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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 DECEMBER 31, 2001
-----------------
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
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(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
--- ---
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 December 31, 2001, 10,937,841 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
<Table>
<Caption>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2001, December 31, 2000 and
September 30, 2001 ..................................................................... 1
Condensed Consolidated Statements of Operations for the Three Months Ended December 31,
2001 and 2000 .......................................................................... 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31,
2001 and 2000 .......................................................................... 3
Notes to Interim Condensed Consolidated Financial Statements ........................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................. 7
PART II. OTHER INFORMATION ............................................................................... 12
SIGNATURE ................................................................................................ 13
</Table>
PART I
ITEM 1. FINANCIAL STATEMENTS
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
<Table>
<Caption>
December 31, December 31, September 30,
2001 2000 2001
------------ ------------ ------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 359 $ 5,218 $ 2,186
Pawn loans 47,254 45,257 47,144
Short-term loans 1,737 37 1,250
Service charges receivable, net 9,921 9,214 8,841
Inventory, net 32,395 37,898 34,231
Deferred tax asset 6,607 7,154 7,413
Federal income tax receivable -- 5,045 --
Prepaid expenses and other assets 2,027 1,527 2,180
------------ ------------ ------------
Total current assets 100,300 111,350 103,245
Investment in unconsolidated affiliates 14,097 13,872 13,812
Property and equipment, net 40,882 61,388 44,965
Other assets:
Goodwill, net 11,529 12,036 11,655
Notes receivable from related parties 1,572 3,144 1,589
Other assets, net 3,585 2,958 3,294
------------ ------------ ------------
Total assets $ 171,965 $ 204,748 $ 178,560
============ ============ ============
Liabilities and Stockholders' Equity:
Current liabilities:
Current maturities of long-term debt $ 51,097 $ 84,312 $ 15,947
Accounts payable and other accrued expenses 11,472 11,750 9,666
Restructuring reserve 118 758 217
Customer layaway deposits 579 2,280 2,081
------------ ------------ ------------
Total current liabilities 63,266 99,100 27,911
Long-term debt, less current maturities -- 98 44,245
Deferred tax liability 1,193 1,622 1,193
Deferred gains and other long-term liabilities 3,956 379 3,254
------------ ------------ ------------
Total long-term liabilities 5,149 2,099 48,692
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; 10,946,874 issued
and 10,937,841 outstanding at December 31, 2001
and September 30, 2001; 10,906,073 issued and
10,897,040 outstanding at December 31, 2000 109 109 109
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 114,664 114,571 114,664
Accumulated deficit (10,355) (10,106) (11,727)
------------ ------------ ------------
104,430 104,586 103,058
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder (729) (729) (729)
Accumulated other comprehensive loss (116) (273) (337)
------------ ------------ ------------
Total stockholders' equity 103,550 103,549 101,957
------------ ------------ ------------
Total liabilities and stockholders' equity $ 171,965 $ 204,748 $ 178,560
============ ============ ============
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
1
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
<Table>
<Caption>
Three Months Ended
December 31,
--------------------------
2001 2000
---------- ----------
(In thousands, except
per share amounts)
Revenues:
Sales $ 37,448 $ 32,532
Service charges 17,134 14,709
---------- ----------
Total revenues 54,582 47,241
Cost of goods sold 23,170 18,098
---------- ----------
Net revenues 31,412 29,143
Operating expenses:
Operations 20,599 19,063
Administrative 4,204 3,892
Depreciation and amortization 2,598 2,434
---------- ----------
Total operating expenses 27,401 25,389
---------- ----------
Operating income 4,011 3,754
Interest expense, net 1,742 2,188
Equity in net income of unconsolidated affiliate (64) (27)
(Gain) loss on sale of assets 155 (3)
---------- ----------
Income before income taxes 2,178 1,596
Income tax expense 806 543
---------- ----------
Net income $ 1,372 $ 1,053
========== ==========
Net income per share, fully diluted $ 0.11 $ 0.09
========== ==========
Weighted average shares outstanding
Basic and diluted 12,128 12,087
========== ==========
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<Table>
<Caption>
Three Months Ended
December 31,
--------------------------
2001 2000
---------- ----------
(In thousands)
Operating Activities:
Net income $ 1,372 $ 1,053
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,598 2,434
Net (gain) loss on sale or disposal of assets 155 (3)
Income from investment in unconsolidated affiliate (64) (27)
Changes in operating assets and liabilities:
Service charges receivable (1,080) (584)
