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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1997, or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission file number 0-19133
FIRST CASH, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction of (IRS Employer Identification Number)
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. [ X ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the last reported sales price on the Nasdaq Stock Market
on October 6, 1997 is $36,243,935. As of October 6, 1997, there were 4,460,792
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 December 16, 1997 is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH, INC.
FORM 10-K
----------------
For the Fiscal Year Ended July 31, 1997
TABLE OF CONTENTS
-----------------
PART I
Item 1. Business........................................ 1
Item 2. Properties...................................... 9
Item 3. Legal Proceedings............................... 10
Item 4. Submission of Matters to a Vote of Security
Holders........................................ 10
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters................ 10
Item 6. Selected Financial Data......................... 11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.. 12
Item 8. Financial Statements and Supplementary Data..... 16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......... 16
PART III................................................. 17
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................ 17
SIGNATURES............................................... 19
PART I
------
Item 1. Business
- -----------------
General
- -------
First Cash, Inc. (the "Company") is the third largest publicly traded
pawnshop operator in the United States and currently has 60 stores in Texas,
Oklahoma, Washington, D.C. and Maryland. The Company engages in both consumer
finance and retail sales activities. The Company provides a convenient source
for consumer loans, lending money against pledged tangible personal property
such as jewelry, electronic equipment, tools, firearms, sporting goods and
musical equipment. The Company also functions as a retailer of previously-owned
merchandise acquired in forfeited pawn transactions and over-the-counter
purchases from customers, as well as new merchandise acquired in close-out
purchases. For the fiscal year ended July 31, 1997, the Company's revenues were
derived 66% from retail activities, 33% from lending activities, and 1% from
other income, including management fee revenue. The Company provides its
customer base timely and convenient access to short-term credit not generally
available from commercial banks, finance companies or other financial
institutions.
In addition to operating its own stores, the Company also receives
management fees for managing pawnshops owned by third parties. As of July 31,
1997, the Company managed seven such stores. These third parties own and
provide 100% of the financing for the pawnshops, and incur all direct costs to
operate the pawnshops, including but not limited to payroll, store operating
expenses, cost of inventory, and pawn loans. The Company receives a monthly
management fee for each store managed, and provides computer support,
accounting, auditing, oversight and management of these stores.
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 four publicly traded
pawnshop companies operate less than 5% 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
selected acquisitions and new store openings and to enhance operating
efficiencies and productivity. During fiscal 1997, 1996 and 1995, the Company
added 7, 7 and 7 stores to its network, respectively, net of stores
consolidated.
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. and Famous Pawn, Inc. 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
- --------
The pawnshop industry in the United States is a growing industry, with the
highest concentration 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 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.
In recent years, several operators have begun to develop multi-unit chains
through acquisitions and new store openings. As of October 6, 1997, the four
publicly traded pawnshop companies operated approximately 650 stores in the
United States. Accordingly, management believes that the industry is in the
early stages of consolidation.
Business Strategy
- -----------------
The Company's business plan is to continue a growth strategy of expansion
through selected acquisitions and new store openings and to enhance operating
efficiencies and productivity at both newly acquired and existing stores.
Acquisitions and New Store Openings
Because of the highly fragmented nature of the pawnshop industry and 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. Therefore, the Company intends to expand through a
combination of acquisitions and start-up stores.
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 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.
The Company has opened nine new stores since its inception and currently
intends to open additional stores in locations where management believes
appropriate demand and other favorable conditions exist. 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 store includes
inventory, funds available for pawn loans, store fixtures, security systems, and
computer equipment. Although the total investment varies and is difficult to
predict for each location, it has been the Company's experience that between
$200,000 and $300,000 is required to fund a new store for the first six months
of operation. Because existing 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.
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 and the Corpus Christi areas. Store
clusters have also been established in the Oklahoma City, Oklahoma area,
Washington D.C. and its surrounding Maryland suburbs, and in Baltimore,
Maryland. The Company currently plans to continue its expansion in existing
markets in Texas and Maryland, 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, 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 pawnshops and to make customers feel more
comfortable with the pawn-shopping experience. In addition to well-lit parking
facilities, several of the stores' exteriors display an attractive and
distinctive blue and yellow 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.
Lending Activities
- ------------------
The Company loans money against the security of pledged goods. The pledged
goods are tangible personal property generally consisting of jewelry, electronic
equipment, tools, firearms, 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. In Washington, D.C., a flat $5
charge per month applies to all loans of up to $40, and a 60% annualized service
charge applies to loans of greater than $40. As of July 31, 1997, the Company's
average loan per pawn ticket was approximately $83. Pawn service charges during
fiscal 1997, 1996 and 1995 accounted for approximately 61%, 62% and 61%,
respectively, of the Company's total revenues (net of cost of goods sold).
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, 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 through
the term of the loan which is 120 days. Historically, approximately 70% of
loans made have either been paid in full or renewed. In the event the borrower
does not pay or renew a loan within 90 days in Texas, 60 days in Oklahoma, 45
days in Maryland and 120 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 fiscal 1997, 1996
and 1995, the Company's annualized yield on average loan balance was 134%, 137%
and 137%, respectively.
Retail Activities
- -----------------
The Company acquires merchandise inventory primarily through forfeited pawn
loans and purchases of used goods from the general public, and to a lesser
extent, purchases of new goods from vendors. New goods consist primarily of
merchandise which complements certain product lines, such as jewelry and tools.
Sales of inventory during fiscal 1997, 1996 and 1995 accounted for approximately
66.0%, 65.3% and 64.3%, respectively, of the Company's total revenues for these
periods. For fiscal 1997, 1996 and 1995, the Company realized gross profit
margins on merchandise sales of 31.0%, 32.7% and 34.1%, 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 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
- -------------------
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 blue and yellow 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 October 6, 1997, the Company operated stores in the following markets:
Number of
Locations
---------
Texas:
------
Corpus Christi.......................... 5
Dallas/Fort Worth metropolitan area..... 17
South Texas (Brownsville/McAllen/
Harlingen/Weslaco/Pharr)............... 9
Tyler................................... 1
--
32
--
Oklahoma:
---------
Oklahoma City........................... 5
--
5
--
Mid Atlantic:
-------------
Baltimore, Maryland..................... 7
Washington, D.C. and surrounding
Maryland suburbs....................... 16
--
23
--
Total................................... 60
==
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 three to five store managers. Each area
supervisor reports to one of three regional vice-presidents. The Company's
fourteen area supervisors and regional vice-presidents have an average of seven
years experience in the pawn industry.
The Company believes that its profitability 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.
Competition
- -----------
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, in connection with lending money, competes primarily with
other pawnshops. The pawnshop industry is characterized by a large number of
independent owner-operators, some of whom own and operate multiple pawnshops.
The Company believes that the primary elements of competition in the pawnshop
business are store location, the ability to lend competitive amounts on items
pawned, 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 companies, including Cash America
International, 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
- ----------
The Company is subject to extensive regulation, supervision and licensing
under various federal, state and local statutes, ordinances and regulations.
Texas
Pursuant to the terms of the Texas Pawnshop Act, the Texas Consumer Credit
Commission ("TCCC") has primary responsibility for the regulation of pawnshops
and enforcement of laws relating to pawnshops in Texas.
