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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2001, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2237318
------------------------------- ---------------------------------
(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price on the Nasdaq
National Market on March 26, 2002 is $50,634,000. As of March 26, 2002,
there were 8,763,687 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on June 26, 2002 is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2001
TABLE OF CONTENTS
PART I
Item 1 Business............................................. 1
Item 2 Properties........................................... 10
Item 3. Legal Proceedings ................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................... 11
Item 6. Selected Financial Data ............................ 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 13
Item 8. Financial Statements and Supplementary Data ........ 20
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............... 20
PART III....................................................... 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K....................................... 21
SIGNATURES..................................................... 22
PART I
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Forward Looking Information
This annual report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans," "intends," or "anticipates" or the
negative thereof, or other variations thereon, or comparable terminology, or
by discussions of strategy. Forward-looking statements in this annual
report include, without limitation, the earnings per share discussion above,
the expectation of increased pawn growth, the expectation for additional
store openings, and the expectation of growth in the Company's short-term
advance products. These statements are made to provide the public with
management's assessment of the Company's business. 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. Security holders are cautioned that such forward-looking
statements involve risks and uncertainties. The forward-looking statements
contained in this report speak only as of the date of this report, and the
Company expressly disclaims any obligation or undertaking to release any
updates or revisions to any such statement to reflect any change in the
Company's expectations or any change in events, conditions or circumstance
on which any such statement is based. Certain factors may cause results to
differ materially from those anticipated by some of the statements made in
this report. Such factors are difficult to predict and many are beyond the
control of the Company, but may include changes in regional or national
economic conditions, the ability to integrate new stores, changes in
governmental regulations, unforeseen litigation, changes in interest rates
or tax rates, future business decisions and other uncertainties.
Item 1. Business
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General
First Cash Financial Services, Inc. (the "Company") is the nation's
third largest publicly traded pawnshop operator and currently owns 114 pawn
stores in Texas, Oklahoma, Washington, D.C., Maryland, Missouri, South
Carolina, Virginia and Mexico. The Company's pawn stores engage in both
consumer finance and retail sales activities. The Company's pawn stores
provide a convenient source for consumer advances, advancing money against
pledged tangible personal property such as jewelry, electronic equipment,
tools, sporting goods and musical equipment. These pawn stores also
function as retailers of previously owned merchandise acquired in forfeited
pawn transactions and over-the-counter purchases from customers. The
Company's pawn stores also offer short-term, secured advances ("short-term
advances").
The Company also currently owns 50 check cashing and short-term advance
stores in Texas, California, Washington, Oregon, Illinois, and Washington,
D.C. These stores provide a broad range of consumer financial services,
including check cashing, money order sales, wire transfers, bill payment
services and short-term advances. In addition, the Company is a 50% partner
in Cash & Go, Ltd., a Texas limited partnership, which currently owns and
operates 59 financial services kiosks located inside convenience stores.
For the year ended December 31, 2001, the Company's revenues were derived
49% from retail activities, 48% from lending activities, and 3% from other
sources, including check-cashing fees. The Company's primary business plan
is to significantly expand its short-term advance operations by opening new
stores in Texas and other states, by accelerating the growth of its
partnership, Cash & Go, Ltd, which operates short-term advance and check
cashing kiosks inside convenience stores, and by expanding its short-term
advance operations in its existing pawn stores.
Management believes the pawnshop industry is highly fragmented with
approximately 15,000 stores in the United States. The three publicly traded
pawnshop companies currently operate approximately 866, or less than 6%, of
the 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. In addition, management believes
that revenues and operating income of its existing pawn stores can be
enhanced by continuing to add consumer financial services, such as short-
term advances, which will attract new customers to its pawn stores, and
provide a broader array of services to its existing customer base. During
the years ended December 31, 2001, 2000, and 1999, the Company added 4, 2
and 10 pawn stores to its network, respectively.
The Company made its initial entry into the check cashing and short-
term advance business during the twelve months ended July 31, 1998, with the
purchase of 11 stores in California and Washington. Management estimates
there are approximately 7,000 such check cashing and short-term advance
locations throughout the United States. The check cashing and short-term
advance industry is experiencing rapid growth. During the years ended
December 31, 2001, 2000 and 1999, the Company added 14, 2 and 4 check
cashing and short-term advance stores to its network, respectively.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as
otherwise indicated, the term "Company" includes its wholly owned
subsidiaries, American Loan & Jewelry, Inc., WR Financial, Inc., Famous
Pawn, Inc., JB Pawn, Inc., Cash & Go, Inc., One Iron Ventures, Inc., Capital
Pawnbrokers, Inc., Silver Hill Pawn, Inc., Elegant Floors, Inc., First Cash,
S.A. de C.V., American Loan Employee Services, S.A. de D.V., First Cash,
Ltd., First Cash Corp, First Cash Management, LLC, and First Cash, 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 in part to the lack of
qualified management personnel, the difficulty of developing adequate
financial controls and reporting systems, and the lack of financial
resources.
The check cashing and short-term advance industry is a relatively new
industry, and management estimates that there are approximately 7,000 check
cashing and short-term advance locations throughout the United States. Some
states have enacted formal check cashing laws which regulate the amount of
fees that operators may charge for cashing checks, and in some cases states
have regulated the amount of service charges that may be charged on small
consumer advances, commonly referred to as "short-term 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 primary business plan is to significantly expand its
operations by opening 10 to 15 new short-term advance stores primarily in
Texas and selectively opening new stores in other states, as well as by
opening 10 to 15 new pawn shops in Mexico. Secondarily, the Company plans
to increase the growth of its partnership, Cash & Go, Ltd, which operates
short-term advance and check cashing kiosks inside convenience stores, and
by expanding its short-term advance operations in its existing pawn stores.
New Store Openings
The Company has opened 21 new pawn stores and 25 new check
cashing/short-term advance stores since its inception and currently intends
to open additional check cashing and short-term advance stores in locations
where management believes appropriate demand and other favorable conditions
exist. In addition, the Company's partnership, Cash & Go, Ltd., has opened
59 financial services kiosks inside convenience stores since its inception
in August 1999. Management seeks to locate new stores where demographics
are favorable and competition is limited. It is the Company's experience
that after a suitable location has been identified and a lease and licenses
are obtained, a new store can be ready for business within six to eight
weeks. The investment required to open a new pawn store includes inventory,
funds available for pawns, 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, pawn 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/short-term advance store
for the first six months of operation, which includes investments for
leasehold improvements, equipment, pawn portfolio, store operating cash, and
start-up losses.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and
the check cashing/short-term advance industry, as well as the availability
of "mom & pop" sole proprietors willing to sell their stores, the Company
believes that acquisition opportunities as well as favorable new store
locations exist. The timing of any future acquisitions is based on
identifying suitable stores and purchasing them on terms that are viewed as
favorable to the Company. Before making an acquisition, management
typically studies a demographic analysis of the surrounding area, considers
the number and size of competing stores, and researches regulatory issues.
Specific pawn store acquisition criteria include an evaluation of the volume
of annual pawn transactions, outstanding receivable 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/short-term advance
stores include the annual volume of transactions, location and condition of
facilities, and a demographic evaluation of the surrounding area to
determine the potential for the Company's short-term advance product.
Store Clusters
Whether acquiring an existing store or opening a new store, the Company
seeks to establish clusters of several stores in a specific geographic area
in order to achieve certain economies of scale relative to supervision,
purchasing and marketing. In Texas, such clusters have been established in
the Dallas/Fort Worth metroplex, the Rio Grande Valley area, the Corpus
Christi area, and the El Paso area. Store clusters have also been
established in the St. Louis, Missouri area, the Oklahoma City, Oklahoma
area, in Washington D.C. and its surrounding Maryland suburbs, in Baltimore,
Maryland, in Northern California, in the Chicago, Illinois area, in South
Carolina, and in the Pacific Northwest. The Company currently plans to
continue its expansion in existing markets in Texas, Washington D.C. and
Mexico, and to enter new markets in other states with favorable demographics
and regulatory environments.
Enhance Productivity of Existing and Acquired Stores
The primary factors affecting the profitability of the Company's
existing store base are the level of pawns 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/short-term
advance stores and to make customers feel more comfortable. In addition to
well-lit parking facilities, several of the stores' exteriors display an
attractive and distinctive awning similar to those used by contemporary
convenience and video rental stores. The Company also has upgraded or
refurbished the interior of certain of its stores and improved merchandise
presentation by categorizing items into departments, improving the lighting
and installing better in-store signage.
Operating Controls
The Company has an organizational structure that it believes is capable
of supporting a larger, multi-state store base. Moreover, the Company has
installed an employee-training program for both store and corporate-level
personnel that stresses productivity and professionalism. Each store is
monitored on a daily basis from corporate headquarters via an online, real-
time computer network, and the Company has strengthened its operating and
financial controls by increasing its internal audit staff as well as the
frequency of store audit visits. Management believes that the current
operating and financial controls and systems are adequate for the Company's
existing store base and can accommodate reasonably foreseeable growth in the
near-term.
Pawn Lending Activities
The Company's pawn stores advance money against the security of pledged
goods. The pledged goods are tangible personal property generally
consisting of jewelry, electronic equipment, tools, sporting goods and
musical equipment. The pledged goods provide security to the Company for
the repayment of the pawn, as pawns 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 pawn. The statutory service charges on pawns at its Texas stores range
from 12% to 240% on an annualized basis depending on the size of the pawn,
and from 36% to 240% on an annualized basis at the Company's Oklahoma
stores. Pawns made in the Maryland stores bear service charges of 144% to
240% on an annualized basis, while pawns in Virginia earn 120% to 180%
annually. In Washington, D.C., a flat $2 charge per month applies to all
pawns of up to $40, and a 48% to 60% annualized service charge applies to
pawns of greater than $40. In Missouri, pawns bear a total service and
storage charge of 240% on an annualized basis, and South Carolina rates
range from 60% to 300%. As of December 31, 2001, the Company's average pawn
per pawn ticket was approximately $89. Service charge revenues for pawns
during the fiscal years ended December 31, 2001, 2000 and 1999 accounted for
approximately 37%, 44% and, 60%, respectively, of the Company's total
service charge revenues after considering the application of a change in
accounting.
At the time a pawn transaction is entered into, an 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 pawn to fair market value restrictions in connection with
the Company's lending activities. The basis for the Company's determination
of the sale value includes 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 pawn 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 pawn,
which is 30 days in Texas, South Carolina, Missouri, Virginia, Oklahoma and
Maryland, with an automatic extension period of 15 to 60 days depending on
state laws, unless the pawn is earlier paid or renewed. In Washington,
D.C., pledged property is held for 30 days. In the event the borrower does
not pay or renew a pawn within 90 days in Texas, South Carolina and
Missouri, 60 days in Oklahoma, 45 days in Maryland and Virginia, and 30 days
in Washington, D.C., the unredeemed collateral is forfeited to the Company
and becomes inventory available for general liquidation or sale in one of
the Company's stores. The Company does not record pawn losses or charge-
offs because if the pawn is not paid, the principal amount pawned becomes
the carrying cost of the forfeited collateral ("inventory") that is
recovered by sale.
The recovery of the principal and 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 amount pawned. For the fiscal years ended December 31, 2001,
2000, and 1999, the Company's annualized yield on average pawn balance was
141%, 127%, and 119%, respectively, after considering the application of a
change in accounting.
