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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, 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 November 4, 2004 there were 15,665,490 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,
-------------------- -------------
2004 2003 2003
------- ------- -------
(unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents................ $ 12,288 $ 13,665 $ 15,847
Service charges receivable............... 4,527 3,615 3,918
Pawn receivables......................... 24,859 20,457 20,037
Short-term advance receivables, net of
allowance of $499, $405 and $497,
respectively........................... 14,014 10,532 13,759
Inventories.............................. 18,074 15,011 15,588
Prepaid expenses and other current assets 1,303 1,239 964
Income taxes receivable.................. 598 2,043 1,613
------- ------- -------
Total current assets ................. 75,663 66,562 71,726
Property and equipment, net.............. 16,767 12,926 14,418
Goodwill................................. 53,237 53,194 53,237
Receivable from Cash & Go, Ltd........... - 4,943 -
Other.................................... 772 612 683
------- ------- -------
$146,439 $138,237 $140,064
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $ 604 $ 801 $ 1,054
Accrued expenses......................... 6,776 10,974 9,832
------- ------- -------
Total current liabilities ............ 7,380 11,775 10,886
Revolving credit facility................ 2,000 11,000 6,000
Deferred income taxes payable............ 6,855 5,824 5,955
------- ------- -------
16,235 28,599 22,841
------- ------- -------
Stockholders' equity:
Preferred stock; $.01 par value;
10,000,000 shares authorized ........ - - -
Common stock; $.01 par value;
90,000,000 shares authorized ........ 161 106 109
Additional paid-in capital ............ 70,811 60,273 63,395
Retained earnings ..................... 71,348 52,274 56,734
Common stock held in treasury, at cost (12,116) (3,015) (3,015)
------- ------- -------
130,204 109,638 117,223
------- ------- -------
$146,439 $138,237 $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 Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
------- ------- ------- -------
(unaudited, in thousands, except per share amounts)
Revenues:
Merchandise sales.......... $ 22,006 $ 17,283 $ 61,103 $ 49,986
Pawn service charges....... 8,998 7,634 25,176 20,796
Short-term advance service
charges.................. 14,545 11,362 39,187 31,136
Check cashing fees......... 683 670 2,316 2,109
Other...................... 312 292 930 876
------- ------- ------- -------
46,544 37,241 128,712 104,903
------- ------- ------- -------
Cost of revenues:
Cost of goods sold......... 13,603 10,245 36,330 29,570
Short-term advance loss
provision................ 4,007 3,009 8,413 7,137
Check cashing returned
items expense............ 50 59 179 151
------- ------- ------- -------
17,660 13,313 44,922 36,858
------- ------- ------- -------
Gross profit................. 28,884 23,928 83,790 68,045
------- ------- ------- -------
Expenses:
Operating expenses......... 15,353 13,534 44,723 38,089
Interest expense........... 17 108 60 412
Interest income............ (10) (133) (42) (467)
Depreciation .............. 1,073 828 2,982 2,176
Administrative expenses.... 4,208 3,110 12,870 10,855
------- ------- ------- -------
20,641 17,447 60,593 51,065
------- ------- ------- -------
Income before income taxes... 8,243 6,481 23,197 16,980
Provision for income taxes... 3,053 2,465 8,583 6,465
------- ------- ------- -------
Net income................... $ 5,190 $ 4,016 $ 14,614 $ 10,515
======= ======= ======= =======
Net income per share:
Basic ..................... $ 0.33 $ 0.28 $ 0.93 $ 0.77
======= ======= ======= =======
Diluted ................... $ 0.31 $ 0.25 $ 0.86 $ 0.68
======= ======= ======= =======
Earnings per share and outstanding 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
Nine Months Ended
--------------------
Sept. 30, Sept. 30,
2004 2003
-------- --------
(unaudited, in thousands)
Cash flows from operating activities:
Net income ................................... $ 14,614 $ 10,515
