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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, 2002
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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
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COMMISSION FILE NUMBER 0-19424
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EZCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
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(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 March 31, 2002, 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 March 31, 2002, March 31, 2001 and September
30, 2001 .................................................................................. 1
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended
March 31, 2002 and 2001 ................................................................... 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2002
and 2001 .................................................................................. 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 ............................................................................ 13
SIGNATURE .............................................................................................. 14
</Table>
PART I
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets
<Table>
<Caption>
March 31, March 31, September 30,
2002 2001 2001
----------- ----------- -------------
(In thousands)
Assets: (Unaudited) (Note A)
Current assets:
Cash and cash equivalents $ 1,224 $ 2,785 $ 2,186
Pawn loans 40,152 40,477 47,144
Short-term loans 1,096 106 1,250
Service charges receivable, net 8,187 7,220 8,841
Inventory, net 31,331 34,148 34,231
Deferred tax asset 6,105 6,135 7,413
Federal income tax receivable -- -- --
Prepaid expenses and other current assets 2,044 2,170 2,180
----------- ----------- -------------
Total current assets 90,139 93,041 103,245
Investment in unconsolidated affiliate 14,066 14,002 13,812
Property and equipment, net 37,725 58,378 44,965
Other assets:
Goodwill, net 11,401 11,908 11,655
Notes receivable from related parties 1,556 3,122
1,589
Other assets, net 3,547 3,031 3,294
----------- ----------- -------------
Total assets $ 158,434 $ 183,482 $ 178,560
=========== =========== =============
Liabilities and stockholders' equity:
Current liabilities:
Current maturities of long-term debt $ 37,445 $ 66,773 $ 15,947
Accounts payable and other accrued expenses 9,279 8,815 9,666
Restructuring reserve 93 355 217
Customer layaway deposits 2,005 2,486 2,081
----------- ----------- -------------
Total current liabilities 48,822 78,429 27,911
Long-term debt, less current maturities -- 94 44,245
Deferred tax liability 1,193 599 1,193
Deferred gains and other long-term liabilities 3,871 614 3,254
----------- ----------- -------------
Total long-term liabilities 5,064 1,307 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 March 31, 2002 and
September 30, 2001; 10,906,073 issued and 10,897,040 109 109 109
outstanding at March 31, 2001
Class B Voting Common Stock, convertible, par value $.01
per share;
Authorized 1,198,990 shares; 1,190,057 issued and 12 12 12
outstanding
Additional paid-in capital 114,664 114,572 114,664
Accumulated deficit (9,261) (10,073) (11,727)
----------- ----------- -------------
105,524 104,620 103,058
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder (729) (729) (729)
Accumulated other comprehensive loss (212) (110) (337)
----------- ----------- -------------
Total stockholders' equity 104,548 103,746 101,957
----------- ----------- -------------
Total liabilities and stockholders' equity $ 158,434 $ 183,482 $ 178,560
=========== =========== =============
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
<Table>
<Caption>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------------------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Revenues:
Sales $ 31,942 $ 35,713 $ 69,390 $ 68,245
Service charges 15,539 13,106 32,673 27,815
47,481 48,819 102,063 96,060
---------- ---------- ---------- ----------
Cost of goods sold 19,820 21,435 42,990 39,533
---------- ---------- ---------- ----------
Net revenues 27,661 27,384 59,073 56,527
Operating expenses:
Operations 18,999 18,653 39,597 37,716
Administrative 3,667 3,621 7,871 7,513