Inventory 1,836 (2,238)
Prepaid expenses, other current assets, and other assets (412) (380)
Accounts payable and accrued expenses 1,969 (146)
Restructuring reserve (99) (891)
Customer layaway deposits (1,502) (52)
Deferred gains and other long-term liabilities (72) --
Federal income taxes 806 465
---------- ----------
Net cash provided by (used in) operating activities 5,507 (369)
Investing Activities:
Pawn loans forfeited and transferred to inventory 19,201 19,072
Pawn loans made (46,857) (45,240)
Pawn loans repaid 27,546 27,827
---------- ----------
Net (increase) decrease in loans (110) 1,659
Short-term loans (487) 3
Additions to property, plant, and equipment (174) (2,503)
Proceeds from sale of assets 2,532 4
---------- ----------
Net cash provided by (used in) investing activities 1,761 (837)
Financing Activities:
Proceeds from bank borrowings 1,500 4,300
Payments on borrowings (10,595) (1,002)
---------- ----------
Net cash provided by (used in) financing activities (9,095) 3,298
---------- ----------
Change in cash and cash equivalents (1,827) 2,092
Cash and cash equivalents at beginning of period 2,186 3,126
---------- ----------
Cash and cash equivalents at end of period $ 359 $ 5,218
========== ==========
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment $ 221 $ (177)
Deferred gain on sale-leaseback $ 829 $ --
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2001
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, 2001.
The Company's business is subject to seasonal variations, and operating results
for the three-month period ended December 31, 2001 are not necessarily
indicative of the results of operations for the full fiscal year.
The balance sheet at September 30, 2001 has been derived from the audited
financial statements at that date but do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
NOTE B: RESTRUCTURING CHARGE
As more fully described in Note C to the Company's audited financial statements
for the year ended September 30, 2001, the Company adopted a restructuring plan
in its fiscal year ended September 30, 2000. Execution of the plan resulted in
the closure of 45 stores by December 31, 2000 and two additional stores by March
31, 2001. No more store closures are expected as part of this plan. During the
quarter ended December 31, 2001, the Company expended $92,000 on severance
related costs and $7,000 on rent and related costs for closed stores. At
December 31, 2001, the remaining restructuring reserve of $118,000 relates
primarily to future rent on closed stores, the leases of which are scheduled to
expire over the next three years.
In conjunction with the restructuring in fiscal 2000, the Company recorded an
additional $1.2 million inventory reserve for anticipated losses on sales at
stores to be closed. This amount was charged to cost of goods sold in fiscal
2000 and is excluded from the restructuring reserve discussed above. Of this
inventory reserve, $0.6 million was utilized in the quarter ended December 31,
2000. This inventory reserve was fully utilized by June 30, 2001 as the related
inventory was sold.
The results of operations from the 47 closed stores were as follows (in
thousands):
<Table>
<Caption>
Three Months Ended December 31,
-------------------------------
2001 2000
---------- ----------
Total revenues $ -- $ 912
Operating loss $ (4) $ (332)
</Table>
NOTE C: ACCOUNTING PRINCIPLES AND PRACTICES
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.
The Company provides inventory reserves for shrinkage and cost in excess of
market value. The Company estimates these reserves using analysis of sales
trends, inventory aging, sales margins and shrinkage on inventory. At December
31, 2001, December 31, 2000, and September 30, 2001, inventory reserves were
$1.0 million, $1.6 million, and $1.1 million, respectively.
4
Property and equipment is shown net of accumulated depreciation of $51.1
million, $43.5 million and $49.1 million at December 31, 2001, December 31,
2000, and September 30, 2001, respectively.
Certain prior year balances have been reclassified to conform to the fiscal 2002
presentation.
NOTE D: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<Table>
<Caption>
Three Months Ended
December 31,
-------------------------
2001 2000
---------- ----------
(In thousands)
Numerator
Numerator for basic and diluted earnings per share: net income $ 1,372 $ 1,053
========== ==========
Denominator
Denominator for basic earnings per share: weighted average shares 12,128 12,087
Effect of dilutive securities:
Warrants and options -- --
---------- ----------
Dilutive potential common shares -- --
---------- ----------
Denominator for diluted earnings per share: adjusted weighted average shares
and assumed conversions 12,128 12,087
========== ==========
Basic earnings per share $ 0.11 $ 0.09
========== ==========
Diluted earnings per share $ 0.11 $ 0.09
========== ==========
</Table>
Options to purchase 1,472,375 and 1,392,649 weighted average shares of common
stock at an average price of $7.67 and $8.16, respectively, were outstanding for
the three-month periods ended December 31, 2001 and 2000. These options were not
included in the computation of diluted earnings per share because the options'
exercise prices are greater than the average market price of common shares and,
therefore, the effect would be anti-dilutive.
