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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number:
September 30, 2003 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(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
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
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 whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act). Yes X No ___
As of November 7, 2003, there were 10,019,887 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
-------------------- -------------
2003 2002 2002
------- ------- -------
(unaudited)
(in thousands, except share data)
ASSETS
Cash .................................... $ 13,665 $ 12,005 $ 12,735
Service charges receivable............... 3,615 2,995 3,174
Receivables.............................. 30,989 25,646 27,314
Inventories.............................. 15,011 13,093 13,648
Prepaid expenses and other current assets 1,239 1,466 1,161
Income taxes receivable.................. 2,043 1,304 109
------- ------- -------
Total current assets ................. 66,562 56,509 58,141
Property and equipment, net.............. 12,926 10,597 11,750
Goodwill, net ........................... 53,194 53,194 53,194
Receivable from Cash & Go, Ltd........... 4,943 6,924 7,351
Other.................................... 612 409 563
------- ------- -------
$138,237 $127,633 $130,999
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........ $ - $ 1,200 $ 900
Accounts payable and accrued expenses.... 11,775 9,767 10,054
------- ------- -------
Total current liabilities ............ 11,775 10,967 10,954
Revolving credit facility................ 11,000 29,000 28,000
Long-term debt, net of current portion... - 627 602
Deferred income taxes.................... 5,824 4,750 4,923
------- ------- -------
28,599 45,344 44,479
------- ------- -------
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; 9,827,387,
8,871,187 and 8,871,187 shares
outstanding, respectively ............ 106 96 96
Additional paid-in capital ............ 60,273 51,907 51,908
Retained earnings ..................... 52,274 38,450 41,759
Notes receivable from officers ........ - (5,149) (4,228)
Common stock held in treasury, at cost,
654,181 shares ...................... (3,015) (3,015) (3,015)
------- ------- -------
109,638 82,289 86,520
------- ------- -------
$138,237 $127,633 $130,999
======= ======= =======
The accompanying notes are an integral
part of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
------------------- ------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
------- ------- ------- -------
(unaudited, in thousands, except per share amounts)
Revenues:
Merchandise sales....... $ 17,283 $ 13,282 $ 49,986 $ 40,615
Service charges......... 18,996 15,552 51,932 41,665
Check cashing fees...... 670 642 2,109 2,026
Other................... 292 279 876 767
------- ------- ------- -------
37,241 29,755 104,903 85,073
------- ------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold...... 10,245 7,628 29,570 23,620
Operating expenses...... 16,602 14,161 45,377 38,929
Interest expense........ 108 238 412 698
Interest income......... (133) (161) (467) (427)
Depreciation ........... 828 718 2,176 1,859
Administrative expenses. 3,110 3,143 10,855 8,471
------- ------- ------- -------
30,760 25,727 87,923 73,150
------- ------- ------- -------
Income before income taxes 6,481 4,028 16,980 11,923
Provision for income taxes 2,465 1,450 6,465 4,292
------- ------- ------- -------
Net income................ $ 4,016 $ 2,578 $ 10,515 $ 7,631
======= ======= ======= =======
Net income per share:
Basic .................. $ 0.42 $ 0.29 $ 1.15 $ 0.87
======= ======= ======= =======
Diluted ................ $ 0.37 $ 0.27 $ 1.02 $ 0.80
======= ======= ======= =======
The accompanying notes are an integral
part of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
--------------------
Sept. 30, Sept. 30,
2003 2002
-------- --------
(unaudited) (unaudited)
(in thousands)
Cash flows from operating activities:
Net income .................................... $ 10,515 $ 7,631
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation ............................. 2,176 1,859
Stock option and warrant income tax benefit 3,298 211
Changes in operating assets and liabilities:
Service charges receivable .................. (441) (178)
Inventories ................................. (1,363) (412)
Prepaid expenses and other assets ........... (127) (145)
Accounts payable and accrued expenses ....... 1,721 (274)
Current and deferred income taxes .......... (1,033) 211
-------- --------
Net cash flows from operating activities .. 14,746 8,903