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation .............................. 2,982 2,176
Short-term advance loss provision .......... 8,413 7,137
Stock option and warrant income tax benefit 5,859 3,298
Changes in operating assets and liabilities:
Service charges receivable ................. (609) (441)
Inventories ................................ (895) (518)
Prepaid expenses and other assets .......... (428) (127)
Accounts payable and accrued expenses ...... (3,506) 1,721
Current and deferred income taxes ......... 1,915 (1,033)
-------- --------
Net cash flows from operating activities . 28,345 22,728
-------- --------
Cash flows from investing activities:
Pawn receivables, net ........................ (6,413) (4,678)
Short-term advance receivables, net .......... (8,668) (6,979)
Purchases of property and equipment .......... (5,331) (3,352)
Receivable from Cash & Go, Ltd ............... - 2,408
-------- --------
Net cash flows from investing activities . (20,412) (12,601)
-------- --------
Cash flows from financing activities:
Proceeds from debt ........................... 10,000 -
Repayments of debt ........................... (14,000) (18,502)
Decrease in notes receivable from officers ... - 4,228
Purchase of treasury stock ................... (13,463) -
Proceeds from exercise of stock options
and warrants ............................... 5,971 5,077
-------- --------
Net cash flows from financing activities . (11,492) (9,197)
-------- --------
Change in cash and cash equivalents............ (3,559) 930
Cash and cash equivalents at beginning
of the period................................ 15,847 12,735
-------- --------
Cash and cash equivalents at end of the period. $ 12,288 $ 13,665
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................... $ 68 $ 471
======== ========
Income taxes ............................... $ 808 $ 4,215
======== ========
Supplemental disclosure of non-cash investing activity:
Non-cash transactions in connection with pawn
receivables settled through forfeitures of
collateral transferred to inventories ...... $ 24,842 $ 19,488
======== ========
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 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. 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 and
as amended on Form 10-K/A. The consolidated financial statements as of
September 30, 2004 and for the periods ended September 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 September 30, 2004
are not necessarily indicative of the results that may be expected for the
full fiscal year.
Certain amounts in the prior year comparative presentation in the
Condensed Consolidated Statements of Cash Flows have been reclassified
between sections of the Condensed Consolidated Statements of Cash Flows in
order to be consistent with the presentation utilized for the nine-month
period ended September 30, 2004. For the nine-month period ended September
30, 2003, the Company determined that it had incorrectly classified the
short-term advance loss provision as an investing activity rather than an
operating activity. The effect of the reclassification is to increase cash
flows from operating activities and to decrease cash flows from investing
activities in the amount of $7,137,000 for the nine-month period ended
September 30, 2003. In addition, the Company has reviewed its recording and
classification of cash flows arising from the forfeiture and subsequent sale
of pawn collateral and determined that investing cash flows representing a
return of pawn receivables were incorrectly recorded on the dates of
forfeiture rather than on the dates that the forfeited collateral was sold.
Accordingly, the reported cash flows for the nine-month period ended
September 30, 2003 related to forfeited collateral have been corrected to
remove the non-cash impact of increases and decreases in on-hand
inventories. The effect of the reclassification is to increase cash flows
from operating activities and to decrease cash flows from investing
activities in the amount of $845,000 for the nine-month period ended
September 30, 2003.
