsecured consumer loans, bill
payment services, money transfer services and money order sales. The Company's
computer software subsidiary, Answers, etc., provides turnkey point of sale
operating systems to other check cashing and payday advance operators
unaffiliated with the Company. Information concerning the segments is set forth
below (in thousands):
Check Cashing/
Pawn Payday Advance
Stores Stores Software Consolidated
------ ------ -------- ------------
Year Ended December 31, 1999
- ----------------------------
Total revenues.................. $ 79,470 $ 14,573 $ 3,708 $ 97,751
Depreciation and amortization... 2,293 709 88 3,090
Income before interest and
income taxes................... 8,019 3,927 345 12,291
Total assets at period end...... 94,108 34,800 2,531 131,439
Capital expenditures............ 2,539 431 312 3,282
Five Months Ended December 31, 1998
- -----------------------------------
Total revenues.................. 29,140 3,484 1,454 34,078
Depreciation and amortization... 804 221 13 1,038
Income before interest and
income taxes................... 4,051 1,036 212 5,299
Total assets at period end...... 80,586 30,495 2,244 113,325
Capital expenditures............ 806 145 46 997
Year Ended July 31, 1998
- ------------------------
Total revenues.................. 57,082 1,133 789 59,004
Depreciation and amortization... 1,627 74 4 1,705
Income before interest and
income taxes................... 7,700 272 122 8,094
Total assets at period end...... 68,143 21,411 1,574 91,128
Capital expenditures............ 999 11 11 1,021
Year Ended July 31, 1997
- ------------------------
Total revenues.................. 49,431 - - 49,431
Depreciation and amortization... 1,353 - - 1,353
Income before interest
and income taxes............... 5,971 - - 5,971
Total assets at period end...... 56,677 - - 56,677
Capital expenditures............ 1,188 - - 1,188
Results of Operations
- ---------------------
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended July 31,
1998
Total revenues increased 66% to $97,751,000 for the fiscal year ended
December 31, 1999 ("Fiscal 1999") as compared to $59,004,000 for the fiscal year
ended July 31, 1998 ("Fiscal 1998"). The change resulted from an increase in
revenues of $37,948,000 generated by the 90 pawn and check cashing/payday
advance stores which were opened or acquired during Fiscal 1998, the five months
ended December 31, 1998 and Fiscal 1999, and an increase of $799,000, or 2%, at
the 57 stores which were in operation during all of Fiscal 1998 and Fiscal 1999.
Of the $38,747,000 increase in total revenues, 39%, or $14,979,000, was
attributable to increased merchandise sales, 52%, or $20,298,000 was
attributable to increased service charges on pawn loans and payday advances, 5%,
or $1,929,000 was attributable to increased check cashing fees, and the
remaining increase of $1,541,000, or 4% was attributable to the increase in
other income. As a percentage of total revenues, merchandise sales decreased
from 64% to 54% during Fiscal 1999 as compared to Fiscal 1998, service charges
increased from 35% to 42%, check cashing fees increased from 0% to 2%, and other
income increased from 1% to 2%.
The aggregate receivables balance increased 43% from $17,054,000 at July
31, 1998 to $24,451,000 at December 31, 1999. Of the $7,397,000 increase,
$2,668,000 was attributable to growth at the 97 pawn and check cashing/payday
advance stores in operation at July 31, 1998 and December 31, 1999, while
$4,729,000 was attributable to the addition of 50 pawn stores and check
cashing/payday advance stores since August 1, 1998. The annualized yield on the
average aggregate receivables balance was 181% during Fiscal 1999 compared to
136% during Fiscal 1998. The Company's average receivables balance per store
decreased from $176,000 as of July 31, 1998 to $166,000 as of December 31, 1999,
primarily due to a higher ratio of payday advance stores in the Company's store
count as of December 31, 1999, which generally have lower per-store receivables
balances than the Company's pawn stores.
Gross profit as a percentage of merchandise sales decreased from 33% during
Fiscal 1998 to 32% during Fiscal 1999. This decrease in the Company's gross
profit margin was primarily the result of lower gold prices during Fiscal 1999
compared to Fiscal 1998, which yielded lower margins on scrap jewelry sales
during Fiscal 1999.
Operating expenses increased 100% to $39,243,000 during Fiscal 1999
compared to $19,608,000 during Fiscal 1998, primarily as a result of the
addition of 90 pawn stores and check cashing/payday advance stores in Fiscal
1998, the five months ended December 31, 1998 and Fiscal 1999, and the addition
of personnel viewed as necessary to support the increased number of store level
transactions. Administrative expenses increased 66% to $6,867,000 during Fiscal
1999 compared to $4,134,000 during Fiscal 1998 due primarily to the addition of
personnel to supervise store operations. Interest expense increased to
$2,602,000 in Fiscal 1999 compared to $2,031,000 in Fiscal 1998 as a result of
higher average outstanding debt balances during Fiscal 1999.
For Fiscal 1999 and 1998, the Company's effective federal income tax rates
of 33% and 37%, respectively, differed from the statutory tax rate of 34%
primarily as a result of state income taxes, utilization of tax net operating
loss carryforwards from acquisitions, and amortization of non-deductible
intangible assets.
Five Months Ended December 31, 1998 Compared to Five Months Ended December 31,
1997
Total revenues increased 47% to $34,078,000 for the five months ended
December 31, 1998 (the "Five-Month 1998 Period") as compared to $23,160,000 for
the five months ended December 31, 1997 (the "Five-Month 1997 Period"). Of the
$10,918,000 increase in total revenues, $11,565,000 relates to revenues
generated by the 75 stores acquired or opened subsequent to August 1, 1997. The
remaining decrease of $647,000 relates to the 3% same store revenue decline at
the 58 stores which were in operation throughout both the Five-Month 1997 Period
and the Five-Month 1998 Period. In addition, 47% of the increase in total
revenues, or $5,131,000, was attributable to increased merchandise sales, 43%,
or $4,697,000, was attributable to increased service charges, 7%, or $754,000
was attributable of increased check cashing fees, and the remaining increase of
$336,000, or 3%, was attributable to the increase in other income. As a
percentage of total revenues, merchandise sales decreased from 66% to 60%,
service charges increased from 33% to 37%, check cashing fees increased from
zero to 2%, and other income remained at 1% during both the Five-Month 1997
Period and the Five-Month 1998 Period. Gross profit as a percentage of
merchandise sales increased from 32% during the Five-Month 1997 Period to 36%
during the Five-Month 1998 Period.
The aggregate receivables balance increased 52% from $13,444,000 at
December 31, 1997 to $20,392,000 at December 31, 1998. Of the $6,948,000
increase, $6,213,000 was attributable to the addition of 67 stores since
December 31, 1997. The remaining increase of $735,000 was due to the 6%
increase in same-store receivable balances at the 66 stores in operation at both
December 31, 1997 and December 31, 1998. The annualized yield on the average
aggregate receivable balance was 159% during the Five-Month 1998 Period compared
to 141% during the Five-Month 1997 Period. The Company's average receivable
balance per store decreased from $204,000 as of December 31, 1997 to $153,000 as
of December 31, 1998, primarily due to the large number of stores less than a
year old as of December 31, 1998.
Operating expenses increased 71% to $12,335,000 during the Five-Month 1998
Period compared to $7,213,000 during the Five-Month 1997 Period, primarily as a
result of the addition of 75 stores subsequent to August 1, 1997.
Administrative expenses increased 39% to $2,249,000 during the Five-Month 1998
Period compared to $1,622,000 during the Five-Month 1997 Period, primarily due
to the addition of corporate personnel to support the increased number of
stores. Interest expense increased to $1,122,000 in the Five-Month 1998 Period
compared to $904,000 in the Five-Month 1997 Period as a result of borrowings
associated with the Company's acquisitions since August 1, 1997.