Short-term Advance Activities
The Company's check cashing/short-term advance stores make secured,
short-term advances in which the customer writes the store a personal check
in exchange for cash, net of a transaction fee. Fees for short-term
advances may be regulated by state law and are generally 15% to 18% of the
amount advanced per transaction. The term of these advances is thirty days
or less. Service charge revenues for short-term advances during the fiscal
years ended December 31, 2001, 2000, and 1999 accounted for approximately
63%, 56%, and 40%, respectively, of the Company's total service charge
revenues after considering the application of a change in accounting.
To qualify for a short-term advance, customers generally must have
proof of steady income, a checking account with a minimum of returned items
within a specified period, and valid identification. Upon completing an
application and subsequent approval, the customer writes a check on their
personal checking account for the amount of the advance, plus applicable
fees. At maturity, the customer may either return to the store and pay off
the advance with cash, in which case the check is returned to the customer,
or the store can deposit the check into its checking account. The bank
returns a significant amount of short-term advance checks deposited by the
Company; however, the Company through various means subsequently collects a
large percentage of these bad debts. The profitability of the Company's
check cashing stores is dependent upon adequate collection of these returned
items.
Retail Activities
The Company acquires merchandise inventory primarily through forfeited
pawns and purchases of used goods from the general public. Sales of
inventory during the years ended December 31, 2001, 2000, and 1999 accounted
for approximately 49%, 51%, and 56%, respectively, of the Company's total
revenues for these periods, after considering the application of a change in
accounting. For the years ended December 31, 2001, 2000, and 1999 the
Company realized gross profit margins on merchandise sales of 36%, 35%, and
30%, 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 pawns is carried
in inventory at the amount of the related pawn. 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, pawns 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 customers by lending a
competitively large percentage of the estimated sale value of items
presented for pledge and by providing quick financing, renewal and
redemption service in an appealing atmosphere.
As of March 26, 2002, the Company operated pawn stores in the following
markets:
Number of
Locations
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Dallas/Fort Worth, Texas......................... 27
Corpus Christi, Texas............................ 8
Brownsville, Harlingen, McAllen, Texas........... 21
El Paso.......................................... 6
St. Louis, Missouri.............................. 3
Oklahoma City, Oklahoma ......................... 5
Spartanburg, Columbia, Greenville, South Carolina 9
Mexico........................................... 7
Baltimore, Maryland.............................. 5
Washington, D.C. and surrounding Maryland suburbs 21
Virginia......................................... 2
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Total....................................... 114
===
Each pawnshop employs a manager, one or two assistant managers, and
between one and eight sales personnel, depending upon the size, sales volume
and location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to
an area supervisor who typically oversees four to seven store managers.
Each supervisor reports to one of three regional vice-presidents.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make pawns 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 pawn 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/Short-term Advance Operations
The Company's check cashing/short-term advance locations are typically
part of a small retail strip shopping center with adequate, well-lit
parking. Management has established a standard store design intended to
distinguish the Company's stores from the competition. The design consists
of a well-illuminated exterior with a lighted sign, and distinctive,
conservative window signage. The interiors usually feature an ample lobby,
separated from employee work areas by floor-to-ceiling teller windows. The
Company's stores are typically open six to seven days a week from 9:00 a.m.
to between 6:00 p.m. and 9:00 p.m.
Computer operating systems in the Company's check cashing/short-term
advance stores allow a store manager or clerk to recall rapidly customer
check cashing histories, short-term advance histories, and other vital
information. The Company attempts to attract customers primarily through
television advertisements and yellow page advertisements.
As of March 26, 2002, the Company operated check cashing/short-term
advance stores in the following markets:
Number of
Locations
---------
Chicago, Illinois...................... 10
Houston, Texas......................... 2
Dallas/ Fort Worth, Texas.............. 12
Washington, D.C........................ 6
Oregon................................. 2
Northern California.................... 15
Washington............................. 3
---
Total............................. 50
===
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 store manager
reports to an area manager who typically oversees two to five store
managers. Each supervisor reports to one of two regional vice-presidents.
Competition
The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may
adversely affect the Company's revenues, profitability and ability to
expand.
The Company competes primarily with other pawn store operators and
check cashing/short-term advance operators. Both the pawnshop and check
cashing/short-term advance industries are characterized by a large number of
independent owner-operators, some of whom own and operate multiple
locations. The Company believes that the primary elements of competition in
these businesses are store location, the ability to lend competitive amounts
on pawns and short-term 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.
Regulation
General
The Company is subject to extensive regulation in several jurisdictions
in which it operates, including jurisdictions that regulate pawn lending,
short-term advance fees and check cashing fees. The Company is also subject
to federal and state regulation relating to the reporting and recording of
certain currency transactions. There can be no assurance that additional
state or federal statutes or regulations will not be enacted at some future
date which could inhibit the ability of the Company to expand, significantly
decrease the service charges for lending money, or prohibit or more
stringently regulate the sale of certain goods, any of which could cause a
significant adverse effect on the Company's future prospects.
State Regulations
The Company operates in seven states that have licensing and/or fee
regulations on pawns, including Texas, Oklahoma, Maryland, Virginia, South
Carolina, Washington, D.C., and Missouri. The Company is licensed in each
of the states in which a license is currently required for it to operate as
a pawnbroker. The Company's fee structures are at or below the applicable
rate ceilings adopted by each of these states. In addition, the Company is
in compliance with the net asset requirements in states where it is required
to maintain certain levels of liquid assets for each pawn store it operates
in the applicable state.
The Company also operates in states, which have licensing, and/or fee
regulations on check cashing and short-term advances, including California,
Washington, Missouri, South Carolina, Oregon, Illinois and Washington, D.C.
The Company is licensed in each of the states in which a license is
currently required for it to operate as a check casher and/or short-term
lender. In addition, in some jurisdictions, check cashing companies or
money transmission agents are required to meet minimum bonding or capital
requirements and are subject to record-keeping requirements.
In Texas, which does not have favorable short-term lending laws, the
Company has entered into an agreement with County Bank of Rehoboth Beach,
Delaware, a federally insured state of Delaware chartered financial
institution, to act as a loan servicer within the state of Texas for County
Bank. As compensation for the Company acting as County Bank's loan
servicer, the Company is entitled to purchase a participation in the loans
made by County Bank. The Company's ability to continue to maintain its
current relationship with County Bank and to continue to service County Bank
loans within the state of Texas is subject to County Bank's ability to
continue to export its loan product to the state of Texas. There can be no
assurance that County Bank will be able to continue to export its loan
product to the state of Texas and bank's failure to do so could have a
materially adverse impact on the Company's operations and financial
condition.
Federal Regulations
Under the Bank Secrecy Act regulations of the U.S. Department of the
Treasury (the "Treasury Department"), transactions involving currency in an
amount greater than $10,000 or the purchase of monetary instruments for cash
in amounts from $3,000 to $10,000 must be recorded. In general, every
financial institution, including the Company, must report each deposit,
withdrawal, exchange of currency or other payment or transfer, whether by,
through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any person and result in
either cash in or cash out totaling more than $10,000 during any one
business day.
The Money Laundering Suppression Act of 1994 added a section to the
Bank Secrecy Act requiring the registration of "money services businesses,"
like the Company, that engage in check-cashing, currency exchange, money
transmission, or the issuance or redemption of money orders, traveler's
checks, and similar instruments. The purpose of the registration is to
enable governmental authorities to better enforce laws prohibiting money
laundering and other illegal activities. The regulations require money
services businesses to register with the Treasury Department, by filing a
form to be adopted by the Financial Crimes Enforcement Network of the
Treasury Department ("FinCEN"), by December 31, 2001 and to re-register at
least every two years thereafter. The regulations also require that a money
services business maintain a list of names and addresses of, and other
information about, its agents and that the list be made available to any
requesting law enforcement agency (through FinCEN). That agent list must
first be maintained by January 1, 2002 and must be updated at least
annually.
In March 2000, FinCEN adopted additional regulations, implementing the
Bank Secrecy Act that is also addressed to money services businesses. In
pertinent part, those regulations will require money services businesses
like the Company to report suspicious transactions involving at least $2,000
to FinCEN. The regulations generally describe three classes of reportable
suspicious transactions - one or more related transactions that the money
services business knows, suspects, or has reason to suspect (1) involve
funds derived from illegal activity or are intended to hide or disguise such
funds, (2) are designed to evade the requirements of the Bank Secrecy Act,
or (3) appear to serve no business or lawful purpose. FinCEN has indicated
that it would provide guidance in the form of examples of reportable
transactions, but (so far as the Company is aware) no such examples have yet
been published. This reporting requirement will apply only to suspicious
transactions that occur after December 31, 2001.
The Gramm-Leach-Bliley Act and its implementing federal regulations
require the Company to generally protect the confidentiality of its
customers' nonpublic personal information and to disclose to its customers
its privacy policy and practices, including those regarding sharing the
customers' nonpublic personal information with third parties. Such
disclosure must be made to customers at the time the customer relationship
is established, at least annually thereafter, and if there is a change in
the Company's privacy policy.
Other
With respect to firearms and ammunition sales, each pawn store must
comply with the regulations promulgated by the Department of the Treasury-
Bureau of Alcohol, Tobacco and Firearms, which requires each pawn store
dealing in firearms to maintain a permanent written record of all firearms
received or disposed of and a similar record for all ammunition sales. The
Company does not currently sell handguns to the public.
Under some municipal ordinances, pawn stores must provide the police
department having jurisdiction copies of all daily transactions involving
pawns 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 pawns 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.
The Company's pawnshop and short-term advance operations are subject
to, and must comply with, extensive regulation, supervision and licensing
from various federal, state and local statutes, ordinances and regulations.
These statutes prescribed, among other things, service charges and
interest rates that may be charged. These regulatory agencies have broad
discretionary authority. 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 an adverse impact on the
Company's operations and financial condition.
Proposed Regulations
Governmental action to prohibit or restrict short-term advances has
been advocated over the past few years by consumer-advocacy groups and by
media reports and stories. The consumer groups and media stories typically
focus on the cost to a consumer for that type of short-term advance, which
is higher than the interest typically charged by credit-card issuers to a
more creditworthy consumer. This difference in credit cost is more
significant if a consumer does not promptly repay the short-term advance,
but renews (or "rolls over") that short-term advance for one or more
additional short-term (e.g., two-week) periods. The consumer groups and
media stories typically characterize short-term advance activities as
abusive toward consumers. During the last few years, legislation has been
introduced in the United States Congress and in certain state legislatures,
and regulatory authorities have proposed or publicly addressed the
possibility of proposing regulations, that would prohibit or restrict short-
term advances. So far as the Company is aware, no such federal legislation
or federal regulatory proposal has made any significant progress in the
legislative or regulatory process. But legislation and regulatory action
that affects consumer lending has recently become effective in a few states
and may be taken in other states. The Company intends to continue, with
others in the short-term advance industry, to oppose legislative or
regulatory action that would prohibit or restrict short-term advances. But
if legislative or regulatory action with that effect were taken on the
federal level or in states such as Texas, in which the Company has a
significant number of stores, that action could have a material adverse
effect on the Company's short-term advance-related activities and revenues.
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 would materially, adversely impact the Company's
operations and financial condition.
