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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 000-19424
-------------------------------
EZCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
-------------- -------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(512) 314-3400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes__ No X
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of March 31, 2004, 11,007,534 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.
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, 2004, March 31, 2003 and
September 30, 2003 1
Condensed Consolidated Statements of Operations for the Three Months and Six Months
Ended March 31, 2004 and 2003 2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2004
and 2003 3
Notes to Interim Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURE 22
EXHIBIT INDEX 23
CERTIFICATIONS 83
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, March 31, September 30,
2004 2003 2003
--------- --------- ---------
(In thousands)
Assets: (Unaudited)
Current assets:
Cash and cash equivalents $ 202 $ 3,386 $ 2,496
Pawn loans 42,079 41,218 47,955
Payday loans 4,643 2,253 3,630
Pawn service charges receivable, net 7,825 7,966 8,990
Payday loan service charges receivable, net 928 442 735
Inventory, net 29,492 29,535 29,755
Deferred tax asset 8,163 6,418 8,163
Federal income tax receivable -- -- 328
Prepaid expenses and other assets 3,054 2,456 1,726
--------- --------- ---------
Total current assets 96,386 93,674 103,778
Investment in unconsolidated affiliates 15,417 15,124 14,700
Property and equipment, net 24,642 28,659 25,369
Note receivable from related party 1,500 1,500 1,500
Deferred tax asset, non-current 4,391 1,948 4,391
Other assets, net 3,866 3,977 3,952
--------- --------- ---------
Total assets $ 146,202 $ 144,882 $ 153,690
========= ========= =========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 11,668 $ 10,030 $ 11,101
Customer layaway deposits 1,842 1,731 1,792
Federal income taxes payable 771 443 --
--------- --------- ---------
Total current liabilities 14,281 12,204 12,893
Long-term debt, less current maturities 15,000 28,000 31,000
Deferred gains and other long-term liabilities 4,139 4,019 4,319
--------- --------- ---------
Total long-term liabilities 19,139 32,019 35,319
Commitments and contingencies -- -- --
Stockholders' equity:
Preferred Stock, par value $.01 per share; Authorized
5,000,000 shares; none issued and outstanding -- -- --
Class A Non-Voting Common Stock, par value $.01 per
share;
Authorized 40,000,000 shares; 11,016,567 issued and
11,007,534 outstanding at March 31, 2004; 11,006,864
issued and 10,997,831 outstanding at March 31, 2003
and September 30, 2003 110 110 110
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; 1,190,057
issued and outstanding 12 12 12
Additional paid-in capital 116,230 114,796 115,580
Accumulated deficit (3,164) (13,777) (9,161)
Less deferred compensation expense (1,125) -- (784)
--------- --------- ---------
112,063 101,141 105,757
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder -- (729) (729)
Accumulated other comprehensive income 754 282 485
--------- --------- ---------
Total stockholders' equity 112,782 100,659 105,478
--------- --------- ---------
Total liabilities and stockholders' equity $ 146,202 $ 144,882 $ 153,690
========= ========= =========
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,
2004 2003 2004 2003
--------- --------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Sales $ 38,374 $ 35,771 $ 71,929 $ 69,969
Pawn service charges 14,488 14,323 30,040 29,957
Payday loan service charges 5,072 2,675 9,933 5,752
Other 355 253 701 543
--------- --------- --------- ---------
Total revenues 58,289 53,022 112,603 106,221
Cost of goods sold 22,517 22,672 41,790 43,992
--------- --------- --------- ---------
Net revenues 35,772 30,350 70,813 62,229
Operating expenses:
Operations 23,061 21,414 45,677 42,859
Administrative 6,378 4,393 12,240 8,690
Depreciation and amortization 1,865 2,192 3,780 4,459
--------- --------- --------- ---------
Total operating expenses 31,304 27,999 61,697 56,008
--------- --------- --------- ---------
Operating income 4,468 2,351 9,116 6,221
Interest expense, net 373 474 821
1,131
Equity in net income of unconsolidated affiliate (496) (427) (861) (730)
--------- --------- --------- ---------
Income before income taxes and cumulative effect of
adopting a new accounting principle 4,591 2,304 9,156 5,820
Income tax expense 1,584 806 3,159 2,037
--------- --------- --------- ---------
Income before cumulative effect of adopting a new
accounting principle 3,007 1,498 5,997 3,783
Cumulative effect of adopting a new accounting principle,
net of tax -- -- -- (8,037)
--------- --------- --------- ---------
Net income (loss) $ 3,007 $ 1,498 $ 5,997 $ (4,254)
========= ========= ========= =========
Income (loss) per common share - basic:
Income before cumulative effect of adopting a new
accounting principle $ 0.25 $ 0.12 $ 0.49 $ 0.31
Cumulative effect of adopting a new accounting
principle, net of tax -- -- -- (0.66)
--------- --------- --------- ---------
Net income (loss) $ 0.25 $ 0.12 $ 0.49 $ (0.35)
========= ========= ========= =========
Income (loss) per common share - assuming dilution:
Income before cumulative effect of adopting a new
accounting principle $ 0.23 $ 0.12 $ 0.46 $ 0.30
Cumulative effect of adopting a new accounting
principle, net of tax -- -- -- (0.64)
--------- --------- --------- ---------
Net income (loss) $ 0.23 $ 0.12 $ 0.46 $ (0.34)
========= ========= ========= =========
Weighted average shares outstanding:
Basic 12,196 12,181 12,192 12,174
Assuming dilution 13,209 12,513 13,101 12,438
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
March 31,
---------------------------
2004 2003
-------- --------
(In thousands)
Operating Activities:
Net income (loss) $ 5,997 $ (4,254)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of adopting a new accounting principle -- 8,037
Depreciation and amortization 3,780 4,459
Deferred taxes -- (3,139)
Impairment of receivable 729 --
Deferred compensation expense 245 3
Income from investment in unconsolidated affiliate (861) (730)
Changes in operating assets and liabilities:
Service charges receivable, net 972 896
Inventory 263 2,562
Notes receivable from related parties -- 22
Prepaid expenses, other current assets, and other assets, net (1,283) 2,090
Accounts payable and accrued expenses 626 (1,518)
Customer layaway deposits 50 (435)
Deferred gains and other long-term liabilities (180) (190)
Federal income taxes 1,099 802
-------- --------
Net cash provided by operating activities 11,437 8,605
Investing Activities:
Pawn loans forfeited and transferred to inventory 35,823 36,899
Pawn loans made, including loans renewed (90,457) (88,725)
Pawn loans repaid or renewed 60,510 59,856
-------- --------
Net decrease in pawn loans 5,876 8,030
Net (increase) decrease in payday loans (1,013) 73
Additions to property and equipment (3,012) (882)
Dividends from unconsolidated affiliate 414 313
-------- --------
Net cash provided by investing activities 2,265 7,534
Financing Activities:
Proceeds from exercise of stock options 4 --
Net payments on bank borrowings (16,000) (14,245)
-------- --------
Net cash used in financing activities (15,996) (14,245)
-------- --------
