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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 MARCH 31, 2005
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 [X] No [ ]
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 March 31, 2005, 11,437,810 shares of the registrant's Class A Non-voting
Common Stock, par value $.01 per share and 990,057 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 March 31, 2005, March 31, 2004 and
September 30, 2004......................................................................... 1
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended March 31, 2005 and 2004.............................................................. 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2005
and 2004................................................................................... 3
Notes to Interim Condensed Consolidated Financial Statements............................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of 11
Operations....................................................................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 23
Item 4. Controls and Procedures............................................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders.................................. 25
Item 6. Exhibits and Reports on Form 8-K..................................................... 25
SIGNATURE........................................................................................... 26
EXHIBIT INDEX....................................................................................... 27
CERTIFICATIONS...................................................................................... 28
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, March 31, September 30,
2005 2004 2004
--------- --------- -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 1,405 $ 202 $ 2,506
Pawn loans 40,081 42,079 49,078
Payday loans, net 7,711 4,643 7,292
Pawn service charges receivable, net 7,720 7,825 8,679
Payday loan service charges receivable, net 1,573 928 1,474
Inventory, net 26,967 29,492 30,636
Deferred tax asset 9,711 8,163 9,711
Note receivable from related party 1,500 - -
Prepaid expenses and other assets 3,918 3,054 2,321
--------- --------- -------------
Total current assets 100,586 96,386 111,697
Investment in unconsolidated affiliate 17,094 15,417 16,101
Property and equipment, net 26,132 24,642 25,846
Note receivable from related party - 1,500 1,500
Deferred tax asset, non-current 4,946 4,391 4,946
Other assets, net 3,914 3,866 4,232
--------- --------- -------------
Total assets $ 152,672 $ 146,202 $ 164,322
========= ========= =============
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses 13,359 $ 11,668 14,947
Customer layaway deposits 1,848 1,842 1,645
Federal income taxes payable 271 771 2.043
--------- --------- -------------
Total current liabilities 15,478 14,281 18,635
Long-term debt 6,825 15,000 25,000
Deferred gains and other long-term liabilities 3,778 4,139 3,958
--------- --------- -------------
Total long-term liabilities 10,603 19,139 28,958
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; 11,446,843 issued and
11,437,810 outstanding at March 31, 2005; 11,016,567
issued and 11,007,534 outstanding at March 31, 2004;
11,181,401 issued and 11,172,368 outstanding at
September 30, 2004 114 110 112
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; Issued
1,190,057; Outstanding 990,057 at March 31, 2005
and 1,190,057 at March 31, 2004 and September 30, 2004 10 12 12
Additional paid-in capital 116,894 116,230 116,683
Retained earnings (deficit) 8,880 (3,164) (38)
Deferred compensation expense (538) (1,125) (832)
--------- --------- -------------
125,360 112,063 115,937
Treasury stock - Class A, at cost (35) (35) (35)
Accumulated other comprehensive income 1,266 754 827
--------- --------- -------------
Total stockholders' equity 126,591 112,782 116,729
--------- --------- -------------
Total liabilities and stockholders' equity $ 152,672 $ 146,202 $ 164,322
========= ========= =============
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(In thousands, except per share amounts)
Revenues:
Sales $ 40,259 $ 38,374 $ 76,583 $ 71,929
Pawn service charges 14,682 14,488 31,351 30,040
Payday loan service charges 7,828 5,072 16,118 9,933
Other 329 355 674 701
-------- -------- -------- --------
Total revenues 63,098 58,289 124,726 112,603
Cost of goods sold 23,901 22,517 45,814 41,790
-------- -------- -------- --------
Net revenues 39,197 35,772 78,912 70,813
Operating expenses:
Operations 23,988 21,775 46,691 42,552
Bad debt and other payday loan direct expenses 1,495 1,286 3,104 3,125
Administrative 5,796 6,378 11,663 12,240
Depreciation 2,054 1,844 3,924 3,739
Amortization 17 21 34 41
-------- -------- -------- --------
Total operating expenses 33,350 31,304 65,416 61,697
-------- -------- -------- --------
Operating income 5,847 4,468 13,496 9,116
Interest expense, net 275 373 614 821
Loss on sale/disposal of assets 6 - 43 -
Equity in net income of unconsolidated affiliate (636) (496) (1,096) (861)
-------- -------- -------- --------
Income before income taxes 6,202 4,591 13,935 9,156
Income tax expense 2,233 1,584 5,017 3,159
-------- -------- -------- --------
Net income $ 3,969 $ 3,007 $ 8,918 $ 5,997
======== ======== ======== ========
Income per common share:
Basic $ 0.32 $ 0.25 $ 0.72 $ 0.49
======== ======== ======== ========
Assuming dilution $ 0.29 $ 0.23 $ 0.66 $ 0.46
======== ======== ======== ========
Weighted average shares outstanding:
Basic 12,402 12,196 12,383 12,192
Assuming dilution 13,755 13,209 13,542 13,101
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
March 31,
--------------------
2005 2004
--------- --------
(In thousands)
Operating Activities:
Net income $ 8,918 $ 5,997
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,958 3,780
Payday loan loss provision 2,449 2,657
Impairment of receivable - 729
Net loss on sale or disposal of assets 43 -
Deferred compensation expense 294 245
Income from investment in unconsolidated affiliate (1,096) (861)
Changes in operating assets and liabilities:
Service charges receivable, net 860 972
Inventory 496 326
Prepaid expenses, other current assets, and other assets, net (1,313) (1,283)
Accounts payable and accrued expenses (1,522) 626
Customer layaway deposits 203 50
Deferred gains and other long-term liabilities (180) (180)
Federal income taxes (1,772) 1,099
--------- --------
Net cash provided by operating activities 11,338 14,157
Investing Activities:
Pawn loans made (75,809) (78,664)
Pawn loans repaid 48,815 48,717
Recovery of pawn loan principal through sale of forfeited collateral 39,164 35,760
Payday loans made (30,942) (21,600)
Payday loans repaid 28,074 17,930
Additions to property and equipment (4,247) (3,012)
Dividends from unconsolidated affiliate 542 414
--------- --------
Net cash provided by (used in) investing activities 5,597 (455)
Financing Activities:
Proceeds from exercise of stock options 139 4
Net payments on bank borrowings (18,175) (16,000)
--------- --------
Net cash used in financing activities (18,036) (15,996)
--------- --------
Change in cash and equivalents (1,101) (2,294)
Cash and equivalents at beginning of period 2,506 2,496
--------- --------
Cash and equivalents at end of period $ 1,405 $ 202
========= ========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 35,991 $ 35,823
Foreign currency translation adjustment $ 439 $ 269
Issuance of common stock to 401(k) plan $ 72 $ 61
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
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 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, 2004 ("Fiscal 2004"). The balance sheet at September 30, 2004 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 six-month periods ended March 31, 2005 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.