Employees
The Company had approximately 1,026 employees as of March 17, 2002,
including approximately 84 persons employed in executive, administrative and
accounting functions. None of the Company's employees are covered by
collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
Insurance
The Company maintains fire, casualty, theft and public liability
insurance for each of its pawn stores and check cashing/short-term advance
locations in amounts management believes to be adequate. The Company
maintains workers' compensation insurance in Maryland, Missouri, California,
Virginia, Washington, Oregon, South Carolina, Illinois, Washington, D.C. and
Oklahoma, as well as excess employer's indemnification insurance in Texas.
The Company is a non-subscriber under the Texas Workers' Compensation Act.
Item 2. Properties
-------------------
The Company currently owns the real estate and buildings for three of
its pawn stores and leases 169 pawn stores and check cashing/short-term
advance locations. Leased facilities are generally leased for a term of two
to eight years with one or more options to renew. The Company's existing
leases expire on dates ranging between 2001 and 2016. All current leases
provide for specified periodic rental payments ranging from approximately
$725 to $9,000 per month. Most leases require the Company to maintain the
property and pay the cost of insurance and property taxes. The Company
believes that termination of any particular lease would not have a material
adverse effect on the Company's operations. The Company's strategy is
generally to lease, rather than purchase, space for its pawnshop and check
cashing locations unless the Company finds what it believes is a superior
location at an attractive price. The Company believes that the facilities
currently owned and leased by it as pawn stores and check cashing/short-term
advance locations are suitable for such purpose. The Company considers its
equipment, furniture and fixtures to be in good condition.
The Company currently leases approximately 14,000 square feet in
Arlington, Texas for its executive offices. The lease, which expires March
31, 2004, currently provides for monthly rental payments of approximately
$24,000.
Item 3. Legal Proceedings
--------------------------
In May 2000, three plaintiffs filed a complaint against Famous Pawn,
Inc., a wholly owned subsidiary of the Company, in the United States
District Court for the District of Maryland (Northern Division). The
allegations consists of five counts: (1) violation of the federal Truth in
Lending Act; (2) violation of the federal Racketeer Influenced and Corrupt
Organizations Act; (3) violation of the Maryland Interest and Usury Statute;
(4) violation of the Maryland Consumer Loan Law; and (5) violation of the
Maryland Consumer Protection Act. The plaintiffs have requested the
following relief: actual and punitive damages, attorneys' fees, expenses,
costs, injunctive relief and treble damages, if available. In April 2001,
the court certified a TILA class in this matter. Later that month, Famous
Pawn, Inc. filed a motion to modify the class definition to exclude from the
class those customers who signed arbitration agreements. In August 2001,
the court denied that motion. Famous Pawn, Inc. next filed a motion to
reconsider the motion to modify the class definition, and filed a separate
motion to stay the proceedings and compel arbitration. These motions are
currently pending. Since discovery has not yet commenced, nor the scope of
the case been determined, management can provide no assurance as to the
outcome of such litigation.
Additionally, the Company is from time to time a defendant (actual or
threatened) in certain other lawsuits encountered in the ordinary course of
its business, the resolution of which, in the opinion of management, should
not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
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 2001.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "FCFS". The following table sets forth the quarterly high
and low closing sales prices per share for the Common Stock, as reported by
the Nasdaq National Market.
Common Stock
Price Range
---------------------
High Low
------- -------
Year Ended December 31, 2000
Quarter Ended March 31, 2000.......... $ 8.38 $ 6.13
Quarter Ended June 30, 2000........... 6.38 3.00
Quarter Ended September 30, 2000...... 3.20 2.00
Quarter Ended December 31, 2000....... 2.88 1.66
Year Ended December 31, 2001
Quarter Ended March 31, 2001.......... $ 5.06 $ 2.19
Quarter Ended June 30, 2001........... 7.46 4.94
Quarter Ended September 30, 2001...... 9.05 6.43
Quarter Ended December 31, 2001....... 8.22 6.16
On March 26, 2002, the closing sales price for the Common Stock as
reported by the Nasdaq National Market was $8.15 per share. On March 26,
2002, there were approximately 74 stockholders of record of the Common
Stock.
No cash dividends have been paid by the Company on its Common Stock,
and the Company does not currently intend to pay cash dividends on its
Common Stock. The current policy of the Company's Board of Directors is to
retain earnings, if any, to provide funds for operation and expansion of the
Company's business. Such policy will be reviewed by the Board of Directors
of the Company from time to time in light of, among other things, the
Company's earnings and financial position and limitations imposed by its
revolving line of credit with its syndicate of commercial lenders (the
"Credit Facility"). Pursuant to the terms of its agreement with its
lenders, the Company is prohibited from paying any dividends until payment
in full of its obligations under the Credit Facility.
Item 6. Selected Financial Data
The information below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 and the Company's Consolidated Financial Statements and
related notes thereto required by Item 8.
Five Months
Ended
Year Ended December 31, December 31, Year Ended July 31,
------------------------------ ------------ --------------------
2001 2000 1999 1998 1998 1997
-------- -------- -------- -------- -------- --------
(in thousands, except per share amounts and certain operating data)
Income Statement Data:
Revenues:
Merchandise sales $ 53,893 $ 53,177 $ 50,071 $ 19,154 $ 37,282 $ 32,628
Service charges 53,028 46,597 40,630 12,434 20,332 16,517
Check cashing fees 2,264 2,216 2,184 754 255 -
Other 1,242 1,737 1,158 282 346 286
-------- -------- -------- -------- -------- --------
110,427 103,727 94,043 32,624 58,215 49,431
-------- -------- -------- -------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold 34,619 34,366 35,157 12,750 25,101 22,502
Operating expenses 48,661 44,836 37,199 11,567 19,317 15,774
Interest expense 1,395 2,859 2,602 1,122 2,031 2,340
Depreciation 2,283 2,612 1,527 472 922 717
Amortization 1,530 1,694 1,475 553 779 636
Administrative expenses 9,420 8,217 6,739 2,195 4,124 3,831
-------- -------- -------- -------- -------- --------
97,908 94,584 84,699 28,659 52,274 45,800
-------- -------- -------- -------- -------- --------
Income before income taxes 12,519 9,143 9,344 3,965 5,941 3,631
Provision for income taxes 4,507 3,476 3,097 1,526 2,219 1,337
-------- -------- -------- -------- -------- --------
Income from continuing operations 8,012 5,667 6,247 2,439 3,722 2,294
Discontinued operations
Income (loss) from discontinued
operations, net of taxes 33 (765) 231 130 76 -
Loss on sale of subsidiary,
net of tax (175) - - - - -
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued
operations (142) (765) 231 130 76 -
-------- -------- -------- -------- -------- --------
Cumulative effect of change
in accounting principle - (2,287) - - - -
-------- -------- -------- -------- -------- --------
Net income $ 7,870 $ 2,615 $ 6,478 $ 2,569 $ 3,798 $ 2,294
======== ======== ======== ======== ======== ========
Net income per share:
Basic
Income from continuing
operations $ 0.92 $ 0.64 $ 0.72 $ 0.31 $ 0.73 $ 0.60
Income (loss) from
discontinued operations (0.02) (0.08) 0.03 0.01 0.01 -
Cumulative effect of change
in accounting principle - (0.26) - - - -
-------- -------- -------- -------- -------- --------
Net income $ 0.90 $ 0.30 $ 0.75 $ 0.32 $ 0.74 $ 0.60
======== ======== ======== ======== ======== ========
Diluted
Income from continuing
operations $ 0.87 $ 0.63 $ 0.67 $ 0.28 $ 0.58 $ 0.46
Income (loss) from
discontinued operations (0.02) (0.08) 0.03 0.01 0.01 -
Cumulative effect of change
in accounting principle - (0.26) - - - -
-------- -------- -------- -------- -------- --------
Net income $ 0.85 $ 0.29 $ 0.70 $ 0.29 $ 0.59 $ 0.46
======== ======== ======== ======== ======== ========
Unaudited pro forma amounts
assuming retroactive
application of change in
accounting principle:
Revenues from continuing
operations $ 110,427 $ 103,727 $ 89,320 $ 30,897 $ 54,832 $ 46,702
Net income from continuing
operations 8,012 5,667 5,619 2,137 3,142 2,144
Basic earnings per share
from continuing operations 0.92 0.64 0.65 0.27 0.62 0.56
Diluted earning per share
from continuing operations 0.87 0.63 0.60 0.25 0.50 0.44
Operating Data:
Locations in operation:
Beginning of the period 148 147 133 97 57 50
Acquisitions 7 2 4 34 38 7
Opened 11 2 10 2 2 -
Consolidated/closed (8) (3) - - - -
-------- -------- -------- -------- -------- --------
End of the period 158 148 147 133 97 57
======== ======== ======== ======== ======== ========
Receivables $ 23,556 $ 22,043 $ 23,568 $ 20,392 $ 17,054 $ 12,877
Average receivables balance
per store $ 149 $ 149 $ 160 $ 153 $ 176 $ 226
Average inventory per
pawn store $ 113 $ 148 $ 183 $ 164 $ 154 $ 176
Annualized inventory turnover 2.3x 1.8x 1.8x 2.0x 2.2x 2.4x
Gross profit percentage on
merchandise sales 35.8% 35.4% 29.8% 33.4% 32.7% 31.0%
Balance Sheet Data:
Working capital $ 8,540 $ 41,835 $ 54,333 $ 39,421 $ 31,987 $ 23,616
Total assets 122,806 119,118 128,847 113,325 91,128 56,677
Long-term liabilities 5,277 44,833 55,560 42,699 34,533 26,892
Total liabilities 48,703 53,464 62,324 52,617 39,611 30,398
Stockholders' equity 74,103 65,654 66,523 60,708 51,517 26,279
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
General
The Company's pawn store revenues are derived primarily from service
charges on pawns, service charges from short term, secured advances ("short-
term advances"), and the sale of unredeemed goods, or "merchandise sales."
Pawn advances are made for a 30-day term with an automatic extension of 60
days in South Carolina and Missouri, 30 days in Texas and Oklahoma, and 15
days in Maryland and Virginia. Pawn advances made in Washington, D.C. are
made for a 120-day term with no automatic extension. All pawn advances are
collateralized by tangible personal property placed in the custody of the
Company. The annualized service charge rates on pawns 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 pawn. Service charge rates are 144% to 240% on
an annualized basis in Maryland, with a $6 monthly minimum charge. In
Washington, D.C., pawns up to $40 bear a flat $2 charge per month, while
pawns over $40 bear a 48% to 60% annualized rate. Missouri pawns bear
service and storage charges totaling 240% per year, and in Virginia rates
range from 120% to 180% annually. Annualized rates in South Carolina range
from 60% to 300%. The Company accrues pawn service charge revenue on a
constant yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. If a pawn is not repaid prior to the expiration of the
automatic extension period, if applicable, the property is forfeited to the
Company and transferred to inventory at a value equal to the pawn principal.
Service charges from short-term advances, which range from 15% to 18% of the
amount advanced, are recognized on a constant-yield basis over the life of
the advance, which is generally 30 days or less.
