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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 000-19424
-------------------------------
EZCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
- ------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
-------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(512) 314-3400
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
--
(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 [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of June 30, 2004, 11,171,168 shares of the registrant's Class A Non-voting
Common Stock, par value $.01 per share and 1,190,057 shares of the registrant's
Class B Voting Common Stock, par value $.01 per share were outstanding.
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EZCORP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2004, June 30, 2003 and September
30, 2003 ..................................................................................... 1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended June 30, 2004 and 2003 ................................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2004
and 2003 ..................................................................................... 3
Notes to Interim Condensed Consolidated Financial Statements ................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk .............................. 20
Item 4. Controls and Procedures ................................................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders .................................... 22
Item 6. Exhibits and Reports on Form 8-K ....................................................... 22
SIGNATURE .................................................................................................. 23
EXHIBIT INDEX .............................................................................................. 24
CERTIFICATIONS ............................................................................................. 25
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, June 30, September 30,
2004 2003 2003
--------- --------- -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 1,692 $ 248 $ 2,496
Pawn loans 51,101 48,149 47,955
Payday loans 6,720 3,116 3,630
Pawn service charges receivable, net 8,557 8,806 8,990
Payday loan service charges receivable, net 1,336 611 735
Inventory, net 30,997 28,853 29,755
Deferred tax asset 8,163 6,418 8,163
Federal income tax receivable 253 683 328
Prepaid expenses and other assets 2,287 2,209 1,726
--------- --------- -------------
Total current assets 111,106 99,093 103,778
Investment in unconsolidated affiliates 15,734 15,113 14,700
Property and equipment, net 25,222 27,141 25,369
Note receivable from related party 1,500 1,500 1,500
Deferred tax asset, non-current 4,391 1,948 4,391
Other assets, net 4,102 3,848 3,952
--------- --------- -------------
Total assets $ 162,055 $ 148,643 $ 153,690
========= ========= =============
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 11,465 $ 9,186 $ 11,101
Customer layaway deposits 1,554 1,471 1,792
--------- --------- -------------
Total current liabilities 13,019 10,657 12,893
Long-term debt, less current maturities 31,200 33,000 31,000
Deferred gains and other long-term liabilities 4,048 4,408 4,319
--------- --------- -------------
Total long-term liabilities 35,248 37,408 35,319
Commitments and contingencies - - -
Stockholders' equity:
Preferred Stock, par value $.01 per share; Authorized
5,000,000 shares; none issued and outstanding - - -
Class A Non-Voting Common Stock, par value $.01 per share;
Authorized 40,000,000 shares; 11,180,201 issued and
11,171,168 outstanding at June 30, 2004; 11,006,864 issued
and 10,997,831 outstanding at June 30, 2003
and September 30, 2003 112 110 110
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; 1,190,057
issued and outstanding 12 12 12
Additional paid-in capital 116,680 114,796 115,580
Accumulated deficit (2,911) (13,724) (9,161)
Less deferred compensation expense (978) - (784)
--------- --------- -------------
112,915 101,194 105,757
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder - (729) (729)
Accumulated other comprehensive income 908 148 485
--------- --------- -------------
Total stockholders' equity 113,788 100,578 105,478
--------- --------- -------------
Total liabilities and stockholders' equity $ 162,055 $ 148,643 $ 153,690
========= ========= =============
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Sales $ 30,782 $ 30,012 $ 102,711 $ 99,980
Pawn service charges 13,835 13,619 43,875 43,576
Payday loan service charges 6,191 3,047 16,124 8,798
Other 333 225 1,034 770
--------- --------- --------- ---------
Total revenues 51,141 46,903 163,744 153,124
Cost of goods sold 19,340 19,714 61,130 63,708
--------- --------- --------- ---------
Net revenues 31,801 27,189 102,614 89,416
Operating expenses:
Operations 21,830 19,700 64,382 60,495
Bad debt and other payday loan direct expenses 2,832 1,111 5,957 3,175
Administrative 4,614 4,021 16,854 12,711
Depreciation and amortization 1,858 2,179 5,638 6,636
--------- --------- --------- ---------
Total operating expenses 31,134 27,011 92,831 83,017
--------- --------- --------- ---------
Operating income 667 178 9,783 6,399
Interest expense, net 332 403 1,153 1,534
Equity in net income of unconsolidated affiliate (430) (333) (1,291) (1,062)
Loss on sale of assets - 27 - 26
--------- --------- --------- ---------
Income before income taxes and cumulative effect of
adopting a new accounting principle 765 81 9,921 5,901
Income tax expense 512 28 3,671 2,065
--------- --------- --------- ---------
Income before cumulative effect of adopting a new
accounting principle 253 53 6,250 3,836
Cumulative effect of adopting a new accounting principle,
net of tax - - - (8,037)
--------- --------- --------- ---------
Net income (loss) $ 253 $ 53 $ 6,250 $ (4,201)
========= ========= ========= =========
Income (loss) per common share - basic:
Income before cumulative effect of adopting a new
accounting principle $ 0.02 $ - $ 0.51 $ 0.31
Cumulative effect of adopting a new accounting
principle, net of tax - - - (0.65)
--------- --------- --------- ---------
Net income (loss) $ 0.02 $ - $ 0.51 $ (0.34)
========= ========= ========= =========
Income (loss) per common share - assuming dilution:
Income before cumulative effect of adopting a new
accounting principle $ 0.02 $ - $ 0.48 $ 0.31
Cumulative effect of adopting a new accounting
principle, net of tax - - - (0.65)
--------- --------- --------- ---------
Net income (loss) $ 0.02 $ - $ 0.48 $ (0.34)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,275 12,188 12,221 12,178
Assuming dilution 13,221 12,528 13,138 12,474
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
----------------------
2004 2003
--------- ---------
(In thousands)
Operating Activities:
Net income (loss) $ 6,250 $ (4,201)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of adopting a new accounting principle - 8,037
Depreciation and amortization 5,638 6,636
Deferred taxes - (3,139)
Net loss on sale or disposal of assets - 26
Impairment of receivable from stockholder 729 -
Deferred compensation expense 392 3
Income from investment in unconsolidated affiliate (1,291) (1,062)
Changes in operating assets and liabilities:
Service charges receivable, net (168) (113)
Inventory (1,242) 3,244
Notes receivable from related parties - 22
Prepaid expenses, other current assets, and other assets, net (364) 2,447
Accounts payable and accrued expenses 432 (2,399)
Customer layaway deposits (238) (695)
Deferred gains and other long-term liabilities (271) (274)
Federal income taxes 75 (324)
--------- ---------
Net cash provided by operating activities 9,942 8,208
Investing Activities:
Pawn loans forfeited and transferred to inventory 53,410 53,210
Pawn loans made, including loans renewed (144,063) (137,755)
Pawn loans repaid or renewed 87,507 85,644
--------- ---------
Net (increase) decrease in pawn loans (3,146) 1,099
Net increase in payday loans (3,090) (790)
Additions to property and equipment (5,431) (1,946)
Dividends from unconsolidated affiliate 681 523
Proceeds from sale of assets - 907
--------- ---------
Net cash used in investing activities (10,986) (207)
Financing Activities:
Proceeds from exercise of stock options 446 -
Debt issuance costs (406) -
Net borrowings (payments) on bank borrowings 200 (9,245)
--------- ---------
Net cash provided by (used in) financing activities 240 (9,245)
--------- ---------
Change in cash and equivalents (804) (1,244)
Cash and equivalents at beginning of period 2,496 1,492
--------- ---------
Cash and equivalents at end of period $ 1,692 $ 248
========= =========
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment $ 423 $ 168
Deferred gain on sale-leaseback $ - $ 506
Issuance of common stock to 401(k) plan $ 70 $ 63
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2004
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. The accompanying financial statements should be read with the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003 ("Fiscal 2003"). The
balance sheet at September 30, 2003 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company's business is subject to seasonal variations, and operating results
for the three-month and nine-month periods ended June 30, 2004 are not
necessarily indicative of the results of operations for the full fiscal year.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of collectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of collectible
loans, affecting the Company's earnings and financial condition.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans and related service charges
reported in the Company's consolidated financial statements reflect only the
Company's participation interest in these loans. The Company accrues service
charges on the percentage of loans the Company deems to be collectible using the
interest method. Accrued service charges related to defaulted loans are deducted
from service charge revenue upon loan default, and increase service charge
revenue upon subsequent collection.