BAD DEBT AND OTHER PAYDAY LOAN DIRECT EXPENSES: The Company considers a loan
defaulted if the loan has not been repaid or renewed 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 $1.2
million and $2.5 million, representing 2.9% in both the three-month and
six-month periods ended March 31, 2005 (the "Fiscal 2005 Second Quarter" and the
"Fiscal 2005 Year-to-Date Period," respectively.) Excluding the benefit of a
$0.9 million sale of older bad debt in December 2004, net defaults for the
six-month period ended March 31, 2005 were $3.4 million, or 3.9% of loans made.
In the comparable 2004 periods (the "Fiscal 2004 Second Quarter" and the "Fiscal
2004 Year-to-Date Period"), payday loan net defaults were $1.2 million and $2.7
million, representing 4.3% and 4.9%, 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, based on
recent loan default experience and expected seasonal variations. 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 recent shrinkage
experiences and the type and age of merchandise as well as recent sales trends
and margins. At March 31, 2005, March 31, 2004, and September 30, 2004, the
valuation allowance deducted from the carrying
4
value of inventory was $2.1 million, $1.0 million, and $1.5 million (7.1%, 3.2%,
and 4.8% 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 tangible
long-lived assets for potential impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
that 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 2005 or 2004 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. As
part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each jurisdiction 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 were 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 were 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 were made
to the Company's valuation allowance in the Fiscal 2005 or 2004 Year-to-Date
Periods. As of March 31, 2005, March 31, 2004 and September 30, 2004, the
Company did not have a valuation allowance on its deferred tax assets.
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 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 Six Months Ended
March 31, March 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
(In thousands, except per share amounts)
Net income, as reported $ 3,969 $ 3,007 $ 8,918 $ 5,997
Add: stock-based employee compensation expense
included in reported net income, net of
related tax effects 95 95 191 159
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (259) (233) (518) (411)
-------- -------- -------- --------
Pro forma net income $ 3,805 $ 2,869 $ 8,591 $ 5,745
======== ======== ======== ========
Earnings per share - basic:
As reported $ 0.32 $ 0.25 $ 0.72 $ 0.49
Pro forma $ 0.31 $ 0.24 $ 0.69 $ 0.47
Earnings per share - assuming dilution:
As reported $ 0.29 $ 0.23 $ 0.66 $ 0.46
Pro forma $ 0.28 $ 0.22 $ 0.63 $ 0.44
See Note I, "Common Stock, Warrants, and Options" and Note J, "Recent
Pronouncements: Share-Based Payment - SFAS No. 123 (revised 2004)."
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $63.1 million, $69.4 million and $59.3 million at March 31,
2005, March 31, 2004, and September 30, 2004, respectively.
OPERATING LEASES: In a letter dated February 7, 2005, the Office of the Chief
Accountant of the Securities and Exchange Commission expressed to the American
Institute of Certified Public Accountants its interpretation of the rules for
accounting for operating leases. In the quarter ended March 31, 2005, the
Company performed a review of its lease accounting practices to ensure
compliance with this letter. Consistent with industry practices, the Company
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term. The Company has concluded that the calculation of
straight-line rent should include lease renewal options that are reasonably
assured, as defined in SFAS 98, "Accounting for Leases." As a result, the
Company determined that rent expense was understated in previous periods by a
cumulative amount of $0.3 million, which was recorded as operations expense in
the quarter ended March 31, 2005. No prior periods were restated as the amount
was not material to any quarterly or annual period or to the Company's financial
position in any period. The adjustment did not affect historical or future net
cash flows or the timing of payments under related leases. The Company also
reassessed the depreciable lives of its leasehold improvements to be the shorter
of their estimated useful life or the reasonably assured lease term at the
inception of the lease. This resulted in no cumulative difference, but did
result in a $0.1 million increase in current depreciation expense in the quarter
ended March 31, 2005.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform
to the Fiscal 2005 presentation.
6
NOTE C: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
March 31, March 31,
------------------- ------------------
2005 2004 2005 2004
------- -------- ------- -------
(In thousands, except per share amounts)
Numerator
Numerator for basic and diluted earnings per share: net
income $ 3,969 $ 3,007 $ 8,918 $ 5,997
======= ======== ======= =======
Denominator
Denominator for basic earnings per share: weighted
average shares 12,402 12,196 12,383 12,192
Effect of dilutive securities:
Options and warrants 1,210 947 1,031 862
Restricted common stock grants 143 66 128 47
------- -------- ------- -------
Dilutive potential common shares 1,353 1,013 1,159 909
------- -------- ------- -------
Denominator for diluted earnings per share: adjusted
weighted average shares and assumed conversions 13,755 13,209 13,542 13,101
======= ======== ======= =======
Basic earnings per share $ 0.32 $ 0.25 $ 0.72 $ 0.49
======= ======== ======= =======
Diluted earnings per share $ 0.29 $ 0.23 $ 0.66 $ 0.46
======= ======== ======= =======
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 options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
anti-dilutive.
Three Months Ended Six Months Ended
March 31, March 31,
------------------------ ------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Total options outstanding
Weighted average shares subject to options 2,119,348 2,402,791 2,136,500 2,267,872
Average exercise price per share $ 6.90 $ 6.55 $ 6.84 $ 6.35
Anti-dilutive options outstanding
Weighted average shares subject to options - 294,273 56,258 948,001
Average exercise price per share $ - $ 13.61 $ 14.94 $ 11.09
NOTE D: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 29% of the total outstanding shares. The investment is
accounted for 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 United Kingdom
securities regulations, A&B files only semi-annual financial reports, for its
fiscal periods ending December 31 and June 30. The income reported for the
Company's Fiscal 2005 Year-to-Date Period represents its percentage interest in
the results of A&B's operations from July 1, 2004 to December 31, 2004.
7
Below is summarized financial information for A&B's most recently reported
results (using average exchange rates for the periods indicated):
Six Months Ended December 31,
-----------------------------
2004 2003
---------- ----------
(In thousands)
Turnover (gross revenues) $ 23,399 $ 19,726
Gross profit 16,243 13,164
Profit after tax (net income) 3,799 2,977
From time to time, the Company is involved in litigation and regulatory matters
arising from its normal business operations. Currently, the Company is a
defendant 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 operations, or liquidity. However, there can be no assurance as to
the ultimate outcome of these actions or that other matters will not be
asserted.
