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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:
June 30, 2004 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
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 August 6, 2004 there were 15,763,633 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------------------- -------------
2004 2003 2003
------- ------- -------
(unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents................ $ 20,083 $ 12,511 $ 15,847
Service charges receivable............... 4,208 3,351 3,918
Pawn receivables......................... 23,063 18,622 20,037
Short-term advance receivables, net of
allowance of $464, $390 and $497,
respectively........................... 13,069 10,159 13,759
Inventories.............................. 16,471 13,248 15,588
Prepaid expenses and other current assets 1,114 523 964
Income taxes receivable.................. 3,044 457 1,613
------- ------- -------
Total current assets .................. 81,052 58,871 71,726
Property and equipment, net.............. 16,104 12,454 14,418
Goodwill................................. 53,237 53,194 53,237
Receivable from Cash & Go, Ltd........... - 5,155 -
Other.................................... 739 537 683
------- ------- -------
$151,132 $130,211 $140,064
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $ 832 $ 560 $ 1,054
Accrued expenses......................... 6,692 9,414 9,832
------- ------- -------
Total current liabilities ............. 7,524 9,974 10,886
Revolving credit facility................ - 17,000 6,000
Deferred income taxes payable............ 6,555 5,524 5,955
------- ------- -------
14,079 32,498 22,841
------- ------- -------
Stockholders' equity:
Preferred stock; $.01 par value;
10,000,000 shares authorized ........ - - -
Common stock; $.01 par value;
90,000,000 shares authorized ........ 161 97 109
Additional paid-in capital ............ 70,734 52,373 63,395
Retained earnings ..................... 66,158 48,258 56,734
Common stock held in treasury, at cost - (3,015) (3,015)
------- ------- -------
137,053 97,713 117,223
------- ------- -------
$151,132 $130,211 $140,064
======= ======= =======
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 Six Months Ended
------------------- ------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------- ------- ------- -------
(unaudited, in thousands, except per share amounts)
Revenues:
Merchandise sales.......... $ 18,626 $ 15,550 $ 39,097 $ 32,703
Service charges............ 20,683 16,923 40,820 32,936
Check cashing fees......... 723 667 1,633 1,439
Other...................... 286 278 618 584
------- ------- ------- -------
40,318 33,418 82,168 67,662
------- ------- ------- -------
Cost of revenues:
Cost of goods sold......... 10,657 8,978 22,727 19,325
Short-term advance loss
provision................ 3,017 2,690 4,406 4,128
Check cashing returned
items expense............ 56 62 129 92
------- ------- ------- -------
13,730 11,730 27,262 23,545
------- ------- ------- -------
Gross profit................. 26,588 21,688 54,906 44,117
------- ------- ------- -------
Expenses:
Operating expenses......... 14,593 12,162 29,370 24,605
Interest expense........... - 122 43 304
Interest income............ (18) (151) (32) (334)
Depreciation .............. 988 686 1,909 1,348
Administrative expenses.... 4,250 3,962 8,662 7,696
------- ------- ------- -------
19,813 16,781 39,952 33,619
------- ------- ------- -------
Income before income taxes... 6,775 4,907 14,954 10,498
Provision for income taxes... 2,529 1,906 5,530 3,999
------- ------- ------- -------
Net income................... $ 4,246 $ 3,001 $ 9,424 $ 6,499
======= ======= ======= =======
Net income per share:
Basic ..................... $ 0.26 $ 0.22 $ 0.60 $ 0.49
======= ======= ======= =======
Diluted ................... $ 0.25 $ 0.20 $ 0.55 $ 0.44
======= ======= ======= =======
Earnings per share amounts reflect the Company's three-for-two stock split
on April 6, 2004.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
--------------------
June 30, June 30,
2004 2003
-------- --------
(unaudited, in thousands)
Cash flows from operating activities:
Net income ................................... $ 9,424 $ 6,499
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation .............................. 1,909 1,348
Short-term advance loss provision .......... 4,406 4,128
Changes in operating assets and liabilities:
Service charges receivable ................. (290) (177)
Inventories ................................ (285) 129
Prepaid expenses and other assets .......... (206) 316
Accounts payable and accrued expenses ...... (3,362) (80)
Current and deferred income taxes ......... 4,990 645
-------- --------
Net cash flows from operating activities . 16,586 12,808
-------- --------
Cash flows from investing activities:
Pawn receivables ............................. (3,624) (1,727)
Short-term advance receivables ............... (3,716) (3,597)
Purchases of property and equipment .......... (3,595) (2,052)
Receivable from Cash & Go, Ltd ............... - 2,196
-------- --------
Net cash flows from investing activities . (10,935) (5,180)
-------- --------
Cash flows from financing activities:
Proceeds from debt ........................... 3,000 -
Repayments of debt ........................... (9,000) (12,501)
Decrease in notes receivable from officers ... - 4,228
Purchase of treasury stock ................... (1,347) -
Proceeds from exercise of stock options
and warrants ............................... 5,932 421
-------- --------
Net cash flows from financing activities . (1,415) (7,852)
-------- --------
Change in cash and cash equivalents............ 4,236 (224)
Cash and cash equivalents at beginning
of the period................................ 15,847 12,735
-------- --------
Cash and cash equivalents at end of the period. $ 20,083 $ 12,511
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................... $ 43 $ 328
======== ========
Income taxes ............................... $ 541 $ 2,931
======== ========
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. In
addition, the accompanying consolidated financial statements also include
the accounts of Cash & Go, Ltd., a Texas limited partnership, which owns
financial services kiosks inside convenience stores. The Company has a 50%
ownership interest in the partnership, which it has historically accounted
for by the equity method of accounting as neither partner has control.
