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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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 1-9733
CASH AMERICA INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2018239
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1600 WEST 7TH STREET
FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
(817) 335-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
27,992,431 common shares, $.10 par value, were outstanding as of October 15,
2003
CASH AMERICA INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets -
September 30, 2003 and 2002 and December 31, 2002 ................... 1
Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2003 and 2002 ............. 2
Consolidated Statements of Stockholders' Equity -
September 30, 2003 and 2002 ......................................... 3
Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 2003 and 2002 ............. 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2003 and 2002 ....................... 4
Notes to Consolidated Financial Statements .......................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk .... 33
Item 4. Controls and Procedures ....................................... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 35
Item 6. Exhibits and Reports on Form 8-K .............................. 35
SIGNATURES ............................................................... 36
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
------------------------ ------------
2003 2002 2002
--------- --------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 11,768 $ 5,106 $ 3,951
Pawn loans ............................................................ 141,523 127,197 127,388
Cash advances, net .................................................... 22,721 1,663 2,210
Merchandise held for disposition, net ................................. 58,262 56,348 54,444
Finance and service charges receivable ................................ 22,341 20,087 21,096
Other receivables and prepaid expenses ................................ 8,952 6,320 8,671
Income taxes recoverable .............................................. 5,646 1,553 --
Deferred tax assets ................................................... 7,346 5,568 5,392
--------- --------- ---------
Total current assets ................................................ 278,559 223,842 223,152
Property and equipment, net ............................................. 76,125 67,763 67,254
Goodwill ................................................................ 114,788 79,339 79,833
Other assets ............................................................ 7,798 6,039 6,239
--------- --------- ---------
Total assets ........................................................ $ 477,270 $ 376,983 $ 376,478
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ................................. $ 30,866 $ 19,411 $ 24,920
Customer deposits ..................................................... 4,614 4,593 4,050
Income taxes currently payable ........................................ 1,084 992 2,086
Current portion of long-term debt ..................................... 8,286 12,571 12,571
--------- --------- ---------
Total current liabilities ........................................... 44,850 37,567 43,627
Deferred tax liabilities ................................................ 5,949 3,028 4,385
Long-term debt .......................................................... 170,727 153,455 136,131
Stockholders' equity:
Common stock, $.10 par value per share, 80,000,000 shares authorized... 3,024 3,024 3,024
Additional paid-in capital ............................................ 140,645 127,819 127,819
Retained earnings ..................................................... 130,560 106,140 113,278
Accumulated other comprehensive income (loss) ......................... 1,743 (5,312) (2,718)
Notes receivable secured by common stock .............................. (3,023) (6,103) (5,864)
Treasury shares at cost ............................................... (17,205) (42,635) (43,204)
--------- --------- ---------
Total stockholders' equity .......................................... 255,744 182,933 192,335
--------- --------- ---------
Total liabilities and stockholders' equity .......................... $ 477,270 $ 376,983 $ 376,478
========= ========= =========
See notes to consolidated financial statements.
1
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -----------------------
2003 2002 2003 2002
-------- ------- --------- --------
(Unaudited)
REVENUE
Finance and service charges ......................... $ 33,014 $30,530 $ 95,070 $ 86,806
Proceeds from disposition of merchandise ............ 57,765 53,244 180,060 178,557
Cash advance fees ................................... 14,513 5,088 27,373 12,834
Check cashing royalties and fees .................... 1,856 1,094 4,567 3,466
-------- ------- --------- --------
TOTAL REVENUE ......................................... 107,148 89,956 307,070 281,663
COST OF REVENUE
Disposed merchandise ................................ 36,584 34,556 113,525 117,622
-------- ------- --------- --------
NET REVENUE ........................................... 70,564 55,400 193,545 164,041
-------- ------- --------- --------
EXPENSES
Operations .......................................... 40,812 34,586 114,023 102,343
Cash advance loss provision ......................... 4,077 2,070 7,101 4,539
Administration ...................................... 9,771 7,534 27,179 21,993
Depreciation and amortization ....................... 4,192 3,881 11,488 11,151
-------- ------- --------- --------
TOTAL EXPENSES ........................................ 58,852 48,071 159,791 140,026
-------- ------- --------- --------
INCOME FROM OPERATIONS ................................ 11,712 7,329 33,754 24,015
Interest expense, net ............................... 2,390 2,252 6,692 6,565
Loss from derivative valuation fluctuations ......... -- 98 -- 170
Gain from disposal of asset ......................... -- -- (1,013) --
-------- ------- --------- --------
Income from continuing operations before income taxes.. 9,322 4,979 28,075 17,280
Provision for income taxes .......................... 3,280 1,797 9,613 6,213
-------- ------- --------- --------
INCOME FROM CONTINUING OPERATIONS ..................... 6,042 3,182 18,462 11,067
Gain from discontinued operations ................... -- -- -- 800
-------- ------- --------- --------
NET INCOME ............................................ $ 6,042 $ 3,182 $ 18,462 $ 11,867
======== ======= ========= ========
Net income per share:
Basic --
Income from continuing operations ................. $ 0.23 $ 0.13 $ 0.75 $ 0.45
Gain from discontinued operations ................. $ -- $ -- $ -- $ 0.03
Net income ........................................ $ 0.23 $ 0.13 $ 0.75 $ 0.49
Diluted --
Income from continuing operations ................. $ 0.22 $ 0.13 $ 0.72 $ 0.45
Gain from discontinued operations ................. $ -- $ -- $ -- $ 0.03
Net income ........................................ $ 0.22 $ 0.13 $ 0.72 $ 0.48
Weighted average common shares outstanding:
Basic ............................................... 25,791 24,412 24,746 24,459
Diluted ............................................. 27,197 24,773 25,806 24,849
Dividends declared per common share ................... $ 0.0175 $0.0125 $ 0.0475 $ 0.0375
See notes to consolidated financial statements.
2
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
September 30,
--------------------------------------------------------------
2003 2002
----------------------------- ---------------------------
Shares Amounts Shares Amounts
------------ ----------- ----------- -----------
(Unaudited)
COMMON STOCK
Balance at beginning of year ........................ 30,235,164 $ 3,024 30,235,164 $ 3,024
============ ----------- =========== -----------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ........................ 127,819 127,821
Reissuance of treasury stock ........................ 5,597 --
Exercise of stock options ........................... (513) (10)
Tax benefit from exercise of stock options .......... 7,742 8
----------- -----------
Balance at September 30 ........................... 140,645 127,819
----------- -----------
RETAINED EARNINGS
Balance at beginning of year ........................ 113,278 95,192
Net income .......................................... 18,462 11,867
Dividends declared .................................. (1,180) (919)
----------- -----------
Balance at September 30 ........................... 130,560 106,140
----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year ........................ (2,718) (10,820)
Foreign currency translation adjustments ............ 4,461 5,508
----------- -----------
Balance at September 30 ........................... 1,743 (5,312)
----------- -----------
NOTES RECEIVABLE SECURED BY COMMON STOCK
Balance at beginning of year ........................ (5,864) (5,890)
Payments (advances) on notes receivable during period 2,841 (213)
----------- -----------
Balance at September 30 ........................... (3,023) (6,103)
----------- -----------
TREASURY SHARES AT COST
Balance at beginning of year ........................ (5,939,794) (43,204) (5,643,318) (40,896)
Purchases of treasury shares ........................ (171,158) (1,803) (238,444) (1,787)
Reissuance of treasury stock ........................ 1,533,333 11,208 -- --
Exercise of stock options ........................... 2,270,689 16,594 6,750 48
------------ ----------- ----------- -----------
Balance at September 30 ........................... (2,306,930) (17,205) (5,875,012) (42,635)
============ ----------- =========== -----------
TOTAL STOCKHOLDERS' EQUITY ............................ $ 255,744 $ 182,933
=========== ===========
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
(Unaudited)
COMPREHENSIVE INCOME
Net income ............................... $ 6,042 $ 3,182 $ 18,462 $ 11,867
Other comprehensive income, net of tax --
Foreign currency translation adjustments 1,083 976 4,461 5,508
------------ ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME ................. $ 7,125 $ 4,158 $ 22,923 $ 17,375
============ =========== =========== ===========
See notes to consolidated financial statements.
3
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .................................................................. $ 18,462 $ 11,867
Less: Gain from discontinued operations .................................... -- 800
--------- ---------
Income from continuing operations ........................................... 18,462 11,067
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities of continuing operations:
Depreciation and amortization ............................................. 11,488 11,151
Cash advance loss provision ............................................... 7,101 4,539
Gain from disposal of assets .............................................. (1,013) --
Loss from derivative valuation fluctuations ............................... -- 170
Changes in operating assets and liabilities --
Merchandise held for disposition ........................................ (2,849) 7,673
Finance and service charges receivable .................................. (514) (112)
Other receivables and prepaid expenses .................................. 538 (1,482)
Accounts payable and accrued expenses ................................... 5,680 (10,696)
Customer deposits, net .................................................. 522 632
Current income taxes .................................................... 1,098 (1,726)
Deferred taxes, net ..................................................... (598) 5,207
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS ...... 39,915 26,423
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Pawn loans forfeited and transferred to merchandise held for disposition .... 100,563 96,047
Pawn loans repaid or renewed ................................................ 222,646 203,046
Pawn loans made, including loans renewed .................................... (330,872) (304,816)
--------- ---------
Net increase in pawn loans .............................................. (7,663) (5,723)
--------- ---------
Cash advances repaid or renewed ............................................. 82,197 24,664
Cash advances made, assigned or purchased ................................... (95,410) (28,420)
--------- ---------
Net increase in cash advances ........................................... (13,213) (3,756)
--------- ---------
Acquisitions, net of cash acquired .......................................... (45,651) (3,713)
Purchases of property and equipment ......................................... (12,826) (8,433)
Proceeds from sale of assets ................................................ 1,639 --
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS .......... (77,714) (21,625)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under bank lines of credit ...................... 42,001 (40,422)
Issuance of long-term debt .................................................. -- 42,500
Payments on notes payable, capital leases and other obligations ............. (12,571) (9,220)
Change in notes receivable secured by common stock .......................... 2,968 48
Net proceeds from reissuance of treasury shares ............................. 16,081 38
Treasury shares purchased ................................................... (1,803) (1,787)
Dividends paid .............................................................. (1,180) (919)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS 45,496 (9,762)
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ....................................... 120 531
--------- ---------
CASH PROVIDED (USED) BY CONTINUING OPERATIONS ................................. 7,817 (4,433)
CASH PROVIDED BY DISCONTINUED OPERATIONS ...................................... -- 3,145
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 3,951 6,394
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................... $ 11,768 $ 5,106
========= =========
See notes to consolidated financial statements.
