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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 000-19424
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EZCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
-------- ----------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
-------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(512) 314-3400
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
--
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of June 30, 2005, 11,456,410 shares of the registrant's Class A Non-voting
Common Stock, par value $.01 per share and 990,057 shares of the registrant's
Class B Voting Common Stock, par value $.01 per share were outstanding.
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EZCORP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2005, June 30, 2004 and September
30, 2004 .................................................................................. 1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended June 30, 2005 and 2004 .............................................................. 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2005
and 2004 .................................................................................. 3
Notes to Interim Condensed Consolidated Financial Statements .............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........................... 22
Item 4. Controls and Procedures .............................................................. 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ................................. 24
Item 6. Exhibits and Reports on Form 8-K .................................................... 24
SIGNATURE .............................................................................................. 25
EXHIBIT INDEX .......................................................................................... 26
CERTIFICATIONS
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, June 30, September 30,
2005 2004 2004
-------- -------- -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 1,972 $ 1,692 $ 2,506
Pawn loans 50,888 51,101 49,078
Payday loans, net 11,089 6,720 7,292
Pawn service charges receivable, net 9,020 8,557 8,679
Payday loan service charges receivable, net 2,244 1,336 1,474
Inventory, net 28,956 30,997 30,636
Deferred tax asset 9,711 8,163 9,711
Federal income taxes receivable - 253 -
Note receivable from related party 1,500 - -
Prepaid expenses and other assets 3,197 2,287 2,321
-------- -------- --------
Total current assets 118,577 111,106 111,697
Investment in unconsolidated affiliate 17,110 15,734 16,101
Property and equipment, net 26,147 25,222 25,846
Note receivable from related party - 1,500 1,500
Deferred tax asset, non-current 4,946 4,391 4,946
Other assets, net 4,205 4,102 4,232
-------- -------- --------
Total assets $170,985 $162,055 $164,322
======== ======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 13,651 $ 11,465 $ 14,947
Customer layaway deposits 1,559 1,554 1,645
Federal income taxes payable 1,452 - 2,043
-------- -------- --------
Total current liabilities 16,662 13,019 18,635
Long-term debt 21,900 31,200 25,000
Deferred gains and other long-term liabilities 3,687 4,048 3,958
-------- -------- --------
Total long-term liabilities 25,587 35,248 28,958
Commitments and contingencies - - -
Stockholders' equity:
Preferred Stock, par value $.01 per share; Authorized
5,000,000 shares; none issued and outstanding - - -
Class A Non-voting Common Stock, par value $.01 per
share;
Authorized 40,000,000 shares; 11,465,443 issued and
11,456,410 outstanding at June 30, 2005; 11,180,201 issued
and 11,171,168 outstanding at June 30, 2004; 11,181,401
issued and 11,172,368 outstanding at September 30, 2004 115 112 112
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; Issued
1,190,057; Outstanding 990,057 at June 30, 2005 and
1,190,057 at June 30, 2004 and September 30, 2004 10 12 12
Additional paid-in capital 116,932 116,680 116,683
Retained earnings (deficit) 11,009 (2,911) (38)
Deferred compensation expense (391) (978) (832)
-------- -------- --------
127,675 112,915 115,937
Treasury stock - Class A, at cost (35) (35) (35)
Accumulated other comprehensive income 1,096 908 827
-------- -------- --------
Total stockholders' equity 128,736 113,788 116,729
-------- -------- --------
Total liabilities and stockholders' equity $170,985 $162,055 $164,322
======== ======== ========
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
-------- -------- -------- --------
(In thousands, except per share amounts)
Revenues:
Sales $ 30,994 $ 30,782 $107,577 $102,711
Pawn service charges 14,722 13,835 46,073 43,875
Payday loan service charges 10,231 6,191 26,349 16,124
Other 303 333 977 1,034
-------- -------- -------- --------
Total revenues 56,250 51,141 180,976 163,744
Cost of goods sold 18,421 19,340 64,235 61,130
-------- -------- -------- --------
Net revenues 37,829 31,801 116,741 102,614
Operating expenses:
Operations 23,693 21,830 70,384 64,382
Bad debt and other payday loan direct expenses 3,413 2,832 6,517 5,957
Administrative 5,506 4,614 17,169 16,854
Depreciation 2,041 1,840 5,965 5,579
Amortization 17 18 51 59
-------- -------- -------- --------
Total operating expenses 34,670 31,134 100,086 92,831
-------- -------- -------- --------
Operating income 3,159 667 16,655 9,783
Interest expense, net 302 332 916 1,153
Loss on sale/disposal of assets 36 - 79 -
Equity in net income of unconsolidated affiliate (505) (430) (1,601) (1,291)
-------- -------- -------- --------
Income before income taxes 3,326 765 17,261 9,921
Income tax expense 1,197 512 6,214 3,671
-------- -------- -------- --------
Net income $ 2,129 $ 253 $ 11,047 $ 6,250
======== ======== ======== ========
Income per common share:
Basic $ 0.17 $ 0.02 $ 0.89 $ 0.51
======== ======== ======== ========
Assuming dilution $ 0.16 $ 0.02 $ 0.82 $ 0.48
======== ======== ======== ========
Weighted average shares outstanding:
Basic 12,443 12,275 12,403 12,221
Assuming dilution 13,434 13,221 13,507 13,138
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
-----------------
2005 2004
--------- ---------
(In thousands)
Operating Activities:
Net income $ 11,047 $ 6,250
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,016 5,638
Payday loan loss provision 5,635 5,216
Impairment of receivable - 729
Net loss on sale or disposal of assets 79 -
Deferred compensation expense 441 392
Income from investment in unconsolidated affiliate (1,601) (1,291)
Changes in operating assets and liabilities:
Service charges receivable, net (1,111) (168)
Inventory 208 (141)
Prepaid expenses, other current assets, and other assets, net (900) (364)
Accounts payable and accrued expenses (1,230) 432
Customer layaway deposits (86) (238)
Deferred gains and other long-term liabilities (271) (271)
Federal income taxes (591) 75
--------- ---------
Net cash provided by operating activities 17,636 16,259
Investing Activities:
Pawn loans made (123,870) (126,365)
Pawn loans repaid 69,892 69,809
Recovery of pawn loan principal through sale of forfeited collateral 53,640 52,309
Payday loans made (51,642) (36,357)
Payday loans repaid 42,210 28,051
Additions to property and equipment (6,339) (5,431)
Dividends from unconsolidated affiliate 861 681
--------- ---------
Net cash used in investing activities (15,248) (17,303)
Financing Activities:
Proceeds from exercise of stock options 178 446
Debt issuance costs - (406)
Net proceeds from (payments on) bank borrowings (3,100) 200
--------- ---------
Net cash provided by (used in) financing activities (2,922) 240
--------- ---------
Change in cash and cash equivalents (534) (804)
Cash and cash equivalents at beginning of period 2,506 2,496
--------- ---------
Cash and cash equivalents at end of period $ 1,972 $ 1,692
========= =========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 52,168 $ 53,410
Foreign currency translation adjustment $ 269 $ 423
Issuance of common stock to 401(k) plan $ 72 $ 70
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2005
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. The accompanying financial
statements should be read with the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2004 ("Fiscal 2004"). The balance sheet at September 30, 2004 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The Company's business is subject to seasonal variations, and operating results
for the three-month and nine-month periods ended June 30, 2005 are not
necessarily indicative of the results of operations for the full fiscal year.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of collectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of collectible
loans, affecting the Company's earnings and financial condition.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans and related service charges
reported in the Company's consolidated financial statements reflect only the
Company's participation interest in these loans. The Company accrues service
charges on the percentage of loans the Company deems to be collectible using the
interest method. Accrued service charges related to defaulted loans are deducted
from service charge revenue upon loan default, and increase service charge
revenue upon subsequent collection.