-------- --------
Cash flows from investing activities:
Net increase in receivables ................... (3,675) (2,090)
Purchases of property and equipment ........... (3,352) (2,422)
Decrease in receivable from Cash & Go, Ltd .... 2,408 184
-------- --------
Net cash flows from investing activities .. (4,619) (4,328)
-------- --------
Cash flows from financing activities:
Proceeds from debt ............................ - 7,000
Repayments of debt ............................ (18,502) (11,166)
Decrease (increase) in notes receivable
from officers ............................... 4,228 (98)
Proceeds from exercise of options and warrants. 5,077 442
-------- --------
Net cash flows from financing activities .. (9,197) (3,822)
-------- --------
Change in cash and cash equivalents............. 930 753
Cash and cash equivalents at beginning
of the period................................. 12,735 11,252
-------- --------
Cash and cash equivalents at end of the period.. $ 13,665 $ 12,005
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .................................... $ 471 $ 717
======== ========
Income taxes ................................ $ 4,215 $ 4,034
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
including the notes thereto, include the accounts of First Cash Financial
Services, Inc. (the "Company") and its wholly owned subsidiaries. Such
unaudited consolidated financial statements are condensed and do not include
all disclosures and footnotes required by generally accepted accounting
principles in the United States of America for complete financial
statements. Such interim period financial statements should be read in
conjunction with the Company's consolidated financial statements which are
included in the Company's December 31, 2002 Annual Report on Form 10-K. All
significant inter-company accounts and transactions have been eliminated in
consolidation. The consolidated financial statements as of September 30,
2003 and for the periods ended September 30, 2003 and 2002 are unaudited,
but in management's opinion, include all adjustments (consisting of only
normal recurring adjustments) considered necessary to present fairly the
financial position, results of operations and cash flows for such interim
periods. Operating results for the period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the full
fiscal year.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51. FIN 46 addresses consolidation
by business enterprises of variable interest entities (formerly special
purpose entities). In general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
On October 9, 2003 the FASB deferred implementation of FIN 46 until the
fourth quarter of 2003. The Company has evaluated the applicability of FIN
46 to its existing 50% investment in Cash & Go, Ltd., a Texas limited
partnership, which owns and operates approximately 40 check-cashing/short
term advance kiosks inside convenience stores in the Texas market. As a
result, the Company expects that effective December 31, 2003, it will
consolidate into its financial statements the assets, liabilities and
operating results of Cash & Go, Ltd.
Note 2 - Revolving Credit Facility
The Company maintains a long-term line of credit with a group of
commercial lenders (the "Credit Facility"). The Credit Facility provides a
$25,000,000 long-term line of credit that matures on August 9, 2005 and
bears interest at the prevailing LIBOR rate (which was approximately 1.1% at
September 30, 2003) plus an applicable margin based on a defined leverage
ratio for the Company. Based on the Company's existing leverage ratio, the
margin is currently 1.375%, the most favorable rate provided under the terms
of the agreement. The Company elected to reduce the total amount available
under the facility from $30,000,000 to $25,000,000 during the Third Quarter
of 2003. Amounts available under the Credit Facility are limited to 300% of
the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. At September 30, 2003, the
Company had $14,000,000 available for additional borrowings. 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 the requirements and covenants of the Credit Facility
as of September 30, 2003 and November 7, 2003. The Company is required to
pay an annual commitment fee of 1/5 of 1% on the average daily-unused
portion of the Credit Facility commitment. The Company's Credit Facility
contains provisions, which will allow the Company to repurchase stock and/or
pay cash dividends within certain parameters. Substantially all of the
unencumbered assets of the Company have been pledged as collateral against
indebtedness under the Credit Facility.