NOTE F: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total stockholders' equity. Comprehensive income for the Fiscal 2005 Second
Quarter was $4.4 million and comprehensive income for the Fiscal 2005
Year-to-Date Period was $9.4 million. For the comparable 2004 periods,
comprehensive income was $3.2 million and $6.3 million, respectively. The
difference between comprehensive income and net income 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 is presented as "Accumulated
other comprehensive income" in the Condensed Consolidated Balance Sheets, and
amounted to $1.3 million ($1.9 million, net of tax of $0.6 million) at March 31,
2005.
NOTE G: LONG-TERM DEBT
At March 31, 2005, the Company's credit agreement provided for a $40.0 million
revolving credit facility with an effective rate of 4.6% 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: GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." 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.
At each balance sheet date presented above, the balance of pawn licenses - the
only major class of indefinite lived intangible assets at each of these dates -
was $1.5 million.
8
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible assets at the
specified dates:
March 31, 2005 March 31, 2004 September 30, 2004
----------------------- ----------------------- -----------------------
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $ (211) $ 742 $ (577) $ 345 $ (195)
Real estate finders' fees 554 (285) 554 (265) 554 (277)
Non-compete agreements 388 (248) 388 (228) 388 (238)
-------- ------------ -------- ------------ -------- ------------
Total $ 1,287 $ (744) $ 1,684 $ (1,070) $ 1,287 $ (710)
======== ============ ======== ============ ======== ============
Total amortization expense from definite-lived intangible assets for the Fiscal
2005 Second Quarter and Fiscal 2005 Year-to-Date Period was approximately
$17,000 and $34,000, respectively. In comparison, the amortization expense for
the Fiscal 2004 Second Quarter and the Fiscal 2004 Year-to-Date Period was
approximately $20,000 and $41,000, respectively. The following table presents
the Company's estimate of amortization expense for definite lived intangible
assets for each of the five succeeding fiscal years as of October 1, 2004 (in
thousands):
Fiscal Year Amortization Expense
- ----------- --------------------
2005 $ 68
2006 67
2007 67
2008 66
2009 57
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
NOTE I: 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 2005 Second
Quarter and the Fiscal 2005 Year-to-Date Period, $0.1 million and $0.2 million,
respectively, of this cost was amortized to expense. During the Fiscal 2004
Second Quarter and the Fiscal 2004 Year-to-Date Period, $0.1 million and $0.2
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 no later than 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 the earlier vesting objectives
will be met. During the Fiscal 2005 Second Quarter and the Fiscal 2005
Year-to-Date Period, $0.05 million and $0.1 million, respectively, of this cost
was amortized to expense. During the Fiscal 2004 Second Quarter, $0.05 million
of this cost was amortized to expense. The Company expects to amortize an
additional $0.1 million of stock compensation cost related to this award during
the remaining six months of the fiscal year ending September 30, 2005. In the
quarter ended March 31, 2004, the Company also reimbursed $0.3 million for the
Chief Executive Officer's one-time taxes related to the award. The reimbursement
was charged to administrative expense.
9
Stock option exercises resulted in the issuance of 59,000 shares of Class A
Common Stock for total proceeds of approximately $133,000 during the Fiscal 2005
Second Quarter and 61,000 shares of Class A Common Stock for total proceeds of
approximately $139,000 during the Fiscal 2005 Year-to-Date Period.
Stock option exercises resulted in the issuance of 1,800 shares of Class A
Common Stock for total proceeds of approximately $4,000 during the Fiscal 2004
Second Quarter and during the Fiscal 2004 Year-to-Date Period. There were no
stock option exercises during the quarter ended December 31, 2004.
The Company issued 3,984 shares of Class A Common Stock during the Fiscal 2005
Year-to-Date Period and 7,903 shares of Class A Common Stock during the Fiscal
2004 Year-to-Date Period to the Company's 401(k) Plan and Trust representing the
Company's match of employees' contributions.
In accordance with conversion rights authorized by the Company's Certificate of
Incorporation, the holder of the Company's Class B Voting Common Stock converted
200,000 shares of Class B Voting Common Stock to Class A Non-Voting Common Stock
in a series of transactions in the quarter ended March 31, 2005. The 200,000
shares of Class A Non-Voting Common Stock issued as a result of the conversion
were sold in open market transactions at the time of the related conversions.
The 200,000 shares of Class B Voting Common Stock converted are held as treasury
shares. The Company also holds 9,033 shares of Class A Non-Voting Common Stock
in treasury, the cost of which is included in the Condensed Consolidated Balance
Sheets.
See Note J, "Recent Pronouncements: Share-Based Payment - SFAS No. 123 (revised
2004)."
NOTE J: RECENT PRONOUNCEMENTS: SHARE-BASED PAYMENT - SFAS NO. 123 (REVISED 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Share Based Payment" ("SFAS No. 123R"). The statement revises
SFAS No. 123 and supercedes APB 25, under which the Company currently accounts
for its share-based payments to its employees. SFAS No. 123R will be effective
for the Company beginning October 1, 2005, and will require the Company to
recognize as expense the grant-date fair value of share-based payments made to
employees. Pro forma disclosure will no longer be an alternative. SFAS No. 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the
effective date of SFAS No. 123R that remain unvested on the
effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
Management has not yet determined the transition method it intends to use or the
impact that adoption of this pronouncement will have on its financial position
or results of operations.
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. See "Risk Factors"
on page 21 of this report.
Second Quarter Ended March 31, 2005 vs. Second Quarter Ended March 31, 2004
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended March 31, 2005 and
2004 ("Fiscal 2005 Second Quarter" and "Fiscal 2004 Second Quarter,"
respectively):
Three Months Ended % or
March 31, (a) Point
2005 2004 Change(b)
-------- -------- ----------
Net revenues:
Sales $ 40,259 $ 38,374 4.9%
Pawn service charges 14,682 14,488 1.3%
Payday loan service charges 7,828 5,072 54.3%
Other 329 355 (7.3)%
-------- --------
Total revenues 63,098 58,289 8.3%
Cost of goods sold 23,901 22,517 6.1%
-------- --------
Net revenues $ 39,197 $ 35,772 9.6%
======== ========
Other data:
Gross margin 40.6% 41.3% (0.7) pts.
Average annual inventory turnover 3.2x 2.9x 0.3x
Average inventory per pawn location at quarter end $ 96 $ 105 (8.6)%
Average pawn loan balance per pawn location at $ 143 $ 150 (4.7)%
quarter end
Average yield on pawn loan portfolio 144% 135% 9 pts.
Pawn loan redemption rate 79% 79% -
Average payday loan balance per location offering
payday loans at quarter end $ 24.6 $ 17.8 38.2%
Payday loan net defaults 2.9% 4.3% (1.4) pts.