NOTE E: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), representing 29.18% of A&B's 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. The income reported
for the Company's three-month period ended December 31, 2001 represents its
percentage interest in the results of A&B's operations, reduced by the
amortization of goodwill, using an estimate of earnings for July 2001 through
September 2001. The Company plans to reconcile this amount during its quarter
ending March 31, 2002 after A&B's results have been reported to the public. The
Company does not expect the actual results to differ materially from this
estimate.
NOTE F: CONTINGENCIES
From time to time, the Company is involved in litigation relating to claims
arising from its normal business operations. Currently, the Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts. While the ultimate outcome of these lawsuits cannot be
ascertained, after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect on the
Company's financial condition or results of operations. However, there can be no
assurance as to the ultimate outcome of these matters.
NOTE G: 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 shareholders' equity. Comprehensive income for the three-month periods
ended December 31, 2001 and December 31, 2000 was approximately $1.6 million and
$0.9 million,
5
respectively. The difference between comprehensive income and net income results
primarily from the effect of foreign currency translation adjustments in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation." The accumulated balance of foreign currency activity
excluded from net income is presented in the Condensed Consolidated Balance
Sheets as "Accumulated other comprehensive loss."
NOTE H: LONG-TERM DEBT
Effective December 3, 2001, the Company amended its credit agreement. Among
other things, the amendment extends the revolving credit facility maturity date
to October 1, 2002. The amended credit agreement provides for a $45 million
revolving credit facility and a term loan of approximately $15 million, both of
which are secured by substantially all of the Company's assets. Availability
under the revolving credit facility continues to be tied to loan and inventory
balances. The term facility must be paid in full by June 28, 2002, and its
balance was $11.4 million at December 31, 2001. The remaining term facility
payments will be made from operating cash flow and the sale of assets, primarily
sale-leaseback transactions of owned properties. Interest on the revolving
credit facility accrues at the agent bank's prime rate ("Prime") plus 300 basis
points, but is payable monthly at Prime plus 100 basis points. The accrued but
unpaid interest is payable upon the earlier of the refinancing or maturity of
the revolving credit facility. Interest on the term loan accrues and is paid
monthly at Prime plus 350 basis points. The Company pays a commitment fee of 25
basis points on the unused amount of the revolving facility.
The Company believes that the financial covenants established in the amended
credit facility will be achieved based upon the Company's current and
anticipated performance. Based upon management's expected performance for Fiscal
2002, including the sale-leaseback of certain assets and the availability under
the revolving credit facility, the Company believes that there is adequate
liquidity to fund the Company's operations and to make the required principal
payments under the term loan during Fiscal 2002. However, material shortfalls or
variances from anticipated performance or the delay in the sale of certain of
its assets could require the Company to seek a further amendment to the amended
credit facility or alternate sources of financing, or to limit capital
expenditures to an amount less than that currently anticipated or permitted
under the amended credit facility.
6
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.
First Quarter Ended December 31, 2001 vs. First Quarter Ended December 31, 2000
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended December 31, 2000
and 1999.
<Table>
<Caption>
Three Months Ended % or
December 31,(a) Point
2001 2000 Change(b)
---------- ---------- ---------
Net Revenues:
Sales $ 37,448 $ 32,532 15.1%
Service charges 17,134 14,709 16.5%
---------- ----------
Total revenues 54,582 47,241 15.5%
Cost of goods sold 23,170 18,098 28.0%
---------- ----------
Net revenues $ 31,412 $ 29,143 7.8%
========== ==========
Other Data:
Gross profit as a percent of sales 38.1% 44.4% (6.3) pts.
Average annual inventory turnover 2.7x 1.9x 0.8x
Inventory balance per average location as of the
end of the quarter $ 114 $ 130 (12.3)%
Loan balance per average location as of the end of
the quarter $ 173 $ 156 10.9%
Average yield on loan portfolio 128% 126% 2 pts.