BAD DEBT AND OTHER PAYDAY LOAN DIRECT EXPENSES: The Company considers a loan
defaulted if the loan has not been repaid or renewed by the maturity date.
Although defaulted loans may be collected later, the Company charges defaulted
loan principal to bad debt upon default, leaving only active loans in the
reported balance. Subsequent collections of principal are recorded as a
reduction of bad debt at the time of collection. The Company's payday loan net
defaults, included in bad debt and other payday loan direct expenses, were $2.9
million and $5.5 million, representing 5.2% and 3.8% of loans made in the
three-month and nine-month periods ended June 30, 2005 (the "Fiscal 2005 Third
Quarter" and the "Fiscal 2005 Year-to-Date Period," respectively.) Excluding the
benefit of a $0.9 million sale of older bad debt, net defaults for the
nine-month period ended June 30, 2005 were $6.4 million, or 4.4% of loans made
during the nine-month period. In the comparable 2004 periods (the "Fiscal 2004
Third Quarter" and the "Fiscal 2004 Year-to-Date Period"), payday loan net
defaults were $2.3 million and $5.0 million, representing 6.6% and 5.6%,
respectively, of loans made.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: The Company also provides an allowance for
losses on active payday loans and related service charges receivable, based on
recent loan default experience and expected seasonal variations. Changes in the
principal valuation allowance are charged to bad debt expense in the Company's
statement of operations. Changes in the service charge receivable valuation
allowance are charged to payday loan service charge revenue.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on recent shrinkage
levels, the type and age of merchandise, and recent sales trends and margins. At
June 30, 2005, June 30, 2004, and September 30, 2004, the valuation allowance
deducted from the carrying value of inventory was
4
$1.9 million, $1.7 million, and $1.5 million (6.0%, 5.1%, and 4.8% of gross
inventory), respectively. Changes in the inventory valuation allowance are
recorded as cost of goods sold.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses tangible
long-lived assets for potential impairment whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
that could trigger an impairment review include the following: significant
underperformance relative to historical or projected future cash flows,
significant changes in the manner of use of the assets or the strategy for the
overall business, and significant negative industry trends. When management
determines that the carrying value of tangible long-lived assets may not be
recoverable, impairment is measured based on the excess of the assets' carrying
value over the estimated fair value. No impairment of tangible long-lived assets
has been recognized in the Fiscal 2005 or 2004 Year-to-Date Periods.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. As
part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each jurisdiction in which it
operates. This process involves estimating the actual current tax liability
together with assessing temporary differences in recognition of income for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income. In the event the Company were to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, a valuation allowance would be charged to the income tax
provision in the period such determination were made. Likewise, should the
Company determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, a decrease to a valuation
allowance would increase income in the period such determination was made. The
Company evaluates the realizability of its deferred tax assets quarterly by
assessing the need for a valuation allowance, if any. As of June 30, 2005, June
30, 2004 and September 30, 2004, the Company did not have a valuation allowance
on its deferred tax assets.
STOCK-BASED COMPENSATION: The Company accounts for its stock-based compensation
plans in accordance with the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB 25"). Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure,"
encourages expensing the fair value of employee stock options, but allows an
entity to continue to account for stock based compensation to employees under
APB 25 with disclosures of the pro forma effect on net income had the fair value
accounting provisions of SFAS No. 123 been adopted. The Company has calculated
the fair value of options granted in these periods using the Black-Scholes
option-pricing model and has determined the pro forma impact on net income. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period.
5
The following table presents the pro forma effect on net income if the Company
had applied the fair value recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, to stock-based compensation:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
--------- --------- --------- ---------
(In thousands, except per share amounts)
Net income, as reported $ 2,129 $ 253 $ 11,047 $ 6,250
Add: stock-based employee compensation expense
included in reported net income, net of
related tax effects 95 95 286 255
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (260) (223) (778) (644)
--------- --------- --------- ---------
Pro forma net income $ 1,964 $ 125 $ 10,555 $ 5,861
========= ========= ========= =========
Earnings per share - basic:
As reported $ 0.17 $ 0.02 $ 0.89 $ 0.51
Pro forma $ 0.16 $ 0.01 $ 0.85 $ 0.48
Earnings per share - assuming dilution:
As reported $ 0.16 $ 0.02 $ 0.82 $ 0.48
Pro forma $ 0.15 $ 0.01 $ 0.78 $ 0.45
See Note I, "Common Stock, Warrants, and Options" and Note J, "Recent
Pronouncements: Share-Based Payment - SFAS No. 123 (revised 2004)."
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $65.2 million, $57.7 million and $59.3 million at June 30, 2005,
June 30, 2004, and September 30, 2004, respectively.
OPERATING LEASES: In a letter dated February 7, 2005, the Office of the Chief
Accountant of the Securities and Exchange Commission expressed to the American
Institute of Certified Public Accountants its interpretation of the rules for
accounting for operating leases. In the quarter ended March 31, 2005, the
Company performed a review of its lease accounting practices to ensure
compliance with this letter. Consistent with industry practices, the Company
historically recorded rent expense on a straight-line basis over the initial
non-cancelable lease term. The Company has concluded that the calculation of
straight-line rent should include lease renewal options that are reasonably
assured, as defined in SFAS 98, "Accounting for Leases." As a result, the
Company determined that rent expense was understated in previous periods by a
cumulative amount of $0.3 million, which was recorded as operations expense in
the quarter ended March 31, 2005. No prior periods were restated as the amount
was not material to any quarterly or annual period or to the Company's financial
position in any period. The adjustment did not affect historical or future net
cash flows or the timing of payments under related leases. The Company also
reassessed the depreciable lives of its leasehold improvements to be the shorter
of their estimated useful life or the reasonably assured lease term at the
inception of the lease. This resulted in no cumulative difference, but did
result in a $0.1 million increase in current depreciation expense in the quarter
ended March 31, 2005.
RECLASSIFICATIONS: Certain prior year balances have been reclassified to conform
to the Fiscal 2005 presentation.
6
NOTE C: EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
------- ------- ------- -------
(In thousands, except per share amounts)
Numerator
Numerator for basic and diluted earnings per share: net
income $ 2,129 $ 253 $11,047 $ 6,250
======= ======= ======= =======
Denominator
Denominator for basic earnings per share: weighted
average shares 12,443 12,275 12,403 12,221
Effect of dilutive securities:
Options and warrants 854 866 973 860
Restricted common stock grants 137 80 131 57
------- ------- ------- -------
Dilutive potential common shares 991 946 1,104 917
------- ------- ------- -------
Denominator for diluted earnings per share: adjusted
weighted average shares and assumed conversions 13,434 13,221 13,507 13,138
======= ======= ======= =======
Basic earnings per share $ 0.17 $ 0.02 $ 0.89 $ 0.51
======= ======= ======= =======
Diluted earnings per share $ 0.16 $ 0.02 $ 0.82 $ 0.48
======= ======= ======= =======
The following table presents the weighted average shares subject to options
outstanding during the periods indicated. Anti-dilutive options, warrants, and
restricted stock grants have been excluded from the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common shares and, therefore, the effect would be
anti-dilutive.
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
2005 2004 2005 2004
----------- ---------- ---------- ----------
Total options outstanding
Weighted average shares subject to options 2,079,044 2,362,426 2,117,348 2,299,275
Average exercise price per share $ 6.99 $ 6.86 $ 6.89 $ 6.53
Anti-dilutive options outstanding
Weighted average shares subject to options 167,000 320,982 108,595 1,018,901
Average exercise price per share $ 13.41 $ 13.42 $ 14.04 $ 11.01
NOTE D: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 29% of the total outstanding shares. The investment is
accounted for using the equity method. Since A&B's fiscal year ends three months
prior to the Company's fiscal year, the income reported by the Company for its
investment in A&B is on a three-month lag. In accordance with United Kingdom
securities regulations, A&B files only semi-annual financial reports, for its
fiscal periods ending December 31 and June 30. The Company estimates A&B's
results of operations for the March 31 quarter for its financial statements. The
income reported for the Company's Fiscal 2005 Year-to-Date Period represents its
percentage interest in the results of A&B's operations from July 1, 2004 to
March 31, 2005, as estimated.