Change in cash and equivalents (2,294) 1,894
Cash and equivalents at beginning of period 2,496 1,492
-------- --------
Cash and equivalents at end of period $ 202 $ 3,386
======== ========
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment
$269 $302
Issuance of common stock to 401(k) plan
$61 $63
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2004
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. The accompanying financial statements should be read with the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003 ("Fiscal 2003"). The
balance sheet at September 30, 2003 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
The Company's business is subject to seasonal variations, and operating results
for the three-month and six-month periods ended March 31, 2004 are not
necessarily indicative of the results of operations for the full fiscal year.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of collectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of collectible
loans, affecting the Company's earnings and financial condition.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans and related service charges
reported in the Company's consolidated financial statements reflect only the
Company's participation interest in these loans. The Company accrues service
charges on the percentage of loans the Company deems to be collectible using the
interest method. Accrued service charges related to defaulted loans are deducted
from service charge revenue upon loan default, and increase service charge
revenue upon subsequent collection.
The Company considers a loan defaulted if the loan has not been repaid or
refinanced by the maturity date. Although defaulted loans may be collected
later, the Company charges defaulted loans' 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 store operating expense, were
$1.2 million and $2.7 million, representing 4.3% and 4.9% of loans made for the
three-month and six-month periods ended March 31, 2004 (the "Fiscal 2004 Second
Quarter" and the "Fiscal 2004 Year-to-Date Period," respectively). In the
comparable 2003 periods (the "Fiscal 2003 Second Quarter" and the "Fiscal 2003
Year-to-Date Period," respectively), payday loan net defaults were $0.5 million
and $1.5 million, representing 3.6% and 4.7%, respectively, of loans made.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: The Company also provides an allowance for
losses on active payday loans and related service charges receivable. Changes in
the principal valuation allowance are charged to bad debt expense, a component
of operations expense in the Company's statement of operations. Changes in the
service charge receivable valuation allowance are charged to payday loan service
charge revenue.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on the type and age
of merchandise as well as recent sales trends and margins. At March 31, 2004,
March 31, 2003, and September 30, 2003, the valuation allowance deducted from
the carrying value of inventory was $1.0 million, $2.4 million, and $1.8 million
(3.2%, 7.4%, and 5.8% of gross inventory), respectively. Changes in the
inventory valuation allowance are recorded as cost of goods sold.
4
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors which could trigger an
impairment review include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy for the overall business; and significant
negative industry trends. When management determines that the carrying value of
tangible long-lived assets may not be recoverable, impairment is measured based
on the excess of the assets' carrying value over the estimated fair value. No
impairment of tangible long-lived assets has been recognized in the Fiscal 2004
or 2003 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 of the jurisdictions in
which it operates. This process involves estimating the actual current tax
liability together with assessing temporary differences in recognition of income
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income. In the event the Company was to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, a valuation allowance would be charged to the income tax
provision in the period such determination was made. Likewise, should the
Company determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, a decrease to a valuation
allowance would increase income in the period such determination was made. The
Company evaluates the realizability of its deferred tax assets quarterly by
assessing the need for a valuation allowance, if any. No adjustments have been
made to the Company's valuation allowance in the Fiscal 2004 or 2003 Periods.
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. See
Note H, Common Stock, Warrants, and Options.
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $69.4 million, $61.6 million and $65.7 million at March 31,
2004, March 31, 2003, and September 30, 2003, respectively.
Certain prior year balances have been reclassified to conform to the Fiscal 2004
presentation.
5
NOTE C: EARNINGS (LOSS) 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,
-------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share amounts)
Numerator
Income before cumulative effect of adopting a new
accounting principle $ 3,007 $ 1,498 $ 5,997 $ 3,783
Cumulative effect of adopting a new accounting
principle, net of tax -- -- -- (8,037)
-------- -------- -------- --------
Net income (loss) 3,007 1,498 $ 5,997 $ (4,254)
======== ======== ======== ========
Denominator
Denominator for basic earnings per share: weighted
average shares 12,196 12,181 12,192 12,174
Effect of dilutive securities:
Options and warrants 947 332 862 264
Restricted common stock grants 66 -- 47 --
-------- -------- -------- --------
Dilutive potential common shares 1,013 332 909 264
-------- -------- -------- --------
Denominator for diluted earnings per share: adjusted
weighted average shares and assumed conversions 13,209 12,513 13,101 12,438
======== ======== ======== ========
Basic earnings (loss) per share $ 0.25 $ 0.12 $ 0.49 $ (0.35)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.23 $ 0.12 $ 0.46 $ (0.34)
======== ======== ======== ========
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.
Three Months Ended Six Months Ended
March 31 March 31
--------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Total options outstanding
Weighted average shares subject to options 2,402,791 2,072,291 2,267,872 2,016,227
Average exercise price per share $ 6.55 $ 5.98 $ 6.35 $ 6.15
Anti-dilutive options outstanding
Weighted average shares subject to options 294,273 901,545 948,001 915,615
Average exercise price per share $ 13.61 $ 10.72 $ 11.09 $ 10.76
NOTE D: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), approximately 29% of A&B's total outstanding shares. The Company
accounts for its investment in A&B using the equity method. Since A&B's fiscal
year ends three months prior to the Company's fiscal year, the income reported
by the Company for its investment in A&B is on a three-month lag. In accordance
with U.K. securities regulations, A&B files only semi-annual financial reports,
for its fiscal periods ending December 31 and June 30. The income reported for
the Company's Fiscal 2004 Year-to-Date Period represents its percentage interest
in the results of A&B's operations from July 1, 2003 to December 31, 2003.