Effective January 1, 2000, the Company changed its method of income
recognition on pawns. The Company now accrues pawn service charge revenue
on a constant yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. For pawns not repaid, the cost of the forfeited collateral
(inventory) is the cash amount originally pawned. Prior to 2000, the
Company recognized service charge income on a constant yield basis over the
initial pawn period for all pawns written. Service charges applicable to the
extension periods or additional pawn periods were not recognized as income
until the pawn was repaid or renewed. If the pawn was not repaid, the
carrying value of the forfeited collateral (inventory) was stated at the
lower of cost (the principal amount pawned plus accrued service charges) or
market. The Company believes the accounting change provides a timelier
matching of revenues and expenses with which to measure the results of
operations. The cumulative effect of the accounting method change on all
periods since inception through December 31, 1999 is $2,287,000 (after an
income tax benefit of $1,373,000) and is included as a one-time reduction of
net income for the year ended December 31, 2000.
The Company's check cashing and short-term advance revenues are derived
primarily from check cashing fees, fees on short-term advances, and fees
from the sale of money orders and wire transfers. Short-term advances carry
a 15% to 18% service charge. The Company recognizes service charge income
on short-term advances on a constant-yield basis over the life of the
advance, which is generally 30 days or less. The Company charges operating
expense for the estimated net potential losses on returned checks in the
same period in which revenues from the short-term advances are recognized.
Although the Company has had significant increases in revenues due
primarily to new store openings, and secondarily to acquisitions, 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 (net
bad debts) for both check cashing and short term advances. 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. Due to
the increased short-term advance operations in its pawn stores and the sale
of its software operations, the Company has restructured its operations into
one primary operating segment whose operating results are regularly reviewed
by the chief operating decision maker to assess performance. The following
table, as well as the discussion, 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.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America 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. The significant accounting policies which we
believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly owned
subsidiaries. All significant inter-company accounts and transactions have
been eliminated. In August 1999, the Company entered into a joint venture
to form Cash & Go, Ltd., a company that owns financial services kiosks
inside convenience stores. The Company presently has a 50% ownership
interest in the partnership, which is accounted for by the equity method of
accounting as neither partner has control. The Company records its 50%
share of the partnership's earnings or losses in its consolidated financial
statements. The Company funds substantially all of the working capital
requirements of the joint venture in the form o f loans to the joint
venture. This loan bear interest at the prime rate plus 1%, and matures on
August 31, 2002.
Receivables and income recognition - Receivables on the accompanying
balance sheet consist of pawn and short-term advances. Pawns are made on
the pledge of tangible personal property. The Company accrues pawn service
charge revenue on a constant yield basis over the life of the pawn for all
pawns that the Company deems collection to be probable based on historical
pawn redemption statistics. If the pawn is not repaid, the principal
amount pawned becomes the carrying value of the forfeited collateral
("inventory"), which is recovered through sale. Short-term advances are
made for thirty days or less. The Company recognizes the service charges
associated with short-term advances on a constant yield basis over the term
of the short-term advance.
Returned checks - The Company charges operating expense for the
estimated net potential losses on returned checks in the same period in
which revenues from the short-term advances are recognized.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal 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.
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 is 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.
During the fourth quarter of 2000 the Company recorded a one-time non-cash
pretax charge in the amount of $765,000 to write-off fixed assets and
goodwill relating to approximately nine stores. Management does not believe
any assets have been additionally impaired at December 31,2001.
Year Ended December 31,
------------------------
2001 2000 1999
---- ---- ----
Income statement items as a
percent of total revenues:
Revenues:
Merchandise sales .......... 48.8% 51.3% 53.3%
Service charges ............ 48.0 44.9 43.2
Check cashing fees ......... 2.1 2.1 2.3
Other ...................... 1.1 1.7 1.2
Expenses:
Operating expenses ......... 44.1 43.2 39.5
Interest expense ........... 1.2 2.7 2.8
Depreciation ............... 2.0 2.5 1.6
Amortization ............... 1.4 1.6 1.6
Administrative expenses .... 8.5 7.9 7.2
Gross profit as a percent of
merchandise sales 35.8 35.4 29.8
Results of Operations
Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended
December 31, 2000
Total revenues increased 6% to $110,427,000 for the fiscal year ended
December 31, 2001 ("Fiscal 2001") as compared to $103,727,000 for the fiscal
year ended December 31, 2000 ("Fiscal 2000"). The change resulted from an
increase in revenues of $2,402,000 generated by the 22 pawn and check
cashing/short-term advance stores which were opened or acquired during
Fiscal 2000 and Fiscal 2001, and an increase of $4,298,000 at the 136 stores
which were in operation during all of Fiscal 2000 and Fiscal 2001. Of the
$6,700,000 increase in total revenues, 11%, or $716,000, was attributable to
increased merchandise sales, 96%, or $6,431,000 was attributable to a net
increase in service charges on pawn and short-term advances, $48,000 was
attributable to increased check cashing fees, and the remaining decrease of
$495,000, or 7%, was attributable to a decrease in other income. Service
charges from short-term advances increased from $26,012,000 in Fiscal 2000
to $33,314,000 in fiscal 2001, while service charges from pawns decreased
from $20,585,000 in Fiscal 2000 to $19,714,000 in Fiscal 2001. Of the
$6,431,000 net increase in service charges; an increase of $7,302,000 was
attributable to short-term advances service charges, while $871,000 was
attributable to a decrease in pawn service charges. As a percentage of
total revenues, merchandise sales decreased from 51% to 49% during Fiscal
2001 as compared to Fiscal 2000, service charges increased from 45% to 48%,
check cashing fees and other income decreased from 4% to 3% during Fiscal
2001 as compared to Fiscal 2000.
The aggregate receivables balance increased 7% from $22,043,000 at
December 31, 2000 to $23,556,000 at December 31, 2001. Of the $1,513,000
increase, an increase of $957,000 was attributable to growth at the 18 pawn
and check cashing/short-term advance stores opened or acquired since
December 31, 2000, and an increase of $556,000 was attributable to the 140
pawn stores and check cashing/short-term advance stores, which were in
operation as of December 31, 2001 and 2000. The annualized yield on the
average aggregate receivables balance was 233% during Fiscal 2001 compared
to 204% during Fiscal 2000.
Gross profit as a percentage of merchandise sales increased from 35.4%
during Fiscal 2000 to 35.8% during Fiscal 2001. Sales of scrap gold had a
negative effect on gross profit margins during Fiscal 2000 and Fiscal 2001.
Factoring out the negative impact of scrap sales, margins would have been
38% and 41% during Fiscal 2000 and Fiscal 2001, respectively.
Operating expenses increased 9% to $48,661,000 during Fiscal 2001
compared to $44,836,000 during Fiscal 2000, primarily as a result of the
addition of 18 pawn stores and check cashing/short-term advance stores in
Fiscal 2001, and increases in net bad debt expense in 2001 due to increases
in the volume of short-term advances in the pawnshops. Of the $3,825,000
increase in operating expenses, an increase of $2,338,000 was attributable
to increased net bad debt on short-term advances. The Company's net bad
debt expense relating to short-term advances increased from $6,346,000 in
Fiscal 2000 to $8,684,000 in Fiscal 2001. During the fourth quarter of 2001
the Company sold its check cashing software business unit. The revenues,
expenses, and costs have been segregated in the accompanying operating
results and reported as a "Loss From Discontinued Operations", which
resulted in $0.02 per share charge in the fourth quarter of 2001. The
Company made the strategic decision to exit the third party check cashing
software business to utilize its staff and resources in its core lending
business, which should further enhance future profitability. The software
and staff continue to support and enhance other aspects of the Company's
operations. Administrative expenses increased 15% to $9,420,000 during
Fiscal 2001 compared to $8,217,000 during Fiscal 2000 due primarily to the
addition of personnel to supervise store operations. Interest expense
decreased to $1,395,000 in Fiscal 2001 compared to $2,859,000 in Fiscal 2000
as a result of lower average outstanding debt balances and lower average
interest rates during Fiscal 2001.
For Fiscal 2001 and 2000, the Company's effective federal income tax
rates of 36% and 38%, respectively, differed from the statutory tax rate of
34% primarily as a result of state income taxes, utilization of tax net
operating loss carry-forwards from acquisitions, and amortization of non-
deductible intangible assets.
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended
December 31, 1999
Total revenues increased 16% to $103,727,000 for the fiscal year ended
December 31, 2000 ("Fiscal 2000") as compared to $89,320,000, pro forma
revenues assuming retroactive application of change in accounting principle,
for the fiscal year ended December 31, 1999 ("Fiscal 1999"). This increase
of $14,407,000, resulted from an increase in revenues of $4,809,000
generated by the 15 pawn and check cashing/short-term advance stores, which
were opened or acquired during Fiscal 1999, and Fiscal 2000, and an increase
of $9,598,000 at the 133 stores, which were in operation during all of
Fiscal 1999, and Fiscal 2000. Of the $14,407,000 increase in total
revenues, 22%, or $3,106,000, was attributable to increased merchandise
sales, 74%, or $10,690,000, was attributable to a net increase in service
charges on pawns and short-term advances, $32,000 was attributable to
increased check cashing fees, and the remaining increase of $579,000, or 4%
was attributable to the increase in other income. Of the $10,690,000 net
increase in service charges, an increase of $11,484,000 was attributable to
short-term advance service charges, and a decrease of $794,000 was
attributable to pawn service charges. As a percentage of total revenues,
merchandise sales decreased from 56% to 51% during Fiscal 2000 as compared
to Fiscal 1999, service charges increased from 40% to 45%, check cashing
fees and other income remained at 4%.
The aggregate receivables balance decreased 6% from $23,568,000 at
December 31, 1999 to $22,043,000 at December 31, 2000. Of the $1,525,000
decrease, an increase of $613,000 was attributable to growth at the 4 pawn
and check cashing/short-term advance stores opened or acquired during Fiscal
2000, while a $2,138,000 decrease was attributable to the 144 pawn stores
and check cashing/short-term advance stores which were in operation as of
December 31, 2000 and 1999. The annualized yield on the average aggregate
receivables balance was 204% during Fiscal 2000 compared to 183% during
Fiscal 1999. The Company's average receivables balance per store decreased
from $160,000 as of December 31, 1999 to $149,000 as of December 31, 2000,
primarily due to our lowering of our pawn to value ratio on pawns during
2000; as well as a higher ratio of short-term advance stores in the
Company's store count as of December 31, 2000, which generally have lower
per-store receivables balances than the Company's pawn stores.
Gross profit as a percentage of merchandise sales increased from 29.8%
during Fiscal 1999 to 35.4% during Fiscal 2000. This increase in the
Company's gross profit margin was primarily the result of the change in
accounting principle in Fiscal 2000. The 1999 pro forma gross profit as a
percentage of merchandise sales was 39%. Sales of scrap gold had a negative
effect on gross profit margins during Fiscal 1999 and Fiscal 2000.
Factoring out the negative impact of scrap sales, pro forma margins would
have been 32% and 39% during Fiscal 1999 and Fiscal 2000, respectively.
