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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1998, 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
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Commission file number 0-19133
FIRST CASH, INC.
----------------
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based upon the last reported sales price on the Nasdaq Stock Market
on October 26, 1998 is $37,860,342. As of October 26, 1998, there were
7,883,346 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 January 14, 1999 is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH, INC.
FORM 10-K
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For the Fiscal Year Ended July 31, 1998
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
PART III
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
SIGNATURES
PART I
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Item 1. Business
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General
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First Cash, Inc. (the "Company") is the third largest publicly traded
pawnshop operator in the United States and currently has 92 pawn stores in
Texas, Oklahoma, Washington, D.C., Maryland, Missouri and Virginia. The
Company's pawnshops engage in both consumer finance and retail sales activities.
The Company's pawnshops provide 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. These pawn
stores also function as retailers of previously-owned merchandise acquired in
forfeited pawn transactions and over-the-counter purchases from customers.
The Company also currently owns 15 check cashing stores in California and
Washington. These check cashing stores provide a broad range of consumer
financial services, including check cashing, money order sales, wire transfers
and short-term unsecured advances ("payday advances"). The Company also owns a
software company in California which provides computer hardware and software to
third party check cashing operators, as well as ongoing technical support. For
the fiscal year ended July 31, 1998, the Company's revenues were derived 64%
from retail activities, 34% from lending activities, and 2% from other sources,
including check-cashing fees.
Management believes the pawnshop industry is highly fragmented with
approximately 15,000 stores in the United States and is in the early stages of
achieving greater efficiencies through consolidation. The five publicly traded
pawnshop companies operate less than 6% 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 1998, 1997 and 1996, the Company
added 29, 7 and 7 pawn stores to its network, respectively, net of stores
consolidated. The Company made its initial entry into the check cashing
business during fiscal 1998, with the purchase of 11 stores in California and
Washington. Management estimates there are approximately 7,000 such check
cashing locations throughout the United States.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as otherwise
indicated, the term "Company" includes its wholly owned subsidiaries, American
Loan & Jewelry, Inc., Famous Pawn, Inc., JB Pawn, Inc., Miraglia, Inc., Capital
Pawnbrokers, Inc., Silver Hill Pawn, Inc., and Elegant Floors, 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 an established industry, with
the highest concentration of pawnshops being in the Southeast and Southwest.
The operation of pawnshops is governed primarily by state laws, and accordingly,
states that maintain pawn laws most conducive to profitable operations have
historically seen the greatest development of pawnshops. The Company believes
that the majority of pawnshops are owned by individuals operating one to three
locations. Management further believes that the highly fragmented nature of the
industry is due 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 pawn operators have begun to develop multi-unit
chains through acquisitions and new store openings. As of October 26, 1998, the
five publicly traded pawnshop companies operated approximately 800 stores in the
United States. Accordingly, management believes that the industry is in the
early stages of consolidation.
The check cashing industry is a relatively new industry, and management
estimates that there are approximately 7,000 check cashing locations throughout
the United States. Some states have enacted formal check cashing laws which
regulate the amount of fees that operators may charge for cashing checks, and in
some cases states have regulated the amount of service charges that may be
charged on small consumer advances, commonly referred to as "payday advances".
Management believes that at least half of the check cashing locations in the
United States are operated by individuals owning from one to ten locations.
Management further believes that this fragmented nature of the industry is due
among other factors to the lack of qualified management personnel, the
difficulty of developing adequate financial controls and reporting systems, and
the lack of financial resources.
Business Strategy
- -----------------
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 pawn and check
cashing stores.
Acquisitions and New Store Openings
Because of the highly fragmented nature of both the pawnshop industry and
the check cashing industry, as well as the availability of "mom & pop" sole
proprietor pawnshops willing to sell their stores, the Company believes that
acquisition opportunities as well as favorable new store locations exist.
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 pawn store acquisition
criteria include an evaluation of the volume of annual loan transactions,
outstanding loan balances, historical redemption rates, the quality and quantity
of inventory on hand, and location and condition of the facility, including
lease terms. Factors involved in evaluating the acquisition of check cashing
stores include the annual volume of transactions, location and condition of
facilities, and a demographic evaluation of the surrounding area to determine
the potential for the Company's payday advance product.
The Company has opened eleven new pawnshops and one new check cashing store
since its inception and currently intends to open additional pawn and check
cashing 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 pawn store includes inventory, funds
available for pawn loans, store fixtures, security systems, computer equipment,
and start-up losses. Although the total investment varies and is difficult to
predict for each location, it has been the Company's experience that between
$200,000 and $300,000 is required to fund a new pawn store for the first six
months of operation. Because existing pawn stores already have an established
customer base, loan portfolio, and retail-sales business, acquisitions generally
contribute more quickly to revenues than do start-up stores. The Company
estimates that approximately $100,000 to $150,000 is required to fund a new
check cashing store for the first six months of operation, and includes
investments for leasehold improvements, equipment, store operating cash, and
start-up losses.
Store Clusters
Whether acquiring an existing store or opening a new store, the Company
seeks to establish clusters of several stores in a specific geographic area in
order to achieve certain economies of scale relative to supervision, purchasing
and marketing. In Texas, such clusters have been established in the Dallas/Fort
Worth metroplex, the Rio Grande Valley area, the Corpus Christi area and the El
Paso area. Store clusters have also been established in the St. Louis, Missouri
area, the Oklahoma City, Oklahoma area, in Washington D.C. and its surrounding
Maryland suburbs, in Baltimore, Maryland, in Northern California, and in the
Pacific Northwest. The Company currently plans to continue its expansion in
existing markets in Texas, Missouri, Maryland, Virginia, Northern California and
the Pacific Northwest, and to enter new markets in other states with favorable
demographics and regulatory environments.
Enhance Productivity of Existing and Acquired Stores
The primary factors affecting the profitability of the Company's existing
store base are the level of loans outstanding, the volume of retail sales and
gross profit on retail sales, the volume of check cashing and related consumer
financial services, and the control of store expenses. To increase customer
traffic, which management believes is a key determinant to increasing its
stores' profitability, the Company has taken several steps to distinguish its
stores from traditional pawn and check cashing stores and to make customers feel
more comfortable. In addition to well-lit parking facilities, several of the
stores' exteriors display an attractive and distinctive awning similar to those
used by contemporary convenience and video rental stores. The Company also has
upgraded or refurbished the interior of certain of its stores and improved
merchandise presentation by categorizing items into departments, improving the
lighting and installing better in-store signage.
Operating Controls
The Company has an organizational structure that it believes is capable of
supporting a larger, multi-state store base. Moreover, the Company has
installed an employee training program for both store and corporate-level
personnel that stresses productivity and professionalism. Each store is
monitored on a daily basis from corporate headquarters via an online, real-time
computer network, and the Company has strengthened its operating and financial
controls by increasing its internal audit staff as well as the frequency of
store audit visits. Management believes that the current operating and
financial controls and systems are adequate for the Company's existing store
base and can accommodate reasonably foreseeable growth in the near-term.
Pawn Lending Activities
- -----------------------
The Company's pawnshops loan 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, while loans
in Virginia earn 120% to 180% annually. In Washington, D.C., a flat $2 charge
per month applies to all loans of up to $40, and a 48% to 60% annualized service
charge applies to loans of greater than $40. In Missouri, loans bear a total
service and storage charge of 240% on an annualized basis. As of July 31, 1998,
the Company's average loan per pawn ticket was approximately $88. Pawn service
charges during fiscal 1998, 1997 and 1996 accounted for approximately 58%, 61%
and 62%, respectively, of the Company's total gross profit.
At the time a pawn transaction is entered into, a pawn loan agreement,
commonly referred to as a pawn ticket, is delivered to the borrower that sets
forth, among other items, the name and address of the pawnshop, borrower's name,
borrower's identification number from his/her driver's license or other
identification, date, identification and description of the pledged goods,
including applicable serial numbers, amount financed, pawn service charge,
maturity date, total amount that must be paid to redeem the pledged goods on the
maturity date, and the annual percentage rate.