Certain other 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 1.8% at September 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 September 30, 2004, the Company had $23,000,000 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, 2004
and November 4, 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 Nine Months Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
------ ------ ------ ------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 5,190 $ 4,016 $14,614 $10,515
====== ====== ====== ======
Denominator:
Weighted-average common shares
for calculating basic earnings
per share 15,750 14,300 15,738 13,658
Effect of dilutive securities:
Stock options and warrants 1,080 2,058 1,330 1,759
------ ------ ------ ------
Weighted-average common
shares for calculating diluted
earnings per share 16,830 16,358 17,068 15,417
====== ====== ====== ======
Basic earnings per share $ 0.33 $ 0.28 $ 0.93 $ 0.77
====== ====== ====== ======
Diluted earnings per share $ 0.31 $ 0.25 $ 0.86 $ 0.68
====== ====== ====== ======
Earnings per share and outstanding 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 Nine Months Ended
------------------- -------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
------ ------ ------ ------
Net income, as reported $ 5,190 $ 4,016 $14,614 $10,515
Less: Stock-based employee
compensation determined under the
fair value requirements of SFAS 123,
net of income tax benefits 55 40 2,466 951
------ ------ ------ ------
Adjusted net income $ 5,135 $ 3,976 $12,148 $ 9,564
====== ====== ====== ======
Earnings per share:
Basic, as reported $ 0.33 $ 0.28 $ 0.93 $ 0.77
Basic, adjusted $ 0.33 $ 0.28 $ 0.77 $ 0.70
Diluted, as reported $ 0.31 $ 0.25 $ 0.86 $ 0.68
Diluted, adjusted $ 0.31 $ 0.24 $ 0.71 $ 0.62
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,
2004 2003 2004 2003
------ ------ ------ ------
Dividend yield - - - -
Volatility 52.7% 55.1% 52.7% 54.5%
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 September 30, 2004, the
Company issued 1,056,992 shares of common stock relating to the exercise of
outstanding stock options and warrants for an aggregate exercise price of
$11,830,000, 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
278 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 U.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 short-term advances, check
cashing, 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 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 nine-month periods ended September 30, 2004:
Three Months Ended Nine Months Ended
Sept. 30, 2004 Sept. 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 180 80 260 160 75 235
New stores opened 10 3 13 32 8 40
Closed stores - - - (2) - (2)
------ ------ ------ ------ ------ ------
Store count at Sept. 30, 2004 190 83 273 190 83 273
====== ====== ====== ====== ====== ======
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 nine-month periods
ended September 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 nine months ended September 30, 2004.
For the quarter ended September 30, 2004, the Company's revenues were
derived 47% from merchandise sales, 19% from service charges on pawn loans,
31% from service charges on 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 September 30, 2004 compared to the three months ended
September 30, 2003
Total revenues increased 25% to $46,544,000 for the three months ended
September 30, 2004 ("the Third Quarter of 2004") as compared to $37,241,000
for the three months ended September 30, 2003 ("the Third Quarter of 2003").
The change was comprised of an increase in revenues of $3,107,000 generated
by the 65 new pawn and check cashing/short-term advance stores which were
opened since July 1, 2003, a same-store increase totaling $5,115,000 at the
208 stores which were in operation during all of the Third Quarter of 2003
and the Third Quarter of 2004, an increase of $1,385,000 related to the
consolidation of the 40 Cash & Go, Ltd. kiosks, net of a decrease in
revenues of $304,000 from the four stores closed since July 1, 2003. Same-
store revenues increased 14% primarily due to the continued maturation of
newer stores opened in the first half of 2003 and fiscal 2002. Of the
$9,303,000 increase in total revenues, 51%, or $4,723,000, was attributable
to increased merchandise sales, 15%, or $1,364,000 was attributable to an
increase in pawn service charges, 34%, or $3,183,000 was attributable to an
increase in short-term advance service charges, and less than 1% or $33,000
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 $2,982,000 in
the Third Quarter of 2003 to $5,357,000 in the Third Quarter of 2004. As a
percentage of total revenues, merchandise sales increased from 46% to 47%
during the Third Quarter of 2003 as compared to the Third Quarter of 2004,
pawn service charges decreased from 20% to 19%, short-term advance service
fees remained unchanged at 31%, and check cashing fees and other income as a
percentage of total revenues remained unchanged at 3% during the Third
Quarter of 2003 and the Third Quarter of 2004.
The pawn receivables balance increased 22% from $20,457,000 at
September 30, 2003 to $24,859,000 at September 30, 2004. Of the $4,402,000
increase, an increase of $2,217,000 was attributable to the growth in same-
store pawn receivable balances at the stores which were in operation as of
September 30, 2004 and 2003, and an increase of $2,380,000 was attributable
to the new stores opened since September 30, 2003, net of a decrease of
$195,000 at the stores closed since September 30, 2003. The net short-term
advance receivables balance increased 33% from $10,532,000 at September 30,
2003 to $14,014,000 at September 30, 2004. Of the $3,482,000 increase, a
same-store increase of $1,296,000 was attributable to the growth in short-
term advance receivable balances at the stores which were in operation as of
September 30, 2004 and 2003, an increase of $794,000 was attributable to the
new stores opened since September 30, 2003, an increase of $1,429,000 was
attributable to the consolidation of the 40 Cash & Go, Ltd. kiosks, net of a
decrease of $37,000 at the stores closed since September 30, 2003. The
Company's loss provision reserve on short-term advance receivables increased
from $405,000 at September 30, 2003 to $499,000 at September 30, 2004.