Expenses and income as a percentage of net revenues (%):
Operations 61.2 60.9 0.3 pts.
Bad debt and other payday loan direct expenses 3.8 3.6 0.2 pts.
Administrative 14.8 17.8 (3.0) pts.
Depreciation and amortization 5.3 5.2 0.1 pts.
Interest expense, net 0.7 1.0 (0.3) pts.
Income before income taxes 15.8 12.8 3.0 pts.
Net income 10.1 8.4 1.7 pts.
Stores in operation:
Beginning of period 445 303
New openings 27 32
Sold, combined or closed - -
-------- --------
End of period 472 335
======== ========
Average number of stores during the period 456 319
Composition of ending stores:
EZPAWN locations 280 280
Mono-line payday loan locations adjoining EZPAWNs 135 48
Mono-line payday loan locations - free standing 57 7
-------- --------
Total stores in operation 472 335
======== ========
EZPAWN locations offering payday loans 121 205
Total locations offering payday loans, including call 314 261
center
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
Six Months Ended March 31, 2005 vs. Six Months Ended March 31, 2004
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the six-month periods ended March 31, 2005 and
2004 ("Fiscal 2005 Year-to-Date Period" and "Fiscal 2004 Year-to-Date Period,"
respectively):
Six Months Ended % or
March 31, (a) Point
2005 2004 Change(b)
-------- -------- ----------
Net revenues:
Sales $ 76,583 $ 71,929 6.5%
Pawn service charges 31,351 30,040 4.4%
Payday loan service charges 16,118 9,933 62.3%
Other 674 701 (3.9)%
-------- --------
Total revenues 124,726 112,603 10.8%
Cost of goods sold 45,814 41,790 9.6%
-------- --------
Net revenues $ 78,912 $ 70,813 11.4%
======== ========
Other data:
Gross margin 40.2% 41.9% (1.7) pts.
Average annual inventory turnover 3.0x 2.7x 0.3x
Average inventory per pawn location at quarter end $ 96 $ 105 (8.6)%
Average pawn loan balance per pawn location at $ 143 $ 150 (4.7)%
quarter end
Average yield on pawn loan portfolio 143% 134% 9 pts.
Pawn loan redemption rate 78% 77% 1pt.
Average payday loan balance per location offering
payday loans at quarter end $ 24.6 $ 17.8 38.2%
Payday loan net defaults 2.9% 4.9% (2.0) pts.
Expenses and income as a percentage of net revenues (%):
Operations 59.2 60.1 (0.9) pts.
Bad debt and other payday loan direct expenses 3.9 4.4 (0.5) pts.
Administrative 14.8 17.3 (2.5) pts.
Depreciation and amortization 5.0 5.3 (0.3) pts.
Interest expense, net 0.8 1.2 (0.4) pts.
Income before income taxes 17.7 12.9 4.8 pts.
Net income 11.3 8.5 2.8 pts.
Stores in operation:
Beginning of period 405 284
New openings 67 51
Sold, combined or closed - -
-------- --------
End of period 472 335
======== ========
Average number of stores during the period 439 306
Composition of ending stores:
EZPAWN locations 280 280
Mono-line payday loan locations adjoining EZPAWNs 135 48
Mono-line payday loan locations - free standing 57 7
-------- --------
Total stores in operation 472 335
======== ========
EZPAWN locations offering payday loans 121 205
Total locations offering payday loans, including call 314 261
center
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 offers payday loans in 121 of its EZPAWN locations, 192
EZMONEY Mono-line payday loan locations ("Mono-line stores"), and through its
Austin, Texas based call center.
The Company earns pawn service charge revenue on its pawn loans. 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% annually. 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. The
Company markets and services payday loans made by County Bank of Rehoboth Beach
("County Bank"), a federally insured Delaware bank, in 254 locations and its
call center. 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 under 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. See
"Risk Factors" for payday loans discussed on page 21 of this Form 10-Q.
In its 280 EZPAWN locations, 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 assessment of the property's resale value.
Improper assessment of the resale value of the collateral in the lending or
purchasing process can result in the realization of a lower margin or reduced
marketability of the property.
In the Fiscal 2005 Second Quarter, the Company saw an improvement in its gross
profit from sales, as well as its pawn loan yields. Pawn loan yields improved
primarily due to an increase in pawn loan redemptions and an increase in pawn
service charge rates in its Colorado market. Also contributing to the quarter's
earnings improvement was a reduction in administrative expenses. Although payday
loan revenues increased significantly in the quarter, the contribution from
payday loans was slightly lower than the Fiscal 2004 Second Quarter due to the
drag of operating expenses at new stores. The Company's net income improved to
$4.0 million in the Fiscal 2005 Second Quarter from $3.0 million in the Fiscal
2004 Second Quarter.
RESULTS OF OPERATIONS
Second Quarter Ended March 31, 2005 vs. Second Quarter Ended March 31, 2004
The following discussion compares the results of operations for the Fiscal 2005
Second Quarter to the Fiscal 2004 Second Quarter. The discussion should be read
in conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2005 Second Quarter pawn service charge revenue increased
1.3%, or $0.2 million from the Fiscal 2004 Second Quarter to $14.7 million. This
increase was due to a nine percentage point improvement in loan yields to 144%,
offset by lower average loan balances during the Fiscal 2005 Second Quarter. The
increase in loan yields was due to the Company's efforts to improve loan
redemption rates and an increase in pawn service charge rates in its twenty-four
Colorado stores. The Company's average balance of pawn loans outstanding during
the Fiscal 2005 Second Quarter was 4.5% lower and ending pawn loans outstanding
were 4.7% lower than in the Fiscal 2004 Second Quarter. The Company believes the
decrease in average pawn loan balance compared to the prior year period is due
to tighter underwriting in its pawn lending operation and a lower level of
demand for pawn loans.
In the Fiscal 2005 Second Quarter, 111.9% ($16.4 million) of recorded pawn
service charge revenue was collected in cash offset by a $1.7 million decrease
in accrued pawn service charges receivable. In the comparable Fiscal 2004 Second
Quarter, 112.3% ($16.3 million) of recorded pawn service charge revenue was
collected in cash offset by a $1.8 million decrease in accrued pawn service
charges receivable. This pattern is consistent with the seasonal nature of
13
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 March 31, 2005 in anticipation of lower loan
redemptions following the income tax refund season.