Depreciation and amortization 2,532 2,814 5,130 5,248
---------- ---------- ---------- ----------
Total operating expenses 25,198 25,088 52,598 50,477
---------- ---------- ---------- ----------
Operating income 2,463 2,296 6,475 6,050
Interest expense, net 996 2,332 2,739 4,520
Equity in net income of unconsolidated affiliate (248) (110) (312) (137)
(Gain)/loss on sale of assets (22) (1) 133 (4)
---------- ---------- ---------- ----------
Income before income taxes 1,737 75 3,915 1,671
Income tax expense 643 42 1,449 585
---------- ---------- ---------- ----------
Net income $ 1,094 $ 33 $ 2,466 $ 1,086
========== ========== ========== ==========
Net income per share, basic and fully diluted $ 0.09 $ 0.00 $ 0.20 $ 0.09
========== ========== ========== ==========
Weighted average shares outstanding:
Basic 12,128 12,087 12,128 12,087
========== ========== ========== ==========
Fully diluted 12,276 12,087 12,174 12,087
========== ========== ========== ==========
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
<Table>
<Caption>
Six Months Ended
March 31,
--------------------------
2002 2001
---------- ----------
(In thousands)
Operating Activities:
Net income $ 2,466 $ 1,086
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,130 5,248
Net (gain)/loss on sale or disposal of assets 133 (4)
Income from investment in unconsolidated affiliate (312) (137)
Changes in operating assets and liabilities:
Service charges receivable 654 1,409
Inventory 2,900 1,512
Prepaid expenses, other current assets, and other assets (534) (1,310)
Accounts payable and accrued expenses (106) (2,947)
Restructuring reserve (124) (1,294)
Customer layaway deposits (76) 154
Deferred gains and other long-term liabilities (157) --
Federal income taxes 1,308 5,506
---------- ----------
Net cash provided by operating activities 11,282 9,223
Investing Activities:
Pawn loans forfeited and transferred to inventory 36,217 35,166
Pawn loans made (89,331) (89,014)
Pawn loans repaid 60,106 60,287
---------- ----------
Net decrease in pawn loans 6,992 6,439
Short-term loans 154 (66)
Additions to property, plant, and equipment (540) (3,049)
Dividends received from unconsolidated affiliate 183 143
Proceeds from sale of assets 3,714 1,214
---------- ----------
Net cash provided by investing activities 10,503 4,681
Financing Activities:
Net payments on bank borrowings (22,747) (14,245)
---------- ----------
Net cash used in financing activities (22,747) (14,245)
---------- ----------
Change in cash and cash equivalents (962) (341)
Cash and cash equivalents at beginning of period 2,186 3,126
---------- ----------
Cash and cash equivalents at end of period $ 1,224 $ 2,785
========== ==========
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment $ 125 $ 14
Deferred gain on sale-leasebacks $ 829 $ 297
</Table>
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2002
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 six-month period ended March 31, 2002 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 does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
NOTE B: RESTRUCTURING
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 47 stores by March 31, 2001. No additional store closures are
expected as part of this plan. During the quarter ended March 31, 2002, the
Company expended $25,000 on rent and related costs for closed stores. At March
31, 2002, the remaining restructuring reserve of $93,000 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 three and six-month periods
ended March 31, 2001. 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 March 31, Six Months Ended March 31,
---------------------------- ---------------------------
2002 2001 2002 2001
---- ------ ---- ------
Total revenues $ -- $ 28 $ -- $ 940
Operating loss $ -- $ (125) $ -- $ (457)
</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 March 31,
2002, March 31, 2001, and September 30, 2001, inventory reserves were $1.0
million, $1.4 million, and $1.1 million, respectively.
4
Property and equipment is shown net of accumulated depreciation of $53.0
million, $45.8 million and $49.1 million at March 31, 2002, March 31, 2001 and
September 30, 2001, respectively.
Certain prior period balances have been reclassified to conform to the fiscal
2002 presentation.