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
------ ------ ------ ------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 4,016 $ 2,578 $10,515 $ 7,631
====== ====== ====== ======
Denominator:
Weighted-average common shares
for calculating basic earnings
per share 9,533 8,871 9,105 8,820
Effect of dilutive securities:
Stock options and warrants 1,372 699 1,173 769
------ ------ ------ ------
Weighted-average common
shares for calculating diluted
earnings per share 10,905 9,570 10,278 9,589
====== ====== ====== ======
Basic earnings per share $ 0.42 $ 0.29 $ 1.15 $ 0.87
====== ====== ====== ======
Diluted earnings per share $ 0.37 $ 0.27 $ 1.02 $ 0.80
====== ====== ====== ======
There were no shares excluded from the calculation of diluted earnings
per share.
Note 4 - Employee Stock Incentive Plans
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. Accordingly, no stock-
based employee compensation cost is reflected in net income as all options
and warrants granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. In accordance with SFAS No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure,
the following table illustrates the effect on net income and earnings per
share as if the Company had applied the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
------ ------ ------ ------
Net income, as reported $ 4,016 $ 2,578 $10,515 $ 7,631
Less: Stock based employee
compensation determined under the
fair value requirements of SFAS
123, net of income tax benefits 40 28 951 1,217
------ ------ ------ ------
Adjusted net income $ 3,976 $ 2,550 $ 9,564 $ 6,414
====== ====== ====== ======
Earnings per share:
Basic, as reported $ 0.42 $ 0.29 $ 1.15 $ 0.87
Basic, adjusted 0.42 0.29 1.05 0.73
Diluted, as reported 0.37 0.27 1.02 0.80
Diluted, adjusted 0.36 0.27 0.93 0.67
The fair values were determined using a Black-Scholes option-pricing
model using the following assumptions:
Three Months Ended Nine Months Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2003 2002 2003 2002
------ ------ ------ ------
Dividend yield - - - -
Volatility 55.1% 58.0% 54.5% 58.0%
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected life 7 years 7 years 7 years 7 years
During the period from January 1, 2003 through September 30, 2003, the
Company issued 956,200 shares of common stock relating to the exercise of
outstanding stock options and warrants for an aggregate exercise price of
$8,375,000, including income tax benefit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Cash Financial Services, Inc. (the "Company") is the nation's
third largest publicly traded pawnshop operator and currently owns 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. Many of
the Company's pawn stores also offer short-term, unsecured advances ("short-
term advances").
The Company also owns and operates check cashing and short-term advance
stores in Texas, California, Washington, Oregon, Illinois, South Carolina
and Washington, D.C. The short-term advances, also known as payday loans,
are unsecured loans in amounts that generally range from $100 to $500 for
terms of 30 days or less. The stores in California, Washington and Oregon
also provide money orders, money transfers and bill payment services. In
addition, the Company is a 50% partner in Cash & Go, Ltd., a Texas limited
partnership, which owns and operates check cashing and short-term advance
kiosks located inside convenience stores.
For the quarter ended September 30, 2003, the Company's revenues were
derived 46% from merchandise sales, 51% from service charges on pawn loans
and short-term advances, and 3% from other sources, primarily check-cashing
fees.
The Company opened a total of twelve stores during the quarter ended
September 30, 2003, bringing total year-to-date store openings to 34 and the
total store count to 224 units. The Company's business plan is to continue
to expand its operations by opening both new check cashing/short-term
advance stores and new pawn stores in selected geographic markets.