The Company considers a loan defaulted if the loan has not been repaid or
refinanced by the maturity date. Although defaulted loans may be collected
later, the Company charges defaulted loan principal to bad debt upon default,
leaving only active loans in the reported balance. Subsequent collections of
principal are recorded as a reduction of bad debt at the time of collection. The
Company's payday loan net defaults, included in bad debt and other payday loan
direct expenses, were $2.3 million and $5.0 million, representing 6.6% and 5.6%
of loans made for the three-month and nine-month periods ended June 30, 2004
(the "Fiscal 2004 Third Quarter" and the "Fiscal 2004 Year-to-Date Period,"
respectively). In the comparable 2003 periods (the "Fiscal 2003 Third Quarter"
and the "Fiscal 2003 Year-to-Date Period," respectively), payday loan net
defaults were $0.8 million and $2.3 million, representing 4.8% and 4.7%,
respectively, of loans made.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: The Company also provides an allowance for
losses on active payday loans and related service charges receivable. Changes in
the principal valuation allowance are charged to bad debt expense in the
Company's statement of operations. Changes in the service charge receivable
valuation allowance are charged to payday loan service charge revenue.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on the type and age
of merchandise as well as recent sales trends and margins. At June 30, 2004,
June 30, 2003, and September 30, 2003, the valuation allowance deducted from the
carrying value of inventory was $1.7 million, $2.5
4
million, and $1.8 million (5.1%, 7.9%, and 5.8% of gross inventory),
respectively. Changes in the inventory valuation allowance are recorded as cost
of goods sold.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors which could trigger an
impairment review include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy for the overall business; and significant
negative industry trends. When management determines that the carrying value of
tangible long-lived assets may not be recoverable, impairment is measured based
on the excess of the assets' carrying value over the estimated fair value. No
impairment of tangible long-lived assets has been recognized in the Fiscal 2004
or 2003 Year-to-Date Periods.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. At
June 30, 2004, the Company increased its estimate of the effective tax rate for
its fiscal year ending September 30, 2004 from 34.5% to 37.0%, as more fully
discussed in Note J, "Income Taxes." As part of the process of preparing the
consolidated financial statements, the Company is required to estimate income
taxes in each of the jurisdictions in which it operates. This process involves
estimating the actual current tax liability together with assessing temporary
differences in recognition of income for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included in
the Company's consolidated balance sheet. Management must then assess the
likelihood that the deferred tax assets will be recovered from future taxable
income. In the event the Company was to determine that it would not be able to
realize all or part of its net deferred tax assets in the future, a valuation
allowance would be charged to the income tax provision in the period such
determination was made. Likewise, should the Company determine that it would be
able to realize its deferred tax assets in the future in excess of its net
recorded amount, a decrease to a valuation allowance would increase income in
the period such determination was made. The Company evaluates the realizability
of its deferred tax assets quarterly by assessing the need for a valuation
allowance, if any. No adjustments have been made to the Company's valuation
allowance in the Fiscal 2004 or 2003 Periods.
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $57.7 million, $63.6 million and $65.7 million at June 30, 2004,
June 30, 2003, and September 30, 2003, respectively.
STOCK-BASED COMPENSATION: The Company accounts for its stock-based compensation
plans in accordance with the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB 25"). Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure,"
encourages expensing the fair value of employee stock options, but allows an
entity to continue to account for stock-based compensation to employees under
APB 25 with disclosures of the pro forma effect on net income had the fair value
accounting provisions of SFAS No. 123 been adopted. The Company has calculated
the fair value of options granted in these periods using the Black-Scholes
option-pricing model and has determined the pro forma impact on net income. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
5
The following table presents the effect on net income (loss) if the Company had
applied the fair value recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, to stock-based compensation:
Three Months Ended Nine Months Ended
June 30 June 30
------------------ ----------------------
2004 2003 2004 2003
--------- ---- --------- ---------
(In thousands, except per share amounts)
Net income (loss), as reported $ 253 $ 53 $ 6,250 $ (4,201)
Add: stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects 97 - 258 1
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (227) (89) (653) (265)
--------- ---- --------- ---------
Pro forma net income (loss) $ 123 $(36) $ 5,855 $ (4,465)
========= ==== ========= =========
Earnings (loss) per share, basic:
As reported $ 0.02 $ - $ 0.51 $ (0.34)
Pro forma $ 0.01 $ - $ 0.48 $ (0.37)
Earnings (loss) per share, assuming dilution:
As reported $ 0.02 $ - $ 0.48 $ (0.34)
Pro forma $ 0.01 $ - $ 0.45 $ (0.36)
See Note H, "Common Stock, Warrants, and Options."
Certain prior year balances have been reclassified to conform to the Fiscal 2004
presentation.
NOTE C: EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share amounts)
Numerator
Income before cumulative effect of adopting a new
accounting principle $ 253 $ 53 $ 6,250 $ 3,836
Cumulative effect of adopting a new accounting
principle, net of tax - - - (8,037)
-------- -------- -------- --------
Net income (loss) 253 53 $ 6,250 $ (4,201)
Denominator ======== ======== ======== ========
Denominator for basic earnings per share: weighted
average shares 12,275 12,188 12,221 12,178
Effect of dilutive securities:
Options and warrants 866 340 860 296
Restricted common stock grants 80 - 57 -
-------- -------- -------- --------
Dilutive potential common shares 946 340 917 296
-------- -------- -------- --------
Denominator for diluted earnings per share: adjusted
weighted average shares and assumed conversions 13,221 12,528 13,138 12,474
======== ======== ======== ========
Basic earnings (loss) per share $ 0.02 $ 0.00 $ 0.51 $ (0.34)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.02 $ 0.00 $ 0.48 $ (0.34)
======== ======== ======== ========
6
The following table presents the weighted average shares subject to options
outstanding during the periods indicated. Anti-dilutive options, warrants and
restricted stock grants have been excluded from the computation of diluted
earnings per share because the exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
anti-dilutive.