For the Five-Month 1998 and 1997 Periods, the Company's tax provisions of
39% of income before income taxes differed from the statutory rate of 34%
primarily due to state income taxes, net of the federal tax benefit.
Twelve Months Ended July 31, 1998 Compared to Twelve Months Ended July 31, 1997
Total revenues increased 19% to $59,004,000 for the fiscal year ended July
31, 1998 ("Fiscal 1998") as compared to $49,431,000 for the fiscal year ended
July 31, 1997 ("Fiscal 1997"). The change resulted from an increase in revenues
of $8,545,000 generated by the 47 pawn and check cashing stores which were
opened or acquired during Fiscal 1997 and Fiscal 1998 and an increase of
$1,028,000, or 2%, at the 50 stores which were in operation during all of Fiscal
1997 and Fiscal 1998. Of the $9,573,000 increase in total revenues, 56%, or
$5,370,000, was attributable to increased merchandise sales, 40%, or $3,815,000
was attributable to increased service charges on pawn loans and payday advances,
3%, or $255,000 was attributable to increased check cashing fees, and the
remaining increase of $133,000, or 1% was attributable to the increase in other
income. As a percentage of total revenues, merchandise sales decreased from 66%
to 64% during Fiscal 1998 as compared to Fiscal 1997, service charges increased
from 33% to 35%, and other income was 1% of total revenues during both periods.
The aggregate receivables balance increased 32% from $12,877,000 at July
31, 1997 to $17,054,000 at July 31, 1998. Of the $4,177,000 increase, $188,000
was attributable to growth at the 57 pawn stores in operation at July 31, 1997
and July 31, 1998, $2,708,000 was attributable to the addition of 29 pawnshops
during Fiscal 1998, and $1,281,000 was attributable to payday advances at the
check cashing stores acquired during Fiscal 1998.
Gross profit as a percentage of merchandise sales increased from 31% during
Fiscal 1997 to 33% during Fiscal 1998. This increase in the Company's gross
profit margin was primarily the result of certain operating controls implemented
during Fiscal 1998, and a slightly higher gold price during Fiscal 1998 compared
to Fiscal 1997, which yielded higher margins on scrap jewelry sales during
Fiscal 1998.
Operating expenses increased 24% to $19,608,000 during Fiscal 1998 compared
to $15,774,000 during Fiscal 1997, primarily as a result of the addition of 47
pawnshops and check cashing stores in Fiscal 1997 and Fiscal 1998, and the
addition of personnel viewed as necessary to support the increased number of
store level transactions. Administrative expenses increased 8% to $4,134,000
during Fiscal 1998 compared to $3,831,000 during Fiscal 1997 due primarily to
the addition of personnel to supervise store operations. Interest expense
decreased to $2,031,000 in Fiscal 1998 compared to $2,340,000 in Fiscal 1997 as
a result of a lower interest rate on the Company's line of credit, and due to
the conversion of $6,522,000 of interest-bearing debentures in May 1998 which
were outstanding for all of Fiscal 1997.
For Fiscal 1998 and 1997, the Company's effective federal income tax rate
of 37% differed from the statutory tax rate of 34% primarily as a result of
state income taxes and amortization of non-deductible intangible assets.
Liquidity and Capital Resources
- -------------------------------
The Company's operations and acquisitions have been financed with funds
generated from operations, bank and other borrowings, and the issuance of the
Company's securities.
The Company currently maintains a $55,000,000 long-term line of credit with
a group of commercial lenders (the "Credit Facility"). At December 31, 1999,
$47,000,000 was outstanding under this Credit Facility and an additional
$4,271,000 was available to the Company pursuant to the available borrowing
base. The Credit Facility bears interest at the prevailing LIBOR rate (which
was approximately 6.5% at December 31, 1999) plus one percent, and matures on
September 1, 2002. Amounts available under the Credit Facility are limited to
325% of the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
these requirements and covenants during the year ended December 31, 1999 and as
of March 28, 2000. The Company is required to pay an annual commitment fee of
1/8 of 1% on the average daily unused portion of the Credit Facility commitment.
The Company is prohibited from paying dividends to its stockholders.
Substantially all of the unencumbered assets of the Company have been pledged as
collateral against indebtedness under the Credit Facility.
In February 1999, the Company acquired the assets of two pawn stores in El
Paso, Texas. In September 1999, the Company acquired the assets of one pawn
store in Arlington, Virginia, and in October 1999, the Company acquired the
assets of one pawn store in Palm View, Texas. The aggregate purchase price for
these four acquisitions was $2,019,000, including legal, consulting, assumed
liabilities and other costs incidental to the acquisitions. The Company
financed substantially all of the cash purchase price for its fiscal 1999
acquisitions through its Credit Facility. The purchase price for these
acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding receivable balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
The Company acquired the assets of one pawn store in Alice, Texas in
September 1998, five pawn stores in El Paso, Texas in October 1998, one pawn
store in Dallas, Texas in October 1998, and twelve pawn stores in South Carolina
in November 1998. In addition, the Company acquired the assets of three check
cashing and payday advance stores in California in August 1998, and one check
cashing and payday advance store in San Francisco, California in December 1998.
The aggregate purchase price for these 23 stores acquired during the five months
ended December 31, 1998 was $8,175,000, including legal, consulting, assumed
liabilities and other costs incidental to the acquisitions. In December 1998,
the Company also acquired 100% of the outstanding common stock of One Iron
Ventures, Inc., which operates eleven payday advance stores in the Chicago,
Illinois area, for a total purchase price of $5,704,000 consisting of 430,000
shares of First Cash Financial Services, Inc. common stock valued at $4,623,000,
or $10.75 per share, assumed liabilities of $904,000, and legal, consulting and
assumed liabilities totaling $177,000. The Company financed substantially all
of the cash purchase price for acquisitions made during the five months ended
December 31, 1998 through its Credit Facility. The purchase price for these
acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding receivable balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
As of December 31, 1999, the Company's primary sources of liquidity were
$10,717,000 in cash and cash equivalents, $2,943,000 in service charges
receivable, $24,451,000 in receivables, $21,091,000 in inventories and
$4,271,000 of available and unused funds under the Company's Credit Facility.
The Company had working capital as of December 31, 1999 of $56,925,000 and a
liabilities to equity ratio of 0.9 to 1.
Net cash provided by operating activities of the Company during the year
ended December 31, 1999 was $4,314,000, consisting primarily of net income
before non-cash depreciation and amortization of $9,568,000, less cash used to
fund the increase of balance sheet items of $5,254,000. Net cash used for
investing activities during the year ended December 31, 1999 was $8,929,000,
which was comprised of cash used for increasing receivables at existing stores
of $3,587,000, and cash paid for acquisitions and other fixed asset additions of
$5,342,000. Net cash provided by financing activities was $10,874,000 during
the year ended December 31, 1999, which consisted of net increases in the
Company's debt of $10,510,000, supplemented by cash provided from the exercise
of stock options and warrants of $364,000.
The profitability and liquidity of the Company is affected by the amount of
pawn loans outstanding, which is controlled in part by the Company's lending
decisions. The Company is able to influence the frequency of loan redemption by
increasing or decreasing the amount loaned in relation to the resale value of
the pledged property. Tighter credit decisions generally result in smaller
loans in relation to the estimated resale value of the pledged property and can
thereby decrease the Company's aggregate loan balance and, consequently,
decrease pawn service charges. Additionally, small loans in relation to the
pledged property's estimated resale value tends to increase loan redemptions and
improve the Company's liquidity. Conversely, providing larger loans in relation
to the estimated resale value of the pledged property can result in an increase
in the Company's pawn service charge income. Also larger average loan balances
can result in an increase in loan forfeitures, which increases the quantity of
goods on hand and, unless the Company increases inventory turnover, reduces the
Company's liquidity. The Company's renewal policy allows customers to renew
pawn loans by repaying all accrued interest on such pawn loans, effectively
creating a new loan transaction. In addition to these factors, the Company's
liquidity is affected by merchandise sales and the pace of store expansions.