The amount the Company is willing to finance typically is based on a
percentage of the estimated sale value of the collateral. There are no minimum
or maximum loan to fair market value restrictions in connection with the
Company's lending activities. The basis for the Company's determination of the
sale value include such sources as catalogs, blue books and newspapers. The
Company also utilizes its computer network to recall recent selling prices of
similar merchandise in its own stores. These sources, together with the
employees' experience in selling similar items of merchandise in particular
stores, influence the determination of the estimated sale value of such items.
The Company does not utilize a standard or mandated percentage of estimated sale
value in determining the amount to be financed. Rather, the employee has the
authority to set the percentage for a particular item and to determine the ratio
of loan amount to estimated sale value with the expectation that, if the item is
forfeited to the pawnshop, its subsequent sale should yield a gross profit
margin consistent with the Company's historical experience. It is the Company's
policy to value merchandise on a conservative basis to avoid the risks
associated with over-valuation. The pledged property is held through the term
of the loan, which is 30 days in Texas, Missouri, Virginia, Oklahoma and
Maryland, with an automatic extension period of 15 to 60 days depending on state
laws, unless the loan is earlier paid or renewed. In Washington, D.C., pledged
property is held for 30 days. 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 and Missouri, 60 days in Oklahoma,
45 days in Maryland and Virginia, and 30 days in Washington, D.C., the
unredeemed collateral is forfeited to the Company and becomes inventory
available for general liquidation or sale in one of the Company's stores. The
Company does not record loan losses or charge-offs because if the loan is not
paid, the principal amount loaned plus the 30 days of accrued pawn service
charges becomes the carrying cost of the forfeited collateral ("inventory") that
is recovered by sale.
The recovery of the principal and accrued pawn service charge as well as
realization of gross profit on sales of inventory is dependent on the Company's
initial assessment of the property's estimated sale value. Improper assessment
of the sale value of the collateral in the lending function can result in
reduced marketability of the property and sale of the property for an amount
less than the principal plus accrued pawn service charge. For fiscal 1998, 1997
and 1996, the Company's annualized yield on average pawn loan balance was 136%,
134% and 137%, respectively.
Payday Advance Activities
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The Company's check cashing stores make unsecured, short-term advances in
which the customer writes the store a personal check in exchange for cash, net
of a transaction fee. Fees for payday advances are regulated by state law and
are 15% of the borrowed amount per transaction in California and Washington.
The term of these advances is thirty days or less. Service charges for payday
advances, which relate only to the period from June 4, 1998 to July 31, 1998,
accounted for approximately 2% of the Company's total gross profit for fiscal
1998.
To qualify for a payday advance, customers generally must have proof of
steady income, a checking account with a minimum of returned items within a
specified period, and valid identification. Upon completing an application for
the advance and approval by store personnel, the customer writes a check on
their personal checking account, in exchange for the cash advance. The Company
deducts the applicable service charge at the inception of the advance. At
maturity, the customer may either return to the store and pay off the advance
with cash, in which case the check is returned to the customer, or the store can
deposit the check into its checking account. A significant amount of payday
advance checks deposited by the Company are returned by the bank, and recorded
as bad debts by the Company as a charge to operating expense. A large
percentage of these bad debts are subsequently collected by the Company through
various means. The profitability of the Company's check cashing stores is
dependent upon adequate collection of these returned items.
Retail Activities
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The Company acquires merchandise inventory primarily through forfeited pawn
loans and purchases of used goods from the general public. Sales of inventory
during fiscal 1998, 1997 and 1996 accounted for approximately 64.4%, 66.0% and
65.3%, respectively, of the Company's total revenues for these periods. For
fiscal 1998, 1997 and 1996, the Company realized gross profit margins on
merchandise sales of 33.0%, 31.0% and 32.7%, 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 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 26, 1998, the Company operated pawn stores in the following
markets:
Number of
Locations
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Texas:
------
Dallas/Fort Worth metropolitan area................. 27
Corpus Christi...................................... 9
South Texas......................................... 14
El Paso............................................. 3
---
53
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Missouri:
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St. Louis metropolitan area......................... 3
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3
---
Oklahoma:
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Oklahoma City....................................... 5
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5
---
Mid Atlantic:
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Baltimore, Maryland................................. 7
Washington, D.C. and surrounding Maryland suburbs... 23
Virginia............................................ 1
---
31
---
Total............................................... 92
===
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
twenty area supervisors and regional vice-presidents have an average of eight
years experience in the pawn industry.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make loans that achieve
optimum redemption rates, to be effective sales people and to provide prompt and
courteous service. Therefore, the Company trains its employees through direct
instruction and on-the-job loan and sales experience. The new employee is
introduced to the business through an orientation and training program that
includes on-the-job training in lending practices, layaways, merchandise
valuation and general administration of store operations. Certain experienced
employees receive training and an introduction to the fundamentals of management
to acquire the skills necessary to advance into management positions within the
organization. Management training typically involves exposure to income
maximization, recruitment, inventory control and cost efficiency. The Company
maintains a performance-based compensation plan for all store employees, based,
among other factors, on sales, gross profits and special promotional contests.
Check Cashing Operations
- ------------------------
The Company's check cashing locations are typically part of a small retail
strip shopping center with adequate, well-lit parking. Management has
established a standard store design intended to distinguish the Company's stores
from the competition. The design consists of a well-illuminated exterior with a
lighted sign, and distinctive, conservative window signage. The interiors
usually feature an ample lobby, separated from employee work areas by floor-to
ceiling teller windows. The Company's stores are typically open six to seven
days a week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.
Computer operating systems in the Company's check cashing stores allow a
store manager or clerk to recall rapidly customer check cashing histories,
payday advance histories, and other vital information. The Company attempts to
attract customers primarily through television advertisements and yellow page
advertisements.
As of October 26, 1998, the Company operated check cashing stores in the
following markets:
Number of
Locations
---------
Northern California............... 13
Washington........................ 2
---
15
===
Each check cashing store employs a manager, an assistant manager, and
between three and eight tellers, depending upon the size, sales volume and
location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to a
district manager who typically oversees two to three store managers.
Competition
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The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may adversely
affect the Company's revenues, profitability and ability to expand.
The Company competes primarily with other pawnshops and check cashers.
Both the pawnshop and check cashing industries are characterized by a large
number of independent owner-operators, some of whom own and operate multiple
locations. The Company believes that the primary elements of competition in
these businesses are store location, the ability to lend competitive amounts on
both pawn loans and payday advances, customer service, and management of store
employees. In addition, the Company competes with financial institutions, such
as consumer finance companies, which generally lend on an unsecured as well as
on a secured basis. Other lenders may and do lend money on terms more favorable
than those offered by the Company. Many of these competitors have greater
financial resources than the Company.
In its retail operations, the Company's competitors include numerous retail
and wholesale stores, including jewelry stores, gun stores, discount retail
stores, consumer electronics stores and other pawnshops. Competitive factors in
the Company's retail operations include the ability to provide the customer with
a variety of merchandise items at attractive prices. Many retailers have
significantly greater financial resources than the Company.
In addition, the Company faces competition in its acquisition program.
There are several other publicly held pawnshop and check cashing companies,
including Cash America International, Inc., ACE Cash Express, Inc. and EZCORP,
Inc., that have announced active expansion and acquisition programs as well.
Management believes that the increased competition for attractive acquisition
candidates may increase acquisition costs.
Pawnshop 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 $11,500. 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, 1998 Year Ending June 30, 1999
------------------------ -------------------------
Maximum Maximum
Allowable Allowable
Annual Annual
Amount Financed Percentage Amount Financed Percentage
Per Pawn Loan Rate Per Pawn Loan Rate
------------- ---- ------------- ----
$ 1 to $ 135 240% $ 1 to $ 138 240%
$ 136 to $ 450 180% $ 139 to $ 460 180%
$ 451 to $ 1,350 30% $ 461 to $ 1,380 30%
$ 1,351 to $11,250 12% $ 1,381 to $11,500 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.
In addition to state laws governing pawnshop operations in Maryland,
certain county governments also impose various requirements for pawnshops to
which the Company is subject.
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 $2 per month
charge on all loans of $40 or less, and a 4% to 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.
Missouri
In Missouri, the maximum allowable interest charge allowed by state law is
2% per month. However, the law contains provisions allowing for the addition of
storage and security fees. These fees effectively increase the total service
charge in the Company's stores to 20% per month, with a $2.50 minimum service
fee. Loans are made for a period of 30 days with an automatic 60 day extension.