Three Months Ended Nine Months Ended
June 30 June 30
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Total options outstanding
Weighted average shares subject to options 2,362,426 1,972,915 2,299,275 2,002,651
Average exercise price per share $ 6.86 $ 6.12 $ 6.53 $ 6.14
Anti-dilutive options outstanding
Weighted average shares subject to options 320,982 886,516 1,018,901 911,643
Average exercise price per share $ 13.42 $ 10.74 $ 11.01 $ 10.70
During the nine months ended June 30, 2004, there were 37,007 weighted average
shares of restricted stock outstanding that were anti-dilutive.
NOTE D: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), approximately 29% of A&B's total outstanding shares. The Company
accounts for its investment in A&B using the equity method. Since A&B's fiscal
year ends three months prior to the Company's fiscal year, the income reported
by the Company for its investment in A&B is on a three-month lag. In accordance
with U.K. securities regulations, A&B files only semi-annual financial reports,
for its fiscal periods ending December 31 and June 30. The Company estimates
A&B's results of operations for the March 31 quarter for its financial
statements. The income reported for the Company's Fiscal 2004 Year-to-Date
Period represents its percentage interest in the results of A&B's operations
from July 1, 2003 to March 31, 2004, as estimated.
Conversion of A&B's financial statements into US Generally Accepted Accounting
Principles ("GAAP") resulted in no material differences from those reported by
A&B following UK GAAP. Below is summarized financial information for A&B's most
recently reported results (in thousands of U.S. dollars, using average exchange
rates for the periods indicated):
Six Months ended December 31,
-----------------------------
2003 2002
-------- --------
Turnover (gross revenues) $ 19,726 $ 16,655
Gross profit 13,164 11,047
Profit after tax (net income) 2,977 2,464
NOTE E: CONTINGENCIES
As previously announced on a Form 8-K filed on May 21, 2004 with the Securities
and Exchange Commission, the Company received a subpoena on May 14, 2004 from
the Securities and Exchange Commission relating to an investigation of certain
jewelry companies. The subpoena requested the Company's documents concerning
Morgan Schiff & Co., Inc. The Company believes it has responded fully to the
subpoena. Since completing its response to the subpoena, the Company has
received no further communication from the Securities and Exchange Commission
regarding this matter.
From time to time, the Company is involved in litigation and regulatory actions
arising from its normal business operations. Currently, the Company is a named
party in several actions, some of which involve claims for substantial amounts.
While the ultimate outcome of these actions cannot be determined, after
consultation with counsel, the Company believes the resolution of these actions
will not have a material adverse effect on the
7
Company's financial condition, results of operations, or liquidity. However,
there can be no assurance as to the ultimate outcome of these actions.
NOTE F: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and other revenues,
expenses, gains and losses that are excluded from net income (loss) but are
included as a component of total stockholders' equity. Comprehensive income for
the Fiscal 2004 Third Quarter was $0.4 million and comprehensive income for the
Fiscal 2004 Year-to-Date Period was $6.7 million. For the comparable 2003
periods, comprehensive loss was $0.1 million and comprehensive loss was $4.0
million, respectively. The difference between comprehensive income (loss) and
net income (loss) results primarily from the effect of foreign currency
translation adjustments determined in accordance with SFAS No. 52, "Foreign
Currency Translation." The accumulated balance of foreign currency activity
excluded from net income (loss) of $1.4 million is presented, net of tax of $0.5
million, in the Condensed Consolidated Balance Sheets as "Accumulated other
comprehensive income."
NOTE G: LONG-TERM DEBT
At June 30, 2004, the Company's credit agreement provided for a $40.0 million
revolving credit facility with an effective rate of 4.0% and a maturity date of
April 1, 2007. Advances are secured by the Company's assets. The Company may
choose either a Eurodollar rate or the agent bank's base rate. Interest accrues
at the Eurodollar rate plus 150 to 275 basis points or the agent bank's base
rate plus 0 to 125 basis points, depending on the leverage ratio computed at the
end of each quarter. The Company also pays a commitment fee of 37.5 basis points
on the unused amount of the revolving facility. Terms of the agreement require,
among other things, that the Company meet certain financial covenants. Payment
of dividends and additional debt are allowed but restricted.
NOTE H: COMMON STOCK, WARRANTS, AND OPTIONS
The Company accounts for its stock-based compensation plans as described in Note
B, "Significant Accounting Policies."
On September 17, 2003, the Compensation Committee of the Board of Directors
approved an award of 125,000 shares of restricted stock to the Chairman of the
Board. The Company also agreed to reimburse the Chairman for the income tax
consequences resulting from the award. The market value of the restricted stock
on the award date was $0.8 million, which is being amortized over the two-year
restriction period expiring September 17, 2005. During the Fiscal 2004 Third
Quarter and the Fiscal 2004 Year-to-Date Period, $0.1 million and $0.3 million,
respectively, of this cost was amortized to expense. In the quarter ended
December 31, 2003, the Company also reimbursed $0.8 million for the Chairman's
one-time taxes related to the award. The reimbursement was charged to
administrative expense.
On January 15, 2004, the Compensation Committee of the Board of Directors
approved an award of 60,000 shares of restricted stock to the Company's Chief
Executive Officer. The shares will vest on January 1, 2009, provided he remains
continuously employed by the Company through the vesting date. The shares are
subject to earlier vesting based on the occurrence of certain objectives. The
Company also agreed to reimburse him for the income tax consequences resulting
from the award. The market value of the restricted stock on the award date was
$0.6 million, which is being amortized over a three-year period based on the
Company's expectation that earlier vesting objectives will be met. During the
Fiscal 2004 Third Quarter and the Fiscal 2004 Year-to-Date Period, $0.05 million
and $0.1 million, respectively, of this cost was amortized to expense. The
Company expects to amortize an additional $0.05 million of stock compensation
cost related to this award during the remaining three months of the fiscal year
ending September 30, 2004. Additionally in the quarter ended March 31, 2004, the
Company reimbursed $0.3 million for the Chief Executive Officer's one-time taxes
related to the award. The reimbursement was charged to administrative expense.
Stock option exercises resulted in the issuance of 162,800 shares of Class A
Common Stock for total proceeds of $442,000 during the Fiscal 2004 Third Quarter
and 164,600 shares of Class A Common Stock for total proceeds of $446,000 during
the Fiscal 2004 Year-to-Date Period. There were no stock option exercises during
fiscal year ending September 30, 2003.
8
The Company issued 8,737 shares of Class A Common Stock during the Fiscal 2004
Year-to-Date Period and 21,189 shares of Class A Common Stock during the Fiscal
2003 Year-to-Date Period to the Company's 401(k) Plan and Trust representing the
Company's match of employees' contributions.
NOTE I: CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective October 1, 2002. Under the provisions of SFAS No. 142, goodwill and
other intangible assets having indefinite lives are not subject to amortization
but are tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the assets might be impaired. During the quarter
ended December 31, 2002, the Company, with assistance of independent valuation
specialists, completed impairment tests of its goodwill and pawn licenses; its
indefinite lived intangible assets. The goodwill testing estimated enterprise
value based on discounted cash flows and market capitalization and indicated an
implied fair value of goodwill of $0 based on the allocation of enterprise value
to all of the Company's assets and liabilities. This resulted in an $8.0
million, net of tax, impairment charge for goodwill, recorded as a cumulative
effect of adopting a new accounting principle. Separately, the estimated fair
value of pawn licenses was compared to their carrying value, indicating no
impairment.