The Texas Pawnshop Act prescribes the stratified loan amounts and the
maximum allowable pawn service charges which pawnbrokers in Texas may charge for
the lending of money within each stratified range of loan amounts. The maximum
allowable pawn service charges were established and have not been revised since
1971 when the Texas Pawnshop Act was enacted. Since 1981, the ceiling amounts
for stratification of the loan amounts to which those rates apply have been
revised and will continue to be reviewed and be subject to annual revision on
July 1 in relation to the Consumer Price Index. These rates are reviewed and
established annually. The Texas Pawnshop Act also prescribes the maximum
allowable pawn loan, which is currently $11,250. The maximum allowable pawn
service charges under the Texas Pawnshop Act for the various loan amounts for
the previous and current year are as follows:
Year Ended June 30, 1997 Year Ending June 30, 1998
------------------------ -------------------------
Maximum Maximum
Allowable Allowable
Annual Annual
Amount Financed Percentage Amount Financed Percentage
Per Pawn Loan Rate Per Pawn Loan Rate
--------------- ---------- --------------- ----------
$ 1 to $ 132 240% $ 1 to $ 135 240%
$ 133 to $ 440 180% $ 136 to $ 450 180%
$ 441 to $ 1,320 30% $ 451 to $ 1,350 30%
$ 1,321 to $11,000 12% $ 1,351 to $11,250 12%
In addition to establishing maximum allowable service charges and loan
ceilings, the Texas Pawnshop Act also provides for the licensing of pawnshops
and pawnshop employees. To be eligible for a pawnshop license in Texas, an
applicant must (i) be of good moral character, (ii) maintain net assets, as
defined in the Texas Pawnshop Act, of at least $150,000 readily available for
use in conducting the business of each licensed pawnshop, (iii) show that the
pawnshop will be operated lawfully and fairly in accordance with the Texas
Pawnshop Act, and (iv) show that the applicant has the financial responsibility,
experience, character and general fitness to command the confidence of the
public in its operations. In the case of a business entity, the good moral
character requirements apply to each officer, director and holder of 5% or more
of the entity's outstanding shares.
As part of the license application process, any existing pawnshop licensee
who would be affected by the granting of the proposed application may request a
public hearing at which to appear and present evidence for or against the
application. For an application for a new license in a county with a population
of 250,000 or more, the TCCC must find not only that the applicant meets the
other requirements for a license, but also that (i) there is a public need for
the proposed pawnshop and (ii) the volume of business in the community in which
the pawnshop will conduct business indicates that a profitable operation is
probable.
The TCCC may, after notice and hearing, suspend or revoke any license for a
Texas pawnshop upon finding, among other things, that (i) any fees or charges
have not been paid; (ii) the licensee violates (whether knowingly or without the
exercise of due care) any provision of the Texas Pawnshop Act or any regulation
or order thereunder; or (iii) a fact or condition exists which, if it had
existed at the time the original application was filed for a license, would have
justified the TCCC in refusing such license.
Under the Texas Pawnshop Act, a pawnbroker may not accept a pledge from a
person under the age of 18 years; make any agreement requiring the personal
liability of the borrower; accept any waiver of any right or protection accorded
a pledgor under the Texas Pawnshop Act; fail to exercise reasonable care to
protect pledged goods from loss or damage; fail to return pledged goods to a
pledgor upon payment of the full amount due; make any charge for insurance in
connection with a pawn transaction; enter into any pawn transaction that has a
maturity date of more than one month; display for sale in storefront windows or
sidewalk display cases, pistols, sword canes, blackjacks, and certain other
types of knives and similar weapons; or purchase used or second hand personal
property or accept building construction materials as pledged goods unless a
record is established containing the name, address and identification of the
seller, a complete description of the property, including serial number, and a
signed statement that the seller has the right to sell the property.
Oklahoma
In Oklahoma, the maximum allowable service charge was established in 1972
when the Oklahoma Pawnshop Act was enacted. Under current Oklahoma law, a pawn
loan may not exceed $25,000. The maximum allowable pawn service charges under
the Oklahoma Pawnshop Act for the various loan amounts are currently as follows:
Maximum
Allowable
Annual
Amount Financed Percentage
Per Pawn Loan Rate
--------------- ----------
$ 1 to $ 150 240%
$ 151 to $ 250 180%
$ 251 to $ 500 120%
$ 501 to $ 1,000 60%
$ 1,001 to $25,000 36%
In addition to establishing maximum allowable service charge and loan
ceilings, the Oklahoma Pawnshop Act also provides for the licensing of
pawnshops. To be eligible for a pawnshop license in Oklahoma, an applicant must
(i) be of good moral character, (ii) maintain net assets, as determined by the
Oklahoma Administrator of Consumer Affairs ("OACA"), of at least $25,000,
(iii) show that the pawnshop will be operated lawfully and fairly in accordance
with the Oklahoma Pawnshop Act, and (iv) not have been convicted of any felony
which directly relates to the duties and responsibilities of the occupation of
pawnbroker.
The OACA may, after notice and hearing, suspend or revoke any license for
an Oklahoma pawnshop upon finding, among other things, that (i) any fees or
charges imposed by the OACA have not been paid; (ii) the licensee violates
(whether knowingly or without exercise of due care) any provision of the
Oklahoma Pawnshop Act or any regulation or order thereunder; or (iii) a fact or
condition exists which, if it had existed at the time of the original
application was filed for a license, would have justified the OACA in refusing
such license.
Under the Oklahoma Pawnshop Act, a pawnbroker may not accept a pledge from
a person under the age of 18 years; accept any waiver of any right or protection
accorded a customer under the Oklahoma Pawnshop Act; fail to exercise reasonable
care to protect pledged goods from loss or damage; fail to return pledged goods
to a customer upon payment of the full amount due the pawnbroker on the pawn
transaction; make any charge for insurance in connection with a pawn
transaction; enter into any pawn transaction which has a maturity date of more
than one month; or accept collateral or buy merchandise from a person unable to
supply verification of identity by photo identification by either a state-issued
identification card, driver's license, or federal government-issued
identification card or by readable fingerprint of right or left index finger on
the back of the pawn or purchase receipt to be retained for the pawnbroker's
record.
Maryland
In Maryland, there is no statutory service charge schedule. The Company
charges 12% to 20% per month on loans at its Maryland stores, with a minimum
monthly charge of $6, which is consistent with service charges levied by other
pawnshops in these areas. The State of Maryland also does not prescribe any
maximum loan amounts.
Article 56 of the Annotated Code of Maryland provides for the licensing of
pawnshops. To be eligible for a pawnshop license in Maryland, an applicant must
(i) file a signed application verified under oath, (ii) provide the Secretary of
the Maryland Department of Licensing and Regulation ("MDLR") with a detail
of the applicants business dealings for the previous 36 months, (iii) pay an
application fee of $100 plus $25 for each employee, (iv) not have had a similar
license suspended, revoked, or refused in another jurisdiction, and (v) not have
been convicted of any felony, theft offense, or crime involving moral turpitude
within 3 years of the application, or any time after the application, or employ
such person.
The MDLR may, after notice and hearing, suspend or revoke any license for a
Maryland pawnshop upon finding, among other things, that (i) any fees or charges
imposed by the MDLR have not been paid, or (ii) the licensee cannot verify that
the information supplied with the original application is current.
Under Article 56 of the Annotated Code of Maryland, a pawnbroker may not
accept a pledge from a person under the age of 18 years; prohibit any police
officer from inspecting a dealer's records during business hours; fail to
exercise reasonable care to protect pledged goods from loss or damage; fail to
return pledged goods to a customer upon payment of the full amount due the
pawnbroker on the pawn transaction; or accept collateral or buy merchandise from
a person unable to supply verification of identity by photo identification by
either a state-issued identification card, driver's license, passport, or
federal government-issued identification card and one other corroborating form
of identification.
Washington, D.C.
Pursuant to the terms of the "Act to Regulate and License Pawnbrokers in
the District of Columbia" ("Act"), the Director of the D.C. Department of
Licenses, Investigations and Inspections ("Director") has primary responsibility
for the regulation of pawnshops and enforcement of laws relating to pawnshops in
Washington, D.C..
The Act prescribes the maximum rates of interest for which a pawnbroker may
contract and which he may receive. The maximum rates are a flat $5 per month
charge on all loans of $40 or less, and a 5% per month charge on loans of
greater than $40.
In addition to establishing maximum allowable service charges and loan
ceilings, the Act also provides for the licensing of pawnshops and pawnshop
employees. To be eligible for a pawnshop license in Washington, D.C., an
applicant must submit an application to both the Director and the Washington,
D.C. Chief of Police. After an investigation has been performed by the Chief of
Police, a report of the applicant's moral character must be forwarded to the
Director who then determines whether to issue a license.
Under the Act, a pawnbroker must file an annual report to the director on
or before the fifteenth day of March of each year which must contain, among
other things, the number of redeemed and unredeemed pledges, the total amount of
cash loaned, cash balances on hand, total interest collected and any other
information requested by the Director. In addition, pawnbrokers must maintain a
pawn record ledger which details pertinent information on all loans.
