Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2004, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
------------------------------- ---------------------------------
(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
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 [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price on the Nasdaq
National Market on June 30, 2004, the last trading date of registrant's most
recently completed second fiscal quarter is $276,126,000.
As of March 10, 2005, there were 16,080,140 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on May 26, 2005, is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2004
TABLE OF CONTENTS
-----------------
PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9a. Controls and Procedures
Item 9b. Other Information
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
SIGNATURES
PART I
------
Forward-Looking Information
This annual report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "projects," "expects,"
"may," "estimates," "should," "plans," "intends," "could," or "anticipates"
or the negative thereof, or other variations thereon, or comparable
terminology, or by discussions of strategy. Forward-looking statements in
this annual report include, without limitation, the Company's liquidity
forecast for 2005 and its expectations for new store openings and
acquisitions in 2005. 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 annual report 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 annual report. Such factors are difficult to predict and many are
beyond the control of the Company. Recently revised federal regulations
affecting the payday advance industry could affect the Company's financial
results and growth expectations in certain markets; however, the impact of
the revised regulations cannot be estimated at the current time. Other such
factors may include changes in regional, national or international economic
conditions, changes or increases in competition, 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.
Stock Split
In March 2004, the Company's Board of Directors approved a three-for-
two stock split in the form of a stock dividend to shareholders of record on
March 22, 2004. The additional shares were distributed on April 6, 2004.
All share and per share amounts (except authorized shares, treasury shares
and par value) have been retroactively adjusted to reflect the split.
Item 1. Business
-----------------
General
First Cash Financial Services, Inc. (the "Company") is a leading
provider of specialty consumer finance products. The Company currently has
292 locations in eleven U.S. states and five states in 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 loans, advancing money against
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. In addition, many of the
Company's pawn stores offer short-term advances, which are also known as
payday loans.
The Company also operates stand-alone payday advance stores in several
U.S. states. These stores provide a broad range of consumer financial
services products, including payday, or short-term advances, check cashing,
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.
For the year ended December 31, 2004, the Company's revenues were
derived as follows: 48% from merchandise sales, 19% from pawn lending
activities, 30% from short-term advance lending activities, and 3% from
other sources, primarily check cashing fees.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as
otherwise indicated, the term "Company" includes its wholly owned
subsidiaries, American Loan & Jewelry, Inc., WR Financial, Inc., Famous
Pawn, Inc., JB Pawn, Inc., Cash & Go, Inc., One Iron Ventures, Inc., Capital
Pawnbrokers, Inc., Silver Hill Pawn, Inc., Elegant Floors, Inc., First Cash,
S.A. de C.V., American Loan Employee Services, S.A. de C.V., First Cash,
Ltd., First Cash Corp., First Cash Management, LLC, First Cash, Inc., FCFS
MO, Inc., FCFS OK, Inc., and FCFS SC, Inc.
The Company's principal executive offices are located at 690 East Lamar
Blvd., Suite 400, Arlington, Texas 76011, and its telephone number is (817)
460-3947.
Industry
Specialty consumer finance represents a rapidly growing segment of the
overall financial services industry. This segment focuses on providing a
quick and convenient source of short-term credit to unbanked, underbanked
and credit-challenged customers. This segment of consumers is typically not
effectively or efficiently served by traditional lenders such as banks,
credit unions or credit-card servicers. First Cash competes directly in the
specialty consumer finance industry through both its pawn loan product and
its short-term or payday advance product.
The pawnshop industry in the United States is an established industry,
with the highest concentration of pawnshops being in the Southeast and
Southwest regions of the country. The operation of pawnshops is governed
primarily by state laws, and accordingly, states that maintain pawn laws
most conducive to profitable operations have historically seen the greatest
development of pawnshops. Management believes the U.S. pawnshop industry
is highly fragmented with approximately 15,000 stores in the country.
The three major publicly traded pawnshop companies currently operate
approximately 1,000 of the pawnshops in the United States. The Company
believes that individuals operating one to three locations own the majority
of pawnshops. Management further believes that the highly fragmented nature
of the industry is due in part to the lack of qualified management
personnel, the difficulty of developing adequate financial controls and
reporting systems, and the lack of financial resources.
The pawnshop industry in Mexico is substantially underdeveloped as
compared to the U.S. Management believes the Mexican pawnshop industry is
somewhat fragmented, as in the U.S., but with fewer than 2,000 stores in the
entire country. Management estimates that the three largest operators,
including First Cash, account for approximately 20% of all pawn stores.
First Cash is one of few U.S. companies with a presence in Mexico and the
only major publicly traded U.S. company that is doing business there. The
Company currently operates over 100 pawnshops in Mexico and sees significant
opportunity due to the large potential consumer base and limited competition
in new and existing Mexican markets.
The short-term or payday advance industry is a relatively new industry
and is experiencing rapid growth in the U.S. A leading industry analyst
estimates that there are over 21,500 payday advance locations throughout the
United States. The number of industry-wide payday advance locations is
expected to double over the next decade. There are several privately held
chains that operate from 100 up to approximately 1,200 stores each. The
eight largest publicly held operators of payday advance stores, which
includes First Cash Financial Services, Inc., operate a combined total of
over 5,700 stores. There is currently not a similar short-term or payday
advance industry in Mexico due to relatively few Mexican consumers that
utilize checking accounts in a manner that is conducive to payday advance
lending.
Business Strategy
The Company's primary business plan is to significantly expand its
operations by opening new pawnshops and payday advance stores. In addition,
it will continue to remain focused on increasing the revenues and operating
profits in its existing stores.
New Store Openings
The Company has opened 118 new pawn stores and 66 new payday advance
stores since its inception and currently intends to open both additional
pawn stores and payday advance stores in locations where management believes
appropriate demand and other favorable conditions exist. During the years
ended December 31, 2004, 2003 and 2002, the Company opened 40, 31 and 25 new
pawn stores, respectively, and over the same three years, the Company opened
12, 16 and 13 new payday advance stores, respectively.
Management seeks to locate new stores where demographics are favorable
and competition is limited. It is the Company's experience that after a
suitable location has been identified and a lease and licenses are obtained,
a new store can be open for business within six to eight weeks. The
investment required to open a new pawn store includes store operating cash,
inventory, funds available for pawns loans, leasehold improvements, store
fixtures, security systems, computer equipment and start-up losses.
Although the total investment varies and is difficult to predict for each
location, it has been the Company's experience that between $200,000 and
$335,000 is required to fund a new pawn store for the first six months of
operation. The Company also estimates that between $200,000 and $335,000 is
required to fund a new payday advance store for the first six months of
operation, which includes investments for leasehold improvements, security
and computer equipment, funds available for short-term advances, store
operating cash, and start-up losses.
The Company currently plans to continue its expansion in existing
markets, with the primary focus being pawn stores, primarily in Mexico,
and secondarily, payday advance stores in the U.S. The Company continues
to evaluate new markets with favorable demographics and regulatory
environments. The Company has an organizational structure that it believes
is capable of supporting a larger, multi-country and multi-state store base.
Enhance Productivity of Existing and Newly Opened Stores
The primary factors affecting the profitability of the Company's
existing store base are the volume of retail sales, the gross profit on
retail sales, the level of pawn loans outstanding, the level of short-term
advances outstanding, the volume of check cashing and other consumer
financial services, and the control of store expenses, including the loss
provision expense related to short-term advances. To increase customer
traffic, which management believes is a key determinant to increasing its
stores' profitability, the Company has taken several steps to distinguish
its stores from traditional pawn and check cashing/short-term advance stores
and to make customers feel more comfortable. In addition to well-lit
parking facilities, the stores' exteriors typically display an attractive
and distinctive awning similar to those used by contemporary convenience and
video rental stores. The Company also has upgraded or refurbished the
interior of certain stores and improved merchandise presentation by
categorizing items into departments, improving the lighting and installing
better in-store signage.
The Company has implemented an employee-training program for both
store and corporate-level personnel that stresses productivity and
professionalism. The Company utilizes a proprietary computer information
system that provides fully integrated functionality to support point-of-sale
retail operations, inventory management and loan processing. Each store is
connected on a real-time basis to a secured off-site data center located in
Allen, Texas, that houses the centralized database and operating system.
The system provides management the ability to continuously monitor store
transactions and operating results. The Company maintains a well-trained
internal audit staff that conducts regular store visits to test compliance
with financial and operational controls. Management believes that the
current operating and financial controls and systems are adequate for the
Company's existing store base, and can accommodate reasonably foreseeable
growth in the near term.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and
the payday advance industry, as well as the availability of certain regional
chains and "mom & pop" sole proprietors willing to sell their stores, the
Company believes that certain acquisition opportunities may arise from time
to time. The timing of any future acquisitions is based on identifying
suitable stores and purchasing them on terms that are viewed as favorable to
the Company. Before making an acquisition, management typically studies a
demographic analysis of the surrounding area, considers the number and size
of competing stores, and researches regulatory issues. Specific pawn store
acquisition criteria includes an evaluation of the volume of annual pawn
transactions, outstanding receivable balances, historical redemption rates,
the quality and quantity of inventory on hand, and location and condition of
the facility, including lease terms. Factors involved in evaluating the
acquisition of payday advance stores include the annual volume of
transactions, location and condition of facilities, and a demographic
evaluation of the surrounding area to determine the potential for the
Company's short-term advance product.
Pawn Lending Activities
The Company's pawn stores advance money against the security of
pledged goods. The pledged goods are tangible personal property generally
consisting of jewelry, electronic equipment, tools, sporting goods and
musical equipment. The pledged goods provide the only security to the
Company for the repayment of the pawn, as pawns cannot result in personal
liability to the borrower. Therefore, the Company does not investigate the
creditworthiness of the borrower, relying instead on the marketability and
sale value of pledged goods as a basis for its credit decision. Receivables
from pawn loans at December 31, 2004 and 2003 were $23,429,000 and
$20,037,000, respectively.
At the time a pawn transaction is entered into, an agreement, commonly
referred to as a pawn ticket, is delivered to the borrower for signature
that sets forth, among other items, the name and address of the pawnshop,
borrower's name, borrower's identification number from his/her driver's
license or other identification, date, identification and description of the
pledged goods, including applicable serial numbers, amount financed, pawn
service charge, maturity date, total amount that must be paid to redeem the
pledged goods on the maturity date, and the annual percentage rate.
Pledged property is held through the term of the pawn, which is 30 days
in Texas, South Carolina, Missouri, Virginia, and Oklahoma, with an
automatic extension period of 15 to 60 days depending on state laws, unless
the pawn is earlier paid or renewed. In Maryland, Washington, D.C., and
Mexico, pledged property is held for 30 days. In the event the borrower
does not pay or renew a pawn within 90 days in South Carolina and Missouri,
60 days in Texas and Oklahoma, 45 days in Virginia, and 30 days in Maryland,
Washington, D.C., and Mexico, the unredeemed collateral is forfeited to the
Company and becomes inventory available for general liquidation or sale
in one of the Company's stores. If a pawn is not repaid prior to the
expiration of the automatic extension period, if applicable, the property is
forfeited to the Company and transferred to inventory at a value equal to
the principal amount of the loan, exclusive of accrued interest.
The amount the Company is willing to finance typically is based on a
percentage of the estimated sale value of the collateral. There are no
minimum or maximum pawn to fair market value restrictions in connection with
the Company's lending activities. The basis for the Company's determination
of the sale value includes such sources as catalogs, blue books, on-line
auction sites and newspapers. The Company also utilizes its integrated
computer information system to recall recent selling prices of similar
merchandise in its own stores. These sources, together with the employees'
experience in selling similar items of merchandise in particular stores,
influence the determination of the estimated sale value of such items. The
Company does not utilize a standard or mandated percentage of estimated sale
value in determining the amount to be financed. Rather, the employee has
the authority to set the percentage for a particular item and to determine
the ratio of pawn amount to estimated sale value with the expectation that,
if the item is forfeited to the pawnshop, its subsequent sale should yield a
gross profit margin consistent with the Company's historical experience. It
is the Company's policy to value merchandise on a conservative basis
to avoid the risks associated with over-valuation. The recovery of the
principal and realization of gross profit on sales of inventory is dependent
on the Company's initial assessment of the property's estimated sale value.
Improper assessment of the sale value of the collateral in the lending
function can result in reduced marketability of the property and sale of the
property for an amount less than the principal amount pawned.
The Company contracts for a pawn service charge in lieu of interest to
compensate it for the pawn loan. The statutory service charges on pawns at
its Texas stores range from 12% to 240% on an annualized basis depending on
the size of the pawn, and from 39% to 240% on an annualized basis at the
Company's Oklahoma stores. Pawns made in the Maryland stores bear service
charges of 144% to 240% on an annualized basis with a $6 minimum charge per
month, while pawns in Virginia earn 120% to 144% annually with a $5 minimum
charge per month. In Washington, D.C., a flat $2 charge per month applies
to all pawns up to $40, and an 18% to 60% annualized service charge applies
to pawns of greater than $40. In Missouri, pawns bear a total service and
storage charge of 180% to 240% on an annualized basis with a $2.50 minimum
charge per month, and South Carolina rates range from 100% to 300%. In
Mexico, pawns bear an annualized rate of 240%. As of December 31, 2004, the
Company's average pawn per pawn ticket was approximately $62. Service
charge revenues for pawns during the fiscal years ended December 31, 2004,
2003 and 2002 were $34,663,000, $28,804,000 and $21,723,000, respectively,
and accounted for approximately 39%, 40% and 37%, respectively, of the
Company's total service charge revenues. For the fiscal years ended
December 31, 2004, 2003 and 2002, the Company's annualized yields on average
pawn balances were 159%, 157% and 143%, respectively.
Short-term Advance Activities
The Company's short-term (or payday) advance stores and selected pawn
stores, make short-term advances for a term of thirty days or less. To
qualify for a short-term advance, customers generally must have proof of
steady income, a checking account with a minimum of returned items within a
specified period, and valid identification. Upon completing an application
and subsequent approval, the customer writes a check on their personal
checking account for the amount of the advance, plus applicable fees. At
maturity, the customer may either return to the store and pay off the
advance with cash, in which case the check is returned to the customer, or
the store can deposit the customer's check into its checking account.