Sales increased $1.9 million in the Fiscal 2005 Second Quarter compared to the
Fiscal 2004 Second Quarter, to $40.3 million. The increase was due to a $1.8
million increase in jewelry scrapping sales and a $0.1 million increase in same
store merchandise sales. The table below summarizes the sales volume, gross
profit, and gross margins on the Company's sales during the quarters presented:
Quarter Ended March 31,
-----------------------
2005 2004
------ ------
Dollars in millions)
Merchandise sales $ 33.3 $ 33.2
Jewelry scrapping sales 7.0 5.2
------ ------
Total sales 40.3 38.4
Gross profit on merchandise sales $ 14.3 $ 14.3
Gross profit on jewelry scrapping sales 2.0 1.5
Gross margin on merchandise sales 43.0% 43.2%
Gross margin on jewelry scrapping sales 29.1% 29.4%
Overall gross margin 40.6% 41.3%
The Fiscal 2005 Second Quarter overall gross margin on sales decreased 0.7 of a
percentage point from the Fiscal 2004 Second Quarter to 40.6%. This resulted
primarily from an increase in the portion of total sales comprised of jewelry
scrapping sales, which realize a lower margin than merchandise sales. Margins on
merchandise sales also decreased 0.2 of a percentage point due to less effective
liquidation of aged general merchandise in the Fiscal 2005 Second Quarter, and
the resulting increase in the inventory valuation reserve. During the Fiscal
2005 Second Quarter, the inventory valuation allowance was increased $0.1
million. In the comparable Fiscal 2004 Second Quarter, the inventory valuation
allowance was reduced $0.2 million as a result of improved liquidation of aged
merchandise in that quarter. Changes in the inventory valuation allowance are
recorded in cost of goods sold, directly impacting the Company's gross margins.
Over a two-day period in the quarter ended December 31, 2004, the Company
experienced performance issues with its store computer system, creating a risk
that some transactions during this period were not recorded. Based on analysis
of transaction activity before, during and after the system issue, the Company
increased its inventory valuation allowance at December 31, 2004 by $0.3 million
in anticipation of higher shrinkage levels in future periods. The additional
valuation allowance was reversed in the Fiscal 2005 Second Quarter as inventory
audits were performed in the Company's stores, and actual inventory shrinkage
was recorded. The cause of the system issue has been identified and repaired and
system performance has returned to expected levels. Inventory shrinkage in the
Fiscal 2005 Second Quarter was unchanged from the Fiscal 2004 Second Quarter at
1.5% of merchandise sales.
14
Payday loan data are as follows:
Quarter Ended March 31,
-----------------------
2005 2004
------- -------
(Dollars in thousands)
Service charge revenue $ 7,828 $ 5,072
Bad debt:
Net defaults on loans (1,209) (1,203)
Change in valuation allowance (15) 82
NSF fees collected and other related costs 48 22
------- -------
Net bad debt (1,176) (1,099)
Other direct transaction expenses (319) (187)
Incremental expenses at Mono-line stores (2,819) (523)
Incremental depreciation and amortization at Mono-line stores (140) (24)
Collection and call center costs (included in administrative expense) (393) (194)
------- -------
Contribution to operating income $ 2,981 $ 3,045
======= =======
Average payday loan balance outstanding during quarter $ 7,819 $ 5,033
Payday loan balance at end of quarter $ 7,711 $ 4,643
Average loan balance per participating location at end of quarter $ 24.6 $ 17.8
Participating locations at end of quarter, including call center 314 261
(whole numbers)
Net default rate (defaults net of collections, measured as a percent of
loans made) 2.9% 4.3%
The Contribution to operating income presented above includes the effect of
incremental operating expenses at Mono-line stores. Shared costs at Mono-li
stores adjoining EZPAWN locations have been excluded from these figures, as they
did not increase with the build-out of those adjoined stores.
Payday loan service charge revenue increased from the Fiscal 2004 Second Quarter
primarily due to higher average loan balances at existing stores and the
addition of new Mono-line stores. In the Fiscal 2005 Second Quarter, 102.4%
($8.0 million) of recorded payday loan service charge revenue was collected in
cash offset by a $0.2 million decrease in accrued payday loan service charges
receivable, as is seasonally expected. In the comparable Fiscal 2004 Second
Quarter, 104.1% ($5.3 million) of recorded payday loan service charge revenue
was collected in cash offset by a $0.2 million decrease in accrued payday loan
service charges receivable.
Although payday loan service charge revenue increased $2.8 million (54.3%),
payday loan bad debt increased only $0.1 million in the Fiscal 2005 Second
Quarter compared to the Fiscal 2004 Second Quarter, resulting in net defaults of
2.9% of loans made, compared to 4.3% in the Fiscal 2004 Second Quarter.
The Company provides a valuation allowance on payday loan principal and fees
receivable. Due to the short-term nature of these loans, the Company uses recent
net default rates and anticipated seasonal changes in the default rate as the
basis for its valuation allowance. At March 31, 2005, the valuation allowance
was $0.5 million, or 4.9% of the payday loan principal and fees receivable,
compared to $0.3 million, or 4.7% of payday loan principal and fees receivable
at March 31, 2004.
The Company's incremental expenses at Mono-line stores increased to $2.8 million
in the Fiscal 2005 Second Quarter from $0.5 million in the comparable Fiscal
2004 Second Quarter. The increase relates primarily to expenses at the 137 new
Mono-line stores constructed in the last twelve months. The Company expects the
contribution from these stores to improve as the stores mature and build their
loan portfolios.
Operations expense increased to $24.0 million in the Fiscal 2005 Second Quarter
from $21.8 million in the Fiscal 2004 Second Quarter, representing a 0.3
percentage point increase when measured as a percentage of net revenue. Of the
total $2.2 million increase, $2.3 million related to Mono-line stores.
Offsetting this was a $0.1 million decrease in same store operating expenses.
Also included in operations expense in the Fiscal 2005 Second Quarter
15
is a $0.3 million charge for prior period rent related to a revised
interpretation of the accounting rules for operating leases and the inclusion of
optional renewal periods in the Company's calculation of rent expense.
Administrative expenses in the Fiscal 2005 Second Quarter were $5.8 million
compared to $6.4 million in the Fiscal 2004 Second Quarter, a decrease of three
percentage points when measured as a percent of net revenue. Of the total
decrease, $0.7 million relates to a valuation allowance placed on a note
receivable from the Company's former Chief Executive Officer in the Fiscal 2004
Second Quarter, with no corresponding amount in the Fiscal 2005 Second Quarter.
Also contributing to the decrease is a $0.4 million reduction in stock
compensation related to restricted stock granted to the Company's Chief
Executive in the Fiscal 2004 Second Quarter with no corresponding grant in the
current quarter. Somewhat offsetting these savings were additional
administrative labor ($0.4 million), payday loan collection and call center
costs ($0.2 million), and professional fees ($0.2 million) during the Fiscal
2005 Second Quarter.
Depreciation and amortization expense was $2.1 million in the Fiscal 2005 Second
Quarter compared to $1.9 million in the comparable prior year period. The
increase related primarily to a $0.1 million charge for depreciation of
leasehold improvements related to a revised interpretation of the accounting
rules for renewal options in operating leases.