Effective December 31, 2003, when the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 46(R) - Consolidation of Variable
Interest Entities, the Company's consolidated balance sheet includes the
assets and liabilities of Cash & Go, Ltd. The operating results of Cash &
Go, Ltd. are included in the Company's consolidated operating results
effective for accounting periods beginning January 1, 2004. All significant
intercompany accounts and transactions have been eliminated.
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, 2003 Annual Report on Form 10-K. The
consolidated financial statements as of June 30, 2004 and for the periods
ended June 30, 2004 and 2003 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 June 30, 2004 are not necessarily indicative of the results
that may be expected for the full fiscal year.
Certain amounts in prior year comparative presentations have been
reclassified in order to conform to the 2004 presentation. All share amounts
and earnings per share amounts included in these financial statements
reflect a three-for-two stock split effective April 6, 2004.
Note 2 - Revolving Credit Facility
The Company maintains a long-term line of credit with two commercial
lenders (the "Credit Facility"). The Credit Facility provides a $25,000,000
long-term line of credit that matures on April 15, 2006 and bears interest
at the prevailing LIBOR rate (which was approximately 1.4% at June 30, 2004)
plus a fixed interest rate margin of 1.375%. 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 June 30, 2004, the Company had no outstanding amounts due under
the facility and had $25,000,000 available for future 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 June 30, 2004 and August 6, 2004. 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's Credit Facility contains
provisions that 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 Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------ ------ ------ ------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 4,246 $ 3,001 $ 9,424 $ 6,499
====== ====== ====== ======
Denominator:
Weighted-average common shares
for calculating basic earnings
per share 16,033 13,358 15,732 13,338
Effect of dilutive securities:
Stock options and warrants 1,261 1,801 1,454 1,583
------ ------ ------ ------
Weighted-average common
shares for calculating diluted
earnings per share 17,294 15,159 17,186 14,921
====== ====== ====== ======
Basic earnings per share $ 0.26 $ 0.22 $ 0.60 $ 0.49
====== ====== ====== ======
Diluted earnings per share $ 0.25 $ 0.20 $ 0.55 $ 0.44
====== ====== ====== ======
Earnings per share amounts adjusted to reflect a three-for-two stock split
on April 6, 2004.