7
Below is summarized financial information for A&B's most recently reported
results (using average exchange rates for the periods indicated):
Six Months Ended December 31,
-----------------------------
2004 2003
-------- --------
(In thousands)
Turnover (gross revenues) $ 23,399 $ 19,726
Gross profit 16,243 13,164
Profit after tax (net income) 3,799 2,977
NOTE E: CONTINGENCIES
From time to time, the Company is involved in litigation and regulatory matters
arising from its normal business operations. Currently, the Company is a party
in several matters, some of which involve claims for substantial amounts. While
the ultimate outcome of these matters cannot be determined, after consultation
with counsel, the Company believes the resolution of these matters 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 matters or that other matters will not be asserted.
NOTE F: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total stockholders' equity. Comprehensive income for the Fiscal 2005 Third
Quarter was $2.0 million and comprehensive income for the Fiscal 2005
Year-to-Date Period was $11.3 million. For the comparable 2004 periods,
comprehensive income was $0.4 million and $6.7 million, respectively. The
difference between comprehensive income and net income results primarily from
the effect of foreign currency translation adjustments determined in accordance
with SFAS No. 52, "Foreign Currency Translation." The accumulated balance of
foreign currency activity excluded from net income is presented as "Accumulated
other comprehensive income" in the Condensed Consolidated Balance Sheets, and
amounted to $1.1 million ($1.7 million, net of tax of $0.6 million) at June 30,
2005.
NOTE G: LONG-TERM DEBT
At June 30, 2005, the Company's credit agreement provided for a $40.0 million
revolving credit facility with a maturity date of April 1, 2007. Advances are
secured by the Company's assets. The Company may choose either a Eurodollar rate
or the agent bank's base rate. Interest accrues at the Eurodollar rate plus 150
to 275 basis points or the agent bank's base rate plus 0 to 125 basis points,
depending on the leverage ratio computed at the end of each quarter. At June 30,
2005, the effective rate was 5.23% based on the Company's leverage ratio. The
Company also pays a commitment fee of 37.5 basis points on the unused amount of
the revolving facility. Terms of the agreement require, among other things, that
the Company meet certain financial covenants. Payment of dividends and
additional debt are allowed but restricted.
NOTE H: GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." Under the provisions of
SFAS No. 142, goodwill and other intangible assets having indefinite lives are
not subject to amortization but are tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the assets might
be impaired. At each balance sheet date presented above, the balance of pawn
licenses - the only major class of indefinite lived intangible assets at each of
these dates - was $1.5 million.
8
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible assets at the
specified dates:
June 30, 2005 June 30, 2004 September 30, 2004
------------- ------------- ------------------
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $ (218) $ 345 $ (187) $ 345 $ (195)
Real estate finders' fees 554 (289) 554 (271) 554 (277)
Non-compete agreements 388 (253) 388 (233) 388 (238)
-------- ------------ -------- ------------ -------- ------------
Total $ 1,287 $ (760) $ 1,287 $ (691) $ 1,287 $ (710)
======== ============ ======== ============ ======== ============
Total amortization expense from definite-lived intangible assets for the Fiscal
2005 Third Quarter and Fiscal 2005 Year-to-Date Period was approximately $17,000
and $51,000, respectively. In comparison, the amortization expense for the
Fiscal 2004 Third Quarter and the Fiscal 2004 Year-to-Date Period was
approximately $18,500 and $59,000, respectively. The following table presents
the Company's estimate of amortization expense for definite lived intangible
assets for each of the five succeeding fiscal years as of October 1, 2004 (in
thousands):
Fiscal Year Amortization Expense
- ----------- --------------------
2005 $ 68
2006 67
2007 67
2008 66
2009 57
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
NOTE I: COMMON STOCK, WARRANTS, AND OPTIONS
The Company accounts for its stock-based compensation plans as described in Note
B, "Significant Accounting Policies."
On September 17, 2003, the Compensation Committee of the Board of Directors
approved an award of 125,000 shares of restricted stock to the Chairman of the
Board. The Company also agreed to reimburse the Chairman for the income tax
consequences resulting from the award. The market value of the restricted stock
on the award date was $0.8 million, which is being amortized over the two-year
restriction period expiring September 17, 2005. During the Fiscal 2005 Third
Quarter and the Fiscal 2005 Year-to-Date Period, $0.1 million and $0.3 million,
respectively, of this cost was amortized to expense. During the Fiscal 2004
Third Quarter and the Fiscal 2004 Year-to-Date Period, $0.1 million and $0.3
million, respectively, of this cost was amortized to expense. In the quarter
ended December 31, 2003, the Company also reimbursed $0.8 million for the
Chairman's one-time taxes related to the award. The reimbursement was charged to
administrative expense.
On January 15, 2004, the Compensation Committee of the Board of Directors
approved an award of 60,000 shares of restricted stock to the Company's Chief
Executive Officer. The shares will vest no later than January 1, 2009, provided
he remains continuously employed by the Company through the vesting date. The
shares are subject to earlier vesting based on the occurrence of certain
objectives. The Company also agreed to reimburse him for the income tax
consequences resulting from the award. The market value of the restricted stock
on the award date was $0.6 million, which is being amortized over a three-year
period based on the Company's expectation that the earlier vesting objectives
will be met. During the Fiscal 2005 Third Quarter and the Fiscal 2005
Year-to-Date Period, $0.05 million and $0.15 million, respectively, of this cost
was amortized to expense. During the Fiscal 2004 Third Quarter and the Fiscal
2004 Year-to-Date Period, $0.05 million and $0.1 million, respectively, of this
cost was amortized to expense. The Company expects to amortize an additional
$0.05 million of stock compensation cost related to this award during the
remaining three months of the fiscal year ending September 30, 2005. In the
quarter ended March 31, 2004, the Company also reimbursed $0.3 million for the
Chief Executive Officer's one-time taxes related to the award. The reimbursement
was charged to administrative expense.
9
Stock option exercises resulted in the issuance of 18,600 shares of Class A
Common Stock for total proceeds of approximately $38,000 during the Fiscal 2005
Third Quarter and 80,058 shares of Class A Common Stock for total proceeds of
approximately $178,000 during the Fiscal 2005 Year-to-Date Period.
Stock option exercises resulted in the issuance of 162,800 shares of Class A
Common Stock for total proceeds of approximately $442,000 during the Fiscal 2004
Third Quarter and 164,600 shares of Class A Common Stock for total proceeds of
approximately $446,000 during the Fiscal 2004 Year-to-Date Period.
The Company issued 3,984 shares of Class A Common Stock during the Fiscal 2005
Year-to-Date Period and 8,737 shares of Class A Common Stock during the Fiscal
2004 Year-to-Date Period to the Company's 401(k) Plan and Trust representing the
Company's match of employees' contributions.
In accordance with conversion rights authorized by the Company's Certificate of
Incorporation, the holder of the Company's Class B Voting Common Stock converted
200,000 shares of Class B Voting Common Stock to Class A Non-Voting Common Stock
in a series of transactions in the quarter ended March 31, 2005. The 200,000
shares of Class A Non-Voting Common Stock issued as a result of the conversion
were sold in open market transactions at the time of the related conversions.
The 200,000 shares of Class B Voting Common Stock converted are held as treasury
shares. The Company also holds 9,033 shares of Class A Non-voting Common Stock
in treasury, the cost of which is included in the Condensed Consolidated Balance
Sheets.