Although the Company has had significant increases in revenues due to
new store openings in 2002 and 2003, 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 bad debt and collection expenses for both check cashing and
short-term advances. Administrative expenses consist of items relating to
the operation of the corporate office, including the compensation and
benefit costs of corporate officers, area supervisors and other operations
management, accounting and administrative costs, information technology
costs, liability and casualty insurance, outside legal and accounting fees
and stockholder-related expenses.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles 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. Both the significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating the reported financial results and the effects of recent
accounting pronouncements have been reported in the Company's 2002 Annual
Report on Form 10-K.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities - an interpretation of ARB No. 51. FIN 46 addresses consolidation
by business enterprises of variable interest entities (formerly special
purpose entities). In general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
On October 9, 2003 the FASB deferred implementation of FIN 46 until the
fourth quarter of 2003. The Company has evaluated the applicability of FIN
46 to its existing 50% investment in Cash & Go, Ltd., a Texas limited
partnership, which owns and operates approximately 40 check-cashing/short
term advance kiosks inside convenience stores in the Texas market. As a
result, the Company expects that effective December 31, 2003, it will
consolidate into its financial statements the assets, liabilities and
operating results of Cash & Go, Ltd. As part of the initial consolidation,
the Company projects that it will incur a change in accounting charge of
approximately $400,000, net of income taxes. The expected fourth quarter
charge results from the Company recognizing the other partner's share of the
previously accumulated losses of the joint venture as a result of the
consolidation. There have been no subsequent changes in the Company's
accounting policies nor have there been any other subsequently issued
accounting pronouncements which materially affect the preparation of the
Company's financial statements.
RESULTS OF OPERATIONS
Three months ended September 30, 2003 compared to the three months ended
September 30, 2002
Total revenues increased 25% to $37,241,000 for the three months ended
September 30, 2003 ("the Third Quarter of 2003") as compared to $29,755,000
for the three months ended September 30, 2002 ("the Third Quarter of 2002").
The change resulted from an increase in revenues of $3,292,000 generated by
the 58 pawn and check cashing/short-term advance stores which were opened
since July 1, 2002, an increase of $4,495,000 at the 166 stores which were
in operation during all of the Third Quarter of 2002 and the Third Quarter
of 2003, net of a decrease in revenues of $301,000 from the four stores
consolidated since July 1, 2002. Same store revenues increased 15%
primarily due to increased consumer demand for short-term loan products and
continued maturation of the 32 new stores opened in 2001 and the first half
of 2002. Of the $7,486,000 increase in total revenues, 53%, or $4,001,000,
was attributable to increased merchandise sales, 46%, or $3,444,000 was
attributable to a net increase in service charges on pawn and short-term
advances, and 1% or $41,000 was attributable to other income, comprised
primarily of check cashing fees. A significant component of the increase
in merchandise sales was non-retail bulk sales of scrap jewelry merchandise,
which increased from $952,000 in the Third Quarter of 2002 to $2,982,000 in
the Third Quarter of 2003. Service charges from short-term advances
increased from $9,780,000 in the Third Quarter of 2002 to $11,362,000 in the
Third Quarter of 2003, while service charges from pawns increased from
$5,772,000 in the Third Quarter of 2002 to $7,634,000 in the Third Quarter
of 2003. As a percentage of total revenues, merchandise sales increased
from 45% to 46% during the Third Quarter of 2003 as compared to the Third
Quarter of 2002, service charges decreased from 52% to 51%, and check-
cashing fees and other income as a percentage of total revenues were 3%
during both the Third Quarter of 2003 and the Third Quarter of 2002.
The receivables balance increased 21% from $28,641,000 at September 30,
2002 to $34,604,000 at September 30, 2003. Of the $5,963,000 increase, an
increase of $2,420,000 was attributable to the 176 pawn stores and check
cashing/short-term advance stores which were in operation as of September
30, 2003 and 2002 and an increase of $3,543,000 was attributable to growth
at the 48 pawn and check cashing/short-term advance stores opened or
acquired since September 30, 2002, net of closed stores. The aggregate
receivables balance at September 30, 2003 was comprised of $22,917,000 of
pawn loan receivables and $11,687,000 of short-term advance receivables,
compared to $18,388,000 of pawn loan receivables and $10,253,000 of short-
term advance receivables at September 30, 2002.
Gross profit margins as a percentage of total merchandise sales were
41% during the Third Quarter of 2003 compared to 43% during the Third
Quarter of 2002. The decrease in overall margins was primarily due to the
increased volume of scrap jewelry sales, which generate lower margins.
Retail merchandise margins, which do not include bulk scrap jewelry sales
were 45% over the same periods.