At each balance sheet date presented, the balance of pawn licenses - the only
major class of indefinite lived intangible assets at each of these dates - was
$1.5 million.
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite lived intangible assets at the
specified dates:
June 30, 2004, June 30, 2003, September 30, 2003,
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application
fees $ 345 $ 187 $ 742 $ 554 $ 742 $ 561
Real estate finders'
fees 554 271 554 240 554 249
Non-compete agreements 388 233 388 214 388 219
-------- ------ -------- ------- -------- -------
Total $ 1,287 $ 691 $ 1,684 $ 1,008 $ 1,684 $ 1,029
======== ====== ======== ======= ======== =======
Total amortization expense from definite lived intangible assets for the Fiscal
2004 Third Quarter and the Fiscal 2004 Year-to-Date Period was approximately
$18,500 and $59,000, respectively. In comparison, the amortization expense for
the Fiscal 2003 Third Quarter and the Fiscal 2003 Year-to-Date Period was
approximately $23,000 and $68,000, respectively. The following table presents
the Company's estimate of amortization expense for definite lived intangible
assets for each of the five succeeding full fiscal years ending September 30 (in
thousands):
Fiscal Year Amortization Expense
- ----------- --------------------
2004 $ 77
2005 68
2006 67
2007 67
2008 66
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
9
NOTE J: INCOME TAXES
The provision for federal income taxes has been calculated based on the
Company's estimate of its effective tax rate for the full fiscal year. At June
30, 2004, the Company increased its estimate of the effective tax rate for its
fiscal year ending September 30, 2004 from 34.5% to 37.0%. The increase resulted
primarily from the determination in the current quarter that certain executive
compensation would not be deductible for federal income tax purposes in 2004 and
from an increase in expected state income taxes. The increase in the effective
income tax rate lowered net income in the quarter ended June 30, 2004 by
$248,000, or $0.02 per share (basic and assuming dilution).
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
Third Quarter Ended June 30, 2004 vs. Third Quarter Ended June 30, 2003
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended June 30, 2004 and
2003 ("Fiscal 2004 Third Quarter" and "Fiscal 2003 Third Quarter,"
respectively):
Three Months Ended % or
June 30, (a) Point
2004 2003 Change(b)
-------- -------- -----------
Net revenues:
Sales $ 30,782 $ 30,012 2.6%
Pawn service charges 13,835 13,619 1.6%
Payday loan service charges 6,191 3,047 103.2%
Other 333 225 48.0%
-------- --------
Total revenues 51,141 46,903 9.0%
Cost of goods sold 19,340 19,714 (1.9)%
-------- --------
Net revenues $ 31,801 $ 27,189 17.0%
======== ========
Other data:
Gross margin 37.2% 34.3% 2.9 pts.
Average annual inventory turnover 2.6x 2.7x (0.1)x
Average inventory per pawn location at quarter end $ 111 $ 103 7.8%
Average pawn loan balance per pawn location at
quarter end $ 183 $ 172 6.4%
Average yield on pawn loan portfolio 119% 122% (3) pts.
Pawn loan redemption rate 77% 78% (1) pt.
Average payday loan balance per location offering
payday loans at quarter end $ 24.5 $ 13.6 80.1%
Payday loan net defaults 6.6% 4.8% 1.8 pts.
Expenses and income as a percentage of net revenues (%):
Store operating 68.6 72.5 (3.9) pts.
Bad debt and other payday loan direct expenses 8.9 4.1 4.8 pts.
Administrative 14.5 14.8 (0.3) pts.
Depreciation and amortization 5.8 8.0 (2.2) pts.
Interest, net 1.0 1.5 (0.5) pts.
Income before income taxes 2.4 0.3 2.1 pts.
Net income 0.8 0.2 0.6 pts.
Stores in operation:
Beginning of period 335 280
New openings 30 -
-------- --------
End of period 365 280
======== ========
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY payday loan locations adjoining EZPAWNs 69 -
EZMONEY payday loan locations - free standing 16 -
-------- --------
Total stores in operation 365 280
======== ========
EZPAWN locations offering payday loans 188 228
Total locations offering payday loans 273 228
- ------------------
a In thousands, except percentages, inventory turnover and store count.
b In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
11
Nine Months Ended June 30, 2004 vs. Nine Months Ended June 30, 2003
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the nine-month periods ended June 30, 2004 and
2003 ("Fiscal 2004 Year-to-Date Period" and "Fiscal 2003 Year-to-Date Period,"
respectively):
Nine Months Ended % or
June 30, (a) Point
2004 2003 Change(b)
-------- -------- -----------
Net revenues:
Sales $102,711 $ 99,980 2.7%
Pawn service charges 43,875 43,576 0.7%
Payday loan service charges 16,124 8,798 83.3%
Other 1,034 770 34.3%
-------- --------
Total revenues 163,744 153,124 6.9%
Cost of goods sold 61,130 63,708 (4.0)%
-------- --------
Net revenues $102,614 $ 89,416 14.8%
======== ========
Other data:
Gross margin 40.5% 36.3% 4.2 pts.
Average annual inventory turnover 2.6x 2.7x (0.1)x
Average inventory per pawn location at quarter end $ 111 $ 103 7.8%
Average pawn loan balance per pawn location at
quarter end $ 183 $ 172 6.4%
Average yield on pawn loan portfolio 128% 128% -
Pawn loan redemption rate 77% 77% -
Average payday loan balance per location offering
payday loans at quarter end $ 24.5 $ 13.6 80.1%
Payday loan net defaults 5.6% 4.7% 0.9 pts.
Expenses and income as a percentage of net revenues (%):
Store operating 62.7 67.7 (5.0) pts.
Bad debt and other payday loan direct expenses 5.8 3.6 2.2 pts.
Administrative 16.4 14.2 2.2 pts.
Depreciation and amortization 5.5 7.4 (1.9) pts.
Interest, net 1.1 1.7 (0.6) pts.
Income before income taxes and cumulative effect 9.7 6.6 3.1 pts.
Income before cumulative effect 6.1 4.3 1.8 pts.
Stores in operation:
Beginning of period 284 280
New openings 81 -
-------- --------
End of period 365 280
======== ========
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY payday loan locations adjoining EZPAWNs 69 -
EZMONEY payday loan locations - free standing 16 -
-------- --------
Total stores in operation 365 280
======== ========
EZPAWN locations offering payday loans 188 228
Total locations offering payday loans 273 228
- ------------------
a In thousands, except percentages, inventory turnover and store count.
b In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
12
OVERVIEW
The Company meets the short-term cash needs of the cash and credit constrained
consumer by offering convenient, non-recourse loans secured by tangible personal
property, commonly known as pawn loans, and short-term non-collateralized loans,
often referred to as payday loans. The Company makes pawn loans in its 280
EZPAWN locations and makes payday loans in 188 of its EZPAWN locations, 85
EZMONEY Payday Loans locations ("EZMONEY stores"), and through its Austin, Texas
based call center.
The Company earns pawn service charge revenue on its pawn lending activity.