Gross profit margins on total merchandise sales were 38% during the
Third Quarter of 2004 compared to 41% during the Third Quarter of 2003.
This decrease was primarily the result of the increased mix of non-retail
bulk sales of scrap jewelry, which is typically sold at lower profit
margins. Retail merchandise margins, which exclude bulk scrap jewelry sales,
remained unchanged at 45% over the same periods. The Company's loss
provision relating to short-term advances increased from $3,009,000 in the
Third Quarter of 2003 to $4,007,000 in the Third Quarter of 2004. As a
percentage of short-term advance service charge revenues, the loss provision
increased from 26% during the Third Quarter of 2003 to 28% during the Third
Quarter of 2004. Management considers this increase to be within the
expected range of variability.
Operating expenses increased 13% to $15,353,000 during the Third
Quarter of 2004 compared to $13,534,000 during the Third Quarter of 2003,
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results and the net addition of 61 pawn and check cashing/short-term advance
stores since July 1, 2003, which is a 29% increase in store count.
Administrative expenses increased 35% to $4,208,000 during the Third Quarter
of 2004 compared to $3,110,000 during the Third Quarter of 2003 primarily as
a result of the consolidation of Cash & Go, Ltd.'s operating results and
increased costs related to additional administrative personnel, accounting
and legal fees, and other expenses necessary to support the Company's growth
strategy and increase in store counts. Interest expense decreased to $17,000
in the Third Quarter of 2004 compared to interest expense of $108,000 in the
Third Quarter of 2003 as a result of lower average outstanding debt balances
during the Third Quarter of 2004. Interest income decreased from $133,000 in
the Third Quarter of 2003 to $10,000 in the Third Quarter of 2004, due
primarily to the elimination of interest income associated with the
consolidation of Cash & Go, Ltd.
For the Third Quarter of 2004 and 2003, the Company's effective federal
income tax rates of 37% and 38%, 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, 2004 compared to the nine months ended
September 30, 2003
Total revenues increased 23% to $128,712,000 for the nine months ended
September 30, 2004 ("the Nine-Month 2004 Period") as compared to
$104,903,000 for the nine months ended September 30, 2003 ("the Nine-Month
2003 Period"). The change was comprised of an increase in revenues of
$10,320,000 generated by the 87 new pawn and check cashing/short-term
advance stores which were opened since January 1, 2003, a same-store
increase of $10,235,000 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
$4,259,000 related to the consolidation of the 40 Cash & Go, Ltd. kiosks,
net of a decrease in revenues of $1,005,000 from the four stores closed
since January 1, 2003. Same store revenues increased 10% primarily due to
increased demand for short-term consumer finance products and continued
maturation of stores opened in fiscal 2002. Of the $23,809,000 increase in
total revenues, 47%, or $11,117,000, was attributable to increased
merchandise sales, 18%, or $4,380,000 was attributable to an increase in
pawn service charges, 34%, or $8,051,000 was attributable to an increase in
short-term advance service charges, and 1% or $261,000 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 $7,541,000 in the Nine-Month
2003 Period to $11,779,000 in the Nine-Month 2004 Period. During both the
Nine-Month 2004 Period and the Nine-Month 2003 Period merchandise sales as a
percentage of total revenues was 48%, pawn service charges as a percentage
of total revenues were 20%, short-term advance service fees as a percentage
of total revenues were 30%, and check cashing fees and other income as a
percentage of total revenues were 2%.