Management believes that the Credit Facility and cash generated from
operations will be sufficient to accommodate the Company's current operations
for fiscal 2000. The Company has no significant capital commitments. The
Company currently has no written commitments for additional borrowings or future
acquisitions; however, the Company intends to continue to grow and will likely
seek additional capital to facilitate expansion. The Company will evaluate
acquisitions, if any, based upon opportunities, acceptable financing, purchase
price, strategic fit and qualified management personnel.
The Company currently intends to continue to engage in a plan of expansion
through existing store acquisitions and new store openings. While the Company
continually looks for, and is presented with, potential acquisition candidates,
the Company has no definitive plans or commitments for further acquisitions. The
Company has no immediate plans to open any other new stores. If the Company
encounters an attractive opportunity to acquire or open a new store in the near
future, the Company will seek additional financing, the terms of which will be
negotiated on a case-by-case basis. Between January 1, 2000 and March 28, 2000,
the Company opened two new check cashing/payday advance locations.
Year 2000 Compliance
- --------------------
In 1999, the Company completed its year 2000 compliance review of its
information technology systems and non-information technology systems and
successfully implemented all related upgrades, replacements, or modifications
necessary. The Company experienced virtually no year 2000 business
interruptions either internally or related to its major vendors. The total cost
of the year 2000 related enhancements was approximately $50,000, including an
estimate of internal payroll committed to year 2000 related projects.
Forward Looking Information
- ---------------------------
This annual report contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans," or "anticipates" or the negative
thereof, or other variations thereon, or comparable terminology, or by
discussions of strategy. Such statements include, but are not limited to, the
discussions of the Company's operations, liquidity, and capital resources.
Forward-looking statements are included in the "Liquidity and Capital Resources"
section of this annual report. Although the Company believes that the
expectations reflected in forward-looking statements are reasonable, there can
be no assurances that such expectations will prove to be accurate. Generally,
these statements relate to business plans, strategies, anticipated strategies,
levels of capital expenditures, liquidity and anticipated capital funding needed
to effect the business plan. All phases of the Company's operations are
subject to a number of uncertainties, risks and other influences, many of which
are outside the control of the Company and cannot be predicted with any degree
of accuracy. Factors such as changes in regional or national economic
conditions, changes in governmental regulations, unforeseen litigation, changes
in interest rates or tax rates, significant changes in the prevailing market
price of gold, future business decisions and other uncertainties may cause
results to differ materially from those anticipated by some of the statements
made in this report. In light of the significant uncertainties inherent in the
forward-looking statements made in this report, the inclusion of such statements
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. Security holders
are cautioned that such forward-looking statements involve risks and
uncertainties. The forward-looking statements contained this report speak only
as of the date of this report and the Company expressly disclaims any obligation
or undertaking to release any updates or revisions to any such statement to
reflect any change in the Company's expectations or any change in events,
conditions or circumstance on which any such statement is based.
Inflation
- ---------
The Company does not believe that inflation has had a material effect on
the amount of loans and payday advances made or unredeemed goods sold by the
Company or its results of operation.
Seasonality
- -----------
The Company's retail business is seasonal in nature with its highest volume
of sales of unredeemed goods occurring during the first and fourth calendar
quarters of each year. The Company's lending and payday advance activities are
also seasonal, with the highest volume of lending activity occurring during the
second and third calendar quarters of each year.
New Accounting Pronouncements
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133, as amended, is
effective for fiscal years beginning after June 15, 2000 and will be adopted for
the period beginning January 1, 2001. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of the derivatives are recorded each period in current earnings
or other comprehensive income depending on whether a derivative is designated as
part of a hedge transaction, and if it is, the type of hedge transaction. The
impact of SFAS No. 133 on the Company's results of operations, financial
position, or cash flows will be dependent on the level and types of derivative
instruments the Company will have entered into at the time the standard in
implemented.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The Company is exposed to market risk in the form of interest rate risk. At
December 31, 1999, the Company had $47 million outstanding under its revolving
line of credit. This revolving line is priced with a variable rate based on
LIBOR or a base rate, plus one percent. See "Note 7 - Revolving Credit
Facility". Based on the average outstanding indebtedness during the year ended
December 31, 1999, a 10% increase in interest rates would have increased the
Company's interest expense by approximately $239,000 for the year ended December
31, 1999.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
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 14(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
There have been no disagreements concerning matters of accounting
principles or financial statement disclosure between the Company and Deloitte &
Touche LLP requiring disclosure hereunder.
PART III
--------
In accordance with General Instruction G(3), a presentation of information
required in response to Items 10, 11, 12, and 13 shall appear in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days of the Company's year end and shall be incorporated herein by reference
when filed.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
Page
(1) Consolidated Financial Statements: ----
Report of Independent Auditors..................... F-1
Consolidated Balance Sheets........................ F-2
Consolidated Statements of Income.................. F-3
Consolidated Statements of Cash Flows.............. F-4
Consolidated Statements of Changes in
Stockholders' Equity.............................. F-5
Notes to Consolidated Financial Statements......... F-6
(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits:
3.1(5) Amended Certificate of Incorporation
3.2(6) Amended Bylaws
4.2a(2) Common Stock Specimen
10.3(1) First Cash, Inc. 1990 Stock Option Plan
10.8(2) Employment Agreement -- Rick Powell
10.15(2) Employment Agreement -- Rick L. Wessel
10.59(4) Acquisition Agreement - Miraglia, Inc.
10.60(3) Audited Financial Statements of Miraglia, Inc. for the ten
months ended May 31, 1998.
10.61(5) Acquisition Agreement for Twelve Pawnshops in South
Carolina
10.62(5) Acquisition Agreement for One Iron Ventures, Inc.
10.63(5) First Cash Financial Services, Inc. 1999 Stock Option Plan
21.0(6) Subsidiaries
23.1(6) Independent Auditors' Consent of Deloitte & Touche LLP
23.2(6) Consent of Brewer & Pritchard, P.C.
27.0 Financial Data Schedules (Edgar version only)
- ---------------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-18
(No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to Form 8-K dated September 22, 1998.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended July 31, 1998 (File No. 0 - 19133) and incorporated herein by
reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 22, 1999 (File No. 333-71077) and incorporated herein by
reference.
(6) Filed herein.
(b) On September 22, 1998, the Company filed a Form 8-K to report the
purchase of Miraglia, Inc., along with the financial statements of
Miraglia, Inc. for the ten months ended May 31, 1998.
On December 11, 1998, the Company filed a Form 8-K to report a change
in the Company's fiscal year end from July 31 to December 31.
On January 20, 1999, the Company filed a Form 8-K to report
shareholder approval of a change in the Company's name to "First Cash
Financial Services, Inc."
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST CASH FINANCIAL SERVICES, INC.
/S/ PHILLIP E. POWELL
------------------------------------------
Phillip E. Powell, Chief Executive Officer
March 28, 2000
/S/ RICK L. WESSEL
------------------------------------------
Rick L. Wessel, Principal Accounting Officer
March 28, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/S/ PHILLIP E. POWELL Chairman of the Board and March 28, 2000
- ---------------------------------- Chief Executive Officer
Phillip E. Powell
/S/ RICK L. WESSEL President, Chief Financial March 28, 2000
- ---------------------------------- Officer, Secretary and
Rick L. Wessel Treasurer
/S/ JOE R. LOVE Director March 28, 2000
- ----------------------------------
Joe R. Love
/S/RICHARD T. BURKE Director March 28, 2000
- ----------------------------------
Richard T. Burke
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Stockholders
of First Cash Financial Services, Inc.