Other
With respect to firearms and ammunition sales, each pawnshop must comply
with the regulations promulgated by the Department of the Treasury-Bureau of
Alcohol, Tobacco and Firearms which require each pawnshop dealing in firearms to
maintain a permanent written record of all firearms received or disposed of and
a similar record for all ammunition sales.
Under some municipal ordinances, pawnshops 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 480 employees as of September 26, 1997. At
that date, approximately 20 persons were 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 pawnshop locations in amounts management believes to be
adequate. The Company maintains workers' compensation insurance in Maryland,
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.
Future Plans
- ------------
The Company's long-term business plan includes continuing to acquire
existing pawnshops in Texas, Maryland and the Washington, D.C. metropolitan
area, and possibly other states. The acquisitions may involve a purchase of
assets for cash or a combination of cash, Company securities and/or debt. From
time to time, the Company may also open new pawnshops where desirable
opportunities are presented.
Item 2. Properties
- -------------------
The Company currently owns the real estate and buildings for three of its
pawnshops and leases 57 pawnshop 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 1997 and 2010. All
current leases provide for specified periodic rental payments ranging from
approximately $1,200 to $9,000 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 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 pawnshop locations are suitable for such purpose. The Company
considers its equipment, furniture and fixtures to be in good condition.
The Company currently leases approximately 8,500 square feet in Arlington,
Texas for its executive offices. The lease, which expires November 2001,
currently provides for monthly rental payments of approximately $10,000.
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 1997.
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 Stock Market under the symbol "PAWN". The following table
sets forth the quarterly high and low last sales prices per share for the Common
Stock, as reported by the Nasdaq Stock Market.
Common Stock
Price Range
------------
High Low
---- ---
1996
First Quarter............... $ 4.63 $ 3.13
Second Quarter.............. 4.25 3.63
Third Quarter............... 6.25 3.63
Fourth Quarter.............. 6.38 4.63
1997
First Quarter............... $ 5.77 $ 4.69
Second Quarter.............. 6.73 5.25
Third Quarter............... 6.81 5.16
Fourth Quarter.............. 6.38 5.50
On October 6, 1997, the last sales price for the Common Stock as reported
by the Nasdaq Stock Market was $8.13 per share. On October 6, 1997, there were
approximately 91 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 Bank One,
Texas, NA (the "Credit Facility"). Pursuant to the terms of its agreement with
its lender, 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 Ended July 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share amounts and
certain operating data)
Income Statement Data:
- ----------------------
Revenues:
Merchandise sales............. $32,628 $24,823 $20,709 $12,174 $ 9,445
Pawn service charges.......... 16,517 13,149 11,298 8,279 6,251
Other......................... 286 51 177 130 131
------- ------- ------- ------- -------
49,431 38,023 32,184 20,583 15,827
------- ------- ------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold............ 22,502 16,714 13,648 8,258 6,012
Operating expenses............ 15,774 12,573 10,678 7,356 5,656
Interest expense.............. 2,340 2,124 2,116 819 434
Depreciation.................. 717 540 506 361 314
Amortization.................. 636 565 531 377 322
Administrative expenses....... 3,831 3,150 3,013 1,815 1,188
------- ------- ------- ------- -------
45,800 35,666 30,492 18,986 13,926
------- ------- ------- ------- -------
Income before income taxes...... 3,631 2,357 1,692 1,597 1,901
Provision for income taxes...... 1,337 917 592 462 784
------- ------- ------- ------- -------
Net income...................... 2,294 1,440 1,100 1,135 1,117
Dividends on preferred stock.... - - - 120 124
------- ------- ------- ------- -------
Net income attributable to
common stockholders........... $ 2,294 $ 1,440 $ 1,100 $ 1,015 $ 993
======= ======= ======= ======= =======
Primary earnings per share...... $ .52 $ .39 $ .30 $ .27 $ .30
Fully diluted earnings per share $ .47 $ .38 $ .30 $ .27 $ .30
Operating Data:
- ---------------
Locations in operation:
Beginning of the period....... 50 43 36 26 23
Acquisitions.................. 7 7 5 10 3
Opened........................ - 1 2 2 -
Sold.......................... - - - (1) -
Consolidated.................. - (1) - (1) -
--- --- --- --- ---
End of the period............. 57 50 43 36 26
=== === === === ===
Pawn loans...................... $12,877 $11,701 $ 9,158 $ 7,320 $ 5,048
Average loan balance per store.. $ 226 $ 234 $ 213 $ 203 $ 194
Redemption rate................. 72% 70% 71% 73% 73%
Average inventory per store..... $ 176 $ 175 $ 178 $ 167 $ 162
Annualized inventory turnover... 2.4x 2.1x 2.0x 1.6x 1.8x
Gross profit percentage on
merchandise sales............. 31.0% 32.7% 34.1% 32.2% 36.3%
Balance Sheet Data:
- -------------------
Working capital................. $23,616 $21,098 $17,027 $14,159 $ 3,966
Total assets.................... 56,677 51,945 43,755 37,814 27,025
Long-term liabilities........... 26,892 28,655 22,964 18,657 392
Total liabilities............... 30,398 31,362 24,808 19,804 7,278
Series A preferred stock........ - - - - 2,000
Stockholders' equity............ 26,279 20,583 18,947 18,010 17,747
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------
General
- -------
The Company's revenues are derived primarily from service charges on pawn
loans and the sale of unredeemed goods, or "merchandise sales". Loans are made
for a 30-day term with an automatic extension of 60 days in Texas, 30 days in
Oklahoma and 15 days in Maryland. Loans made in Washington, D.C. are made for a
120-day term with no automatic extension. All loans are collateralized by
tangible personal property placed in the custody of the Company. The annualized
service charge rates on the 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 $5 charge per month, while loans over $40 bear a 60% annualized rate. In
its Texas stores, the Company recognizes service charges at the inception of the
loan at the lesser of the amount allowed by the state law for the initial 30-day
term or $15, in accordance with state law. In Oklahoma, Maryland and
Washington, D.C., the Company recognizes service charges at the inception of the
loan at the amount allowed by law for the first 30 days. 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 held for resale.
As a result of the Company's policy of accruing pawn service charges only
for the initial 30-day term, unredeemed merchandise is transferred to inventory
at a value equal to the loan principal plus one-month's accrued interest. The
Company's accounting policy defers recognition of an amount of income equal to
the amount of pawn service charges relating to the extension period until the
loan is repaid or renewed, or until the merchandise is resold. As a result of
this policy, the Company's annualized loan yield is lower than certain of its
publicly traded competitors. Conversely, this revenue recognition policy
results in inventory being recorded at a lower value, which results in
realization of a larger gross profit margin on merchandise sales than would be
realized by certain of the Company's publicly traded competitors. This policy,
in the Company's opinion, lessens the risk that the inventory's cost will exceed
its realizable value when sold. However, if the pawn loan is repaid or renewed,
or if the forfeited merchandise is resold, the amount of income which would be
recognized by the Company or certain of its publicly traded competitors would be
the same over time.
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 and
security. 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 for the
three years ended July 31, 1997. 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 Ended July 31,
-------------------
1997 1996 1995
---- ---- ----
Income statement items as a percent
of total revenues:
Revenues:
Merchandise sales..................... 66.0% 65.3% 64.3%
Pawn service charges.................. 33.4 34.6 35.1
Other................................. .6 .1 .6
Expenses:
Operating expenses.................... 31.9 33.1 33.2
Interest expense...................... 4.7 5.6 6.6
Depreciation.......................... 1.5 1.4 1.6
Amortization.......................... 1.3 1.5 1.6
Administrative expenses............... 7.8 8.3 9.4
Gross profit as a percent of
merchandise sales........................ 31.0 32.7 34.1
Results of Operations
- ---------------------
Fiscal 1997 Compared to Fiscal 1996
Total revenues increased 30% to $49,431,000 for the fiscal year ended July
31, 1997 ("Fiscal 1997") as compared to $38,023,000 for the fiscal year ended
July 31, 1996 ("Fiscal 1996"). The change resulted from an increase in revenues
of $7,163,000 generated by the 15 stores which were opened or acquired during
Fiscal 1996 and Fiscal 1997 and an increase of $4,245,000, or 12%, at the 42
stores which were in operation during all of Fiscal 1996 and Fiscal 1997. Of
the $11,408,000 increase in total revenues, 68%, or $7,805,000, was attributable
to increased merchandise sales, 30%, or $3,368,000 was attributable to increased
pawn service charges, and the remaining increase of $235,000, or 2% was
attributable to the increase in other income, primarily management fee revenue.