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 Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------ ------ ------ ------
Net income, as reported $ 4,246 $ 3,001 $ 9,424 $ 6,499
Less: Stock-based employee
compensation determined under the
fair value requirements of SFAS
123, net of income tax benefits 55 823 2,411 911
------ ------ ------ ------
Adjusted net income $ 4,191 $ 2,178 $ 7,013 $ 5,588
====== ====== ====== ======
Earnings per share:
Basic, as reported $ 0.26 $ 0.22 $ 0.60 $ 0.49
Basic, adjusted $ 0.26 $ 0.16 $ 0.45 $ 0.42
Diluted, as reported $ 0.25 $ 0.20 $ 0.55 $ 0.44
Diluted, adjusted $ 0.24 $ 0.14 $ 0.41 $ 0.37
The fair values were determined using a Black-Scholes option-pricing
model using the following assumptions:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------ ------ ------ ------
Dividend yield - - - -
Volatility 52.7% 58.1% 52.7% 58.1%
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected life 5.5 years 7 years 5.5 years 7 years
During the period from January 1, 2004 through June 30, 2004, the
Company issued 1,049,492 shares of common stock relating to the exercise of
outstanding stock options and warrants for an aggregate exercise price of
$11,759,000, 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 a leading
provider of specialty consumer finance products. The Company currently has
263 locations in eleven U.S. states and Mexico and is the nation's third
largest publicly traded pawnshop operator. The Company's pawn stores engage
in both consumer finance and retail sales activities and are a convenient
source for small consumer advances ("pawns"), secured by pledged tangible
personal property such as jewelry, electronic equipment, tools, sporting
goods and musical equipment. The pawn stores also retail previously-owned
merchandise acquired through collateral forfeitures and over-the-counter
purchases from customers. Many of the Company's pawn stores offer short-
term, unsecured advances ("short-term advances"), which are also known as
payday advances.
The Company also operates stand-alone check cashing/short-term advance
stores in several U.S. states. These stores provide a broad range of
consumer financial services products, including check cashing, short-term
advances, money order sales, money transfers and bill payment services. In
addition, the Company is a 50% partner in Cash & Go, Ltd., a Texas limited
partnership, which currently owns and operates 40 kiosks located inside
convenience stores, which offer short-term advances and check cashing.
OPERATIONS AND LOCATIONS
The following table details store openings and closings for the three
and six-month periods ended June 30, 2004:
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2004
---------------------- ----------------------
Check Cashing/ Check Cashing/
Short-term Short-term
Pawn Advance Total Pawn Advance Total
Stores Stores Stores Stores Stores Stores
------ ------ ------ ------ ------ ------
Beginning of period count 170 77 247 160 75 235
New stores opened 10 3 13 22 5 27
Closed stores - - - (2) - (2)
------ ------ ------ ------ ------ ------
Store count at June 30, 2004 180 80 260 180 80 260
====== ====== ====== ====== ====== ======
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. For the three-month and six-month periods
ended June 30, 2004, the Company's 50% owned joint venture, Cash & Go, Ltd.
operated a total of 40 kiosks located inside convenience stores in the state
of Texas, which are not included in the above chart. No kiosks were opened
or closed during the six months ended June 30, 2004.
For the quarter ended June 30, 2004, 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.
Stores included in the same-store revenue calculations are those stores
that were opened prior to the beginning of the prior year comparative fiscal
period and are still open. Also included are stores that were relocated
during the year within a specified distance serving the same market, where
there is not a significant change in store size and where there is not a
significant overlap or gap in timing between the opening of the new store
and the closing of the existing store. During the periods reported, the
Company has not had store expansions that involved a significant change in
the size of retail showrooms, and accordingly, no expanded stores have been
excluded from the same-store calculations. Sales of scrap jewelry are
included in same-store revenue calculations. Revenues from the Cash & Go,
Ltd. kiosks are not included in same-store calculations for 2004 as the
revenues from the kiosks were not included in the consolidated revenues for
fiscal 2003.
Although the Company has had significant increases in revenues due to
new store openings in 2003 and 2004 and the consolidation of Cash & Go, Ltd.
effective December 31, 2003, the Company has also incurred increases in
operating expenses attributable to the additional stores, consolidation of
Cash & Go, Ltd. and increases in administrative expenses attributable to
additions to the management team and hiring the support personnel required
for the Company's growth. Operating expenses consist of all items directly
related to the operation of the Company's stores, including salaries and
related payroll costs, rent, utilities, equipment depreciation, advertising,
property taxes, licenses, supplies and security. Administrative expenses
consist of items relating to the operation of the corporate office,
including the 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 2003 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
Three months ended June 30, 2004 compared to the three months ended June 30,
2003
Total revenues increased 21% to $40,318,000 for the three months ended
June 30, 2004 ("the Second Quarter of 2004") as compared to $33,418,000 for
the three months ended June 30, 2003 ("the Second Quarter of 2003"). The
change was comprised of an increase in revenues of $2,512,000 generated by
the 63 new pawn and check cashing/short-term advance stores which were
opened since April 1, 2003, a same-store increase totaling $3,325,000 at the
197 stores which were in operation during all of the second quarter of 2003
and the second quarter of 2004, an increase of $1,449,000 related to the
consolidation of the 40 Cash & Go, Ltd. kiosks, net of a decrease in
revenues of $386,000 from the four stores closed since April 1, 2003. Same-
store revenues increased 10% primarily due to increased demand for short-
term consumer finance products and continued maturation of newer stores
opened in the first quarter of 2003 and fiscal 2002. Of the $6,900,000
increase in total revenues, 45%, or $3,076,000, was attributable to
increased merchandise sales, 54%, or $3,760,000 was attributable to a net
increase in service charges on pawn and short-term advances, and 1% or
$64,000 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
$2,171,000 in the Second Quarter of 2003 to $2,983,000 in the Second Quarter
of 2004. Service charges from short-term advances increased from $10,255,000
in the Second Quarter of 2003 to $12,639,000 in the Second Quarter of 2004,
while service charges from pawns increased from $6,668,000 in the Second
Quarter of 2003 to $8,044,000 in the Second Quarter of 2004. As a
percentage of total revenues, merchandise sales remained unchanged at 46%
during both the Second Quarter of 2004 and the Second Quarter of 2003,
service charges remained unchanged at 51%, and check cashing fees and other
income as a percentage of total revenues were at 3% during both the Second
Quarter of 2004 and the Second Quarter of 2003.