4
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
______________________________________________________
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cash America
International, Inc. (the "Company") and its majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In September 2001, the Company announced plans to exit the rent-to-own
business in order to focus on its core business of lending activities. In June
2002, the Company sold the remaining assets of its rent-to-own business. See
Note 9.
The financial statements as of September 30, 2003 and 2002, and for the
three and nine month periods then ended are unaudited but, in management's
opinion, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results for such interim
periods. Operating results for the three and nine month periods are not
necessarily indicative of the results that may be expected for the full fiscal
year.
Certain amounts in the consolidated financial statements for the three and
nine month periods ended September 30, 2002, have been reclassified to conform
to the presentation format adopted in 2003. These reclassifications have no
effect on the net income previously reported.
These financial statements and related notes should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 2002 Annual Report to Stockholders.
2. REVENUE RECOGNITION
Pawn Lending - Pawn loans ("loans") are made on the pledge of tangible personal
property. The Company accrues finance and service charges revenue on all loans
that the Company deems collectible, based on historical loan redemption
statistics. For loans not repaid, the carrying value of the forfeited collateral
("merchandise held for disposition") is stated at the lower of cost (cash amount
loaned) or market. Revenue is recognized at the time that merchandise is sold.
Interim customer payments for layaway sales are recorded as customer deposits
and subsequently recognized as revenue during the period in which final payment
is received.
Cash Advances - Small consumer cash advances ("cash advances") provide customers
with cash in exchange for a promissory note or other repayment agreement
supported by that customer's personal check for the aggregate amount of the cash
advanced plus a service fee. To repay the cash advance, customers may redeem
their check by paying cash or they may allow the check to be presented for
collection. The Company accrues fees and interest on cash advances on a constant
yield basis ratably over their terms. For those locations that offer cash
advances from a third-party financial institution, the Company receives
administrative service fees for services provided on the institutions' behalf.
These fees are recorded in revenue when earned.
5
Check Cashing - The Company records fees derived from its owned check cashing
locations in the period in which the service is provided. Royalties derived from
franchise locations are recorded on the accrual basis.
3. ACQUISITIONS
Cashland, Inc. - As part of the Company's strategic initiative of expanding its
reach into new markets with new customers and new financial services, effective
August 1, 2003, the Company, through its wholly-owned subsidiary Cashland
Financial Services, Inc. ("Cashland"), completed the purchase of substantially
all of the assets of Cashland, Inc., a privately-owned consumer finance company
based in Dayton, Ohio. As of the purchase date, Cashland operated 121 consumer
finance centers that offer short-term cash advances and check cashing services.
The results of Cashland's operations have been included in the consolidated
financial statements since that date. The aggregate purchase consideration was
$50,512,000, which consisted of $32,000,000 cash, 1,533,333 shares of the
Company's stock valued at $16,805,000 and estimated acquisition costs of
$1,707,000. The cash portion of the purchase price was funded by the Company's
U.S. line of credit. During the quarter, the total commitment amount under the
line of credit increased from $90,000,000 to $135,000,000 (see Note 7) to
facilitate this acquisition. The terms of the purchase include the potential for
additional consideration to be paid based on the future earnings performance of
Cashland. Any additional consideration would be in the form of subordinated debt
or cash.
Under the purchase method of accounting, the assets of Cashland were
recorded at their respective fair values as of the purchase date. The allocation
of the purchase price is subject to refinement. The total assets acquired at
fair value as of August 1, 2003 are presented below (in thousands):
Assets
Cash advances ............................................. $12,868
Other receivables and prepaid expenses .................... 40
Property and equipment .................................... 6,451
Goodwill .................................................. 27,853
Intangible assets ......................................... 3,300
-------
Total assets acquired ................................... $50,512
=======
Of the total purchase price, $100,000 was assigned to a non-competition
agreement that is being amortized over the period of the agreement of two years,
$2,200,000 was assigned to customer relationships and is being amortized over
its estimated useful life of six years and $1,000,000 was assigned to tradenames
which is not subject to amortization.
The acquisition resulted in the recognition of goodwill of $27,853,000,
which is not subject to amortization. All of that amount is expected to be
deductible for tax purposes.
Other Acquisitions - On August 11, 2003, the Company completed the acquisition
of a five-store chain of pawn lending locations in the Texas Rio Grande Valley,
near the border with Mexico, for cash of $8,629,000. Of the total purchase
price, $1,000,000 was allocated to a non-competition agreement which is being
amortized over the period of the agreement of ten years, $250,000 was assigned
to customer relationships and is being amortized over five years, and $4,429,000
was assigned to goodwill. In addition, during the nine months ended September
30, 2003, the Company acquired five pawnshops, one check cashing franchise and
other earning assets in purchase transactions for an aggregate cash
consideration of $3,315,000. The excess of the aggregate purchase price over the
aggregate fair market value of net assets acquired was $1,824,000.
6
4. SMALL CONSUMER CASH ADVANCES AND ALLOWANCE FOR LOSSES
The Company offers the cash advance product through its Cash America pawnshops,
Cash America cash advance centers and Cashland consumer finance centers. Cash
advances are generally offered for a term of 7 to 45 days, depending on the
customer's next payday. The Company originates cash advances in some of its
locations and markets and services cash advances made by a third-party bank in
other Company locations. During the first quarter of 2003, the Company
terminated its relationship with a national bank that had offered this product
in many of its stores and entered into an agreement with a state chartered bank
to offer the product in those stores.
Under the current bank program, the Company purchases a participation interest
in the bank originated cash advances, and receives an administrative fee for its
services. In order to benefit from the use of the Company's collection resources
and proficiency, all cash advances unpaid after maturity are assigned to the
Company at a discount from the amount owed by the borrower. Losses on cash
advances assigned to the Company that prove uncollectible are the responsibility
of the Company. To the extent that the Company collects an amount owed by the
customer in excess of the amount assigned by the bank, the Company is entitled
to the excess and recognizes it in income when collected. Since the Company may
not be successful in the collection of the assigned accounts, the Company's
provision for loan losses includes amounts estimated to be adequate to absorb
credit losses from cash advances in the aggregate portfolio, including those
expected to be assigned from the third-party bank's outstanding portfolio.
7
Cash advances outstanding at September 30, 2003 and 2002, were as follows
(in thousands):
2003 2002
------- -------
Originated by the Company
Active cash advances and fees receivable ............ $13,501 $ 1,083
Cash advances and fees in collection ................ 3,807 404
------- -------
TOTAL ORIGINATED BY THE COMPANY ................. 17,308 1,487
------- -------
Originated by bank
Active cash advances and fees receivable ............ 8,144 5,702
Cash advances and fees in collection ................ 2,576 2,266
------- -------
TOTAL ORIGINATED BY BANK ........................ 10,720 7,968
------- -------
COMBINED GROSS PORTFOLIO .............................. 28,028 9,455
Less: Elimination of cash advances owned by bank .. 995 5,702
Less: Discount on cash advances assigned by bank .. 477 381
------- -------
Company cash advances and fees receivable, gross ...... 26,556 3,372
Less: Allowance for losses ......................... 3,835 1,709
------- -------
CASH ADVANCES AND FEES RECEIVABLE, NET ................ $22,721 $ 1,663
======= =======
ALLOWANCE FOR LOSSES AS A % OF COMBINED GROSS PORTFOLIO 13.7% 18.1%
======= =======
The table above of cash advances outstanding includes the results of
Cashland as of September 30, 2003. Excluding the impact of Cashland, the
Company's gross and net balances of cash advances and fees receivable would have
been $11,174,000 and $9,140,000, respectively, and the allowance for losses
would have been $2,034,000 representing 16.1% of the combined gross portfolio as
of September 30, 2003.
Changes in the allowance for losses on cash advances for the three and
nine month periods ended September 30, 2003 and 2002, were as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2003 2002 2003 2002
------- ------- ------- -------
Balance at beginning of period .................................... $ 1,937 $ 1,324 $ 1,748 $ 711
Cash advance loss provision ..................................... 4,077 2,070 7,101 4,539
Charge-offs ..................................................... (2,871) (2,145) (7,275) (5,055)
Recoveries ...................................................... 692 460 2,261 1,514
------- ------- ------- -------
Balance at end of period .......................................... $ 3,835 $ 1,709 $ 3,835 $ 1,709
======= ======= ======= =======
Cash advance loss provision as a % of combined advances written ... 4.4% 6.1% 4.1% 5.5%
======= ======= ======= =======
Charge-offs (net of recoveries) as a % of combined advances written 2.4% 4.9% 2.9% 4.3%
======= ======= ======= =======
The table above of the changes in allowance for losses on cash advances
includes the results of Cashland for the two months since its acquisition.
Excluding the impact of Cashland, the cash advance loss provision would have
been $2,276,000 representing 4.7% of cash advances written during the three
month period and $5,300,000 representing 4.1% for the nine month period,
respectively. Also, charge-offs, net of recoveries, would have been 4.5% and
3.9% of cash advances written for the three and nine month periods ended
September 30, 2003, excluding the effect of Cashland.
8
Cash advances assigned by the bank to the Company for collection were
$21,701,000 and $16,187,000, for the nine months ended September 30, 2003 and
2002, respectively. The Company's participation interest in bank originated cash
advances at September 30, 2003, was $6,996,000.
5. WEIGHTED AVERAGE SHARES
The reconciliation of basic and diluted weighted average common shares
outstanding for the three and nine month periods ended September 30, 2003 and
2002, was as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
Weighted average shares - Basic ........................ 25,791 24,412 24,746 24,459
Effect of shares applicable to stock option plans ...... 1,345 296 998 322
Effect of shares applicable to nonqualified savings plan 61 65 62 68
------ ------ ------ ------
Weighted average shares - Diluted ...................... 27,197 24,773 25,806 24,849
====== ====== ====== ======
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets having an indefinite useful life are tested
for impairment annually at June 30, or more frequently if events or changes in
circumstances indicate that the assets might be impaired. Based on the results
of the test, management determined there was no impairment as of June 30, 2003
as the respective fair values of the Company's reporting units exceed their
respective carrying amounts.
Goodwill - The changes in the carrying value of goodwill for the nine month
periods ended September 30, 2003 and 2002, were as follows (in thousands):
Pawn Lending
------------
United Cash Check
States Foreign Advances(a) Cashing Consolidated
------ ------- ----------- ------- ------------
Balance as of January 1, 2003,
Net of amortization of $23,365 $ 59,591 $ 15,059 $ -- $ 5,183 $ 79,833
Acquired goodwill .............. 4,844 1,282 27,853 127 34,106
Effect of foreign translation .. -- 849 -- -- 849
-------- -------- -------- -------- --------
Balance as of September 30, 2003 $ 64,435 $ 17,190 $ 27,853 $ 5,310 $114,788
======== ======== ======== ======== ========
Balance as of January 1, 2002,
Net of amortization of $24,224 $ 59,050 $ 12,453 $ -- $ 5,183 $ 76,686
Acquired goodwill .............. 552 1,006 -- -- 1,558
Effect of foreign translation .. -- 1,095 -- -- 1,095
-------- -------- -------- -------- --------
Balance as of September 30, 2002 $ 59,602 $ 14,554 $ -- $ 5,183 $ 79,339
======== ======== ======== ======== ========
- ----------
(a) Cashland only.