Operating expenses increased 21% to $44,836,000 during Fiscal 2000
compared to $37,199,000 during Fiscal 1999, primarily as a result of the
addition of 18 pawn stores and check cashing/short-term advance stores in
Fiscal 1999 and Fiscal 2000, and increases in net bad debt expense in 2000
due to increases in the volume of short-term advances in the pawnshops. Of
the $7,637,000 increase in operating expenses, an increase of $2,358,000 was
attributable to increased net bad debt on short-term advances. The
Company's net bad debt expense relating to short-term advances increased
from $3,988,000 in Fiscal 1999 to $6,346,000 in Fiscal 2000. During the
fourth quarter of 2000 the Company recorded a one-time non-cash pretax
charge in the amount of $765,000 to write-off fixed assets and goodwill
relating to approximately nine stores. These stores are primarily located
in the Company's East Coast market, and continue to be unprofitable or under
performing locations. This one-time store closing charge had a $0.05 per
share impact on the Company's earnings per share. The Company will continue
to evaluate and aggressively address any stores that do not measure up to
the Company's earnings expectations. Administrative expenses increased 22%
to $8,217,000 during Fiscal 2000 compared to $6,739,000 during Fiscal 1999
due primarily to the addition of personnel to supervise store operations.
Interest expense increased to $2,859,000 in Fiscal 2000 compared to
$2,602,000 in Fiscal 1999 as a result of higher average outstanding debt
balances and higher average interest rates during Fiscal 2000.
For Fiscal 2000 and 1999, the Company's effective federal income tax
rates of 38% and 33%, respectively, differed from the statutory tax rate of
34% primarily as a result of state income taxes, utilization of tax net
operating loss carry-forwards from acquisitions, and amortization of non-
deductible intangible assets.
Liquidity and Capital Resources
The Company's operations and acquisitions have been financed with funds
generated from operations, bank and other borrowings, and the issuance of
the Company's securities.
The Company currently maintains a $50,000,000 long-term line of credit
with a group of commercial lenders (the "Credit Facility"). At December 31,
2001, $32,000,000 was outstanding under this Credit Facility and an
additional $18,000,000 was available to the Company pursuant to the
available borrowing base. The Credit Facility bears interest at the
prevailing LIBOR rate (which was approximately 1.9% at December 31, 2001)
plus one percent, and matures on September 1, 2002. Management believes its
lenders will extend the maturity of its Credit Facility for an additional
two-year term prior to its current maturity date under substantially similar
terms. Amounts available under the Credit Facility are limited to 325% of
the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
these requirements and covenants during the year ended December 31, 2001 and
as of March 26, 2002. 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 December 2001, the Company acquired 100% of the outstanding common
stock of WR, Financial, which operates 7 stores in Texas, for a total cash
purchase price of $1,394,000. The Company financed the cash purchase price
for this purchase through its Credit Facility. The purchase price for this
acquisition was determined based upon the volume of annual pawn and sales
transactions, outstanding receivable balances, inventory on hand, location
and condition of the facilities, and projected future operating results.
In December 2000, the Company acquired the assets of one pawn store in
LaFeria, Texas and one pawn store in Laredo, Texas. The aggregate cash
purchase price for these two acquisitions was $1,200,000. The Company
financed the cash purchase price for these acquisitions through its Credit
Facility. The purchase price for these acquisitions was determined based
upon the volume of annual pawn and sales transactions, outstanding
receivable balances, inventory on hand, location and condition of the
facilities, and projected future operating results.
In February 1999, the Company acquired the assets of two pawn stores in
El Paso, Texas. In September 1999, the Company acquired the assets of one
pawn store in Arlington, Virginia, and in October 1999, the Company acquired
the assets of one pawn store in Palm View, Texas. The aggregate purchase
price for these four acquisitions was $2,019,000, including legal,
consulting, assumed liabilities and other costs incidental to the
acquisitions. The Company financed substantially the entire cash purchase
price for its fiscal 1999 acquisitions through its Credit Facility. The
purchase price for these acquisitions was determined based upon the volume
of annual pawn and sales transactions, outstanding receivable balances,
inventory on hand, location and condition of the facilities, and projected
future operating results.
As of December 31, 2001, the Company's primary sources of liquidity
were $11,252,000 in cash and cash equivalents, $2,817,000 in service charges
receivable, $23,556,000 in receivables, $12,681,000 in inventories and
$18,000,000 of available and unused funds under the Company's Credit
Facility. The Company had working capital as of December 31, 2001 of
$8,540,000 and liabilities to equity ratio of 0.7 to 1.
Net cash provided by operating activities of the Company during the
year ended December 31, 2001 was $19,771,000, consisting primarily of income
from continuing operations before non-cash depreciation and amortization and
income on discontinued operations of $12,417,000, plus a decrease in
inventory and increase in accrued service fees of $4,687,000 and $89,000
respectively, in addition to an increase in accounts payable of $3,509,000.
Net cash used for investing activities during the year ended December 31,
2001 was $7,040,000, which was primarily comprised of cash used in
increasing receivables of $1,110,000, and cash paid for acquisitions, other
fixed asset additions, and cash paid to fund the expansion of our Cash & Go,
Ltd. joint venture of $6,160,000. Net cash used by financing activities was
$8,090,000 during the year ended December 31, 2001, which primarily
consisted of a net decrease in the Company's debt of $8,669,000 and a
decrease in common stock receivables from officers of $775,000.
The Company funds substantially all of the working capital needs of
Cash & Go, Ltd. The Company's receivable from the partnership was
$7,455,000 at December 31, 2001.
The profitability and liquidity of the Company is affected by the
amount of pawns outstanding, which is controlled in part by the Company's
lending decisions. The Company is able to influence the frequency of pawn
redemption by increasing or decreasing the amount pawned in relation to the
resale value of the pledged property. Tighter credit decisions generally
result in smaller pawns in relation to the estimated resale value of the
pledged property and can thereby decrease the Company's aggregate pawn
balance and, consequently, decrease pawn service charges. Additionally,
small advances in relation to the pledged property's estimated resale value
tend to increase pawn redemptions and improve the Company's liquidity.
Conversely, providing larger pawns 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 pawn balances can result in an
increase in pawn forfeitures, which increases the quantity of goods on hand
and, unless the Company increases inventory turnover, reduces the Company's
liquidity. The Company's renewal policy allows customers to renew pawns by
repaying all accrued interest on such pawns, effectively creating a new pawn
transaction. In addition to these factors, merchandise sales and the pace
of store expansions affect the Company's liquidity.
Management believes that the Credit Facility and cash generated from
operations will be sufficient to accommodate the Company's current
operations for fiscal 2002. The Company has no significant capital
commitments. The Company currently has no written commitments for
additional borrowings or future acquisitions; however, the Company intends
to continue to grow and will likely seek additional capital to facilitate
expansion. The Company will evaluate acquisitions, if any, based upon
opportunities, acceptable financing, purchase price, strategic fit and
qualified management personnel.
The Company currently intends to continue to engage in a plan of
expansion primarily through new store openings. During fiscal 2002, the
Company currently plans to open between 10 and 15 check cashing/short-term
advance locations, primarily located in Texas, as well as 10 to 15 pawnshops
in Mexico. Secondarily, the Company plans to increase the growth of its
partnership, Cash & Go, Ltd, which operates short-term advance and check
cashing kiosks inside convenience stores, and by expanding its short-term
advance operations in its existing pawn stores. This expansion will be
funded through the Company's Credit Facility. While the Company continually
looks for, and is presented with, potential acquisition candidates, the
Company has no definitive plans or commitments for further acquisitions. If
the Company encounters an attractive opportunity to acquire or open a new
store in the near future, the Company will seek additional financing, the
terms of which will be negotiated on a case-by-case basis. Between January
1, 2002 and March 26, 2002, the Company opened four new check cashing/short-
term advance locations and three pawnshops in Mexico.
Contractual Commitments. A schedule of contractual commitments at
December 31, 2001 is as follows:
Operating Long-term
Fiscal Leases Debt
------ ------ ------
2002 ................ $ 6,458 $33,385
2003 ................ 5,817 952
2004 ................ 4,537 656
2005 ................ 3,560 -
2006 ................ 2,756 -
Thereafter .......... 6,604 -
------ ------
$29,732 $34,993
====== ======
Related Parties
In June 1998, in conjunction with the purchase of 11 check cashing
stores, the Company entered into lease agreements relating to one store
location and certain office space located in California. These properties
were partially owned through September 2000 by Mr. Blake Miraglia, an
employee of the Company. Total lease payments made pursuant to these leases
were $130,000 and $239,000 during the fiscal years ended December 31, 2000
and 1999, respectively, which approximated market rates. In addition, the
Company has an outstanding, unsecured note payable due July 5, 2003, bearing
interest at 7%, to Mr. Miraglia, which amounted to $800,000 and $1,281,000
as of December 31, 2001 and 2000, respectively, including accrued interest.
As of December 31, 2001 and 2000, the Company had notes receivable
outstanding from certain of its officers totaling $5,051,000 and $5,826,000,
respectively. These notes are secured by a total of 650,000 shares of
common stock of the Company owned by these individuals, term life insurance
policies, and bear interest at four percent. These notes are due upon the
sale of the underlying shares of common stock.
Inflation
The Company does not believe that inflation has had a material effect
on the amount of pawns and short-term advances made or unredeemed goods sold
by the Company or its results of operation.
Seasonality
The Company's retail business is seasonal in nature with its highest
volume of sales of unredeemed goods occurring during the first and fourth
calendar quarters of each year. The Company's lending and short-term
advance activities are also seasonal, with the highest volume of lending
activity occurring during the second and third calendar quarters of each
year.
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which is
effective as of January 1, 2002. Under SFAS No. 142, goodwill is no longer
amortized but reviewed for impairment annually, or more frequently if
certain indicators arise. The Company is required to complete the initial
step of a transitional impairment test within six months of adoption of SFAS
No. 142 and to complete the final step of the transitional impairment test
by the end of the fiscal year. Any impairment loss resulting from the
transitional impairment test will be recorded as a cumulative effect of a
change in accounting principle for the year ended December 31, 2002.
Subsequent impairment losses will be reflected in operating income or loss
in the statements of operations. The Company has not yet determined the
impact, if any; on its earnings and financial position of the required
impairment tests of goodwill and other indefinite lived intangible assets.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143") in August 2001 and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") in October
2001. SFAS 143 addresses reporting for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement
costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002
with earlier application permitted. SFAS 144 supercedes earlier guidance
with respect to such accounting and is effective for years beginning after
December 15, 2001. The Company has not yet determined the effect the
adoption of SFAS 143 and SFAS 144 will have on its financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15,
2000. SFAS 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS 133,
certain contracts that were not formerly considered derivatives may now meet
the definition of a derivative. The Company adopted SFAS 133 effective
January 1, 2001. The adoption of SFAS 133 did not have a significant impact
on the financial position, results of operations, or cash flows of the
Company.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company is exposed to market risk in the form of interest rate
risk. At December 31, 2001, the Company had $32 million outstanding under
its revolving line of credit. This revolving line is priced with a variable
rate based on LIBOR or a base rate, plus one percent. See "Note 8 -
Revolving Credit Facility". Based on the average outstanding indebtedness
during the year ended December 31, 2001, a 10% increase in interest rates
would have increased the Company's interest expense by approximately
$179,000 for the year ended December 31, 2001.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 14(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There have been no disagreements concerning matters of accounting
principles or financial statement disclosure between the Company and
Deloitte & Touche LLP requiring disclosure hereunder.
PART III
--------
In accordance with General Instruction G(3), a presentation of
information required in response to Items 10, 11, 12, and 13 shall appear in
the Company's definitive Proxy Statement to be filed pursuant to Regulation
14A within 120 days of the Company's year end and shall be incorporated
herein by reference when filed.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: Page
Report of Independent Auditors..................... F-1
Consolidated Balance Sheets........................ F-2
Consolidated Statements of Income.................. F-3
Consolidated Statements of Cash Flows.............. F-4
Consolidated Statements of Changes in Stockholders'
Equity........................................... F-5
Notes to Consolidated Financial Statements......... F-6
(b) During Fiscal 2001 the Company filed no reports on Form 8-K.