In addition to establishing maximum allowable interest rates, the state of
Missouri also provides that all pawnshops must obtain a municipal license. To
be eligible for a municipal pawnshop license in Missouri, an applicant must meet
the following minimum requirements (i) be of good moral character, (ii) maintain
net assets of at least $50,000 readily available for each pawnshop, (iii) show
that the pawnshop will be operated lawfully and fairly in accordance with
Missouri state law, and (iv) not have been convicted of any felony or
misdemeanor which directly relates to the duties and responsibilities of the
occupation of pawnbroker.
Under Missouri state law, a pawnshop may not accept a pledge from a person
under the age of 18 years; make any agreement requiring the personal liability
of a pledgor in connection with a pawn transaction; accept any waiver of any
right or protection accorded a customer under the Missouri state law; 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 purchase or take in trade used or
secondhand personal property unless a record is established that contains the
name, address, description and drivers license number of the seller, a complete
description of the property, and a signed document from the seller providing
that the seller has the right to sell the property.
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.
Check Cashing Regulation
- ------------------------
California
The Company's check cashing operations in California are governed by the
California Civil Code (the "Code"). The Code provides regulations governing
both check cashing and deferred deposits ("payday advances"). Under the Code,
check cashers are prohibited from charging more than 3% for cashing a government
or payroll check if proper identification is provided by the customer, or more
than 3.5% if the customer has no identification. Check cashers may not charge
more than 12% for cashing a personal or business check, and no more than 15% of
the face value of the check may be charged for deferred deposit transactions.
The face value of deferred deposit checks may not exceed $300, and the deferral
term for deferred deposit transactions may not exceed 30 days. The Code
prohibits companies from making more than one payday advance to any particular
customer at any one time.
The Code also provides for the California Department of Justice to issue
permits for check cashers. Permit applicants must file an application along
with fingerprints, and pay a fee for the permit. Permit holders must renew the
permit on an annual basis. Permit applicants may be rejected if they have been
convicted of a felony involving dishonesty, fraud or deceit, provided that the
crime is substantially related to the qualifications, functions, or duties of a
person engaged in a check cashing business.
Washington
Check cashing operations in Washington are governed by the State of
Washington Department of Financial Institutions. As it pertains to the
operations of the Company, these regulations primarily cover payday advances.
The law provides for a maximum advance amount of $500, a maximum term of thirty
one days, and a maximum interest rate of 15% of the advance. The Company is
prohibited from making more than one payday advance to any particular customer
at any one time.
The Department of Financial Institutions also requires a license for all
check cashers, along with a surety bond. Check cashers who make deferred
deposits secured by personal checks must provide an additional bond and
application for a deferred deposit endorsement. Applicants are investigated to
determine whether they are financially responsible, and whether they have any
felony convictions.
Employees
- ---------
The Company had approximately 750 employees as of October 26, 1998. At
that date, approximately 25 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 and check cashing locations in amounts management
believes to be adequate. The Company maintains workers' compensation insurance
in Maryland, Missouri, California, Virginia, Washington, 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, Missouri and Maryland, and possibly other states.
The Company also plans to acquire additional check cashing locations in
California and the Pacific Northwest, and to introduce check cashing and related
financial services in a select number of its existing pawnshop locations. The
acquisitions of both pawnshops and check cashing stores 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 and check cashing
locations where desirable opportunities are presented.
Item 2. Properties
- -------------------
The Company currently owns the real estate and buildings for three of its
pawnshops and leases 104 pawnshop and check cashing 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
1999 and 2010. All current leases provide for specified periodic rental
payments ranging from approximately $500 to $9,100 per month. Most leases
require the Company to maintain the property and pay the cost of insurance and
property taxes. The Company believes that termination of any particular lease
would not have a material adverse effect on the Company's operations. The
Company's strategy is generally to lease, rather than purchase, space for its
pawnshop and check cashing locations unless the Company finds what it believes
is a superior location at an attractive price. The Company believes that the
facilities currently owned and leased by it as pawnshop and check cashing
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. In
addition, the Company leases approximately 9,200 square feet in Concord,
California for the headquarters of Answers, etc., its software company which
provides computer hardware and software for third-party check cashing stores.
Item 3. Legal Proceedings
- --------------------------
The Company is aware of no material legal proceedings pending to which it
is a party, or its property is subject. From time to time the Company is a
defendant (actual or threatened) in certain lawsuits encountered in the ordinary
course of its business, the resolution of which, in the opinion of management,
should not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matter was submitted to a vote of the Company's security holders during
the fourth quarter of fiscal 1998.
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
---- ---
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
1998
First Quarter......................... $ 8.50 $ 5.88
Second Quarter........................ 8.50 6.69
Third Quarter......................... 9.13 7.13
Fourth Quarter......................... 17.00 9.00
On October 26, 1998, the last sales price for the Common Stock as reported
by the Nasdaq Stock Market was $9.63 per share. On October 26, 1998, there
were approximately 90 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,
-------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share amounts
and certain operating data)
Income Statement Data:
- ----------------------
Revenues:
Merchandise sales..................... $ 37,998 $ 32,628 $ 24,823 $ 20,709 $ 12,174
Service charges....................... 20,332 16,517 13,149 11,298 8,279
Check cashing fees.................... 255 - - - -
Other................................. 419 286 51 177 130
-------- -------- -------- -------- --------
59,004 49,431 38,023 32,184 20,583
-------- -------- -------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold.................... 25,463 22,502 16,714 13,648 8,258
Operating expenses.................... 19,608 15,774 12,573 10,678 7,356
Interest expense...................... 2,031 2,340 2,124 2,116 819
Depreciation.......................... 922 717 540 506 361
Amortization.......................... 783 636 565 531 377
Administrative expenses............... 4,134 3,831 3,150 3,013 1,815
-------- -------- -------- -------- --------
52,941 45,800 35,666 30,492 18,986
-------- -------- -------- -------- --------
Income before income taxes............... 6,063 3,631 2,357 1,692 1,597
Provision for income taxes............... 2,265 1,337 917 592 462
-------- -------- -------- -------- --------
Net income............................... 3,798 2,294 1,440 1,100 1,135
Dividends on preferred stock............. - - - - 120
-------- -------- -------- -------- --------
Net income attributable to
common stockholders..................... $ 3,798 $ 2,294 $ 1,440 $ 1,100 $ 1,015
======== ======== ======== ======== ========
Basic earnings per share................. $ .74 $ .60 $ .39 $ .30 $ .27
Diluted earnings per share............... $ .59 $ .46 $ .35 $ .30 $ .27
Operating Data:
- ---------------
Locations in operation:
Beginning of the period............... 57 50 43 36 26
Acquisitions.......................... 38 7 7 5 10
Opened................................ 2 - 1 2 2
Sold.................................. - - - - (1)
Consolidated.......................... - - (1) - (1)
-------- -------- -------- -------- --------
End of the period..................... 97 57 50 43 36
======== ======== ======== ======== ========
Receivables.............................. $ 17,054 $ 12,877 $ 11,701 $ 9,158 $ 7,320
Average receivables balance per store.... $ 176 $ 226 $ 234 $ 213 $ 203
Pawn loan redemption rate................ 74% 72% 70% 71% 73%
Average inventory per pawn store......... $ 154 $ 176 $ 175 $ 178 $ 167
Annualized inventory turnover............ 2.2x 2.4x 2.1x 2.0x 1.6x
Gross profit percentage on
merchandise sales....................... 33.0% 31.0% 32.7% 34.1% 32.2%
Balance Sheet Data:
- -------------------
Working capital.......................... $ 31,987 $ 23,616 $ 21,098 $ 17,027 $ 14,159
Total assets............................. 91,128 56,677 51,945 43,755 37,814
Long-term liabilities.................... 34,533 26,892 28,655 22,964 18,657
Total liabilities........................ 39,611 30,398 31,362 24,808 19,804
Stockholders' equity..................... 51,517 26,279 20,583 18,947 18,010
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
General
- -------
The Company's pawnshop revenues are derived primarily from service charges
on pawn loans, and the sale of unredeemed goods, or "merchandise sales". Pawn
loans are made for a 30-day term with an automatic extension of 60 days in Texas
and Missouri, 30 days in Oklahoma and 15 days in Maryland and Virginia. Pawn
loans made in Washington, D.C. are made for a 30 day term with no automatic
extension. All pawn loans are collateralized by tangible personal property
placed in the custody of the Company. The annualized service charge rates on
pawn loans are set by state laws and range between 12% and 240% in Texas and 36%
and 240% in Oklahoma, depending on the size of the loan. Service charge rates
are 144% to 240% on an annualized basis in Maryland, with a $6 monthly minimum
charge. In Washington, D.C., loans up to $40 bear a flat $2 charge per month,
while loans over $40 bear a 48% to 60% annualized rate. Missouri pawn loans
bear service and storage charges totaling 240% per year, and in Virginia rates
range from 120% to 180% annually. In its Texas stores, the Company recognizes
service charges at the inception of the pawn 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, Virginia, Missouri 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.