NOTE D: EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except per share data):
<Table>
<Caption>
Three Months Ended Six Months Ended
March 31 March 31
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator
Numerator for basic and diluted earnings per share: net income $ 1,094 $ 33 $ 2,466 $ 1,086
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share: weighted average shares 12,128 12,087 12,128 12,087
Effect of dilutive securities:
Warrants and options 148 -- 46 --
---------- ---------- ---------- ----------
Dilutive potential common shares 148 -- 46 --
---------- ---------- ---------- ----------
Denominator for diluted earnings per share: adjusted weighted
average shares and assumed conversions 12,276 12,087 12,174 12,087
========== ========== ========== ==========
Basic earnings per share $ 0.09 $ 0.00 $ 0.20 $ 0.09
========== ========== ========== ==========
Diluted earnings per share $ 0.09 $ 0.00 $ 0.20 $ 0.09
========== ========== ========== ==========
</Table>
The following table presents the weighted average shares subject to options
outstanding during the periods indicated. Anti-dilutive options 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.
<Table>
<Caption>
Three Months Ended Six Months Ended
March 31 March 31
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Total options outstanding
Weighted average shares subject to options 1,460,049 1,378,611 1,466,027 1,385,707
Average exercise price per share $ 7.70 $ 8.20 $ 7.69 $ 8.18
Anti-dilutive options outstanding
Weighted average shares subject to options 937,098 1,378,611 948,953 1,385,707
Average exercise price per share $ 10.88 $ 8.20 $ 10.78 $ 8.18
</Table>
NOTE E: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), a company organized in the United Kingdom, representing 29% 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 six-month period ended
5
March 31, 2002 represents its percentage interest in the results of A&B's
operations from July through December 2001, reduced by the amortization of
goodwill.
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 and six-month
periods ended March 31, 2002 was approximately $1.0 million and $2.6 million,
and the comprehensive income for the three and six-month periods ended March 31,
2001 was approximately $0.2 million and $1.1 million, respectively. The
difference between comprehensive income and net income is 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
The Company's credit agreement, maturing October 1, 2002, 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 is tied to loan and inventory
balances. The term facility must be paid in full by June 28, 2002, and its
balance was $5.0 million at March 31, 2002. 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 credit
facility will be achieved based upon the Company's current and anticipated
performance. Based upon the performance to date and management's expected
performance for the remainder of 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.
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 credit facility or alternate sources of financing, or
to limit capital expenditures to an amount less than that currently anticipated
or permitted under the 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.
Second Quarter Ended March 31, 2002 vs. Second Quarter Ended March 31, 2001
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended March 31, 2002 and
2001.
<Table>
<Caption>
Three Months Ended % or
March 31,(a) Point
2002 2001 Change(b)
-------- -------- ---------
Net revenues:
Sales $ 31,942 $ 35,713 (10.6)%
Service charges 15,539 13,106 18.6%
-------- --------
Total revenues 47,481 48,819 (2.7)%
Cost of goods sold 19,820 21,435 (7.5)%
-------- --------
Net revenues $ 27,661 $ 27,384 1.0%
======== ========
Other data:
Gross profit as a percent of sales 38.0% 40.0% (2.0) pts.
Average annual inventory turnover 2.5x 2.4x 0.1x
Inventory per store at end of the period $ 112 $ 118 (5.1)%
Loan balance per store at end of period $ 147 $ 140 5.0%
Average yield on loan portfolio 130% 123% 7 pts.
Redemption rate 78% 78% --
Expenses as a percent of total revenues:
Operating 40.0% 38.2% 1.8 pts.
Administrative 7.7% 7.4% 0.3 pts.
Depreciation and amortization 5.3% 5.8% (0.5) pts.
Interest, net 2.1% 4.8% (2.7) pts.
Locations in operation:
Beginning of period 283 291
Acquired -- --
Established -- --
Sold, combined or closed 3 2
-------- --------
End of period 280 289
======== ========
Average locations in operation during the period (c) 281 290
</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
Six Months Ended March 31, 2002 vs. Six Months Ended March 31, 2001
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the six-month periods ended March 31, 2002 and
2001.