The pawn receivables balance increased 24% from $18,622,000 at June 30,
2003 to $23,063,000 at June 30, 2004. Of the $4,441,000 increase, an
increase of $2,772,000 was attributable to the growth in same-store pawn
receivable balances at the stores which were in operation as of June 30,
2004 and 2003, and an increase of $1,669,000 was attributable to the new
stores opened since June 30, 2003. The net short-term advance receivables
balance increased 29% from $10,159,000 at June 30, 2003 to $13,069,000 at
June 30, 2004. Of the $2,910,000 increase, a same-store increase of
$898,000 was attributable to the growth in short-term advance receivable
balances at the stores which were in operation as of June 30, 2004 and 2003,
an increase of $609,000 was attributable to the new stores opened since June
30, 2003, an increase of $1,433,000 was attributable to the consolidation of
the 40 Cash & Go, Ltd. kiosks, net of a decrease of $30,000 at the stores
closed since June 30, 2003. The Company's loss provision reserve on short-
term advance receivables increased from $390,000 at June 30, 2003 to
$464,000 at June 30, 2004.
Gross profit margins on total merchandise sales were 43% during the
Second Quarter of 2004 compared to 42% during the Second Quarter of 2003.
Retail merchandise margins, which do not include bulk scrap jewelry sales,
were equal at 46% over the same periods. The Company's loss provision
relating to short-term advances increased from $2,690,000 in the Second
Quarter of 2003 to $3,017,000 in the Second Quarter of 2004. As a
percentage of short-term advance service charge revenues, the loss provision
decreased from 26% during the Second Quarter of 2003 to 24% during the
Second Quarter of 2004.
Operating expenses increased 20% to $14,593,000 during the Second
Quarter of 2004 compared to $12,162,000 during the Second Quarter of 2003,
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results and the net addition of 59 pawn and check cashing/short-term advance
stores since April 1, 2003, which is a 29% increase in store count.
Administrative expenses increased 7% to $4,250,000 during the Second Quarter
of 2004 compared to $3,962,000 during the Second Quarter of 2003 primarily
as a result of the consolidation of Cash & Go, Ltd.'s operating results and
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. There was no
interest expense in the Second Quarter of 2004 compared to interest expense
of $122,000 in the Second Quarter of 2003 due to the elimination of
interest-bearing debt during the First Quarter of 2004. Interest income
decreased from $151,000 in the Second Quarter of 2003 to $18,000 in the
Second Quarter of 2004, due primarily to the elimination of interest income
associated with the consolidation of Cash & Go, Ltd.
For the Second Quarter of 2004 and 2003, the Company's effective
federal income tax rates of 37.3% and 38.8%, respectively, differed from the
statutory tax rate of approximately 34% primarily as a result of state and
foreign income taxes.
Six months ended June 30, 2004 compared to the six months ended June 30,
2003
Total revenues increased 21% to $82,168,000 for the six months ended
June 30, 2004 ("the Six-Month 2004 Period") as compared to $67,662,000 for
the six months ended June 30, 2003 ("the Six-Month 2003 Period"). The
change was comprised of an increase in revenues of $5,818,000 generated by
the 74 new pawn and check cashing/short-term advance stores which were
opened since January 1, 2003, a same-store increase of $6,072,000 at the 186
stores which were in operation during all of the first half of 2003 and the
first half of 2004, an increase of $2,873,000 related to the consolidation
of the 40 Cash & Go, Ltd. kiosks, net of a decrease in revenues of $257,000
from the four stores closed since January 1, 2003. Same store revenues
increased 9% primarily due to increased demand for short-term consumer
finance products and continued maturation of stores opened in fiscal 2002.