Revenues at the Company's check cashing stores are derived primarily from
check cashing fees, fees on payday advances, and fees from the sale of money
orders and wire transfers. Payday advances have a term of thirty days or less,
and carry a 15% service charge in both California and Washington. The Company
recognizes service charge income on payday advances at the inception of the
advance. Bad debts on payday advances are charged to operating expense in the
month that the items are returned by the bank, and are credited to operating
expense in the period the items are subsequently collected.
Although the Company has had significant increases in revenues due
primarily to acquisitions and secondarily to new store openings, the Company has
also incurred increases in operating expenses attributable to the additional
stores and increases in administrative expenses attributable to building a
management team and the support personnel required by the Company's growth.
Operating expenses consist of all items directly related to the operation of the
Company's stores, including salaries and related payroll costs, rent, utilities,
equipment depreciation, advertising, property taxes, licenses, supplies,
security and net returned checks. 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, 1998. 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,
-------------------
1998 1997 1996
---- ---- ----
Income statement items as a percent
of total revenues:
Revenues:
Merchandise sales............... 64.4% 66.0% 65.3%
Service charges................. 34.5 33.4 34.6
Check cashing fees.............. .4 - -
Other........................... .7 .6 .1
Expenses:
Operating expenses.............. 33.2 31.9 33.1
Interest expense................ 3.4 4.7 5.6
Depreciation.................... 1.6 1.5 1.4
Amortization.................... 1.3 1.3 1.5
Administrative expenses......... 7.0 7.8 8.3
Gross profit as a percent of
merchandise sales.................... 33.0 31.0 32.7
Results of Operations
- ---------------------
Fiscal 1998 Compared to Fiscal 1997
Total revenues increased 19% to $59,004,000 for the fiscal year ended July
31, 1998 ("Fiscal 1998") as compared to $49,431,000 for the fiscal year ended
July 31, 1997 ("Fiscal 1997"). The change resulted from an increase in revenues
of $8,545,000 generated by the 47 pawn and check cashing stores which were
opened or acquired during Fiscal 1997 and Fiscal 1998 and an increase of
$1,028,000, or 2%, at the 50 stores which were in operation during all of Fiscal
1997 and Fiscal 1998. Of the $9,573,000 increase in total revenues, 56%, or
$5,370,000, was attributable to increased merchandise sales, 40%, or $3,815,000
was attributable to increased service charges on pawn loans and payday advances,
3%, or $255,000 was attributable to increased check cashing fees, and the
remaining increase of $133,000, or 1% was attributable to the increase in other
income. As a percentage of total revenues, merchandise sales decreased from
66.0% to 64.4% during Fiscal 1998 as compared to Fiscal 1997, service charges
increased from 33.4% to 34.5%, check cashing fees increased from zero to 0.4%,
and other income increased from 0.6% to 0.7%.
The aggregate receivables balance increased 32% from $12,877,000 at July
31, 1997 to $17,054,000 at July 31, 1998. Of the $4,177,000 increase, $188,000
was attributable to growth at the 57 pawn stores in operation at July 31, 1997
and July 31, 1998, $2,708,000 was attributable to the addition of 29 pawnshops
during Fiscal 1998, and $1,281,000 was attributable to payday advances at the
check cashing stores acquired during Fiscal 1998.
Gross profit as a percentage of merchandise sales increased from 31.0%
during Fiscal 1997 to 33.0% during Fiscal 1998. This increase in the Company's
gross profit margin was primarily the result of certain operating controls
implemented during Fiscal 1998, and a slightly higher gold price during Fiscal
1998 compared to Fiscal 1997, which yielded higher margins on scrap jewelry
sales during Fiscal 1998.
Operating expenses increased 24% to $19,608,000 during Fiscal 1998 compared
to $15,774,000 during Fiscal 1997, primarily as a result of the addition of 47
pawnshops and check cashing stores in Fiscal 1997 and Fiscal 1998, and the
addition of personnel viewed as necessary to support the increased number of
store level transactions. Administrative expenses increased 8% to $4,134,000
during Fiscal 1998 compared to $3,831,000 during Fiscal 1997 due primarily to
the addition of personnel to supervise store operations. Interest expense
decreased to $2,031,000 in Fiscal 1998 compared to $2,340,000 in Fiscal 1997 as
a result of a lower interest rate on the Company's line of credit, and due to
the conversion of $6,522,000 of interest-bearing debentures in May 1998 which
were outstanding for all of Fiscal 1997.
For Fiscal 1998 and 1997, the Company's effective federal income tax rate
of 37% differed from the statutory tax rate of 34% primarily as a result of
state income taxes and amortization of non-deductible intangible assets.
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 receivables 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.
Liquidity and Capital Resources
- -------------------------------
The Company's operations and acquisitions during the past three years have
been financed with funds generated from operations, bank and other borrowings,
and the issuance of the Company's securities.
Effective November 1, 1997, the Company increased its long-term line of
credit with its senior commercial lender to $35,000,000 (the "Credit Facility").
At July 31, 1998, $25,450,000 was outstanding under this Credit Facility and an
additional $7,094,000 was available to the Company pursuant to the available
borrowing base. The Credit Facility bears interest at the prevailing LIBOR rate
plus one percent, and matures on November 1, 2000. Amounts available under the
Credit Facility are limited to 325% of the Company's earnings before income
taxes, interest, depreciation and amortization for the trailing twelve months.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios and comply with certain technical covenants. The
Company was in compliance with these requirements and covenants during fiscal
1998 and as of October 26, 1998. 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 April 1998, the Company acquired 100% of the outstanding common stock of
JB Pawn, Inc., which operates ten pawn stores in Texas and Maryland, for a total
cash price of $2,000,000. In June 1998, the Company acquired 100% of the
outstanding common stock of Miraglia, Inc. for a total purchase price of
$21,175,000 consisting of 850,000 shares of First Cash common stock valued at
$8,713,000, or $10.25 per share, a $6,000,000 note payable to the sellers,
$6,300,000 cash, and legal, consulting and other costs totaling $162,000.
Miraglia, Inc. operates eleven check cashing stores located in California and
Washington, as well as Answers, etc., a provider of computer hardware and
software to third-party operators of check cashing stores. In addition to JB
Pawn, Inc. and Miraglia, Inc., the Company acquired a total of 19 additional
individual pawnshops in various regions at various times during the fiscal year
for an aggregate purchase price of $4,813,000, including legal, consulting,
assumed liabilities and other costs incidental to the acquisitions. The Company
financed substantially all of the cash purchase price for all of its fiscal 1998
acquisitions through its credit facility. The purchase price for these
acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding loan balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
As of July 31, 1998, the Company's primary sources of liquidity were
$1,582,000 in cash and cash equivalents, $2,436,000 in service charges
receivable, $17,054,000 in receivables, $13,254,000 in inventories and
$7,094,000 of available and unused funds under the Company's Credit Facility.
The Company had working capital as of July 31, 1998 of $31,987,000 and a
liabilities to equity ratio of 0.8 to 1.
Net cash provided by operating activities of the Company during Fiscal 1998
was $2,497,000, consisting primarily of net income before non-cash depreciation
and amortization of $5,503,000, less cash used to fund the increase of balance
sheet items of $3,006,000. Net cash used for investing activities during Fiscal
1998 was $14,025,000, which was comprised of cash used for increasing
receivables at existing stores of $1,050,000, and cash paid for acquisitions and
other fixed asset additions of $12,975,000 during Fiscal 1998. Net cash
provided by financing activities was $11,971,000 during Fiscal 1998, which
consisted of net increases in the Company's debt of $7,213,000, supplemented by
cash provided from the exercise of stock options and warrants of $4,758,000.