Operating expenses increased 17% to $16,602,000 during the Third
Quarter of 2003 compared to $14,161,000 during the Third Quarter of 2002,
primarily as a result of the net addition of 44 pawn stores and check
cashing/short-term advance stores since July 1, 2002, which is a 24%
increase in store count. The Company's net bad debt expense relating to
short-term advances increased from $2,789,000 in the Third Quarter of 2002
to $3,009,000 in the Third Quarter of 2003 as a result of an increase in
volume of short-term advances. As a percentage of short-term advance service
charge revenues, net bad debts decreased from 29% during the Third Quarter
of 2002 to 26% during the Third Quarter of 2003. Administrative expenses
decreased 1% to $3,110,000 during the Third Quarter of 2003 compared to
$3,143,000 during the Third Quarter of 2002. Increased costs for
administrative/supervisory compensation and benefits, insurance, accounting
and legal fees and other expenses necessary to support the Company's growth
strategy and increase in store counts were offset by $767,000 in insurance
recoveries related to a prior year store robbery claims. Interest expense
decreased to $108,000 in the Third Quarter of 2003 compared to interest
expense of $238,000 in the Third Quarter of 2002 as a result of lower
average outstanding debt balances during the Third Quarter of 2003.
Interest income decreased to $133,000 in the Third Quarter of 2003 compared
to $161,000 in the Third Quarter of 2002, due primarily to a decrease in the
note receivable from Cash & Go, Ltd.
For the Third Quarter of 2003 and 2002, the Company's effective federal
income tax rates of 38% and 36%, respectively, differed from the statutory
tax rate of approximately 34% primarily as a result of state and foreign
income taxes.
Nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002
Total revenues increased 23% to $104,903,000 for the nine months ended
September 30, 2003 ("the Nine-Month 2003 Period") as compared to $85,073,000
for the nine months ended September 30, 2002 ("the Nine-Month 2002 Period").
The change resulted from an increase in revenues of $10,343,000 generated by
the 72 pawn and check cashing/short-term advance stores which were opened
since January 1, 2002, an increase of $10,788,000 at the 152 stores which
were in operation during all of the Nine-Month 2002 Period and the Nine-
Month 2003 Period, net of a decrease in revenues of $1,301,000 from the nine
stores consolidated since January 1, 2002. Same store revenues increased by
13% primarily due to increased consumer demand for short-term loan products
and continued maturation of 18 new stores opened in 2001. Of the $19,830,000
increase in total revenues, 47%, or $9,371,000, was attributable to
increased merchandise sales, 52%, or $10,267,000 was attributable to a net
increase in service charges on pawn and short-term advances, and 1% or
$192,000 was attributable to an increase in other income, primarily check
cashing fees. A significant component of the increase in merchandise sales
was non-retail bulk sales of scrap jewelry merchandise, which increased from
$2,253,000 in the Nine-Month 2002 Period to $7,541,000 in the Nine-Month
2003 Period. Service charges from short-term advances increased from
$26,132,000 in the Nine-Month 2002 Period to $31,136,000 in the Nine-Month
2003 Period, while service charges from pawns increased from $15,533,000 in
the Nine-Month 2002 Period to $20,796,000 in the Nine-Month 2003 Period. As
a percentage of total revenues, merchandise sales were 48% during the Nine-
Month 2003 Period, which was consistent with merchandise sales as a
percentage of total revenues during the Nine-Month 2002 Period, service
charges increased from 49% to 50%, check-cashing fees and other income as a
percentage of total revenues decreased from 3% to 2% during the Nine-Month
2003 Period as compared to the Nine-Month 2002 Period.
The receivables balance increased 21% from $28,641,000 at September 30,
2002 to $34,604,000 at September 30, 2003. Of the $5,963,000 increase, an
increase of $2,420,000 was attributable to the 176 pawn stores and check
cashing/short-term advance stores which were in operation as of September
30, 2003 and 2002 and an increase of $3,543,000 was attributable to growth
at the 48 pawn and check cashing/short-term advance stores opened or
acquired since September 30, 2002, net of closed stores. The aggregate
receivables balance at September 30, 2003 was comprised of $22,917,000 of
pawn loan receivables and $11,687,000 of short-term advance receivables,
compared to $18,388,000 of pawn loan receivables and $10,253,000 of short-
term advance receivables at September 30, 2002.