Receivables from short-term advances, net of short-term advance loss
valuation allowances, at December 31, 2004 and 2003 were $15,465,000 and
$13,759,000, respectively. Short-term advance transactions are subject to
federal truth-in-lending regulations and fair debt collection practice
regulations. In addition, state and federal regulations exist in certain
markets, which, among other things, limit the number of consecutive short-
term advances a customer can obtain or limit the total transactions over a
specified time period.
Fees charged for short-term advances are generally regulated by state
law and range from 13.9% to 40% of the amount advanced per transaction.
Service charge revenues for short-term advances during the fiscal years
ended December 31, 2004, 2003 and 2002 were $54,123,000, $42,939,000 and
$36,473,000, respectively, and accounted for approximately 61%, 60% and 63%,
respectively, of the Company's total service charge revenues.
The bank returns a significant number of customer short-term advance
checks deposited by the Company because there are insufficient funds in the
customer's account. However, the Company subsequently collects a large
percentage of these bad debts by redepositing the customer's check or
subsequent cash repayment by the customer. The profitability of the
Company's short-term advance operations is dependent upon adequate
collection of these returned items. The short-term loss valuation allowances
were $552,000 and $497,000 at December 31, 2004 and 2003, respectively.
Merchandise Sales
The Company's merchandise sales are primarily retail sales to the
general public in its pawn stores. The items retailed are primarily used
jewelry, consumer electronics, tools, musical instruments, and sporting
goods. The Company also melts down limited quantities of scrap gold jewelry
and sells the gold at market commodity prices. Total merchandise sales
during the years ended December 31, 2004, 2003 and 2002 accounted for
approximately 48% of the Company's total revenues in each of these periods.
For the years ended December 31, 2004, 2003 and 2002 the Company realized
gross profit margins on merchandise sales of 40%, 41% and 42%, respectively.
The Company acquires merchandise inventory primarily through forfeited
pawns and purchases of used goods directly from the general public.
Merchandise acquired by the Company through defaulted pawns is carried
in inventory at the amount of the related pawn loan, exclusive of any
accrued service charges. Management believes that this practice lessens the
likelihood that the Company will incur significant, unexpected inventory
devaluations.
The Company does not provide financing to purchasers of its merchandise
nor does it provide a standard or automatic warranty on merchandise sold.
Nevertheless, the Company may, at its discretion, refund purchases if
merchandise is returned because it was damaged or not in good working order
when purchased. The Company permits its customers to purchase inventory on
a "layaway" plan. Should the customer fail to make a required payment, the
item is returned to inventory and previous payments are forfeited to the
Company.
Operations and Locations
As of December 31, 2004, the Company operated stores in the following
markets:
Pawn Payday Advance Total
Stores Stores Stores
------------------------------
United States:
Texas (1)................ 58 46 104
Maryland................. 21 - 21
California............... - 15 15
Illinois................. - 10 10
District of Columbia (1). 2 7 9
South Carolina (1)....... 8 - 8
Oregon................... - 6 6
Washington............... - 3 3
Missouri................. 3 - 3
Oklahoma (1)............. 3 - 3
Virginia................. 2 - 2
Mexico:
Tamaulipas............... 28 - 28
Nuevo Leon............... 27 - 27
Coahuila................. 22 - 22
Chihuahua................ 21 - 21
Durango.................. 2 - 2
------------------------------
Total 197 87 284
==============================
(1) Pawn stores in these markets also offer the payday or
short-term advance product.
In addition, at December 31, 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.
The Company seeks to establish clusters of several stores in a specific
geographic area in order to achieve certain economies of scale relative to
supervision, purchasing and marketing. In Texas, such clusters have been
established in the Dallas/Fort Worth metropolitan area, the greater Houston
metropolitan area, the Rio Grande Valley area, the Corpus Christi area, the
El Paso area, the central Texas area (Austin, San Antonio and surrounding
cities) and the west Texas area. Store clusters have also been established
in the St. Louis, Missouri area, the Oklahoma City, Oklahoma area, in
Washington, D.C. and its surrounding Maryland suburbs, in Baltimore,
Maryland, in northern California, in the Chicago, Illinois area, in South
Carolina, in the Pacific Northwest, and in northern Mexico.
Financial information about geographic areas is provided in Note 13 of
the Notes to the Consolidated Financial Statements.
Pawn Store Operations
The typical Company pawn store is a freestanding building or part of a
small retail strip shopping center with adequate, well-lit parking.
Management has established a standard store design intended to distinguish
the Company's stores from the competition. The design consists of a well-
illuminated exterior with a distinctive awning and a layout similar to a
contemporary convenience store or video rental store. The Company's stores
are typically open six to seven days a week from 9:00 a.m. to between 6:00
p.m. and 9:00 p.m.
The Company's computer system permits a store manager or clerk to
recall rapidly the cost of an item in inventory, the date it was purchased
as well as the prior transaction history of a particular customer. It also
facilitates the timely valuation of goods by showing values assigned to
similar goods in the past. The Company has networked its stores to permit
the Company's headquarters to more efficiently monitor each store's
operations, including merchandise sales, service charge revenues, pawns
written and redeemed, and changes in inventory.
The Company attempts to attract retail shoppers seeking bargain prices
through the use of seasonal promotions, special discounts for regular
customers, prominent display of impulse purchase items such as jewelry and
tools, tent sales and sidewalk sales, and a layaway purchasing plan. The
Company attempts to attract and retain pawn customers by lending a
competitive percentage of the estimated sale value of items presented for
pledge and by providing quick financing, renewal and redemption services in
an appealing atmosphere.
Each pawnshop employs a manager, one or two assistant managers, and
between one and eight sales personnel, depending upon the size, sales volume
and location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to
an area supervisor who typically oversees four to seven store managers.
Each supervisor reports to one of three regional vice-presidents.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make pawns that achieve
optimum redemption rates, to be effective sales people and to provide prompt
and courteous service. Therefore, the Company trains its employees through
direct instruction and on-the-job pawn and sales experience. The new
employee is introduced to the business through an orientation and training
program that includes on-the-job training in lending practices, layaways,
merchandise valuation, and general administration of store operations.
Certain experienced employees receive training and an introduction to the
fundamentals of management to acquire the skills necessary to advance into
management positions within the organization. Management training typically
involves exposure to income maximization, recruitment, inventory control and
cost efficiency. The Company maintains a performance-based compensation
plan for all store employees based on sales, gross profit and special
promotional contests.
Payday Advance Operations
The Company's payday advance locations are typically part of a retail
strip shopping center with adequate, well-lit parking. Management has
established a standard store design intended to distinguish the Company's
stores from the competition. The design consists of a well-illuminated
exterior with a lighted sign, and distinctive, conservative window signage.
The interiors typically feature an ample lobby, separated from employee
work areas by floor-to-ceiling teller windows. The Company's stores are
typically open six to seven days a week from 9:00 a.m. to between 6:00 p.m.
and 9:00 p.m.
Computer operating systems in the Company's payday advance stores allow
a store manager or clerk to recall rapidly customer check cashing histories,
short-term advance histories, and other vital information. The Company
attempts to attract customers primarily through television advertisements
and yellow page advertisements.
Each check cashing/short-term loan store employs a manager, and between
one and eight tellers, depending upon the size, sales volume and location of
the store. The store manager is responsible for supervising personnel and
assuring that the store is managed in accordance with Company guidelines
and established policies and procedures. Each store manager reports to an
area supervisor who typically oversees two to five store managers. Each
supervisor reports to one of two regional vice-presidents.
The kiosks operated by the Cash & Go, Ltd., joint venture are located
inside convenience stores. Each kiosk is a physically secured area with its
own counter space within the convenience store. Each kiosk is typically
staffed by one or two employees at any point in time.
Competition
The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may
adversely affect the Company's revenues, profitability, and ability to
expand.
The Company competes primarily with other pawn store operators and
check cashing/short-term advance operators. There are three publicly held
pawnshop operators and five publicly held payday advance/check cashing
operators, all of which have more locations than the Company. There are
several privately held operators of payday advance stores, some of which are
significantly larger than the Company. In addition, both the pawnshop and
payday advance industries are characterized by a large number of independent
owner-operators, some of whom own and operate multiple locations. The
Company believes that the primary elements of competition in these
businesses are store location, the ability to lend competitive amounts on
pawns and short-term advances, customer service, and management of store
employees. In addition, the Company competes with financial institutions,
such as consumer finance companies, which generally lend on an unsecured as
well as a secured basis. Other lenders may and do lend money on terms more
favorable than those offered by the Company. Many of these competitors have
greater financial resources than the Company.
In its retail operations, the Company's competitors include numerous
retail and wholesale stores, including jewelry stores, discount retail
stores, consumer electronics stores and other pawnshops. Competitive
factors in the Company's retail operations include the ability to provide
the customer with a variety of merchandise items at attractive prices. Many
retailers have significantly greater financial resources than the Company.
Governmental Regulation
General
The Company is subject to extensive regulation in most jurisdictions in
which it operates, including jurisdictions that regulate pawn lending,
short-term advances 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.
State and Local Regulations
The Company operates in seven states that have licensing and/or fee
regulations on pawns, including Texas, Oklahoma, Maryland, Virginia, South
Carolina, Washington, D.C., and Missouri. The Company is licensed in each
of the states in which a license is currently required for it to operate as
a pawnbroker. The Company's fee structures are at or below the applicable
rate ceilings adopted by each of these states. In addition, the Company is
in compliance with the net asset requirements in states where it is required
to maintain certain levels of liquid assets for each pawn store it operates
in the applicable state.
Under some county and municipal ordinances, pawn stores must provide
local law enforcement agencies with copies of all daily transactions
involving pawns and over-the-counter purchases. These daily transaction
reports are designed to provide the local law enforcement officials with a
detailed description of the goods involved, including serial numbers, if
any, and the name and address of the owner obtained from a valid
identification card. Goods held to secure pawns or goods purchased which are
determined to belong to an owner other than the borrower or seller are
subject to recovery by the rightful owners. Historically, the Company has
not found these claims to have a material adverse effect upon results of
operations. The Company does not maintain insurance to cover the costs of
returning merchandise to its rightful owners.
The Company also operates in states that have licensing, and/or fee
regulations on check cashing and payday or short-term advances, including
California, Washington, Oklahoma, South Carolina, Oregon, Illinois and
Washington, D.C. The Company is licensed in each of the states in which a
license is currently required for it to operate as a check casher and/or
short-term advance provider. In addition, in some jurisdictions, check
cashing companies or money transmission agents are required to meet
minimum bonding or capital requirements and are subject to record-keeping
requirements.
In Texas, which does not have favorable short-term lending service
charge rates, the Company has entered into an agreement with County Bank of
Rehoboth Beach, Delaware, a federally insured State of Delaware chartered
financial institution, to act as a loan servicer within the State of Texas
for County Bank. The Company is licensed as a regulated servicing agent by
the State of Texas. As compensation for the Company acting as County Bank's
loan servicer, the Company is entitled to purchase a participation in the
loans made by County Bank. The Company's ability to continue to maintain
its current relationship with County Bank and to continue to service County
Bank loans within the state of Texas is subject to County Bank's ability to
continue to export its loan product to the state of Texas. There can be no
assurance that County Bank will be able to continue to export its loan
product to the state of Texas, and the bank's failure to do so could have a
materially adverse impact on the Company's operations and financial
condition.
Federal Regulations
There is currently no direct federal regulation of the pawn and payday
advance industry. The federal government does, however, regulate the
ability of national and state chartered banks to participate in the payday
advance industry. The U.S. Office of Comptroller of the Currency has
significantly restricted the ability of nationally chartered banks to
establish or maintain relationships with loan servicers in order to
make out-of-state payday advance loans. The Company does not currently
maintain nor intend in the future to establish loan-servicing relationships
with nationally chartered banks. In 2003, the Federal Deposit Insurance
Corporation ("FDIC"), which regulates the ability of state chartered banks
to enter into relationships with out of state payday loan servicers, issued
guidelines 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 FDIC guidelines for payday lending.
On March 2, 2005, the FDIC issued revised payday lending guidelines for
FDIC-supervised banks, such as County Bank. The revised guidelines include
a requirement that such banks develop procedures to ensure that a payday
loan is not provided to any customer with payday loans outstanding from any
bank for more than three months in the previous twelve months. It currently
remains to be determined what procedures may be proposed by the lending
banks or accepted by the FDIC in order to meet these guidelines. The
Company and County Bank are currently in the process of reviewing the
revised guidelines and expect to implement any necessary changes in lending
procedures to comply with them. The Company's payday advance revenues
from Texas locations totaled $30,554,000 in Fiscal 2004 and represented
approximately 17% of the Company's total revenues for 2004. The Company
expects that implementation of the revised guidelines could have a negative
effect on some portion of its payday lending revenues in its Texas
locations, which are the Company's only locations which currently use a bank
relationship subject to the FDIC's payday lending guidelines. Until the
Company and County Bank complete their review of the revised guidelines and
the FDIC approves the revised procedures expected to be developed by County
Bank and/or other banks providing payday loans, the exact timing and amount
of the financial impact of the revised guidelines cannot be estimated.
Under the Bank Secrecy Act regulations of the U.S. Department of the
Treasury (the "Treasury Department"), transactions involving currency in an
amount greater than $10,000 or the purchase of monetary instruments for cash
in amounts from $3,000 to $10,000 must be recorded. In general, every
financial institution, including the Company, must report each deposit,
withdrawal, exchange of currency or other payment or transfer, whether by,
through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any person and result in
either cash in or cash out totaling more than $10,000 during any one
business day.