In the Fiscal 2005 Second Quarter, interest expense decreased to $0.3 million
from $0.4 million in the Fiscal 2004 Second Quarter. The improvement resulted
from lower average debt balances and lower effective interest rates. At March
31, 2005, the Company's total debt was $6.8 million compared to $15.0 million at
March 31, 2004. Decreases in the debt balance were funded by cash flow from
operations and lending activity included in investing activities.
The Fiscal 2005 Second Quarter income tax expense was $2.2 million (36.0% of
pretax income) compared to $1.6 million (34.5% of pretax income) for the Fiscal
2004 Second Quarter. The increase in effective tax rate between these periods is
due to an increase in state taxes and an increase in the Company's federal tax
rate due to the higher level of taxable income expected in the year ending
September 30, 2005.
Operating income for the Fiscal 2005 Second Quarter increased $1.4 million from
the Fiscal 2004 Second Quarter to $5.8 million, primarily due to the $0.5
million increase in gross profit from sales, the $0.6 million decrease in
administrative expense, and the $0.2 million increase in pawn service charges.
After a $0.6 million increase in income taxes related to the increased earnings
and other smaller items, net income improved to $4.0 million in the Fiscal 2005
Second Quarter from $3.0 million in the Fiscal 2004 Second Quarter.
Six Months Ended March 31, 2005 vs. Six Months Ended March 31, 2004
The following discussion compares the results of operations for the Fiscal 2005
Year-to-Date Period to the Fiscal 2004 Year-to-Date Period. The discussion
should be read in conjunction with the accompanying financial statements and
related notes.
The Company's Fiscal 2005 Year-to-Date Period pawn service charge revenue
increased 4.4%, or $1.3 million from the Fiscal 2004 Year-to-Date Period to
$31.4 million. This increase was due to a nine percentage point improvement in
loan yields to 143%, offset by lower average loan balances during the Fiscal
2005 Year-to-Date Period. The increase in loan yields was due to the Company's
efforts to improve loan redemption rates and an increase in pawn service charge
rates in its twenty-four Colorado stores. The Company's average balance of pawn
loans outstanding during the Fiscal 2005 Year-to-Date Period was 2.2% lower and
ending pawn loans outstanding were 4.7% lower than in the Fiscal 2004
Year-to-Date Period. The Company believes the decrease in the pawn loan balance
compared to the prior year period is due to tighter underwriting in its pawn
lending operation and a lower level of demand for pawn loans.
In the Fiscal 2005 Year-to-Date Period, 103.1% ($32.3 million) of recorded pawn
service charge revenue was collected in cash offset by a $1.0 million decrease
in accrued pawn service charges receivable. In the Fiscal 2004 Year-to-Date
Period, 103.9% ($31.2 million) of recorded pawn service charge revenue was
collected in cash offset by a $1.2 million decrease in accrued pawn service
charges receivable. 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,
16
the Company decreased its estimate of collectible loans at March 31, 2005 in
anticipation of lower loan redemptions following the income tax refund season.
Sales increased $4.7 million in the Fiscal 2005 Year-to-Date Period compared to
the Fiscal 2004 Year-to-Date Period, to $76.6 million. The increase was due to a
$3.6 million (46.8%) increase in jewelry scrapping sales and a $1.1 million
(1.7%) increase in same store merchandise sales. The table below summarizes the
sales volume, gross profit, and gross margins on the Company's sales during the
periods presented:
Six Months Ended March 31,
--------------------------
2005 2004
------ ------
(Dollars in millions)
Merchandise sales $ 65.3 $ 64.2
Jewelry scrapping sales 11.3 7.7
------ ------
Total sales 76.6 71.9
Gross profit on merchandise sales $ 27.6 $ 27.8
Gross profit on jewelry scrapping sales 3.2 2.3
Gross margin on merchandise sales 42.2% 43.3%
Gross margin on jewelry scrapping sales 28.4% 30.3%
Overall gross margin 40.2% 41.9%
The Fiscal 2005 Year-to-Date Period overall gross margin on sales decreased 1.7
percentage points from the Fiscal 2004 Year-to-Date Period to 40.2%. Margins on
merchandise sales decreased 1.1 percentage points due to less effective
liquidation of aged general merchandise in the Fiscal 2005 Year-to-Date Period.
During the Fiscal 2005 Year-to-Date Period, the inventory valuation allowance
was increased $0.5 million.
In the comparable Fiscal 2004 Year-to-Date Period, the inventory valuation
allowance was reduced $0.8 million as a result of improved liquidation of aged
merchandise in that quarter. Changes in the inventory valuation allowance are
recorded in cost of goods sold, directly impacting the Company's gross margins.
Inventory shrinkage was unchanged from the Fiscal 2004 Year-to-Date Period at
1.6% of merchandise sales.
Also contributing to the decrease in overall margins was an increase in the
portion of total sales comprised of jewelry scrapping sales, which realize a
lower margin than merchandise sales.
17
Payday loan data are as follows:
Six Months Ended March 31,
--------------------------
2005 2004
---------- -------
(Dollars in thousands)
Service charge revenue $ 16,118 $ 9,933
Bad debt:
Net defaults on loans, excluding sale of older bad debt (3,447) (2,724)
Change in valuation allowance 93 (2)
Sale of older bad debt 905 -
NSF fees collected and other related costs 87 69
---------- -------
Net bad debt (2,362) (2,657)
Other direct transaction expenses (742) (468)
Incremental expenses at Mono-line stores (5,140) (674)
Incremental depreciation and amortization at Mono-line stores (243) (31)
Collection and call center costs (included in administrative expense) (732) (377)
---------- -------
Contribution to operating income $ 6,899 $ 5,726
========== =======
Average payday loan balance outstanding during quarter $ 7,555 $ 4,607
Payday loan balance at end of quarter $ 7,711 $ 4,643
Average loan balance per participating location at end of quarter $ 24.6 $ 17.8
Participating locations at end of quarter, including call center 314 261
(whole numbers)
Net default rate (defaults net of collections, measured as a percent of
loans made) 2.9% 4.9%
Net default rate, excluding sale of older bad debt 3.9% 4.9%
The Contribution to operating income presented above includes the effect of
incremental operating expenses at Mono-line stores. Shared costs at Mono-line
stores adjoining EZPAWN locations have been excluded from these figures, as they
did not increase with the build-out of those adjoined stores.