6
Conversion of A&B's financial statements into US Generally Accepted Accounting
Principles ("GAAP") resulted in no material differences from those reported by
A&B following UK GAAP. Below is summarized financial information for A&B's most
recently reported results (in thousands of U.S. dollars, using average exchange
rates for the periods indicated):
Six Months ended December 31,
-----------------------------
2003 2002
---- ----
Turnover (gross revenues) $ 19,726 $ 16,655
Gross profit 13,164 11,047
Profit after tax (net income) 2,977 2,464
NOTE E: CONTINGENCIES
From time to time, the Company is involved in litigation and regulatory actions
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.
NOTE F: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and other revenues,
expenses, gains and losses that are excluded from net income (loss) but are
included as a component of total stockholders' equity. Comprehensive income for
the Fiscal 2004 Second Quarter was $3.2 million and comprehensive income for the
Fiscal 2004 Year-to-Date Period was $6.3 million. For the comparable 2003
periods, comprehensive income was $1.7 million and comprehensive loss was $4.0
million, respectively. The difference between comprehensive income (loss) and
net income (loss) results primarily from the effect of foreign currency
translation adjustments determined in accordance with SFAS No. 52, "Foreign
Currency Translation." The accumulated balance of foreign currency activity
excluded from net income (loss) of $1.2 million is presented, net of tax of $0.4
million, in the Condensed Consolidated Balance Sheets as "Accumulated other
comprehensive income."
NOTE G: LONG-TERM DEBT
At March 31, 2004, the Company's credit agreement provided for a $42.5 million
revolving credit facility with an effective rate of 4.5%. Effective April 8,
2004, the Company amended and restated its credit agreement. The amendment
extends the maturity date to April 1, 2007 and provides for a $40.0 million
revolving credit facility. 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 total
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. In addition, payment of dividends and
additional debt are allowed but restricted.
NOTE H: COMMON STOCK, WARRANTS, AND OPTIONS
The Company accounts for its stock-based compensation plans as described in Note
B, Significant Accounting Policies. For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
7
The Company's pro forma results are as follows:
Three Months Ended Six Months Ended
March 31 March 31
----------------------------- -----------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net income (loss), as reported $ 3,007 $ 1,498 $ 5,997 $ (4,254)
Add: stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects 97 -- 162 1
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (237) (91) (417) (176)
--------- --------- --------- ---------
Pro forma net income (loss) $ 2,867 $ 1,407 $ 5,742 $ (4,429)
========= ========= ========= =========
Earnings (loss) per share, basic:
As reported $ 0.25 $ 0.12 $ 0.49 $ (0.35)
Pro forma $ 0.24 $ 0.12 $ 0.47 $ (0.36)
Earnings (loss) per share, assuming dilution:
As reported $ 0.23 $ 0.12 $ 0.46 $ (0.34)
Pro forma $ 0.22 $ 0.11 $ 0.44 $ (0.36)
On September 17, 2003, the Compensation Committee of the Board of Directors
approved an award of 125,000 shares of restricted stock to the Chairman of the
Board. The Company also agreed to reimburse the Chairman for the income tax
consequences resulting from the award. The market value of the restricted stock
on the award date was $0.8 million, which is being amortized over the two-year
restriction period expiring September 17, 2005. During the Fiscal 2004 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 on January 1, 2009, provided he remains
continuously employed by the Company through the vesting date. The shares are
subject to earlier vesting based on the occurrence of certain objectives. The
Company also agreed to reimburse him for the income tax consequences resulting
from the award. The market value of the restricted stock on the award date was
$0.6 million, which is being amortized over a three-year period based on the
Company's expectation that earlier vesting objectives will be met. During the
Fiscal 2004 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, 2004. Additionally in the quarter ended March 31, 2004, the
Company reimbursed $0.3 million for the Chief Executive Officer's one-time taxes
related to the award. The reimbursement was charged to administrative expense.
NOTE I: CHANGE IN ACCOUNTING PRINCIPLE - GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective October 1, 2002. Under the provisions of SFAS No. 142, goodwill and
other intangible assets having indefinite lives are not subject to amortization
but are tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the assets might be impaired. During the quarter
ended December 31, 2002, the Company, with assistance of independent valuation
specialists, completed impairment tests of its goodwill and pawn licenses; its
indefinite lived intangible assets. The goodwill testing estimated enterprise
value based on discounted cash flows and market capitalization and indicated an
implied fair value of goodwill of $0 based on the allocation of enterprise value
to all of the Company's assets and liabilities. This resulted in an $8.0
million, net of tax, impairment charge for goodwill, recorded as a cumulative
effect of adopting a new accounting principle. Separately, the estimated fair
value of pawn licenses was compared to their carrying value, indicating no
impairment.
8
At each balance sheet date presented, the balance of pawn licenses - the only
major class of indefinite lived intangible assets at each of these dates was
$1.5 million.
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite lived intangible assets at the
specified dates:
March 31, 2004, March 31, 2003, September 30, 2003,
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application
fees $ 742 $ 577 $ 742 $ 546 $ 742 $ 561
Real estate finders'
fees 554 265 554 230 554 249
Non-compete agreements 388 228 388 209 388 219
------ ------ ------ ------ ------ ------
Total $1,684 $1,070 $1,684 $ 985 $1,684 $1,029
====== ====== ====== ====== ====== ======
Total amortization expense from definite lived intangible assets for the Fiscal
2004 Second Quarter and the Fiscal 2004 Year-to-Date Period was approximately
$20,000 and $41,000, respectively. In comparison, the amortization expense for
the Fiscal 2003 Second Quarter and the Fiscal 2003 Year-to-Date Period was
approximately $23,000 and $46,000, respectively. The following table presents
the Company's estimate of amortization expense for definite lived intangible
assets for each of the five succeeding full fiscal years ending September 30 (in
thousands):
Fiscal Year Amortization Expense
- ----------- --------------------
2004 $ 77
2005 68
2006 67
2007 67
2008 66
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
NOTE J: RELATED PARTY TRANSACTIONS
In 1994, the Company loaned Vince Lambiase, the former President and Chief
Executive Officer, approximately $729,000 to purchase 50,000 shares of EZCORP
Class A Common Stock. The loan was shown as a reduction of stockholders' equity.