<Table>
<Caption>
Six Months Ended % or
March 31,(a) Point
2002 2001 Change(b)
-------- -------- ---------
Net revenues:
Sales $ 69,390 $ 68,245 1.7%
Service charges 32,673 27,815 17.5%
-------- --------
Total revenues 102,063 96,060 6.2%
Cost of goods sold 42,990 39,533 8.7%
-------- --------
Net revenues $ 59,073 $ 56,527 4.5%
======== ========
Other data:
Gross profit as a percent of sales 38.0% 42.1% (4.1) pts.
Average annual inventory turnover 2.6x 2.1x 0.5x
Inventory per store at end of the period $ 112 $ 118 (5.1)%
Loan balance per store at end of period $ 147 $ 140 5.0%
Average yield on loan portfolio 130% 125% 5 pts.
Redemption rate 77% 77% --
Expenses as a percent of total revenues:
Operating 38.8% 39.3% (0.5) pts.
Administrative 7.7% 7.8% (0.1) pts.
Depreciation and amortization 5.0% 5.5% (0.5) pts.
Interest, net 2.7% 4.7% (2.0) pts.
Locations in operation:
Beginning of period 283 305
Acquired -- --
Established -- --
Sold, combined or closed 3 16
-------- --------
End of period 280 289
======== ========
Average locations in operation during the period (c) 282 301
</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.
8
RESULTS OF OPERATIONS
The following discussion compares results for the three and six-month periods
ended March 31, 2002 ("Fiscal 2002 Periods") to the three and six-month periods
ended March 31, 2001 ("Fiscal 2001 Periods"). 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
short-term loans, commonly referred to as "payday loans" in most of its
pawnshops. At March 31, 2002, the Company operated 280 pawnshops in eleven
states compared to 289 in twelve states at March 31, 2001. The Company offers
short-term loans in 217 of its locations at March 31, 2002 compared to 38
locations a year ago. In 199 of the locations providing short-term loans, the
Company markets and services loans originated by County Bank, a federally
insured Delaware banking corporation. After origination of the loans, the
Company can 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, sales of
primarily forfeited collateral, and fees on short-term loans. For the six-month
Fiscal 2002 Period, pawn service charges, sales, and short-term loan fees
comprised 29%, 68%, and 3% of total revenues compared to 29%, 71%, and 0% for
the six-month Fiscal 2001 Period. After deducting for the cost of goods sold for
the six-month 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 49%, 51%, and 0% for the six-month Fiscal 2001 Period.
Pawn service charge revenue for a period is 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, less
an allowance for expected loan forfeitures. The expected level of forfeitures
within the ending pawn loan balance is based on recent loan redemption
statistics adjusted for seasonal changes expected to occur over the next ninety
days.
In the three-month Fiscal 2002 Period, pawn service charge revenue increased
$0.9 million from the three-month Fiscal 2001 Period to $13.9 million, primarily
due to a seven percentage point higher annualized loan yield ($0.8 million) and
greater average loan volumes ($0.1 million). Of the $13.9 million three-month
total, $15.5 million was collected during the period, offset by a $1.6 million
reduction in the pawn service charge receivable. In the three-month Fiscal 2001
Period, the $13.0 million pawn service charge revenue is comprised of $15.0
million collected during the period, offset by a $2.0 million decrease in the
pawn service charge receivable.
In the six-month Fiscal 2002 Period, pawn service charge revenue increased $1.4
million from the six-month Fiscal 2001 Period to $29.1 million primarily due to
a five percentage point higher annualized loan yield ($1.0 million) and greater
average loan volumes ($0.6 million). Slightly offsetting these improvements was
a reduction in pawn service charges from closed stores ($0.2 million). The $29.1
million pawn service charge revenue is comprised of $29.8 million collected
during the period, offset by a $0.7 million decrease in the pawn service charge
receivable. In the six-month Fiscal 2001 Period, the $27.7 million pawn service
charge revenue is comprised of $29.1 million collected during the period, less a
$1.4 million decrease in the pawn service charge receivable.