Payday loan service charge revenue increased from the Fiscal 2004 Year-to-Date
Period primarily due to higher average loan balances at existing stores and the
addition of new Mono-line stores. In the Fiscal 2005 Year-to-Date Period, 99.4%
($16.0 million) of recorded payday loan service charge revenue was collected in
cash, and 0.6% ($0.1 million) resulted from an increase in accrued payday loan
service charges receivable. In the comparable Fiscal 2004 Year-to-Date Period,
98.1% ($9.7 million) of recorded payday loan service charge revenue was
collected in cash, and 1.9% ($0.2 million) was due to an increase in accrued
payday loan service charges receivable.
Payday loan bad debt decreased $0.3 million in the Fiscal 2005 Year-to-Date
Period compared to the Fiscal 2004 Year-to-Date Period, resulting in net
defaults of 2.9% of loans made. In December 2004, the Company sold its older
payday loan bad debt to an outside agency for net proceeds of approximately $0.9
million, which is reflected in the net bad debt in the Fiscal 2005 Year-to-Date
Period. Excluding this sale of older bad debt, the Company's payday loan net
defaults improved to 3.9% for the Fiscal 2005 Year-to-Date Period, compared to
4.9% in the Fiscal 2004 Year-to-Date Period.
The Company provides a valuation allowance on payday loan principal and fees
receivable. Due to the short-term nature of these loans, the Company uses recent
net default rates and anticipated seasonal changes in the default rate as the
basis for its valuation allowance. At March 31, 2005, the valuation allowance
was $0.5 million, or 4.9% of the payday loan principal and fees receivable,
compared to $0.3 million, or 4.7% of payday loan principal and fees receivable
at March 31, 2004.
The Company's incremental expenses at Mono-line stores increased to $5.1 million
in the Fiscal 2005 Year-to-Date Period from $0.7 million in the comparable
Fiscal 2004 Year-to-Date Period. The increase relates primarily to expenses at
the 137 new Mono-line stores constructed in the last twelve months. The Company
expects the contribution from these stores to improve as the stores mature and
build their loan portfolios.
18
Operations expense increased to $46.7 million in the Fiscal 2005 Year-to-Date
Period from $42.6 million in the Fiscal 2004 Year-to-Date Period, representing a
0.9 percentage point decrease when measured as a percentage of net revenue. Of
the total $4.1 million increase, $4.4 million related to Mono-line stores.
Offsetting this was a $0.3 million decrease in same store operating expenses.
Also included in operations expense in the Fiscal 2005 Year-to-Date Period is a
$0.3 million charge for prior period rent related to a revised interpretation of
the accounting rules for operating leases and the inclusion of optional renewal
periods in the Company's calculation of rent expense.
Administrative expenses in the Fiscal 2005 Year-to-Date Period were $11.7
million compared to $12.2 million in the Fiscal 2004 Year-to-Date Period, a 2.5
percentage point decrease when measured as a percent of net revenue. Of the
total decrease, $0.7 million relates to a valuation allowance placed on a note
receivable from the Company's former Chief Executive Officer in the Fiscal 2004
Year-to-Date Period, with no corresponding amount in the Fiscal 2005 Second
Quarter. Also contributing to the decrease is a $1.1 million reduction in stock
compensation related to restricted stock granted to the Company's Chief
Executive and Chairman in the Fiscal 2004 Year-to-Date Period with no
corresponding grants in the current year. Offsetting these savings were
additional administrative labor ($0.7 million), payday loan collection and call
center costs ($0.4 million), and professional fees ($0.3 million) during the
Fiscal 2005 Year-to-Date Period.
Depreciation and amortization expense was $4.0 million in the Fiscal 2005
Year-to-Date Period compared to $3.8 million in the Fiscal 2004 Year-to-Date
Period. The increase related primarily to a $0.1 million charge for depreciation
of leasehold improvements related to a revised interpretation of the accounting
rules for renewal options in operating leases.
In the Fiscal 2005 Year-to-Date Period, interest expense decreased to $0.6
million from $0.8 million in the Fiscal 2004 Year-to-Date Period. The
improvement resulted from lower average debt balances and lower effective
interest rates. At March 31, 2005, the Company's total debt was $6.8 million
compared to $15.0 million at March 31, 2004. Decreases in the debt balance were
funded by cash flow from operations and lending activity included in investing
activities.
The Fiscal 2005 Year-to-Date Period income tax expense was $5.0 million (36.0%
of pretax income) compared to $3.2 million (34.5% of pretax income) for the
Fiscal 2004 Year-to-Date Period. The increase in effective tax rate between
these periods is due to an increase in state taxes and an increase in the
Company's federal tax rate due to the higher level of taxable income expected in
the year ending September 30, 2005.
Operating income for the Fiscal 2005 Year-to-Date Period increased $4.4 million
from the Fiscal 2004 Year-to-Date Period to $13.5 million, primarily due to the
$1.3 million increase in pawn service charge revenue, the $1.2 million greater
contribution from payday loans, the $0.6 million increase in sales gross
profits, and smaller decreases in operations and administrative expenses. After
a $1.9 million increase in income taxes related primarily to the Company's
increased earnings, net income improved to $8.9 million in the Fiscal 2005
Year-to-Date Period from $6.0 million in the Fiscal 2004 Year-to-Date Period.
LIQUIDITY AND CAPITAL RESOURCES
In the Fiscal 2005 Year-to-Date Period, the Company's $11.3 million cash flow
from operations consisted of (i) net income plus several non-cash items,
aggregating to $14.5 million, offset by (ii) $3.2 million of changes in
operating assets and liabilities, primarily accounts payable, accrued expenses,
federal income taxes, prepaid expenses, and other current and non-current
assets. In the Fiscal 2004 Year-to-Date Period, the Company's $14.2 million cash
flow from operations consisted of (i) net income plus several non-cash items,
aggregating to $12.6 million, and (ii) $1.6 million of changes in operating
assets and liabilities, primarily federal income taxes and service charges
receivable offset by an increase in prepaid expenses and other current and
non-current assets.
The Company's investing activities provided $5.6 million of cash during the
Fiscal 2005 Year-to-Date Period, consisting primarily of the $12.2 million
excess of pawn loan repayments and principal recovery through the sale of
forfeited collateral over pawn loans made. Partially offsetting this was $4.2
million invested in property and equipment and $2.9 million invested in payday
loans net of repayments. Cash flows from operations, investing activities, and
cash on hand funded the $18.2 million debt reduction during the Fiscal 2005
Year-to-Date Period.