Gross profit margins as a percentage of total merchandise sales were
41% during the Nine-Month 2003 Period as compared with 42% during the Nine-
Month 2002 Period. The decrease in overall margins was primarily due to the
increased volume of scrap jewelry sales, which generate lower margins.
Retail merchandise margins, which do not include bulk scrap jewelry sales,
increased from 44% to 45% over the same periods.
Operating expenses increased 17% to $45,377,000 during the Nine-Month
2003 Period compared to $38,929,000 during the Nine-Month 2002 Period,
primarily as a result of the net addition of 66 pawn stores and check
cashing/short-term advance stores since January 1, 2002, which is a 41%
increase in store count. The Company's net bad debt expense relating to
short-term advances increased from $6,076,000 in the Nine-Month 2002 Period
to $7,137,000 in the Nine-Month 2003 Period as a result of an increase in
volume of short-term advances. Net bad debts as a percentage of short-term
advance service charge revenues were 23% during the Nine-Month 2003 and 2002
Periods. Administrative expenses increased 28% to $10,855,000 during the
Nine-Month 2003 Period compared to $8,471,000 during the Nine-Month 2002
Period. Increased costs for administrative/supervisory compensation and
benefits, insurance, accounting and legal fees and other expenses necessary
to support the Company's growth strategy and increase in store counts were
offset by $767,000 in insurance recoveries related to a prior year store
robbery claims. Interest expense decreased to $412,000 in the Nine-Month
2003 Period compared to interest expense of $698,000 in the Nine-Month 2002
Period as a result of lower average outstanding debt balances and lower
average interest rates during the Nine-Month 2003 Period. Interest income
increased to $467,000 in the Nine-Month 2003 Period compared to $427,000 in
the Nine-Month 2002 Period.
For the Nine-Month Period of 2003 and 2002, the Company's effective
federal income tax rates of 38% and 36%, respectively, differed from the
statutory tax rate of approximately 34% primarily as a result of state and
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations, acquisitions and store openings have been
financed with funds generated from operations, bank and other borrowings,
and the issuance of the Company's securities.
The Company's Credit Facility provides a $25,000,000 long-term line of
credit that matures on August 9, 2005 and bears interest at the prevailing
LIBOR rate (which was approximately 1.1% at September 30, 2003) plus an
applicable margin based on a defined leverage ratio for the Company. Based
on the Company's current leverage ratio, the margin is 1.375%, the most
favorable rate provided under the terms of the agreement. The Company
elected to reduce the total amount available under the facility from
$30,000,000 to $25,000,000 during the Third Quarter of 2003. Amounts
available under the Credit Facility are limited to 300% 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 the
requirements and covenants of the Credit Facility as of September 30, 2003
and November 7, 2003. The Company is required to pay an annual commitment
fee of 1/5 of 1% on the average daily-unused portion of the Credit Facility
commitment. The Company's Credit Facility contains provisions, which will
allow the Company to repurchase stock and/or pay cash dividends within
certain parameters. Substantially all of the unencumbered assets of the
Company have been pledged as collateral against indebtedness under the
Credit Facility.
As of September 30, 2003, the Company's primary sources of liquidity
were $13,665,000 in cash and cash equivalents, $34,604,000 in receivables,
$15,011,000 in inventories and $14,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital of
$54,787,000 as of September 30, 2003, and total liabilities to equity ratio
of 0.26 to 1.