For the three-month Fiscal 2002 Period, sales decreased $3.8 million from the
Fiscal 2001 Period to $31.9 million. This decrease resulted from lower same
store sales ($3.0 million) and lower jewelry scrapping ($0.8 million). For the
six-month Fiscal 2002 Period, sales increased $1.1 million from the Fiscal 2001
Period to approximately $69.4 million. This increase resulted from higher
jewelry scrapping ($1.9 million) and same store sales ($0.3 million), offset by
a reduction in sales from closed stores ($1.1 million). During the quarter ended
December 31, 2001, the Company required that layaway sales be paid in full by
December 15th rather than the normal ninety-day period. This change had the
effect of increasing first fiscal quarter sales by approximately $3.5 million as
layaway sales that would have typically been completed in the second fiscal
quarter ended March 31, 2002 were completed in the first quarter. While this
change caused a year-over-year sales decline in the current quarter, the layaway
change increased total layaway completions in Fiscal 2002 over what it has
traditionally seen in its first two quarters taken as a whole.
9
For the three-month Fiscal 2002 Period, gross margins on sales decreased 2.0
percentage points from the Fiscal 2001 Period to 38%. Lower margins on
merchandise sales reduced overall margins 4.0 percentage points while lower
volume and improved margins on jewelry scrapping (jewelry is generally scrapped
at or below cost) offset the overall decrease by 2.0 percentage points.
Inventory shrinkage for the quarter increased 0.3 of a percentage point from the
prior year period to 1.6% of merchandise sales, primarily due to lower layaway
sales in the current quarter as discussed above.
For the six-month Fiscal 2002 Period, gross margins on sales decreased 4.1
percentage points from the Fiscal 2001 Period to 38%. Lower margins on
merchandise sales reduced overall margins 1.3 percentage points while an
increase in jewelry scrapping (jewelry is generally scrapped at or below cost)
contributed 2.7 percentage points to the overall margin decrease. Inventory
shrinkage for the six-month Fiscal 2002 Period was unchanged from the prior year
period at 1.2% of merchandise sales. Annualized inventory turnover was 2.6 times
in the six-month Fiscal 2002 Period compared to 2.1 times in the Fiscal 2001
Period.
Short-term loan service charges increased to $1.6 million and $3.5 million in
the three and six-month Fiscal 2002 Periods from $75,000 and $120,000 in the
prior year periods. The Company introduced this product during the quarter ended
March 31, 2001. 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 immediately upon 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.
The Company experienced net default rates (defaults net of collections measured
as a percent of loans made) of 4.7% and 7.3% during the three and six-month
Fiscal 2002 Periods. In addition to writing off loans immediately upon default,
the Company also records 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 three and six-month Fiscal 2002 Periods, the Company's bad debt
expense, included in operations expense, was $0.5 million and $1.5 million,
respectively, compared to $14,000 and $36,000 in the comparable Fiscal 2001
Periods. Changes in the fee receivable valuation allowance are charged to
service charge revenue.
In the three-month Fiscal 2002 Period, operations expense increased $0.3 million
(2%) primarily due to $0.6 million additional bad debt and other short-term loan
expenses and $0.5 million higher rent from leasebacks of previously owned
properties. Offsetting these were $0.5 million lower labor and incentive
compensation expense and $0.3 million lower utility and advertising expenses.
Administrative expenses increased $46,000 (1%) in the three-month Fiscal 2002
Period.
In the six-month Fiscal 2002 Period, operations expense increased $1.9 million
(5%) primarily due to $1.8 million additional bad debt and other short-term loan
expenses and $0.9 million higher rent from sale-leasebacks of previously owned
properties, offset by $0.8 million lower utility, advertising, and other
operating expenses. Administrative expenses increased $0.4 million (5%) in the
six-month Fiscal 2002 Period primarily due to $0.8 million higher labor and
incentive compensation costs and $0.2 million higher rent due to the
sale-leaseback of the corporate office, offset by $0.6 million lower
professional fees and services.