The Money Laundering Suppression Act of 1994 added a section to the
Bank Secrecy Act requiring the registration of "money services businesses,"
like the Company, that engage in check cashing, currency exchange, money
transmission, or the issuance or redemption of money orders, traveler's
checks, and similar instruments. The purpose of the registration is to
enable governmental authorities to better enforce laws prohibiting money
laundering and other illegal activities. The regulations require money
services businesses to register with the Treasury Department by filing a
form, adopted by the Financial Crimes Enforcement Network of the Treasury
Department ("FinCEN"), and to re-register at least every two years
thereafter. The regulations also require that a money services business
maintain a list of names and addresses of, and other information about, its
agents and that the list be made available to any requesting law enforcement
agency (through FinCEN). The agent list must be updated annually.
In March 2000, FinCEN adopted additional regulations, implementing the
Bank Secrecy Act that is also addressed to money services businesses. These
regulations require money services businesses, such as the Company, to
report suspicious transactions involving at least $2,000 to FinCEN. The
regulations generally describe three classes of reportable suspicious
transactions - one or more related transactions that the money services
business knows, suspects, or has reason to suspect (1) involve funds derived
from illegal activity or are intended to hide or disguise such funds, (2)
are designed to evade the requirements of the Bank Secrecy Act, or (3)
appear to serve no business or lawful purpose.
Under the USA PATRIOT Act passed by Congress in 2001, the Company is
required to maintain an anti-money laundering compliance program. The
program must include (1) the development of internal policies, procedures
and controls; (2) the designation of a compliance officer; (3) an ongoing
employee-training program; and (4) an independent audit function to test the
program. The United States Department of Treasury is expected to issue
regulations specifying the appropriate features and elements of the anti-
money laundering compliance programs for the pawnbrokering and short-term
advance industries.
The Gramm-Leach-Bliley Act requires the Company to generally protect
the confidentiality of its customers' nonpublic personal information and to
disclose to its customers its privacy policy and practices, including those
regarding sharing the customers' nonpublic personal information with third
parties. Such disclosure must be made to customers at the time the customer
relationship is established, at least annually thereafter, and if there is a
change in the Company's privacy policy.
With respect to firearms sales, the Company must comply with the
regulations promulgated by the Department of the Treasury-Bureau of Alcohol,
Tobacco and Firearms, which requires firearms dealers to maintain a
permanent written record of all firearms that it receives or sells. The
Company does not currently take firearms as pawn collateral nor does it sell
firearms to the public.
Proposed Regulations
Governmental action to prohibit or restrict payday or 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 generally charged by credit-
card issuers to a more creditworthy consumer. The consumer groups and media
stories often 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.
Legislation and regulatory action at the state level that affects
consumer lending has recently become effective in a few states and may be
passed in other states. The Company intends to continue, with others in the
short-term advance industry, to oppose legislative or regulatory action that
would prohibit or restrict consumer access to the payday advance product.
If legislative or regulatory action with that effect were taken on the
federal level or in states such as Texas, in which the Company has a
significant number of stores, that action could have a material, adverse
effect on the Company's payday advance-related activities and revenues.
There can be no assurance that additional local, state, or federal
legislation will not be enacted or that existing laws and regulations will
not be amended, which would have a materially adverse impact on the
Company's operations and financial condition.
Employees
The Company had approximately 1,822 employees as of March 10, 2005,
including approximately 103 persons employed in executive, administrative
and accounting functions. In addition, Cash & Go, Ltd. had approximately 92
employees as of March 10, 2005. None of the Company's employees are covered
by collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
First Cash Website
The Company's primary website is at http://www.firstcash.com. The
Company makes available, free of charge, at its corporate website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, as
soon as reasonably practicable after they are electronically filed with the
SEC.
Insurance
The Company maintains fire, casualty, theft and public liability
insurance for each of its pawn stores and check cashing/short-term advance
locations in amounts management believes to be adequate. The Company
maintains workers' compensation insurance in Maryland, Missouri, California,
Virginia, Washington, Oregon, South Carolina, Illinois, Washington, D.C.,
Oklahoma, as well as excess employer's indemnification insurance in Texas
and equivalent coverage in Mexico. The Company is a non-subscriber under
the Texas Workers' Compensation Act.
Item 2. Properties
-------------------
The Company owns the real estate and buildings for three of its pawn
stores and leases 290 pawn and check cashing/short-term advance locations
that are currently open or are in the process of opening. Leased facilities
are generally leased for a term of three to five years with one or more
options to renew. The Company's existing leases expire on dates ranging
between 2005 and 2016. All current store leases provide for specified
periodic rental payments ranging from approximately $600 to $9,600 per
month.
Most leases require the Company to maintain the property and pay the
cost of insurance and property taxes. The Company believes that termination
of any particular lease would not have a materially adverse effect on the
Company's operations. The Company's strategy is generally to lease, rather
than purchase, space for its pawnshop and payday advance locations unless
the Company finds what it believes is a superior location at an attractive
price. The Company believes that the facilities currently owned and leased
by it as pawn stores and payday advance locations are suitable for such
purpose. The Company considers its equipment, furniture and fixtures to be
in good condition.
The Company currently leases approximately 18,000 square feet in
Arlington, Texas for its executive offices. The lease, which expires April
30, 2010, currently provides for monthly rental payments of approximately
$24,000. The Company's 50% owned joint venture, Cash & Go, Ltd. leases its
kiosk locations under operating leases generally with terms ranging from one
to five years, with renewal options for certain locations. The joint
venture's existing leases expire on dates ranging between 2005 and 2009.
All current Cash and Go, Ltd. leases provide for specified periodic rental
payments ranging from approximately $1,100 to $1,700 per month.
Item 3. Legal Proceedings
--------------------------
The Company is from time to time a defendant (actual or threatened) in
certain lawsuits and arbitration claims encountered in the ordinary course
of its business, the resolution of which, in the opinion of management,
should not have a materially adverse effect on the Company's financial
position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of Fiscal 2004.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "FCFS". The following table sets forth the quarterly high
and low closing sales prices per share for the Common Stock, as reported by
the Nasdaq National Market, which have been adjusted for the Company's stock
split on April 6, 2004.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2004
High ............... $24.30 $24.73 $21.42 $27.35
Low ................ 16.93 19.60 16.85 20.34
2003
High ............... $ 7.15 $10.09 $15.99 $18.03
Low ................ 5.71 6.63 9.40 13.36
On March 10, 2005, the closing sales price for the Common Stock as
reported by the Nasdaq National Market was $21.20 per share. On March 10,
2005, there were approximately 58 stockholders of record of the Common
Stock.
No cash dividends have been paid by the Company on its Common Stock.
The dividend and earning retention policies are reviewed by the Board of
Directors of the Company from time to time in light of, among other things,
the Company's earnings, cash flows, and financial position. The Company's
revolving credit facility contains provisions that allow the Company to pay
cash dividends within certain parameters.
During the period from October 1, 2004 through December 31, 2004, the
Company issued 486,000 shares of common stock relating to the exercise of
outstanding stock options and warrants for an aggregate exercise price of
$7,395,000, including income tax benefit. While the issuance of the
derivative securities to officers and employees was exempt under Section
4(2) of the Act, the resale was registered under the Act.
Issuer Purchases of Equity Securities
In July 2004, the Company's Board of Directors authorized a stock
repurchase program to permit future repurchases of up to 1,600,000 shares of
the Company's outstanding common stock. The following table provides the
information with respect to purchases made by the Company of shares of its
common stock during each month of 2004 that the program was in effect.
Total Maximum
Number of Number
Total Average Shares Purchased Of Shares
Number Price as Part that May Yet
Of Shares Paid of Publicly Be Purchased
Purchased Per Share Announced Plan Under the Plan
--------- --------- -------------- --------------
July 1 through
July 31, 2004 270,983 $20.02 270,983 1,329,017
August 1 through
August 31, 2004 337,032 19.02 337,032 991,985
September 1 through
September 30, 2004 14,700 19.06 14,700 977,285
October 1 through
December 31, 2004 - - - 977,285
------- -------
Total 622,715 $19.46 622,715
======= =======
Item 6. Selected Financial Data
--------------------------------
The information below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 and the Company's Consolidated Financial Statements and
related notes thereto required by Item 8.
Year Ended December 31,
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(in thousands, except per share amounts and certain operating data)
Income Statement Data:
Revenues:
Merchandise sales $ 86,745 $ 69,808 $ 56,916 $ 53,893 $ 53,177
Pawn service charges 34,663 28,804 21,723 19,714 20,585
Short-term advance
service charges 54,123 42,939 36,473 33,314 26,012
Check cashing fees 3,030 2,749 2,659 2,264 2,216
Other 1,252 1,168 1,022 1,242 1,737
-------- -------- -------- -------- --------
179,813 145,468 118,793 110,427 103,727
-------- -------- -------- -------- --------
Cost of Revenues:
Cost of goods sold 52,056 41,110 32,890 34,619 34,366
Short-term advance
loss provision 11,559 9,879 8,669 8,684 6,346
Check cashing returned
items expense 252 233 258 195 153
-------- -------- -------- -------- --------
63,867 51,222 41,817 43,498 40,865
-------- -------- -------- -------- --------
Gross Profit 115,946 94,246 76,976 66,929 62,862
-------- -------- -------- -------- --------
Expenses:
Store operating expenses 61,063 51,814 45,163 39,782 38,337
Interest expense 73 472 939 2,307 3,749
Interest income (67) (595) (645) (912) (890)
Depreciation 4,173 3,019 2,548 2,283 2,612
Amortization - - - 1,530 1,694
Administrative expenses 17,837 14,807 11,580 9,420 8,217
-------- -------- -------- -------- --------
83,079 69,517 59,585 54,410 53,719
-------- -------- -------- -------- --------
Income before income taxes 32,867 24,729 17,391 12,519 9,143
Provision for income taxes 12,161 9,397 6,451 4,507 3,476
-------- -------- -------- -------- --------
Income from continuing operations 20,706 15,332 10,940 8,012 5,667
-------- -------- -------- -------- --------
Discontinued operations
Income (loss) from discontinued
operations, net of taxes - - - 33 (765)
Loss on sale of subsidiary,
net of tax - - - (175) -
-------- -------- -------- -------- --------
Income (loss) from discontinued
operations - - - (142) (765)
-------- -------- -------- -------- --------
Cumulative effect of change
in accounting principle,
net of taxes - (357) - - (2,287)
-------- -------- -------- -------- --------
Net income $ 20,706 $ 14,975 $ 10,940 $ 7,870 $ 2,615
======== ======== ======== ======== ========
Net income per share:
Basic:
Income from continuing
operations $ 1.31 $ 1.09 $ 0.83 $ 0.61 $ 0.42
Income (loss) from
discontinued operations - - - (0.01) (0.05)
Cumulative effect of change
in accounting principle - (0.02) - - (0.17)
-------- -------- -------- -------- --------
Net income $ 1.31 $ 1.07 $ 0.83 $ 0.60 $ 0.20
======== ======== ======== ======== ========
Diluted:
Income from continuing
operations $ 1.22 $ 0.97 $ 0.76 $ 0.58 $ 0.42
Income (loss) from
discontinued operations - - - (0.01) (0.05)
Cumulative effect of change
in accounting principle - (0.02) - - (0.17)
-------- -------- -------- -------- --------
Net income $ 1.22 $ 0.95 $ 0.76 $ 0.57 $ 0.20
======== ======== ======== ======== ========
Unaudited pro forma amounts
assuming retroactive
application of change in
accounting principle:
Revenues from continuing
operations $ 179,813 $ 152,162 $ 125,886 $ 117,260 $ 107,239
Income from continuing
operations 20,706 15,362 10,790 7,951 5,564
Basic earnings per share
from continuing operations 1.31 1.09 0.83 0.61 0.42
Diluted earnings per share
from continuing operations 1.22 0.97 0.76 0.58 0.42
Operating Data:
Company operated stores:
Locations in operation:
Beginning of the year 235 190 158 148 147
Acquisitions - - - 7 2
Opened 52 47 38 11 2
Consolidated/closed (3) (2) (6) (8) (3)
-------- -------- -------- -------- --------
End of the year 284 235 190 158 148
======== ======== ======== ======== ========
End of year location counts:
Pawn-only stores 127 89 57 35 36
Pawn stores offering payday
advances 70 71 74 77 80
Payday advance stores 87 75 59 46 32
-------- -------- -------- -------- --------
End of the year 284 235 190 158 148
======== ======== ======== ======== ========
Pawn receivables $ 23,429 $ 20,037 $ 16,624 $ 13,849 $ 14,142
Average pawn receivables
balance per pawn store $ 119 $ 125 $ 127 $ 124 $ 122
Average inventory per
pawn store $ 90 $ 97 $ 104 $ 113 $ 148
Annualized inventory turnover 3.1x 2.8x 2.7x 2.3x 1.8x
Gross profit percentage on
merchandise sales 40.0% 41.1% 42.2% 35.8% 35.4%
Short-term advance receivables
in pawn stores $ 2,974 $ 3,414 $ 3,550 $ 4,200 $ 3,911
Average short-term advance
receivables in pawn stores
offering short-term advances 43 47 51 57 51
Short-term advance receivables
in payday advance stores
(excluding Cash & Go, Ltd.) $ 10,967 $ 8,609 $ 7,140 $ 5,507 $ 3,990
Average short-term advance
receivables in payday
advance stores (excluding
Cash & Go, Ltd.) 126 115 121 120 125
Cash & Go, Ltd. joint venture
kiosks:
End of year location counts 40 40 59 59 32
Short-term advance receivables $ 1,524 $ 1,736 $ 1,790 $ 1,885 $ 1,364
Average receivables balance
per location $ 38 $ 43 $ 30 $ 32 $ 43 -
Balance Sheet Data:
Working capital $ 79,985 $ 60,840 $ 47,187 $ 8,540 $ 41,835
Total assets 160,939 140,064 130,999 122,806 119,118
Long-term liabilities 7,351 11,955 33,525 5,277 44,833
Total liabilities 16,893 22,841 44,479 48,703 53,464
Stockholders' equity 144,046 117,223 86,520 74,103 65,654
Item 7. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
Special Note Regarding Forward-Looking Statements
Some of the statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, and elsewhere in this Annual
Report on Form 10-K, are "forward-looking statements," as that term is
defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements regarding our business,
financial condition, results of operations, cash flows, strategies and
prospects. Forward-looking statements can be identified by the fact that
these statements do not relate strictly to historical or current matters.