We have audited the consolidated balance sheets of First Cash Financial
Services, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year ended December 31, 1999, the five months ended December 31,
1998 and the years ended July 31, 1998 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc. and subsidiaries at December 31, 1999 and 1998 and the
results of their operations and their cash flows for the year ended December 31,
1999, the five months ended December 31, 1998 and the years ended July 31, 1998
and 1997 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
January 21, 2000
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, December 31,
1999 1998
---- ----
(in thousands, except share data)
ASSETS
Cash and cash equivalents......................... $ 10,717 $ 4,458
Service charges receivable........................ 2,943 2,707
Receivables....................................... 24,451 20,392
Inventories....................................... 21,091 17,403
Income taxes receivable........................... - 1,471
Prepaid expenses and other current assets......... 4,487 2,908
-------- --------
Total current assets......................... 63,689 49,339
Property and equipment, net....................... 10,954 9,146
Intangible assets, net of accumulated
amortization of $5,418 and $3,919, respectively.. 54,600 54,494
Other............................................. 2,196 346
-------- --------
$131,439 $113,325
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt and
notes payable.................................... $ 1,689 $ 2,177
Accounts payable and accrued expenses............. 4,892 6,752
Income taxes payable.............................. 183 989
-------- --------
Total current liabilities.................... 6,764 9,918
Revolving credit facility......................... 47,000 33,450
Long-term debt and notes payable, net of
current portion.................................. 5,020 6,283
Deferred income taxes............................. 3,540 2,966
-------- --------
62,324 52,617
-------- --------
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding.................................... - -
Common stock; $.01 par value; 20,000,000
shares authorized; 9,320,868 and 9,089,305
shares issued, respectively; 8,849,909 and
8,618,346 shares outstanding, respectively..... 93 91
Additional paid-in capital...................... 50,953 49,026
Retained earnings............................... 20,334 13,856
Common stock held in treasury, at cost;
470,959 shares................................. (2,265) (2,265)
-------- --------
69,115 60,708
-------- --------
Commitments (see Note 10)
$131,439 $113,325
======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Five Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
(in thousands, except per share amounts)
Revenues:
Merchandise sales............... $ 52,977 $ 20,418 $ 37,998 $ 32,628
Service charges................. 40,630 12,434 20,332 16,517
Check cashing fees.............. 2,184 754 255 -
Other........................... 1,960 472 419 286
-------- -------- -------- --------
97,751 34,078 59,004 49,431
-------- -------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold.............. 36,260 13,157 25,463 22,502
Operating expenses.............. 39,243 12,335 19,608 15,774
Interest expense................ 2,602 1,122 2,031 2,340
Depreciation.................... 1,590 475 922 717
Amortization.................... 1,500 563 783 636
Administrative expenses......... 6,867 2,249 4,134 3,831
-------- -------- -------- --------
88,062 29,901 52,941 45,800
-------- -------- -------- --------
Income before income taxes......... 9,689 4,177 6,063 3,631
Provision for income taxes......... 3,211 1,608 2,265 1,337
-------- -------- -------- --------
Net income......................... $ 6,478 $ 2,569 $ 3,798 $ 2,294
======== ======== ======== ========
Basic earnings per share........... $ 0.75 $ 0.32 $ 0.74 $ 0.60
======== ======== ======== ========
Diluted earnings per share......... $ 0.70 $ 0.29 $ 0.59 $ 0.46
======== ======== ======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Five Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Cash flows from operating activities: (in thousands)
Net income................................... $ 6,478 $ 2,569 $ 3,798 $ 2,294
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization............ 3,090 1,038 1,705 1,353
Changes in operating assets and liabilities,
net of effect of purchases of existing
stores:
Service charges receivable............... (162) 10 (195) (62)
Inventories.............................. (3,354) (2,551) (1,614) (1,152)
Prepaid expenses and other assets........ (1,958) (1,302) (2,115) (6)
Accounts payable and accrued expenses.... 452 773 (241) 257
Current and deferred income taxes........ (232) 985 1,159 135
-------- -------- -------- --------
Net cash flows from operating
activities........................... 4,314 1,522 2,497 2,819
-------- -------- -------- --------
Cash flows from investing activities:
Net increase in receivables.................. (3,587) (1,130) (1,050) (566)
Purchases of property and equipment.......... (3,282) (997) (1,021) (1,188)
Acquisition of existing operations........... (2,060) (4,734) (11,954) (2,643)
-------- -------- -------- --------
Net cash flows from investing
activities........................... (8,929) (6,861) (14,025) (4,397)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from debt........................... 21,000 12,250 13,440 16,086
Repayments of debt........................... (10,490) (4,856) (6,227) (13,975)
Repurchase of outstanding warrants........... - - - (250)
Registration fees............................ (12) - - -
Proceeds from exercise of options and
warrants.................................... 376 821 4,758 176
-------- -------- -------- --------
Net cash flows from financing
activities........................... 10,874 8,215 11,971 2,037
-------- -------- -------- --------
Change in cash and cash equivalents............. 6,259 2,876 443 459
Cash and cash equivalents at beginning of
the year....................................... 4,458 1,582 1,139 680
-------- -------- -------- --------
Cash and cash equivalents at end of the year.... $ 10,717 $ 4,458 $ 1,582 $ 1,139
======== ======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest............................... $ 2,553 $ 1,061 $ 2,061 $ 2,405
======== ======== ======== ========
Income taxes........................... $ 2,296 $ - $ 985 $ 1,173
======== ======== ======== ========
Supplemental disclosure of noncash investing
And financing activities:
Noncash transactions in connection with
various acquisitions:
Fair market value of assets acquired
and goodwill.......................... $ 2,602 $ 13,164 $ 31,196 $ 2,652
Less issuance of common stock ..... - (4,622) (8,712) -
Less amounts payable in cash or
common stock...................... - (2,331) - -
Less issuance of debt.............. (523) (1,070) (6,000) -
Less assumption of liabilities
and costs of acquisition.......... (19) (407) (4,530) (9)
-------- -------- -------- --------
Net cash paid.......................... $ 2,060 $ 4,734 $ 11,954 $ 2,643
======== ======== ======== ========
Noncash conversion of subordinated
debentures into shareholders' equity...... $ - $ - $ 6,522 $ 3,476
======== ======== ======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Additional
Common Stock Paid- Pref. Stock Treasury Stock
-------------- In ------------- Retained --------------
Shares Amount Capital Shares Amount Earnings Shares Amount Total
------ ------ ------- ------ ------ -------- ------ ------ -----
(in thousands)
Balance at
July 31, 1996.... 4,168 $ 42 $17,611 - - $ 5,195 471 $(2,265) $20,583
Exercise of stock
warrants......... 44 1 175 - - - - - 176
Conversion of
debentures....... 719 7 3,469 - - - - - 3,476
Repurchase of
warrants......... - - (250) - - - - - (250)
Net income........ - - - - - 2,294 - - 2,294
----- --- ------- --- --- ------- --- ------- -------
Balance at
July 31, 1997.... 4,931 50 21,005 - - 7,489 471 (2,265) 26,279
Exercise of stock
options and war-
rants, including
income tax benefit
of $1,894........ 1,151 11 6,640 - - - - - 6,651
Conversion of
debentures....... 1,402 14 6,063 - - - - - 6,077
Common stock issued
in connection with
an acquisition... 850 8 8,704 - - - - - 8,712
Net income........ - - - - - 3,798 - - 3,798
----- --- ------- --- --- ------- --- ------- -------
Balance at
July 31, 1998.... 8,334 83 42,412 - - 11,287 471 (2,265) 51,517
Exercise of stock
options and war-
rants, including
income tax benefit
of $528.......... 325 3 1,996 - - - - - 1,999
Common stock issued
in connection with
an acquisition... 430 5 4,618 - - - - - 4,623
Net income........ - - - - - 2,569 - - 2,569
----- --- ------- --- --- ------- --- ------- -------
Balance at Decem-
ber 31, 1998..... 9,089 91 49,026 - - 13,856 471 (2,265) 60,708
Exercise of stock
options and war-
rants, including
income tax
benefit of $24... 77 1 376 - - - - - 377
Common stock issued
to retire debt... 155 1 1,551 - - - - - 1,552
Net income........ - - - - - 6,478 - - 6,478
----- --- ------- --- --- ------- --- ------- -------
Balance at Decem-