Of the $14,506,000 increase in total revenues, 44%, or $6,394,000, was
attributable to increased merchandise sales, 54%, or $7,884,000 was
attributable to a net increase in service charges on pawn and short-term
advances, and 2% or $228,000 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 $4,559,000 in the Six-Month 2003 Period to
$6,422,000 in the Six-Month 2004 Period. Service charges from short-term
advances increased from $19,774,000 in the Six-Month 2003 Period to
$24,642,000 in the Six-Month 2004 Period, while service charges from pawns
increased from $13,162,000 in the Six-Month 2003 Period to $16,178,000 in
the Six-Month 2004 Period. As a percentage of total revenues, merchandise
sales decreased from 48% to 47% during the Six-Month 2004 Period as compared
to the Six-Month 2003 Period, service charges increased from 49% to 50%,
check-cashing fees and other income as a percentage of total revenues were
at 3% during both the Six-Month 2004 and 2003 Period.
The pawn receivables balance increased 24% from $18,622,000 at June 30,
2003 to $23,063,000 at June 30, 2004. Of the $4,441,000 increase, an
increase of $2,772,000 was attributable to the growth in same-store pawn
receivable balances at the stores which were in operation as of June 30,
2004 and 2003, and an increase of $1,669,000 was attributable to the new
stores opened since June 30, 2003. The net short-term advance receivables
balance increased 29% from $10,159,000 at June 30, 2003 to $13,069,000 at
June 30, 2004. Of the $2,910,000 increase, a same-store increase of
$898,000 was attributable to the growth in short-term advance receivable
balances at the stores which were in operation as of June 30, 2004 and 2003,
an increase of $609,000 was attributable to the new stores opened since June
30, 2003, and an increase of $1,433,000 was attributable to the
consolidation of the 40 Cash & Go, Ltd. kiosks net of a decrease of $30,000
at the stores closed since June 30, 2003. The Company's loss provision
reserve on short-term advance receivables increased from $390,000 at June
30, 2003 to $464,000 at June 30, 2004.
Gross profit margins on total merchandise sales were 42% during the
Six-Month 2004 Period compared to 41% during the Six-Month 2003 Period.
Retail merchandise margins, which do not include bulk scrap jewelry sales,
were equal at 45% over the same periods. The Company's loss provision
relating to short-term advances increased from $4,128,000 in the Six-Month
2003 Period to $4,406,000 in the Six-Month 2004 Period. As a percentage of
short-term advance service charge revenues, the loss provision decreased
from 21% during the Six-Month 2003 Period to 18% during the Six-Month 2004
Period.
Operating expenses increased 19% to $29,370,000 during the Six-Month
2004 Period compared to $24,605,000 during the Six-Month 2003 Period,
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results and the net addition of 70 pawn and check cashing/short-term advance
stores since January 1, 2003, which is a 37% increase in store count.
Administrative expenses increased 13% to $8,662,000 during the Six-Month
2004 Period compared to $7,696,000 during the Six-Month 2003 Period
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results, and 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, which
were partially offset by a $570,000 non-recurring insurance recovery related
to an unreimbursed employment-related insurance claim. Interest expense
decreased to $43,000 in the Six-Month 2004 Period compared to interest
expense of $304,000 in the Six-Month 2003 Period due to the reduction, and
subsequent elimination of interest-bearing debt in February of 2004.
Interest income decreased from $334,000 in the Six-Month 2003 Period to
$32,000 in the Six-Month 2004 Period, due primarily to the elimination of
interest income associated with the consolidation of Cash & Go, Ltd.
For the Six-Month Period of 2004 and 2003, the Company's effective
federal income tax rates of 37.0% and 38.1%, 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 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 April 15, 2006 and bears interest at the prevailing
LIBOR rate (which was approximately 1.4% at June 30, 2004) plus a fixed
interest rate margin of 1.375%. 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 June 30,
2004, the Company had no outstanding amounts due under the facility and the
Company had $25,000,000 available for 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
June 30, 2004 and August 6, 2004. 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's Credit Facility contains
provisions that 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 June 30, 2004, the Company's primary sources of liquidity were
$20,083,000 in cash and cash equivalents, $40,340,000 in receivables,
$16,471,000 in inventories and $25,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital of
$73,528,000 as of June 30, 2004, and total equity exceeded total liabilities
by a ratio of 9.7 to 1.