Rather, forward-looking statements relate to anticipated or expected events,
activities, trends or results. Because forward-looking statements relate to
matters that have not yet occurred, these statements are inherently subject
to risks and uncertainties. Many factors could cause our actual activities
or results to differ materially from the activities and results anticipated
in forward-looking statements. These factors include those described under
the caption "Forward-Looking Information" in Part I of this document and
under the caption "Quantitative and Qualitative Disclosures about Market
Risk" in Item 7a of this document. The Company does not undertake any
obligation or duty to update forward-looking statements to reflect either
the occurrence or non-occurrence of any of the risk factors, or to reflect
any other future event or circumstance.
General
The Company's pawn store revenues are derived primarily from service
charges on pawns, service charges from short-term advances, also known as
payday loans, and the sale of unredeemed goods, or "merchandise sales."
Pledged property is held through the term of the pawn, which is 30 days in
Texas, South Carolina, Missouri, Virginia, and Oklahoma, with an automatic
extension period of 15 to 60 days depending on state laws, unless the pawn
is earlier paid or renewed. In Maryland, Washington, D.C., and Mexico,
pledged property is held for 30 days. In the event the borrower does not
pay or renew a pawn within 90 days in South Carolina and Missouri, 60 days
in Texas and Oklahoma, 45 days in Virginia, and 30 days in Maryland,
Washington, D.C., and Mexico, the unredeemed collateral is forfeited to the
Company and becomes inventory available for general liquidation or sale in
one of the Company's stores. The statutory service charges on pawns at its
Texas stores range from 12% to 240% on an annualized basis depending on the
size of the pawn, and from 39% to 240% on an annualized basis at the
Company's Oklahoma stores. Pawns made in the Maryland stores bear service
charges of 144% to 240% on an annualized basis with a $6 minimum charge per
month, while pawns in Virginia earn 120% to 144% annually with a $5 minimum
charge per month. In Washington, D.C., a flat $2 charge per month applies
to all pawns up to $40, and an 18% to 60% annualized service charge applies
to pawns of greater than $40. In Missouri, pawns bear a total service and
storage charge of 180% to 240% on an annualized basis with a $2.50 minimum
charge per month, and South Carolina rates range from 100% to 300%. In
Mexico, pawns bear an annualized rate of 240%. The Company accrues pawn
service charge revenue on a constant-yield basis over the life of the pawn
for all pawns that the Company deems collection to be probable based on
historical pawn redemption statistics. If a pawn is not repaid prior to the
expiration of the automatic extension period, if applicable, the property is
forfeited to the Company and transferred to inventory at a value equal to
the principal amount of the loan, exclusive of accrued interest.
The Company's check cashing and short-term advance revenues are derived
primarily from check cashing fees, fees on short-term advances, and fees
from the sale of money orders and wire transfers. Short-term advances carry
a 13.9% to 40% service charge, which varies by state and life of the
advance. The Company recognizes service charge income on short-term
advances on a constant-yield basis over the life of the advance, which is
generally 30 days or less. The net defaults on short-term advances and
changes in the short-term advance valuation reserve are charged to the
short-term advance loss provision.
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Total receivable balances at end
of period, in thousands:
Pawn receivables $ 23,429 $ 20,037 $ 16,624
Short-term advance receivables 15,465 13,759 10,690
Annualized yield:
Pawn receivables 159% 157% 143%
Short-term advance receivables,
net of loss provision 291% 291% 273%
Net loss provision on short-term
advance receivables as a percentage
of service charges 21% 23% 24%
Number of locations at end of period:
Pawn-only stores 127 89 57
Pawn stores also offering short-term
advances 70 71 74
Payday advance stores 87 75 59
Cash & Go, Ltd. joint venture kiosks 40 40 59
Average receivable balances per location
at end of period, in thousands:
Pawn receivables in pawn stores $ 119 $ 125 $ 127
Short-term advances in pawn stores 43 47 51
Short-term advances in check
cashing/short-term advance stores 126 115 121
Short-term advances in Cash & Go, Ltd.
joint venture kiosks 38 43 30
Average outstanding receivable transaction:
Pawn receivables $ 62 $ 61 $ 65
Short-term advance receivables 391 381 374
The annualized yield on pawn receivables is calculated by dividing
total pawn service charges by the average pawn receivable balance for the
year. The annualized yield, net of loss provision, for short-term advances
is calculated by dividing total short-term advance service charges, net of
the short-term advance loss provision, by the average short-term advance
receivable balance for the year.
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
primarily to new store openings, the Company has also incurred increases in
operating expenses attributable to the additional stores, and increases in
administrative expenses attributable to building a management team and
the support personnel required by the Company's growth. Store 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 salaries of corporate
officers, area supervisors and other management, accounting and
administrative costs, liability and casualty insurance, outside legal and
accounting fees and stockholder-related expenses.
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Income statement items as a percent
of total revenues:
Revenues:
Merchandise sales 48.2% 48.0% 47.9%
Pawn service charges 19.3 19.8 18.3
Short-term advance service charges 30.1 29.5 30.7
Check cashing fees 1.7 1.9 2.1
Other 0.7 0.8 1.0
Cost of Revenues:
Cost of goods sold 29.0% 28.3% 27.7%
Short-term advance loss provision 6.4 6.8 7.3
Check cashing returned items expense 0.1 0.2 0.2
Expenses:
Store operating expenses 34.0% 35.6% 38.0%
Administrative expenses 9.9 10.2 9.7
Depreciation 2.3 2.1 2.1
Interest expense - 0.3 0.8
Interest income - (0.4) (0.6)
Gross profit as a percent
of merchandise sales 40.0% 41.1% 42.2%
Short-term advance loss provision
as a percentage of short-term advance
service charges 21.4% 23.0% 23.8%
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, related revenues and expenses, and
disclosure of gain and loss contingencies at the date of the financial
statements. Such estimates and assumptions are subject to a number of risks
and uncertainties, which may cause actual results to differ materially from
the Company's estimates. The significant accounting policies that we
believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated. In addition, effective December 31, 2003, 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. Through December 31, 2003, the
Company recorded its 50% share of the partnership's earnings or losses in
its consolidated financial statements. Effective December 31, 2003, when the
Company adopted FASB Interpretation No. 46(R) - Consolidation of Variable
Interest Entities, the Company included the balance sheet accounts of Cash &
Go, Ltd., in its consolidated financial statements. The Company recorded a
non-recurring change in accounting principle charge of $357,000 net of
income tax benefit on December 31, 2003, in order to reflect the other
partner's share of accumulated losses in the partnership. The consolidated
operating results for the fiscal periods beginning on or after January 1,
2004 include the operating results of Cash & Go, Ltd.
Receivables and income recognition - Receivables on the balance sheet
consist of pawn and short-term advances. Pawns are made on the pledge of
tangible personal property. The Company accrues pawn service charge revenue
on a constant-yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. If the pawn is not repaid, the principal amount pawned becomes
the carrying value of the forfeited collateral (inventory), which is held
for sale. Short-term advances are made for thirty days or less. The
Company recognizes the service charges associated with short-term advances
on a constant-yield basis over the term of the short-term advance.
Short-term advance loss provision - An allowance is provided for losses
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 advances in the reported
balance. Net defaults and changes in the short-term advance allowance are
charged to the short-term advance loss provision.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal on the
unredeemed goods. The cost of inventories is determined on the specific
identification method. Inventories are stated at the lower of cost or
market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Long-lived assets - Long-lived assets (i.e., property, plant and
equipment, and intangible assets) are reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of the
asset may not be recoverable. An impairment loss is recognized if the sum
of the expected future cash flows (undiscounted and before interest) from
the use of the asset is less than the net book value of the asset.
Generally, the amount of the impairment loss is measured as the difference
between the net book value of the asset and the estimated fair value of the
related asset. Management does not believe any assets have been impaired at
December 31, 2004.
Goodwill - Acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to
assets and liabilities acquired based upon their estimated fair market
values at the dates of acquisition. The excess purchase price over the fair
market value of the net tangible assets acquired and identifiable intangible
assets has been recorded as goodwill. Goodwill, net of accumulated
amortization was $53,237,000 as of December 31, 2004 and 2003. Excess
purchase price over net assets acquired was amortized on a straight-line
basis over an estimated useful life of forty years through December 31,
2001. The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, effective January 1,
2002. Under SFAS No. 142, goodwill is not amortized, but reviewed for
impairment annually, or more frequently if certain indicators arise. The
Company completed the transitional fair value impairment test and determined
that no impairment of recorded goodwill existed at January 1, 2002. The
Company has also determined that no impairment existed at December 31, 2002,
2003 and 2004. Subsequent impairment losses, if any, will be reflected in
operating income or loss in the consolidated statement of income for the
period in which such loss is realized.
Results of Operations
Twelve Months Ended December 31, 2004 Compared to Twelve Months Ended
December 31, 2003
Total revenues increased 24% to $179,813,000 for the fiscal year ended
December 31, 2004 ("Fiscal 2004") as compared to $145,468,000 for the fiscal
year ended December 31, 2003 ("Fiscal 2003"). The change was comprised of
an increase in revenues of $15,934,000 generated by the 99 new pawn and
payday advance stores that were opened during Fiscal 2003 and Fiscal 2004, a
same-store increase totaling $14,056,000 at the 185 stores that were in
operation during all of Fiscal 2003 and Fiscal 2004, an increase of
$5,679,000 related to the consolidation of the 40 Cash & Go, Ltd. kiosks,
net of a decrease in revenues of $1,324,000 from stores closed or
consolidated during Fiscal 2003 and Fiscal 2004. Same-store revenues
increased 10% due to the maturation of 38 stores opened in Fiscal 2002 and
a net overall increase in revenues in the Company's mature stores. Of
the $34,345,000 increase in total revenues, 49%, or $16,937,000, was
attributable to increased merchandise sales, 17%, or $5,859,000 was
attributable to an increase in pawn service charges, 33%, or $11,184,000 was
attributable to an increase in short-term advance service charges, and 1% or
$365,000 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 $9,941,000 in Fiscal 2003 to $16,664,000 in Fiscal 2004. As a
percentage of total revenues, merchandise sales remained unchanged at 48%
during Fiscal 2004 and Fiscal 2003, pawn service charges decreased from 20%
to 19%, short-term advance service fees increased from 29% to 30%, and check
cashing fees and other income as a percentage of total revenues remained
unchanged at 3% during Fiscal 2003 and Fiscal 2004.
The pawn receivables balance increased 17% from $20,037,000 at December
31, 2003 to $23,429,000 at December 31, 2004. Of the $3,392,000 increase,
an increase of $2,082,000 was attributable to the growth in same-store pawn
receivable balances at the stores which were in operation as of December 31,
2004 and 2003, and an increase of $1,310,000 was attributable to the 40 new
pawn stores opened since December 31, 2003. The net short-term advance
receivables balance increased 12% from $13,759,000 at December 31, 2003 to
$15,465,000 at December 31, 2004. Of the $1,706,000 increase, a same-store
increase of $1,146,000 was attributable to the growth in short-term advance
receivable balances at the stores that were in operation as of December 31,
2004 and 2003 and an increase of $560,000 was attributable to the 12 new
payday advance stores opened since December 31, 2003. The Company's loss
provision reserve on short-term advance receivables increased from $497,000
at December 31, 2003 to $552,000 at December 31, 2004.
Gross profit margins on total merchandise sales were 40% during Fiscal
2004 compared to 41% during Fiscal 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, decreased from 45% during Fiscal 2003
compared to 44% during Fiscal 2004. The Company's loss provision relating to
short-term advances increased from $9,879,000 in Fiscal 2003 to $11,559,000
in Fiscal 2004. As a percentage of short-term advance service charge
revenues, the loss provision decreased from 23% during Fiscal 2003 to 21%
during Fiscal 2004. This decrease was due in part to the consolidation of
the Cash & Go, Ltd. joint venture, which is a more mature group of stores
with a lower than average loss provision expense.
Operating expenses increased 18% to $61,063,000 during Fiscal 2004
compared to $51,814,000 during Fiscal 2003, primarily as a result of the
consolidation of Cash & Go, Ltd.'s operating results and the net addition of
49 pawn and payday advance stores in Fiscal 2004, which is a 21% increase in
store count. Administrative expenses increased 20% to $17,837,000 during
Fiscal 2004 compared to $14,807,000 during Fiscal 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 $73,000 in
Fiscal 2004 compared to interest expense of $472,000 in Fiscal 2003 as a
result of lower average outstanding debt balances during Fiscal 2004.
Interest income decreased from $595,000 in Fiscal 2003 to $67,000 in Fiscal
2004, due primarily to the elimination of interest income associated with
the consolidation of Cash & Go, Ltd.
For Fiscal 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.
Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended
December 31, 2002
Total revenues increased 22% to $145,468,000 for the fiscal year ended
December 31, 2003 ("Fiscal 2003") as compared to $118,793,000 for the fiscal
year ended December 31, 2002 ("Fiscal 2002"). The change was comprised of
an increase in revenues of $15,193,000 generated by the 85 new pawn and
check cashing/short-term advance stores that were opened during Fiscal 2002
and Fiscal 2003, a same-store increase totaling $13,121,000 at the 150
stores that were in operation during all of Fiscal 2002 and Fiscal 2003,
net of a decrease in revenues of $1,639,000 from the 8 stores closed
or consolidated during Fiscal 2002 and Fiscal 2003. Of the $26,675,000
increase in total revenues, 48%, or $12,892,000, was attributable to
increased merchandise sales, 27%, or $7,081,000 was attributable to an
increase in pawn service charges, 24%, or $6,466,000 was attributable to an
increase in short-term advance service charges, and less than 1% or $236,000
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 $3,287,000 in
Fiscal 2002 to $9,941,000 in the Fiscal 2003. As a percentage of total
revenues, merchandise sales remained unchanged at 48% during Fiscal 2002 and
Fiscal 2003, pawn service charges increased from 18% to 20%, short-term
advance service fees decreased from 31% to 29% during Fiscal 2002 and Fiscal
2003, and check cashing fees and other income as a percentage of total
revenues remained unchanged at 3% during Fiscal 2002 and Fiscal 2003.