Depreciation and amortization decreased $0.3 million (10%) and $0.1 million (2%)
in the three and six-month Fiscal 2002 Periods compared to the same periods in
Fiscal 2001 due to the elimination of depreciation on assets sold, primarily
through sale-leasebacks, offset by an increase in depreciation of software
placed in use during December 2001. Interest expense decreased $1.3 million
(57%) and $1.8 million (39%) in the three and six-month Fiscal 2002 Periods due
to lower average debt balances coupled with lower average interest rates.
Net income for the three-month Fiscal 2002 Period was $1.1 million compared to
$33,000 in the Fiscal 2001 Period. Higher service charges ($2.4 million) and a
decrease in sales margins ($2.1 million), largely due to the layaway change
discussed above, increased net revenues ($0.3 million) for the quarter. After
deducting higher total operating expenses ($0.1 million), operating income was
$0.2 million above the prior year period. After lower interest
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expenses and depreciation, combined with higher earnings from the investment in
Albemarle & Bond Holdings, plc ("A&B"), net income improved by $1.1 million.
Net income for the six-month Fiscal 2002 Period was $2.5 million compared to
$1.1 million in the Fiscal 2001 Period. Higher net revenues in the Fiscal 2002
Period ($2.5 million), mainly due to an increase in service charges ($4.9
million), offset by higher total operating expenses ($2.1 million), resulted in
operating income $0.4 million above the prior year period. After lower interest
expenses and higher earnings from the investment in A&B, net income increased
$1.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six-month Fiscal 2002 Period
was $11.3 million compared to $9.2 million provided in the Fiscal 2001 Period.
Excluding a $5.0 million tax refund included in the six-month Fiscal 2001
period, cash provided by operating activities increased $7.1 million. The
Company's new short-term loan product, higher levels of jewelry scrapping, and
lower expenditures, primarily for closed stores, account for most of the
increase in cash provided by operating activities. Net cash provided by
investing activities was $10.5 million for the Fiscal 2002 Period compared to
$4.7 million provided in the Fiscal 2001 Period. The change is primarily due to
a $2.5 million increase in proceeds from the sale of assets coupled with a $2.5
million reduction in capital expenditures. 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 $22.7 million,
compared to a reduction of $14.2 million in the Fiscal 2001 Period. During the
six months ended March 31, 2002, the Company completed sales or sale-leasebacks
of 14 owned properties for proceeds of $3.7 million. At March 31, 2002, 16
additional properties were available for sale or sale-leaseback, however there
can be no assurance that the Company will be successful in selling any of these
properties.
The Company's credit agreement, maturing October 1, 2002, 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 is tied to loan and inventory
balances. The term facility must be paid in full by June 28, 2002, and its
balance was $5.0 million at March 31, 2002. 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 performance to date and management's
expected performance for the remainder of 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 Company anticipates renegotiating its line of
credit prior to its October 1, 2002 maturity date.
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 March 31, 2002, the Company had $32.4
million outstanding on the revolving credit facility and $5.0 million
outstanding under the term loan.
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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 March 31, 2002. If interest rates average 25 basis points more
in the remaining two quarters of fiscal 2002, the Company's interest expense for
the year would increase by approximately $47,000. This amount is determined by
considering the impact of the hypothetical interest rate increase on the
Company's variable rate long-term debt at March 31, 2002.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations, which impact the Company's 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
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 weakening in the U.K.
pound during the quarter ended March 31, 2002 was approximately $96,000. On
March 31, 2002, the U.K. pound closed at 0.7015 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 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 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
(a) Exhibit Incorporated by
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 March 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: May 13, 2002 By: /s/ DAN N. TONISSEN
-----------------------
(Signature)
Daniel N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
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