The Company utilized positive cash flows from operations in the Nine-
Month 2003 Period to fund investing and financing activities primarily
related to opening new stores and reduction of debt. Net cash provided by
operating activities of the Company during the nine months ended September
30, 2003 was $14,746,000, consisting primarily of net income of $10,515,000
plus non-cash adjustments for depreciation of $2,176,000 and stock option
and warrant tax benefit of $3,298,000, plus an increase in accounts payable
and accrued expenses of $1,721,000, net of an increase in inventory and
prepaid expenses of $1,363,000 and $127,000, respectively, and an increase
in accrued service charges and current and deferred taxes of $441,000 and
$1,033,000 respectively. Net cash used by investing activities during the
nine months ended September 30, 2003 was $4,619,000, which was primarily
comprised of an increase in receivables of $3,675,000, cash paid for fixed
asset additions of $3,352,000, net of a decrease in the receivable from the
Cash & Go, Ltd. joint venture of $2,408,000. The year-to-date opening of 34
new stores in 2003 contributed significantly to the volume of fixed asset
additions. Net cash used by financing activities was $9,197,000 during the
nine months ended September 30, 2003, which primarily consisted of a
decrease in the Company's debt of $18,502,000, net of repayments of notes
receivable from officers of $4,228,000 and proceeds from exercises of stock
options and warrants of $5,077,000.
The Company funds substantially all of the working capital needs of
Cash & Go, Ltd. The Company's net receivable from the joint venture was
$4,943,000 at September 30, 2003.
The profitability and liquidity of the Company is affected by the amount
of pawn loans outstanding, which is controlled in part by the Company's
lending decisions. The Company is able to influence the frequency of pawn
redemption by increasing or decreasing the amount loaned in relation to the
resale value of the pawned property. Tighter credit decisions generally
result in smaller pawn loans in relation to the estimated resale value of
the pledged property and can thereby decrease the Company's aggregate pawn
loan 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 pawn loans in relation to the
estimated resale value of the pledged property can result in an increase in
the Company's pawn service charge income. Also, larger average pawn loan
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.
The amount of short-term advances outstanding and related potential bad
debt expense also affect the profitability and liquidity of the Company. An
allowance for losses is provided on active short-term advances and service
charges receivable, based upon expected default rates, net of estimated
future recoveries of previously defaulted short-term advances and service
charges receivable. The Company considers short-term advances to be in
default if they are not repaid on the due date, and writes off the principal
amount and service charges receivable as of the default date, leaving only
active receivables in the reported balances. Net defaults and changes in
the short-term advance allowance are charged to bad debt expense, which is
included in operating expenses.
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 2003. 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 may seek additional
capital to facilitate expansion.
While the Company continually looks for, and is presented with
potential acquisition candidates, the Company has no definitive plans or
commitments for further acquisitions. The Company will evaluate
acquisitions, if any, based upon opportunities, acceptable financing,
purchase price, strategic fit and qualified management personnel. If the
Company encounters an attractive opportunity to acquire or open additional
new stores in the near future, the Company may seek additional financing,
the terms of which will be negotiated on a case-by-case basis.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS
Forward-Looking Statements
This quarterly report may contain forward-looking statements about the
business, financial condition and prospects of the Company. Forward-looking
statements can be identified by the use of forward-looking terminology such
as "believes," "projects," "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 include, without limitation, the
earnings per share discussion, the expectation of increased revenue growth
and increased profitability, the expectation for additional store openings,
and the anticipated effect of new accounting pronouncements. 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, the ability to maintain favorable banking
relationships as it relates to short-term lending products, changes in
governmental regulations, unforeseen litigation, changes in interest rates
or tax rates, changes in gold prices, changes in foreign currency exchange
rates, future business decisions, other risks indicated in the Company's
2002 Annual Report to Stockholders and other uncertainties.
Regulatory Changes
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. 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.
The U.S. Office of Comptroller of the Currency has initiated
enforcement actions that essentially eliminates the ability of nationally
chartered banks to establish or maintain relationships with loan servicers
in order to make out-of-state short-term advance loans. The Company does not
currently maintain nor intend in the future to establish loan-servicing
relationships with nationally chartered banks. The Federal Deposit
Insurance Corporation, ("FDIC"), which regulates the ability of state
chartered banks to enter into relationships with loan servicers, enacted new
examiner guidelines in July 2003 under which such arrangements are
permitted. Texas is the only state in which the Company functions as loan
servicer through a relationship with a state chartered bank, County Bank of
Rehoboth Beach, Delaware, that is subject to the new FDIC examiner
guidelines. If the implementation of the FDIC's new guidelines were to
ultimately restrict the ability of all or certain state banks to maintain
relationships with loan servicers, it could have a materially adverse impact
on the Company's operations and financial results.