The pawn receivables balance increased 21% from $16,624,000 at December
31, 2002 to $20,037,000 at December 31, 2003. Of the $3,413,000 increase,
an increase of $2,579,000 was attributable to the growth in same-store pawn
receivable balances at the stores which were in operation as of December 31,
2003 and 2002, and an increase of $834,000 was attributable to the 31 new
pawn stores opened since December 31, 2002. The net short-term advance
receivables balance increased 29% from $10,690,000 at December 31, 2002 to
$13,759,000 at December 31, 2003. Of the $3,069,000 increase, a same-store
increase of $700,000 was attributable to the growth in short-term advance
receivable balances at the stores which were in operation as of December 31,
2003 and 2002, an increase of $633,000 was attributable to the 16 new payday
advance stores opened since December 31, 2002 and an increase of $1,736,000
was attributable to the consolidation of the 40 Cash & Go, Ltd. kiosks. The
Company's loss provision reserve on short-term advance receivables increased
from $422,000 at December 31, 2002 to $497,000 at December 31, 2003.
Gross profit margins on total merchandise sales were 41% during Fiscal
2003 compared to 42% during Fiscal 2002. 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, were 45% during Fiscal 2003 as compared to
44% in Fiscal 2002. The Company's loss provision relating to short-term
advances increased from $8,669,000 in Fiscal 2002 to $9,879,000 in Fiscal
2003. As a percentage of short-term advance service charge revenues, the
loss provision decreased from 24% during Fiscal 2002 to 23% during the
Fiscal 2003. Management considers this increase to be within the expected
range of variability.
Operating expenses increased 15% to $51,814,000 during Fiscal 2003
compared to $45,163,000 during Fiscal 2002, primarily as a result of the net
addition of 45 pawn and payday advance stores in Fiscal 2003, which is a
24% increase in store count. Administrative expenses increased 28% to
$14,807,000 during Fiscal 2003 compared to $11,580,000 during Fiscal
2002 primarily as a result of 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 $472,000 in Fiscal 2003 compared to
interest expense of $939,000 in Fiscal 2002 as a result of lower average
outstanding debt balances during Fiscal 2003. Interest income decreased from
$645,000 in Fiscal 2002 to $595,000 in Fiscal 2003, due primarily to a lower
average note receivable balance from Cash & Go, Ltd.
For Fiscal 2003 and 2002, the Company's effective federal income tax
rates of 38% and 37%, 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 growth have been financed with funds
generated from operations and bank borrowings.
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 2.4% at December 31,
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 December 31, 2004, no amounts were outstanding under the
Credit 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 December 31, 2004 and March 10, 2005. 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 December 31, 2004, the Company's primary sources of liquidity
were $26,232,000 in cash and cash equivalents, $4,512,000 in service
charges receivable, $38,894,000 in pawn and short-term advance receivables,
$17,644,000 in inventories and $25,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital as of
December 31, 2004 of $79,985,000 and an equity-to-liabilities ratio of 9
to 1.
The Company utilized positive cash flows from operations in 2004 to
fund investing and financing activities primarily related to opening new
stores, fund growth of receivables and inventory balances in existing
stores, to reduce outstanding debt and to purchase treasury stock. Net cash
provided by operating activities of the Company during the year ended
December 31, 2004 was $44,128,000, consisting primarily of income before
change in accounting of $20,706,000 plus adjustments for depreciation
expense of $4,173,000, the tax benefit from the exercise of employee stock
options of $8,736,000 and the provision for short-term advance loss
provision of $11,559,000, changes in accrued service charges receivable,
inventories, prepaid expenses and accounts payable of $594,000, $720,000,
$530,000 and $1,344,000, respectively, in addition to an increase in
deferred income taxes of $2,142,000. Net cash used for investing activities
during the year ended December 31, 2004 was $25,124,000, which was primarily
comprised of cash used to fund pawn receivables of $4,728,000, cash used to
fund short-term advance receivables of $13,265,000 and cash paid for fixed
asset additions of $7,131,000. The opening of 52 new stores in 2004
contributed significantly to the increased funding of receivables and the
volume of fixed asset additions. Net cash used by financing activities was
$8,619,000 during the year ended December 31, 2004, which consisted of net
repayments of the Company's debt of $6,000,000 and $13,463,000 used to
purchase treasury stock, net of proceeds from exercises of stock options and
warrants of $10,844,000. The non-recurring cash flows from the proceeds
from exercises of stock options and warrants were primarily utilized to
reduce the Company's debt and purchase treasury stock.
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, although in the
Statements of Cash Flows these are classified as investing cash flows. For
Fiscal 2004, total cash flows from operations were $44,128,000 while net
cash outflows related to pawn receivables and short-term advance receivables
were $4,728,000 and $13,265,000, respectively. The combined net cash flows
from operations and pawn and short-term advance receivables totaled
$26,135,000 for Fiscal 2004. For Fiscal 2003, total cash flows from
operations were $32,606,000 while net cash outflows related to pawn
receivables and short-term advance receivables were $4,635,000 and
$11,211,000, respectively. The combined net cash flows from operations and
pawn and short-term advance receivables totaled $16,760,000 for Fiscal 2003.
For Fiscal 2002, cash flows from operations were $23,333,000 and net cash
outflows related to pawn receivables and short-term advance receivables were
$3,413,000 and $9,652,000, respectively. The combined net cash flows from
operations and pawn and short-term advance receivables totaled $10,268,000
for Fiscal 2002.
The profitability and liquidity of the Company is affected by the
amount of pawn loans outstanding, which is controlled in part by the
Company's lending decisions. The Company is able to influence the frequency
of pawn redemption by increasing or decreasing the amount pawned in relation
to the resale value of the pledged property. Tighter credit decisions
generally result in smaller pawns in relation to the estimated resale value
of the pledged property and can thereby decrease the Company's aggregate
pawn balance and, consequently, decrease pawn service charges.
Additionally, small advances in relation to the pledged property's estimated
resale value tend to increase pawn redemptions and improve the Company's
liquidity. Conversely, providing larger pawns in relation to the estimated
resale value of the pledged property can result in an increase in the
Company's pawn service charge income. Also, larger average pawn balances
can result in an increase in pawn forfeitures, which increases the quantity
of goods on hand and, unless the Company increases inventory turnover,
reduces the Company's liquidity. The Company's renewal policy allows
customers to renew pawns by repaying all accrued service fees on such pawns,
effectively creating a new pawn transaction.
The amount of short-term advances outstanding and related potential
loss provision expense also affect the profitability and liquidity of the
Company. An allowance for losses is provided on active short-term advances
and service charges receivable, based upon expected default rates, net of
estimated future recoveries of previously defaulted short-term advances and
service charges receivable. The Company considers short-term advances to be
in default if they are not repaid on the due date, and writes off the
principal amount and service charges receivable as of the default date,
leaving only active receivables in the reported balances. Net defaults and
changes in the short-term advance allowance are charged to 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 the
Credit Facility and cash generated from operations will be sufficient to
accommodate the Company's current operations for Fiscal 2005. 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. The Company will evaluate acquisitions, if
any, based upon opportunities, acceptable financing, purchase price,
strategic fit and qualified management personnel.
The Company currently intends to continue to engage in a plan of
expansion primarily through new store openings. During Fiscal 2005, the
Company currently plans to open approximately 60 new stores, comprised of
both payday advance locations, primarily located in Texas, and pawnshops,
primarily in Mexico. This expansion is expected to be funded entirely
through operating cash flows. While the Company continually looks for, and
is presented with potential acquisition candidates, the Company has no
definitive plans or commitments for further acquisitions. If the Company
encounters an attractive opportunity to acquire new stores in the near
future, the Company will seek additional financing, the terms of which will
be negotiated on a case-by-case basis. Between January 1, 2005 and March
10, 2005, the Company opened 4 new check cashing/short-term advance
locations and 5 pawnshops, while 1 pawnshop located in the U.S. was closed.
Contractual Commitments
A tabular disclosure of contractual obligations at December 31, 2004,
including Cash & Go, Ltd., is as follows:
Payments due by period
-----------------------------------------------
(in thousands)
Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
------ ------ ------ ------ ------
Operating leases $42,771 $10,870 $18,570 $ 9,066 $ 4,265
Employment contracts
for Chief Executive
Officer and President 5,250 1,050 3,150 1,050 -
------ ------ ------ ------ ------
Total $48,021 $11,920 $21,720 $10,116 $ 4,265
====== ====== ====== ====== ======
Off-Balance Sheet Arrangements
As of December 31, 2004, the Company had no off-balance sheet
arrangements.
Inflation
The Company does not believe that inflation has had a material effect
on the amount of pawns and short-term advances made or unredeemed goods sold
by the Company, or its results of operation.
Seasonality
The Company's retail business is seasonal in nature with its highest
volume of merchandise sales occurring during the first and fourth calendar
quarters of each year. The Company's lending and short-term advance
activities are also seasonal, with the highest volume of lending activity
occurring during the third and fourth calendar quarters of each year.
Recent Regulatory Pronouncements
In 2003, the Federal Deposit Insurance Corporation ("FDIC"), which
regulates the ability of state chartered banks to enter into relationships
with out of state payday loan servicers, issued guidelines 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 FDIC
guidelines for payday lending.
On March 2, 2005, the FDIC issued revised payday lending guidelines for
FDIC-supervised banks, such as County Bank. The revised guidelines include
a requirement that such banks develop procedures to ensure that a payday
loan is not provided to any customer with payday loans outstanding from any
bank for more than three months in the previous twelve months. It currently
remains to be determined what procedures may be proposed by the lending
banks or accepted by the FDIC in order to meet these guidelines. The
Company and County Bank are currently in the process of reviewing the
revised guidelines and expect to implement any necessary changes in lending
procedures to comply with them. The Company's payday advance revenues from
Texas locations totaled $30,554,000 in Fiscal 2004 and represented
approximately 17% of the Company's total revenues for 2004. The Company
expects that implementation of the revised guidelines could have a negative
effect on some portion of its payday lending revenues in its Texas
locations, that are the Company's only locations which currently use a bank
relationship subject to the FDIC's payday lending guidelines. Until the
Company and County Bank complete their review of the revised guidelines and
the FDIC approves the revised procedures expected to be developed by County
Bank and/or other banks providing payday loans, the exact timing and amount
of the financial impact of the revised guidelines cannot be estimated.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
("FASB") enacted Statement of Financial Accounting Standards 123-revised
2004 ("SFAS 123R"), Share-Based Payments, which replaces Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-
Based Compensation, and supersedes APB Opinion No. 25 ("APB 25"), Accounting
for Stock Issued to Employees. SFAS 123R requires the measurement of all
employee share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of such
expense in the consolidated statements of income.
The accounting provisions of SFAS 123R will be effective for the
Company for reporting periods beginning after July 1, 2005. The pro forma
disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. See Note 2 of the Notes to
Consolidated Financial Statements for the pro forma net income and net
income per share amounts, for Fiscal 2002 through Fiscal 2004, as if the
Company had used a fair-value-based method similar to the methods required
under SFAS 123R to measure compensation expense for employee stock incentive
awards. The Company is evaluating the terms and structure of its current
share based payments and does not expect the adoption to have a significant,
adverse impact on the consolidated statements of income and net income per
share as it relates to current granted options and warrants as of the date
of the adoption.
In January 2003, the FASB issued Interpretation No. 46(R) ("FIN
46"), Consolidation of Variable Interest Entities. FIN 46 addresses
consolidation by business enterprises of variable interest entities
(formerly special purpose entities). In general, a variable interest entity
is a corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights or (b) has equity investors that do not provide sufficient financial
resources for the entity to support its activities. The objective of FIN 46
is not to restrict the use of variable interest entities, but to improve
financial reporting by companies involved with variable interest entities.
FIN 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. The consolidation requirements are
effective for the first period that ends after March 15, 2004; however, the
Company elected to adopt the requirements effective December 31, 2003. The
effect of the adoption of FIN 46 on the Consolidated Financial Statements is
described in Note 3 of the Notes to the Consolidated Financial Statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates, foreign exchange rates, and gold prices. The
Company does not engage in speculative or leveraged transactions, nor does
it hold or issue financial instruments for trading purposes.
Interest Rate Risk
The Company is exposed to market risk in the form of interest rate risk
in regards to its long-term line of credit. As of March 10, 2005, the line
of credit did not have an outstanding balance; therefore, the Company's
interest rate risk for 2005 is immaterial.
The Company's cash and cash equivalents are invested in money market
accounts. Accordingly, the Company is subject to changes in market interest
rates. However, the Company does not believe a change in these rates would
have a materially adverse effect on the Company's operating results,
financial condition, or cash flows.
Foreign Currency Risk
A majority of the Company's pawn loans in Mexico are currently
contracted and settled in U.S. dollars, and therefore the Company bears
limited exchange risk from its operations in Mexico. The Company maintained
certain Mexican peso-denominated pawn loan balances at December 31, 2004,
which converted to a U.S. dollar equivalent of $2,500,000. The Company also
maintained certain peso-denominated bank balances at December 31, 2004,
which converted to a U.S. dollar equivalent of $938,000. A 10% increase in
the peso to U.S. dollar exchange rate would increase the Company's foreign
currency translation exposure by approximately $315,000.
Gold Price Risk
A significant and sustained decline in the price of gold would
negatively impact the value of jewelry inventories held by the Company and
the value of jewelry pledged as collateral by pawn customers. As a result,
the Company's profit margins on existing jewelry inventories would be
negatively impacted, as would be the potential profit margins on jewelry
currently pledged as collateral by pawn customers in the event it is
forfeited by the pawn customer. In addition, a decline in gold prices could
result in a lower balance of pawn loans outstanding for the Company, as
customers would receive lower loan amounts for individual pieces of jewelry.