The profitability and liquidity of the Company is affected by the amount of
pawn loans outstanding, which is controlled in part by the Company's 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 amounts loaned under pawn transactions
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 1999. The Company has no significant capital
commitments as of October 26, 1998. 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, 1998 and October 26,
1998, the Company acquired three individual check cashing stores for an
aggregate purchase price of $257,000, and opened one new check cashing location.
In addition, the Company acquired five pawnshops for an aggregate purchase
price of $1,650,000, and opened one new pawnshop location. All of these
acquisitions were financed with proceeds from the Company's Credit Facility, and
with seller-financed debt.
Year 2000 Issue
- ---------------
The "Year 2000 Issue" is the result of computer programs that use two
digits instead of four to record the applicable year. Computer programs that
have date-sensitive software might recognize a date using "00" as the Year 1900
instead of the Year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other events,
a temporary inability to process transactions or engage in similar normal
business activities. The Year 2000 is a leap year, which may also lead to
incorrect calculations, functions or system failure. The Company has
established a committee to initiate the process of gathering, testing, and
producing information about the Company's operations systems impacted by the
Year 2000 transition. The Company intends to utilize both internal and external
resources to identify, correct or reprogram, and test systems for Year 2000
compliance. The Company intends to contact its significant suppliers to
determine the extent to which the Company may be vulnerable to those parties'
failure to remediate their own Year 2000 issues. There can be no guarantee that
the systems of other companies with which the Company's systems interface will
be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems would not require the
Company to spend more time or money than anticipated, or even have a material
adverse effect on the Company. Although the Year 2000 assessment has not been
completed, management currently believes, based on available information, that
resolving these matters will not have a material adverse impact on the Company's
financial position or it's results of operations.
Forward Looking Information
- ---------------------------
This annual report contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans," or "anticipates" or the negative
thereof, or other variations thereon, or comparable terminology, or by
discussions of strategy. Such statements include, but are not limited to, the
discussions of the Company's operations, liquidity, and capital resources.
Forward-looking statements are included in the "Liquidity and Capital
Resources," and "Business" sections of this annual report. Although the Company
believes that the expectations reflected in forward-looking statements are
reasonable, there can be no assurances that such expectations will prove to be
accurate. Generally, these statements relate to business plans, strategies,
anticipated strategies, levels of capital expenditures, liquidity and
anticipated capital funding needed to effect the business plan. All phases of
the Company's operations are subject to a number of uncertainties, risks and
other influences, many of which are outside the control of the Company and
cannot be predicted with any degree of accuracy. Factors such as changes in
regional or national economic conditions, changes in governmental regulations,
unforeseen litigation, changes in interest rates or tax rates, significant
changes in the prevailing market price of gold, future business decisions and
other uncertainties may cause results to differ materially from those
anticipated by some of the statements made in this report. In light of the
significant uncertainties inherent in the forward-looking statements made in
this annual report, the inclusion of such statements should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved. Security holders are cautioned that such
forward-looking statements involve risks and uncertainties. The forward-looking
statements contained this annual report speak only as of the date of this annual
report and the Company expressly disclaims any obligation or undertaking to
release any updates or revisions to any such statement to reflect any change in
the Company's expectations or any change in events, conditions or circumstance
on which any such statement is based.
Inflation
- ---------
The Company does not believe that inflation has had a material effect on
the amount of loans and payday advances made or unredeemed goods sold by the
Company or its results of operation.
Seasonality
- -----------
The Company's retail business is seasonal in nature with its highest volume
of sales of unredeemed goods occurring during the 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 and payday advance
activities are not seasonal in nature.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") 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 adopted FAS 128, which establishes standards for computing and
presenting earnings per share for entities with publicly held common stock.
Earnings per share for Fiscal 1998 have been calculated in conformity with FAS
128, and earnings per share for prior periods presented have been restated to
conform with FAS 128.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 "Disclosure of Information about Capital Structure" ("FAS
129"). FAS 129 is effective for periods ending after December 15, 1997. The
Company believes it is not required to make any additional disclosures under FAS
129.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes
standards for reporting comprehensive income and its components in a full set of
financial statements. The new standard requires that all items that are to be
recognized under accounting standards as components of comprehensive income,
including an amount representing total comprehensive income, be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company believes it is not required to make any
additional disclosures under FAS 130.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 establishes reporting standards for a company's operating
segments in annual financial statements and the reporting of selected
information about operating segments in interim financial reports. The new
pronouncement also establishes standards for related disclosures about products
and services, geographic areas and major customers. The statement is effective
for financial statements for periods beginning after December 15, 1997. The
Company believes it will not be required to report segment information for the
year ended July 31, 1999.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 14(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
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 year 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 year ended July
31, 1996, and during the period from August 1, 1996 through May 28, 1997, there
were no reportable events. During the year 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:
Report of Independent Auditors
Report of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in
Stockholders' Equity
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not
applicable or the required information is shown
in the financial statements or notes thereto.
(3) Exhibits:
3.1(5) Amended Certificate of Incorporation
3.2(4) Amended Bylaws
4.2a(2) Common Stock Specimen
10.3(1) Registrant's Stock Option Plan and Form of Option
10.3(a)(1) Amended Stock Option Agreement -- Rick Powell
10.7(2) Lease of Registrant's Pawnshop located at S. Cooper
10.8(2) Employment Agreement -- Rick Powell
10.15(2) Employment Agreement -- Rick L. Wessel
10.16(2) Warrant Agreement -- Rick Powell
10.18(2) Warrant Agreement -- Rick Wessel
10.23(2) Lease of Registrant's Pawnshop located at Tyler, Texas
10.24(2) Lease of Registrant's Pawnshop located at James Avenue in
Ft. Worth, Texas
10.25(2) Lease of Registrant's Pawnshop located at Brown Trail in
Bedford, Texas
10.26(2) Lease of Registrant's Pawnshops located at Hurst and Euless,
Texas
10.28(2) Lease of Registrant's Pawnshop located at S. 23rd Street in
McAllen, Texas
10.29(2) Lease of Registrant's Pawnshop located at E. 14th Street in
Brownsville, Texas
10.30(2) Lease of Registrant's Pawnshop located at W. Tyler in
Harlingen, Texas
10.31(2) Lease of Registrant's Pawnshop located at Morgan in Corpus
Christi, Texas
10.32(2) Lease of Registrant's Pawnshop located at N. 10th in
McAllen, Texas
10.43(3) Lease of Registrant's Pawnshop located at Garland, Texas
10.46(5) Lease of Registrant's Pawnshop located at 5519 S.E. 15th
Street in Del City, Oklahoma
10.54(6) Repurchase of First Cash, Inc. Stock from American Pawn &
Jewelry, Inc.
10.55(6) Acquisition of Famous Pawn, Inc.
10.56(7) Audited Financial Statements of Famous Pawn, Inc. for the
ten and one-half months ended May 15, 1994.
10.57(8) Acquisition Agreement of Five Pawnshops from Jeff Gerhoff.
10.58(8) Loan Agreement between First Cash, Inc. and Bank One, Texas,
National Association, dated July 28, 1994.
10.59(11) Acquisition Agreement - Miraglia, Inc.
10.60(10) Audited Financial Statements of Miraglia, Inc. for the ten
months ended May 31, 1998.
11.0(9) Computation of Earnings Per Share for the Year Ended July
31, 1995.
21.0(11) Subsidiaries
27.0 Financial Date Schedules (Edgar version only)
- ---------
(1) Filed as an exhibit to the Company's Registration Statement on Form S-18
(No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year
ended July 31, 1992 (File No. 0 - 19133) and incorporated herein by
reference.
(4) 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.
(5) 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.
(6) 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.
(7) Filed as an exhibit to Form 8-K dated July 29, 1994.
(8) 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.
(9) 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.
(10) Filed as an exhibit to Form 8-K dated September 22, 1998.
(11) Filed herein.
(b) On September 22, 1998, the Company filed a Form 8-K to report the
purchase of Miraglia, Inc., along with the financial statements of
Miraglia, Inc. for the ten months ended May 31, 1998.