The pawn receivables balance increased 22% from $20,457,000 at
September 30, 2003 to $24,859,000 at September 30, 2004. Of the $4,402,000
increase, an increase of $2,217,000 was attributable to the growth in same-
store pawn receivable balances at the stores which were in operation as of
September 30, 2004 and 2003, and an increase of $2,380,000 was attributable
to the new stores opened since September 30, 2003, net of a decrease of
$195,000 at the stores closed since September 30, 2003. The net short-term
advance receivables balance increased 33% from $10,532,000 at September 30,
2003 to $14,014,000 at September 30, 2004. Of the $3,482,000 increase, a
same-store increase of $1,296,000 was attributable to the growth in short-
term advance receivable balances at the stores which were in operation as of
September 30, 2004 and 2003, an increase of $794,000 was attributable to the
new stores opened since September 30, 2003, an increase of $1,429,000 was
attributable to the consolidation of the 40 Cash & Go, Ltd. kiosks, net of a
decrease of $37,000 at the stores closed since September 30, 2003. The
Company's loss provision reserve on short-term advance receivables increased
from $405,000 at September 30, 2003 to $499,000 at September 30, 2004.
Gross profit margins on total merchandise sales were 41% during both
the Nine-Month 2004 Period and the Nine-Month 2003 Period. Retail
merchandise margins, which exclude bulk scrap jewelry sales, were 45% over
the same periods. The Company's loss provision relating to short-term
advances increased from $7,137,000 in the Nine-Month 2003 Period to
$8,413,000 in the Nine-Month 2004 Period. As a percentage of short-term
advance service charge revenues, the loss provision decreased from 23%
during the Nine-Month 2003 Period to 22% during the Nine-Month 2004 Period.
Operating expenses increased 17% to $44,723,000 during the Nine-Month
2004 Period compared to $38,089,000 during the Nine-Month 2003 Period,
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results and the net addition of 83 pawn and check cashing/short-term advance
stores since January 1, 2003, which is a 44% increase in store count.
Administrative expenses increased 19% to $12,870,000 during the Nine-Month
2004 Period compared to $10,855,000 during the Nine-Month 2003 Period
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results, and increased costs related to additional administrative personnel,
accounting and legal fees, and other expenses necessary to support the
Company's growth strategy and increase in store counts. Interest expense
decreased to $60,000 in the Nine-Month 2004 Period compared to interest
expense of $412,000 in the Nine-Month 2003 Period as a result of lower
average outstanding debt balances during the Nine-Month 2004 Period.
Interest income decreased from $467,000 in the Nine-Month 2003 Period to
$42,000 in the Nine-Month 2004 Period, due primarily to the elimination of
interest income associated with the consolidation of Cash & Go, Ltd.
For the Nine-Month Period of 2004 and 2003, the Company's effective
federal income tax rates of 37% and 38%, 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 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 1.8% at September 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 September 30, 2004, the Company had $23,000,000 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, 2004
and November 4, 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 September 30, 2004, the Company's primary sources of liquidity
were $12,288,000 in cash and cash equivalents, $43,400,000 in receivables,
$18,074,000 in inventories and $23,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital of
$68,283,000 as of September 30, 2004, and total equity exceeded total
liabilities by a ratio of 8 to 1.
The Company utilized positive cash flows from operations in the Nine-
Month 2004 Period to fund investing and financing activities primarily
related to opening new stores and the reduction of debt. Net cash provided
by operating activities of the Company during the nine months ended
September 30, 2004 was $28,345,000, consisting primarily of net income of
$14,614,000 plus non-cash adjustments for depreciation, short-term advance
loss provision and stock option and warrant income tax benefit of
$2,982,000, $8,413,000 and $5,859,000 respectively, net of an increase in
service charge receivables, inventory and prepaid assets of $609,000,
$895,000 and $428,000 respectively, a decrease in accounts payable and
accrued expenses of $3,506,000, net of a change in tax balances of
$1,915,000. Net cash used by investing activities during the nine months
ended September 30, 2004 was $20,412,000, which was primarily comprised of
net cash outflows from pawn receivable activity of $6,413,000, net cash
outflows from short-term advance receivable activity of $8,668,000, and cash
paid for fixed asset additions of $5,331,000. The opening of 40 new stores
during the Nine-Month 2004 period contributed significantly to the volume
of fixed asset additions. Net cash used by financing activities was
$11,492,000 during the nine months ended September 30, 2004, which primarily
consisted of a net decrease in the Company's debt of $4,000,000, purchases
of treasury stock in the amount of $13,463,000, net of proceeds from
exercises of stock options and warrants of $5,971,000.