The Company believes that many customers would be willing to add additional
items of value to their pledge in order to obtain the desired loan amount,
thus mitigating a portion of this risk.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 15(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure
--------------------
On March 12, 2004, First Cash Financial Services, Inc. (the "Company")
notified its independent accountant, Deloitte & Touche LLP, of its dismissal
as principal auditors of the Company for the year ending December 31, 2004.
Effective March 17, 2004, the Company has engaged Hein & Associates LLP to
audit the Company's consolidated financial statements for the year ending
December 31, 2004. The change was the result of a proposal and competitive
bidding process involving several accounting firms. The decision to dismiss
Deloitte & Touche LLP and to retain Hein & Associates LLP was recommended by
the Audit Committee of the Company's Board of Directors and approved by the
Board of Directors.
The audit reports of Deloitte & Touche LLP on the consolidated
financial statements of the Company as of and for the years ended
December 31, 2003, and 2002, did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles, except that the audit
reports for 2002 and 2003 were modified to reflect a change in the Company's
method of accounting for amortization of goodwill in 2002 in accordance with
FASB Statement No. 142, Goodwill and Other Intangible Assets, and except
that the audit report for 2003 was modified to reflect a change in the
Company's method of accounting for its 50% owned joint venture, Cash & Go,
Ltd., in 2003 in accordance with FASB Interpretation 46(R), Consolidation of
Variable Interest Entities.
During the Company's fiscal periods ended December 31, 2003 and 2002,
and the subsequent interim period through March 12, 2004, there were no
disagreements between the Company and Deloitte & Touche LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure (within the meaning of Item 304(a)(1)(iv) of
Regulation S-K) and there were no reportable events (as defined by
Item 304(a)(1)(v) of Regulation S-K).
During the Company's two most recent years ended December 31, 2003, and
the subsequent interim period through March 12, 2004, neither the Company
nor anyone on its behalf consulted with Hein & Associates LLP regarding any
of the matters or events set forth in Item 304(a)(2)(i) and (ii) of
Regulation S-K. Hein & Associates LLP has served as the independent
accountant engaged to audit the First Cash 401(k) Plan for the three most
recent years ended December 31, 2004.
Item 9a. Controls and Procedures
---------------------------------
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
participated in an evaluation by our management of the effectiveness of the
Company's disclosure controls and procedures as of the end of the fiscal
year that ended on December 31, 2004. Based on their participation in that
evaluation, the CEO and CFO concluded that the disclosure controls and
procedures were effective as of December 31, 2004 to ensure that required
information is disclosed on a timely basis in our reports filed or furnished
under the Securities Exchange Act of 1934.
The CEO and CFO also participated in an evaluation by the management of
any changes in the internal control over financial reporting that occurred
during the year ended December 31, 2004. That evaluation did not identify
any changes that have materially affected, or are likely to materially
affect, the internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
The management of First Cash Financial Services, Inc. is responsible for
establishing and maintaining adequate internal control over financial
reporting. This internal control system has been designed to provide
reasonable assurance to the Company's management and board of directors
regarding the preparation and fair presentation of the Company's published
financial statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
The management of First Cash Financial Services, Inc. has assessed the
effectiveness of the company's internal control over financial reporting as
of December 31, 2004. To make this assessment, management used the criteria
for effective internal control over financial reporting described in
Internal Control-Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management believes that, as of December 31, 2004, the Company's internal
control over financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by Hein &
Associates LLP, an independent registered public accounting firm, as stated
in their report which appears herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited management's assessment, included in the accompanying
management's report on internal controls, that First Cash Financial
Services, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Company management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004,
is fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also in our opinion, the
Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Hein & Associates LLP
Dallas, Texas
March 10, 2005
Item 9b. Other Information
---------------------------
Effective March 14, 2005, the Company entered into the following three
material contracts, which contracts for Messrs. Wessel and Barron replaced
in the entirety their previous employment agreements.
Mr. Wessel has entered into an employment agreement with the Company
through December 31, 2009 to serve as the president of the Company; at the
discretion of the board this agreement may be extended for additional
successive periods of one year each on each January 1 anniversary. The
agreement provides for: (i) a base salary of $550,000 with increases at
the discretion of the Compensation Committee; (ii) an annual bonus at
the discretion of the Compensation Committee; (iii) participation in
compensation plans at the discretion of the Compensation Committee; (iv)
certain fringe benefits including club membership, car, vacation, a term
life insurance policy with a beneficiary designated by Mr. Wessel in the
amount of $4 million; and (v) reimbursement of business related expenses.
Mr. Wessel has agreed not to compete with the Company, not to solicit
employees of the Company, and not to solicit customers of the Company for a
period of time following his termination.
Mr. Barron has entered into an employment agreement with the Company
through December 31, 2009 to serve as the chief executive officer and the
chief operating officer of the Company; at the discretion of the board this
agreement may be extended for additional successive periods of one year each
on each January 1 anniversary. The agreement provides for: (i) a base
salary of $500,000 with increases at the discretion of the Compensation
Committee; (ii) an annual bonus at the discretion of the Compensation
Committee; (iii) participation in compensation plans at the discretion of
the Compensation Committee; (iv) certain fringe benefits including club
membership, car, vacation, a term life insurance policy with a beneficiary
designated by Mr. Barron in the amount of $2 million; and (v) reimbursement
of business related expenses. Mr. Barron has agreed not to compete with the
Company, not to solicit employees of the Company, and not to solicit
customers of the Company for a period of time following his termination.
In addition, Mr. Powell has entered into a consulting agreement with the
Company through December 31, 2014 to perform such services as may be
requested by the Board of Directors. The agreement provides for: (i) annual
payments of $500,000; (ii) certain other benefits including club membership,
car, health insurance, a term life insurance policy with a beneficiary
designated by Mr. Powell in the amount of $4 million; and (iii)
reimbursement of business related expenses. Mr. Powell has agreed not to
compete with the Company, not to solicit employees of the Company, and not
to solicit customers of the Company for a period of time following his
termination.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information required by this item with respect to the directors,
executive officers and compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the information provided under the headings
"Election of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company's Annual Meeting
of Stockholders.
Item 11. Executive Compensation
--------------------------------
The information required by this item is incorporated by reference from
the information provided under the heading "Executive Compensation" of the
Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Equity Compensation Plan Information
The following table gives information about the Company's common stock
that may be issued upon the exercise of options under shareholder-approved
plans, including its 1990 Stock Option Plan, its 1999 Stock Option Plan, and
its 2004 Long-Term Incentive Plan as of December 31, 2004. Additionally,
the Company issues warrants to purchase shares of common stock to certain
key members of management, members of the Board of Directors that are not
employees or officers, and to other third parties. The issuance of warrants
is not approved by shareholders, and each issuance is generally negotiated
between the Company and such recipients. The issuance of warrants to
outside consultants is accounted for using the fair value method prescribed
by FAS No. 123.
Number of Number of securities
securities to Weighted remaining available
be issued upon average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column A)
Plan Category (A) (B) (C)
------------- --- --- ---
Equity Compensation
Plans Approved by
Security Holders 795,050 $ 5.88 2,077,406
Equity Compensation
Plans Not Approved
by Security Holders 888,400 14.04 -
--------- ---------
Total 1,683,450 $ 9.73 2,077,406
========= =========
Other information required by this item is incorporated herein by
reference from the information provided under the heading "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
Item 14. Principal Accounting Fees and Services
-----------------------------------------------
The information required by this item is incorporated by reference from
the information provided in the Company's Proxy Statement under the
discussion of the Company Audit Committee and under the item regarding
shareholder ratification of the Company's independent accountants.
PART IV
-------
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(3) Exhibits:
3.1(7) Amended Certificate of Incorporation
3.2(5) Amended Bylaws
4.1(2) Common Stock Specimen
10.1(1) First Cash, Inc. 1990 Stock Option Plan
10.2(8) Consulting Agreement - Phillip E. Powell
10.3(8) Employment Agreement - Rick L. Wessel
10.4(8) Employment Agreement - Alan Barron
10.5(3) Acquisition Agreement - Miraglia, Inc.
10.6(4) Acquisition Agreement for Twelve Pawnshops
in South Carolina
10.7(4) Acquisition Agreement for One Iron Ventures, Inc.
10.8(4) First Cash Financial Services, Inc. 1999 Stock
Option Plan
10.16(6) Executive Incentive Compensation Plan
10.17(7) 2004 Long-Term Incentive Plan
14.1(8) Code of Ethics
21.1(8) Subsidiaries
23.1(8) Consent of Independent Registered Public Accounting
Firm, Deloitte & Touche LLP
23.2(8) Consent of Independent Registered Public Accounting
Firm, Hein & Associates LLP
31.1(8) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(8) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(8) Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-18 (No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended July 31, 1998 (File No. 0 - 19133) and incorporated herein
by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 22, 1999 (File No. 333-71077) and incorporated herein by
reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0 - 19133) and incorporated herein
by reference.
(6) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 30, 2003.
(7) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 29, 2004.
(8) Filed herewith.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST CASH FINANCIAL SERVICES, INC.
/s/ J. ALAN BARRON
--------------------------------------------
J. Alan Barron, Chief Executive Officer
March 10, 2005
/s/ R. DOUGLAS ORR
--------------------------------------------
R. Douglas Orr, Principal Accounting Officer
March 10, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ PHILLIP E. POWELL Chairman of the Board March 10, 2005
----------------------
Phillip E. Powell
/s/ RICK L. WESSEL Vice Chairman of the Board, March 10, 2005
---------------------- President, Secretary and
Rick L. Wessel Treasurer
/s/ JOE R. LOVE Director March 10, 2005
----------------------
Joe R. Love
/s/ RICHARD T. BURKE Director March 10, 2005
----------------------
Richard T. Burke
/s/ TARA MACMAHON Director March 10, 2005
----------------------
Tara MacMahon
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated balance sheet of First Cash
Financial Services, Inc., and subsidiaries as of December 31, 2004, and
the related consolidated statements of income, stockholders' equity,
and cash flows for the year ended December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc., and subsidiaries at December 31, 2004, and the
consolidated results of their operations and cash flows for the year ended
December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
the Company's internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 10, 2005, expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over
financial reporting.
Hein & Associates LLP
Dallas, Texas
March 10, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of First Cash
Financial Services, Inc., and subsidiaries as of December 31, 2003, and
the related consolidated statements of income, stockholders' equity, and
cash flows for each of the two years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc., and subsidiaries at December 31, 2003, and the
consolidated results of its operations and cash flows for each of the two
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 3, effective December 31, 2003, in connection with
the adoption of Financial Accounting Standards Board Interpretation
No. 46(R), Consolidation of Variable Interest Entities, the Company
consolidated into its financial statements its 50% owned joint venture,
Cash & Go, Ltd.