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 27, 1998
RICK L. WESSEL
--------------------------------------
Rick L. Wessel, Principal Accounting Officer
October 27, 1998
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 27, 1998
- ------------------------------- Chief Executive Officer
Phillip E. Powell
RICK L. WESSEL President, Chief Financial October 27, 1998
- ------------------------------- Officer, Secretary and
Rick L. Wessel Treasurer
JOE R. LOVE Director October 27, 1998
- -------------------------------
Joe R. Love
RICHARD T. BURKE Director October 27, 1998
- -------------------------------
Richard T. Burke
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Board of Directors and Stockholders
of First Cash, Inc.
We have audited the consolidated balance sheets of First Cash, Inc. and
subsidiaries as of July 31, 1998 and 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years 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 audits.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 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, 1998 and 1997 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
- ---------------------------
Deloitte & Touche LLP
Fort Worth, Texas
August 31, 1998
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of First Cash, Inc.
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity for the year ended July 31, 1996 present fairly,
in all material respects, the results of operations and cash flows of First
Cash, Inc. and its subsidiaries for the year 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 audit. We conducted our
audit 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
audit provides a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of First Cash, Inc. and its
subsidiaries for any period subsequent to July 31, 1996.
PRICEWATERHOUSECOOPERS LLP
- ---------------------------------
PRICE WATERHOUSE LLP
Fort Worth, Texas
October 22, 1996
FIRST CASH, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
July 31, July 31,
1998 1997
---- ----
(in thousands, except
share data)
ASSETS
Cash and cash equivalents............................ $ 1,582 $ 1,139
Service charges receivable........................... 2,436 1,949
Receivables.......................................... 17,054 12,877
Inventories.......................................... 13,254 10,035
Income taxes receivable.............................. 1,471 -
Prepaid expenses and other current assets............ 1,268 1,122
-------- --------
Total current assets............................ 37,065 27,122
Property and equipment, net.......................... 7,890 6,554
Intangible assets, net of accumulated amortization
of $3,356 and $2,570, respectively.................. 45,873 22,256
Other................................................ 300 745
-------- --------
$ 91,128 $ 56,677
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt and notes payable.. $ 1,587 $ 942
Accounts payable and accrued expenses................ 3,283 2,437
Income taxes payable................................. 208 127
-------- --------
Total current liabilities....................... 5,078 3,506
Revolving credit facility............................ 25,450 15,575
Long-term debt and notes payable, net of current
portion............................................. 6,367 2,735
Debentures Due 1999.................................. - 6,022
Debentures Due 2004.................................. - 500
Deferred income taxes................................ 2,716 2,060
-------- --------
39,611 30,398
-------- --------
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; 8,334,305 and 4,931,376 shares
issued, respectively; 7,863,346 and 4,460,417
shares outstanding, respectively............... 83 50
Additional paid-in capital....................... 42,412 21,005
Retained earnings................................ 11,287 7,489
Common stock held in treasury, at cost; 470,959
shares.......................................... (2,265) (2,265)
-------- --------
51,517 26,279
Commitments (see Note 11)
-------- --------
$ 91,128 $ 56,677
======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Ended July 31,
1998 1997 1996
---- ---- ----
(in thousands, except per
share amounts)
Revenues:
Merchandise sales........................ $ 37,998 $ 32,628 $ 24,823
Service charges.......................... 20,332 16,517 13,149
Check cashing fees....................... 255 - -
Other.................................... 419 286 51
-------- -------- --------
59,004 49,431 38,023
-------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold....................... 25,463 22,502 16,714
Operating expenses....................... 19,608 15,774 12,573
Interest expense......................... 2,031 2,340 2,124
Depreciation............................. 922 717 540
Amortization............................. 783 636 565
Administrative expenses.................. 4,134 3,831 3,150
-------- -------- --------
52,941 45,800 35,666
-------- -------- --------
Income before income taxes.................... 6,063 3,631 2,357
Provision for income taxes.................... 2,265 1,337 917
-------- -------- --------
Net income.................................... $ 3,798 $ 2,294 $ 1,440
======== ======== ========
Basic earnings per share...................... $ 0.74 $ 0.60 $ 0.39
======== ======== ========
Diluted earnings per share.................... $ 0.59 $ 0.46 $ 0.35
======== ======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended July 31,
1998 1997 1996
---- ---- ----
(in thousands)
Cash flows from operating activities:
Net income........................................ $ 3,798 $ 2,294 $ 1,440
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization................. 1,705 1,353 1,105
Changes in operating assets and liabilities,
net of effect of purchases of existing stores:
Service charges receivable.................... (195) (62) (227)
Inventories................................... (1,614) (1,152) (899)
Prepaid expenses and other assets............. (2,115) (6) (474)
Accounts payable and accrued expenses......... (241) 257 451
Current and deferred income taxes............. 1,159 135 556
-------- -------- --------
Net cash flows from operating activities.. 2,497 2,819 1,952
-------- -------- --------
Cash flows from investing activities:
Net increase in pawn loans and payday advances.... (1,050) (566) (1,606)
Purchases of property and equipment............... (1,021) (1,188) (1,282)
Acquisition of existing operations................ (11,954) (2,643) (4,370)
-------- -------- --------
Net cash flows from investing activities.. (14,025) (4,397) (7,258)
-------- -------- --------
Cash flows from financing activities:
Proceeds from debt................................ 13,440 16,086 17,909
Repayments of debt................................ (6,227) (13,975) (12,385)
Repurchase of outstanding warrants................ - (250) -
Proceeds from exercise of options and warrants.... 4,758 176 196
-------- -------- --------
Net cash flows from financing activities.. 11,971 2,037 5,720
-------- -------- --------
Change in cash and cash equivalents.................. 443 459 414
Cash and cash equivalents at beginning of the year... 1,139 680 266
-------- -------- --------
Cash and cash equivalents at end of the year......... $ 1,582 $ 1,139 $ 680
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest..................................... $ 2,061 $ 2,405 $ 2,102
======== ======== ========
Income taxes................................. $ 985 $ 1,173 $ 361
======== ======== ========
Supplemental disclosure of noncash investing and
financing activities:
Noncash transactions in connection with various
acquisitions:
Fair market value of assets acquired....... $ 31,196 $ 2,652 $ 4,308
Less issuance of common stock............ (8,712) - -
Less issuance of debt.................... (6,000) - -
Less assumption of liabilities and costs
of acquisition.......................... (4,530) (9) (23)
-------- -------- --------
Net cash paid.............................. $ 11,954 $ 2,643 $ 4,285
======== ======== ========
Noncash conversion of subordinated debentures
into shareholders' equity....................... $ 6,522 $ 3,476 -
======== ======== ========
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH, 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, 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
Exercise of stock options
and warrants, including
income tax benefit
of $1,894................ 1,151 11 6,640 - - - - - 6,651
Conversion of debentures.. 1,402 14 6,063 - - - - - 6,077
Common stock issued in
connection with an
acquisition.............. 850 8 8,704 - - - - - 8,712
Net income................ - - - - - 3,798 - - 3,798
----- ---- ------- ---- ---- ------- --- ------- -------
Balance at July 31, 1998.. 8,334 $ 83 $42,412 - - $11,287 471 $(2,265) $51,517
===== ==== ======= ==== ==== ======= === ======= =======
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,
these pawnshops offer for resale the personal property forfeited by the
individuals on loans, as well as personal property purchased outright from
customers. The Company also operates outlets that provide check cashing, short
term unsecured advances ("payday advances"), and other related financial
services through its wholly-owned subsidiary, Miraglia, Inc. Miraglia, Inc.
also supplies computer hardware and software to third-party check cashing
operators, as well as ongoing technical support. As of July 31, 1998 the
Company owned 86 pawn stores and 11 check cashing stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
The following is a summary of significant accounting policies followed in
the preparation of these financial statements.
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at date of
acquisition to be cash equivalents.
Receivables and income recognition - Receivables on the accompanying
balance sheet consist of pawn loans and payday advances. Pawn loans ("loans")
are made on the pledge of tangible personal property for one month with an
automatic extension period of sixty days in Texas and Missouri, 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, Missouri, 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. Payday advances made at the Company's check cashing outlets are
made for thirty days or less. The Company recognizes the service charges
associated with payday advances at the inception of the payday advance at the
amount of service charge allowed for the term of the payday advance.