9
Acquired Intangible Assets - Acquired intangible assets as of September 30, 2003
and 2002, were as follows (in thousands):
2003 2002
---------------------------------------- ----------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Non-competition agreements $ 2,260 $ (830) $ 1,430 $ 2,991 $ (2,415) $ 576
Customer relationships.... 2,460 (137) 2,323 -- -- --
Tradenames ............... 1,000 -- 1,000 -- -- --
Other .................... 160 (50) 110 131 (68) 63
--------- --------- --------- --------- --------- ---------
Total .................... $ 5,880 $ (1,017) $ 4,863 $ 3,122 $ (2,483) $ 639
========= ========= ========= ========= ========= =========
Non-competition agreements are amortized over the terms of the contracts.
Net acquired intangible assets are included in "Other assets" in the
accompanying consolidated balance sheets.
7. LONG-TERM DEBT
The Company's long-term debt instruments and balances outstanding at September
30, 2003 and 2002, were as follows (in thousands):
2003 2002
-------- --------
U.S. Line of Credit up to $135,000
Due July 31, 2006 ........................... $ 83,421 $ 60,955
Multi-currency Line of Credit up to L20,000
Due April 30, 2006 ......................... 15,663 --
Multi-currency Line of Credit up to L15,000
Due April 30, 2004 (terminated in 2002) ..... -- 12,571
8.33% senior unsecured notes due 2003 .......... -- 4,286
8.14% senior unsecured notes due 2007 .......... 16,000 20,000
7.10% senior unsecured notes due 2008 .......... 21,429 25,714
7.20% senior unsecured notes due 2009 .......... 42,500 42,500
-------- --------
179,013 166,026
Less current portion ........................... 8,286 12,571
-------- --------
Total long-term debt ........................ $170,727 $153,455
======== ========
In connection with the acquisition of Cashland, the Company increased the
total commitment amount under its U.S. line of credit from $90,000,000 to
$135,000,000 and extended the maturity date of this line of credit for an
additional year to July 31, 2006. The interest rate on the line of credit varies
from 1.50% to 2.25% over LIBOR, depending on the Company's cash flow leverage
ratio as defined in the credit agreement. The Company pays a fee of 0.375% per
annum on the unused portion of this line of credit. The amended credit agreement
also changed certain financial ratios that the Company has to maintain.
The Company also has an SEK 15,000,000 line of credit (approximately
$1,938,000 at September 30, 2003) that matures on May 30, 2004. There were no
amounts outstanding on this line of credit as of September 30, 2003 and 2002,
respectively.
10
8. STOCK OPTIONS
Under various plans (the "Plans") it sponsors, the Company is authorized to
issue 8,300,000 shares of common stock pursuant to "Awards" granted as incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended) and nonqualified stock options. Stock options granted
under the Plans have contractual terms of 5 to 15 years and have an exercise
price equal to or greater than the fair market value of the stock at grant date.
Stock options granted vest equally over periods ranging from 1 to 7 years and
certain option awards issued since 1997 have a provision to accelerate the
vesting if specified share price appreciation criteria are met. During the nine
months ended September 30, 2003, there were 794,575 shares that vested due to
the acceleration provision. No such accelerated vesting of stock options
occurred during the nine months ended September 30, 2002.
The Company applies the intrinsic value based method of accounting for the
Plans and, accordingly, no compensation costs have been recognized. Had
compensation costs for the Company's stock options been determined using the
fair value accounting provisions of Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company's
net income and related amounts per share, basic and diluted, for each of the
three and nine month periods ended September 30, 2003 and 2002 would have been
reported as follows (in thousands, except per share amounts). Included in the
pro-forma amounts below is the effect of the accelerated vesting of the 794,575
shares, which brings the estimated pro-forma compensation cost of those options
shares forward to the current period, eliminating it from future periods had
scheduled vesting occurred over the next 3 to 4 years.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income - as reported .................................... $ 6,042 $ 3,182 $ 18,462 $ 11,867
Deduct: Total stock-based employee compensation expense (a) 1,828 353 2,848 1,027
---------- ---------- ---------- ----------
Net income - pro forma ...................................... $ 4,214 $ 2,829 $ 15,614 $ 10,840
========== ========== ========== ==========
Net income per share
Basic:
As reported ............................................... $ 0.23 $ 0.13 $ 0.75 $ 0.49
Pro forma ................................................. $ 0.16 $ 0.12 $ 0.63 $ 0.44
Diluted:
As reported ............................................... $ 0.22 $ 0.13 $ 0.72 $ 0.48
Pro forma ................................................. $ 0.15 $ 0.11 $ 0.61 $ 0.44
- ----------
(a) Determined under fair value based method for all awards, net of related
tax effects. "All awards" refers to awards granted, modified, or settled
in fiscal periods beginning after December 15, 1994, that is, awards for
which the fair value was required to be measured under SFAS 123.
The fair value of each stock option is estimated on the date of grant
using the Black-Scholes option-pricing model. For options granted during the
three and nine month periods ended September 30, 2003 and 2002, the following
weighted average assumptions were used:
11
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Expected term (years) .......... 7.2 8.0 8.2 8.2
Risk-free interest rate ........ 4.20% 5.17% 4.14% 5.23%
Expected dividend yield ........ 0.56% 0.57% 0.54% 0.63%
Expected volatility ............ 46.7% 55.9% 49.5% 56.7%
9. DISCONTINUED OPERATIONS
In September 2001, the Company adopted a formal plan (the "Plan") to exit the
rent-to-own business conducted by the Company's subsidiary, Rent-A-Tire, Inc.
("Rent-A-Tire"), in order to focus on its core business of lending activities.
The Company closed 21 Rent-A-Tire operating locations and held the remaining 22
locations for sale. In conjunction with the Plan, a pre-tax charge of
$10,961,000 ($7,553,000 after income tax benefit) was recorded in the quarter
ended September 30, 2001, to establish a reserve for the estimated loss on
disposal of the rent-to-own business segment.
On June 14, 2002, the Company sold the assets of 22 Rent-A-Tire stores for
proceeds of approximately $3,000,000 in cash. During the quarter ended June 30,
2002, the Company recorded a $1,214,000 ($800,000 after income tax) reduction in
the original charge to the reserve, due to both a decrease in the Company's
expected future operating lease obligations (net of expected sublease income)
for closed stores and proceeds from the sale of assets in excess of the original
estimate. The remaining balance of the reserve of $410,000 at September 30,
2003, consists primarily of expected future operating lease obligations (net of
expected sublease income) for closed stores. The reserve is included in
"Accounts payable and accrued expenses" in the accompanying consolidated balance
sheets.
The Company guarantees obligations under certain operating leases for the
premises related to the 22 Rent-A-Tire stores included in the asset sale
agreement. In the event the buyer is unable to perform under the operating
leases, the Company's maximum aggregate contingent obligation under these
guarantees was approximately $1,122,000 at September 30, 2003. This amount will
be reduced dollar-for-dollar by future amounts paid on these operating leases by
the buyer. In the event that the buyer fails to perform and the Company is
required to make payments under these leases, the Company will seek to mitigate
its losses by subleasing the properties or buying out of the leases.
10. OPERATING SEGMENT INFORMATION
The Company has two reportable operating segments in the pawn lending industry
(United States pawn lending and foreign pawn lending), one in the cash advance
industry (Cashland), and one in the check cashing industry (Mr. Payroll). While
the United States and foreign pawn lending segments offer the same services,
each is managed separately due to the different operational strategies required.
Cashland and Mr. Payroll are managed separately and, therefore, are reported as
separate segments. The segment data included below excludes amounts related to
discontinued operations. See Note 9.
12
Information concerning the segments is set forth below (in thousands):
Pawn Lending
------------
United Cash Check
States Foreign Advances(a) Cashing(b) Consolidated
------ ------- ----------- ---------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2003:
REVENUE
Finance and service charges ............ $ 25,720 $ 7,294 $ -- $ -- $ 33,014
Proceeds from disposition of merchandise 53,456 4,309 -- -- 57,765
Cash advance fees ...................... 7,454 -- 7,059 -- 14,513
Check cashing royalties and fees ....... -- 507 525 824 1,856
-------- -------- -------- -------- --------
TOTAL REVENUE ............................ 86,630 12,110 7,584 824 107,148
Cost of revenue - disposed merchandise ... 33,599 2,985 -- -- 36,584
-------- -------- -------- -------- --------
NET REVENUE .............................. 53,031 9,125 7,584 824 70,564
-------- -------- -------- -------- --------
EXPENSES
Operations ............................. 32,870 4,094 3,444 404 40,812
Cash advance loss provision ............ 2,276 -- 1,801 -- 4,077
Administration ......................... 7,619 1,236 709 207 9,771
Depreciation and amortization .......... 2,879 719 459 135 4,192
-------- -------- -------- -------- --------
TOTAL EXPENSES ........................... 45,644 6,049 6,413 746 58,852
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ................... $ 7,387 $ 3,076 $ 1,171 $ 78 $ 11,712
======== ======== ======== ======== ========
AS OF SEPTEMBER 30, 2003:
Total assets ............................. $306,368 $105,430 $ 57,729 $ 7,743 $477,270
======== ======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 2002:
REVENUE
Finance and service charges ............ $ 24,167 $ 6,363 $ -- $ -- $ 30,530
Proceeds from disposition of merchandise 50,447 2,797 -- -- 53,244
Cash advance fees ...................... 5,088 -- -- -- 5,088
Check cashing royalties and fees ....... -- 275 -- 819 1,094
-------- -------- -------- -------- --------
TOTAL REVENUE ............................ 79,702 9,435 -- 819 89,956
Cost of revenue - disposed merchandise ... 32,670 1,886 -- -- 34,556
-------- -------- -------- -------- --------
NET REVENUE .............................. 47,032 7,549 -- 819 55,400
-------- -------- -------- -------- --------
EXPENSES
Operations ............................. 31,095 3,130 -- 361 34,586
Cash advance loss provision ............ 2,070 -- -- -- 2,070
Administration ......................... 6,314 1,076 -- 144 7,534
Depreciation and amortization .......... 3,066 659 -- 156 3,881
-------- -------- -------- -------- --------
TOTAL EXPENSES ........................... 42,545 4,865 -- 661 48,071
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ................... $ 4,487 $ 2,684 $ -- $ 158 $ 7,329
======== ======== ======== ======== ========
AS OF SEPTEMBER 30, 2002:
Total assets ............................. $283,483 $ 85,914 $ -- $ 7,586 $376,983
======== ======== ======== ======== ========
- ----------
(a) Cashland only, for the two month period August 1, 2003 to September 30,
2003.