NOTE J: RECENT PRONOUNCEMENTS: SHARE-BASED PAYMENT - SFAS NO. 123 (REVISED 2004)
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), "Share Based Payment" ("SFAS No. 123R"). The statement revises
SFAS No. 123 and supersedes APB 25, under which the Company currently accounts
for its share-based payments to its employees. SFAS No. 123R will be effective
for the Company beginning October 1, 2005, and will require the Company to
recognize as expense the grant-date fair value of share-based payments made to
employees. Pro forma disclosure will no longer be an alternative. SFAS No. 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This requirement will
reduce net operating cash flows and increase net financing cash flows in periods
after adoption.
SFAS No. 123R permits public companies to adopt its requirements using one of
two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the
effective date of SFAS No. 123R that remain unvested on the
effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
Management has not yet determined the transition method it intends to use or the
impact that adoption of this pronouncement will have on its financial position
or results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report. See "Risk Factors"
on page 21 of this report.
Third Quarter Ended June 30, 2005 vs. Third Quarter Ended June 30, 2004
The following table presents selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended June 30, 2005 and
2004 ("Fiscal 2005 Third Quarter" and "Fiscal 2004 Third Quarter,"
respectively):
Three Months Ended % or
June 30,(a) Point
2005 2004 Change(b)
-------- -------- ---------
Net revenues:
Sales $ 30,994 $ 30,782 0.7%
Pawn service charges 14,722 13,835 6.4%
Payday loan service charges 10,231 6,191 65.3%
Other 303 333 (9.0)%
-------- --------
Total revenues 56,250 51,141 10.0%
Cost of goods sold 18,421 19,340 (4.8)%
-------- --------
Net revenues $ 37,829 $ 31,801 19.0%
======== ========
Other data:
Gross margin 40.6% 37.2% 3.4 pts.
Average annual inventory turnover 2.7x 2.6x 0.1 x
Average inventory per pawn location at quarter-end $ 103 $ 111 (7.2)%
Average pawn loan balance per pawn location at $ 182 $ 183 (0.5)%
quarter-end
Average yield on pawn loan portfolio 130% 119% 11 pts.
Pawn loan redemption rate 78% 77% 1 pt.
Average payday loan balance per location offering
payday loans at quarter-end $ 35.1 $ 24.5 43.3%
Payday loan net defaults 5.2% 6.6% (1.4)pts.
Same store merchandise sales growth 1.0% 3.9% (2.9)pts.
Same store pawn service charge growth 6.4% 1.6% 4.8 pts.
Same store payday loan service charge growth 38.8% 90.1% (51.3)pts.
Expenses and income as a percentage of net revenues (%):
Operations 62.6 68.6 (6.0)pts.
Bad debt and other payday loan direct expenses 9.0 8.9 0.1 pts.
Administrative 14.6 14.5 0.1 pts.
Depreciation and amortization 5.4 5.8 (0.4)pts.
Interest expense, net 0.8 1.0 (0.2)pts.
Income before income taxes 8.8 2.4 6.4 pts.
Net income 5.6 0.8 4.8 pts.
Stores in operation:
Beginning of period 472 335
New openings 12 30
Sold, combined or closed 1 -
-------- --------
End of period 483 365
======== ========
Average number of stores during the period 477 351
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY payday loan locations adjoining EZPAWNs 144 69
EZMONEY payday loan locations - free standing 59 16
-------- --------
Total stores in operation 483 365
======== ========
EZPAWN locations offering payday loans 112 188
Total locations offering payday loans, including call
center 316 274
a In thousands, except percentages, inventory turnover and store count.
b In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
11
Nine Months Ended June 30, 2005 vs. Nine Months Ended June 30, 2004
The following table presents selected, unaudited, consolidated financial data
with respect to the Company for the nine-month periods ended June 30, 2005 and
2004 ("Fiscal 2005 Year-to-Date Period" and "Fiscal 2004 Year-to-Date Period,"
respectively):
Nine Months Ended % or
June 30,(a) Point
2005 2004 Change(b)
--------- --------- ---------
Net revenues:
Sales $ 107,577 $ 102,711 4.7%
Pawn service charges 46,073 43,875 5.0%
Payday loan service charges 26,349 16,124 63.4%
Other 977 1,034 (5.5)%
--------- ---------
Total revenues 180,976 163,744 10.5%
Cost of goods sold 64,235 61,130 5.1%
--------- ---------
Net revenues $ 116,741 $ 102,614 13.8%
========= =========
Other data:
Gross margin 40.3% 40.5% (0.2)pts.
Average annual inventory turnover 2.9x 2.6x 0.3x
Average inventory per pawn location at quarter-end $ 103 $ 111 (7.2)%
Average pawn loan balance per pawn location at $ 182 $ 183 (0.5)%
quarter-end
Average yield on pawn loan portfolio 137% 128% 9pts.
Pawn loan redemption rate 78% 77% 1pt.
Average payday loan balance per location offering
payday loans at quarter-end $ 35.1 $ 24.5 43.3%
Payday loan net defaults 3.8% 5.6% (1.8)pts.
Same store merchandise sales growth 1.5% 2.4% (0.9)pts.
Same store pawn service charge growth 5.0% 0.7% 4.3pts.
Same store payday loan service charge growth 38.2% 75.7% (37.5)pts.
Expenses and income as a percentage of net revenues (%):
Operations 60.3 62.7 (2.4)pts.
Bad debt and other payday loan direct expenses 5.6 5.8 (0.2)pts.
Administrative 14.7 16.4 (1.7)pts.
Depreciation and amortization 5.2 5.5 (0.3)pts.
Interest expense, net 0.8 1.1 (0.3)pts.
Income before income taxes 14.8 9.7 5.1 pts.
Net income 9.5 6.1 3.4 pts.
Stores in operation:
Beginning of period 405 284
New openings 79 81
Sold, combined or closed 1 -
--------- ---------
End of period 483 365
========= =========
Average number of stores during the period 451 321
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY payday loan locations adjoining EZPAWNs 144 69
EZMONEY payday loan locations - free standing 59 16
--------- ---------
Total stores in operation 483 365
========= =========
EZPAWN locations offering payday loans 112 188
Total locations offering payday loans, including call 316 274
center
a In thousands, except percentages, inventory turnover and store count.
b In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
12
OVERVIEW
The Company meets the short-term cash needs of the cash and credit constrained
consumer by offering convenient, non-recourse loans secured by tangible personal
property, commonly known as pawn loans, and short-term non-collateralized loans,
often referred to as payday loans. The Company makes pawn loans in its 280
EZPAWN locations and offers payday loans in 112 of its EZPAWN locations, 203
EZMONEY Mono-line payday loan locations ("EZMONEY stores"), and through its
Austin, Texas based call center.
The Company earns pawn service charge revenue on its pawn loans. While allowable
service charges vary by state and by amount of the loan, a majority of the
Company's pawn loans are in amounts that permit pawn service charges of 20% per
month or 240% annually. The Company's average pawn loan amount has historically
averaged between $70 and $75, but varies depending on the valuation of each item
pawned. The allowable term of pawn loans also differs by state, but is typically
30 days with a 60-day grace period.
The Company earns payday loan service charge revenue on its payday loans. The
Company markets and services payday loans made by County Bank of Rehoboth Beach
("County Bank"), a federally insured Delaware bank, in 256 locations and its
call center. After origination of the loans, the Company may purchase a 90%
participation in the loans made by County Bank and marketed by the Company. In
59 of its locations, the Company makes payday loans under state law. The average
payday loan amount is approximately $405 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.
Effective July 15, 2005, 177 of the Company's Texas EZMONEY stores ceased
marketing County Bank payday loans. These EZMONEY stores registered as a Credit
Services Organization ("CSO") under Chapter 393 of the Texas Finance Code and
now provide fee-based advice, services and assistance to customers in obtaining
loans from an unaffiliated lender. The new CSO services include evaluating the
customers' creditworthiness using the Company's underwriting criteria.