In connection with his separation from the Company in 2000, the maturity date of
the loan was extended to the earlier of (a) ten business days following the
first day that the closing price for the Company's stock is equal to or exceeds
$10 per share, or (b) August 1, 2005. On January 16, 2004, the Company's stock
closed at $10.34. As of March 31, 2004, the note remained outstanding. A full
valuation allowance has been recorded for the note as its collection is
doubtful.
9
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, 2004 vs. Second Quarter Ended March 31, 2003
- ---------------------------------------------------------------------------
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended March 31, 2004 and
2003 ("Fiscal 2004 Second Quarter" and "Fiscal 2003 Second Quarter,"
respectively):
Three Months Ended % or
March 31, (a) Point
2004 2003 Change(b)
---------- ---------- ----------
Net revenues:
Sales $ 38,374 $ 35,771 7.3%
Pawn service charges 14,488 14,323 1.2%
Payday loan service charges 5,072 2,675 89.6%
Other 355 253 40.3%
---------- ----------
Total revenues 58,289 53,022 9.9%
Cost of goods sold 22,517 22,672 (0.7)%
---------- ----------
Net revenues $ 35,772 $ 30,350 17.9%
========== ==========
Other data:
Gross margin 41.3% 36.6% 4.7 pts.
Average annual inventory turnover 2.9x 2.8x 0.1x
Average inventory per pawn location at quarter end $ 105 $ 105 --
Average pawn loan balance per pawn location at
quarter end $ 150 $ 147 2.0%
Average yield on pawn loan portfolio 135% 134% 1 pt.
Pawn loan redemption rate 79% 78% 1 pt.
Expenses and income as a percentage of net revenues (%):
Store operating 64.5 70.6 (6.1) pts.
Administrative 17.8 14.5 3.3 pts.
Depreciation and amortization 5.2 7.2 (2.0) pts.
Interest, net 1.0 1.6 (0.6) pts.
Income before income taxes 12.8 7.6 5.2 pts.
Net income 8.4 4.9 3.5 pts.
Stores in operation:
Beginning of period 303 280
New openings 32 --
---------- ----------
End of period 335 280
========== ==========
Average number of stores during the period 319 280
========== ==========
- ------------------------------------------------------------------
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.
10
Six Months Ended March 31, 2004 vs. Six Months Ended March 31, 2003
- -------------------------------------------------------------------
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the six-month periods ended March 31, 2004 and
2003 ("Fiscal 2004 Year-to-Date Period" and "Fiscal 2003 Year-to-Date Period,"
respectively):
Six Months Ended % or
March 31, (a) Point
2004 2003 Change(b)
-------- -------- --------
Net revenues:
Sales $ 71,929 $ 69,969 2.8%
Pawn service charges 30,040 29,957 0.3%
Payday loan service charges 9,933 5,752 72.7%
Other 701 543 29.1%
-------- --------
Total revenues 112,603 106,221 6.0%
Cost of goods sold 41,790 43,992 (5.0)%
-------- --------
Net revenues $ 70,813 $ 62,229 13.8%
======== ========
Other data:
Gross margin 41.9% 37.1% 4.8 pts.
Average annual inventory turnover 2.7x 2.7x --
Average inventory per pawn location at quarter end $ 105 $ 105 --
Average pawn loan balance per pawn location at
quarter end $ 150 $ 147 2.0%
Average yield on pawn loan portfolio 134% 133% 1 pt.
Pawn loan redemption rate 77% 77% --
Expenses and income as a percentage of net revenues (%):
Store operating 64.5 68.9 (4.4) pts.
Administrative 17.3 14.0 3.3 pts.
Depreciation and amortization 5.3 7.2 (1.9) pts.
Interest, net 1.2 1.8 (0.6) pts.
Income before income taxes and cumulative effect 12.9 9.4 3.5 pts.
Income before cumulative effect 8.5 6.1 2.4 pts.
Stores in operation:
Beginning of period 284 280
New openings 51 --
-------- --------
End of period 335 280
======== ========
Average number of stores during the period 306 280
======== ========
- ------------------------------------------------------------------
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
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 pawnshops, located in eleven states. The Company makes payday loans in
205 of its EZPAWN locations, 55 EZMONEY Payday Loans locations ("EZMONEY
stores"), and its Austin, Texas based call center.
The Company earns pawn service charge revenue on its pawn lending activity.
While allowable service charges vary by state and by amount of the loan, a
majority of the Company's pawn loans are in amounts that permit pawn service
charges of 20% per month or 240% per annum. The Company's average pawn loan
amount has historically averaged between $70 and $75, but varies depending on
the evaluation of each item pawned and prevailing gold prices. The allowable
term of pawn loans also differs by state, but is typically 30 days with a 60-day
grace period.
The Company earns payday loan service charge revenue on its payday loans. In 204
locations and its call center, the Company markets and services payday loans
made by County Bank of Rehoboth Beach ("County Bank"), a federally insured
Delaware bank. After origination of the loans, the Company may purchase an 85%
participation in the loans made by County Bank and marketed by the Company. In
56 of its locations, the Company makes payday loans in compliance with state
law. The average payday loan amount is approximately $370 and the terms are
generally less than 30 days, averaging about 17 days. The service charge per
$100 loaned is typically $18 for a 7 to 23-day period, but varies in certain
locations.
In its 280 EZPAWNs, the Company sells merchandise acquired primarily through
pawn loan forfeitures and, to a lesser extent, through purchases of customers'
merchandise. The realization of gross profit on sales of inventory primarily
depends on the Company's initial assessment of the property's resale value.
Improper assessment of the resale value of the collateral in the lending
function can result in reduced marketability of the property and the realization
of a lower margin.