(b) Mr. Payroll only.
13
Pawn Lending
------------
United Cash Check
States Foreign Advances(a) Cashing(b) Consolidated
------ ------- ----------- ---------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2003:
REVENUE
Finance and service charges ............ $ 73,868 $ 21,202 $ -- $ -- $ 95,070
Proceeds from disposition of merchandise 168,162 11,898 -- -- 180,060
Cash advance fees ...................... 20,314 -- 7,059 -- 27,373
Check cashing royalties and fees ....... -- 1,307 525 2,735 4,567
-------- -------- -------- -------- --------
TOTAL REVENUE ............................ 262,344 34,407 7,584 2,735 307,070
Cost of revenue - disposed merchandise ... 105,086 8,439 -- -- 113,525
-------- -------- -------- -------- --------
NET REVENUE .............................. 157,258 25,968 7,584 2,735 193,545
-------- -------- -------- -------- --------
EXPENSES
Operations ............................. 97,691 11,677 3,444 1,211 114,023
Cash advance loss provision ............ 5,300 -- 1,801 -- 7,101
Administration ......................... 22,437 3,468 709 565 27,179
Depreciation and amortization .......... 8,598 2,052 459 379 11,488
-------- -------- -------- -------- --------
TOTAL EXPENSES ........................... 134,026 17,197 6,413 2,155 159,791
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ................... $ 23,232 $ 8,771 $ 1,171 $ 580 $ 33,754
======== ======== ======== ======== ========
NINE MONTHS ENDED SEPTEMBER 30, 2002:
REVENUE
Finance and service charges ............ $ 69,170 $ 17,636 $ -- $ -- $ 86,806
Proceeds from disposition of merchandise 170,097 8,460 -- -- 178,557
Cash advance fees ...................... 12,834 -- -- -- 12,834
Check cashing royalties and fees ....... -- 701 -- 2,765 3,466
-------- -------- -------- -------- --------
TOTAL REVENUE ............................ 252,101 26,797 -- 2,765 281,663
Cost of revenue - disposed merchandise ... 111,474 6,148 -- -- 117,622
-------- -------- -------- -------- --------
NET REVENUE .............................. 140,627 20,649 -- 2,765 164,041
-------- -------- -------- -------- --------
EXPENSES
Operations ............................. 92,519 8,696 -- 1,128 102,343
Cash advance loss provision ............ 4,539 -- -- -- 4,539
Administration ......................... 18,472 3,046 -- 475 21,993
Depreciation and amortization .......... 8,859 1,828 -- 464 11,151
-------- -------- -------- -------- --------
TOTAL EXPENSES ........................... 124,389 13,570 -- 2,067 140,026
-------- -------- -------- -------- --------
INCOME FROM OPERATIONS ................... $ 16,238 $ 7,079 $ -- $ 698 $ 24,015
======== ======== ======== ======== ========
- ----------
(a) Cashland only, for the two month period August 1, 2003 to September 30,
2003.
(b) Mr. Payroll only.
11. LITIGATION
The Company is party to a number of lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's financial position, results of
operations or liquidity.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a provider of specialty financial services to individuals in the
United States, United Kingdom and Sweden. The Company offers secured
non-recourse loans, commonly referred to as pawn loans, to individuals through
its pawn lending operations. The pawn loan portfolio generates finance and
service charges revenue. As an alternative to a pawn loan, the Company offers
unsecured small consumer cash advances in selected lending locations and on
behalf of a third-party financial institution in other locations. A related
activity of the lending operations is the disposition of merchandise, primarily
collateral from unredeemed pawn loans. The Company also provides check cashing
services through its franchised and company owned Mr. Payroll(R) check cashing
centers and through "Cashland" consumer finance centers.
Effective August 1, 2003, the Company, through its wholly-owned subsidiary
Cashland Financial Services, Inc. ("Cashland"), completed the purchase of
substantially all of the assets of Cashland, Inc., a privately-owned consumer
finance company based in Dayton, Ohio. The aggregate purchase consideration was
$50.5 million, which consisted of $32.0 million cash, 1.5 million shares of the
Company's stock valued at $16.8 million and estimated acquisition costs of $1.7
million. The terms of the purchase include the potential for additional
consideration to be paid based on the future earnings performance of Cashland.
Any additional consideration would be in the form of subordinated debt or cash.
As of September 30, 2003, the Company's pawn lending operations consisted
of 469 pawnshops, including 396 owned units and 9 franchised units in 17 states
in the United States, 52 units in the United Kingdom, and 12 units in Sweden.
The foreign operations consist primarily of jewelry-only lending units. The
number of owned pawnshops remained unchanged during the 21 months ended
September 30, 2003, as the Company acquired 14 operating units, established 3
locations, and combined or closed 17 locations. In addition, 4 franchise units
were either closed or terminated. As of September 30, 2003, the Company's U.S.
pawn lending operations also owned and operated 16 locations that offer only the
cash advance product.
As of September 30, 2003, Cashland owned and operated 129 consumer finance
centers that offer short-term cash advances and check cashing services in 2
states. During the two month period since its acquisition, Cashland has
established 8 locations.
As of September 30, 2003, Mr. Payroll operated 128 franchised and 6
company-owned manned check cashing centers in 20 states.
In September 2001, the Company announced plans to exit the rent-to-own
business in order to focus on its core business of lending activities. In June
2002, the Company sold the remaining assets of its rent-to-own business. See
Note 9 of Notes to Consolidated Financial Statements.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the components of the
consolidated statements of operations as a percentage of total revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
REVENUE
Finance and service charges ....................... 30.8% 33.9% 31.0% 30.8%
Proceeds from disposition of merchandise .......... 53.9 59.2 58.6 63.4
Cash advance fees ................................. 13.6 5.7 8.9 4.6
Check cashing royalties and fees .................. 1.7 1.2 1.5 1.2
------ ------ ------ ------
TOTAL REVENUE ....................................... 100.0 100.0 100.0 100.0
COST OF REVENUE
Disposed merchandise .............................. 34.2 38.4 37.0 41.8
------ ------ ------ ------
NET REVENUE ......................................... 65.8 61.6 63.0 58.2
------ ------ ------ ------
EXPENSES
Operations ........................................ 38.1 38.4 37.1 36.3
Cash advance loss provision ....................... 3.8 2.3 2.3 1.6
Administration .................................... 9.1 8.4 8.9 7.8
Depreciation and amortization ..................... 3.9 4.3 3.7 4.0
------ ------ ------ ------
TOTAL EXPENSES ...................................... 54.9 53.4 52.0 49.7
------ ------ ------ ------
INCOME FROM OPERATIONS .............................. 10.9 8.2 11.0 8.5
Interest expense, net ............................. 2.2 2.5 2.2 2.3
Loss from derivative valuation fluctuations ....... -- 0.1 -- 0.1
Gain from disposal of asset ....................... -- -- (0.3) --
------ ------ ------ ------
Income from continuing operations before income taxes 8.7 5.6 9.1 6.1
Provision for income taxes ........................ 3.1 2.0 3.1 2.2
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS ................... 5.6% 3.6% 6.0% 3.9%
====== ====== ====== ======
16
The following table sets forth certain selected consolidated financial and
non-financial data as of September 30, 2003 and 2002, and for the three and nine
months then ended (dollars in thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
PAWN LENDING OPERATIONS:
PAWN LOANS
Annualized yield on pawn loans ............................ 94.6% 97.2% 97.0% 99.5%
Total pawn loans written .................................. $ 113,877 $ 109,259 $ 330,696 $ 304,816
Average pawn loan balance outstanding ..................... $ 138,483 $ 124,665 $ 131,010 $ 116,673
Average pawn loan balance per average
pawnshop location in operation .......................... $ 303 $ 274 $ 288 $ 255
Average pawn loan amount at end of period
(not in thousands) ...................................... $ 109 $ 102 $ 109 $ 102
Profit margin on disposition of merchandise
as a percentage of proceeds from disposition
of merchandise .......................................... 36.7% 35.1% 36.9% 34.1%
Average annualized merchandise turnover ................... 2.7x 2.6x 2.9x 2.8x
Average merchandise held for disposition per
average pawnshop location ............................... $ 120 $ 116 $ 115 $ 121
Pawnshop locations in operation -
Beginning of period, owned .............................. 453 454 455 460
Acquired .............................................. 7 2 10 4
Start-ups ............................................. -- 1 2 1
Combined or closed .................................... -- (1) (7) (9)
End of period, owned .................................... 460 456 460 456
Franchise locations at end of period .................... 9 13 9 13
Total pawnshop locations at end of period ............... 469 469 469 469
Average number of owned pawnshop locations
in operation .......................................... 457 455 455 458
CASH ADVANCES
Total amount of cash advances written (a) ................. $ 48,179 $ 34,072 $ 129,942 $ 82,106
Number of cash advances written (not in thousands) (a) .... 162,468 120,578 440,712 291,087
Average cash advance amount (not in thousands) (a) ........ $ 297 $ 283 $ 295 $ 282
Combined cash advances outstanding (a) .................... $ 12,646 $ 9,455 $ 12,646 $ 9,455
Cash advances outstanding per location at end of period (a) $ 32 $ 24 $ 32 $ 24
Cash advances outstanding before allowance for losses (b) . $ 11,174 $ 3,372 $ 11,174 $ 3,372
Locations offering cash advances at end of period:
Pawnshops ............................................... 383 391 383 391
Cash advance units ...................................... 16 -- 16 --
Total ................................................. 399 391 399 391
Average number of locations offering cash advances ........ 396 390 392 390
- ----------
(a) Includes cash advances made by the Company and cash advances made by
third-party financial institutions.
(b) Amounts recorded in the Company's consolidated financial statements.