As a percentage of total revenues, merchandise sales increased from 65.3% to
66.0% during Fiscal 1997 as compared to Fiscal 1996, while pawn service charges
declined from 34.6% to 33.4%. Other income increased from 0.1% to 0.6% during
the same period.
The aggregate loan balance increased 10% from $11,701,000 at July 31, 1996
to $12,877,000 at July 31, 1997. Of the $1,176,000 increase, $436,000 was
attributable to growth at the 50 stores in operation at July 31, 1996 and July
31, 1997, while $740,000 was attributable to the addition of 7 stores during
Fiscal 1997.
Gross profit as a percentage of merchandise sales decreased from 32.7%
during Fiscal 1996 to 31.0% during Fiscal 1997. This decrease in the Company's
gross profit margin was primarily the result of the Company's efforts to
increase its inventory turn ratio, and increased jewelry scrap sales during
Fiscal 1997, which generally yield a significantly lower margin than the
Company's regular retail sales, but improve the Company's liquidity. Such scrap
jewelry sales are generally made at prevailing precious metals market prices,
which have declined over the last two years.
Operating expenses increased 25% to $15,774,000 during Fiscal 1997 compared
to $12,573,000 during Fiscal 1996, primarily as a result of the addition of 14
stores in Fiscal 1996 and Fiscal 1997, and the addition of personnel viewed as
necessary to support the increased number of store level transactions.
Administrative expenses increased 22% to $3,831,000 during Fiscal 1997 compared
to $3,150,000 during Fiscal 1996 due primarily to the addition of personnel to
supervise store operations. Interest expense increased to $2,340,000 in Fiscal
1997 compared to $2,124,000 in Fiscal 1996 as a result of borrowings associated
with expansion of the Company's store base.
For Fiscal 1997 and 1996, the Company's effective federal income tax rates
of 37% and 39%, respectively, differed from the statutory tax rate of 34%
primarily as a result of state income taxes and amortization of non-deductible
intangible assets.
Fiscal 1996 Compared to Fiscal 1995
Total revenues increased 18% to $38,023,000 for the fiscal year ended July
31, 1996 ("Fiscal 1996") as compared to $32,184,000 for the fiscal year ended
July 31, 1995 ("Fiscal 1995"). The change resulted from an increase in revenues
of $2,433,000 generated by the 14 stores which were opened or acquired during
Fiscal 1995 and Fiscal 1996 and an increase of $4,119,000 at the 36 stores which
were in operation during all of Fiscal 1995 and Fiscal 1996. These increases
were offset by a $713,000 decrease resulting from the consolidation of a store
into an existing store subsequent to August 1, 1995. Of the $5,839,000 increase
in total revenues, 70%, or $4,114,000, was attributable to increased merchandise
sales, 32%, or $1,851,000 was attributable to increased pawn service charges,
and the remaining decrease of $126,000, or 2% was attributable to the decrease
in other income. As a percentage of total revenues, merchandise sales increased
from 64.3% to 65.3% during Fiscal 1996 as compared to Fiscal 1995, while pawn
service charges declined from 35.1% to 34.6%.
The aggregate loan balance increased 28% from $9,158,000 at July 31, 1995
to $11,701,000 at July 31, 1996. Of the $2,543,000 increase, $1,641,000 was
attributable to growth at the 42 stores in operation at July 31, 1996 and July
31, 1995, while $902,000 was attributable to the addition of 8 stores during
Fiscal 1996, net of one store consolidated.
Gross profit as a percentage of merchandise sales decreased from 34.1%
during Fiscal 1995 to 32.7% during Fiscal 1996. This decrease in the Company's
gross profit margin was primarily the result of increased jewelry scrap sales
during Fiscal 1996, which generally yield a significantly lower margin than the
Company's regular retail sales, but improve the Company's liquidity.
Operating expenses increased 18% to $12,573,000 during Fiscal 1996 compared
to $10,678,000 during Fiscal 1995, primarily as a result of the addition of 14
stores (net) in Fiscal 1995 and Fiscal 1996, and the addition of personnel
viewed as necessary to support the increased number of store level transactions.
Administrative expenses increased 5% to $3,150,000 during Fiscal 1996 compared
to $3,013,000 during Fiscal 1995 due primarily to the addition of personnel to
supervise store operations. Interest expense increased to $2,124,000 in Fiscal
1996 compared to $2,116,000 in Fiscal 1995 as a result of borrowings associated
with expansion of the Company's store base.
For Fiscal 1996 and 1995, the Company's effective federal income tax rates
of 39% and 35%, respectively, 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 during the past three years have
been financed with funds generated from operations, bank borrowings, and seller
financed indebtedness.
The Company maintains a $20,000,000 long-term line of credit with Bank One,
Texas, NA (the "Credit Facility"). At July 31, 1997, $15,575,000 was
outstanding under this Credit Facility and an additional $1,802,000 was
available to the Company pursuant to the available borrowing base. The Credit
Facility bears interest at the prevailing LIBOR rate plus one and three-quarters
percent, and matures in December 1998. Amounts available under the Credit
Facility are limited to the sum of 60% of inventory and 80% of loans and service
charges receivable of the Company. The Credit Facility is scheduled to mature
on December 1, 1998. Under the terms of the Credit Facility, the Company is
required to maintain certain financial ratios and comply with certain technical
covenants. As of July 31, 1997, the Company was in compliance with such
covenants. 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 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.
As of July 31, 1997, the Company's primary sources of liquidity were
$1,139,000 in cash and cash equivalents, $1,949,000 in service charge
receivables, $12,877,000 in loans, $10,035,000 in inventories and $1,802,000 of
available and unused funds under the Company's Credit Facility. The Company had
working capital as of July 31, 1997 of $23,616,000 and a liabilities to equity
ratio of 1.2 to 1.
Net cash provided by operating activities of the Company during Fiscal 1997
was $2,819,000, consisting primarily of net income before non-cash depreciation
and amortization of $3,647,000, less cash used to fund the increase of balance
sheet items of $828,000. Net cash used for investing activities during Fiscal
1997 was $4,397,000, which was comprised of cash used for increasing pawn loans
of $566,000, and cash paid for acquisitions and other fixed asset additions of
$3,831,000 during Fiscal 1997. Net cash provided by financing activities was
$2,037,000 during Fiscal 1997, which consisted of net increases in the Company's
debt and repurchase of outstanding stock warrants of $1,861,000, supplemented by
cash provided from the exercise of stock options and warrants of $176,000.
The profitability and liquidity of the Company is affected by the amount of
loans outstanding, which is controlled in part by the Company's loan decisions.
The Company is able to influence the frequency of forfeiture of collateral 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. In each of the Company's last three fiscal years, at least
70% of the amounts loaned were either paid in full or renewed, and it is
management's current intent to maintain this ratio. 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, current assets and cash
generated from operations will be sufficient to accommodate the Company's
current operations for fiscal 1998. The Company has no significant capital
commitments as of October 6, 1997. 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 August 1, 1997 and October 6, 1997,
the Company acquired three individual stores for an aggregate purchase price of
$574,000, which was financed with proceeds from the Company's Credit Facility.
Forward Looking Information
- ---------------------------
Statements, either written or oral, which express the Company's expectation
for the future with respect to financial performance or operating strategies can
be identified as "forward-looking statements." These statements are made to
provide the public with management's assessment of the Company's business. The
Company may or may not update information contained in previously released
forward-looking statements and does not assume the duty to do so.
Certain portions of this report contain forward-looking statements,
particularly the portion captioned "Liquidity and Capital Resources" contained
in Item 7, Part II. Factors such as changes in regional or national economic or
competitive conditions, changes in government regulations, changes in
regulations governing pawn service charges, 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. Such factors are difficult to predict and many are beyond the control
of the Company.