Redemption rate 76% 77% (1) pt.
Expenses as a Percent of Total Revenues:
Operating 37.7% 40.4% (2.7) pts.
Administrative 7.7% 8.2% (0.5) pts.
Depreciation and amortization 4.8% 5.2% (0.4) pts.
Interest, net 3.2% 4.6% (1.4) pts.
Locations in Operation:
Beginning of period 283 313
Acquired -- --
Established -- --
Sold, combined or closed -- 22
---------- ----------
End of period 283 291
========== ==========
Average locations in operation during the period(c) 283 302
========== ==========
</Table>
- ----------
(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.
(c) Average locations in operation during the period are calculated based on
the average of the locations operating at the beginning and end of such
period.
7
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the three-month
period ended December 31, 2001 ("Fiscal 2002 Period") to the three-month period
ended December 31, 2000 ("Fiscal 2001 Period"). The discussion should be read in
conjunction with the accompanying financial statements and related notes.
EZCORP, Inc. (the "Company") is primarily engaged in operating pawnshops which
function as convenient sources of consumer credit and as value oriented
retailers of primarily previously owned merchandise. The Company also offers
non-collateralized short-term loans, commonly referred to as "payday loans" in
most of its pawnshops. At December 31, 2001, the Company operated 283 pawnshops
in twelve states compared to 291 in twelve states at December 31, 2000. The
Company offers short-term loans in 204 of its locations at the end of the Fiscal
2002 Period compared to five locations a year ago. In 200 of the locations
providing short-term loans, the Company is the marketer, servicer, processor,
and collector of loans originated by County Bank, a federally insured Delaware
banking corporation. After origination of the loans, the Company is entitled to
purchase an 85% participation in the loans made by County Bank and marketed by
the Company. The loans and related fees reported in the Company's financial
statements reflect only the Company's participation in such loans.
The Company has three main sources of revenue: pawn service charges collected
and earned on its pawn loans; sales proceeds primarily from the sale of
forfeited collateral; and fees collected and earned on its short-term loans. For
the Fiscal 2002 period, pawn service charges, sales, and short-term loan fees
comprised 28%, 69%, and 3% of total revenues compared to 31%, 69%, and 0% for
the Fiscal 2001 Period. After deducting for the cost of goods sold, Fiscal 2002
Period net revenues are comprised of 49% pawn service charges, 45% gross profit
on merchandise sales, and 6% short-term loan fees compared to 50%, 50%, and 0%
for the Fiscal 2001 Period.
In the Fiscal 2002 Period, pawn service charge revenue increased $0.5 million
from the Fiscal 2001 Period to $15.2 million primarily due to greater average
loan volumes ($0.5 million) and a two percentage point higher annualized loan
yield ($0.2 million). Slightly offsetting these improvements was a reduction in
pawn service charges from closed stores ($0.2 million).
Pawn service charge revenue for a period is the sum of the actual pawn service
charges collected and the change in the pawn service charge receivable for the
period. The pawn service charge receivable represents the service charges that
would be paid if all accrued loan fees were paid in full at the end of the
period with an allowance for expected loan forfeitures. The level of forfeitures
within the ending pawn loan balance is based on recent forfeiture levels
adjusted for seasonal changes expected to occur over the next ninety days.
Typically, the expected level of forfeitures, relative to expected loan
redemptions, extensions or renewals, in the ending loan balance is at its lowest
point, relative to other quarter ends, at the end of the December quarter. Of
the $15.2 million pawn service charge revenue in the Fiscal 2002 Period, $14.2
million resulted from pawn service charges collected during the period, and $1.0
million resulted from an increase in the pawn service charge receivable. Of the
total increase in the ending pawn service charge receivable, $0.8 million was
due to lower level of expected forfeitures and $0.2 million was due to the
higher level of loans outstanding at the end of the period.
In the Fiscal 2001 Period, the $14.7 million pawn service charge revenue is
comprised of $14.1 million pawn service charges collected during the period, and
a $0.6 million increase in the pawn service charge receivable. Of the total
increase in ending pawn service charge receivable in the Fiscal 2001 Period,
$1.1 million was due lower levels of expected forfeitures, offset by a $0.5
million decrease due to lower ending pawn loan balances.