17
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
CASH ADVANCE OPERATIONS (CASHLAND):
Total amount of cash advances written ................. $ 44,235 $ -- $ 44,235 $ --
Number of cash advances written (not in thousands) .... 133,022 -- 133,022 --
Average cash advance amount (not in thousands) ........ $ 333 $ -- $ 333 $ --
Cash advances outstanding per location at end of period $ 119 $ -- $ 119 $ --
Cash advances outstanding before allowance for losses . $ 15,382 $ -- $ 15,382 $ --
Cash advance locations in operation -
Beginning of period ................................. -- -- -- --
Acquired .......................................... 121 -- 121 --
Start-ups ......................................... 8 -- 8 --
End of period ....................................... 129 -- 129 --
Average number of locations in operation for the period 125 -- 125 --
CHECK CASHING OPERATIONS (MR. PAYROLL):
Face amount of checks cashed ........................ $262,163 $247,030 $827,757 $792,753
Gross fees collected ................................ $ 3,558 $ 3,388 $ 11,695 $ 11,305
Fees as a percentage of checks cashed ............... 1.4% 1.4% 1.4% 1.4%
Average check cashed (not in thousands) ............. $ 347 $ 333 $ 365 $ 355
Centers in operation at end of period ............... 134 135 134 135
Average centers in operation for the period ......... 137 135 137 135
THIRD QUARTER ENDED SEPTEMBER 30, 2003, COMPARED TO THE
THIRD QUARTER ENDED SEPTEMBER 30, 2002
CONSOLIDATED NET REVENUE. Consolidated net revenue increased $15.1 million, or
27.3%, to $70.5 million during the third quarter ended September 30, 2003 (the
"current quarter") from $55.4 million during the third quarter ended September
30, 2002 (the "prior year quarter"). The following table sets forth net revenue
results by operating segment for the three month periods ended September 30 (in
millions):
2003 2002 Increase
------- ------- --------------------
Domestic pawn lending operations $ 53.0 $ 47.0 $ 6.0 12.8%
Foreign pawn lending operations 9.1 7.6 1.5 19.7
Cash advance operations ........ 7.6 -- 7.6 --
Check cashing operations ....... 0.8 0.8 -- --
------- ------- ------- -------
Consolidated net revenue ..... $ 70.5 $ 55.4 $ 15.1 27.3%
======= ======= ======= =======
The increase in consolidated net revenue was partially due to the
consolidation of the operating results of Cashland beginning August 1, 2003.
Excluding the impact of Cashland, net revenue for the three month period was up
$7.5 million, or 13.5%, compared to the prior year quarter. The Company's
domestic pawn lending operations contributed the majority of the increase in
consolidated net revenue excluding Cashland. Higher revenue from the Company's
small consumer cash advance product, higher finance and service charges on pawn
loans, and higher gross profit from disposition of merchandise accounted for the
increase in net revenue.
The components of net revenue are finance and service charges from pawn
loans, which increased $2.5 million; gross profit from disposition of
merchandise, which increased $2.5 million; cash advance fees, which increased
$9.4 million; and check cashing royalties and fees, which increased $0.7
million. Management believes that the trend of higher cash advance fees
18
and higher finance and service charges on pawn loans will continue during the
remainder of 2003 as a result of the expected continuation of increased demand
for these products and due to the higher balances of cash advances and pawn
loans at the end of the third quarter of 2003 compared to the prior year.
FINANCE AND SERVICE CHARGES. The following is a summary of finance and service
charges related to pawn loans by operating segment for the three months ended
September 30, 2003 and 2002 (in millions):
2003 2002 Increase
----- ----- ----------------
Domestic pawn lending operations .. $25.7 $24.1 $ 1.6 6.6%
Foreign pawn lending operations ... 7.3 6.4 0.9 14.1
----- ----- ----- -----
Total finance and service charges $33.0 $30.5 $ 2.5 8.2%
===== ===== ===== =====
Variations in finance and service charges on pawn loans are caused by
changes in the average balance of pawn loans outstanding, the annualized yield
of the pawn loan portfolio, and the effects of translation of foreign currency
amounts into United States dollars. The following table demonstrates how each of
these factors affected the total change in finance and service charges for the
current quarter as compared to the prior year quarter (in millions):
Total
Average Before
Balance Loan Foreign Foreign
Outstanding Yield Translation Translation Total
----------- ----- ----------- ----------- -----
Domestic pawn lending operations $ 1.3 $ 0.3 $ 1.6 $ -- $ 1.6
Foreign pawn lending operations 0.7 (0.3) 0.4 0.5 0.9
-------- -------- -------- -------- --------
Total ..................... $ 2.0 $ -- $ 2.0 $ 0.5 $ 2.5
======== ======== ======== ======== ========
Excluding the favorable impact of foreign currency translation, the
company-wide average balance of pawn loans outstanding was 7.6% higher during
the current quarter than the prior year quarter. On a segment basis, the average
balances of pawn loans were 5.3% and 11.5% higher for the domestic and foreign
pawn lending operations, respectively. The increase in the average balance of
domestic pawn loans outstanding was driven by a 3.8% increase in the average
number of pawn loans outstanding during the current quarter coupled with a 1.4%
increase in the average amount per loan. As management expected, during the
third quarter of 2003, the domestic operations experienced a slow down in the
rate of growth of pawn loan balances due to the advance child tax credit refund
distributed by the Internal Revenue Service to certain customers. Management
believes that customers may have used these proceeds to repay loans and/or
reduce demand for loans in the quarter, although pawn loan balances finished the
quarter higher than the prior year. Management believes the higher average
domestic loan balance outstanding is partially attributable to adverse trends in
the U.S. economy, which were conducive to an increase in loan demand. Domestic
pawn loan balances at September 30, 2003, were $4.1 million, or 5.3%, higher
than at September 30, 2002. Management expects this trend of higher demand for
pawn loans to continue throughout the remainder of 2003. The average balances of
pawn loans outstanding denominated in their local currencies increased 14.3% and
7.0% in the United Kingdom and Sweden, respectively. The average number of pawn
loans outstanding in the United Kingdom and Sweden increased 8.3% and 5.3%,
respectively.
19
Average amounts per loan were higher for both the United Kingdom and Sweden by
5.5% and 1.6%, respectively.
Excluding the favorable impact of foreign currency translation, the
consolidated annualized loan yield, which represents the blended result derived
from the distinctive loan yields realized from operations in the three
countries, was 96.2% in the current year quarter, compared to 97.2% in the prior
year quarter. There was an increase in the domestic annualized loan yield to
123.2% for the current year quarter, compared to 121.8% for the prior year
quarter. Improved performance of the pawn loan portfolio, including higher
redemption rates and a slightly higher concentration of extended loans in the
portfolio, contributed to the higher domestic yield. The blended yield on
average foreign pawn loans outstanding decreased to 52.6% in the current year
quarter compared to 55.0% in the prior year quarter. The decrease in the blended
foreign yield was caused by a decrease in loan redemption rates and lower yield
on the disposition of unredeemed collateral at auction.
Favorable currency translation adjustments contributed $0.5 million to the
increase in foreign source finance and service charges in the current quarter as
compared to the prior year quarter, as the British pound and Swedish kronor were
stronger relative to the United States dollar. The weighted average exchange
rates used to translate local currency earnings into dollars for the pound and
kronor were 3.9% and 15.5% higher, respectively, during the current quarter
compared to the prior year quarter.
PROFIT FROM DISPOSITION OF MERCHANDISE. Profit from disposition of merchandise
represents the proceeds received from disposition of merchandise in excess of
the cost of disposed merchandise. The following table summarizes, by operating
segment, the proceeds from disposition of merchandise and the related profit for
the current quarter compared to the prior year quarter (in millions):
Three Months Ended September 30,
-----------------------------------------------------------------------------------
2003 2002
-------------------------------------- --------------------------------------
Merch- Refined Merch- Refined
andise* Gold Total andise* Gold Total
-------- -------- -------- -------- -------- --------
Proceeds from disposition:
Domestic ............... $ 46.2 $ 7.3 $ 53.5 $ 44.9 $ 5.5 $ 50.4
Foreign ................ 3.4 0.9 4.3 2.4 0.4 2.8
-------- -------- -------- -------- -------- --------
Total proceeds ....... $ 49.6 $ 8.2 $ 57.8 $ 47.3 $ 5.9 $ 53.2
======== ======== ======== ======== ======== ========
Profit on disposition .... $ 19.0 $ 2.2 $ 21.2 $ 17.6 $ 1.1 $ 18.7
======== ======== ======== ======== ======== ========
Profit margin ............ 38.3% 26.8% 36.7% 37.2% 18.6% 35.1%
Profit margin - Domestic . 38.5% 28.7% 37.2% 37.3% 18.8% 35.2%
Profit margin - Foreign .. 35.7% 10.9% 30.7% 36.1% 9.7% 32.6%
- ----------
*Excluding refined gold.
Total proceeds from disposition of merchandise in the current quarter were
$4.6 million, or 8.6%, higher than in the prior year quarter. Management
attributes the higher sales levels to a combination of factors including the
advance child tax credit refund issued to customers in the quarter, higher
levels of merchandise available for sale in the foreign lending operations and a
general increase in consumer demand for value priced goods. Proceeds from
disposition of
20
merchandise, excluding refined gold, increased $2.3 million, or 4.9%. Proceeds
from disposition of refined gold increased $2.3 million, or 39.0% due to higher
market prices for gold. The consolidated merchandise turnover rate increased to
2.7 times during the current quarter compared to 2.6 times during the prior year
quarter, and the gross profit on disposition of merchandise increased to 36.7%
in the current quarter compared to 35.1% in the prior year quarter. Excluding
the effect of disposition of refined gold, the gross profit on disposition of
merchandise increased to 38.3% in the current quarter from 37.2% in the prior
year quarter due predominately to the lower average cost of merchandise sold.
The gross profit on disposition of refined gold was 26.8% in the current quarter
compared to 18.6% in the prior year quarter due to higher prevailing market
prices of refined gold than in the prior year.
CASH ADVANCE FEES. Cash advance fees increased $9.4 million, or 184.3%, to
$14.5 million in the current quarter as compared to $5.1 million in the prior
year quarter. The increase was partially due to the consolidation of the
operating results of Cashland beginning August 1, 2003, which accounted for $7.1
million of the increase. Significantly higher cash advance balances at the
beginning of the period related to the continued increase in demand for the
small consumer cash advance product also contributed to the increase in cash
advance fees. The product was available in 528 lending locations, which includes
383 Cash America pawnshops, 16 Cash America cash advance centers and 129
Cashland consumer finance centers at September 30, 2003. This includes 310 units
that offer the product on behalf of a third-party bank, for which the Company
performs administrative services. Cash advance fees include revenue from the
cash advance portfolio owned by the Company and fees for administrative services
performed for the bank. (Although small consumer cash advance transactions may
take the form of loans or deferred check deposit transactions, the transactions
are referred to throughout this discussion as "cash advances" for convenience.)
Excluding the impact of Cashland, the amount of cash advances written
increased $14.1 million, or 41.4%, to $48.2 million in the current quarter from
$34.1 million in the prior year quarter. The $48.2 million in cash advances
written in the current quarter includes $41.7 million extended to customers by
the bank. The average amount per cash advance increased to $297 from $283. The
combined Company and bank portfolios of cash advances generated $8.6 million in
revenue during the current quarter compared to $5.9 million in the prior year
quarter. The outstanding combined portfolios of small consumer cash advances
increased $3.1 million to $12.6 million at September 30, 2003, from $9.5 million
at September 30, 2002. Included in these amounts are $11.2 million and $3.4
million for 2003 and 2002, respectively, that are included in the Company's
consolidated balance sheets. An allowance for losses of $2.0 million and $1.7
million has been provided in the consolidated financial statements as of
September 30, 2003 and 2002, respectively, which offsets the outstanding cash
advance amounts.