The Company utilized positive cash flows from operations in the Six-
Month 2004 Period to fund investing and financing activities primarily
related to opening new stores and the elimination of debt. Net cash
provided by operating activities of the Company during the six months ended
June 30, 2004 was $16,586,000, consisting primarily of net income of
$9,424,000 plus non-cash adjustments for depreciation and short-term advance
loss provision of $1,909,000 and $4,406,000, respectively, net of an
increase in service charge receivables, inventory and prepaid assets of
$290,000, $285,000 and $206,000 respectively, a decrease in accounts payable
and accrued expenses of $3,362,000, net of a change in tax balances of
$4,990,000. Net cash used by investing activities during the six months
ended June 30, 2004 was $10,935,000, which was primarily comprised of an
increase in pawn receivables of $3,624,000 and cash paid for fixed asset
additions of $3,595,000, and an increase in short-term advance receivables
of $3,716,000. The opening of 13 new stores during the second quarter of
2004 contributed significantly to the volume of fixed asset additions. Net
cash used by financing activities was $1,415,000 during the six months ended
June 30, 2004, which primarily consisted of a net decrease in the Company's
debt of $6,000,000, a purchase of treasury stock in the amount of
$1,347,000, net of proceeds from exercises of stock options and warrants of
$5,932,000.
Certain transactions presented in the Statement of Cash Flows for the
Six-Month 2003 Period have been reclassified between certain sections of the
Statement of Cash Flows in order to be consistent with the classification of
these same cash flows for the Six-Month 2004 Period. The intent of this
change for 2004 and the reclassification of the comparable period of 2003 is
to better reflect the presentation and classification of cash flows between
operating, investing and financing activities. The net effect of the 2003
reclassification is to increase operating cash flows, while decreasing
investing and financing cash flows. Specifically, the reclassifications
for the Six-Month 2003 Period relate to changes in pawn receivables
for forfeitures of pawn collateral in the amount of $271,000, changes in
the short-term advance loss provision in the amount of $4,128,000, and
changes to the tax benefit associated with the exercise of stock options
and warrants in the amount of $44,000. The net impact of these
reclassifications for the Six-Month 2003 Period was to increase cash flows
from operating activities in the amount of $3,901,000, decrease cash flows
from investing activities in the amount of $3,857,000, and decrease cash
flows from financing activities in the amount of $44,000.
For purposes of its internal liquidity assessments, the Company
considers net cash changes in pawn receivables and short-term advance
receivables to be closely related to operating cash flows. For the Six-
Month 2004 Period the total cash flows from operations were $16,586,000,
while net cash outflows related to pawn receivables and short-term advance
receivables were $3,624,000 and $3,716,000, respectively. The combined net
cash flows from operations and pawn and short-term advance receivables
totaled $9,246,000 for the Six-Month 2004 Period. For the comparable Six-
Month 2003 Period, cash flows from operations were $12,808,000 and net cash
outflows related to pawn receivables and short-term advance receivables were
$1,727,000 and $3,597,000, respectively. The combined net cash flows from
operations and pawn and short-term advance receivables totaled $7,484,000
for the Six-Month 2003 Period.
The profitability and liquidity of the Company is affected by the
amount of pawn receivables outstanding, which is controlled in part by the
Company's pawn lending decisions. The Company is able to influence the
frequency of pawn redemptions by increasing or decreasing the amount
advanced in relation to the resale value of the pawned property. Tighter
credit decisions generally result in smaller pawn advances in relation to
the estimated resale value of the pledged property and can thereby decrease
the Company's aggregate pawn receivable 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.
The amount of short-term advances outstanding and the related loss
provision 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 the short-term advance loss
provision.