ber 31, 1999..... 9,321 $93 $50,953 - - $20,334 471 $(2,265) $69,115
===== === ======= === === ======= === ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
- -----------------------------------------------
First Cash Financial Services, Inc. (the "Company") was incorporated in
Texas on July 5, 1988 and was reincorporated in Delaware in April 1991. The
Company is engaged in the operation of pawn stores which lend money on the
collateral of pledged personal property, and which retail previously-owned
merchandise acquired through loan forfeitures. In addition to making short-term
secured loans, most of the Company's pawn stores offer short-term unsecured
advances ("payday advances"). The Company also operates check cashing and
payday advance stores that provide payday advances, check cashing services, and
other related financial services. The Company also supplies computer hardware
and software to third-party check cashing operators, as well as ongoing
technical support, and owns "firstcash.com", a website offering previously-owned
jewelry, electronics and other products. As of December 31, 1999, the Company
owned 116 pawn stores and 31 check cashing and payday advance stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated. In
August 1999, the Company entered into a joint venture to form Cash & Go, Ltd., a
company which owns financial services kiosks inside convenience stores. The
Company presently has a 50% ownership interest in the partnership, which is
accounted for by the equity method of accounting whereby the Company records its
50% share of the partnership's earnings or losses in its consolidated financial
statements. The joint venture had a pretax loss in 1999 of $203,000. The
Company funds substantially all of the capital requirements of the joint
venture, and at December 31, 1999 had a receivable from this joint venture
totaling $1,816,000. This receivable bears interest at the prime rate plus 1%,
and matures on August 31, 2002.
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at date of
acquisition to be cash equivalents.
Receivables and income recognition - Receivables on the accompanying
balance sheet consist of pawn loans and payday advances. Pawn loans ("loans")
are made on the pledge of tangible personal property. Pawn service charges are
recognized on a constant yield basis over the initial loan period. Pawn service
charges applicable to the extension periods or additional loan periods are not
recognized as income until the loan is repaid or renewed. If the loan is not
repaid, the principal amount loaned plus accrued pawn service charges becomes
the carrying value of the forfeited collateral ("inventory") which is recovered
through sale. Payday advances are made for thirty days or less. The Company
recognizes the service charges associated with payday advances on a constant
yield basis over the term of the payday advance.
Returned checks - The Company charges operating expense for the estimated
net potential losses on returned checks in the same period in which revenues
from the payday advances are recognized.
Operating expenses - Costs incurred in operating the pawn stores and check
cashing stores have been classified as operating expenses. Operating expenses
include salary and benefit expense of store employees, rent and other occupancy
costs, bank charges, security, net returned checks, utilities, cash shortages
and other costs incurred by the stores.
Layaway and deferred revenue - Interim payments from customers on layaway
sales are credited to deferred revenue and subsequently recorded as income
during the period in which final payment is received.
Inventories - Inventories represent merchandise purchased directly from the
public and merchandise acquired from forfeited loans. Inventories purchased
directly from customers are recorded at cost. Inventories from forfeited loans
are recorded at the amount of the loan principal plus one month's accrued pawn
service charges on the unredeemed goods. The cost of inventories is determined
on the specific identification method. Inventories are stated at the lower of
cost or market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is determined on the straight-line method based on estimated useful
lives of thirty-one years for buildings and three to ten years for equipment.
The costs of improvements on leased stores are capitalized as leasehold
improvements and are amortized on the straight-line method over the applicable
lease period, or useful life if shorter.
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are charged to the appropriate property and equipment accounts.
Upon sale or retirement of depreciable assets, the cost and related accumulated
depreciation is removed from the accounts, and the resulting gain or loss is
included in the results of operations in the period retired.
Intangible assets - Intangible assets consist of the excess of purchase
price over net assets acquired and non-compete agreements. Excess purchase
price over net assets acquired is being amortized on a straight-line basis over
an estimated useful life of forty years and payments relative to non-compete
agreements are amortized over their estimated useful lives, generally ranging
from five to ten years. The Company's amortization policy is reviewed annually
by the Board of Directors to determine if any change is appropriate. Management
of the Company periodically evaluates the carrying value of the excess purchase
price over the net tangible assets of businesses acquired to determine that no
diminution in carrying value has occurred by comparing expected future cash
flows, undiscounted and without interest charges, to the net carrying value of
the related intangibles. Upon any such diminution in value, an appropriate
amount would be charged to earnings.
Long lived assets - Long-lived assets (i.e., property, plant and equipment
and intangible assets) are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss would be recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the asset
is less than the net book value of the asset. Generally, the amount of the
impairment loss is measured as the difference between the net book value of the
assets and the estimated fair value of the related assets.
Fair value of financial instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded values, due primarily
to their short-term nature.
Income taxes - The Company uses the liability method of computing deferred
income taxes on all material temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their
tax bases.
Advertising - The Company expenses the costs of advertising the first time
the advertising takes place. Advertising expense for the fiscal year ended
December 31, 1999, the five months ended December 31, 1998, and the fiscal years
ended July 31, 1998 and 1997 was $1,112,000, $191,000, $248,000 and $219,000,
respectively.
Stock-Based Compensation - Compensation expense is recorded with respect to
stock option grants and retention stock awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to
remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of accounting
defined in Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") had been applied. The Company accounts
for stock-based employee compensation plans under the intrinsic method pursuant
to APB 25 and has made the disclosures in the footnotes as required by SFAS 123.
Earnings per share - Basic net income per share is computed by dividing net
income by the weighted average number of shares outstanding during the year.
Diluted net income per share is calculated by giving effect to the potential
dilution that could occur if securities or other contracts to issue common
shares were exercised and converted into common shares during the year.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year 5 Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Numerator:
Net income for calculating
basic earnings per share......... $ 6,478 $ 2,569 $ 3,798 $ 2,294
Plus interest expense, net of
taxes, relating to convertible
debentures....................... - - 399 657
-------- -------- -------- --------
Net income for calculating
diluted earnings per share....... $ 6,478 $ 2,569 $ 4,197 $ 2,951
======== ======== ======== ========
Denominator:
Weighted-average common shares
for calculating basic earnings
per share........................ 8,656 8,030 5,101 3,825
Effect of dilutive securities:
Stock options and warrants...... 478 667 897 573
Contingently issuable shares
due to acquisitions............ 133 71 - -
Convertible debentures.......... - - 1,163 2,016
-------- -------- -------- --------
Weighted-average common shares
for calculating diluted
earnings per share............... 9,267 8,768 7,161 6,414
======== ======== ======== ========
Basic earnings per share............. $ 0.75 $ 0.32 $ 0.74 $ 0.60
Diluted earnings per share........... $ 0.70 $ 0.29 $ 0.59 $ 0.46
Pervasiveness of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses and disclosure of gain and loss
contingencies at the date of the financial statements. Such estimates and
assumptions are subject to a number of risks and uncertainties which may cause
actual results to differ materially from the Company's estimates.