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 Nine-
Month 2004 Period the total cash flows from operations were $28,345,000,
while net cash outflows related to pawn receivable activity and short-term
advance receivable activity were $6,413,000 and $8,668,000, respectively.
The combined net cash flows from operations and pawn and short-term advance
receivables totaled $13,264,000 for the Nine-Month 2004 Period. For the
comparable Nine-Month 2003 Period, cash flows from operations were
$22,728,000 and net cash outflows related to pawn receivables and short-term
advance receivables were $4,678,000 and $6,979,000, respectively. The
combined net cash flows from operations and pawn and short-term advance
receivables totaled $11,071,000 for the Nine-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 quarterly report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "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 quarterly
report include, without limitation, the earnings per share discussion, the
expectation for additional store openings, the expected impact of stock
repurchases and the expectation for future operating cash flows necessary to
fund store openings. 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, 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
The Company is subject to extensive regulation in most jurisdictions in
which it operates, including jurisdictions that regulate pawn lending,
short-term advance activities and check cashing. The Company's pawnshop and
short-term advance operations in the United States are subject to, and must
comply with, extensive regulation, supervision and licensing from various
federal, state and local statutes, ordinances and regulations. These
statutes prescribe, among other things, the general terms of the loans and
the service charges and/or interest rates that may be charged. These
regulatory agencies have broad discretionary authority. The Company is also
subject to federal and state regulation relating to the reporting and
recording of certain currency transactions. The Company's pawnshop
operations in Mexico are also subject to, and must comply with, general
business, tax and consumer protection regulations from various federal,
state and local governmental agencies in Mexico. There can be no assurance
that additional state or federal statutes or regulations in either the
United States or Mexico will not be enacted or that existing laws and
regulations will not be amended at some future date which could inhibit the
ability of the Company to offer pawn loans and short-term advances,
significantly decrease the service charges for lending money, or prohibit or
more stringently regulate the sale of certain goods, any of which could
cause a significant adverse effect on the Company's future prospects. The
overall regulatory environment is described more fully in the Company's 2003
Annual Report on Form 10-K. Additional information related to federal and
state regulation of short-term advances is provided below.
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 or
restrict the ability of the Company to attract or retain customers for
County Bank, 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.
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.
Accordingly, 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 Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of September 30, 2004. Based
upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of September 30, 2004, 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) Changes in Internal Control Over Financial Reporting
There has been no significant change in the Company's internal
control over financial reporting that was identified in connection
with management's evaluation, as described above, that has
materially affected, or is reasonably likely to materially affect,
the Company's 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 November 4, 2004, the
Company issued 719,367 shares of common stock relating to the exercise of
outstanding stock warrants for an aggregate exercise price of $7,500,000
(including income tax effect). During the period from January 1, 2004
through November 4, 2004, the Company issued 499,500 shares of common stock
relating to the exercise of outstanding stock options for an aggregate
exercise price of $7,046,000 (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 November 4, 2004, the Company repurchased 623,000 shares of common
stock at an average price of $19.46 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
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits:
3 Amended and Restated Certificate of Incorporation to
Increase the Number of Authorized Shares of Common Stock
from 20,000,000 to 90,000,000
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 and
R. Douglas Orr, Chief Financial Officer
(2) Reports on Form 8-K:
July 15, 2004 Issuance of Press Release Announcing Operating
Results for the Quarter Ended June 30, 2004
Item 7. Financial Statements and Exhibits
Item 9. Regulation FD Disclosure
Item 12. Results of Operations and Financial
Condition
July 15, 2004 Issuance of Press Release Announcing Stock
Repurchase Program
Item 5. Other Events and Regulation FD Disclosure
Item 7. Financial Statements and Exhibits
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 4, 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
------ -----------
3 Amended and Restated Certificate of Incorporation to Increase
the Number of Authorized Shares of Common Stock from 20,000,000
to 90,000,000
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 and R. Douglas Orr,
Chief Financial Officer