For the Fiscal 2002 Period, sales increased approximately $4.9 million from the
Fiscal 2001 Period to approximately $37.4 million. This increase resulted from
higher same store sales ($3.0 million) and higher jewelry scrapping ($2.7
million), offset by sales from closed stores ($0.8 million). During the Fiscal
2002 Period, the Company required that layaway sales be paid in full by December
15th rather than the normal ninety-day period. This change had the benefit of
increasing financial sales by approximately $3.5 million as layaway sales that
would have typically been paid in full in the second quarter were paid in full
in the Fiscal 2002 Period. While this change may slow year-over-year sales
growth in the second quarter, the Company believes the layaway change will
increase total layaway completions over what it has traditionally seen in its
first two quarters taken as a whole. Annualized inventory turnover was 2.7 times
in the Fiscal 2002 Period compared to 1.9 times in the Fiscal 2001 Period.
8
For the Fiscal 2002 Period, gross margins on merchandise sales decreased 6.3
percentage points from the Fiscal 2001 Period to approximately 38 percent.
Higher margins on merchandise sales contributed a 1.3 percentage point
improvement, while an increase in jewelry scrapping (jewelry is generally
scrapped at or below cost) reduced overall gross margins by 7.6 percentage
points. Inventory shrinkage for the quarter improved 0.1 of a percentage point
from the prior year period to 0.9% of merchandise sales.
Short-term loan service charges increased to $1.9 million in the Fiscal 2002
Period from $45,000 in the prior year period, primarily due to offering this
product in more locations. Unlike pawn loans, short-term loans are unsecured,
and their profitability is highly dependent upon the Company's ability to manage
the default rate and collect defaulted loans. 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 through subsequent collection efforts,
the Company charges defaulted loans to bad debt expense when they default,
leaving only current loans in the reported balance. Collections of defaulted
loans are recorded as a reduction of bad debt expense at the time of collection.
During the Fiscal 2002 Period the Company experienced a net default rate
(defaults net of collections measured as a percent of loans made) of 9.3%. In
addition to writing off loans immediately upon default, the Company also
provides for a valuation allowance on both the principal and fees receivable
from active loans, based on recent net default rates. Net defaults and changes
in the principal valuation allowance are charged to bad debt expense. In the
Fiscal 2002 Period, the Company's bad debt expense, included in operations
expense, was $1.1 million, compared to $22,000 in the Fiscal 2001 Period, due to
increased loan volume. Changes to the fee receivable valuation allowance are
charged to service charge revenue.
In the Fiscal 2002 Period, operations expense increased $1.5 million (8%)
primarily due to $1.1 million additional bad debt on short-term loans as
discussed above, $0.5 million higher labor and incentive compensation expense,
and $0.2 million higher rent from sale-leasebacks of previously owned
properties, offset by $0.3 million lower utility costs. Administrative expenses
increased $0.3 million (8%) in the Fiscal 2002 Period primarily due to $0.7
million higher labor and incentive compensation costs, offset by $0.4 million
lower professional fees and services.
Depreciation and amortization increased $0.2 million (7%) in the Fiscal 2002
Period due to increased depreciation of software placed in use, offset by
elimination of depreciation on assets sold, primarily through sale-leasebacks.
Interest expense decreased $0.4 million (20%) from the Fiscal 2001 Period due to
lower average debt balances coupled with lower average interest rates.
Net income for the Fiscal 2002 Period was $1.4 million compared to $1.1 million
in the Fiscal 2001 Period. Higher net revenues in the Fiscal 2002 Period ($2.3
million), mainly due to an increase in service charges ($2.4 million), were
partially offset by higher total operating expenses ($2.0 million), resulting in
operating income $0.3 million above the prior year period. After lower interest
expenses in the Fiscal 2002 Period, a loss on the sale of assets ($0.2 million),
and higher income taxes, net income increased $0.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in the Fiscal 2002 Period was $5.5
million as compared to $0.4 million used in the Fiscal 2001 Period, an increase
of $5.9 million. Stronger operating results in the Fiscal 2002 period, primarily
merchandise sales, and higher levels of jewelry scrapping account for the
increased cash flow provided by operating activities. Net cash provided by
investing activities was $1.8 million for the Fiscal 2002 Period compared to
$0.8 million used in the Fiscal 2001 Period. The change is due to a $2.5 million
increase in proceeds from the sale of assets coupled with a $2.3 million
reduction in capital expenditures, offset by $2.3 million greater growth in pawn
and short-term loans in the Fiscal 2002 Period than in the prior year period.