Returned checks - The Company charges operating expense for potential
losses on returned checks in the period such checks are returned, since ultimate
collection of these items is uncertain. Recoveries on returned checks are
credited in the period when the recovery is received.
Operating expenses - Costs incurred in operating the pawn stores and check
cashing stores have been classified as operating expenses. Operating expenses
include salary and benefit expense of store employees, rent and other occupancy
costs, bank charges, security, net returned checks, utilities, cash shortages
and other costs incurred by the stores.
Layaway and deferred revenue - Interim payments from customers on layaway
sales are credited to deferred revenue and subsequently recorded as income
during the period in which final payment is received.
Inventories - Inventories represent merchandise purchased directly from the
public and merchandise acquired from forfeited loans. Inventories purchased
directly from customers are recorded at cost. Inventories from forfeited loans
are recorded at the amount of the loan principal plus one month's accrued pawn
service charges on the unredeemed goods. The cost of inventories is determined
on the specific identification method. Inventories are stated at the lower of
cost or market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is determined on the straight-line method based on estimated useful
lives of thirty-one years for buildings and three to ten years for equipment.
The costs of improvements on leased stores are capitalized as leasehold
improvements and are amortized on the straight-line method over the applicable
lease period, or useful life if shorter.
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are charged to the appropriate property and equipment accounts.
Upon sale or retirement of depreciable assets, the cost and related accumulated
depreciation is removed from the accounts, and the resulting gain or loss is
included in the results of operations in the period retired.
Intangible assets - Intangible assets consist of the excess of purchase
price over net assets acquired and non-compete agreements. Excess purchase
price over net assets acquired is being amortized on a straight-line basis over
an estimated useful life of forty years and payments relative to non-compete
agreements are amortized over their estimated useful lives, generally ranging
from five to ten years. The Company's amortization policy is reviewed annually
by the Board of Directors to determine if any change is appropriate. Management
of the Company periodically evaluates the carrying value of the excess purchase
price over the net tangible assets of businesses acquired to determine that no
diminution in carrying value has occurred by comparing expected future cash
flows, undiscounted and without interest charges, to the net carrying value of
the related intangibles. Upon any such diminution in value, an appropriate
amount would be charged to earnings.
Long lived assets - Long-lived assets (i.e., property, plant and equipment
and intangible assets) are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss would be recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the asset
is less than the net book value of the asset. Generally, the amount of the
impairment loss is measured as the difference between the net book value of the
assets and the estimated fair value of the related assets.
Fair value of financial instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded values, due primarily
to their short-term nature.
Income taxes - The Company uses the liability method of computing deferred
income taxes on all material temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their
tax bases.
Advertising - The Company expenses the costs of advertising the first time
the advertising takes place. Advertising expense for the fiscal years ended
July 31, 1998, 1997 and 1996 was $248,000, $219,000 and $165,000, 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 - In February 1997, the Financial Accounting Standards
Board issued Financial Accounting Standard No. 128, "Earnings Per Share" ("FAS
128"), which became effective for periods ending after December 15, 1997. FAS
128 establishes standards for computing and presenting earnings per share for
entities with publicly held common stock or potential common stock. Basic and
diluted earnings per share for the year ended July 31, 1998 have been calculated
in accordance with FAS 128. Earnings per share for prior periods have been
restated to conform with FAS 128.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended July 31,
-------------------
1998 1997 1996
---- ---- ----
Numerator:
Net income for calculating
basic earnings per share............ $ 3,798 $ 2,294 $ 1,440
Plus interest expense,
net of taxes, relating to
convertible debentures.............. 399 657 658
------- ------- -------
Net income for calculating
diluted earnings per share.......... $ 4,197 $ 2,951 $ 2,098
======= ======= =======
Denominator:
Weighted-average common
shares for calculating basic
earnings per share.................. 5,101 3,825 3,669
Effect of dilutive securities:
Stock options and warrants......... 897 573 2,122
Convertible debentures............. 1,163 2,016 197
------- ------- -------
Weighted-average common
shares for calculating diluted
earnings per share.................. 7,161 6,414 5,988
======= ======= =======
Basic earnings per share................ $ .74 $ .60 $ .39
Diluted earnings per share.............. $ .59 $ .46 $ .35
Pervasiveness of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, and related revenues and expenses and disclosure of gain and loss
contingencies at the date of the financial statements. Such estimates and
assumptions are subject to a number of risks and uncertainties which may cause
actual results to differ materially from the Company's estimates.
NOTE 3 - BUSINESS ACQUISITIONS
- ------------------------------
In April 1998, the Company acquired 100% of the outstanding common stock of
JB Pawn, Inc., which operates ten pawn stores in Texas and Maryland, for a total
cash price of $2,000,000 (see Note 4 - Related Party Transactions). In June
1998, the Company acquired 100% of the outstanding common stock of Miraglia,
Inc. for a total purchase price of $21,175,000 consisting of 850,000 shares of
First Cash common stock valued at $8,712,000, or $10.25 per share, a $6,000,000
note payable to the sellers, $6,300,000 cash, and legal, consulting and assumed
liabilities totalling $163,000. Miraglia, Inc. operates eleven check cashing
stores located in California and Washington, as well as Answers, etc., a
provider of software to third-party operators of check cashing stores. In
addition to JB Pawn, Inc. and Miraglia, Inc., the Company acquired a total of 19
additional individual pawnshops in various regions at various times during the
fiscal year for an aggregate purchase price of $4,813,000, including legal,
consulting, assumed liabilites and other costs incidental to the acquisitions.
The Company financed substantially all of the cash purchase price for all of its
fiscal 1998 acquisitions through its credit facility. The purchase price for
these acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding loan balances, inventory on hand, location and
condition of the facilities, and projected future operating results.
The following unaudited pro forma summary data for the year ended July 31,
1998 and July 31, 1997 (in thousands, except per share amounts) combines the
results of operations of the Company and Miraglia, Inc. as if the acquisition
had occurred as of August 1, 1996, after giving effect to certain adjustments,
including increased interest expense on acquisition debt, increased depreciation
and amortization expense on assets acquired, and the related income tax effects.
The unaudited pro forma fiscal 1998 and Fiscal 1997 results do not necessarily
represent results which would have occurred if the Company had acquired
Miraglia, Inc. on August 1, 1996, nor are they necessarily indicative of the
results of future consolidated operations.
Pro Forma Pro Forma
1998 1997
---- ----
(unaudited) (unaudited)
Revenues.......................... $ 64,884 $ 53,970
Net income........................ $ 3,605 $ 2,237
Basic earnings per share.......... $ .62 $ .48
Diluted earnings per share........ $ .51 $ .40
In September and October 1996, the Company acquired four individual stores
in its Mid-Atlantic division, in December 1996 the Company acquired one store in
the Dallas, Texas area, in February 1997 the Company acquired one store in
Corpus Christi, Texas, and in March 1997 the Company acquired one store in
Bladensburg, Maryland. These asset purchases were made for an aggregate
purchase price of $2,643,000 consisting of cash paid to the sellers of
$2,516,000 and legal, consulting and other fees of $127,000. These acquisitions
were financed with proceeds from the Company's Credit Facility and acquisition
term notes provided by the Company's primary lender. The purchase price for
these acquisitions was determined based upon the volume of annual loan and sales
transactions, outstanding loan balances, inventory on hand, and location and
condition of the facilities. Pro forma results of operations for these
acquisitions are not presented because they are not material to historical
results.
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.
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 $45,873,000 and $22,256,000 as of
July 31, 1998 and 1997, respectively. The results of operations of the acquired
companies are included in the consolidated financial statements from their
respective dates of acquisition. In connection with these acquisitions, the
Company entered into non-compete agreements with the former owners, generally
ranging from five to ten years.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
From August 1996 through March 1998, the Company was involved in a
management agreement to operate and manage pawnshops for JB Pawn, Inc., a Texas
corporation which, up until March 31, 1998, was 100% owned and controlled by Mr.