Additionally, the Company's CSO services include issuing a letter of credit to
the unaffiliated lender on behalf of the Company's eligible customers to assist
them in obtaining a loan from the lender. In exchange for its CSO services, the
Company charges a fee of 20% of the principal loan amount. The lender's approval
or denial of loans to the customers is based on its independently defined
underwriting criteria. If the customers default on the loan, the unaffiliated
lender may make demand on the Company to pay under the letter of credit. The
Company would then attempt collection of the customers' obligations to the
Company on the letter of credit. The customers' letter of credit obligations
include unpaid principal, interest, and fees for insufficient funds, if any.
Operations are unchanged in all remaining stores. See "Risk Factors" discussed
on page 21 of this Form 10-Q.
In its 280 EZPAWN locations, the Company sells merchandise acquired primarily
through pawn loan forfeitures and, to a lesser extent, through purchases of
customer merchandise. The realization of gross profit on sales of inventory
depends primarily on the Company's assessment of the property's resale value.
Improper assessment of the resale value of the collateral in the lending or
purchasing process can result in the realization of a lower margin or reduced
marketability of the property.
In the Fiscal 2005 Third Quarter, the Company realized a 65% increase in payday
loan service charges while bad debt and other payday loan direct expense
measured as a percent of payday loan service charges declined 13 percentage
points to 33%. Gross profit from sales improved 10% primarily due to margin
improvement. Pawn service charge revenues improved 6% primarily due to improved
yields resulting from improved pawn loan redemptions and a statutory increase in
pawn service charge rates in its Colorado market. The Company's net income
improved to $2.1 million in the Fiscal 2005 Third Quarter from $0.3 million in
the Fiscal 2004 Third Quarter.
13
RESULTS OF OPERATIONS
Third Quarter Ended June 30, 2005 vs. Third Quarter Ended June 30, 2004
The following discussion compares the results of operations for the Fiscal 2005
Third Quarter to the Fiscal 2004 Third Quarter. The discussion should be read in
conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2005 Third Quarter pawn service charge revenue increased
6.4%, or $0.9 million from the Fiscal 2004 Third Quarter to $14.7 million. This
increase was due to an eleven percentage point improvement in loan yields to
130%, offset by lower average loan balances during the Fiscal 2005 Third
Quarter. The increase in loan yields was due to the Company's efforts to improve
loan redemption rates and a statutory increase in pawn service charge rates in
its twenty-four Colorado stores. The Company's average balance of pawn loans
outstanding during the Fiscal 2005 Third Quarter was 2.3% lower and ending pawn
loans outstanding were 0.4% lower than in the Fiscal 2004 Third Quarter. The
Company believes the decrease in average pawn loan balance compared to the prior
year period is due to tighter underwriting in its pawn lending operation.
In the Fiscal 2005 Third Quarter, 91.2% ($13.4 million) of pawn service charge
revenue was collected in cash, and 8.8% ($1.3 million) resulted from an increase
in accrued pawn service charges receivable. In the comparable Fiscal 2004 Third
Quarter, 94.7% ($13.1 million) of pawn service charge revenue was collected in
cash and 5.3% ($0.7 million) resulted from an increase in accrued pawn service
charges receivable. The accrual of pawn service charges is dependent on the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company decreased its
estimate of collectible loans at June 30, 2005 in anticipation of lower loan
redemptions following the summer lending season.
Sales increased $0.2 million in the Fiscal 2005 Third Quarter compared to the
Fiscal 2004 Third Quarter, to $31.0 million, due to an increase in same store
sales. The table below summarizes the sales volume, gross profit, and gross
margins on the Company's sales during the quarters presented:
Quarter Ended June 30,
----------------------
2005 2004
---- ----
(Dollars in millions)
Merchandise sales $ 26.1 $ 25.9
Jewelry scrapping sales 4.9 4.9
------ ------
Total sales 31.0 30.8
Gross profit on merchandise sales $ 11.3 $ 10.3
Gross profit on jewelry scrapping sales 1.2 1.2
Gross margin on merchandise sales 43.4% 39.8%
Gross margin on jewelry scrapping sales 25.5% 23.6%
Overall gross margin on sales 40.6% 37.2%
The Fiscal 2005 Third Quarter overall gross margin on sales increased 3.4
percentage points from the Fiscal 2004 Third Quarter to 40.6%. This resulted
primarily from an improvement in margins on same store merchandise sales,
combined with the effect of improved gross margins on jewelry scrapping sales.
Margins on merchandise sales improved largely due to the $0.2 million reduction
in the inventory valuation allowance during the Fiscal 2005 Third Quarter,
compared to the $0.7 million increase in the allowance during the comparable
2004 quarter. The difference in inventory valuation allowance is due to the more
effective liquidation of aged general merchandise in the Fiscal 2005 Third
Quarter and the larger gross inventory balance in 2004. 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 1.4% of merchandise sales in the Fiscal 2005 Third Quarter compared to
1.6% in the Fiscal 2004 Third Quarter.
14
Payday loan data are as follows:
Quarter Ended June 30,
----------------------
2005 2004
---- ----
(Dollars in thousands)
Service charge revenue $ 10,231 $ 6,191
Bad debt:
Net defaults on loans (2,928) (2,297)
Change in valuation allowance (259) (293)
NSF fees collected and other related costs 44 31
-------- -------
Net bad debt (3,143) (2,559)
Other direct transaction expenses (270) (273)
Incremental expenses at EZMONEY stores (3,687) (999)
Incremental depreciation and amortization at EZMONEY stores (218) (50)
Collection and call center costs (included in administrative expense) (368) (213)
-------- -------
Contribution to operating income $ 2,545 $ 2,097
======== =======
Average payday loan balance outstanding during quarter $ 9,481 $ 5,752
Payday loan balance at end of quarter $ 11,089 $ 6,720
Average loan balance per participating location at end of quarter $ 35.1 $ 24.5
Participating locations at end of quarter, including call center 316 274
(whole numbers)
Net default rate (defaults net of collections, measured as a percent of
loans made) 5.2% 6.6%
The Contribution to operating income presented above includes the effect of
incremental operating expenses at EZMONEY stores. Shared costs at EZMONEY stores
adjoining EZPAWN locations have been excluded from these figures.
Payday loan service charge revenue increased from the Fiscal 2004 Third Quarter
primarily due to higher average loan balances at existing stores and the
addition of new EZMONEY stores. In the Fiscal 2005 Third Quarter, 93.4% ($9.5
million) of payday loan service charge revenue was collected in cash and 6.6%
($0.7 million) resulted from an increase in accrued payday loan service charges
receivable. In the comparable Fiscal 2004 Third Quarter, 93.4% ($5.8 million) of
payday loan service charge revenue was collected in cash, and 6.6% ($0.4
million) resulted from an increase in accrued payday loan service charges
receivable.
Although payday loan service charge revenue increased $4.0 million (65.3%),
payday loan bad debt increased only $0.6 million (22.8%) in the Fiscal 2005
Third Quarter compared to the Fiscal 2004 Third Quarter. Net defaults were 5.2%
of loans made, compared to 6.6% in the Fiscal 2004 Third Quarter.
The Company provides a valuation allowance on payday loan principal and fees
receivable. Due to the short-term nature of these loans, the Company uses recent
net default rates and anticipated seasonal changes in the default rate as the
basis for its valuation allowance. At June 30, 2005, the valuation allowance was
$0.8 million, or 5.6% of the payday loan principal and fees receivable, compared
to $0.6 million, or 7.2% of payday loan principal and fees receivable at June
30, 2004.