In the Fiscal 2004 Second Quarter, the Company saw significant growth in its
payday loan balances and related earnings contribution. The Company also
realized improvements in its gross margins on merchandise sales primarily due to
effective liquidation of aged general merchandise and due to market-driven price
increases on gold jewelry sold to refiners. The Company's income improved to
$3.0 million in the Fiscal 2004 Second Quarter from $1.5 million in the Fiscal
2003 Second Quarter.
RESULTS OF OPERATIONS
Second Quarter Ended March 31, 2004 vs. Second Quarter Ended March 31, 2003
- ---------------------------------------------------------------------------
The following discussion compares the results of operations for the Fiscal 2004
Second Quarter to the Fiscal 2003 Second Quarter. The discussion should be read
in conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2004 Second Quarter pawn service charge revenue increased
1.2%, or $0.2 million, from the Fiscal 2003 Second Quarter to $14.5 million.
This increase was due to a one percentage point improvement in loan yields to
135% in the Fiscal 2004 Second Quarter. Variations in the annualized loan yield,
as seen between these periods, are due generally to changes in statutory fees
that can be charged, changes in the level of loan forfeitures and a mix shift
between loans with different yields. The Company's ending balance of pawn loans
outstanding at March 31, 2004 was 2.1% higher than at March 31, 2003, while the
average balance of pawn loans outstanding during the two periods remained
constant.
In the Fiscal 2004 Second Quarter, 112.3%, or $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. In the comparable Fiscal 2003 Second
Quarter, 111.0%, or $15.9 million, of recorded pawn service charge revenue was
collected in cash offset by a $1.6 million decrease in accrued pawn service
charges receivable. This pattern is consistent with the seasonal nature of the
pawn lending business. The accrual of pawn service charges is dependent on the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company decreased its
estimate of collectible loans at March 31, 2004 in anticipation of lower loan
redemptions following the income tax refund season.
12
Sales increased $2.6 million in the Fiscal 2004 Second Quarter compared to the
Fiscal 2003 Second Quarter, to $38.4 million. The increase was due to 5.1%
higher same store merchandise sales ($1.6 million) and an increase in jewelry
scrapping sales ($1.0 million). Below is a summary of comparable sales data:
Quarter Ended March 31,
-------------------------
2004 2003
------- -------
(Dollars in thousands)
Merchandise sales $33,188 $31,587
Jewelry scrapping sales 5,186 4,184
------- -------
Total sales 38,374 35,771
Gross profit on merchandise sales $14,330 $12,344
Gross profit on jewelry scrapping sales 1,527 755
Gross margin on merchandise sales 43.2% 39.1%
Gross margin on jewelry scrapping sales 29.4% 18.0%
Overall gross margin 41.3% 36.6%
The Fiscal 2004 Second Quarter overall gross margins on sales increased 4.7
percentage points from the Fiscal 2003 Second Quarter to 41.3%. This resulted
from improved margins on same store merchandise sales and the effect higher
recent gold prices had on jewelry scrapping. Margins on merchandise sales,
excluding jewelry scrapping, increased 4.1 percentage points due primarily to
more effective liquidation of aged general merchandise in the Fiscal 2004 Second
Quarter. During the Fiscal 2004 Second Quarter, the inventory valuation
allowance was reduced $0.2 million as a result of the improved liquidation of
aged merchandise. In the comparable Fiscal 2003 Second Quarter, the inventory
allowance was increased $0.2 million due to the less favorable liquidation of
aged merchandise during that quarter. Changes in the inventory valuation
allowance are recorded in cost of goods sold, directly impacting the Company's
gross margins. Inventory shrinkage, also included in cost of goods sold, was
1.5% of merchandise sales in the Fiscal 2004 Second Quarter compared to 1.9% in
the Fiscal 2003 Second Quarter.
Payday loan data are as follows:
Quarter Ended March 31,
2004 2003
------- -------
(Dollars in thousands)
Service charge revenue $ 5,072 $ 2,675
Bad debt (included in operating expense):
Net defaults on loans (1,203) (540)
Change in valuation allowance and other related costs 104 51
------- -------
Net bad debt (1,099) (489)
Other direct expenses (included in operating expense) (187) (279)
Collection and call center costs (included in administrative expense) (194) (189)
------- -------
Contribution to operating income $ 3,592 $ 1,718
======= =======
Average payday loan balance outstanding during quarter $ 5,033 $ 2,529
Payday loan balance at end of quarter $ 4,643 $ 2,253
Average loan balance per participating location at end of quarter $ 17.8 $ 9.8
Participating locations at end of quarter (whole numbers) 261 229
Net default rate (defaults net of collections, measured as a percent of
loans made) 4.3% 3.6%
The Contribution to operating income presented above is the incremental
contribution only and excludes other costs such as labor, rent, and other
overhead costs.
Payday loan service charge revenue increased from the Fiscal 2003 Second Quarter
with the growth in the amount of loans made during the quarter. Payday loan bad
debt expense increased primarily due to the growth in the amount of loans made
during the quarter. An increase in the net default rate also contributed
approximately one
13
third of the increase in bad debt expense. The maturing of the product and a
growth in the number of locations offering the loans contributed to the increase
in the loan balance. In the Fiscal 2004 Second Quarter, 104.1% or $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. In the
comparable Fiscal 2003 Second Quarter, 106.2% or $2.9 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. This is consistent
with the seasonal pattern expected in payday lending. The 18.4% decrease in
accrued payday loan service charges receivable during the Fiscal 2004 Second
Quarter was commensurate with the 18.3% reduction in the related payday loans
receivable. The Company anticipates continued growth in payday loans as it
continues the expansion of additional EZMONEY Payday Loans stores and the
product matures in its current locations.
The Company provides for a valuation allowance on both the principal and fees
receivable for payday loans. At March 31, 2004, the valuation allowance was $0.3
million, or 4.7% of the payday loan principal and fees receivable, compared to
$0.2 million, or 5.2% of payday loan principal and fees receivable at March 31,
2003. Due to the short-term nature of these loans, the Company uses recent net
default rates and anticipated seasonal changes in the rate of defaults as the
basis for its valuation allowance, rather than reserving the annual or quarterly
rate. Actual loan losses could vary from those estimated due to variance in any
of these factors, as well as any national or regional economic downturn.