While allowable service charges vary by state and by amount of the loan, a
majority of the Company's pawn loans are in amounts that permit pawn service
charges of 20% per month or 240% per annum. The Company's average pawn loan
amount has historically averaged between $70 and $75, but varies depending on
the valuation of each item pawned. The allowable term of pawn loans also differs
by state, but is typically 30 days with a 60-day grace period.
The Company earns payday loan service charge revenue on its payday loans. In 214
locations and its call center, the Company markets and services payday loans
made by County Bank of Rehoboth Beach ("County Bank"), a federally insured
Delaware bank. After origination of the loans, the Company may purchase a 90%
participation in the loans made by County Bank and marketed by the Company. In
59 of its locations, the Company makes payday loans in compliance with state
law. The average payday loan amount is approximately $380 and the terms are
generally less than 30 days, averaging about 17 days. The service charge per
$100 loaned is typically $18 for a 7 to 23-day period, but varies in certain
locations.
In its 280 EZPAWNs, the Company sells merchandise acquired primarily through
pawn loan forfeitures and, to a lesser extent, through purchases of customer
merchandise. The realization of gross profit on sales of inventory depends
primarily on the Company's initial assessment of the property's resale value.
Improper assessment of the resale value of the collateral in the lending
function can result in reduced marketability of the property and the realization
of a lower margin.
In the Fiscal 2004 Third Quarter, the Company's net income improved to $253,000
million compared to $53,000 in the Fiscal 2003 Third Quarter. Contributing to
the earnings improvement was a significant growth in the Company's payday loan
balances and related earnings contribution, as well as improvements in its gross
margins on merchandise sales. Partially offsetting these factors was the
incremental operating costs at the 85 new EZMONEY stores and an increase in same
store labor costs.
RESULTS OF OPERATIONS
Third Quarter Ended June 30, 2004 vs. Third Quarter Ended June 30, 2003
The following discussion compares the results of operations for the Fiscal 2004
Third Quarter to the Fiscal 2003 Third Quarter. The discussion should be read in
conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2004 Third Quarter pawn service charge revenue increased
1.6%, or $0.2 million, from the Fiscal 2003 Third Quarter to $13.8 million. This
increase was due to a $1.8 million, or 3.9% increase in average pawn loans
outstanding during the quarter, offset by a three percentage point decrease in
loan yields to 119% in the Fiscal 2004 Third Quarter. The yield decrease in the
Fiscal 2004 Third Quarter is primarily due to the higher level of loan
forfeitures during the quarter and the higher level of loan forfeitures expected
in the ending pawn loan balance. Variations in the annualized loan yield are due
generally to changes in the level of loan forfeitures, a mix shift between loans
with different yields, and changes in statutory fees that can be charged. The
Company's average balance of pawn loans outstanding during the Fiscal 2004 Third
Quarter was 3.9% higher and ending pawn loans outstanding were 6.1% higher than
in the Fiscal 2003 Third Quarter.
In the Fiscal 2004 Third Quarter, 94.7%, or $13.1 million, of recorded pawn
service charge revenue was collected in cash, and 5.3%, or $0.7 million resulted
from an increase in accrued pawn service charges receivable. In the comparable
Fiscal 2003 Third Quarter, 93.8%, or $12.8 million, of recorded pawn service
charge revenue was collected in cash and 6.2% or $0.8 million was due to an
increase in accrued pawn service charges receivable. This pattern is
13
consistent with the seasonal nature of the pawn lending business. The accrual of
pawn service charges is dependent on the Company's estimate of collectible loans
in its portfolio at the end of each quarter. Consistent with prior year
treatment, the Company decreased its estimate of collectible loans at June 30,
2004 in anticipation of lower loan redemptions during the summer lending season.
Sales increased $0.8 million in the Fiscal 2004 Third Quarter compared to the
Fiscal 2003 Third Quarter, to $30.8 million. The increase was due to 4.0% higher
same store merchandise sales ($1.0 million), offset by a decrease in jewelry
scrapping sales ($0.2 million). Below is a summary of comparable sales data:
Quarter Ended June 30,
----------------------
2004 2003
-------- --------
(Dollars in thousands)
Merchandise sales $ 25,845 $ 24,863
Jewelry scrapping sales 4,937 5,149
-------- --------
Total sales 30,782 30,012
Gross profit on merchandise sales $ 10,279 $ 9,421
Gross profit on jewelry scrapping sales 1,163 877
Gross margin on merchandise sales 39.8% 37.9%
Gross margin on jewelry scrapping sales 23.6% 17.0%
Overall gross margin 37.2% 34.3%
The Fiscal 2004 Third Quarter overall gross margins on sales increased 2.9
percentage points from the Fiscal 2003 Third Quarter to 37.2%. This resulted
from improved margins on same store merchandise sales and the effect higher gold
prices had on jewelry scrapping. Margins on merchandise sales, excluding jewelry
scrapping, increased 1.9 percentage points primarily due to less discounting,
offset by an increase in the inventory valuation allowance. During the Fiscal
2004 Third Quarter, the Company increased its inventory valuation allowance $0.7
million as a result of the less efficient liquidation of aged general
merchandise since the beginning of the quarter and the growth in overall
inventory balances. In the comparable Fiscal 2003 Third Quarter, the inventory
allowance was increased $0.1 million due to liquidation levels of aged
merchandise during that quarter. Changes in the inventory valuation allowance
are recorded in cost of goods sold, directly impacting the Company's gross
margins. Inventory shrinkage, also included in cost of goods sold, was 1.6% of
merchandise sales in the Fiscal 2004 Third Quarter compared to 2.8% in the
Fiscal 2003 Third Quarter.
Payday loan data are as follows:
Quarter Ended June 30,
-----------------------
2004 2003
-------- --------
(Dollars in thousands)
Service charge revenue $ 6,191 $ 3,047
Bad debt (included in operating expense):
Net defaults on loans (2,297) (821)
Change in valuation allowance and other related costs (262) (36)
-------- --------
Net bad debt (2,559) (857)
Incremental operating expenses at EZMONEY stores (1,049) -
Other direct expenses (included in operating expense) (273) (254)
Collection and call center costs (included in administrative expense) (213) (149)
-------- --------
Contribution to operating income $ 2,097 $ 1,787
======== ========
Average payday loan balance outstanding during quarter $ 5,752 $ 2,678
Payday loan balance at end of quarter $ 6,720 $ 3,116
Average loan balance per participating location at end of quarter $ 24.5 $ 13.6
Participating locations at end of quarter (whole numbers) 273 228
Net default rate (defaults net of collections, measured as a percent of
loans made) 6.6% 4.8%
14
The Contribution to operating income presented above is the incremental
contribution only, including the effect of incremental operating expenses at
EZMONEY stores, but excluding operating costs such as labor, rent, and other
overhead costs at EZPAWN locations offering payday loans.
Payday loan service charge revenue increased from the Fiscal 2003 Third Quarter
with the growth in the amount of loans made during the quarter. The maturing of
the product in locations offering the product for more than twelve months and a
growth in the number of locations offering the loans contributed to the increase
in the loan balance. In the Fiscal 2004 Third Quarter, 93.4% or $5.8 million of
recorded payday loan service charge revenue was collected in cash and 6.6% or
$0.4 million resulted from an increase in accrued payday loan service charges
receivable. In the comparable Fiscal 2003 Third Quarter, 94.4% or $2.8 million
of recorded payday loan service charge revenue was collected in cash and 5.6% or
$0.2 million resulted from an increase in accrued payday loan service charges
receivable. This is consistent with the seasonal pattern expected in payday
lending. The Company anticipates continued growth in payday loans as it
continues the expansion of additional EZMONEY stores and the product matures in
its current locations.