Legislation and regulatory developments at a state level continue to
affect consumer-lending activities. While some states have recently enacted
legislation that is favorable to short-term advance providers, other states
are restricting, or attempting to restrict, short-term advance lending
activities. 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.
Other
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, changes in
competition from various sources including both financial services entities
and retail businesses, the ability to integrate new stores, changes in
governmental regulations, unforeseen litigation, changes in capital markets,
changes in interest rates or tax rates, the ability to maintain a loan
servicing relationship with an out-of-state bank necessary to generate
service charges from short-term advances in the Texas market, future
business decisions, changes in gold prices, changes in foreign currency
exchange rates, other risks indicated in the Company's 2002 Annual Report to
Stockholders and other uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates, gold prices and foreign currency exchange rates
and are described in detail in the Company's 2002 Annual Report on Form 10-
K. The Company does not engage in speculative or leveraged transactions,
nor does it hold or issue financial instruments for trading purposes.
There have been no material changes to the Company's exposure to market
risks since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, management of
the Company has evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934)
as of September 30, 2003. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of
September 30, the Company's disclosure controls and procedures are
effective in timely alerting them to the material information
relating to the Company required to be included in its periodic
filings with the Securities and Exchange Commission.
(b) During the period covered by this report, there were no significant
changes in the Company's internal controls or, to management's
knowledge, in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation and
arbitration "previously reported" in the Company's 2002 Annual Report to
Stockholders filed on Form 10-K.
ITEM 2. CHANGES IN SECURITIES
During the period from January 1, 2003 through November 7, 2003, the
Company issued 441,950 shares of common stock relating to the exercise of
outstanding stock warrants for an aggregate exercise price of $4,673,000
(including income tax effect) and issued warrants to purchase 270,000 shares
of common stock at an average exercise price of $11.20, expiring in ten
years.
The transactions set forth in the above paragraph were completed
pursuant to either Section 4(2) of the Securities Act or Rule 506 of
Regulation D of the Securities Act. With respect to issuances made pursuant
to Section 4(2) of the Securities Act, the transactions did not involve any
public offering and were sold to a limited group of persons. Each recipient
either received adequate information about the Company or had access,
through employment or other relationships, to such information, and the
Company determined that each recipient had such knowledge and experience in
financial and business matters that they were able to evaluate the merits
and risks of an investment in the Company. With respect to issuances made
pursuant to Rule 506 of Regulation D of the Securities Act, the Company
determined that each purchaser was an "accredited investor" as defined in
Rule 501(a) under the Securities Act. All sales of the Company's securities
were made by officers of the Company who received no commission or other
remuneration for the solicitation of any person in connection with the
respective sales of securities described above. The recipients of
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
During the period from January 1, 2003 through November 7, 2003, the
Company issued 706,750 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $5,875,000
(including income tax effect) and issued options to purchase 335,000 shares
of common stock at an average exercise price of $18.55, expiring in ten
years.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits:
31.1 Chief Executive Officer Certification Pursuant to Section
13a-14 of the Securities Exchange Act
31.2 Chief Financial Officer Certification Pursuant to Section
13a-14 of the Securities Exchange Act
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2) Reports on Form 8-K:
July 22, 2003 Item 9. Regulation FD Disclosure
Item 12. Results of Operations and
Financial Condition
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 7, 2003 FIRST CASH FINANCIAL SERVICES, INC.
----------------------------------
(Registrant)
/s/ PHILLIP E. POWELL
-----------------------
Phillip E. Powell
Chief Executive Officer
/s/ R. DOUGLAS ORR
-----------------------
R. Douglas Orr
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Chief Executive Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act
31.2 Chief Financial Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002