Jon Burke, the brother of Mr. Richard Burke, a director of First Cash. Through
March 31, 1998, JB Pawn, Inc. owned and provided 100% of the financing for its
pawnshops, and incurred all direct costs to operate the pawnshops, including
payroll, store operating expenses, cost of inventory, and pawn loans. The
Company received a monthly management fee for each store managed, and provided
computer support, accounting, auditing, oversight and management of these
stores. As dicussed in Note 3, the Company purchased 100% of the outstanding
common stock of JB Pawn, Inc. on April 1, 1998. The Company recorded management
fee revenue of $247,000 and $212,000 under this agreement during fiscal 1998 and
1997, respectively. In January 1996, the Company issued to Mr. Jon Burke
warrants to purchase 50,000 shares of the Company's Common Stock at an exercise
price of $4.625 per share for consulting services to be provided through January
2001. The warrants vest over a five-year period.
In June 1998, in conjunction with the purchase of Miraglia, Inc. (see Note
3 - Acquisitions), the Company entered into lease agreements for one of its
check cashing locations, as well as for certain office space located in
Concorde, California. These properties are partially owned by Mr. Blake
Miraglia, an employee of the Company. Total lease payments made pursuant to
these leases were $20,000 during fiscal 1998, which approximated market rates.
In addition, the Company has an outstanding, unsecured note payable due July 5,
2003, bearing interest at 7%, to Mr. Miraglia which amounted to $2,387,000 as of
July 31, 1998 including accrued interest.
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,
1998 1997
---- ----
Land.................................. $ 672 $ 719
Buildings............................. 1,002 1,002
Leasehold improvements................ 2,091 2,089
Furniture, fixtures and equipment..... 7,865 5,516
------- -------
11,630 9,326
Less: accumulated depreciation....... (3,740) (2,772)
------- -------
$ 7,890 $ 6,554
======= =======
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
- ----------------------------------------------
Accounts payable and accrued expenses consist of the following (in
thousands):
July 31, July 31,
1998 1997
---- ----
Accounts payable..................... $ 351 $ 216
Money orders payable................. 487 -
Wire transfers payable............... 124 -
Accrued payroll...................... 675 939
Layaway deposits..................... 783 572
Sales tax payable.................... 190 147
Other................................ 673 563
------- -------
$ 3,283 $ 2,437
======= =======
NOTE 7 - REVOLVING CREDIT FACILITY
- ----------------------------------
Effective November 1, 1997, the Company increased its long-term line of
credit with its senior commercial lender to $35,000,000 (the "Credit Facility").
At July 31, 1998, $25,450,000 was outstanding under this Credit Facility and an
additional $7,094,000 was available to the Company pursuant to the available
borrowing base. The Credit Facility bears interest at the prevailing LIBOR rate
plus one percent, which was approximately 6.7% as of July 31, 1998, and matures
on November 1, 2000. Amounts available under the Credit Facility are limited to
325% of the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
these requirements and covenants during fiscal 1998.
NOTE 8 - LONG-TERM DEBT AND NOTES PAYABLE
- -----------------------------------------
Long-term debt and notes payable consist of the following (in thousands,
except payment information):
July 31, July 31,
1998 1997
---- ----
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.................. $ 538 $ 555
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........................ 483 511
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............ 165 317
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......... 249 312
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........ 207 255
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............ 212 257
Note payable to a bank; bearing interest at
7.4%; monthly principal payments of $8,222
and interest payments based upon the
unpaid balance; secured by specific ac-
quired assets; retired during fiscal 1998..... - 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; secured by specific
acquired assets; retired during fiscal 1998... - 1,074
Notes payable to five former shareholders
of Miraglia, Inc.; bearing interest at 7%;
quarterly principal payments of $300,000
and quarterly interest payments based upon
the unpaid balance until maturity at July 5,
2003; unsecured............................... 6,000 -
------- -------
7,954 3,677
Less: current portion........................... (1,587) (942)
------- -------
$ 6,367 $ 2,735
======= =======
Long-term debt and notes payable are scheduled to mature as follows (in
thousands):
Fiscal
------
1999.................. $ 1,587
2000.................. 1,542
2001.................. 2,313
2002.................. 1,312
2003.................. 1,200
--------
$ 7,954
========
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, and during fiscal 1998 the remaining debentures were converted
into 1,302,000 shares of Common Stock.
In conjunction with the acquisition of Famous Pawn, Inc. in May 1994, the
Company issued $2,500,000 of 7% Convertible Subordinated Debentures Due 2004.
During fiscal 1997, $2,000,000 of these debentures were converted into 400,000
shares of Common Stock, and in fiscal 1998 the remaining debentures were
converted into 100,000 shares of Common Stock.
NOTE 10 - INCOME TAXES
- ----------------------
Components of the provision for income taxes consist of the following (in
thousands):
For the year ended July 31,
---------------------------
1998 1997 1996
---- ---- ----
Current:
Federal......................... $ 1,481 $ 784 $ 446
State........................... 117 121 67
------- ------- -------
1,598 905 513
Deferred........................ 667 432 404
------- ------- -------
$ 2,265 $ 1,337 $ 917
======= ======= =======
The principal current and non-current deferred tax liabilities consist of
the following at July 31, 1998 and 1997 (in thousands):
July 31, July 31,
1998 1997
---- ----
Deferred tax liabilities:
Intangible asset amortization................ $ 1,552 $ 1,222
Depreciation................................. 758 603
State income taxes........................... 258 139
Service charges receivable................... 58 50
Other........................................ 181 150
------- -------
Net deferred tax liability................... $ 2,807 $ 2,164
======= =======
Reported as:
Current liabilities - income taxes payable... $ 91 $ 104
Non-current liabilities - deferred
income taxes................................ 2,716 2,060
------- -------
Net deferred tax liability................... $ 2,807 $ 2,164
======= =======
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,
---------------------------
1998 1997 1996
---- ---- ----
Tax at the federal statutory rate................. $ 2,061 $ 1,235 $ 801
Nondeductible amortization of intangible assets... 39 34 34
State income taxes, net of federal tax benefit.... 197 112 67
Other, net........................................ (32) (44) 15
------- ------- -------
$ 2,265 $ 1,337 $ 917
======= ======= =======
NOTE 11 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company leases certain of its facilities and equipment under operating
leases with terms generally ranging from three to ten years. Most facility
leases contain renewal and/or purchase options. Remaining future minimum
rentals due under non-cancelable operating leases are as follows (in thousands):
Fiscal
------
1999.................. $ 4,096
2000.................. 3,599
2001.................. 3,040
2002.................. 2,119
2003.................. 1,166
Thereafter............ 3,759
--------
$ 17,779
========
Rent expense under such leases was $3,596,000, $2,519,000 and $2,070,000
for fiscal years 1998, 1997 and 1996, 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, 1998, options to purchase 35,749 shares of Common Stock
were available for grant under the Plan. Options to purchase 158,814 shares
were fully vested at July 31, 1998.
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, 1995 through July 31, 1998
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, 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
Granted 27 480 8.00
Cancelled (1) (450) 14.65
Exercised (13) (1,138) 4.13
---- ------
July 31, 1998 214 1,869 8.42 2,027 8.48
==== ======
Options and warrants outstanding as of July 31, 1998 are as follows (in
thousands, except exercise price and life):
Total Warrants Weighted Average Currently
Exercise Price and Options Remaining Life Exercisable
-------------- ----------- -------------- -----------
$4.00 50 .4 50
4.63 917 2.4 895
4.75 9 3.0 2
8.00 507 4.6 480
15.00 600 2.0 600
----- -----
2,083 2,027
===== =====
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 $397,000, $217,000 and $114,000 in fiscal 1998, 1997
and 1996, respectively. Basic and diluted earnings per share would have been
reduced by $0.07 and $0.06, respectively, in fiscal 1998, by $0.06 and $0.03,
respectively, in fiscal 1997, and by $0.03 and $0.02, respectively, in fiscal
1996.
Weighted average grant-date fair values of options issued were $5.71, $3.30
and $0.83 per unit in fiscal 1998, 1997 and 1996, respectively, which were
calculated in accordance with the Black-Scholes option pricing model, using the
following assumptions:
1998 1997 1996
---- ---- ----
Expected volatility......... 99% 39% 38%
Expected dividend yield..... - - -
Expected option term........ 5 years 5 years 5 years
Risk-free rate of return.... 6.0% 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 $95,000, $69,000 and $34,000 for fiscal 1998,
1997 and 1996, respectively.