Bad debt expense on payday loans increased to $2.6 million in the Fiscal 2004
Third Quarter from $0.9 million in the Fiscal 2003 Third Quarter. Of the total
increase, $0.9 million was due to the growth in the loan portfolio, and $0.8
million resulted from an increase in the net default rate from 4.8% in the
Fiscal 2003 Third Quarter to 6.6% in the Fiscal 2004 Third Quarter. While the
percentage of payday loans defaulting upon maturity during the Fiscal 2004 Third
Quarter approximated that in the Fiscal 2003 Third Quarter, the percentage of
collections of those defaulted loans decreased significantly. The Company
believes it has taken the appropriate steps to return collection rates to levels
experienced in prior periods.
The Company provides for a valuation allowance on both the principal and service
charges receivable for payday loans. At June 30, 2004, the valuation allowance
was $0.6 million, or 7.2% of the payday loan principal and service charges
receivable, compared to $0.2 million, or 5.2% of payday loan principal and
service charges receivable at June 30, 2003. Due to the short-term nature of
these loans, the Company uses recent net default rates and anticipated seasonal
changes in the rate of defaults as the basis for its valuation allowance, rather
than reserving the annual or quarterly rate. Actual loan losses could vary from
those estimated due to variance in any of these factors, as well as any national
or regional economic downturn.
Store operating expenses increased 10.8% ($2.1 million), to $21.8 million in the
Fiscal 2004 Third Quarter, representing a 3.9 percentage point decrease when
measured as a percent of net revenues. This dollar increase was due primarily to
$1.0 million in incremental operating expenses at the 85 new EZMONEY stores.
Also contributing to the increase was a $0.4 million (4.5%) increase in same
store labor and benefits and a $0.3 million increase in robbery losses.
While administrative expenses decreased 0.3 of a percentage point when measured
as a percent of net revenue, it increased 14.7% ($0.6 million) from the Fiscal
2003 Third Quarter to $4.6 million. The primary cause of this was a $0.4 million
increase in legal and professional services.
Depreciation and amortization expense decreased $0.3 million in the Fiscal 2004
Third Quarter to $1.9 million. This improvement is primarily due to assets that
became fully depreciated over the past year, net of additional depreciation on
assets placed in service in the last twelve months.
In the Fiscal 2004 Third Quarter, interest expense decreased by $0.1 million to
$0.3 million as a result of lower average debt balances and lower effective
interest rates. At June 30, 2004, the Company's total debt was $31.2 million
compared to $33.0 million at June 30, 2003.
The Fiscal 2004 Third Quarter income tax provision was $0.5 million (66.9% of
pretax income) compared to $28,000 (35% of pretax income) for the Fiscal 2003
Third Quarter. At June 30, 2004, the Company increased its
15
estimate of the effective tax rate for its full fiscal year ending September 30,
2004 from the previously estimated 34.5% to 37.0%. The increase resulted
primarily from the determination in the current quarter that certain executive
compensation would not be deductible for federal income tax purposes in 2004 and
from an increase in expected state income taxes. The increase in the effective
income tax rate lowered net income in the Fiscal 2004 Third Quarter by $248,000.
Operating income for the Fiscal 2004 Third Quarter increased $0.5 million from
the Fiscal 2003 Third Quarter to $0.7 million. The $1.1 million higher gross
profit on sales and $0.9 million greater contribution from same store payday
loan operations were partially offset by a $0.6 million operating loss from
EZMONEY stores opened in the last 12 months, a $0.4 million increase in same
store labor costs, and $0.5 million higher administrative costs. After a $0.5
million increase in income tax expense and smaller changes in other
non-operating items, net income improved to $253,000 in the Fiscal 2004
Third Quarter from $53,000 in the Fiscal 2003 Third Quarter.
Nine Months Ended June 30, 2004 vs. Nine Months Ended June 30, 2003
The following discussion compares the results of operations for the Fiscal 2004
Year-to-Date Period to the Fiscal 2003 Year-to-Date Period. The discussion
should be read in conjunction with the accompanying financial statements and
related notes.
The Company's Fiscal 2004 Year-to-Date Period pawn service charge revenue
increased 0.7%, or $0.3 million from the Fiscal 2003 Year-to-Date Period to
$43.9 million. This increase was primarily due to a slightly higher loan yield
of 128% in the Fiscal 2004 Year-to-Date Period. Variations in the annualized
loan yield, as seen between these periods, are due generally to changes in the
level of loan forfeitures, a mix shift between loans with different yields and
changes in statutory fees that can be charged. The Company's average balance of
pawn loans outstanding during the Fiscal 2004 Year-to-Date Period was 0.8%
higher and ending pawn loans outstanding were 6.1% higher than in the Fiscal
2003 Year-to-Date Period.
In the Fiscal 2004 Year-to-Date Period, 101.0% or $44.3 million of recorded pawn
service charge revenue was collected in cash offset by a $0.4 million decrease
in accrued pawn service charges receivable. In the Fiscal 2003 Year-to-Date
Period, 100.0% or $43.6 million of recorded pawn service charge revenue was
collected in cash. The accrual of pawn service charges is dependent on the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company decreased its
estimate of collectible loans at June 30, 2004 in anticipation of lower loan
redemptions during the summer lending season.
Sales increased $2.7 million in the Fiscal 2004 Year-to-Date Period compared to
the Fiscal 2003 Year-to-Date Period, to $102.7 million. The increase was due to
higher same store merchandise sales ($2.1 million), coupled with an increase in
jewelry scrapping sales ($0.6 million). Below is a summary of comparable sales
data:
Nine Months Ended June 30,
--------------------------
2004 2003
-------- --------
(Dollars in thousands)
Merchandise sales $ 90,095 $ 87,994
Jewelry scrapping sales 12,616 11,986
-------- --------
Total sales 102,711 99,980
Gross profit on merchandise sales $ 38,088 $ 34,614
Gross profit on jewelry scrapping sales 3,493 1,658
Gross margin on merchandise sales 42.3% 39.3%
Gross margin on jewelry scrapping sales 27.7% 13.8%
Overall gross margin 40.5% 36.3%
16
Overall gross margins on sales in the Fiscal 2004 Year-to-Date Period increased
4.2 percentage points from the Fiscal 2003 Year-to-Date Period to 40.5%. This
resulted from improved margins on same store merchandise sales and the favorable
effect higher gold prices had on jewelry scrapping. Margins on merchandise
sales, excluding jewelry scrapping, increased 3.0 percentage points primarily
due to the more efficient liquidation of aged general merchandise and less
discounting in the Fiscal 2004 Year-to-Date Period. During the Fiscal 2004
Year-to-Date Period, the inventory valuation allowance was reduced $0.2 million
as a result of the improved liquidation of aged merchandise. In the comparable
Fiscal 2003 Year-to-Date Period, the inventory valuation allowance was increased
$0.8 million due to less efficient liquidation of aged general merchandise
during that period. Changes in the inventory valuation allowance are recorded in
cost of goods sold, directly impacting the Company's gross margins. Inventory
shrinkage, also included in cost of goods sold, was 1.6% of merchandise sales in
the Fiscal 2004 Year-to-Date Period compared to 1.9% in the Fiscal 2003
Year-to-Date Period.