The Company's incremental expenses at EZMONEY stores increased to $3.7 million
in the Fiscal 2005 Third Quarter from $1.0 million in the comparable Fiscal 2004
Third Quarter. The increase relates primarily to expenses at the 118 new EZMONEY
stores opened in the last twelve months, as well as a full quarter's operating
expenses at the 30 stores opened during the Fiscal 2004 Third Quarter.
Operations expense increased to $23.7 million in the Fiscal 2005 Third Quarter
from $21.8 million in the Fiscal 2004 Third Quarter, representing a 6.0
percentage point increase when measured as a percentage of net revenue. The $1.9
million net increase was comprised of a $2.7 million increase in operations
expense at EZMONEY stores, offset by a $0.8 million decrease in same store
operating expense. A significant decrease in robbery losses, due to more secure
safes in certain locations, caused the majority of the decrease in same-store
operating expense.
15
Administrative expenses in the Fiscal 2005 Third Quarter were $5.5 million
compared to $4.6 million in the Fiscal 2004 Third Quarter, an increase of 0.1 of
a percentage point when measured as a percent of net revenue. The increase is
due primarily to an increase in labor and benefit costs ($0.9 million) and an
increase in payday loan collection and call center expenses ($0.2 million).
Depreciation and amortization expense was $2.1 million in the Fiscal 2005 Third
Quarter compared to $1.9 million in the comparable prior year period. The
increase related primarily to a $0.1 million charge for depreciation of
leasehold improvements related to a revised interpretation of the accounting
rules for renewal options in operating leases.
In the Fiscal 2005 Third Quarter, interest expense remained unchanged from the
Fiscal 2004 Third Quarter at $0.3 million. This resulted from lower average debt
balances offset by higher effective interest rates. At June 30, 2005, the
Company's total debt was $21.9 million compared to $31.2 million at June 30,
2004. The decrease in the debt balance was funded primarily by cash flow from
operations.
The Fiscal 2005 Third Quarter income tax expense was $1.2 million (36.0% of
pre-tax income) compared to $0.5 million (66.9% of pre-tax income) for the
Fiscal 2004 Third Quarter. In the Fiscal 2004 Third Quarter, the Company
increased its estimate of the effective tax rate for that full fiscal year from
34.5% to 37.0% due to non-deductible executive compensation and an increase in
state income taxes. No corresponding adjustment in rates was made in the Fiscal
2005 Third Quarter. The one percentage point decrease in rates expected for the
full fiscal year is due to the Company's expectation that all executive
compensation will be fully deductible in Fiscal 2005.
Operating income for the Fiscal 2005 Third Quarter increased $2.5 million from
the Fiscal 2004 Third Quarter to $3.2 million, primarily due to the $1.1 million
increase in gross profit from sales, the $0.9 million increase in pawn service
charges, and the $0.4 million incremental contribution from payday loans, offset
by the increase in administrative expense. After a $0.7 million increase in
income taxes related to the increased earnings and other smaller items, net
income improved to $2.1 million in the Fiscal 2005 Third Quarter from $0.3
million in the Fiscal 2004 Third Quarter.
Nine Months Ended June 30, 2005 vs. Nine Months Ended June 30, 2004
The following discussion compares the results of operations for the Fiscal 2005
Year-to-Date Period to the Fiscal 2004 Year-to-Date Period. The discussion
should be read in conjunction with the accompanying financial statements and
related notes.
The Company's Fiscal 2005 Year-to-Date Period pawn service charge revenue
increased 5.0%, or $2.2 million from the Fiscal 2004 Year-to-Date Period to
$46.1 million. This increase was due to a nine percentage point improvement in
loan yields to 137%, offset by lower average loan balances during the Fiscal
2005 Year-to-Date Period. The increase in loan yields was due to the Company's
efforts to improve loan redemption rates and an increase in pawn service charge
rates in its twenty-four Colorado stores. The Company's average balance of pawn
loans outstanding during the Fiscal 2005 Year-to-Date Period was 2.0% lower and
ending pawn loans outstanding were 0.4% lower than in the Fiscal 2004
Year-to-Date Period. The Company believes the decrease in the pawn loan balance
compared to the prior year period is due to tighter underwriting in its pawn
lending operation.
In the Fiscal 2005 Year-to-Date Period, 99.3% ($45.7 million) of recorded pawn
service charge revenue was collected in cash and 0.7% ($0.4 million) resulted
from an increase in accrued pawn service charges receivable. In the Fiscal 2004
Year-to-Date Period, 101.0% ($44.3 million) of recorded pawn service charge
revenue was collected in cash offset by a $0.4 million decrease in accrued pawn
service charges receivable. The accrual of pawn service charges is dependent on
the Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company decreased its
estimate of collectible loans at June 30, 2005 in anticipation of lower loan
redemptions during the summer lending season.
Sales increased $4.9 million in the Fiscal 2005 Year-to-Date Period compared to
the Fiscal 2004 Year-to-Date Period, to $107.6 million. The increase was due to
a $3.6 million increase in jewelry scrapping sales and a $1.3 million increase
in same store merchandise sales. The table below summarizes the sales volume,
gross profit, and gross margins on the Company's sales during the periods
presented:
16
Nine Months Ended June 30,
--------------------------
2005 2004
---- ----
(Dollars in millions)
Merchandise sales $ 91.4 $ 90.1
Jewelry scrapping sales 16.2 12.6
------ ------
Total sales 107.6 102.7
Gross profit on merchandise sales $ 38.9 $ 38.1
Gross profit on jewelry scrapping sales 4.4 3.5
Gross margin on merchandise sales 42.5% 42.3%
Gross margin on jewelry scrapping sales 27.5% 27.7%
Overall gross margin on sales 40.3% 40.5%
The Fiscal 2005 Year-to-Date Period overall gross margin on sales decreased 0.2
of a percentage point from the Fiscal 2004 Year-to-Date Period to 40.3%.
Although margins on merchandise sales increased 0.2 of a percentage point, the
overall gross margin decreased due to the disproportionate increase in jewelry
scrapping, which realizes a lower margin than merchandise sales. Inventory
shrinkage, included in cost of goods sold, was 1.5% of merchandise sales in the
Fiscal 2005 Year-to-Date Period compared to 1.6% in the Fiscal 2004 Year-to-Date
Period.
Payday loan data are as follows:
Nine Months Ended June 30,
--------------------------
2005 2004
---- ----
(Dollars in thousands)
Service charge revenue $ 26,349 $ 16,124
Bad debt:
Net defaults on loans, excluding sale of older bad debt (6,375) (5,021)
Change in valuation allowance (165) (295)
Sale of older bad debt 905 -
NSF fees collected and other related costs 130 100
-------- --------
Net bad debt (5,505) (5,216)
Other direct transaction expenses (1,012) (741)
Incremental expenses at EZMONEY stores (8,907) (1,655)
Incremental depreciation and amortization at EZMONEY stores (461) (80)
Collection and call center costs (included in administrative expense) (1,101) (590)
-------- --------
Contribution to operating income $ 9,363 $ 7,842
======== =======
Average payday loan balance outstanding during period $ 8,310 $ 5,061
Payday loan balance at end of period $ 11,089 $ 6,720
Average loan balance per participating location at end of period $ 35.1 $ 24.5
Participating locations at end of period, including call center 316 274
(whole numbers)
Net default rate (defaults net of collections, measured as a percent of
loans made) 3.8% 5.6%
Net default rate, excluding sale of older bad debt 4.4% 5.6%
The Contribution to operating income presented above includes the effect of
incremental operating expenses at EZMONEY stores. Shared costs at EZMONEY stores
adjoining EZPAWN locations have been excluded from these figures.