Although store operating expenses decreased 6.1 percentage points when measured
as a percentage of net revenues, it increased 7.7% ($1.6 million) in dollar
terms, to $23.1 million. This was due primarily to a $0.6 million volume-related
increase in bad debt from payday loans and a 12.6% ($1.3 million) increase in
store labor and benefits, offset by a $0.5 million decrease in robbery expense.
The Company expects continued volume-related increases in bad debt from payday
loans, commensurate with the growth in locations offering payday loans and the
maturation of the product in existing locations.
Administrative expenses increased 45.2% ($2.0 million) from the Fiscal 2003
Second Quarter to $6.4 million, representing a 3.3 percentage point increase
when measured as a percent of net revenues. The primary causes of this were a
$0.4 million increase in accrued incentive compensation due to the Company's
improved performance, $0.5 million related to restricted stock awarded to the
Company's Chairman and its Chief Executive Officer as long-term incentives as
discussed in Note H to the Company's Interim Condensed Consolidated Financial
Statements, and $0.7 million related to a valuation allowance placed on a note
receivable from a former Chief Executive Officer of the Company as discussed in
Note J to the Company's Interim Condensed Consolidated Financial Statements.
Depreciation and amortization expense decreased $0.3 million in the Fiscal 2004
Second Quarter to $1.9 million. This improvement is primarily due to the
reduction in depreciable assets through the 2003 sale-leaseback of three
previously owned locations and assets that became fully depreciated over the
past year, net of additional depreciation on assets placed in service in the
last twelve months.
In the Fiscal 2004 Second Quarter, interest expense decreased by $0.1 million to
$0.4 million as a result of lower average debt balances and lower effective
interest rates. At March 31, 2004, the Company's total debt was $15.0 million
compared to $28.0 million at March 31, 2003.
The Fiscal 2004 Second Quarter income tax provision was $1.6 million (34.5% of
pretax income) compared to $0.8 million (35% of pretax income) for the Fiscal
2003 Second Quarter. The decrease in effective tax rate between these periods is
due to non-tax deductible items having a smaller percentage impact on larger
pre-tax earnings.
Operating income for the Fiscal 2004 Second Quarter increased $2.1 million from
the Fiscal 2003 Second Quarter to $4.5 million. The $1.9 million greater
contribution from payday loans, $2.8 million higher gross profit on sales, and
$0.3 million decrease in depreciation and amortization were somewhat offset by
$2.2 million additional labor, benefits, and incentive compensation expense and
the $0.7 million valuation allowance placed on a note receivable. After a $0.8
million increase in income tax expense and smaller changes in other
non-operating items, net income improved to $3.0 million in the Fiscal 2004
Second Quarter from $1.5 million in the Fiscal 2003 Second Quarter.
14
Six Months Ended March 31, 2004 vs. Six Months Ended March 31, 2003
- -------------------------------------------------------------------
The following discussion compares the results of operations for the Fiscal 2004
Year-to-Date Period to the Fiscal 2003 Year-to-Date Period. The discussion
should be read in conjunction with the accompanying financial statements and
related notes.
The Company's Fiscal 2004 Year-to-Date Period pawn service charge revenue
increased 0.3%, or $0.1 million from the Fiscal 2003 Year-to-Date Period to
$30.0 million. This increase was primarily due to a one percentage point
improvement in loan yields to 134% in the Fiscal 2004 Year-to-Date Period,
offset by lower average loan balances during the Fiscal 2004 Year-to-Date
Period. Variations in the annualized loan yield, as seen between these periods,
are due generally to changes in statutory fees that can be charged, changes in
the level of loan forfeitures and a mix shift between loans with different
yields. The Company's average balance of pawn loans outstanding during the
Fiscal 2004 Year-to-Date Period was 0.9% lower and ending pawn loans outstanding
were 2.1% higher than in the Fiscal 2003 Year-to-Date Period.
In the Fiscal 2004 Year-to-Date Period, 103.9% or $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. In the Fiscal 2003 Year-to-Date
Period, 102.8% or $30.8 million of recorded pawn service charge revenue was
collected in cash offset by a $0.8 million decrease in accrued pawn service
charges receivable. This pattern is consistent with the seasonal nature of the
pawn lending business. The accrual of pawn service charges is dependent on the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company decreased its
estimate of collectible loans at March 31, 2004 in anticipation of lower loan
redemptions following the income tax refund season.
Sales increased $1.9 million in the Fiscal 2004 Year-to-Date Period compared to
the Fiscal 2003 Year-to-Date Period, to $71.9 million. The increase was due to
higher same store merchandise sales ($1.1 million) and an increase in jewelry
scrapping sales ($0.8 million). Below is a summary of comparable sales data:
Six Months Ended March 31,
2004 2003
------- -------
(Dollars in thousands)
Merchandise sales $64,250 $63,132
Jewelry scrapping sales 7,679 6,837
------- -------
Total sales 71,929 69,969
Gross profit on merchandise sales $27,809 $25,195
Gross profit on jewelry scrapping sales 2,330 782
Gross margin on merchandise sales 43.3% 39.9%
Gross margin on jewelry scrapping sales 30.3% 11.4%
Overall gross margin 41.9% 37.1%
The Fiscal 2004 Year-to-Date Period overall gross margins on sales increased 4.8
percentage points from the Fiscal 2003 Year-to-Date Period to 41.9%. This
resulted from improved margins on same store merchandise sales and the favorable
effect higher recent gold prices had on jewelry scrapping. Margins on
merchandise sales, excluding jewelry scrapping, increased 3.4 percentage points
primarily due to more effective liquidation of aged general merchandise in the
Fiscal 2004 Year-to-Date Period. During the Fiscal 2004 Year-to-Date Period, the
inventory valuation allowance was reduced $0.8 million as a result of the
improved liquidation of aged merchandise. In the comparable Fiscal 2003
Year-to-Date Period, the inventory allowance was increased $0.7 million due to
the less favorable liquidation of aged merchandise during that period. Changes
in the inventory valuation allowance are recorded in cost of goods sold,
directly impacting the Company's gross margins. Inventory shrinkage, also
included in cost of goods sold, was 1.6% of merchandise sales in the Fiscal 2004
Year-to-Date Period compared to 1.5% in the Fiscal 2003 Year-to-Date Period.