As described in Note 2, the statements of cash flows for the years ended
December 31, 2003 and 2002 have been restated.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 8, 2004 (October 8, 2004 as to the effects of the restatement
described in the last paragraph of Note 2)
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
------- -------
(in thousands, except share data)
ASSETS
Cash and cash equivalents...................... $ 26,232 $ 15,847
Service charges receivable..................... 4,512 3,918
Pawn receivables............................... 23,429 20,037
Short-term advance receivables, net of
allowance of $552 and $497, respectively..... 15,465 13,759
Inventories.................................... 17,644 15,588
Prepaid expenses and other current assets...... 1,378 964
Income taxes receivable........................ 867 1,613
------- -------
Total current assets ......................... 89,527 71,726
Property and equipment, net.................... 17,376 14,418
Goodwill....................................... 53,237 53,237
Other.......................................... 799 683
------- -------
Total assets .............................. $160,939 $140,064
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................. $ 856 $ 1,054
Accrued expenses............................... 8,686 9,832
------- -------
Total current liabilities .................... 9,542 10,886
Revolving credit facility...................... - 6,000
Deferred income taxes.......................... 7,351 5,955
------- -------
Total liabilities ......................... 16,893 22,841
------- -------
Commitments and contingencies (see Note 10)
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding................................. - -
Common stock; $.01 par value; 90,000,000
shares authorized; 16,611,955 and 16,148,352
shares issued, respectively; 15,989,240 and
15,167,081 shares outstanding, respectively 166 109
Additional paid-in capital ................... 78,556 63,395
Retained earnings ............................ 77,440 56,734
Common stock in treasury, 622,715 and 654,181
shares at cost, respectively ............... (12,116) (3,015)
------- -------
Total stockholders' equity................ 144,046 117,223
------- -------
Total liabilities and stockholders' equity $160,939 $140,064
======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
(in thousands, except per share amounts)
Revenues:
Merchandise sales ....................... $ 86,745 $ 69,808 $ 56,916
Pawn service charges .................... 34,663 28,804 21,723
Short-term advance service charges....... 54,123 42,939 36,473
Check cashing fees ...................... 3,030 2,749 2,659
Other ................................... 1,252 1,168 1,022
------- ------- -------
179,813 145,468 118,793
------- ------- -------
Cost of revenues:
Cost of goods sold ...................... 52,056 41,110 32,890
Short-term advance loss provision........ 11,559 9,879 8,669
Check cashing returned items expense .... 252 233 258
------- ------- -------
63,867 51,222 41,817
------- ------- -------
Gross profit........................... 115,946 94,246 76,976
------- ------- -------
Expenses:
Store operating expenses ................ 61,063 51,814 45,163
Administrative expenses ................. 17,837 14,807 11,580
Depreciation ............................ 4,173 3,019 2,548
Interest expense ........................ 73 472 939
Interest income ......................... (67) (595) (645)
------- ------- -------
83,079 69,517 59,585
------- ------- -------
Income before income taxes ................. 32,867 24,729 17,391
Provision for income taxes .............. 12,161 9,397 6,451
------- ------- -------
Income before change in accounting principle 20,706 15,332 10,940
Cumulative effect of change in accounting
principle, net of tax (see Note 3) - (357) -
------- ------- -------
Net income............................. $ 20,706 $ 14,975 $ 10,940
======= ======= =======
Net income per share:
Basic:
Income before change in accounting
principle.......................... $ 1.31 $ 1.09 $ 0.83
Cumulative effect of change in
accounting principle, net of tax .. - (0.02) -
------- ------- -------
Net income........................... $ 1.31 $ 1.07 $ 0.83
======= ======= =======
Diluted:
Income before change in accounting
principle.......................... $ 1.22 $ 0.97 $ 0.76
Cumulative effect of change in
accounting principle, net of tax .. - (0.02) -
------- ------- -------
Net income........................... $ 1.22 $ 0.95 $ 0.76
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Cash flows from operating activities:
Income before change in accounting
principle ............................... $ 20,706 $ 15,332 $ 10,940
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation .......................... 4,173 3,019 2,548
Short-term advance loss provision ..... 11,559 9,878 8,669
Tax benefit from exercise of stock
options ............................. 8,736 5,408 229
Changes in operating assets and
liabilities, net of effect of Cash & Go,
Ltd. consolidation:
Service charges receivable ............ (594) (553) (357)
Inventories ........................... (720) (718) (329)
Prepaid expenses and other assets ..... (530) 167 41
Accounts payable and accrued expenses.. (1,344) 545 13
Current and deferred income taxes ..... 2,142 (472) 1,579
------- ------- -------
Net cash flows from operating activities 44,128 32,606 23,333
------- ------- -------
Cash flows from investing activities:
Pawn receivables, net .................... (4,728) (4,635) (3,413)
Short-term advance receivables, net ...... (13,265) (11,211) (9,652)
Purchases of property and equipment ...... (7,131) (5,202) (4,264)
Cash from consolidation of Cash & Go, Ltd. - 2,103 -
Net (increase) decrease in receivable
from Cash & Go, Ltd. ................... - 2,633 (278)
------- ------- -------
Net cash flows from investing activities (25,124) (16,312) (17,607)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt ....................... 10,000 - 7,000
Repayments of debt ....................... (16,000) (23,502) (12,491)
Decrease in notes receivable from officers - 4,228 823
Purchases of treasury stock .............. (13,463) - -
Proceeds from exercise of stock options
and warrants ........................... 10,844 6,092 425
------- ------- -------
Net cash flows from financing activities (8,619) (13,182) (4,243)
------- ------- -------
Change in cash and cash equivalents ........ 10,385 3,112 1,483
Cash and cash equivalents at beginning
of the year............................... 15,847 12,735 11,252
------- ------- -------
Cash and cash equivalents at end of the year $ 26,232 $ 15,847 $ 12,735
======= ======= =======
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest ................................ $ 70 $ 498 $ 964
======= ======= =======
Income taxes ............................ $ 1,356 $ 4,256 $ 4,907
======= ======= =======
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Supplemental disclosure of non-cash
operating, investing and financing
activities:
Non-cash transactions in connection with
consolidation of Cash & Go, Ltd.:
Fair market value of assets
consolidated ........................ $ - $ 4,648 $ -
Less assumption of liabilities
from consolidation ................ - (5,791) -
------- ------- -------
Net liabilities resulting from consolidation $ - $ (1,143) $ -
======= ======= =======
Non-cash transactions in connection with
pawn receivables collateral forfeited
and transferred to inventories ......... $ 35,173 $ 27,112 $ 22,346
======= ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Common stock:
Balance at beginning of year ........... $ 109 $ 96 $ 95
Exercise of stock options and warrants.. 15 13 1
Cancellation of treasury stock ......... (8) - -
Effect of stock split .................. 50 - -
------- ------- -------
Balance at end of year ............ 166 109 96
------- ------- -------
Preferred stock:
Balance at end of year ............ - - -
------- ------- -------
Additional paid-in capital:
Balance at beginning of year ........... 63,395 51,908 51,255
Exercise of stock options and warrants,
including income tax benefit of
$8,736, $5,408, and $229, respectively 19,572 11,487 653
Cancellation of treasury stock ......... (4,354) - -
Effect of stock split .................. (57) - -
------- ------- -------
Balance at end of year ............ 78,556 63,395 51,908
------- ------- -------
Retained earnings:
Balance at beginning of year ........... 56,734 41,759 30,819
Net income ............................. 20,706 14,975 10,940
------- ------- -------
Balance at end of year ............ 77,440 56,734 41,759
------- ------- -------
Notes receivable from officers:
Balance at beginning of year ........... - (4,228) (5,051)
Repayment of notes receivable .......... - 4,228 823
------- ------- -------
Balance at end of year ............ - - (4,228)
------- ------- -------
Treasury stock:
Balance at beginning of year ........... (3,015) (3,015) (3,015)
Repurchases of treasury stock .......... (13,463) - -
Cancellation of treasury stock ......... 4,362 - -
------- ------- -------
Balance at end of year ............ (12,116) (3,015) (3,015)
------- ------- -------
Total stockholders' equity:............... $144,046 $117,223 $ 86,520
======= ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
First Cash Financial Services, Inc. (the "Company") was incorporated in
Texas on July 5, 1988, and was reincorporated in Delaware in April 1991.
The Company is engaged in the operation of pawn stores which lend money on
the collateral of pledged personal property, and which retail previously
owned merchandise acquired through pawn forfeitures. In addition to making
short-term secured pawns, most of the Company's pawn stores offer short-term
advances, also known as payday loans. The Company also operates short-term
or payday advance stores that provide short-term advances, check cashing,
and other related financial services. As of December 31, 2004, the Company
owned and operated 197 pawn stores and 87 payday advance stores. The
Company is also a 50% owner of Cash & Go, Ltd., a Texas limited partnership
that owns and operates 40 financial services kiosks inside convenience
stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in the preparation of these financial statements:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned
subsidiaries. In addition, effective December 31, 2003, the accompanying
consolidated financial statements include the balance sheet accounts of Cash
& Go, Ltd., a Texas limited partnership, which owns financial services
kiosks inside convenience stores. The operating results of the partnership
are included in the consolidated financial statements effective January 1,
2004. All significant intercompany accounts and transactions have been
eliminated (See Note 3).
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at date of
acquisition to be cash equivalents.
Receivables and income recognition - Pawn receivables are secured by
the pledge of tangible personal property. The Company accrues pawn service
charge revenue on a constant-yield basis over the life of the pawn for all
pawns that the Company deems collection to be probable based on historical
pawn redemption statistics. If the pawn is not repaid, the principal amount
pawned becomes the carrying value of the forfeited collateral ("inventory"),
which is recovered through sale. Short-term advances are made for thirty
days or less. The Company recognizes the service charges associated with
short-term advances on a constant-yield basis over the term of the short-
term advance.
Short-term advance loss provision - An allowance is provided on short-
term advance receivables and service charge receivables, based upon expected
default rates, net of estimated future recoveries of previously defaulted
short-term advances and service charge receivables. 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 charge receivables as of the
default date. Net defaults and changes in the short-term advance allowance
are charged to the short-term advance loss provision.
Store operating expenses - Costs incurred in operating the pawn stores
and payday advance stores have been classified as store operating expenses.
Operating expenses include salary and benefit expense of store employees,
rent and other occupancy costs, bank charges, security, insurance,
utilities, cash shortages and other costs incurred by the stores.
Layaway and deferred revenue - Interim payments from customers on
layaway sales are credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal on the
unredeemed goods. The cost of inventories is determined on the specific
identification method. Inventories are stated at the lower of cost or
market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is determined on the straight-line method based on estimated
useful lives of thirty-one years for buildings and three to five years for
equipment. The costs of improvements on leased stores are capitalized as
leasehold improvements and are amortized on the straight-line method over
the applicable lease period, or useful life if shorter.
Maintenance and repairs are charged to expense as incurred; renewals
and betterments are charged to the appropriate property and equipment
accounts. Upon sale or retirement of depreciable assets, the cost and
related accumulated depreciation is removed from the accounts, and the
resulting gain or loss is included in the results of operations in the
period retired.
Goodwill - Acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to
assets and liabilities acquired based upon their estimated fair market
values at the dates of acquisition. The excess purchase price over the fair
market value of the net tangible assets acquired and identifiable intangible
assets have been recorded as goodwill. Goodwill was amortized on a
straight-line basis over an estimated useful life of forty years through
December 31, 2001. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective
January 1, 2002. Under SFAS No. 142, goodwill is not amortized, but
reviewed for impairment annually, or more frequently if certain indicators
arise. The Company completed the transitional fair value impairment test
and determined that no impairment of recorded goodwill existed at January 1,
2002. The Company has also determined that no impairment existed at
December 31, 2002, 2003 and 2004. Subsequent impairment losses, if any, will
be reflected in operating income or loss in the consolidated statement of
income for the period in which such loss is realized.
Long-lived assets - Long-lived assets (i.e., property, plant and
equipment, and intangible assets with definite lives) are reviewed for
impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment loss is
recognized if the sum of the expected future cash flows (undiscounted and
before interest) from the use of the asset is less than the net book value
of the asset. Generally, the amount of the impairment loss is measured as
the difference between the net book value of the assets and the estimated
fair value of the related assets. Management does not believe that any
impairments exist at December 31, 2004.
Fair value of financial instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded values, due
primarily to their short-term nature.
Income taxes - The Company uses the liability method of computing
deferred income taxes on all material temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases.
Advertising - The Company expenses the costs of advertising the first
time the advertising takes place. Advertising expense for the fiscal years
ended December 31, 2004, 2003 and 2002, was $2,302,000, $1,567,000 and
$1,332,000, respectively.
Stock-based compensation - The Company's stock-based employee
compensation plans are described in Note 11. The expense recognition and
measurement principles of APB 25, Accounting for Stock Issued to Employees,
and related interpretations are followed in accounting for these plans. No
stock-based employee compensation has been charged to earnings because the
exercise prices of all stock options granted under this plan have been equal
to the market value of the Company's common stock at the date of the grant.
The following presents information about net income and earnings per
share as if the Company had applied the fair value expense recognition
requirements of Statement of Financial Accounting Standards (SFAS) 123,
Accounting for Stock-Based Compensation, to all employee stock options
granted under the plan (in thousands, except per share data).
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Net income, as reported $ 20,706 $ 14,975 $ 10,940
Less: Stock-based employee compensation
determined under the fair value
requirements of SFAS 123, net of
income tax benefits 2,716 2,261 1,252
------- ------- -------
Pro forma net income $ 17,990 $ 12,714 $ 9,688
======= ======= =======
Earnings per share:
Basic, as reported $ 1.31 $ 1.07 $ 0.83
Basic, pro forma $ 1.14 $ 0.91 $ 0.73
Diluted, as reported $ 1.22 $ 0.95 $ 0.76
Diluted, pro forma $ 1.06 $ 0.81 $ 0.67
Pursuant to the requirements of SFAS 123, the weighted-average fair
value of the individual employee stock options and warrants granted during
2004, 2003 and 2002 have been estimated as $9.93, $5.93 and $3.11,
respectively, on the date of the grant. The fair values were determined
using a Black-Scholes option-pricing model using the following assumptions:
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Dividend yield - - -
Volatility 52.7% 54.0% 58.0%
Risk-free interest rate 3.5% 3.5% 3.5%
Expected life 5.5 years 7 years 7 years
In December 2004, the FASB issued Statement No. 123(R), Share Based
Payments. This statement, which is effective for the Company beginning July
1, 2005, requires that companies recognize compensation expense equal to the
fair value of stock options or other share-based payments.
Earnings per share - Basic net income per share is computed by dividing
net income by the weighted average number of shares outstanding during the
year. Diluted net income per share is calculated by giving effect to the
potential dilution that could occur if securities or other contracts to
issue common shares were exercised and converted into common shares during
the year. All share amounts have been retroactively adjusted to give effect
to a three-for-two split of the Company's common stock in 2004 (See Note 4).
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Numerator:
Net income for calculating
basic and diluted earnings per share $ 20,706 $ 14,975 $ 10,940
======= ======= =======
Denominator:
Weighted-average common shares for
calculating basic earnings per share 15,754 13,986 13,250
Effect of dilutive stock options
and warrants 1,280 1,770 1,146
------- ------- -------
Weighted-average common shares for
calculating diluted earnings per share 17,034 15,756 14,396
======= ======= =======
Basic earnings per share $ 1.31 $ 1.07 $ 0.83
Diluted earnings per share $ 1.22 $ 0.95 $ 0.76
Pervasiveness of estimates - 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 the 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.
Reclassification - Certain amounts for the years ended December 31,
2002 and 2003 have been reclassified in order to conform to the 2004
presentation.
In addition, the Statements of Cash Flows for the years ended December
31, 2003 and 2002 were restated to correct the classification of certain
transactions between sections of the Statements of Cash Flows. The effects
of these reclassifications were to increase cash flows from operating
activities by $16,508,000 and $9,563,000 from amounts previously reported
for 2003 and 2002, respectively with offsetting reductions to net cash flows
from investing and financing activities. The specific adjustments were
provided in the Company's amended and restated Annual Report on Form 10-K/A,
dated October 8, 2004, for the year ended December 31, 2003.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
In December 2003, the FASB issued Interpretation No. 46(R) ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 addresses consolidation
by business enterprises of variable interest entities (formerly special
purpose entities). In general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for business purposes
that either (a) does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities
or entitled to receive a majority of the entity's residual returns or both.