Payday loan data are as follows:
Nine Months Ended June 30,
--------------------------
2004 2003
------- -------
(Dollars in thousands)
Service charge revenue $16,124 $ 8,798
Bad debt (included in operating expense):
Net defaults on loans (5,021) (2,304)
Change in valuation allowance and other related costs (195) 20
------- -------
Net bad debt (5,216) (2,284)
Incremental operating expenses at EZMONEY stores (1,735) -
Other direct expenses (included in operating expense) (741) (891)
Collection and call center costs (included in administrative expense) (590) (482)
------- -------
Contribution to operating income $ 7,842 $ 5,141
======= =======
Average payday loan balance outstanding during period $ 5,061 $ 2,554
Payday loan balance at end of period $ 6,720 $ 3,116
Average loan balance per participating location at end of period $ 24.5 $ 13.6
Participating locations at end of period (whole numbers) 273 228
Net default rate (defaults net of collections, measured as a percent of
loans made) 5.6% 4.7%
The Contribution to operating income presented above is the incremental
contribution only, including the effect of incremental operating expenses at
EZMONEY stores, but excluding operating costs such as labor, rent, and other
overhead costs at EZPAWN locations offering payday loans.
Payday loan service charge revenue and bad debt expense each increased from the
Fiscal 2003 Year-to-Date Period primarily due to an increase in the amount of
loans made during the period. The maturing of the product and a growth in the
number of locations offering the loans contributed to the increase in the loan
balance. In the Fiscal 2004 Year-to-Date Period, 96.3% or $15.5 million of
recorded payday loan service charge revenue was collected in cash, and 3.7% or
$0.6 million resulted from an increase in accrued payday loan service charges
receivable. In the comparable Fiscal 2003 Year-to-Date Period, 98.6% or $8.7
million of recorded payday loan service charge revenue was collected in cash,
and 1.4% or $0.1 million resulted from an increase in accrued payday loan
service charges receivable. The Company anticipates continued growth in payday
loans as it continues the expansion of additional EZMONEY stores and the product
matures in its current locations.
Bad debt expense on payday loans increased to $5.2 million in the Fiscal 2004
Year-to-Date Period from $2.3 million in the Fiscal 2003 Year-to-Date Period. Of
the total increase, $2.1 million was due to the growth in the loan portfolio,
and $0.8 million resulted from an increase in the net default rate from 4.7% in
the Fiscal 2003 Year-to-Date Period to 5.6% in the Fiscal 2004 Year-to-Date
Period. While the percentage of payday loans defaulting upon maturity during the
Fiscal 2004 Year-to-Date Period approximated that in the Fiscal 2003
Year-to-Date Period, the percentage of collections of those defaulted loans
decreased significantly. The Company believes it has taken the appropriate steps
to return collection rates to levels experienced in prior periods.
17
Although store operating expenses decreased 5.0 percentage points when measured
as a percentage of net revenues, it increased 6.4% ($3.9 million) in dollar
terms, to $64.4 million. This was due primarily to $1.7 million in incremental
operating expenses at the 85 new EZMONEY stores. Also contributing to the
increase was a $1.8 million (5.7%) increase in same store labor and benefits.
Administrative expenses increased 32.6% ($4.1 million) from the Fiscal 2003
Year-to-Date Period to $16.9 million, representing a 2.2 percentage point
increase when measured as a percent of net revenues. The primary causes of this
were a $1.0 million increase in legal and professional fees, a $0.8 million
increase in accrued incentive compensation related to the Company's improved
performance and $1.5 million for restricted stock awarded to the Company's
Chairman and its Chief Executive Officer. Also contributing to the increase was
$0.7 million related to a valuation allowance placed on a note receivable from
the Company's former Chief Executive Officer.
Depreciation and amortization expense decreased $1.0 million in the Fiscal 2004
Year-to-Date Period to $5.6 million. This improvement is primarily due to assets
that became fully depreciated over the past year, net of additional depreciation
on assets placed in service in the last twelve months.
In the Fiscal 2004 Year-to-Date Period, interest expense decreased by $0.4
million to $1.2 million as a result of lower average debt balances and lower
effective interest rates. At June 30, 2004, the Company's total debt was $31.2
million compared to $33.0 million at June 30, 2003.
The Fiscal 2004 Year-to-Date Period income tax provision was $3.7 million (37.0%
of pretax income) compared to $2.1 million (35% of pretax income) for the Fiscal
2003 Year-to-Date Period. At June 30, 2004, the Company increased its estimate
of the effective tax rate for its full fiscal year ending September 30, 2004
from the previously estimated 34.5% to 37.0%. The increase resulted primarily
from the determination in the current quarter that certain executive
compensation would not be deductible for federal income tax purposes in 2004 and
from an increase in expected state income taxes. The increase in the effective
income tax rate lowered net income in the Fiscal 2004 Year-to-Date Period by
$248,000.
On October 1, 2002, the Company adopted SFAS No. 142 regarding goodwill and
other intangible assets. During the Fiscal 2003 Year-to-Date Period, the Company
completed its transitional impairment tests, resulting in a non-cash $8.0
million, net of tax impairment charge for goodwill, recorded as a cumulative
effect of adopting a new accounting principle.
Operating income for the Fiscal 2004 Year-to-Date Period increased $3.4 million
from the Fiscal 2003 Year-to-Date Period to $9.8 million. This increase was
primarily due to a $5.3 million increase in gross profit on sales and a $3.5
million greater contribution from same store payday loan operations. Somewhat
offsetting these factors were a $4.1 million increase in labor and incentive
compensation, a $1.0 million increase in professional fees, and a $0.8 million
operating loss at EZMONEY stores opened in the last 12 months. After a $1.6
million increase in income tax expense and smaller changes in other
non-operating items, income before the cumulative effect of adopting a new
accounting principle improved 62.9% to $6.3 million in the Fiscal 2004
Year-to-Date Period from $3.8 million in the Fiscal 2003 Year-to-Date Period.
The Company's net income for the Fiscal 2004 Year-to-Date Period was $6.3
million, compared to a net loss of $4.2 million after the cumulative effect of
adopting a new accounting principle in the Fiscal 2003 Year-to-Date Period.
LIQUIDITY AND CAPITAL RESOURCES
During the Fiscal 2004 Year-to-Date Period, operating activities provided $9.9
million compared to $8.2 million in the Fiscal 2003 Year-to-Date Period. Payday
loan service charges collected increased $6.8 million in the Fiscal 2004
Year-to-Date Period due primarily to the growth in the underlying loan
portfolio, cash from sales of inventory increased $3.5 million in the Fiscal
2004 Year-to-Date Period compared to the Fiscal 2003 Year-to-Date Period, and
pawn service charges collected in cash increased $0.7 million. Offsetting these
improvements in cash flows were an
18
increase of $4.2 million of labor, benefits, and incentive compensation paid to
employees, the payment of $1.1 million in payroll taxes related to the
restricted stock awards discussed above and $0.7 million paid to settle
previously accrued workers' compensation claims. Among other smaller changes,
the Company also used $1.5 million more in the Fiscal 2004 Year-to-Date Period
for the direct purchase of customers' merchandise, and $1.2 million more was
paid in income taxes during the Fiscal 2004 Year-to-Date Period.