NOTE 3 - BUSINESS ACQUISITIONS
- ------------------------------
In February 1999, the Company acquired the assets of two pawn stores in El
Paso, Texas. In September 1999, the Company acquired the assets of one pawn
store in Arlington, Virginia, and in October 1999, the Company acquired the
assets of one pawn store in Palm View, Texas. The aggregate purchase price for
these four acquisitions was $2,019,000, including legal, consulting, assumed
liabilities and other costs incidental to the acquisitions. The Company
financed substantially all of the cash purchase price for its fiscal 1999
acquisitions through its credit facility. The purchase price for these
acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding receivable balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
The Company acquired the assets of one pawn store in Alice, Texas in
September 1998, five pawn stores in El Paso, Texas in October 1998, one pawn
store in Dallas, Texas in October 1998, and twelve pawn stores in South Carolina
in November 1998. In addition, the Company acquired the assets of three check
cashing and payday advance stores in California in August 1998, and one check
cashing and payday advance store in San Francisco, California in December 1998.
The aggregate purchase price for these 23 stores acquired during the five months
ended December 31, 1998 was $8,175,000, including legal, consulting, assumed
liabilities and other costs incidental to the acquisitions. In December 1998,
the Company also acquired 100% of the outstanding common stock of One Iron
Ventures, Inc., which operates eleven payday advance stores in the Chicago,
Illinois area, for a total purchase price of $5,704,000 consisting of 430,000
shares of First Cash Financial Services, Inc. common stock valued at $4,623,000,
or $10.75 per share, assumed liabilities of $904,000, and legal, consulting and
assumed liabilities totaling $177,000. The Company financed substantially all
of the cash purchase price for acquisitions made during the five months ended
December 31, 1998 through its credit facility. The purchase price for these
acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding receivable balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
In April 1998, the Company acquired 100% of the outstanding common stock of
JB Pawn, Inc., which operates ten pawn stores in Texas and Maryland, for a total
cash price of $2,000,000 (see Note 4 - Related Party Transactions). In June
1998, the Company acquired 100% of the outstanding common stock of Miraglia,
Inc. for a total purchase price of $21,175,000 consisting of 850,000 shares of
First Cash common stock valued at $8,712,000, or $10.25 per share, a $6,000,000
note payable to the sellers, $6,300,000 cash, and legal, consulting and assumed
liabilities totaling $163,000. Miraglia, Inc. operates eleven check cashing
stores located in California and Washington, as well as Answers, etc., a
provider of software to third-party operators of check cashing stores. In
addition to JB Pawn, Inc. and Miraglia, Inc., the Company acquired a total of 19
additional individual pawnshops in various regions at various times during the
fiscal year for an aggregate purchase price of $4,813,000, including legal,
consulting, assumed liabilities and other costs incidental to the acquisitions.
The Company financed substantially all of the cash purchase price for all of its
fiscal 1998 acquisitions through its credit facility. The purchase price for
these acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding loan balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
The following unaudited pro forma summary data for the year ended July 31,
1998 and July 31, 1997 (in thousands, except per share amounts) combines the
results of operations of the Company and Miraglia, Inc. as if the acquisition
had occurred as of August 1, 1996, after giving effect to certain adjustments,
including increased interest expense on acquisition debt, increased depreciation
and amortization expense on assets acquired, and the related income tax effects.
The unaudited pro forma fiscal 1998 and Fiscal 1997 results do not necessarily
represent results which would have occurred if the Company had acquired
Miraglia, Inc. on August 1, 1996, nor are they necessarily indicative of the
results of future consolidated operations.
Pro Forma Pro Forma
1998 1997
---- ----
(unaudited) (unaudited)
Revenues.................... $ 64,884 $ 53,970
Net income.................. $ 3,605 $ 2,237
Basic earnings per share.... $ .62 $ .48
Diluted earnings per share.. $ .51 $ .40
In September and October 1996, the Company acquired four individual stores
in its Mid-Atlantic division, in December 1996 the Company acquired one store in
the Dallas, Texas area, in February 1997 the Company acquired one store in
Corpus Christi, Texas, and in March 1997 the Company acquired one store in
Bladensburg, Maryland. These asset purchases were made for an aggregate
purchase price of $2,643,000 consisting of cash paid to the sellers of
$2,516,000 and legal, consulting and other fees of $127,000. These acquisitions
were financed with proceeds from the Company's Credit Facility and acquisition
term notes provided by the Company's primary lender. The purchase price for
these acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding loan balances, inventory on hand, and location and
condition of the facilities. Pro forma results of operations for these
acquisitions are not presented because they are not material to historical
results.
All of these acquisitions have been accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their estimated fair market values at the dates
of acquisition. The excess purchase price over the fair market value of the net
tangible assets acquired and identifiable intangible assets has been recorded as
goodwill. Goodwill and other intangible assets, net of accumulated
amortization, resulting from acquisitions was $54,600,000 and $54,494,000 as of
December 31, 1999 and 1998, respectively. The results of operations of the
acquired companies are included in the consolidated financial statements from
their respective dates of acquisition. In connection with these acquisitions,
the Company entered into non-compete agreements with the former owners,
generally ranging from five to ten years.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
From August 1996 through March 1998, the Company was involved in a
management agreement to operate and manage pawnshops for JB Pawn, Inc., a Texas
corporation which, up until March 31, 1998, was 100% owned and controlled by Mr.
Jon Burke, the brother of Mr. Richard Burke, a director of First Cash Financial
Services, Inc. Through March 31, 1998, JB Pawn, Inc. owned and provided 100% of
the financing for its pawnshops, and incurred all direct costs to operate the
pawnshops, including payroll, store operating expenses, cost of inventory, and
pawn loans. The Company received a monthly management fee for each store
managed, and provided computer support, accounting, auditing, oversight and
management of these stores. As discussed in Note 3, the Company purchased 100%
of the outstanding common stock of JB Pawn, Inc. on April 1, 1998. The Company
recorded management fee revenue of $247,000 and $212,000 under this agreement
during the fiscal year ended July 31, 1998 and 1997, respectively. In January
1996, the Company issued to Mr. Jon Burke warrants to purchase 50,000 shares of
the Company's common stock at an exercise price of $4.625 per share for
consulting services to be provided through January 2001. The warrants vest over
a five year period.
In June 1998, in conjunction with the purchase of Miraglia, Inc. (see Note
3 - Acquisitions), the Company entered into lease agreements for one of its
check cashing locations, as well as for certain office space located in
Concorde, California. These properties are partially owned by Mr. Blake
Miraglia, an employee of the Company. Total lease payments made pursuant to
these leases were $239,000, $100,000 and $20,000 during the fiscal year ended
December 31, 1999, the five months ended December 31, 1998, and the fiscal year
ended July 31, 1998, respectively, which approximated market rates. In
addition, the Company has an outstanding, unsecured note payable due July 5,
2003, bearing interest at 7%, to Mr. Miraglia which amounted to $1,761,000 as of
December 31, 1999, including accrued interest.
At December 31, 1999 and 1998, the Company had notes receivable outstanding
from certain of its officers totaling $2,592,000 and $1,289,000, respectively.
These notes are secured by a total of 760,000 shares of common stock of the
Company owned by these individuals, and bear interest at the prime rate minus
one and a half percent. These notes are due upon the earlier of termination of
employment with the Company or the sale of the underlying shares of common
stock.