19
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
---------- ----------- --------- --------- -----------
(In thousands)
Long-term debt obligations $ 6,825 $ - $ 6,825 $ - $ -
Interest on long-term debt obligations 1,096 438 658 - -
Capital lease obligations - - - - -
Operating lease obligations 104,032 14,791 27,831 20,022 41,388
Purchase obligations - - - - -
Other long-term liabilities - - - - -
---------- ----------- --------- --------- -----------
Total $ 111,953 $ 15,229 $ 35,314 $ 20,022 $ 41,388
========== =========== ========= ========= ===========
In the remaining six months of the fiscal year ending September 30, 2005, the
Company also plans to open an additional 50 to 75 Mono-line payday loan stores
for an expected aggregate capital expenditure of approximately $2.0 million,
plus the funding of working capital and start-up losses at these stores. While
the Company anticipates that these new stores will increase future earnings, it
expects they will have a negative effect on earnings and cash flow in their
first year of operation.
The Company's $40.0 million credit agreement matures April 1, 2007. Under the
terms of the amended agreement, the Company had the ability to borrow an
additional $33.2 million at March 31, 2005. 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 amount of long-term debt obligations
included in the table above is the balance outstanding on the Company's
revolving credit agreement at March 31, 2005. The outstanding balance fluctuates
based on cash needs and the interest rate varies in response to the Company's
leverage ratio. For purposes of this table, the Company assumed the current
outstanding balance and interest rate would be applicable through the maturity
date of the credit agreement.
The Company anticipates that cash flow from operations and availability under
its revolving credit agreement 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 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
20
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 and the Company's
Annual Report as well as changes in business strategies, could adversely impact
the consolidated financial position, results of operations, and cash flows in
future periods.
RISK FACTORS
Important risk factors that could cause results or events to differ from current
expectations are described in the Company's Annual Report on Form 10-K for the
year ended September 30, 2004, and are supplemented by the additional factors
listed below. These factors are not intended to be an all-inclusive list of
risks and uncertainties that may affect the operations, performance,
development, results, or financial position of the business.
- - RECENT CHANGES IN FDIC GUIDANCE FOR PAYDAY LOANS COULD RESULT IN A
SIGNIFICANT DECREASE IN REVENUES AND EARNINGS. On March 1, 2005, the Federal
Deposit Insurance Corporation ("FDIC") issued revised payday lending guidance
to FDIC insured institutions that offer payday loans, including County Bank.
The revised guidance targets the frequency of borrower usage of payday loans
offered by FDIC insured institutions and will limit the period a customer may
have payday loans outstanding from any FDIC insured lender to 90 days during
the previous twelve-month period. Based on an average term of approximately
17 days, this effectively caps the number of payday loans that may be made by
County Bank to any customer to five during any 12-month period. All payday
loans made by any FDIC insured lender would count against such limit.
Approximately 92% of the Company's payday loan balance at March 31, 2005 was
purchased from County Bank. Based on only loans made at the Company's stores
and call center over the last twelve months, it recently determined that
approximately 53% of the Company's payday loans would have been impacted had
the revised FDIC guidance been in place for the past year. The revised
guidance also suggests that lending banks may offer alternative longer-term
products. We are currently developing strategies to mitigate the effects of
this guidance change on our business, including working with County Bank to
develop alternative products, but this process is not yet complete. The
Company also believes a portion of impacted customers would utilize the
Company's pawn loans as an alternate source of funds, but the amount of
additional pawn loan activity cannot be reasonably estimated. It is,
therefore, too early to measure the effect, financial or otherwise, the
revised guidance will have on our results or on County Bank's payday loans
offered through our locations. Moreover, there can be no assurance that the
FDIC will accept any of the revised procedures or alternative products County
Bank has proposed or may propose. Any of these developments could have a
material adverse effect on our business, results of operations and financial
condition.
- - IN AN ORDER TO CEASE AND DESIST DATED MARCH 11, 2005 ISSUED TO COUNTY BANK BY
THE FDIC (THE "ORDER"), THE FDIC DIRECTED COUNTY BANK TO AMEND CERTAIN OF ITS
PAYDAY LENDING ADMINISTRATIVE PRACTICES, WHICH IF NOT FOLLOWED COULD LIMIT OR
ELIMINATE COUNTY BANK'S ABILITY TO MAKE PAYDAY LOANS AND OUR ABILITY TO
PARTICIPATE IN LOANS MADE BY COUNTY BANK, RESULTING IN A SIGNIFICANT DECREASE IN
OUR REVENUES AND EARNINGS. The Order requires that County Bank enhance certain
aspects of the administration of its payday loan business. County Bank consented
to the issuance of the Order without admitting to or denying the alleged
charges. The FDIC has provided specific timetables ranging from 15 to 90 days
from the date of the Order for County Bank to comply with the directives in the
Order. County Bank has informed the Company that it expects to meet the
requirements of the Order. While the Company does not expect that actions taken
by County Bank to comply with the Order will have a significant impact on the
Company's payday loan operations, the ultimate effect of any such actions cannot
be determined at the current time. If County Bank is determined not to have
complied with the terms of the Order, the FDIC may limit or eliminate the bank's
ability to make payday loans. As our participation interest in loans made by
County Bank comprises approximately 92% of our total payday loan balance at
March 31, 2005, such action by the FDIC could have a material adverse effect on
our revenues, earnings, financial position, and ability to participate in payday
loans.
21
- - THE COMPANY FACES OTHER RISKS DISCUSSED UNDER QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK IN ITEM 3 OF THIS FORM 10-Q AND IN THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2004.
22
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 jewelry scrapping 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 50 basis points more during the remaining six months of
the fiscal year ending September 30, 2005 than they did in the comparable period
of 2004, the Company's interest expense during those six months would increase
by approximately $17,000. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's variable-rate debt at March 31,
2005.
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 representing the strengthening in the U.K. pound
during the quarter ended December 31, 2004 (included in the Company's March 31,
2005 results on a three-month lag as described above) was approximately a
$473,000 increase to stockholders' equity. On March 31, 2005, the U.K. pound
closed at 1.00 to 1.8790 U.S. dollars, a weakening from 1.9266 at December 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.
23
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report and 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 March 31, 2005 ("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
to ensure that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
(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
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or internal controls will prevent all possible error and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. 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.
24
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory matters
arising from its normal business operations. Currently, the Company is a
defendant 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 operations, or liquidity. However, there can be no assurance as to
the ultimate outcome of these actions or that other matters will not be
asserted.
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 4/20/05 Item 2.02 - Results Quarterly earnings announcement and related
of Operations and press release.
Financial Condition
25
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: May 9, 2005 By: /s/ DAN N. TONISSEN
-------------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
26
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to Page
- ------- ---------------------------------------- --------------- ----
31.1 Certification of Chief Executive Officer 28
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer 29
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer 30
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer 31
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
27