Payday loan service charge revenue increased from the Fiscal 2004 Year-to-Date
Period primarily due to higher average loan balances at existing stores and the
addition of new EZMONEY stores. In the Fiscal 2005 Year-to-Date Period, 97.1%
($25.6 million) of recorded payday loan service charge revenue was collected in
cash, and 2.9% ($0.8 million) resulted from an increase in accrued payday loan
service charges receivable. In the comparable Fiscal 2004
17
Year-to-Date Period, 96.3% ($15.5 million) of recorded payday loan service
charge revenue was collected in cash, and 3.7% ($0.6 million) was due to an
increase in accrued payday loan service charges receivable.
Although payday loan service charge revenues increased 63.4%, payday loan bad
debt increased only 5.5% ($0.3 million) in the Fiscal 2005 Year-to-Date Period
compared to the Fiscal 2004 Year-to-Date Period, resulting in net defaults of
3.8% of loans made. In December 2004, the Company sold its older payday loan bad
debt to an outside agency for net proceeds of approximately $0.9 million, which
is reflected in the net bad debt in the Fiscal 2005 Year-to-Date Period.
Excluding this sale of older bad debt, the Company's payday loan net defaults
improved to 4.4% for the Fiscal 2005 Year-to-Date Period, compared to 5.6% in
the Fiscal 2004 Year-to-Date Period.
The Company provides a valuation allowance on payday loan principal and fees
receivable. Due to the short-term nature of these loans, the Company uses recent
net default rates and anticipated seasonal changes in the default rate as the
basis for its valuation allowance. At June 30, 2005, the valuation allowance was
$0.8 million, or 5.6% of the payday loan principal and fees receivable, compared
to $0.6 million, or 7.2% of payday loan principal and fees receivable at June
30, 2004.
The Company's incremental expenses at EZMONEY stores increased to $8.9 million
in the Fiscal 2005 Year-to-Date Period from $1.7 million in the comparable
Fiscal 2004 Year-to-Date Period. The increase relates primarily to expenses at
the 118 new EZMONEY stores opened in the last twelve months, as well as a full
period's operating expenses at the 81 stores opened during the Fiscal 2004
Year-to-Date Period.
Operations expense increased to $70.4 million in the Fiscal 2005 Year-to-Date
Period from $64.4 million in the Fiscal 2004 Year-to-Date Period, representing a
2.4 percentage point decrease when measured as a percentage of net revenue. The
$6.0 million net increase was comprised of a $7.3 million increase in operations
expense at EZMONEY stores, offset by a $1.3 million decrease in same store
operations expense. A significant decrease in robbery losses, due to more secure
safes in certain locations, caused the majority of the decrease in same-store
operating expense. Also included in operations expense in the Fiscal 2005
Year-to-Date Period is a $0.3 million charge for prior period rent related to a
revised interpretation of the accounting rules for operating leases and the
inclusion of optional renewal periods in the Company's calculation of rent
expense.
Administrative expenses in the Fiscal 2005 Year-to-Date Period were $17.2
million compared to $16.9 million in the Fiscal 2004 Year-to-Date Period, a 1.7
percentage point decrease when measured as a percent of net revenue. The
increase is comprised primarily of additional administrative labor and benefits
($1.5 million), payday loan collection and call center costs ($0.5 million), and
professional fees ($0.3 million) during the Fiscal 2005 Year-to-Date Period.
Offsetting these increases is a $0.7 million valuation allowance placed on a
note receivable from the Company's former Chief Executive Officer in the Fiscal
2004 Year-to-Date Period, with no corresponding amount in the Fiscal 2005 Third
Quarter. Also offsetting the overall increase is a $1.1 million reduction in
stock compensation related to restricted stock granted to the Company's Chief
Executive and Chairman in the Fiscal 2004 Year-to-Date Period with no
corresponding grants in the current year.
Depreciation and amortization expense was $6.0 million in the Fiscal 2005
Year-to-Date Period compared to $5.6 million in the Fiscal 2004 Year-to-Date
Period. The increase related primarily to an increase in depreciation of
leasehold improvements related to a second-quarter revised interpretation of the
accounting rules for renewal options in operating leases.
In the Fiscal 2005 Year-to-Date Period, interest expense decreased to $0.9
million from $1.2 million in the Fiscal 2004 Year-to-Date Period, primarily due
to lower average debt balances. At June 30, 2005, the Company's total debt was
$21.9 million compared to $31.2 million at June 30, 2004. The decrease in the
debt balance was funded primarily by cash flow from operations.
The Fiscal 2005 Year-to-Date Period income tax expense was $6.2 million (36.0%
of pre-tax income) compared to $3.7 million (37.0% of pre-tax income) for the
Fiscal 2004 Year-to-Date Period. The decrease in effective tax rate between
these periods is due to the Company's expectation that, unlike Fiscal 2004, all
executive compensation will be fully deductible in Fiscal 2005.
Operating income for the Fiscal 2005 Year-to-Date Period increased $6.9 million
from the Fiscal 2004 Year-to-Date Period to $16.7 million, primarily due to the
$2.2 million increase in pawn service charge revenue, the $1.8 million
18
increase in sales gross profits, the $1.5 million greater contribution from
payday loans, and the $1.3 million improvement in non-EZMONEY store operations
expense. After a $2.5 million increase in income taxes related primarily to the
Company's increased earnings, net income improved to $11.0 million in the Fiscal
2005 Year-to-Date Period from $6.3 million in the Fiscal 2004 Year-to-Date
Period.
LIQUIDITY AND CAPITAL RESOURCES
In the Fiscal 2005 Year-to-Date Period, the Company's $17.6 million cash flow
from operations consisted of (i) net income plus several non-cash items,
aggregating to $21.6 million, offset by (ii) $4.0 million of changes in
operating assets and liabilities, primarily accounts payable, accrued expenses,
service charges receivable, prepaid expenses, and other current and non-current
assets. In the Fiscal 2004 Year-to-Date Period, the Company's $16.3 million cash
flow from operations consisted of (i) net income plus several non-cash items,
aggregating to $16.9 million, offset by (ii) $0.6 million of changes in
operating assets and liabilities.
The Company's $15.2 million of investments during the Fiscal 2005 Year-to-Date
Period were funded primarily by cash flow from operations. These investments
consisted of $9.4 million of payday loans made net of repayments, $0.4 million
of pawn loans made in excess of those repaid and recovered through the sale of
forfeited collateral, and $6.3 million invested in property and equipment,
offset by $0.9 million of dividends received from the Company's investment in
Albemarle and Bond.
The $3.1 million debt reduction during the Fiscal 2005 Year-to-Date Period was
funded primarily by cash flow from operations.
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations in the full fiscal years ending September 30:
Payments due by Period
----------------------
Less than 1 More than 5
Contractual Obligations Total year 1-3 years 3-5 years years
- ----------------------- ----- ---- --------- --------- -----
(In thousands)
Long-term debt obligations $ 21,900 $ - $21,900 $ - $ -
Interest on long-term debt obligations 3,034 1,214 1,820 - -
Capital lease obligations - - - - -
Operating lease obligations 106,991 14,941 27,167 21,216 43,667
Purchase obligations - - - - -
Other long-term liabilities - - -
--------- -------- ------- -------- --------
Total $ 131,925 $ 16,155 $50,887 $ 21,216 $ 43,667
========= ======== ======= ======== ========
In the remaining three months of the fiscal year ending September 30, 2005, the
Company also plans to open an additional 25 to 30 EZMONEY stores offering payday
loans or fee-based credit services for an expected aggregate capital expenditure
of approximately $0.8 million, plus the funding of working capital and start-up
losses at these stores. While the Company anticipates that these new stores will
increase future earnings, it expects they will have a negative effect on
earnings and cash flow in their first year of operation.