The amount of cash advances written by Cashland for the period from August
1, 2003 through September 30, 2003 was $44.2 million. The average amount per
cash advance was $333. Cashland generated cash advance fees of $7.1 million
during the period. At September 30, 2003, the outstanding portfolio was $13.6
million, net of allowance for losses of $1.8 million which was included in the
Company's consolidated balance sheet.
During the first quarter of 2003, the Company terminated its relationship
with the national bank that had offered this product in many of its stores and
entered into an agreement with a state chartered bank to offer the product in
those stores. See further discussion in Note 4 of Notes to Consolidated
Financial Statements.
21
CHECK CASHING ROYALTIES AND FEES. Check cashing fees for the United Kingdom
operations increased 84.4% to $0.5 million, in the current quarter, while check
cashing revenue for the Mr. Payroll operations remained unchanged at $0.8
million. Check cashing revenue for Cashland in the current quarter was $0.5
million.
OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and
administration expenses, as a percentage of total revenue, were 47.2% in the
current quarter compared to 46.8% in the prior year quarter. These expenses
increased $8.5 million, or 20.1%, in the current quarter compared to the prior
year quarter primarily due to the consolidation of the operating results of
Cashland beginning August 1, 2003, which incurred $4.2 million of such expenses.
Domestic pawn lending expenses increased $3.1 million, as a result of higher
expenses related to the cash advance product including advertising and new
locations. In addition, there were increased incentive expenses associated with
the improvement in operating results. Foreign lending operations expenses
increased $1.1 million primarily due to an increase in the number of locations
in the United Kingdom and Sweden. Mr. Payroll's expenses increased slightly from
$0.5 million for the prior year quarter to $0.6 million for the current quarter.
CASH ADVANCE LOSS PROVISION. The Company maintains an allowance for losses on
cash advances at a level projected to be adequate to absorb credit losses
inherent in the outstanding cash advance portfolio. The cash advance loss
provision is utilized to increase the allowance carried against the outstanding
portfolio. The cash advance loss provision increased $2.0 million to $4.1
million in the current quarter as compared to $2.1 million in the prior year
quarter principally due to the acquisition at August 1, 2003 of Cashland, which
provided $1.8 million of the loss provision. Loss provision as a percentage of
cash advance fees was 28.1% in the current quarter as compared to 40.7% in the
prior year quarter. The decrease in the loss provision as a percentage of cash
advance fees is due to lower loss rates experienced by the Company in the
current quarter compared to the prior year quarter. The loss provision as a
percentage of cash advance fees would have been 30.5% for the current quarter
without Cashland.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a
percentage of total revenue was 3.9% in the current quarter compared to 4.3% in
the prior year quarter.
INTEREST EXPENSE. Net interest expense as a percentage of total revenue was 2.2%
for the current quarter as compared to 2.5% for the prior year quarter. Interest
expense increased $0.1 million to $2.4 million in the current quarter as
compared to $2.3 million in the prior year quarter. The increase was due to the
acquisition of Cashland, effective August 1, 2003, and was partially offset by
the effect of lower interest rates on floating rate debt and lower debt balances
outstanding prior to the acquisition of Cashland during the quarter. The Company
paid cash of $32.0 million for the acquisition of Cashland through the expansion
of its U.S. line of credit from $90.0 million to $135.0 million. The effective
blended borrowing cost decreased to 5.3% in the current quarter as compared to
5.5% in the prior year quarter. The slight decrease in blended borrowing cost
was due to a year over year decline in interest rates on floating rate debt
which was partially offset by the Company's decision to issue $42.5 million of
long-term fixed rate notes in July 2002 that replaced lower floating rate debt
and the elimination of interest income from a note receivable repaid in the
first quarter of 2003. The average amount of debt outstanding increased during
the current quarter to $179.8 million from $163.6 million during the prior year
quarter.
22
LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. There were no adjustments to fair
values of interest rate cap agreements during the current quarter compared to a
loss of $98,000 in the prior year quarter.
INCOME TAXES. The Company's effective tax rate for the current quarter was 35.2%
as compared to 36.1% for the prior year quarter. The decrease in the current
quarter is primarily attributable to lower state and local income taxes.
23
OTHER DATA. The following table sets forth certain selected financial and
non-financial data for the Company's domestic and foreign lending operations,
presented in U.S. dollars, as of September 30, 2003 and 2002, and for the three
months then ended (dollars in thousands).
Domestic Foreign
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
Annualized yield on pawn loans - domestic 123.2% 121.8% -- --
Annualized yield on pawn loans - foreign:
In U.S. dollars ....................... -- -- 52.0% 55.0%
In local currency --
United Kingdom ...................... -- -- 57.2% 59.5%
Sweden .............................. -- -- 45.0% 48.1%
Total pawn loans written ................ $ 81,601 $ 81,113 $ 32,276 $ 28,146
Average pawn loan balance outstanding ... $ 82,862 $ 78,725 $ 55,621 $ 45,940
Average pawn loan balance per average
pawnshop location in operation ........ $ 211 $ 198 $ 869 $ 806
Average pawn loan amount at end of period
(not in thousands) .................... $ 83 $ 81 $ 206 $ 179
Profit margin on disposition of
merchandise as a percentage of proceeds
from disposition of merchandise ....... 37.2% 35.2% 30.7% 32.6%
Average annualized merchandise turnover . 2.7x 2.6x 2.1x 1.9x
Average merchandise held for disposition
per average pawnshop location ......... $ 125 $ 123 $ 87 $ 68
Pawnshop locations in operations --
Beginning of period, owned ............ 390 398 63 56
Acquired ............................ 6 -- 1 2
Start-ups ........................... -- -- -- 1
Combined or closed .................. -- (1) -- --
End of period, owned .................. 396 397 64 59
Franchise locations at end of period .. 9 13 -- --
Total pawnshop locations at end of
period .............................. 405 410 64 59
Average number of owned pawnshop
locations in operation .............. 393 398 64 57
- ------------------------------------------------------------------------------------------------------
CURRENCY EXCHANGE RATES:
Harvey & Thompson, Ltd. (British pound
per U.S. dollar) --
Balance sheet data - end of period rate -- -- 0.6009 0.6375
Statements of operations data - average
rate for the period ................. -- -- 0.6205 0.6449
Svensk Pantbelaning (Swedish kronor per
U.S. dollar) --
Balance sheet data - end of
period rate ......................... -- -- 7.7399 9.2678
Statements of operations data - average
rate for the period ................. -- -- 8.1284 9.3858
24
NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2002
CONSOLIDATED NET REVENUE. Consolidated net revenue increased $29.5 million, or
18.0%, to $193.5 million during the nine months ended September 30, 2003, (the
"current period") from $164.0 million during the nine months ended September 30,
2002 (the "prior year period"). The following table sets forth net revenue
results by operating segment for the nine month periods ended September 30, 2003
and 2002 (in millions):
2003 2002 Increase
---- ---- --------
Domestic pawn lending operations $157.2 $ 140.6 $ 16.6 11.8%
Foreign pawn lending operations 26.0 20.6 5.4 26.2
Cash advance operations 7.6 -- 7.6 --
Check cashing operations 2.7 2.8 (0.1) (3.6)
------ ------- ------ ----
Consolidated net revenue $193.5 $ 164.0 $ 29.5 18.0%
====== ======= ====== ====
The increase in consolidated net revenue was partially due to the
consolidation of the operating results of Cashland beginning August 1, 2003.
Excluding the impact of Cashland, net revenue for the current period was up
$21.9 million, or 13.4%, compared to the prior year period. The Company's
domestic pawn lending operations contributed the majority of the increase in
consolidated net revenue excluding Cashland. Higher revenue from its small
consumer cash advance product, higher finance and service charges on pawn loans,
and higher gross profit from disposition of merchandise accounted for the
increase in net revenue.
The components of net revenue are finance and service charges from pawn
loans, which increased $8.3 million; gross profit from disposition of
merchandise, which increased $5.6 million; cash advance fees, which increased
$14.5 million; and check cashing royalties and fees, which increased $1.1
million.
FINANCE AND SERVICE CHARGES. The following is a summary of finance and service
charges related to pawn loans by operating segment for the nine months ended
September 30, 2003 and 2002 (in millions):
2003 2002 Increase
---- ---- --------
Domestic pawn lending operations $ 73.9 $ 69.2 $ 4.7 6.8%
Foreign pawn lending operations 21.2 17.6 3.6 20.5
------- ------- ------ ----
Total finance and service charges $ 95.1 $ 86.8 $ 8.3 9.6%
======= ======= ====== ====
The following table demonstrates how the key factors affected the total
change in finance and service charges for the current period as compared to the
prior year period (in millions):
Total
Average Before
Balance Loan Foreign Foreign
Outstanding Yield Translation Translation Total
----------- ----- ----------- ----------- -----
Domestic pawn lending operations $ 3.4 $ 1.3 $ 4.7 $ -- $ 4.7
Foreign pawn lending operations 1.9 (0.7) 1.2 2.4 3.6
------ ------ ------ ------ ------
Total $ 5.3 $ 0.6 $ 5.9 $ 2.4 $ 8.3
====== ====== ====== ====== ======
25
Excluding the favorable impact of foreign currency translation, the
company-wide average balance of pawn loans outstanding was 7.1% higher during
the current period than the prior year period. On a segment basis, the average
balances of pawn loans were 5.0% and 10.7% higher for the domestic and foreign
lending operations, respectively. The increase in the average balance of
domestic pawn loans outstanding was driven by a 3.3% increase in the average
number of pawn loans outstanding during the current period coupled with a 1.7%
increase in the average amount per loan. The average balances of foreign pawn
loans outstanding denominated in their local currencies increased 13.1% and 6.7%
in the United Kingdom and Sweden, respectively. The average number of pawn loans
outstanding in the United Kingdom and Sweden increased 7.2% and 1.0%,
respectively. Average amounts per loan were higher for both the United Kingdom
and Sweden by 5.5% and 5.7%, respectively.
Excluding the favorable impact of foreign currency translation, the
consolidated annualized loan yield was 99.3% for the current year period,
compared to 99.5% for the prior year period. There was an increase in the
domestic annualized loan yield to 127.4% for the current year period, compared
to 125.2% for the prior year period. Improved performance of the pawn loan
portfolio, demonstrated by higher redemption rates and a slightly higher
concentration of extended loans in the portfolio, contributed to the higher
domestic yield. The blended yield on average foreign pawn loans outstanding
decreased to 53.2% in the current year period compared to 55.1% in the prior
year period. The decrease in the blended foreign yield was caused by a decrease
in loan redemption rates and lower yield on the disposition of unredeemed
collateral at auction.