15
Payday loan data are as follows:
Six Months Ended March 31,
2004 2003
------- -------
(Dollars in thousands)
Service charge revenue $ 9,933 $ 5,752
Bad debt (included in operating expense):
Net defaults on loans (2,724) (1,483)
Change in valuation allowance and other related costs 67 55
------- -------
Net bad debt (2,657) (1,428)
Other direct expenses (included in operating expense) (468) (637)
Collection and call center costs (included in administrative expense) (377) (333)
------- -------
Contribution to operating income $ 6,431 $ 3,354
======= =======
Average payday loan balance outstanding during Period $ 4,607 $ 2,440
Payday loan balance at end of Period $ 4,643 $ 2,253
Average loan balance per participating location at end of Period $ 17.8 $ 9.8
Participating locations at end of Period (whole numbers) 261 229
Net default rate (defaults net of collections, measured as a percent of
loans made) 4.9% 4.7%
The Contribution to operating income presented above is the incremental
contribution only and excludes other costs such as labor, rent, and other
overhead costs.
Payday loan service charge revenue and bad debt expense each increased from the
Fiscal 2003 Year-to-Date Period primarily due to an increase in the amount of
loans made during the period. The maturing of the product and a growth in the
number of locations offering the loans contributed to the increase in the loan
balance. In the Fiscal 2004 Year-to-Date Period, 98.1% ($9.7 million) of
recorded payday loan service charge revenue was collected in cash, and 1.9%
($0.2 million) resulted from an increase in accrued payday loan service charges
receivable. In the comparable Fiscal 2003 Year-to-Date Period, 100.7% or $5.8
million of recorded payday loan service charge revenue was collected in cash
offset by a $0.04 million decrease in accrued payday loan service charges
receivable. The Company anticipates continued growth in payday loans as it
continues the expansion of additional EZMONEY Payday Loans stores and the
product matures in its current locations.
The Company provides for a valuation allowance on both the principal and fees
receivable for payday loans. At March 31, 2004, the valuation allowance was $0.3
million, or 4.7% of the payday loan principal and fees receivable, compared to
$0.2 million, or 5.2% of payday loan principal and fees receivable at March 31,
2003. Due to the short-term nature of these loans, the Company uses recent net
default rates and anticipated seasonal changes in the rate of defaults as the
basis for its valuation allowance, rather than reserving the annual or quarterly
rate. Actual loan losses could vary from those estimated due to variance in any
of these factors, as well as any national or regional economic downturn.
Although store operating expenses decreased 4.4 percentage points when measured
as a percentage of net revenues, it increased 6.6% ($2.8 million) in dollar
terms, to $45.7 million. This was due primarily to a $1.2 million volume-related
increase in bad debt from payday loans and an 8.7% ($1.8 million) increase in
store labor and benefits, offset by smaller fluctuations in other operating
expenses.
Administrative expenses increased 40.9% ($3.6 million) from the Fiscal 2003
Year-to-Date Period to $12.2 million, representing a 3.3 percentage point
increase when measured as a percent of net revenues. The primary causes of this
were a $1.0 million increase in accrued incentive compensation related to the
Company's improved performance and $1.3 million for restricted stock awarded to
the Company's Chairman and its Chief Executive Officer as long-term incentives
as discussed in Note H to the Company's Interim Condensed Consolidated Financial
Statements. Also contributing to the increase was $0.7 million related to a
valuation allowance placed on a note receivable from a former Chief Executive
Officer of the Company as discussed in Note J to the Company's Interim Condensed
Consolidated Financial Statements and a $0.5 million increase in professional
fees.
Depreciation and amortization expense decreased $0.7 million in the Fiscal 2004
Year-to-Date Period to $3.8 million. This improvement is primarily due to the
reduction in depreciable assets through the 2003 sale-leaseback of
16
three previously owned locations and assets that became fully depreciated over
the past year, net of additional depreciation on assets placed in service in the
last twelve months.
In the Fiscal 2004 Year-to-Date Period, interest expense decreased by $0.3
million to $0.8 million as a result of lower average debt balances and lower
effective interest rates. At March 31, 2004, the Company's total debt was $15.0
million compared to $28.0 million at March 31, 2003.
The Fiscal 2004 Year-to-Date Period income tax provision was $3.2 million (34.5%
of pretax income) compared to $2.0 million (35% of pretax income) for the Fiscal
2003 Year-to-Date Period. The decrease in effective tax rate between these
periods is due to non-tax deductible items having a smaller percentage impact on
larger pre-tax earnings.
On October 1, 2002, the Company adopted SFAS No. 142 regarding goodwill and
other intangible assets. During the Fiscal 2003 Year-to-Date Period, the Company
completed its transitional impairment tests, resulting in a non-cash $8.0
million, net of tax impairment charge for goodwill, recorded as a cumulative
effect of adopting a new accounting principle.
Operating income for the Fiscal 2004 Year-to-Date Period increased $2.9 million
from the Fiscal 2003 Year-to-Date Period to $9.1 million. This increase was
primarily due to a $3.1 million greater contribution from payday loans, $4.2
million higher gross profit on sales, and a $0.7 million decrease in
depreciation and amortization. Somewhat offsetting these factors were a $4.1
million increase in labor, benefits, and incentive compensation expense and the
$0.7 million valuation allowance placed on a note receivable. After a $0.3
million decrease in interest expense, a $1.1 million increase in income tax
expense, and smaller changes in other non-operating items, income before the
cumulative effect of adopting a new accounting principle improved to $6.0
million in the Fiscal 2004 Year-to-Date Period from $3.8 million in the Fiscal
2003 Year-to-Date Period. The Company's net income for the Fiscal 2004
Year-to-Date Period was $6.0 million, compared to a net loss of $4.3 million
after the cumulative effect of adopting a new accounting principle in the Fiscal
2003 Year-to-Date Period.
LIQUIDITY AND CAPITAL RESOURCES
During the Fiscal 2004 Year-to-Date Period, operating activities provided $11.4
million compared to $8.6 million in the Fiscal 2003 Year-to-Date Period. Payday
loan service charges collected increased $3.9 million in the Fiscal 2004
Year-to-Date Period due primarily to the growth in the underlying loan
portfolio, cash from sales of inventory increased $2.6 million in the Fiscal
2004 Year-to-Date Period compared to the Fiscal 2003 Year-to-Date Period, and
pawn service charges collected in cash increased $0.4 million. Offsetting these
improvements in cash flows were the payments of $1.1 million in payroll taxes
related to the restricted stock awards discussed above, $0.7 million to settle
previously accrued workers' compensation claims, and $0.4 million more in
incentive compensation. Among other smaller changes, the Company also used $0.8
million more in the Fiscal 2004 Year-to-Date Period for the direct purchase of
customers' merchandise.