During the Fiscal 2002 Period, the Company used the cash flow from operating and
investing activities, as well as cash on hand, to reduce its outstanding bank
borrowings by $9.1 million.
Effective December 3, 2001, the Company amended its credit agreement. Among
other things, the amendment extends the revolving credit facility maturity date
to October 1, 2002. The amended credit agreement provides for a $45 million
revolving credit facility and a term loan of approximately $15 million, both of
which are secured by substantially all of the Company's assets. Availability
under the revolving credit facility continues to be tied to loan and inventory
balances. The term facility must be paid in full by June 28, 2002, and its
balance was $11.4 million at
9
December 31, 2001. The remaining term facility payments will be made from
operating cash flow and the sale of assets, primarily sale-leaseback
transactions of owned properties.
The Company's credit agreement requires, among other things, that the Company
meet certain financial covenants. Specifically, the Company must operate within
specified levels of consolidated net worth, leverage ratio, capital
expenditures, inventory turnover, fixed charge coverage ratio, and EBITDA
(earnings before interest, taxes, depreciation and amortization). The Company
believes that these covenants will be achieved based upon the Company's current
and anticipated performance. Based upon management's expected performance for
fiscal 2002, including the sale-leaseback of certain assets and the availability
under the revolving credit facility, the Company believes that there is adequate
liquidity to fund the Company's operations and its planned capital expenditures,
and to make the required principal payments under the credit agreement during
Fiscal 2002. However, material shortfalls or variances from anticipated
performance or delays in the sale of certain of its assets could require the
Company to seek a further amendment to its credit agreement or alternate sources
of financing, or to limit capital expenditures to an amount less than currently
anticipated or permitted under the credit agreement.
The outstanding balance under the $45 million revolving credit facility bears
interest at the agent bank's prime rate plus 300 basis points, but is payable
monthly at Prime plus 100 basis points, with the accrued but unpaid amount
payable upon the earlier of the refinancing or the maturity of the revolving
credit facility. The term loan bears interest at prime plus 350 basis points,
payable monthly. The Company pays a commitment fee of 25 basis points of the
unused amount of the total commitment. At December 31, 2001, the Company had
$39.7 million outstanding on the revolving credit facility and $11.4 million
outstanding under the term loan.
SEASONALITY
Historically, pawn service charge revenues are highest in the Company's fourth
fiscal quarter (July, August and September) due to higher loan demand during the
summer months. Merchandise sales are highest in the Company's first and second
fiscal quarters (October through March) due to the holiday season and tax
refunds.
QUALITATIVE AND QUANTITATIVE 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 and foreign currency exchange rates.
The Company does not use derivative financial instruments.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on the Company's long-term debt, all of which was
variable-rate at December 31, 2001. If interest rates average 25 basis points
more in the remaining three quarters of fiscal 2002, the Company's interest
expense for the year would increase by approximately $96,000. This amount is
determined by considering the impact of the hypothetical interest rate increase
on the Company's variable rate long-term debt at December 31, 2001.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations, which impact the Company's equity investment in Albemarle &
Bond Holdings, plc ("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 financial position and results of
operations of a hypothetical change in the exchange rate between the U.S. dollar
and the U.K. pound cannot be reasonably estimated. The translation adjustment
representing the strengthening in the U.K. pound during the quarter ended
December 31, 2001 was approximately $221,000. On December 31, 2001, the U.K.
pound closed at 0.6889 to 1.00 U.S. dollar, an increase from 0.6779 at September
30, 2001. No assurance can be given as to the future valuation of the U.K. pound
and how further movements in the pound could effect future earnings or the
financial position of the Company.
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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 yield on loan portfolios, loan forfeiture rates, labor and employment
matters, competition, operating risk, charges related to store closings,
acquisition, and expansion risk, liquidity, and capital requirements and the
effect of government and environmental regulations and (ii) adverse changes in
the market for the Company's services or properties offered for sale-leaseback.
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.
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PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising from its normal business operations. Currently, the Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts. While the ultimate outcome of these lawsuits cannot be
ascertained, after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect on the
Company's financial condition or results of operations. However, there can be no
assurance as to the ultimate outcome of these matters.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Incorporated by
(a) Number Description Reference to
------- ----------- ---------------
None
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for
the quarter ended December 31, 2001.
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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: February 13, 2002 By: /s/ DAN N. TONISSEN
-----------------------------
(Signature)
Daniel N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
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