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following (in thousands):
December 31, December 31,
1999 1998
---- ----
Land..................................... $ 672 $ 672
Buildings................................ 1,002 1,002
Leasehold improvements................... 2,127 2,102
Furniture, fixtures and equipment........ 12,960 9,585
-------- --------
16,761 13,361
Less: accumulated depreciation.......... (5,807) (4,215)
-------- --------
$ 10,954 $ 9,146
======== ========
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
1999 1998
---- ----
Accounts payable......................... $ 558 $ 641
Money orders payable..................... 611 880
Wire transfers payable................... 189 236
Accrued payroll.......................... 592 456
Layaway deposits......................... 946 1,002
Sales tax payable........................ 367 343
Store acquisition payable................ - 2,443
Other.................................... 1,629 751
-------- --------
$ 4,892 $ 6,752
======== ========
NOTE 7 - REVOLVING CREDIT FACILITY
- ----------------------------------
The Company currently maintains a $55,000,000 long-term line of credit with
a group of commercial lenders (the "Credit Facility"). At December 31, 1999,
$47,000,000 was outstanding under this Credit Facility and an additional
$4,271,000 was available to the Company pursuant to the available borrowing
base. The Credit Facility bears interest at the prevailing LIBOR rate (which
was approximately 6.5% at December 31, 1999) plus one percent, and matures on
September 1, 2002. Amounts available under the Credit Facility are limited to
325% of the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
these requirements and covenants during the year ended December 31, 1999 and as
of March 28, 2000. Pursuant to the terms of the Credit Facility, the Company is
prohibited from paying any dividends.
NOTE 8 - LONG-TERM DEBT AND NOTES PAYABLE
- -----------------------------------------
Long-term debt and notes payable consist of the following (in thousands,
except payment information):
December 31, December 31,
1999 1998
---- ----
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,257; matures December 31, 2004;
secured by real estate............................ $ 498 $ 528
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,518; matures December 31, 2004;
secured by real estate............................ 439 470
Unsecured demand note payable to an individual;
bearing interest at 7%; interest payable monthly
in installments of $583........................... 100 100
Note payable to a bank; bearing interest at 9.3%;
monthly principal and interest payments of
$14,504, until maturity at July 1, 1999; secured
by equipment...................................... - 98
Note payable to a bank; bearing interest at 8.9%;
monthly principal and interest payments of
$7,367, until maturity at October 1, 2001;
secured by equipment.............................. 149 221
Note payable to a bank; bearing interest at 9.2%;
monthly principal and interest payments of
$5,797, until maturity at January 15, 2002;
secured by equipment.............................. 131 186
Note payable to a bank; bearing interest at 9.3%;
monthly principal and interest payments of
$5,452, until maturity at July 1, 2002; secured
by equipment...................................... 150 199
Note payable to a corporation; bearing interest
at 14.7%; monthly principal and interest
payments of $1,658 until maturity at
August 22, 2001; secured by equipment............. 24 37
Note payable to a corporation; bearing interest
at 7%; monthly principal and interest payments
of $2,566, until maturity at December 1, 2005;
secured by specific acquired assets............... 150 170
Note payable to a corporation; bearing interest
at 7%; monthly principal and interest payments
of $4,528, until maturity at December 1, 2005;
secured by specific acquired assets............... 266 300
Note payable to a corporation; bearing interest
at 7%; monthly principal and interest payments
of $16,151 until maturity at March 1, 2002;
secured by specific acquired assets............... 402 -
Note payable to corporation; bearing interest at
6.5%; monthly principal and interest payments of
$51,778; retired during fiscal 1999............... - 551
Notes payable to five former shareholders of
Miraglia, Inc.; bearing interest at 7%;
quarterly principal payments of $300,000 and
quarterly interest payments based upon the
unpaid balance until maturity at July 5, 2003;
unsecured......................................... 4,400 5,600
-------- --------
6,709 8,460
Less: current portion.............................. (1,689) (2,177)
-------- --------
$ 5,020 $ 6,283
======== ========
Long-term debt and notes payable are scheduled to mature as follows (in
thousands):
Fiscal
------
2000..................... $ 1,689
2001..................... 1,703
2002..................... 1,418
2003..................... 1,196
2004..................... 703
--------
$ 6,709
========
NOTE 9 - INCOME TAXES
- ---------------------
Components of the provision for income taxes consist of the following (in
thousands):
Year 5 Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Current:
Federal......................... $ 2,506 $ 504 $ 1,481 $ 784
State........................... 441 119 117 121
-------- -------- -------- --------
2,947 623 1,598 905
Deferred........................... 264 985 667 432
-------- -------- -------- --------
$ 3,211 $ 1,608 $ 2,265 $ 1,337
======== ======== ======== ========
The principal current and non-current deferred tax liabilities consist of
the following at December 31, 1999 and December 31, 1998 (in thousands):
December 31, December 31,
1999 1998
---- ----
Deferred tax liabilities:
Intangible asset amortization...... $ 2,624 $ 1,827
Depreciation....................... 1,067 798
State income taxes................. 434 334
Service charges receivable......... 68 64
Other.............................. (653) 204
-------- --------
Net deferred tax liability......... $ 3,540 $ 3,227
======== ========
Reported as:
Current liabilities - income
taxes payable..................... $ - $ 261
Non-current liabilities - deferred
income taxes...................... 3,540 2,966
-------- --------
Net deferred tax liability......... $ 3,540 $ 3,227
======== ========
The provision for income taxes differs from the amounts determined by
applying the expected federal statutory tax rate to income before income taxes.
The following is a reconciliation of such differences (in thousands):
Year 5 Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Tax at the federal statutory rate.. $ 3,294 $ 1,420 $ 2,061 $ 1,235
Nondeductible amortization
of intangible assets.............. 90 23 39 34
State income taxes, net of
federal tax benefit............... 381 153 197 112
Other, net......................... (554) 12 (32) (44)
-------- -------- -------- --------
$ 3,211 $ 1,608 $ 2,265 $ 1,337
======== ======== ======== ========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases certain of its facilities and equipment under operating
leases with terms generally ranging from three to ten years. Most facility
leases contain renewal and/or purchase options. Remaining future minimum
rentals due under non-cancelable operating leases are as follows (in thousands):
Fiscal
------
2000.................... $ 5,141
2001.................... 4,389
2002.................... 3,025
2003.................... 2,113
2004.................... 1,498
Thereafter.............. 4,423
--------
$ 20,589
========
Rent expense under such leases was $5,708,000, $1,942,000, $3,596,000 and
$2,519,000 for the year ended December 31, 1999, the five months ended December
31, 1998, the year ended July 31, 1998 and the year ended July 31, 1997,
respectively.
From time to time the Company is a defendant (actual or threatened) in
certain 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 11 - EMPLOYEE STOCK OPTION PLAN AND OUTSTANDING WARRANTS
- -------------------------------------------------------------
On October 30, 1990, the Company's Board of Directors adopted the 1990
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of Common Stock authorized
and reserved for issuance under the 1990 Plan is 250,000 shares. The exercise
price for each stock option granted under the 1990 Plan may not be less than the
fair market value of the Common Stock on the date of the grant, unless, in the
case of incentive stock options, the optionee owns greater than 10% of the total
combined voting power of all classes of capital stock of the Company, in which
case the exercise price may not be less than 110% of the fair market value of
the Common Stock on the date of the grant. Unless otherwise determined by the
Board, options granted under the 1990 Plan have a maximum duration of five years
and vest in up to four equal installments, commencing on the first anniversary
of the date of grant. As of December 31, 1999, options to purchase 1,687 shares
of Common Stock were available for grant under the 1990 Plan. Options to
purchase 110,250 shares were vested at December 31, 1999.