(c) Exhibits:
3.1(5) Amended Certificate of Incorporation
3.2(6) Amended Bylaws
4.2a(2) Common Stock Specimen
10.3(1) First Cash, Inc. 1990 Stock Option Plan
10.8(8) Employment Agreement -- Rick Powell
10.15(8) Employment Agreement -- Rick L. Wessel
10.59(4) Acquisition Agreement - Miraglia, Inc.
10.60(3) Audited Financial Statements of Miraglia, Inc. for the
ten months ended May 31, 1998.
10.61(5) Acquisition Agreement for Twelve Pawnshops in South
Carolina
10.62(5) Acquisition Agreement for One Iron Ventures, Inc.
10.63(5) First Cash Financial Services, Inc. 1999 Stock Option
Plan
10.64(9) First Addendum to Executive Employment Agreement -
Rick Powell
10.65(9) First Addendum to Executive Employment Agreement -
Rick Wessel
18.1(7) Letter re Change in Accounting Principle
21.0(9) Subsidiaries
23.1(9) Independent Auditors' Consent of Deloitte & Touche LLP
23.2(9) Consent of Brewer & Pritchard, P.C.
(d) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-18 (No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to Form 8-K dated September 22, 1998.
(4) Filed as an exhibit to the Annual Report on Form 10-K for
the fiscal year ended July 31, 1998 (File No. 0 - 19133) and
incorporated herein by reference.
(5) Filed as an exhibit to the Company's Registration Statement
on Form S-3 dated January 22, 1999 (File No. 333-71077) and
incorporated herein by reference.
(6) Filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 1999 (File No. 0 - 19133) and
incorporated herein by reference.
(7) Filed as an exhibit to the quarterly report on Form 10-Q
for the quarter ended March 31, 2000 (File No. 0 - 19133)
and incorporated herein by reference.
(8) Filed as an exhibit to the Annual Report on Form 10-K for
the year ended December 31, 2000 (File No. 0 - 19133) and
incorporated herein by reference.
(9) Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CASH FINANCIAL SERVICES, INC.
/s/ PHILLIP E. POWELL
------------------------------------------
Phillip E. Powell, Chief Executive Officer
March 26, 2002
/s/ RICK L. WESSEL
--------------------------------------------
Rick L. Wessel, Principal Accounting Officer
March 26, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ PHILLIP E. POWELL Chairman of the Board and March 26, 2002
--------------------- Chief Executive Officer
Phillip E. Powell
/s/ RICK L. WESSEL President, Chief Financial March 26, 2002
--------------------- Officer, Secretary and
Rick L. Wessel Treasurer
/s/ JOE R. LOVE Director March 26, 2002
---------------------
Joe R. Love
/s/ RICHARD T. BURKE Director March 26, 2002
---------------------
Richard T. Burke
/s/ TARA SCHUCHMANN Director March 26, 2002
---------------------
Tara Schuchmann
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of First Cash
Financial Services, Inc. and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years ended December 31, 2001, 2000
and 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc. and subsidiaries at December 31, 2001 and 2000,
and the consolidated results of its operations and its cash flows for each
of the years ended December 31, 2001, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the Company changed
its method of accounting for income recognition on pawns in 2000.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
January 29, 2002
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
------- -------
(in thousands, except share data)
ASSETS
Cash and cash equivalents.................... $ 11,252 $ 6,611
Service charges receivable................... 2,817 2,707
Receivables.................................. 23,556 22,043
Inventories.................................. 12,681 17,132
Prepaid expenses and other current assets.... 1,226 1,387
Income taxes receivable...................... 434 -
Net current assets of discontinued operations - 586
------- -------
Total current assets ....................... 51,966 50,466
Property and equipment, net.................. 10,034 10,378
Intangible assets, net of accumulated
amortization of $8,448 and $7,136,
respectively .............................. 53,194 53,508
Receivable from Cash & Go, Ltd............... 7,455 4,580
Other........................................ 157 186
------- -------
$122,806 $119,118
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt and notes
payable.................................... $ 1,385 $ 1,643
Revolving credit facility.................... 32,000 -
Accounts payable and accrued expenses........ 10,041 6,460
Income taxes payable......................... - 528
------- -------
Total current liabilities .................. 43,426 8,631
Revolving credit facility.................... - 39,000
Long-term debt and notes payable, net of
current portion............................ 1,608 3,019
Deferred income taxes........................ 3,669 2,814
------- -------
48,703 53,464
------- -------
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding............................... - -
Common stock; $.01 par value; 20,000,000
shares authorized; 9,417,868 and 9,320,868
shares issued, respectively; 8,763,687 and
8,796,027 shares outstanding, respectively 95 93
Additional paid-in capital ................. 51,255 50,953
Retained earnings .......................... 30,819 22,949
Common stock receivables from officers ..... (5,051) (5,826)
Common stock held in treasury, at cost,
654,181 and 524,841 shares, respectively . (3,015) (2,515)
------- -------
74,103 65,654
------- -------
$122,806 $119,118
======= =======
Commitments and contingencies (see Note 11)
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
(in thousands, except per share amounts)
Revenues:
Merchandise sales ..................... $ 53,893 $ 53,177 $ 50,071
Service charges ....................... 53,028 46,597 40,630
Check cashing fees .................... 2,264 2,216 2,184
Other ................................. 1,242 1,737 1,158
------- ------- -------
110,427 103,727 94,043
------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold .................... 34,619 34,366 35,157
Operating expenses .................... 48,661 44,836 37,199
Interest expense ...................... 1,395 2,859 2,602
Depreciation .......................... 2,283 2,612 1,527
Amortization .......................... 1,530 1,694 1,475
Administrative expenses ............... 9,420 8,217 6,739
------- ------- -------
97,908 94,584 84,699
------- ------- -------
Income before income taxes ............... 12,519 9,143 9,344
Provision for income taxes ............... 4,507 3,476 3,097
------- ------- -------
Income from continuing operations 8,012 5,667 6,247
Discontinued operations (Note 14):
Income (loss) from discontinued
operations, net of tax............... 33 (765) 231
Loss on sale of subsidiary,
net of tax (175) - -
------- ------- -------
Income (loss) from discontinued operations (142) (765) 231
------- ------- -------
Cumulative effect of change in
accounting principle.................... - (2,287) -
------- ------- -------
Net income ............................... $ 7,870 $ 2,615 $ 6,478
======= ======= =======
Net income per share:
Basic
Income from continuing operations.... $ 0.92 $ 0.64 $ 0.72
Income (loss) from discontinued
operations......................... (0.02) (0.08) 0.03
Cumulative effect of change in
accounting principle .............. - (0.26) -
------- ------- -------
Net income........................... $ 0.90 $ 0.30 $ 0.75
======= ======= =======
Diluted
Income from continuing operations.... $ 0.87 $ 0.63 $ 0.67
Income (loss) from discontinued
operations......................... (0.02) (0.08) 0.03
Cumulative effect of change in
accounting principle .............. - (0.26) -
------- ------- -------
Net income........................... $ 0.85 $ 0.29 $ 0.70
======= ======= =======
Unaudited pro forma amounts assuming
retroactive application of change in
accounting principle:
Revenues from continuing operations.... $110,427 $103,727 $ 89,320
Income from continuing operations...... 8,012 5,667 5,619
Basic earnings per share from
continuing operations................ 0.92 0.64 0.65
Diluted earnings per share from
continuing operations................ 0.87 0.63 0.60
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
(in thousands)
Cash flows from operating activities:
Income from continuing operations........ $ 8,012 $ 5,667 $ 6,247
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization......... 3,813 4,306 3,002
Income (loss) from discontinued
operations.......................... 592 (108) (189)
Changes in operating assets and
liabilities, net of effect of
purchases of existing stores:
Service charges receivable............ (89) 728 (1,045)
Inventories .......................... 4,687 1,616 (3,358)
Prepaid expenses and other assets..... (646) (323) 1,673
Accounts payable and accrued expenses. 3,509 1,546 452
Current and deferred income taxes..... (107) 1,196 (232)
------- ------- -------
Net cash flows from operating activities 19,771 14,628 6,550
------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in receivables... (1,110) 1,021 (2,704)
Purchases of property and equipment...... (1,891) (2,055) (3,282)
Acquisition of existing operations....... (1,394) (1,200) (2,060)
Proceeds from sale of discontinued
operations............................. 230 - -
Increase in receivable from
Cash & Go, Ltd. ....................... (2,875) (2,764) (1,816)
------- ------- -------
Net cash flows from investing activities. (7,040) (4,998) (9,862)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt ...................... 14,200 6,000 21,000
Repayments of debt ...................... (22,869) (16,252) (10,490)
Common stock receivables from officers... 775 (3,234) (1,303)
Purchase of treasury stock .............. (500) (250) -
Registration fees ....................... - - (12)
Proceeds from exercise of options and
warrants............................... 304 - 376
------- ------- -------
Net cash flows from financing activities (8,090) (13,736) 9,571
------- ------- -------
Change in cash and cash equivalents........ 4,641 (4,106) 6,259
Cash and cash equivalents at beginning
of the year.............................. 6,611 10,717 4,458
------- ------- -------
Cash and cash equivalents at end
of the year.............................. $11,252 $ 6,611 $ 10,717
======= ======= =======
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest ............................... $ 2,394 $ 2,813 $ 2,553
======= ======= =======
Income taxes ........................... $ 4,533 $ 2,013 $ 2,296
======= ======= =======
Supplemental disclosure of non-cash
investing and financing activities:
Non-cash transactions in connection with
various acquisitions:
Fair market value of assets acquired
and goodwill........................ $ 2,302 $ 1,222 $ 2,602
Less issuance of debt .............. - - (523)
Less assumption of liabilities and
costs of acquisition.............. (908) (22) (19)
------- ------- -------
Net cash paid......................... $ 1,394 $ 1,200 $ 2,060
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Common Stock
Common Stock Paid- Preferred Stock Receivables Treasury Stock
-------------- In --------------- Retained From --------------
Shares Amount Capital Shares Amount Earnings Officers Shares Amount Total
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
(in thousands)
Balance at December 31, 1998 9,089 91 49,026 - - 13,856 (1,289) 471 (2,265) 59,419
Exercise of stock options
and warrants, including
income tax benefit of $24 77 1 376 - - - - - - 377
Common stock issued to
retire debt 155 1 1,551 - - - - - - 1,552
Common stock receivables from
officers - - - - - - (1,303) - - (1,303)
Net income - - - - - 6,478 - - - 6,478
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 1999 9,321 93 50,953 - - 20,334 (2,592) 471 (2,265) 66,523
Common stock receivables from
officers - - - - - - (3,234) - - (3,234)
Purchase of treasury stock - - - - - - - 54 (250) (250)
Net income - - - - - 2,615 - - - 2,615
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 2000 9,321 $ 93 $ 50,953 - - $ 22,949 $ (5,826) 525 $(2,515) $ 65,654
Exercise of stock options
and warrants 97 2 302 - - - - - - 304
Common stock receivables from
officers - - - - - - 775 - - 775
Purchase of treasury stock - - - - - - - 129 (500) (500)
Net income - - - - - 7,870 - - - 7,870
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 2001 9,418 $ 95 $ 51,255 - - $ 30,819 $ (5,051) 654 $(3,015) $ 74,103
====== ====== ======= ====== ====== ======== ======== ====== ====== =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
First Cash Financial Services, Inc. (the "Company") was incorporated in
Texas on July 5, 1988 and was reincorporated in Delaware in April 1991. The
Company is engaged in the operation of pawn stores which lend money on the
collateral of pledged personal property, and which retail previously-owned
merchandise acquired through pawn forfeitures. In addition to making short-
term secured pawns, most of the Company's pawn stores offer short-term
secured advances ("short-term advances"). The Company also operates check
cashing and short-term advance stores that provide short-term advances,
check cashing services, and other related financial services. As of
December 31, 2001, the Company owned 112 pawn stores and 46 check cashing
and short-term advance stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in the preparation of these financial statements.