Inflation
- ---------
The Company does not believe that inflation has had a material effect on
the amount of loans 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 second fiscal quarter of each
year and its lowest volume of sales of unredeemed goods occurring during the
first fiscal quarter of each year. The Company's lending activities are not
seasonal in nature.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings per Share" ("FAS 128"), which is
effective for periods ending after December 15, 1997. Effective November 1,
1997, the Company will adopt FAS 128, which establishes standards for computing
and presenting earnings per share for entities with publicly held common stock.
FAS 128 permits a pro forma disclosure of the new earnings per share
computations in periods prior to adoption.
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
- ------------------------------------------------------
In April 1997, at the direction of the audit committee of the board of
directors, First Cash, Inc. solicited proposals from several accounting firms to
become the Company's independent accountants, including the audit of the
Company's financial statements. On June 26, 1997, the Company notified Deloitte
& Touche LLP of the Company's intention to engage Deloitte & Touche LLP as
independent accountants for the audit of the Company's financial statements for
the fiscal year ending July 31, 1997. On May 28, 1997, Price Waterhouse LLP
resigned as the independent accountants for the audit of the Company's financial
statements and the client-auditor relationship between the Company and Price
Waterhouse LLP ceased. The reports of Price Waterhouse LLP on the financial
statements of the Company for the two years ended July 31, 1996 contained no
adverse opinion or disclaimer of opinion or any qualification or modification as
to uncertainty, audit scope or accounting principles. During the two years
ended July 31, 1996, and during the period from August 1, 1996 through May 28,
1997, there were no reportable events. During the two years ended July 31,
1996, and during the period from August 1, 1996 through May 28, 1997, there were
no disagreements with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure that, if not resolved to the satisfaction of Price Waterhouse LLP,
would have caused a reference to the subject matter of the disagreement in its
audit report.
There have been no disagreements concerning matters of accounting
principles or financial statement disclosure between the Company and Deloitte &
Touche LLP of the type 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:
(1) Consolidated Financial Statements: Page
----
Report of Independent Auditors.............. F-1
Report of Independent Accountants........... F-2
Consolidated Balance Sheets................. F-3
Consolidated Statements of Income........... F-4
Consolidated Statements of Cash Flows....... F-5
Consolidated Statements of Changes in
Stockholders' Equity....................... F-6
Notes to Consolidated Financial Statements.. F-7
(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(6) Amended Certificate of Incorporation
3.2(5) Amended Bylaws
4.2a(3) Common Stock Specimen
10.3(2) Registrant's Stock Option Plan and Form of Option
10.3(a)(2) Amended Stock Option Agreement -- Rick Powell
10.5(2) Lease of Registrant's Pawnshop located at South Hampton
10.6(2) Lease of Registrant's Pawnshop located at River Oaks
10.7(3) Lease of Registrant's Pawnshop located at S. Cooper
10.8(3) Employment Agreement -- Rick Powell
10.15(3) Employment Agreement -- Rick L. Wessel
10.16(3) Warrant Agreement -- Rick Powell
10.18(3) Warrant Agreement -- Rick Wessel
10.20(3) Lease of Registrant's Pawnshop located at Thornton in Dallas,
Texas
10.21(3) Lease of Registrant's Pawnshop located at MacArthur in
Oklahoma City
10.22(3) Lease of Registrant's Pawnshop located at Portland in Oklahoma
City
10.23(3) Lease of Registrant's Pawnshop located at Tyler, Texas
10.24(3) Lease of Registrant's Pawnshop located at James Avenue in Ft.
Worth, Texas
10.25(3) Lease of Registrant's Pawnshop located at Brown Trail in
Bedford, Texas
10.26(3) Lease of Registrant's Pawnshops located at Hurst and Euless,
Texas
10.28(3) Lease of Registrant's Pawnshop located at S. 23rd Street in
McAllen, Texas
10.29(3) Lease of Registrant's Pawnshop located at E. 14th Street in
Brownsville, Texas
10.30(3) Lease of Registrant's Pawnshop located at W. Tyler in
Harlingen, Texas
10.31(3) Lease of Registrant's Pawnshop located at Morgan in Corpus
Christi, Texas
10.32(3) Lease of Registrant's Pawnshop located at N. 10th in McAllen,
Texas
10.34(3) Acquisition Agreement -- Dallas Pawn and Gun
10.35(3) Acquisition Agreement -- Pete's Pawn and Music
10.36(3) Acquisition Agreement -- Sid's E-Z Money Pawn Shop
10.37(3) Acquisition Agreement -- Granny's Pawn and Mercantile
10.38(3) Acquisition Agreement -- The Happy Hocker
10.39(3) Acquisition Agreement -- D&B Pawn Shop and Hurst Pawn Shop
10.40(3) Acquisition Agreement -- Try Us Pawn Shop
10.41(3) Acquisition Agreement -- American Loan & Jewelry, Inc.
10.42(3) Supplement to Acquisition Agreement -- American Loan &
Jewelry, Inc.
10.43(4) Lease of Registrant's Pawnshop located at Garland, Texas
10.44(5) Amendment No. 1 to Acquisition Agreement - American Loan &
Jewelry, Inc.
10.45(6) Acquisition Agreement - First Cash Auto Pawn
10.46(6) Lease of Registrant's Pawnshop located at 5519 S.E. 15th
Street in Del City, Oklahoma
10.47(1) Acquisition Agreement - Chapel Jewelry & Loan
10.48(1) Acquisition Agreement - Outta Pawn Outlet
10.49(8) Asset Purchase Agreement Between Mr. Payne and the Company
10.50(8) Agreement with Partridge Capital Corporation
10.52(8) Fairness Opinion dated November 19, 1993 in connection with
the Asset Sale
10.53(8) NationsBank consent to Asset Sale
10.54(7) Repurchase of First Cash, Inc. Stock from American Pawn &
Jewelry, Inc.
10.55(7) Acquisition of Famous Pawn, Inc.
10.56(9) Audited Financial Statements of Famous Pawn, Inc. for the ten
and one-half months ended May 15, 1994.
10.57(10) Acquisition Agreement of Five Pawnshops from Jeff Gerhoff.
10.58(10) Loan Agreement between First Cash, Inc. and Bank One, Texas,
National Association, dated July 28, 1994.
11.0(11) Computation of Earnings Per Share for the Year Ended July 31,
1995.
21.0(10) Subsidiaries
27.0 Financial Date Schedules (Edgar version only)
(1) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-61544) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-18
(No. 33-37760-FW) and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-48436) and incorporated herein by reference.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended July 31, 1992 (File No. 0 - 19133) and incorporated herein by
reference.
(5) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended October 31, 1992 (File No. 0 - 19133) and incorporated herein by
reference.
(6) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended January 31, 1993 (File No. 0 - 19133) and incorporated herein by
reference.
(7) Filed as an exhibit to the Quarterly Report on Form 10-Q for the quarter
ended April 30, 1994 (File No. 0 - 19133) and incorporated herein by
reference.
(8) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-70592) and incorporated herein by reference.
(9) Filed as an exhibit to Form 8-K dated July 29, 1994.
(10) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended July 31, 1994 (File No. 0 - 19133) and incorporated herein by
reference.
(11) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended July 31, 1995 (File No. 0 - 19133) and incorporated herein by
reference.
(b) On June 4, 1997, the Company filed a Form 8-K to report a change in the
Company's independent accountants. There were no financial statements
included in the Form 8-K dated June 4, 1997.
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, INC.
----------------
PHILLIP E. POWELL
---------------------------------
Phillip E. Powell, Chief Executive Officer
October 10, 1997
RICK L. WESSEL
---------------------------------
Rick L. Wessel, Principal Accounting Officer
October 10, 1997
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
--------- -------- ----
PHILLIP E. POWELL Chairman of the Board and October 10, 1997
- ---------------------------- Chief Executive Officer
Phillip E. Powell
RICK L. WESSEL Chief Financial Officer, October 10, 1997
- ---------------------------- Secretary and Treasurer
Rick L. Wessel
JOE R. LOVE Director October 10, 1997
- ----------------------------
Joe R. Love
RICHARD T. BURKE Director October 10, 1997
- ----------------------------
Richard T. Burke
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Stockholders
of First Cash, Inc.