The Company's investing activities provided $2.3 million of cash during the
Fiscal 2004 Year-to-Date Period, consisting of a $5.9 million reduction in
outstanding pawn loans and a $0.4 million dividend received from the Company's
investment in an unconsolidated affiliate, offset by a $1.0 million increase in
payday loans outstanding and $3.0 million invested in property and equipment.
The cash flow from operating and investing activities and $2.3 million of cash
on hand were used to make payments on the Company's revolving credit facility of
$16.0 million in the Fiscal 2004 Year-to-Date Period.
17
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations in the full fiscal years ending September 30:
Payments due by Period
-----------------------------------------------------------------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
------- ------- ------- ------- -------
Long-term debt obligations $15,000 $ -- $ -- $15,000 $ --
Capital lease obligations -- -- -- -- --
Operating lease obligations 71,449 12,373 20,092 12,888 26,096
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
------- ------- ------- ------- -------
Total $86,449 $12,373 $20,092 $27,888 $26,096
======= ======= ======= ======= =======
In the remaining six months of the fiscal year ending September 30, 2004, the
Company also plans to open an additional 65 to 70 EZMONEY payday loan stores for
an expected aggregate capital expenditure of approximately $1.9 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.
Effective April 8, 2004, the Company amended and restated its credit agreement.
The amendment extends the maturity date to April 1, 2007 and provides for a
$40.0 million revolving credit facility. Under the terms of the amended
agreement, the Company would have had the ability to borrow an additional $25.0
million at March 31, 2004. Advances are secured by the Company's assets. Terms
of the agreement require, among other things, that the Company meet certain
financial covenants. In addition, payment of dividends and additional debt are
allowed but restricted.
The Company anticipates that cash flow from operations and availability under
its revolving credit facility will be adequate to fund its contractual
obligations, planned store growth, capital expenditures, and working capital
requirements during the coming year.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow is greatest in its second fiscal quarter
primarily due to a high level of loan redemptions and sales in the income tax
refund season.
USE OF ESTIMATES AND ASSUMPTIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, inventory, allowance
for losses on payday loans, long-lived and intangible assets, income taxes,
contingencies and litigation. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances. Management uses this information to
make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
the estimates under different assumptions or conditions.
18
DISCLOSURE AND INTERNAL CONTROLS
Based on an assessment of the effectiveness of the Company's disclosure controls
and procedures, accounting policies, and the underlying judgments and
uncertainties affecting the application of those policies and procedures,
management believes that the Company's condensed consolidated financial
statements provide a meaningful and fair perspective of the Company in all
material respects. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation. Management identified no significant
deficiencies or material weaknesses in internal controls. Other risk factors,
such as those discussed elsewhere in this interim report as well as changes in
business strategies, could adversely impact the consolidated financial position,
results of operations, and cash flows in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold prices. The Company also is exposed to regulatory risk in relation to its
payday loans. The Company does not use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
prices and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold prices. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold prices cannot be reasonably estimated.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its debt, all of which is variable-rate debt. If
interest rates average 50 basis points more during the remaining six months of
the fiscal year ending September 30, 2004 than they did in the comparable period
of 2003, the Company's interest expense during those six months would increase
by approximately $38,000. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's variable-rate debt at March 31,
2004.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment, net of tax, representing the strengthening in the
U.K. pound during the quarter ended December 31, 2003 (included in the Company's
March 31, 2004 results on a three-month lag as described above) was
approximately a $190,000 increase to stockholders' equity. On March 31, 2004,
the U.K. pound closed at 1.00 to 1.8262 U.S. dollars, a strengthening from
1.7785 at December 31, 2003. 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
19
speak only as of the date hereof. The Company undertakes no obligations to
release publicly the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances after the date
hereon, including without limitation, changes in the Company's business strategy
or planned capital expenditures, or to reflect the occurrence of unanticipated
events.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
its Senior Vice President and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's "disclosure controls and procedures,"
which are defined under SEC rules as controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Based upon that
evaluation, the Company's President and Chief Executive Officer and Senior Vice
President and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
(c) Limitations on Controls
Notwithstanding the foregoing, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Moreover, the design of any system of controls is also
based in part upon certain assumptions about the likelihood of future events.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory actions
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 operation, or liquidity. There can be no assurance, however, as to
the ultimate outcome of these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By written consent dated February 10, 2004, the holder of a majority of the
Company's Class B voting common stock ratified the audit committee's
re-appointment of Ernst & Young LLP as the Company's independent auditors for
the fiscal year ending September 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Incorporated by
Number Description Reference to
------ ----------- ------------
10.89 Third Amended and Restated Credit Agreement between the Company
and Wells Fargo Bank, N.A., as Agent and Issuing Bank, re: $40
million Credit Facility
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 4/20/04 Item 12 - Results Quarterly earnings announcement and related press
of Operations and release.
Financial
Condition
21
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 7, 2004 By:/s/ DAN N. TONISSEN
----------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
22
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to Page
- ------ ----------- ------------ ----
10.89 Third Amended and Restated Credit 24
Agreement between the Company and Wells
Fargo Bank, N.A., as Agent and Issuing
Bank, re: $40 million Credit Facility
31.1 Certification of Chief Executive 83
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial 84
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive 85
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial 86
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
23