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly owned
subsidiaries. All significant inter-company accounts and transactions have
been eliminated. In August 1999, the Company entered into a partnership to
form Cash & Go, Ltd., a Texas limited partnership, which owns financial
services kiosks inside convenience stores. The Company presently has a 50%
ownership interest in the partnership, which is accounted for by the equity
method of accounting as neither partner has control. The Company records
its 50% share of the partnership's earnings or losses in its consolidated
financial statements. The Company funds substantially all of the working
capital requirements of the partnership in the form of a loan to the
partnership. This loan bears interest at the prime rate plus 1%, and
matures on August 31, 2002.
Summarized financial information for Cash & Go, Ltd. as of December 31,
2001 and 2000 and for the years ended December 31, 2001, 2000 and 1999 are
as follows:
December 31, December 31,
2001 2000
----- -----
(in thousands)
Current assets .......................... $5,647 $3,215
Non-current assets ..................... 1,458 994
Current note payable to First Cash
Financial Services, Inc................ (7,455) (4,580)
Other current liabilities ............... (389) (192)
----- -----
Net assets .......................... $ (739) $ (563)
===== =====
Company's share of net assets ........... $ (369) $ (282)
===== =====
Company's receivable from the partnership $7,455 $4,580
===== =====
Year Ended December 31,
--------------------------
2001 2000 1999
----- ----- -----
(in thousands)
Revenues ......................... $6,788 $3,512 $ 119
Expenses ......................... 6,964 3,836 369
----- ----- -----
Net loss before taxes ........ $ (176) $ (324) $ (250)
===== ===== =====
Company's share of pretax net loss $ (88) $ (162) $ (125)
===== ===== =====
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 and short-term advances. Pawns are made on
the pledge of tangible personal property. The Company accrues pawn service
charge revenue on a constant yield basis over the life of the pawn for all
pawns that the Company deems collection to be probable based on historical
pawn redemption statistics. If the pawn is not repaid, the principal
amount pawned becomes the carrying value of the forfeited collateral
("inventory"), which is recovered through sale. Short-term advances are
made for thirty days or less. The Company recognizes the service charges
associated with short-term advances on a constant yield basis over the term
of the short-term advance.
Returned checks - The Company charges operating expense for the
estimated net potential losses on returned checks in the same period in
which revenues from the short-term advances are recognized.
Operating expenses - Costs incurred in operating the pawn stores and
check-cashing stores have been classified as operating expenses. Operating
expenses include salary and benefit expense of store employees, rent and
other occupancy costs, bank charges, security, net returned checks,
utilities, cash shortages and other costs incurred by the stores.
Layaway and deferred revenue - Interim payments from customers on
layaway sales are credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal 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 is 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.
During the fourth quarter of 2000 the Company recorded a one-time non-cash
pretax charge in the amount of $765,000 to write-off fixed assets and
goodwill relating to approximately nine stores. Management does not believe
any assets have been additionally impaired at December 31,2001.
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 December 31, 2001, 2000 and 1999, was $1,070,000, $1,283,000, and
$1,112,000, respectively.
Stock-Based Compensation - Compensation expense is recorded with
respect to stock option grants and retention stock awards to employees using
the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Entities electing to remain with the accounting in APB 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting defined in Statement of Financial Accounting
Standard No. 123; "Accounting for Stock-Based Compensation" ("SFAS 123") had
been applied. The Company accounts for stock-based employee compensation
plans under the intrinsic method pursuant to APB 25 and has made the
disclosures in the footnotes as required by SFAS 123.
Earnings per share - Basic net income per share is computed by dividing
net income by the weighted average number of shares outstanding during the
year. Diluted net income per share is calculated by giving effect to the
potential dilution that could occur if securities or other contracts to
issue common shares were exercised and converted into common shares during
the year.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended December 31,
-----------------------
2001 2000 1999
----- ----- -----
Numerator:
Net income for calculating
basic and diluted earnings per share $7,870 $2,615 $6,478
===== ===== =====
Denominator:
Weighted-average common shares for
calculating basic earnings per share 8,699 8,813 8,656
Effect of dilutive securities:
Stock options and warrants 569 56 478
Contingently issuable shares due
to acquisitions - - 133
----- ----- -----
Weighted-average common shares for
calculating diluted earnings per share 9,268 8,869 9,267
===== ===== =====
Basic earnings per share $ 0.90 $ 0.30 $ 0.75
Diluted earnings per share $ 0.85 $ 0.29 $ 0.70
Pervasiveness of estimates - The preparation of financial statements in
conformity with accounting principals generally accepted in the United
States of America 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.
Operating Segment - Due to the increased short-term advance operations
in its pawn stores and the sale of its software operations, the Company has
restructured its operations into one primary operating segment whose
operating results are regularly reviewed by the chief operating decision
maker to assess performance.
Reclassification - Certain amounts as of December 31, 2000 and for the
years ended December 31, 2000 and 1999 have been reclassified in order to
conform to the 2001 presentation.
New Accounting Standards - In June 2001, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets," which is effective as of January 1, 2002. Under SFAS No.
142, goodwill is no longer amortized but reviewed for impairment annually,
or more frequently if certain indicators arise. The Company is required to
complete the initial step of a transitional impairment test within six
months of adoption of SFAS No. 142 and to complete the final step of the
transitional impairment test by the end of the fiscal year. Any impairment
loss resulting from the transitional impairment test will be recorded as a
cumulative effect of a change in accounting principle for the year ended
December 31, 2002. Subsequent impairment losses will be reflected in
operating income or loss in the statements of operations. The Company has
not yet determined the impact, if any; on its earnings and financial
position of the required impairment tests of goodwill and other indefinite
lived intangible assets.
The FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143") in August 2001 and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") in October
2001. SFAS 143 addresses reporting for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement
costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002
with earlier application permitted. SFAS 144 supercedes earlier guidance
with respect to such accounting and is effective for years beginning after
December 15, 2001. The Company has not yet determined the effect the
adoption of SFAS 143 and SFAS 144 will have on its financial statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," is effective for all fiscal years beginning after June 15,
2000. SFAS 133, as amended, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS 133,
certain contracts that were not formerly considered derivatives may now meet
the definition of a derivative. The Company adopted SFAS 133 effective
January 1, 2001. The adoption of SFAS 133 did not have a significant impact
on the financial position, results of operations, or cash flows of the
Company.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company changed its method of income
recognition on pawns. The Company now accrues pawn service charge revenue on
a constant yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. For pawns not repaid, the cost of the forfeited collateral
(inventory) is the cash amount originally pawned. Prior to 2000, the Company
recognized service charge income on a constant yield basis over the initial
pawn period for all pawns written. Service charges applicable to the
extension periods or additional pawn periods were not recognized as income
until the pawn was repaid or renewed. If the pawn was not repaid, the
carrying value of the forfeited collateral (inventory) was stated at the
lower of cost (the principal amount pawned plus accrued service charges) or
market. The Company believes the accounting change provides a timelier
matching of revenues and expenses with which to measure the results of
operations. The cumulative effect of the accounting method change on all
periods since inception through December 31, 1999 is $2,287,000 (after an
income tax benefit of $1,373,000) and is included as a one-time reduction of
net income for the year ended December 31, 2000.
Operating results for Fiscal 2000 have been calculated using the new
accounting method. The effect for Fiscal 2000 of adopting the change in
income recognition on pawns was to decrease net income before cumulative
effect of change in accounting principle $9,000, and decrease net income
$2,296,000 ($0.26 per share.) The unaudited pro forma amounts shown in the
statements of income reflect the effect of retroactive application on
service charge revenues, cost of goods sold, and related income taxes.
NOTE 4 - BUSINESS ACQUISITIONS
In December 2001, the Company acquired 100% of the outstanding common
stock of WR Financial, Inc., which operates 7 stores in Texas, for a total
purchase price of $1,394,000, consisting of cash. The Company financed
substantially the all cash purchase price for its fiscal 2001 acquisition
through its Credit Facility. The purchase price for this acquisition was
determined based upon the volume of annual pawn and sales transactions,
outstanding receivable balances, inventory on hand, location and condition
of the facilities, and projected future operating results.
In December 2000, the Company acquired the assets of one pawn store in
LaFeria, Texas, and one pawn store in Laredo, Texas. The aggregate purchase
price for these two acquisitions was $1,200,000, including legal,
consulting, assumed liabilities and other costs incidental to the
acquisitions. The Company financed substantially the all cash purchase
price for its fiscal 2000 acquisitions through its Credit Facility. The
purchase price for these acquisitions was determined based upon the volume
of annual pawn and sales transactions, outstanding receivable balances,
inventory on hand, location and condition of the facilities, and projected
future operating results.
In February 1999, the Company acquired the assets of two pawn stores in
El Paso, Texas. In September 1999, the Company acquired the assets of one
pawn store in Arlington, Virginia, and in October 1999, the Company acquired
the assets of one pawn store in Palm View, Texas. The aggregate purchase
price for these four acquisitions was $2,019,000, including legal,
consulting, assumed liabilities and other costs incidental to the
acquisitions. The Company financed the cash purchase price for its fiscal
1999 acquisitions through its Credit Facility. The purchase price for these
acquisitions was determined based upon the volume of annual pawn and sales
transactions, outstanding receivable balances, inventory on hand, location
and condition of the facilities, and projected future operating results.
All of these acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to
assets and liabilities acquired based upon their estimated fair market
values at the dates of acquisition. The excess purchase price over the fair
market value of the net tangible assets acquired and identifiable intangible
assets has been recorded as goodwill. Goodwill and other intangible assets,
net of accumulated amortization, resulting from acquisitions were
$53,194,000 and $53,508,000 as of December 31, 2001 and 2000, 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 5 - RELATED PARTY TRANSACTIONS
In June 1998, in conjunction with the purchase of 11 check cashing
stores, the Company entered into lease agreements relating to one store
location and certain office space located in California. These properties
were partially owned through September 2000 by Mr. Blake Miraglia, an
employee of the Company. Total lease payments made pursuant to these leases
were $130,000 and $239,000 during the fiscal years ended December 31, 2000
and 1999, respectively, which approximated market rates. In addition, the
Company has an outstanding, unsecured note payable due July 5, 2003, bearing
interest at 7%, to Mr. Miraglia, which amounted to $800,000 and $1,281,000
as of December 31, 2001 and 2000, respectively, including accrued interest.