We have audited the consolidated balance sheet of First Cash, Inc. and
subsidiaries as of July 31, 1997 and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of First Cash,
Inc. and subsidiaries at July 31, 1997 and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Fort Worth, Texas
September 4, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of First Cash, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, of cash flows, and of changes in stockholders'equity as of
and for each of the two years in the period ended July 31, 1996 present fairly,
in all material respects, the financial position, results of operations and cash
flows of First Cash, Inc. and its subsidiaries as of and for each of the two
years in the period ended July 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements for First Cash, Inc. and its subsidiaries for
any period subsequent to July 31, 1996.
PRICE WATERHOUSE LLP
Fort Worth, Texas
October 22, 1996
FIRST CASH, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
July 31, July 31,
1997 1996
---- ----
(in thousands, except
share data)
ASSETS
Cash and cash equivalents....................... $ 1,139 $ 680
Service charges receivable...................... 1,949 1,783
Loans........................................... 12,877 11,701
Inventories..................................... 10,035 8,772
Prepaid expenses and other current assets....... 1,122 869
-------- --------
Total current assets...................... 27,122 23,805
Property and equipment, net..................... 6,554 5,647
Intangible assets, net of accumulated
amortization of $2,570 and $1,934, respectively 22,256 21,547
Other........................................... 745 946
-------- --------
$ 56,677 $ 51,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt and
notes payable.................................. $ 942 $ 611
Accounts payable and accrued expenses........... 2,437 1,672
Income taxes payable............................ 127 424
-------- --------
Total current liabilities................. 3,506 2,707
Revolving credit facility....................... 15,575 14,550
Long-term debt and notes payable, net of
current portion................................ 2,735 2,477
Debentures Due 1999............................. 6,022 7,500
Debentures Due 2004............................. 500 2,500
Deferred income taxes........................... 2,060 1,628
-------- --------
30,398 31,362
-------- --------
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; 4,931,376 and 4,168,459
shares issued, respectively; 4,460,417 and
3,697,500 shares outstanding, respectively... 50 42
Additional paid-in capital.................... 21,005 17,611
Retained earnings............................. 7,489 5,195
Common stock held in treasury, at cost;
470,959 shares............................... (2,265) (2,265)
-------- --------
26,279 20,583
Commitments (see Note 11)
-------- --------
$ 56,677 $ 51,945
======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Ended July 31,
1997 1996 1995
---- ---- ----
(in thousands, except per share amounts)
Revenues:
Merchandise sales................... $32,628 $24,823 $20,709
Pawn service charges................ 16,517 13,149 11,298
Other............................... 286 51 177
------- ------- -------
49,431 38,023 32,184
------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold.................. 22,502 16,714 13,648
Operating expenses.................. 15,774 12,573 10,678
Interest expense.................... 2,340 2,124 2,116
Depreciation........................ 717 540 506
Amortization........................ 636 565 531
Administrative expenses............. 3,831 3,150 3,013
------- ------- -------
45,800 35,666 30,492
------- ------- -------
Income before income taxes................ 3,631 2,357 1,692
Provision for income taxes................ 1,337 917 592
------- ------- -------
Net income................................ $ 2,294 $ 1,440 $ 1,100
======= ======= =======
Primary earnings per share................ $ 0.52 $ 0.39 $ 0.30
======= ======= =======
Fully diluted earnings per share.......... $ 0.47 $ 0.38 $ 0.30
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended July 31,
1997 1996 1995
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income.............................. $ 2,294 $ 1,440 $ 1,100
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities:
Depreciation and amortization........ 1,353 1,105 1,037
Changes in operating assets and
liabilities, net of effect of purchases
of existing stores:
Service charges receivable........... (62) (227) (83)
Inventories.......................... (1,152) (899) (1,260)
Prepaid expenses and other assets.... (6) (474) 707
Accounts payable and accrued expenses 257 451 151
Current and deferred income taxes.... 135 556 723
------- ------- -------
Net cash flows from operating
activities........................ 2,819 1,952 2,375
------- ------- -------
Cash flows from investing activities:
Net increase in loans................... (566) (1,606) (601)
Purchases of property and equipment..... (1,188) (1,282) (1,063)
Proceeds from sale of property and
equipment.............................. - - 375
Acquisition of existing pawnshops....... (2,643) (4,370) (2,347)
------- ------- -------
Net cash flows from investing
activities........................ (4,397) (7,258) (3,636)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt...................... 16,086 17,909 10,622
Repayments of debt...................... (13,975) (12,385) (8,499)
Purchase of treasury stock.............. - - (963)
Repurchase of outstanding warrants...... (250) - -
Proceeds from exercise of options and
warrants............................... 176 196 -
------- ------- -------
Net cash flows from financing
Activities........................ 2,037 5,720 1,160
------- ------- -------
Change in cash and cash equivalents....... 459 414 (101)
Cash and cash equivalents at beginning
of the year.............................. 680 266 367
------- ------- -------
Cash and cash equivalents at end of
the year................................. $ 1,139 $ 680 $ 266
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest............................ $ 2,405 $ 2,102 $ 1,990
======= ======= =======
Income taxes........................ $ 1,173 $ 361 $ 99
======= ======= =======
Supplemental disclosure of noncash investing and
financing activities:
Noncash transactions in connection with
various pawnshop acquisitions:
Fair market value of assets acquired. $ 2,652 $ 4,308 $ 5,099
Less issuance of common stock...... - - (800)
Less issuance of debt.............. - - (2,000)
Less assumption of liabilities
and costs of acquisition.......... (9) (23) (99)
------- ------- -------
Net cash paid........................ $ 2,643 $ 4,285 $ 2,200
======= ======= =======
Noncash conversion of subordinated
debentures into shareholders' equity.. $ 3,476 - -
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Common Additional Preferred Treasury
Stock Paid-in Stock Retained Stock
-------- Capital -------- Earnings --------
Shrs Amnt ------- Shrs Amnt -------- Shrs Amnt Total
---- ---- ---- ---- ---- ---- -----
(in thousands)
Balance at July 31, 1994. 3,930 $ 40 $ 16,617 - - $ 2,655 313 $(1,302) $18,010
Common stock issued in
connection with an
acquisition............. 200 2 798 - - - - - 800
Purchase of treasury
Stock................... - - - - - - 158 (963) (963)
Net income............... - - - - - 1,100 - - 1,100
----- ----- -------- --- --- -------- --- ------- -------
Balance at July 31, 1995. 4,130 42 17,415 - - 3,755 471 (2,265) 18,947
Exercise of stock
options and warrants.... 38 - 196 - - - - - 196
Net income............... - - - - - 1,440 - - 1,440
----- ----- -------- --- --- -------- --- ------- -------
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
===== ===== ======== === === ======== === ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
- -----------------------------------------------
First Cash, Inc. (the "Company") was incorporated in Texas on July 5, 1988
and was reincorporated in Delaware in April 1991. The Company is engaged in
acquiring, establishing and operating pawnshops which lend money on the security
of pledged tangible personal property. In addition to making short-term loans,
the Company offers for resale the personal property forfeited by the individuals
on loans, as well as personal property purchased outright from customers and
vendors. As of July 31, 1997 the Company owned fifty-seven stores.
In addition to operating its own stores, the Company also receives
management fees for managing pawnshops owned by third parties. As of July 31,
1997, the Company managed seven such stores. These third parties own and
provide 100% of the financing for the pawnshops, and incur all direct costs to
operate the pawnshops, including but not limited to payroll, store operating
expenses, cost of inventory, and pawn loans. The Company receives a monthly
management fee for each store managed, and provides computer support,
accounting, auditing, oversight and management of these 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,
American Loan & Jewelry, Inc. ("American Loan") and Famous Pawn, Inc. ("Famous
Pawn"). All significant intercompany accounts and transactions have been
eliminated.
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Loans and income recognition - Pawn loans ("loans") are made on the pledge
of tangible personal property for one month with an automatic extension period
of sixty days in Texas, thirty days in Oklahoma, and fifteen days in Maryland.
Loans are made for a period of 120 days in Washington, D.C. with no automatic
extension. In accordance with Texas state law, the Company has recorded pawn
service charges at the inception of the loan at the lesser of the amount of
interest allowed by law for the initial loan period, or $15. Additional pawn
service charges are recognized during the initial loan period when the aggregate
pawn service charges earned, determined on a constant yield basis over the
initial loan period, exceed the amount of income recognized at the inception of
the loan. Pawn service charges on loans made in Oklahoma, Maryland and
Washington, D.C. are recorded at the amount of interest allowed by law for the
first 30 days. 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.