In addition to these factors, merchandise sales and the pace of store
expansions affect the Company's liquidity. Management believes that cash
generated from operations should be sufficient to accommodate the Company's
current operations for Fiscal 2004. 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 release 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," "projects," "expects," "may," "estimates,"
"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 release include, without
limitation, the earnings per share discussion, the expectations of future
revenue growth and increased profitability, the expectation of additional
store openings, and the expectation of future operating cash flows. 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 release
speak only as of the date of this statement, 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 release. Such factors
are difficult to predict and many are beyond the control of the Company, but
may include changes in regional, national or international economic
conditions, changes in competition from various sources including both
financial services entities and retail businesses, the ability to open and
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,
changes in tax rates or policies, changes in gold prices, changes in foreign
currency exchange rates, future business decisions, 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 effectively
eliminated 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. The ultimate effect of the new
guidelines, which are currently being implemented, on the Company's ability
to offer short-term advances in Texas under its current loan servicing
arrangement with County Bank is unknown at this time. 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. If legislative or regulatory
action with that effect were taken at the state level 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 could have a materially adverse impact on 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, national or international 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, changes in tax rates or
policies, 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 2003 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 2003 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, 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. Our
principal executive officer and principal financial officer, after
evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in the Securities Exchange Act of 1934 (Exchange
Act) Rules 13a-15(e) and 15d-15(e)) as of June 30, 2004, have concluded
that our disclosure controls and procedures are effective in providing
reasonable assurance that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Commission's rules and forms.
(b) Changes in Internal Control Over Financial Reporting.
The management of the Company, with the participation of the principal
executive officer and principal financial officer, has concluded there
were no significant changes in the Company's internal controls over
financial reporting that occurred during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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 2003 Annual Report to
Stockholders filed on Form 10-K.
ITEM 2. CHANGES IN SECURITIES
During the period from January 1, 2004 through August 6, 2004, the
Company issued 716,867 shares of common stock relating to the exercise of
outstanding stock warrants for an aggregate exercise price of $7,470,000
(including income tax effect). During the period from January 1, 2004
through August 6, 2004, the Company issued 340,125 shares of common stock
relating to the exercise of outstanding stock options for an aggregate
exercise price of $4,367,000 (including income tax effect) and issued
options to purchase 454,500 shares of common stock at an average exercise
price of $19.33, expiring in ten years.
The transactions set forth in the above paragraphs 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.
On July 15, 2004 the Board of Directors authorized the repurchase of up
to 1,600,000 shares of common stock. During the period from July 16, 2004
through August 6, 2004, the Company repurchased 362,597 shares of common
stock at an average price of $19.89 per share under the stock repurchase
program approved by the Board of Directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 15, 2004, the Company held the annual meeting of its
stockholders. Of the 16,112,455 issued and outstanding common shares
entitled to vote at the meeting, 15,611,631 of the common shares voted in
person or by proxy. The shareholders voted affirmatively on the following
four proposals:
1. The stockholders ratified the re-election of Tara Schuchmann, director:
FOR % WITHHOLD %
--------- ---- --------- ----
15,123,081 96.9 488,550 3.1
2. The stockholders approved the adoption of the Amended and Restated
Certificate of Incorporation to increase the number of authorized
shares of common stock from 20,000,000 to 90,000,000.
FOR % AGAINST % ABSTAIN %
--------- ---- --------- ---- ------- ---
10,802,773 69.2 4,742,769 30.4 66,089 0.4
3. The stockholders approved the adoption of the First Cash Financial
Services, Inc. 2004 Long-Term Incentive Plan.
FOR % AGAINST % ABSTAIN % NON-VOTE %
--------- ---- --------- ---- ------- --- --------- ---
5,894,643 53.1 5,201,825 46.9 127,218 - 4,387,945 -
4. The stockholders ratified the selection of Hein & Associates LLP as
independent auditors of the Company for the year ended December 31,
2004.
FOR % AGAINST % ABSTAIN %
--------- ---- --------- ---- ------- ---
15,388,853 99.0 157,823 1.0 64,955 -
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by Phillip E. Powell, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
provided by Phillip E. Powell, Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
provided by R. Douglas Orr, Chief Financial Officer
(2) Reports on Form 8-K:
April 20, 2004 Item 7. Financial Statements and Exhibits
Item 9. Regulation FD Disclosure
Item 12. Results of Operations and
Financial Condition
April 23, 2004 Item 4. Changes to Registrant's
Certifying Accountants
Item 7. Financial Statements and Exhibits
June 10, 2004 Item 11. Temporary Suspension of Trading Under
Registrant's Employee Benefits Plan
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: August 6, 2004 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 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by Phillip E. Powell, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided
by Phillip E. Powell, Chief Executive Officer
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided
by R. Douglas Orr, Chief Financial Officer