As of December 31, 2001 and 2000, the Company had notes receivable
outstanding from certain of its officers totaling $5,051,000 and $5,826,000,
respectively. These notes are secured by a total of 650,000 shares of
common stock of the Company owned by these individuals, term life insurance
policies, and bear interest at four percent. These notes are due upon the
sale of the underlying shares of common stock.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, December 31,
2001 2000
------- -------
Land $ 672 $ 672
Buildings 1,002 1,002
Leasehold improvements 2,104 2,127
Furniture, fixtures and equipment 15,922 15,089
------- -------
19,700 18,890
Less: accumulated depreciation (9,666) (8,512)
------- -------
$ 10,034 $ 10,378
======= =======
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
2001 2000
------- -------
Accounts payable $ 628 $ 450
Money orders payable 890 850
Wire transfers payable 342 395
Accrued payroll 1,067 779
Layaway deposits 1,198 1,017
Sales tax payable 488 364
Other 5,428 2,605
------- -------
$ 10,041 $ 6,460
======= =======
NOTE 8 - REVOLVING CREDIT FACILITY
The Company currently maintains a $50,000,000 long-term line of credit
with a group of commercial lenders (the "Credit Facility"). At December 31,
2001, $32,000,000 was outstanding under this Credit Facility and an
additional $18,000,000 was available to the Company pursuant to the
available borrowing base. The Credit Facility bears interest at the
prevailing LIBOR rate (which was approximately 1.9% at December 31, 2001)
plus one percent, and matures on September 1, 2002. Management believes its
lenders will extend the maturity of its Credit Facility for an additional
two-year term prior to its current maturity date under substantially similar
terms Amounts available under the Credit Facility are limited to 325% of
the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
these requirements and covenants during the year ended December 31, 2001.
Pursuant to the terms of the Credit Facility, the Company is prohibited from
paying any dividends.
NOTE 9 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt and notes payable consist of the following (in
thousands, except payment information):
December 31, December 31,
2001 2000
------ ------
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,257; matures
December 31, 2004; secured by real estate $ 439 $ 474
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,518; matures
December 31, 2004; secured by real estate 364 406
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 8.9%;
monthly principal and interest payments of
$7,367, until entire unpaid balance was retired
in October 2001; secured by equipment - 71
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 5 71
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 37 96
Note payable to a corporation; bearing interest
at 14.7%; monthly principal and interest
payments of $1,658 until entire unpaid balance
was retired in August 2001; secured by equipment - 13
Note payable to a corporation; bearing interest at
7%; monthly principal and interest payments of
$16,151 until maturity at March 1, 2002;
secured by specific acquired assets 48 231
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 2,000 3,200
------ ------
2,993 4,662
Less: current portion (1,385) (1,643)
------ ------
$ 1,608 $ 3,019
====== ======
Long-term debt and notes payable are scheduled to mature as follows (in
thousands):
Fiscal
------
2002 $1,385
2003 952
2004 656
-----
$2,993
=====
NOTE 10 - INCOME TAXES
Components of the provision for income taxes consist of the following
(in thousands):
Year Ended December 31,
-----------------------
2001 2000 1999
----- ----- -----
Current:
Federal $2,609 $2,627 $2,392
State and foreign 1,042 399 441
----- ----- -----
3,651 3,026 2,833
Deferred 856 450 264
----- ----- -----
$4,507 $3,476 $3,097
===== ===== =====
The principal current and non-current deferred tax liabilities consist
of the following at December 31, 2001 and 2000 (in thousands):
December 31, December 31,
2001 2000
------ ------
Deferred tax liabilities:
Intangible asset amortization $ 3,834 $ 3,166
Depreciation 1,107 1,046
Change in accounting principle (1,135) (1,373)
Net operating loss benefit carry-forward (198) (394)
State income taxes 204 377
Service charges receivable 46 50
Legal accruals (430) (435)
Other 241 377
------ ------
Net deferred tax liability $ 3,669 $ 2,814
====== ======
Reported as:
Current liabilities - income
taxes payable $ - $ -
Non-current liabilities - deferred
income taxes 3,669 2,814
------ ------
Net deferred tax liability $ 3,669 $ 2,814
====== ======
The provision for income taxes differs from the amounts determined by
applying the expected federal statutory tax rate to income from continuing
operations before income taxes. The following is a reconciliation of such
differences (in thousands):
Year Ended December 31,
-----------------------
2001 2000 1999
----- ----- -----
Tax at the federal statutory rate $4,256 $3,109 $3,177
State income taxes, net of federal
tax benefit 646 278 381
Other, net (395) 89 (461)
----- ----- -----
$4,507 $3,476 $3,097
===== ===== =====
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
------
2002 $ 6,458
2003 5,817
2004 4,537
2005 3,560
2006 2,756
Thereafter 6,604
-------
$ 29,732
=======
Rent expense under such leases was $6,515,000, $6,311,000, and
$5,708,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
In May 2000, three plaintiffs filed a complaint against Famous Pawn,
Inc., a wholly owned subsidiary of the Company, in the United States
District Court for the District of Maryland (Northern Division). The
allegations consists of five counts: (1) violation of the federal Truth in
Lending Act; (2) violation of the federal Racketeer Influenced and Corrupt
Organizations Act; (3) violation of the Maryland Interest and Usury Statute;
(4) violation of the Maryland Consumer Loan Law; and (5) violation of the
Maryland Consumer Protection Act. The plaintiffs have requested the
following relief: actual and punitive damages, attorneys' fees, expenses,
costs, injunctive relief and treble damages, if available. In April 2001,
the court certified a TILA class in this matter. Later that month, Famous
Pawn, Inc. filed a motion to modify the class definition to exclude from the
class those customers who signed arbitration agreements. In August 2001,
the court denied that motion. Famous Pawn, Inc. next filed a motion to
reconsider the motion to modify the class definition, and filed a separate
motion to stay the proceedings and compel arbitration. These motions are
currently pending. Since discovery has not yet commenced, nor the scope of
the case been determined, management can provide no assurance as to the
outcome of such litigation.
Additionally, the Company is from time to time a defendant (actual or
threatened) in certain other lawsuits encountered in the ordinary course of
its business, the resolution of which, in the opinion of management, should
not have a material adverse effect on the Company's financial position,
results of operations, or cash flows.
NOTE 12 - EMPLOYEE STOCK OPTION PLAN AND OUTSTANDING WARRANTS
On October 30, 1990, the Company's Board of Directors adopted the 1990
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the
issuance of incentive stock options and non-qualified stock options to key
employees and directors of the Company. The total number of shares of
Common Stock authorized and reserved for issuance under the 1990 Plan is
250,000 shares. The exercise price for each stock option granted under the
1990 Plan may not be less than the fair market value of the Common Stock on
the date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1990 Plan have a maximum duration of five years and vest
in up to four equal installments, commencing on the first anniversary of the
date of grant. As of December 31, 2001, options to purchase 21,187 shares
of Common Stock were available for grant under the 1990 Plan. Options to
purchase 104,000 shares were vested at December 31, 2001.
On January 14, 1999, the Company's shareholders adopted the 1999 Stock
Option Plan (the "1999 Plan"). The 1999 Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of Common Stock
authorized and reserved for issuance under the 1999 Plan is 1,200,000
shares. The exercise price for each stock option granted under the 1999
Plan may not be less than the fair market value of the Common Stock on the
date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1999 Plan have a maximum duration of ten years unless, in
the case of incentive stock options, the optionee owns at least 10% of the
total combined voting power of all classes of capital stock of the Company,
in which case the maximum duration is five years. As of December 31, 2001,
options to purchase 11,589 shares of Common Stock were available for grant
under the 1999 Plan. Options to purchase 829,911 shares of common stock
under the 1999 Plan were vested as of December 31, 2001.
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 for fiscal 1999, 2000 and 2001 is
summarized in the accompanying chart (in thousands, except exercise price).
Exercisable
-----------------
Weighted
Weighted Average
Average Exercise
Options Warrants Exercise Price Number Price
------- -------- -------------- ------ -----
December 31, 1998 234 1,896 $ 9.65 2,075 $ 9.66
Granted 480 - 10.07
Exercised (73) (5) 4.63
---- ------
December 31, 1999 641 1,891 9.88 2,001 9.84
Granted 475 - 2.00
Cancelled (65) (630) 14.35
---- ------
December 31, 2000 1,051 1,261 6.92 1,816 6.28
Granted 335 - 4.48
Exercised (84) (13) 3.12
Cancelled (57) (310) 11.24
---- ------
December 31, 2001 1,245 938 5.99 1,689 5.30
Options and warrants outstanding as of December 31, 2001 are as follows
(in thousands, except exercise price and life):
Total Warrants
Exercise and Remaining Currently
Price Options Life Exercisable
----- ------- ---- -----------
$2.00 425 9.0 375
2.00 14 4.5 14
4.00 245 9.1 190
4.00 9 4.5 9
4.63 549 9.0 549
4.63 17 4.5 17
8.00 438 1.1 310
10.00 323 7.4 200
10.00 69 4.5 14
12.00 83 7.5 -
12.00 11 4.5 11
----- -----
2,183 1,689
===== =====
The Company applies the intrinsic value method in accounting for its
stock option and warrant issuances. Accordingly, no compensation cost has
been recognized for its stock option and warrant grants. Had compensation
cost for the Company's stock options and warrants been determined based on
the fair value at the grant dates for such option and warrant awards, the
Company's net income would have been reduced by $1,492,000, $1,349,000, and
$748,000 during the years ended December 31, 2001, 2000 and 1999,
respectively. Basic and diluted earnings per share would have been reduced
by $0.17 and $0.16, $0.15 and $0.15,and $0.09 and $0.08 respectively, during
the years ended December 31, 2001, 2000 and 1999.
Weighted average grant-date fair values of options issued were $4.48,
$1.59 and $6.62 per unit during the years ended December 31, 2001, 2000 and
1999, respectively, which were calculated in accordance with the Black
Scholes option pricing model, using the following assumptions:
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Expected volatility 55% 80% 55%
Expected dividend yield - - -
Expected option term 10 years 10 years 10 years
Risk-free rate of return 3.8% 5.0% 5.5%
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 and
company contributions are paid to a corporate trustee and invested in
various funds. Contributions made to participants' accounts become fully
vested upon completion of five years of service. The total Company
contributions to the Plan were $162,000, $146,000, and $121,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
NOTE 14 - DISCONTINUED OPERATIONS INFORMATION
On November 30, 2001, the Company sold all of its common stock of its
subsidiary, Miraglia, Inc. to a former employee of the Company for
approximately $230,000 in cash. The sale resulted in a pretax loss of
$273,000. The disposal of the software company and, accordingly, its
operating results are segregated and reported as discontinued operations in
the accompanying Consolidated Statements of Income. Prior year financial
statements have been reclassified to conform to the current year
presentation.
The condensed statements of operations relating to the discontinued
software operations for the years ended December 31, 2001, 2000, and 1999
are presented below:
Year Ended December 31,
--------------------------
2001 2000 1999
------ ------ ------
Revenues $ 1,897 $ 2,131 $ 3,708
Costs and expenses 1,846 3,367 3,363
------ ------ ------
Income (loss) before income taxes 51 (1,236) 345
Income tax benefit (expenses) (18) 471 (114)
------ ------ ------
Net loss $ 33 $ (765) $ 231
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