The Company anticipates a one-time cash inflow of approximately $9.7 million in
July and August 2005 as it transitions 177 of its Texas EZMONEY stores from
marketing payday loans for County Bank to operating as a Credit Services
Organization, as described above. The Company previously purchased a 90%
participation in the loans made by County Bank at these stores. As the County
Bank loans are repaid, the Company will receive its pro rata share of amounts
collected. At June 30, 2005, the Company's participation in the County Bank
loans at these stores was $9.7 million. As a Credit Services Organization, these
stores now provide fee-based advice, services and assistance to customers in
obtaining loans from an unaffiliated lender, but will not participate in the
loans made by the lender.
The Company's $40.0 million credit agreement matures April 1, 2007. Under the
terms of the agreement, the Company had the ability to borrow an additional
$18.1 million at June 30, 2005. Advances are secured by the Company's assets.
Terms of the agreement require, among other things, that the Company meet
certain financial
19
covenants. Payment of dividends and additional debt are allowed but restricted.
The amount of long-term debt obligations included in the table above is the
balance outstanding on the Company's revolving credit agreement at June 30,
2005. The outstanding balance fluctuates based on cash needs and the interest
rate varies in response to the Company's leverage ratio. For purposes of this
table, the Company assumed the current outstanding balance and interest rate
would be applicable through the maturity date of the credit agreement.
The Company anticipates that cash flow from operations and availability under
its revolving credit agreement will be adequate to fund its contractual
obligations, planned store growth, capital expenditures, and working capital
requirements during the coming year.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow is greatest in its second fiscal quarter
primarily due to a high level of loan redemptions and sales in the income tax
refund season.
USE OF ESTIMATES AND ASSUMPTIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, 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, the allowance for
losses on payday loans, long-lived and intangible assets, income taxes,
contingencies and litigation. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances. Management uses this information to
make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
the estimates under different assumptions or conditions.
DISCLOSURE AND INTERNAL CONTROLS
Based on an assessment of the effectiveness of the Company's disclosure controls
and procedures, accounting policies, and the underlying judgments and
uncertainties affecting the application of those policies and procedures,
management believes that the Company's interim condensed consolidated financial
statements provide a meaningful and fair perspective of the Company in all
material respects. There have been no significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation. Management identified no significant
deficiencies or material weaknesses in internal controls. Other risk factors,
such as those discussed elsewhere in this interim report and the Company's
Annual Report as well as changes in business strategies, could adversely impact
the Company's consolidated financial position, results of operations, and cash
flows in future periods.
20
RISK FACTORS
Important risk factors that could cause results or events to differ from current
expectations are described in the Company's Annual Report on Form 10-K for the
year ended September 30, 2004, and are supplemented by the additional factors
listed below. These factors are not intended to be an all-inclusive list of
risks and uncertainties that may affect the operations, performance,
development, results, or financial position of the business.
-THE COMPANY IS REGISTERED IN TEXAS AS A CREDIT SERVICES ORGANIZATION ("CSO")
IN 177 TEXAS EZMONEY STORES, AND AS A RESULT IS EXPOSED TO REGULATORY,
LEGISLATIVE, AND LEGAL RISKS OR ACTIONS, AS WELL AS THE RISK THAT CUSTOMERS
WILL NOT USE THE COMPANY'S CSO SERVICES, ANY OF WHICH COULD SIGNIFICANTLY
IMPACT REVENUES AND EARNINGS.
Effective July 15, 2005, 177 of the Company's Texas EZMONEY stores ceased
marketing County Bank payday loans. These Texas EZMONEY stores now offer
fee-based advice, services, and assistance to customers in obtaining loans from
an unaffiliated lender. If the Company's customers do not utilize the new CSO
services to the same extent they have historically utilized payday loans, the
Company's revenues and earnings could decrease significantly. In addition, the
Company is exposed to regulatory, legislative, and legal risks that could limit
its ability to perform its CSO services, negatively impacting its revenues and
earnings.
-THE COMPANY'S CSO REVENUES ARE DEPENDENT UPON ITS ABILITY TO HELP CUSTOMERS
OBTAIN LOANS FROM AN INDEPENDENT LENDER. THE COMPANY CURRENTLY HAS AN INTERIM
AGREEMENT WITH THE INDEPENDENT LENDER DATED JULY 14, 2005. THE INTERIM
AGREEMENT HAS A TERM OF 30 DAYS WITH PROVISIONS FOR AUTOMATIC 30-DAY
RENEWALS UNLESS EITHER PARTY GIVES THE OTHER PARTY 15 DAYS NOTICE OF ITS
INTENT NOT TO RENEW THE AGREEMENT. THE TERMINATION OF THE INTERIM AGREEMENT
COULD MATERIALLY IMPACT THE COMPANY'S EXPECTED REVENUES AND EARNINGS.
The Company and the lender are currently negotiating a longer-term, definitive
agreement, and each party has expressed its interest in a longer-term agreement
on substantially similar terms. If the Company is unsuccessful in finalizing the
longer-term, definitive agreement on similar terms or reaching a similar
agreement with another independent lender prior to a termination of the interim
agreement, its ability to arrange loans for the Company's customers may be
limited or eliminated, which could significantly decrease its expected revenues
and earnings. Despite the short-term nature of the interim agreement, the lender
has verbally committed to provide the Company sufficient notice and time to
reach agreements with other lenders in the event the independent lender elects
to cease its lending operations.
-THE COMPANY FACES OTHER RISKS DISCUSSED UNDER QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK IN ITEM 3 OF THIS FORM 10-Q AND IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2004.
21
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 and legislative risk in
relation to its payday loans and CSO services. The Company does not use
derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
prices and the resulting impact on pawn lending and jewelry sales. The proceeds
of jewelry scrapping sales and the Company's ability to liquidate excess jewelry
inventory at an acceptable margin are dependent upon gold prices. The impact on
the Company's financial position and results of operations of a hypothetical
change in gold prices cannot be reasonably estimated.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its debt, all of which is variable-rate debt. If
interest rates average 50 basis points more during the remaining three months of
the fiscal year ending September 30, 2005 than they did in the comparable period
of 2004, the Company's interest expense during those three months would increase
by approximately $27,000. This amount is determined by considering the impact of
the hypothetical interest rates on the Company's variable-rate debt at June 30,
2005.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment representing the weakening in the U.K. pound during
the quarter ended March 31, 2005 (included in the Company's June 30, 2005
results on a three-month lag as described above) was approximately a $169,000
decrease to stockholders' equity. On June 30, 2005, the U.K. pound closed at
1.00 to 1.8048 U.S. dollars, a weakening from 1.8790 at March 31, 2005. 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, new product risks, changes in the number of
expected store openings, changes in expected returns from new stores, liquidity,
and capital requirements and the effect of government and environmental
regulations, and (ii) adverse changes in the market for the Company's services.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligations to release publicly the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereon, including without limitation, changes in the Company's
business strategy or planned capital expenditures, or to reflect the occurrence
of unanticipated events.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of this report and under the supervision
and with the participation of the Company's Chief Executive Officer and Chief
Financial Officer, management of the Company has evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934) as of June 30, 2005 ("Evaluation Date").
22
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
(c) Limitations on Controls
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or internal controls will prevent all possible error and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
23
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory matters
arising from its normal business operations. Currently, the Company is a party
in several matters, some of which involve claims for substantial amounts. While
the ultimate outcome of these matters cannot be determined, after consultation
with counsel, the Company believes the resolution of these matters 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 matters or that other matters will not be asserted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
Exhibit Incorporated by
Number Description Reference to
- ------- ----------- ---------------
10.92 First Amendment to 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 7/14/05 Item 8.01 - Other Press release announcing new product offering.
Events
8-K 7/20/05 Item 2.02 - Results Quarterly earnings announcement and related
of Operations and press release.
Financial Condition
24
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: August 2, 2005 By: /s/ DAN N. TONISSEN
-----------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
25
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to
- ------- ----------- ---------------
10.92 First Amendment to 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
26