Favorable currency translation adjustments contributed $2.4 million to the
increase in foreign source finance and service charges in the current period as
compared to the prior year period, as the British pound and Swedish kronor were
stronger relative to the United States dollar. The weighted average exchange
rates used for translating earnings into dollars for the pound and kronor were
8.5% and 20.4% higher, respectively, during the current period compared to the
prior year period.
PROFIT FROM DISPOSITION OF MERCHANDISE. The following table summarizes, by
operating segment, the proceeds from disposition of merchandise and the related
profit for the current period compared to the prior year period (in millions):
Nine Months Ended September 30,
-----------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Merch- Refined Merch- Refined
andise* Gold Total andise* Gold Total
------- ---- ----- ------- ---- -----
Proceeds from disposition:
Domestic ................... $ 145.7 $ 22.5 $ 168.2 $ 151.0 $ 19.1 $ 170.1
Foreign .................... 8.8 3.1 11.9 6.8 1.7 8.5
-------- ------- -------- -------- ------- --------
Total proceeds ............ $ 154.5 $ 25.6 $ 180.1 $ 157.8 $ 20.8 $ 178.6
======== ======= ======== ======== ======= ========
Profit on disposition ........ $ 60.1 $ 6.4 $ 66.5 $ 57.7 $ 3.2 $ 60.9
======== ======= ======== ======== ======= ========
Profit margin ................ 38.9% 25.0% 36.9% 36.6% 15.4% 34.1%
Profit margin - Domestic ..... 39.1% 27.5% 37.5% 36.7% 16.4% 34.5%
Profit margin - Foreign ...... 36.6% 7.5% 29.1% 33.5% 3.5% 27.3%
- ------------------
* Excluding refined gold.
26
Total proceeds from disposition of merchandise in the current period were
$1.5 million, or 0.8%, higher than in the prior year period. Proceeds from
disposition of merchandise, excluding refined gold, decreased $3.3 million, or
2.1%. Proceeds from disposition of refined gold increased $4.8 million, or 23.1%
due to higher market prices for gold. The consolidated merchandise turnover rate
increased to 2.9 times during the current period as compared to 2.8 times during
the prior year period, and the gross profit on disposition of merchandise
increased to 36.9% in the current period as compared to 34.1% in the prior year
period. Excluding the effect of the disposition of refined gold, the gross
profit on disposition of merchandise increased to 38.9% in the current period
from 36.6% in the prior year period due predominately to lower average cost of
merchandise sold. The gross profit on disposition of refined gold was 25.0% in
the current period compared to 15.4% in the prior year period due to higher
prevailing market prices of refined gold than in the prior year.
CASH ADVANCE FEES. Cash advance fees increased $14.5 million, or 113.3%, to
$27.3 million in the current period as compared to $12.8 million in the prior
year period. The increase was partially due to the consolidation of the
operating results of Cashland beginning August 1, 2003. Excluding the impact of
Cashland, cash advance fees for the current period were up $7.5 million, or
58.3%, due to significantly higher cash advance balances at the beginning of the
period related to the continued increase in demand for the small consumer cash
advance product.
Excluding the impact of Cashland, the amount of cash advances written
increased $47.8 million, or 58.3%, to $129.9 million in the current period from
$82.1 million in the prior year period. The $129.9 million in cash advances
written in the current period includes $112.9 million extended to customers by
the bank. The average amount per cash advance increased to $295 from $282. The
combined Company and bank portfolios of cash advances generated $23.3 million in
revenue during the current period compared to $14.4 million in the prior year
period.
The amount of cash advances written by Cashland for the period from August
1, 2003 through September 30, 2003 was $44.2 million. The average amount per
cash advance was $333. Cashland generated cash advance fees of $7.1 million
during the period. At September 30, 2003, the outstanding portfolio was $13.6
million, net of allowance for losses of $1.8 million, which was included in the
Company's consolidated balance sheet.
CHECK CASHING ROYALTIES AND FEES. Check cashing fees for the United Kingdom
operations increased 86.4% to $1.3 million, in the current period, while check
cashing revenue for the Mr. Payroll operations remained unchanged at $2.7
million. Check cashing revenue for Cashland in the current period was $0.5
million.
OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and
administration expenses, as a percentage of total revenue, were 46.0% in the
current period compared to 44.1% in the prior year period. These expenses
increased $16.9 million, or 13.6%, in the current period compared to the prior
year period due to the consolidation of the operating results of Cashland
beginning August 1, 2003 which contributed $4.2 million of the increase.
Domestic lending expenses increased $9.0 million primarily as a result of higher
expenses related to the cash advance product, including advertising and the
establishment of new locations and increased incentive expenses associated with
the improvement in operating results. In addition, slightly higher staffing
levels also contributed to the increase. Foreign lending operations expenses
increased $3.4 million primarily due to an increase in the number of locations
in the United Kingdom and Sweden. Mr. Payroll's expenses increased slightly from
$1.6 million for the prior year period to $1.8 million for the current period.
27
CASH ADVANCE LOSS PROVISION. The cash advance loss provision for domestic
lending operations increased $2.6 million to $7.1 million in the current period
as compared to $4.5 million in the prior year period principally due to the
acquisition effective August 1, 2003 of Cashland. Loss provision as a percentage
of cash advance fees was 25.9% in the current period as compared to 35.4% in the
prior year period. The decrease in the loss provision as a percentage of cash
advance fees is due to lower loss rates experienced by the Company in the
current period compared to the prior year. The loss provision as a percentage of
cash advance fees would have been 26.1% for the current period without Cashland.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a
percentage of total revenue was 3.7% in the current period compared to 4.0% in
the prior year period.
INTEREST EXPENSE. Net interest expense as a percentage of total revenue was 2.2%
for the current period as compared to 2.3% for the prior year period. The
Company's average debt balance decreased 5.5% during the current period compared
to the prior year period. The aggregate blended borrowing cost increased to 5.8%
in the current period as compared to 5.3% in the prior year period due primarily
to the Company's decision to issue $42.5 million of long-term fixed rate notes
in July 2002 that replaced lower floating rate debt and the elimination of
interest income from a note receivable repaid early in the current period. The
average amount of debt outstanding decreased during the current period to $155.2
million from $164.3 million during the prior year period.
LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. There were no adjustments to fair
values of interest rate cap agreements during the current period compared to a
loss of $0.2 million in the prior year period.
GAIN FROM DISPOSAL OF ASSET. During the current period, the Company sold real
estate that was being held for investment purposes following the reconstruction
of the corporate headquarters. The Company received cash proceeds of $1.6
million and realized a gain of $1.0 million.
INCOME TAXES. The Company's effective tax rate for the current period was 34.2%
as compared to 36.0% for the prior year period. The decrease in the current
period is primarily attributable to a reduction in the deferred tax valuation
allowance for capital losses. The valuation allowance was reduced as a result of
the recognition of capital gain from the sale of real estate held for
investment. The effective tax rate for the current period would have been 36.0%
excluding the gain and the related tax effect.
28
OTHER DATA. The following table sets forth certain selected financial and
non-financial data for the Company's domestic and foreign lending operations,
presented in U.S. dollars, for the nine months ended September 30, 2003 and 2002
(dollars in thousands).
Domestic Foreign
---------------------------- ---------------------------
2003 2002 2003 2002
-------- --------- --------- ---------
Annualized yield on pawn loans - domestic ..... 127.4% 125.2% -- --
Annualized yield on pawn loans - foreign:
In U.S. dollars ............................. -- -- 53.0% 55.1%
In local currency -
United Kingdom ............................. -- -- 57.5% 59.5%
Sweden ..................................... -- -- 46.2% 48.3%
Total pawn loans written ...................... $ 235,688 $ 226,716 $ 95,008 $ 78,100
Average pawn loan balance outstanding ......... $ 77,529 $ 73,873 $ 53,481 $ 42,800
Average pawn loan balance per average
pawnshop location in operation .............. $ 197 $ 184 $ 863 $ 751
Profit margin on disposition of merchandise
as a percentage of proceeds from
disposition of merchandise .................. 37.5% 34.5% 29.1% 27.3%
Average annualized merchandise turnover ....... 3.0x 2.9x 2.1x 2.3x
Average merchandise held for disposition
per average pawnshop location ............... $ 119 $ 130 $ 88 $ 63
Pawnshop locations in operations -
Beginning of period, owned .................. 396 404 59 56
Acquired ................................... 6 2 4 2
Start-ups .................................. -- -- 2 1
Combined or closed ......................... (6) (9) (1) --
End of period, owned ........................ 396 397 64 59
Franchise locations at end of period .......... 9 13 -- --
Total pawnshop locations at end period ........ 405 410 64 59
Average number of owned pawnshop locations
in operations ............................... 393 401 62 57
- --------------------------------------------------------------------------------------------------------------
CURRENCY EXCHANGE RATES:
Harvey & Thompson, Ltd. (British pound per
U.S. dollars) -
Balance sheet data - end of period .......... -- -- 0.6009 0.6375
Statement of operations data - average
rate for the period ........................ -- -- 0.6205 0.6733
Svensk Pantbelaning (Swedish kronor per
U.S. dollar) -
Balance sheet data - end of period .......... -- -- 7.7399 9.2678
Statement of operations data - average
rate for the period ........................ -- -- 8.2508 9.9301
29
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows and other key indicators of liquidity are summarized as
follows ($ in millions):
Nine Months Ended
September 30,
----------------------
2003 2002
---- ----
Operating activities cash flows $ 39.9 $ 26.4
Investing activities cash flows:
Pawn loans .................. (7.7) (5.7)
Cash advances ............... (13.2) (3.8)
Other investing activities .. (56.8) (12.1)
Financing activities cash flows 45.5 (9.8)
Working capital ................ $ 233.7 $ 186.3
Current ratio .................. 6.2x 6.0x
Merchandise turnover ........... 2.9x 2.8x
CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating activities
of continuing operations was $39.9 million for the nine months ended September
30, 2003 ("current period").
CASH FLOWS FROM INVESTING ACTIVITIES. An increase in the Company's investment in
pawn loans during the current period required $7.7 million of cash. The
Company's transition from a national bank to a state chartered bank program in
early 2003 and increases in balances for its cash advance product required an
investment of $13.2 million in cash during the current period. The Company
invested $12.8 million in purchases of property and equipment during the current
period for property improvements, the remodeling of selected operating units and
additions to computer systems for lending operations. During the current period,
in addition to the acquisition of Cashland assets (see below), the Company
acquired nine lending locations, one check cashing franchise and other earning
assets for $11.9 million. During the current period, the Company sold real
estate that was being held for investment purposes following the reconstruction
of the corporate headquarters. The Company received cash proceeds of $1.6
million.