The Company has a 50% ownership interest in a joint venture, Cash & Go,
Ltd., a Texas limited partnership, which owns and operates 40 check
cashing/short-term advance kiosks inside convenience stores. The Company
previously accounted for its share of the joint venture's operating results
using the equity method of accounting, as neither joint venture partner had
control. Accordingly, through December 31, 2003, the Company recorded its
50% share of the partnership's earnings or losses in its consolidated
financial statements. As defined in FIN 46, Cash & Go, Ltd. meets the
requirements of a variable interest entity that must be consolidated by the
Company. The Company implemented FIN 46 on December 31, 2003, at which time
it recorded a change in accounting principle charge of $357,000, net of
income tax benefit, which was necessary to recognize the other joint venture
partner's share of the Cash & Go, Ltd.'s accumulated operating losses as
part of the initial consolidation accounting. As of December 31, 2003 and
periods thereafter, the Company's consolidated balance sheet includes the
assets and liabilities of Cash & Go, Ltd., net of intercompany accounts,
including the loan described below, which have been eliminated. The
operating results of Cash & Go, Ltd., are included in the Company's
consolidated operating results effective for accounting periods beginning
January 1, 2004.
The Company funds substantially all of the working capital requirements
of Cash & Go, Ltd. in the form of a loan to the joint venture. This loan is
callable at any time by the Company, bears interest at the prime rate plus
5%, and is secured by substantially all of Cash & Go, Ltd.'s assets.
Summarized financial information for Cash & Go, Ltd. as of December 31,
2003, and for the years ended December 31, 2003 and 2002, are as follows:
December 31,
2003
-------
(in thousands)
Current assets $ 4,120
Non-current assets 528
Current note payable to First Cash Financial
Services, Inc. (5,504)
Other current liabilities (287)
-------
Net liabilities $ (1,143)
=======
Company's net receivable from Cash & Go, Ltd.:
Note receivable from Cash & Go, Ltd. $ 5,504
Company's share of net liabilities (572)
-------
$ 4,932
=======
Year Ended December 31,
-----------------------
2003 2002
------- -------
(in thousands)
Revenues $ 6,694 $ 7,093
Expenses 6,596 7,571
------- -------
Income (loss) before taxes $ 98 $ (478)
======= =======
Company's share of income (loss),
as accounted for using the equity
method through December 31, 2003 $ 49 $ (239)
======= =======
Had the Company been accounting for its investment in Cash & Go, Ltd.
under FIN 46 for the years ended December 31, 2003 and 2002, the Company's
net income would have been as follows (in thousands, except per share data):
Year Ended December 31,
-----------------------
2003 2002
------- -------
Reported net income $ 14,975 $ 10,940
Additional net income (loss) related
to consolidation of Cash & Go, Ltd.,
net of tax 387 (150)
------- -------
Adjusted net income $ 15,362 $ 10,790
======= =======
Basic earnings per share:
Reported net income $ 1.07 $ 0.83
Adjusted net income $ 1.10 $ 0.81
Diluted earnings per share:
Reported net income $ 0.95 $ 0.76
Adjusted net income $ 0.97 $ 0.75
NOTE 4 - CAPITAL STOCK
In March 2004, the Company's Board of Directors approved a three-for-
two stock split in the form of a stock dividend to shareholders of record on
March 22, 2004. The additional shares were distributed on April 6, 2004.
All share and per share amounts (except authorized shares, treasury shares
and par value) have been retroactively adjusted to reflect the split.
In July 2004, the Company's Board of Directors authorized a stock
repurchase program to permit future repurchases of up to 1,600,000 shares
of the Company's outstanding common stock. During 2004, the Company
repurchased a total of 623,000 common shares under the stock repurchase
program for an aggregate purchase price of $12,100,000, or $19.46 per share.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of December 31, 2002, the Company had notes receivable outstanding
from certain of its officers totaling $4,228,000. Repayment of these notes
was completed during Fiscal 2003. The notes bore interest at 3%.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, December 31,
2004 2003
------- -------
Land $ 672 $ 672
Buildings 1,002 1,002
Leasehold improvements 1,792 1,792
Furniture, fixtures and equipment 33,418 26,405
------- -------
36,884 29,871
Less: accumulated depreciation (19,508) (15,453)
------- -------
$ 17,376 $ 14,418
======= =======
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
December 31, December 31,
2004 2003
------- -------
Money orders and wire transfers payable $ 523 $ 726
Accrued compensation 3,492 2,979
Layaway deposits 2,057 1,655
Sales and property taxes payable 910 1,144
Lending activity settlements payable 781 1,462
Other 923 1,866
------- -------
$ 8,686 $ 9,832
======= =======
NOTE 8 - 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 2.4% at December 31,
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 December 31, 2004, no amounts were outstanding under the
Credit 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 December 31, 2004, and March 10, 2005. 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 9 - INCOME TAXES
Components of the provision for income taxes consist of the following
(in thousands):
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Current:
Federal $ 9,874 $ 7,495 $ 4,437
State and foreign 891 870 760
------- ------- -------
10,765 8,365 5,197
Deferred 1,396 1,032 1,254
------- ------- -------
$ 12,161 $ 9,397 $ 6,451
======= ======= =======
The principal current and non-current deferred tax liabilities consist
of the following at December 31, 2004 and 2003 (in thousands):
December 31, December 31,
2004 2003
------- -------
Deferred tax assets:
Inventory tax-basis difference $ 1,673 $ 1,520
Legal accruals - 430
------- -------
1,673 1,950
------- -------
Deferred tax liabilities:
Amortization of goodwill 7,264 6,120
Depreciation 1,013 1,248
State income tax effect of
deferred tax items 407 329
Other 340 208
------- -------
9,024 7,905
------- -------
Net deferred tax liability $ 7,351 $ 5,955
======= =======
Reported as:
Non-current liabilities - deferred
income taxes $ 7,351 $ 5,955
======= =======
The provision for income taxes differs from the amounts determined by
applying the expected federal statutory tax rate to income from continuing
operations before income taxes. The following is a reconciliation of such
differences (in thousands):
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Tax at the federal statutory rate $ 11,175 $ 8,408 $ 5,913
State and foreign income taxes,
net of federal tax benefit 588 558 400
Other, net 398 431 138
------- ------- -------
$ 12,161 $ 9,397 $ 6,451
======= ======= =======
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under
operating leases with terms generally ranging from three to five years.
Most facility leases contain renewal options. Remaining future minimum
rentals due under non-cancelable operating leases, including Cash & Go,
Ltd., are as follows (in thousands):
Fiscal
------
2005 ................ $ 10,870
2006 ................ 10,024
2007 ................ 8,546
2008 ................ 5,913
2009 ................ 3,153
Thereafter .......... 4,265
-------
$ 42,771
=======
Rent expense under such leases was $10,923,000, $8,664,000 and
$7,251,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
The Company is from time to time a defendant (actual or threatened) in
certain lawsuits and arbitration claims encountered in the ordinary course
of its business, the resolution of which, in the opinion of management,
should not have a materially adverse effect on the Company's financial
position, results of operations, or cash flows.
NOTE 11 - EMPLOYEE STOCK OPTION AND INCENTIVE PLANS AND OUTSTANDING WARRANTS
On October 30, 1990, the Company's Board of Directors adopted the 1990
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the
issuance of incentive stock options and non-qualified stock options to key
employees and directors of the Company. The total number of shares of
Common Stock authorized and reserved for issuance under the 1990 Plan is
375,000 shares. The exercise price for each stock option granted under the
1990 Plan may not be less than the fair market value of the Common Stock on
the date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1990 Plan have a maximum duration of five years and vest
in up to four equal installments, commencing on the first anniversary of the
date of grant. As of December 31, 2004, no options to purchase shares of
Common Stock were available for grant under the 1990 Plan. Options to
purchase 1,000 shares were vested at December 31, 2004.
On January 14, 1999, the Company's shareholders adopted the 1999 Stock
Option Plan (the "1999 Plan"). The 1999 Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of Common Stock
authorized and reserved for issuance under the 1999 Plan is 3,750,000
shares. The exercise price for each stock option granted under the 1999
Plan may not be less than the fair market value of the Common Stock on the
date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1999 Plan have a maximum duration of ten years unless, in
the case of incentive stock options, the optionee owns at least 10% of the
total combined voting power of all classes of capital stock of the Company,
in which case the maximum duration is five years. As of December 31, 2004,
options to purchase 1,177,000 shares of Common Stock were available for
grant under the 1999 Plan. Options to purchase 552,000 shares of common
stock under the 1999 Plan were vested as of December 31, 2004.
On June 15, 2004, the Company's shareholders adopted the 2004 Long-Term
Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the issuance
of incentive stock options, non-qualified stock options and other forms of
equity compensation such as stock appreciation rights and restricted stock
to key employees and directors of the Company. The total number of shares
of Common Stock authorized and reserved for issuance under the 2004 Plan
is 900,000 shares. The exercise price for each stock option or stock
appreciation right granted under the 2004 Plan may not be less than the fair
market value of the Common Stock on the date of the grant. Unless otherwise
determined by the Board, options granted under the Plan have a maximum
duration of ten years. As of December 31, 2004, no stock options or other
equity compensation units had been granted or vested and 900,000 options or
units were available for grant under the 2004 Plan.
The Company also issues warrants to purchase shares of Common Stock to
certain key members of management, to members of the Board of Directors who
are not employees or officers of the Company and to outside consultants
and advisors in connection with various acquisitions, debt offerings and
consulting engagements. In accordance with the provisions of FAS 123, the
issuance of warrants to outside consultants and advisors is accounted for
using the fair value method prescribed by FAS 123.
Stock option and warrant activity for Fiscal 2002, 2003 and 2004 is
summarized in the accompanying chart (in thousands, except exercise price).
Exercisable
-----------------
Weighted
Weighted Average
Average Exercise
Options Warrants Exercise Price Number Price
------- -------- -------------- ------ -----
December 31, 2001 1,769 1,504 $ 3.99 2,534 $ 3.53
Granted 195 783 5.33
Exercised (93) (68) 2.75
Cancelled (205) (135) 7.04
----- -----
December 31, 2002 1,666 2,084 4.12 3,279 4.01
Granted 503 405 10.18
Exercised (1,197) (663) 3.27
Cancelled (27) - 5.33
----- -----
December 31, 2003 945 1,826 6.65 2,463 6.45
Granted 455 - 19.33
Exercised (605) (938) 7.03
----- -----
December 31, 2004 795 888 $ 9.73 1,395 $ 9.42
===== =====
Options and warrants outstanding as of December 31, 2004, are as
follows (in thousands, except exercise price and life):
Total Warrants
Exercise and Remaining Currently
Price Options Life Exercisable
----- ------- ---- -----------
$1.33 75 6.0 75
2.67 8 6.1 -
5.33 14 0.3 14
5.33 22 3.2 22
5.33 365 7.3 273
5.33 15 7.7 -
5.33 300 8.1 300
6.67 38 4.3 38
6.67 60 8.1 30
6.73 100 8.3 100
7.67 120 8.4 120
8.67 19 8.4 20
13.37 93 8.8 36
19.33 454 9.1 367
----- -----
1,683 1,395
===== =====
NOTE 12 - FIRST CASH 401(k) PLAN
The First Cash 401(k) Plan (the "Plan") is provided by the Company for
all full-time employees who have been employed with the Company for one
year. Under the Plan, a participant may contribute up to 15% of earnings,
with the Company matching the first 3% at a rate of 50%. The employee and
Company contributions are paid to a corporate trustee and invested in
various funds. Contributions made to participants' accounts become fully
vested upon completion of five years of service. The total Company matching
contributions to the Plan were $250,000, $213,000 and $220,000 for the years
ended December 31, 2004, 2003 and 2002, respectively.
NOTE 13 - GEOGRAPHIC AREAS
The Company manages its business on the basis of one reportable
segment. See Note 1 for a brief description of the Company's business. The
following table shows revenues, selected current assets and long-lived
assets (all non-current assets except goodwill) by geographic area (in
thousands):
Year Ended December 31,
-----------------------------
2004 2003 2002
------- ------- -------
Revenues:
United States $145,386 $126,707 $112,720
Mexico 34,427 18,761 6,073
------- ------- -------
Total $179,813 $145,468 $118,793
======= ======= =======
Pawn receivables:
United States $ 16,707 $ 15,695 $ 14,430
Mexico 6,722 4,342 2,194
------- ------- -------
Total $ 23,429 $ 20,037 $ 16,624
======= ======= =======
Short-term advance receivables:
United States $ 15,465 $ 13,759 $ 10,690
Mexico - - -
------- ------- -------
Total $ 15,465 $ 13,759 $ 10,690
======= ======= =======
Inventories:
United States $ 13,393 $ 13,042 $ 12,283
Mexico 4,251 2,546 1,365
------- ------- -------
Total $ 17,644 $ 15,588 $ 13,648
======= ======= =======
Long-lived assets:
United States $ 11,183 $ 11,391 $ 16,706
Mexico 6,992 3,710 2,958
------- ------- -------
Total $ 18,175 $ 15,101 $ 19,664
======= ======= =======
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands, except per share
data) for the fiscal years ended December 31, 2004 and 2003, are set forth
below. The Company's operations are subject to seasonal fluctuations.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2004
----
Total revenues $ 41,850 $ 40,318 $ 46,544 $ 51,101
Cost of revenues 13,532 13,730 17,660 18,945
Gross profit 28,318 26,588 28,884 32,156
Total expenses 20,139 19,813 20,641 22,486
Net income 5,178 4,246 5,190 6,092
Diluted earnings per share
from net income 0.30 0.25 0.31 0.36
Diluted weighted average shares 17,079 17,294 16,830 16,931
2003
----
Total revenues $ 34,244 $ 33,418 $ 37,241 $ 40,565
Cost of revenues 11,815 11,730 13,313 14,364
Gross profit 22,429 21,688 23,928 26,201
Total expenses 16,838 16,781 17,447 18,452
Income before change in
accounting principle 3,498 3,001 4,016 4,817
Cumulative effect of change
in accounting principle - - - (357)
Net income 3,498 3,001 4,016 4,460
Diluted earnings per share before
change in accounting principle 0.24 0.19 0.25 0.29
Diluted earnings per share from
cumulative effect of change
in accounting principle - - - (0.02)
Diluted earnings per share
from net income 0.24 0.19 0.25 0.27
Diluted weighted average shares 14,684 15,159 16,358 16,773