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, merchandise acquired from forfeited loans and new merchandise purchased
from vendors. Inventories purchased directly from vendors and 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 five 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 ranging from two 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 a multiple of current
earnings before income taxes on an undiscounted basis to the net carrying value
of the related intangibles. The multiple used in this evaluation is consistent
with the Company's acquisition model and is determined based upon a discount to
the historical trading multiple of the Company's common stock. 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 years ended
July 31, 1997, 1996 and 1995 was $219,000, $165,000 and $225,000, 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 Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("FAS 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 FAS 123.
Earnings per share - Earnings per common share is calculated using the
Modified Treasury Stock Method as required by Accounting Principles Board
Opinion No.15 ("APB 15"), which requires a dual computation. The first
computation divides net income available to common shareholders by the weighted
average shares of common stock outstanding during the period. The second
computation requires all common stock equivalents, whether dilutive or anti
dilutive, be included in an aggregate computation, however, the number of common
shares assumed to be repurchased into treasury is limited to 20% of the number
of common shares outstanding at the end of the period. The remaining excess
proceeds are then assumed to first retire outstanding debt, and second, to
purchase certain "risk-free" securities. Pursuant to APB 15, if the result of
the aggregate computation is dilutive, when compared to the first computation,
its result must be reported as earnings per share; otherwise, the result of the
first computation is reported. As a result of this computation, the proceeds
from the assumed exercise of common stock equivalents were assumed to be used to
repurchase 20% of the outstanding common shares at the average stock price
during the year and the remaining proceeds were used to retire debt and invest
in 5.25% securities. This increased adjusted net income by $1,019,000,
$1,073,000, and $470,000, respectively, and increased the share count by
2,589,000 shares, 2,726,000 shares, and 1,430,000 shares, respectively, for the
years ended July 31, 1997, 1996 and 1995. Thus, the adjusted net income and
share count used in computing primary earnings per share were $3,313,000 and
6,414,000 shares, respectively, for the year ended July 31, 1997, $2,513,000 and
6,395,000 shares, respectively, for the year ended July 31, 1996, and $1,570,000
and 5,150,000 shares, respectively, for the year ended July 31, 1995. For
purposes of calculating primary earnings per share, convertible debentures are
not included as they are not considered common stock equivalents. Fully diluted
earnings per share is calculated in a similar manner except that all convertible
debentures are also included in this computation and the higher of the closing
stock price or average stock price for the year is used. Fully diluted earnings
per share's adjusted net income increased $1,670,000, $1,757,000, and
$1,083,000, respectively, and the share count increased 4,604,000 shares,
4,848,000 shares, and 3,552,000 shares, respectively, for the years ended July
31, 1997, 1996 and 1995. Thus, the adjusted net income and share count used in
computing fully diluted earnings per share were $3,964,000 and 8,430,000 shares,
respectively, for the year ended July 31, 1997, $3,197,000 and 8,517,000 shares,
respectively, for the year ended July 31, 1996, and $2,183,000 and 7,271,000
shares, respectively, for the year ended July 31, 1995.
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.
New accounting pronouncements - In February 1997, the Financial Accounting
Standards Board issued Financial Accounting Standard No. 128, "Earnings per
Share" ("FAS 128"), which is effective for periods ending after December 15,
1997. Effective November 1, 1997, the Company will adopt FAS 128, which
establishes standards for computing and presenting earnings per share for
entities with publicly held common stock or potential common stock. FAS 128
permits a pro forma disclosure of the new earnings per share computations in
periods prior to adoption. Using the computations in FAS 128, the Company's
basic and diluted earnings per share for the year ended July 31, 1997 would be
$0.60 and $0.46, respectively, compared to basic and diluted earnings per share
of $0.39 and $0.35, respectively for the year ended July 31, 1996, and $0.30 for
both basic and fully diluted earnings per share for the year ended July 31,
1995.
NOTE 3 - BUSINESS ACQUISITIONS
- ------------------------------
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.
In May 1996, the Company acquired three pawnshops in Baltimore, Maryland in
an asset purchase including fixed assets, layaways and pawn loans from an
unaffiliated corporation which is wholly-owned by a former employee of the
Company, for an aggregate purchase price of $2,446,000 consisting of $2,400,000
cash paid to the seller, and legal, consulting and other fees of $46,000. In
June 1996, the Company acquired three additional pawnshops in Baltimore,
Maryland in an asset purchase including fixed assets, layaways, pawn loans and
inventory from an unaffiliated corporation for an aggregate cash purchase price
of $1,662,000 consisting of $1,590,000 paid to the seller, and legal, consulting
and other fees of $72,000. The Company financed substantially all of the cash
purchase price for both of these 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, and location and condition of the facilities.
In October 1994, the Company acquired five pawnshops in Maryland and the
Washington, D.C. Metropolitan area in an asset purchase including fixed assets,
layaways, deposits, pawn loans and inventory from five unaffiliated
corporations, four of which received cash and the fifth corporation, National
Trade Center, Inc. received a combination of cash, stock and a note payable.
The five pawnshops and related assets were acquired for a purchase price of
$5,099,000 consisting of $2,200,000 cash, a five year unsecured $2,000,000
promissory note with principal and interest payable monthly at the rate of 7%
per annum, the issuance of 200,000 shares of the Company's Common Stock valued
at the then market price of $4 per share, and assumed liabilities, legal,
accounting and transaction fees of $99,000. The Company financed substantially
all of the cash purchase price through its credit facility. The purchase price
of the transaction 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.
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 $22,256,000 and $21,547,000 as of
July 31, 1997 and 1996, 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 2 to 10 year non-compete agreements with the former owners.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
In October 1994 and January 1996, the Company issued to Mr. Jon Burke, the
brother of a director of the Company, Mr. Richard T. Burke, warrants to purchase
5,000 shares and 50,000 shares, respectively, of the Company's Common Stock at
exercise prices of $4.625 per share for consulting services to be provided
through January 2001. The warrants vest over a five-year period. In August
1996, the Company entered into a management agreement to operate and manage
pawnshops for JB Pawn, Inc., a Texas corporation. JB Pawn, Inc. owns and
provides 100% of the financing for its pawnshops, and incurs all direct costs to
operate the pawnshops, including payroll, store operating expenses, cost of
inventory, and pawn loans. The Company receives a monthly management fee for
each store managed, and provides computer support, accounting, auditing,
oversight and management of these stores. JB Pawn, Inc. is 100% owned and
controlled by Mr. Jon Burke, a brother of a director of the Company. In the
event that JB Pawn, Inc. receives an offer to purchase any of its pawnshops, the
Company shall have a first right of refusal to match such offer. The Company
recorded management fee revenue of $212,000 under this agreement during fiscal
1997.
During fiscal 1996, the Company paid to Joe R. Love, a director of the
Company, a consulting fee of $75,000 for services rendered in connection with
certain acquisitions.
NOTE 5 - PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment consist of the following (in thousands):
July 31, July 31,
1997 1996
---- ----
Land............................... $ 719 $ 719
Buildings.......................... 1,002 1,002
Leasehold improvements............. 2,089 1,792
Furniture, fixtures and equipment.. 5,516 4,192
------- -------
9,326 7,705
Less: accumulated depreciation..... (2,772) (2,058)
------- -------
$ 6,554 $ 5,647
======= =======
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses consist of the following (in
thousands):
July 31, July 31,
1997 1996
---- ----
Accounts payable................... $ 216 $ 147
Accrued payroll.................... 939 650
Layaway deposits................... 572 534
Sales tax payable.................. 147 113
Other.............................. 563 228
------- -------
$ 2,437 $ 1,672
======= =======
NOTE 7 - REVOLVING CREDIT FACILITY
- ----------------------------------
The Company maintains a long-term line of credit facility ("Credit
Facility") with a bank in the amount of $20,000,000. At July 31, 1997,
$15,575,000 was outstanding under this Credit Facility and an additional
$1,802,000 was available to the Company pursuant to the available borrowing
base. Borrowings under the Credit Facility bear interest at the prevailing LIBOR
rate plus one and three-quarters percent. Amounts available under the Credit
Facility are limited to the sum of 60% of inventory and 80% of loans and service
charges receivable of the Company. The Credit Facility is scheduled to mature
on December 1, 1998. Under the terms of the Credit Facility, the Company is
required to maintain certain financial ratios and comply with certain technical
covenants. As of July 31, 1997, the Company was in compliance with such
covenants. 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.