Management anticipates that capital expenditures for the remainder of 2003
will be approximately $1.0 to $2.0 million. These expenditures will primarily
relate to the establishment of new lending locations, the remodeling of selected
operating units and enhancements to communications and information systems. The
Company may add up to twenty new lending locations, including cash advance only
locations. The new locations may be added through the establishment of both new
cash advance locations and new pawnshops and the acquisition of existing
pawnshop locations.
The cash portion of the purchase price paid in the Cashland acquisition
was funded by the Company's U.S. line of credit. The total commitment was
increased from $90.0 million to $135.0 million to facilitate the acquisition and
the maturity date was extended to July 2006. The terms of the purchase include
the potential for additional consideration to be paid based on future earnings
performance of Cashland. Any additional consideration would be in the form of
subordinated debt and cash.
30
CASH FLOWS FROM FINANCING ACTIVITIES. During the nine month period, the Company
had net borrowings of $42.0 million on bank lines of credit, of which $32.0
million was used to pay the cash portion of the purchase consideration of
Cashland, and $12.6 million for payments on other debt obligations. Additional
uses of cash included $1.2 million for dividends and $1.8 million for the
purchase of treasury shares. On July 24, 2002, the Company's Board of Directors
authorized management to purchase up to one million shares of its common stock
in the open market and terminated the open market purchase authorization
established in 2000. During the current period, the Company purchased 175,900
shares for an aggregate amount of $1.8 million under this authorization.
Additional purchases may be made from time to time in the open market, and it is
expected that funding will come from operating cash flow.
In connection with the acquisition of Cashland, the Company increased the
total commitment under its U.S. line of credit from $90 million to $135 million
and extended the maturity date of this line of credit for an additional year to
July 31, 2006. The interest rate on the line of credit varies from 1.50% to
2.25% over LIBOR, depending on the Company's cash flow leverage ratio as defined
in the credit agreement. The Company pays a fee of 0.375% per annum on the
unused portion of this line of credit. The amended agreement also changed
certain financial ratios that the Company has to maintain. At September 30,
2003, there was $83.4 million outstanding on this line of credit.
The Company extended its multi-currency line of credit to April 30, 2006
and increased the maximum amount to L20 million (approximately $33.3 million at
September 30, 2003) from L15 million (approximately $25.0 million at September
30, 2003). Funds may be drawn in British pounds, bearing interest at the Bank's
cost of funds plus a margin of 75 basis points. Funds up to the equivalent of
L10 million may be drawn in Swedish kronor, bearing interest at the Bank's cost
of funds plus a margin of 75 basis points. In the aggregate, the British pound
and Swedish kronor drawings may not exceed the equivalent of L20 million. The
Company pays a fee of 0.25% per annum on the unused portion of this line of
credit. As of September 30, 2003, amounts outstanding under this line of credit
were L6.5 million (approximately $10.8 million) and SEK 37.5 million
(approximately $4.8 million) for an aggregate of $15.6 million. The Company also
extended its SEK 15 million line of credit (approximately $1.9 million as of
September 30, 2003) with a commercial bank to mature on May 30, 2004. Interest
on this line of credit is charged at the Bank's base funding rate plus 1%. There
were no amounts outstanding on this line of credit as of September 30, 2003.
Management believes that borrowings available under these credit
facilities, cash generated from operations and current working capital of $233.7
million should be sufficient to meet the Company's anticipated future capital
requirements.
During the third quarter, the Company received a $5,709,000 equity
infusion when holders exercised stock options for 864,950 shares and sold their
shares. These options were held by several members of its board of directors. In
addition, some of the Company's officers and employees exercised options for
1,256,039 shares, and the Company received proceeds totaling $9,422,000 upon
sales of those shares during the nine months. Separately, the Chairman of its
board of directors sold 139,400 shares of common stock that had been pledged to
the Company to secure a loan under the Company's now discontinued officer stock
loan program.
31
The proceeds of $1,749,000 from the sale were used to repay the loan in full.
The Company's Chief Executive Officer and other officers also made principal and
interest payments totaling $2,875,000 toward such loans.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS
This quarterly report, including management's discussion and analysis, contains
statements that are forward-looking, as that term is defined by the Private
Securities Litigation Reform Act of 1995 or by the Securities and Exchange
Commission in its rules. The Company intends that all forward-looking statements
be subject to the safe harbors created by these laws and rules. When used in
this quarterly report, the words "believes", "estimates", "plans", "expects",
"anticipates", and similar expressions as they relate to the Company or its
management are intended to identify forward-looking statements. All
forward-looking statements are based on current expectations regarding important
risk factors. These risks and uncertainties are beyond the ability of the
Company to control, and, in many cases, the Company cannot predict all of the
risks and uncertainties that could cause its actual results to differ materially
from those expressed in the forward-looking statements. Accordingly, actual
results may differ materially from those expressed in the forward-looking
statements, and such statements should not be regarded as a representation by
the Company or any other person that the results expressed in the statements
will be achieved. Important risk factors that could cause results or events to
differ from current expectations are described below. These factors are not
intended to be an all-encompassing list of risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business.
RISK FACTORS
- - CHANGES IN CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SPECIALTY
FINANCIAL SERVICES. Although the Company's products and services are a
staple of its customer base, a significant change in the needs or wants of
customers and the Company's failure to adapt to those needs or wants could
result in a significant decrease in the revenues of the Company.
- - THE ACTIONS OF THIRD PARTIES WHO OFFER PRODUCTS AND SERVICES AT THE
COMPANY'S LOCATIONS. The Company offers products and services to its
customers through various third parties. A failure of a third party
provider to provide its product or service or to maintain the quality and
consistency of its product or service could result in a loss of customers
and a related loss in revenue from those products or services.
- - THE ABILITY OF THE COMPANY TO OPEN AND ACQUIRE NEW OPERATING UNITS IN
ACCORDANCE WITH ITS PLANS. The Company's expansion program is subject to
numerous factors which cannot be predicted or controlled, such as the
availability of attractive acquisition candidates and the Company's
ability to attract, train and retain qualified unit management personnel.
Another such factor is the availability of sites with acceptable
restrictions and suitable terms and general economic conditions.
- - CHANGES IN COMPETITION FROM VARIOUS SOURCES SUCH AS BANKS, SAVINGS AND
LOANS, SHORT-TERM CONSUMER LENDERS, AND OTHER SIMILAR FINANCIAL SERVICES
ENTITIES, AS WELL AS RETAIL BUSINESSES THAT OFFER PRODUCTS AND SERVICES
OFFERED BY THE COMPANY. The Company encounters significant competition in
connection with its lending and merchandise disposition operations from
other pawnshops and other forms of financial
32
institutions such as consumer finance companies. Significant increases in
these competitive influences could adversely affect the Company's
operations through a decrease in the number of cash advances and pawn
loans originated, resulting in lower levels of earning assets in these
categories.
- - CHANGES IN ECONOMIC CONDITIONS. While the credit risk for most OF the
Company's consumer lending is mitigated by the collateralized nature of
pawn lending, a sustained deterioration in the economic environment could
adversely affect the Company's operations through a deterioration in
performance of its pawn loan or cash advance portfolios, or by reducing
consumer demand for the purchase of pre-owned merchandise.
- - REAL ESTATE MARKET FLUCTUATIONS. A significant rise in real esTATE prices
could result in an increase in the cost of store leases as the Company
opens new locations and renews leases for existing locations.
- - INTEREST RATE FLUCTUATIONS. Although the weakness in the U.S. economy over
the past several quarters has resulted in relatively low interest rates
offered by lending institutions, an eventual economic recovery could
result in a rise in interest rates which would, in turn, increase the cost
of borrowing to the Company.
- - CHANGES IN THE CAPITAL MARKETS. The Company regularly accesses the debt
capital markets to refinance existing debt obligations, and to obtain
capital to finance growth. Efficient access to these markets is critical
to the Company's ongoing financial success; however, the Company's future
access to the debt capital markets could become restricted should the
Company experience deterioration of its cash flows, balance sheet quality,
or overall business or industry prospects.
- - CHANGES IN TAX AND OTHER LAWS AND GOVERNMENTAL RULES AND REGULATIONS
APPLICABLE TO THE SPECIALTY FINANCIAL SERVICES INDUSTRY. The Company's
lending activities are subject to extensive regulation and supervision
under various federal, state and local laws, ordinances and regulations.
The Company faces the risk that new laws and regulations could be enacted
that could have a negative impact on the Company's domestic or
international lending activities.
- - OTHER FACTORS DISCUSSED UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK IN ITEM 3 OF THIS FORM 10-Q AND IN THE COMPANY'S 2002
ANNUAL REPORT TO STOCKHOLDERS.
- - OTHER RISKS INDICATED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND
EXCHANGE COMMISSION.
ITEM 3. 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. There have been no material
changes to the Company's exposure to market risks since December 31, 2002.
33
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, management of
the Company has evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the last day of the period covered by
this report (the "Evaluation Date"). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, the Company's disclosure controls
and procedures are effective in timely alerting them to the material
information relating to the Company required to be included in its
periodic filings with the Securities and Exchange Commission.
(b) During the period covered by this report, there was no change in the
Company's internal control over financial reporting that was identified in
connection with management's evaluation described in Item 4(a) above and
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
34
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11 of Notes to Consolidated Financial Statements
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) promulgated under the Securities
Exchange Act of 1934
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) promulgated under the Securities
Exchange Act of 1934
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 1, 2003, the Company filed a Report on Form 8-K that it had
issued a press release announcing that it had entered into an
agreement to acquire substantially all of the assets of Cashland,
Inc. Under a separate release the Company also announced an increase
in expected earnings for the second quarter of 2003. Copies of the
press releases were filed with the Report as exhibits.
On July 24, 2003, the Company filed a Report on Form 8-K that it had
issued a press release announcing its earnings for the second
quarter of 2003. A copy of the press release was filed with the
Report as an exhibit.
On August 15, 2003, the Company filed a Report on Form 8-K that it
had acquired substantially all of the assets of Cashland, Inc. The
purchase agreement and the press release dated August 4, 2003
announcing the closing of the acquisition and the increase in its
earnings estimates were filed with the report as exhibits.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CASH AMERICA INTERNATIONAL, INC.
(Registrant)
By: /s/ Thomas A. Bessant, Jr.
--------------------------
Thomas A. Bessant, Jr.
Executive Vice President and
Chief Financial Officer
Date: October 24, 2003
36
INDEX TO EXHIBITS
Exhibit No. DESCRIPTION
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) promulgated under the Securities
Exchange Act of 1934
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) promulgated under the Securities
Exchange Act of 1934
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002