On January 14, 1999, the Company's shareholders adopted the 1999 Stock
Option Plan (the "1999 Plan"). The 1999 Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of Common Stock authorized
and reserved for issuance under the 1999 Plan is 1,200,000 shares. The exercise
price for each stock option granted under the 1999 Plan may not be less than the
fair market value of the Common Stock on the date of the grant, unless, in the
case of incentive stock options, the optionee owns greater than 10% of the total
combined voting power of all classes of capital stock of the Company, in which
case the exercise price may not be less than 110% of the fair market value of
the Common Stock on the date of the grant. Unless otherwise determined by the
Board, options granted under the 1999 Plan have a maximum duration of ten years
unless, in the case of incentive stock options, the optionee owns at least 10%
of the total combined voting power of all classes of capital stock of the
Company, in which case the maximum duration is five years. As of December 31,
1999, options to purchase 719,500 shares of Common Stock were available for
grant under the 1999 Plan. There were no vested shares under the 1999 Plan as
of December 31, 1999.
The Company also issues warrants to purchase shares of Common Stock to
certain key members of management, to members of the Board of Directors who are
not employees or officers of the Company and to outside consultants and advisors
in connection with various acquisitions, debt offerings and consulting
engagements. In accordance with the provisions of FAS 123, the issuance of
warrants to outside consultants and advisors is accounted for using the fair
value method prescribed by FAS 123. Warrants granted to outside consultants and
advisors prior to December 15, 1995 are accounted for using methods prescribed
by APB 25.
Stock option and warrant activity from July 31, 1996 through December 31,
1999 is summarized in the accompanying chart (in thousands, except exercise
price).
Exercisable
-----------------
Weighted Wtd. Avg.
Average Exercise
Options Warrants Exercise Price Number Price
------- -------- -------------- ------ -----
July 31, 1996........ 207 3,219 $ 7.57 3,352 $ 7.64
Granted........... 9 - 4.75
Cancelled......... (15) - 4.93
Repurchased....... - (198) 4.52
Exercised......... - (44) 4.00
---- ------
July 31, 1997........ 201 2,977 7.82 3,120 7.88
Granted........... 27 480 8.00
Cancelled......... (1) (450) 14.65
Exercised......... (13) (1,138) 4.13
---- ------
July 31, 1998........ 214 1,869 8.42 2,027 8.48
Granted........... 22 352 12.00
Cancelled......... (2) - 7.26
Exercised......... - (325) 4.53
---- ------
December 31, 1998.... 234 1,896 9.65 2,075 9.66
Granted........... 480 - 10.07
Exercised......... (73) (5) 4.63
---- ------
December 31, 1999.... 641 1,891 9.88 2,001 9.84
Options and warrants outstanding as of December 31, 1999 are as follows (in
thousands, except exercise price and life):
Total Warrants Weighted Average
Exercise Price and Options Remaining Life Currently Exercisable
-------------- ----------- -------------- ---------------------
$ 4.63 563 1.0 562
4.75 9 1.6 7
8.00 505 3.1 480
10.00 447 4.3 -
11.00 34 4.5 -
12.00 374 3.7 352
15.00 600 .6 600
----- -----
2,532 2,001
===== =====
The Company applies the intrinsic value method in accounting for its stock
option and warrant issuances. Accordingly, no compensation cost has been
recognized for its stock option and warrant grants. Had compensation cost for
the Company's stock options and warrants been determined based on the fair value
at the grant dates for such option and warrant awards, the Company's net income
would have been reduced by $1,433,000, $391,000, $397,000 and $217,000 during
the year ended December 31, 1999, the five months ended December 31, 1998, the
year ended July 31, 1998 and the year ended July 31, 1997, respectively. Basic
and diluted earnings per share would have been reduced by $0.17 and $0.16,
respectively, during the year ended December 31, 1999, by $0.05 and $0.04,
respectively, during the five months ended December 31, 1998, by $0.07 and
$0.06, respectively, during the year ended July 31, 1998, and by $0.06 and
$0.03, respectively, during the year ended July 31, 1997.
Weighted average grant-date fair values of options issued were $9.28,
$11.39, $5.71 and $3.30 per unit during the year ended December 31, 1999, the
five months ended December 31, 1998, the year ended July 31, 1998 and the year
ended July 31, 1997, respectively, which were calculated in accordance with the
Black-Scholes option pricing model, using the following assumptions:
Year 5 Months Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, July 31, July 31,
1999 1998 1998 1997
---- ---- ---- ----
Expected volatility........... 232% 227% 99% 39%
Expected dividend yield....... - - - -
Expected option term.......... 5 years 5 years 5 years 5 years
Risk-free rate of return...... 6.0% 6.0% 6.0% 6.31%
NOTE 12 - FIRST CASH 401(k) PLAN
- --------------------------------
The First Cash 401(k) Plan (the "Plan") is provided by the Company for all
full-time employees who have been employed with the Company for one year. Under
the Plan, a participant may contribute up to 15% of earnings, with the Company
matching the first 3% at a rate of 50%. The employee contributions are paid to
a corporate trustee and invested in various funds. Company contributions are
invested in its common stock, and contributions made to participants' accounts
become fully vested upon completion of five years of service. The total Company
contributions to the Plan were $121,000, $48,000, $95,000 and $69,000 for the
year ended December 31, 1999, the five months ended December 31, 1998, the year
ended July 31, 1998 and the year ended July 31, 1997, respectively.
NOTE 13 - OPERATING SEGMENT INFORMATION
- ---------------------------------------
The Company has three reportable operating segments: pawn lending stores,
check cashing/payday advance stores, and a software and hardware provider. The
Company's pawn stores offer non-recourse loans on the collateral of pledged
tangible personal property. The Company's check cashing and payday advance
stores provide check cashing services, short-term unsecured consumer loans, bill
payment services, money transfer services and money order sales. The Company's
computer software subsidiary, Answers, etc., provides turnkey point of sale
operating systems to other check cashing and payday advance operators
unaffiliated with the Company.
The accounting policies of the segments are the same as those described in
Note 2. Management of the Company evaluates performance based on the operating
income of each segment. There are no intersegmental sales. Each of the
segments are supervised separately. Information concerning the segments is set
forth below (in thousands):
Check Cashing/
Pawn Payday Advance
Stores Stores Software Consolidated
------ ------ -------- ------------
Year Ended December 31, 1999
- ----------------------------
Total revenues................... $ 79,470 $ 14,573 $ 3,708 $ 97,751
Depreciation and amortization.... 2,293 709 88 3,090
Income before interest and
income taxes.................... 8,019 3,927 345 12,291
Total assets at
December 31, 1999............... 94,108 34,800 2,531 131,439
Capital expenditures............. 2,539 431 312 3,282
Five Months Ended December 31, 1998
- -----------------------------------
Total revenues................... 29,140 3,484 1,454 34,078
Depreciation and amortization.... 804 221 13 1,038
Income before interest and
income taxes.................... 4,051 1,036 212 5,299
Total assets at
December 31, 1998............... 80,586 30,495 2,244 113,325
Capital expenditures............. 806 145 46 997
Year Ended July 31, 1998
- ------------------------
Total revenues................... 57,082 1,133 789 59,004
Depreciation and amortization.... 1,627 74 4 1,705
Income before interest and
income taxes.................... 7,700 272 122 8,094
Total assets at July 31, 1998.... 68,143 21,411 1,574 91,128
Capital expenditures............. 999 11 11 1,021
Year Ended July 31, 1997
- ------------------------
Total revenues................... 49,431 - - 49,431
Depreciation and amortization.... 1,353 - - 1,353
Income before interest and
income taxes.................... 5,971 - - 5,971
Total assets at July 31, 1997.... 56,677 - - 56,677
Capital expenditures............. 1,188 - - 1,188