NOTE 8 - LONG-TERM DEBT AND NOTES PAYABLE
- -----------------------------------------
Long-term debt and notes payable consist of the following (in thousands):
July 31, July 31,
1997 1996
---- ----
Note payable to a bank; bearing interest at 7.4%; monthly
principal payments of $2,335 and interest payments
based upon the unpaid balance; matures December 1,
2000; secured by real estate.............................. $ 555 $ 564
Note payable to a bank; bearing interest at 7.4%; monthly
principal payments of $2,957 and interest payments
based upon the unpaid balance; matures April 1, 2001;
secured by real estate.................................... 511 538
Note payable to an unrelated corporation; bearing interest
at 7%; unsecured; fully retired during fiscal 1997........ - 1,443
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............ 317 443
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.................. 312 -
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................. 255 -
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..................... 257 -
Note payable to a bank; bearing interest at 7.4%; monthly
principal payments of $8,222 and interest payments based
upon the unpaid balance; matures July 1, 2000; secured
by specific acquired assets............................... 296 -
Note payable to a bank; bearing interest at 7.4%; monthly
principal payments of $39,834 and interest payments based
upon the unpaid balance; matures November 1, 1999;
secured by specific acquired assets....................... 1,074 -
------- -------
3,677 3,088
Less: current portion...................................... (942) (611)
------- -------
$ 2,735 $ 2,477
======= =======
Long-term debt and notes payable are scheduled to mature as follows (in
thousands):
Fiscal
------
1998....................... $ 942
1999....................... 975
2000....................... 565
2001....................... 1,078
2002....................... 117
-------
$ 3,677
=======
NOTE 9 - CONVERTIBLE SUBORDINATED DEBENTURES
- --------------------------------------------
In April 1994, the Company completed the private placement of $7,500,000 of
10% Convertible Subordinated Debentures Due 1999. During fiscal 1997,
$1,476,000 of these debentures were converted by the holders into 318,917 shares
of Common Stock. The outstanding debentures are convertible into 1,302,000
shares of Common Stock, which represents a conversion price of $4.625 per share,
at the option of the debenture holders, or may be prepaid in whole by the
Company if the price of the Company's Common Stock trades at or above $8.10 for
30 consecutive days
These debentures are subordinated to the Credit Facility and are unsecured.
A default under the terms of the Company's Credit Facility also results in
default under the provisions of these debentures. Interest on the debentures is
payable quarterly at March 31, June 30, September 30 and December 31, and
principal is due in 1999, if not previously converted into Common Stock. Debt
issue costs of $934,000 were incurred in this transaction and are included in
other assets on the accompanying consolidated balance sheet, net of accumulated
amortization of $400,000, $280,000 and $160,000 at July 31, 1997, 1996 and 1995,
respectively. As of July 31, 1997, the fair market value of these debentures is
estimated to be $7,812,000.
In conjunction with the acquisition of Famous Pawn in May 1994, the Company
issued $2,500,000 of 7% Convertible Subordinated Debentures Due 2004 to the
former sole shareholder of Famous Pawn. During fiscal 1997, $2,000,000 of these
debentures were converted into 400,000 shares of Common Stock. The outstanding
debentures may be converted into 100,000 shares of Common Stock at the option of
the debenture holder on or after June 1, 1997, which represents a conversion
price of $5 per share, or may be prepaid in whole by the Company if the price of
the Company's Common Stock trades at or above $10 per share for 10 consecutive
trading days on or after June 1, 1997. These debentures are subordinated to the
Credit Facility and are unsecured. A default under the terms of the Company's
Credit Facility also results in default under the provisions of these
debentures. Interest on the debentures is payable monthly, and principal is due
2004, if not previously converted into Common Stock. As of July 31, 1997, the
fair market value of the remaining debentures is estimated to be $600,000.
NOTE 10 - INCOME TAXES
- ----------------------
Components of the provision for income taxes consist of the following (in
thousands):
For the year ended July 31,
1997 1996 1995
---- ---- ----
Current:
Federal................... $ 784 $ 446 $ 40
State..................... 121 67 46
------- ------- -------
905 513 86
Deferred.................... 432 404 506
------- ------- -------
$ 1,337 $ 917 $ 592
======= ======= =======
The Company has no deferred tax assets. The principal current and non
current deferred tax liabilities consist of the following at July 31, 1997 and
1996 (in thousands):
July 31, July 31,
1997 1996
---- ----
Deferred tax liabilities:
Intangible asset amortization.. $ 1,222 $ 989
Depreciation................... 603 466
State income taxes............. 139 106
Service charges receivable..... 50 48
Other.......................... 150 67
-------- --------
Net deferred tax liability..... $ 2,164 $ 1,676
======== ========
Reported as:
Current liabilities - income
taxes payable................. $ 104 $ 48
Non-current liabilities -
deferred income taxes......... 2,060 1,628
-------- --------
Net deferred tax liability..... $ 2,164 $ 1,676
======== ========
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):
For the year ended July 31,
1997 1996 1995
---- ---- ----
Tax at the federal statutory rate..... $1,235 $ 801 $ 575
Nondeductible amortization of
intangible assets.................... 34 34 34
State income taxes, net of federal
tax benefit.......................... 112 67 52
Other, net............................ (44) 15 (69)
------ ------ ------
$1,337 $ 917 $ 592
====== ====== ======
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases certain of its pawnshop facilities and computer
equipment under operating leases with terms ranging from two 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
------
1998.............. $ 2,602
1999.............. 2,329
2000.............. 1,872
2001.............. 1,398
2002.............. 752
Thereafter........ 1,447
-------
$10,400
=======
Rent expense under such leases was $2,519,000, $2,070,000 and $1,964,000
for fiscal years 1997, 1996 and 1995, respectively.
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.
NOTE 12 - EMPLOYEE STOCK OPTION PLAN AND OUTSTANDING WARRANTS
- -------------------------------------------------------------
On October 30, 1990, the Company's Board of Directors adopted the 1990
Stock Option Plan (the "Plan"). The 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 Plan is 250,000 shares. The exercise price for each
stock option granted under the 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 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 July 31, 1997, options to purchase 45,875 shares of Common Stock
were available for grant under the Plan. Options to purchase 143,938 shares
were fully vested at July 31, 1997.
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, 1994 through July 31, 1997
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, 1994.. 119 1,595 $ 4.63 1,710 $ 4.60
Granted....... 97 65 4.63
Cancelled..... (14) (210) 4.94
----- ------
July 31, 1995.. 202 1,450 4.58 1,566 4.55
Granted....... 117 1,908 9.75
Cancelled..... (109) (124) 5.55
Exercised..... (3) (15) 4.28
----- ------
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
===== ======
Options and warrants outstanding as of July 31, 1997 are as follows
(in thousands, except exercise price and life):
Total Warrants Weighted Average
Exercise Price and Options Remaining Life Currently Exercisable
-------------- ----------- -------------- ---------------------
$4.00 953 3.3 953
4.63 1,166 3.4 1,117
4.75 9 4.0 -
12.00 50 0.1 50
15.00 1,000 3.0 1,000
----- -----
3,178 3,120
===== =====
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 $1,039,000 in 1996 and $2,000 in 1997. Primary and
fully diluted earnings per share would have been reduced by $0.28 in fiscal
1996, while there would be no earnings per share effect in fiscal 1997.
Weighted average grant-date fair values of options issued were $3.30 per
unit in fiscal 1997 and $0.83 per unit in fiscal 1996, which were calculated in
accordance with the Black-Scholes option pricing model, using the following
assumptions:
1997 1996
---- ----
Expected volatility......... 39% 38%
Expected dividend yield..... - -
Expected option term........ 5 years 5 years
Risk-free rate of return.... 6.31% 5.79%
NOTE 13 - 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 $69,000 and $34,000 for fiscal 1997 and 1996,
respectively.