The Company's financing activities provided $0.2 million of cash during the
Fiscal 2004 Year-to-Date Period, comprised of $0.4 million proceeds from the
exercise of employee stock options and $0.2 million additional bank borrowings,
offset by $0.4 million paid in connection with the renewal of the Company's
credit agreement.
The cash flows from operating and financing activities, as well as $0.8 million
of cash on hand was used to fund $11.0 million of investments during the Fiscal
2004 Year-to-Date Period. These investments consisted of a $3.1 million increase
in outstanding pawn loans, a $3.1 million increase in payday loans outstanding
and $5.4 million invested in property and equipment, offset by $0.7 million of
dividends received from the Company's investment in an unconsolidated affiliate.
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations in the full fiscal years ending September 30:
Payments due by Period
-------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
- ----------------------- --------- ----------- --------- --------- -----------
Long-term debt obligations $ 31,200 $ - $ - $ 31,200 $ -
Capital lease obligations - - - - -
Operating lease obligations 79,741 12,828 22,297 15,012 29,604
Purchase obligations - - - - -
Other long-term liabilities - - - - -
--------- ----------- --------- --------- -----------
Total $ 110,941 $ 12,828 $ 22,297 $ 46,212 $ 29,604
========= =========== ========= ========= ===========
In the remaining three months of the fiscal year ending September 30, 2004, the
Company plans to open an additional 35 to 40 EZMONEY payday loan stores for an
expected aggregate capital expenditure of approximately $1.2 million, plus the
funding of working capital and start-up losses at these stores. The Company
believes that these new stores will create a drag on earnings in their first six
to nine months of operations before turning profitable.
Effective April 8, 2004, the Company amended and restated its credit agreement.
The amendment extends the maturity date to April 1, 2007 and provides for a
$40.0 million revolving credit facility. Under the terms of the amended
agreement, the Company had the ability to borrow an additional $8.8 million at
June 30, 2004. Advances are secured by the Company's assets. Terms of the
agreement require, among other things, that the Company meet certain financial
covenants. Payment of dividends and additional debt are allowed but restricted.
The Company anticipates that cash flow from operations and availability under
its revolving credit facility will be adequate to fund its contractual
obligations, planned store growth, capital expenditures, and working capital
requirements during the coming year.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and
19
second fiscal quarters. The Company's cash flow is greatest in its second fiscal
quarter primarily due to a high level of loan redemptions and sales in the
income tax refund season.
USE OF ESTIMATES AND ASSUMPTIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, inventory, allowance
for losses on payday loans, long-lived and intangible assets, income taxes,
contingencies and litigation. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances. Management uses this information to
make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
the estimates under different assumptions or conditions.
DISCLOSURE AND INTERNAL CONTROLS
Based on an assessment of the effectiveness of the Company's disclosure controls
and procedures, accounting policies, and the underlying judgments and
uncertainties affecting the application of those policies and procedures,
management believes that the Company's condensed consolidated financial
statements provide a meaningful and fair perspective of the Company in all
material respects. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation. Management identified no significant
deficiencies or material weaknesses in internal controls. Other risk factors,
such as those discussed elsewhere in this interim report as well as changes in
business strategies, could adversely impact the consolidated financial position,
results of operations, and cash flows in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold prices. The Company also is exposed to regulatory risk in relation to its
payday loans. The Company does not use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
prices and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold prices. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold prices cannot be reasonably estimated.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its debt, all of which is variable-rate debt. If
interest rates average 25 basis points more during the remaining three months of
the fiscal year ending September 30, 2004 than they did in the comparable period
of 2003, the Company's interest expense during those three months would increase
by approximately $20,000. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's variable-rate debt at June 30,
2004.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment, net of tax, representing the strengthening in the
U.K. pound during the quarter ended March 31, 2004
20
(included in the Company's June 30, 2004 results on a three-month lag as
described above) was approximately a $154,000 increase to stockholders' equity.
On June 30, 2004, the U.K. pound closed at 1.00 to 1.8074 U.S. dollars, a
weakening from 1.8262 at March 31, 2004. No assurance can be given as to the
future valuation of the U.K. pound and how further movements in the pound could
affect future earnings or the financial position of the Company.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical information provided herein are
forward-looking and may contain information about financial results, economic
conditions, trends and known uncertainties. The Company cautions the reader that
actual results could differ materially from those expected by the Company
depending on the outcome of certain factors, including without limitation (i)
fluctuations in the Company's inventory and loan balances, inventory turnover,
average yields on loan portfolios, pawn redemption rates, payday loan default
and collection rates, labor and employment matters, competition, operating risk,
acquisition and expansion risk, changes in the number of expected store
openings, changes in expected returns from new stores, liquidity, and capital
requirements and the effect of government and environmental regulations, and
(ii) adverse changes in the market for the Company's services. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligations to
release publicly the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereon, including without limitation, changes in the Company's business strategy
or planned capital expenditures, or to reflect the occurrence of unanticipated
events.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
its Senior Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's "disclosure controls and procedures,"
which are defined under SEC rules as controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Based upon that
evaluation, the Company's President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
(c) Limitations on Controls
Notwithstanding the foregoing, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Moreover, the design of any system of controls is also
based in part upon certain assumptions about the likelihood of future events.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
As previously announced on a Form 8-K filed on May 21, 2004 with the Securities
and Exchange Commission, the Company received a subpoena on May 14, 2004 from
the Securities and Exchange Commission relating to an investigation of certain
jewelry companies. The subpoena requested the Company's documents concerning
Morgan Schiff & Co., Inc. The Company believes it has responded fully to the
subpoena. Since completing its response to the subpoena, the Company has
received no further communication from the Securities and Exchange Commission
regarding this matter.
From time to time, the Company is involved in litigation and regulatory actions
arising from its normal business operations. Currently, the Company is a named
party in several actions, some of which involve claims for substantial amounts.
While the ultimate outcome of these actions cannot be determined, after
consultation with counsel, the Company believes the resolution of these actions
will not have a material adverse effect on the Company's financial condition,
results of operation, or liquidity. There can be no assurance, however, as to
the ultimate outcome of these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit Incorporated by
Number Description Reference to
- ------ ----------- ------------
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Filing Date Item Reported Information Reported
- ------ ---- ------------- --------------------
8-K 5/14/04 Item 5 - Other Announcement of subpoena from SEC pursuant to
Events and investigation of an affiliate of EZCORP, Inc.
Regulation FD
Disclosure
8-K 7/20/04 Item 12 - Results Quarterly earnings announcement and related press
of Operations and release.
Financial
Condition
22
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.
EZCORP, INC.
------------
(Registrant)
Date: July 30, 2004 By:/s/ DAN N. TONISSEN
----------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
23
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to Page
- ------ ----------- ------------ ----
31.1 Certification of Chief Executive 25
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial 26
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive 27
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial 28
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
24