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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
Registrant's telephone number, including area code: (512) 314-3400
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Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Class A Non-voting Common Stock, The NASDAQ Stock Market
$.01 par value per share
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 if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, all 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. The aggregate market value of the
Class A Non-Voting Common Stock held by non-affiliates of the registrant was
$150 million, based on the closing price on the NASDAQ Stock Market on March 31,
2005.
As of October 31, 2005, 11,875,975 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.
YEAR ENDED SEPTEMBER 30, 2005
INDEX TO FORM 10-K
Item Page
No. No.
- ---- ----
INTRODUCTION
PART I
1. Business 3
1A. Risk Factors 16
1B. Unresolved Staff Comments 17
2. Properties 18
3. Legal Proceedings 21
4. Submission of Matters to a Vote of Security Holders 21
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 22
6. Selected Financial Data 23
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 25
7A. Qualitative and Quantitative Disclosures About Market Risk 36
8. Financial Statements and Supplementary Data 38
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 63
9A. Controls and Procedures 64
9B. Other Information 66
PART III
10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 70
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 76
13. Certain Relationships and Related Party Transactions 78
14. Principal Accounting Fees and Services 79
PART IV
15. Exhibits and Financial Statement Schedules 80
Signatures 83
Exhibit Index 84
PART I
ITEM 1. BUSINESS
EZCORP, Inc. (the "Company") is a Delaware corporation with its principal
executive offices located at 1901 Capital Parkway, Austin, Texas 78746. Its
telephone number is (512) 314-3400. Interested parties may access the Company's
filings with the Securities and Exchange Commission through a link in the
Investor Relations section of the Company's website at www.ezcorp.com. Also
available on the Company's website is its Code of Conduct and Ethics. References
to the Company include its subsidiaries listed in Exhibit 21.1. The Company is
primarily engaged in operating pawnshops and signature loan stores that function
as convenient sources of short-term cash. Signature loan stores offer payday
loans or credit services. The Company's pawnshops are also value-oriented
specialty retailers of primarily previously owned merchandise.
The discussion in this section of the report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this report.
GENERAL
The Company is primarily a lender or provider of credit services to individuals
who do not have cash resources or access to credit to meet their short-term cash
needs. The Company offers non-recourse loans collateralized by tangible personal
property, commonly known as pawn loans. The Company also sells merchandise,
primarily collateral forfeited from its pawn lending operations, to consumers
looking for good value. The Company also offers short-term non-collateralized
loans, often referred to as payday loans, and fee based credit services to
customers seeking loans.
As of September 30, 2005, the Company made pawn loans in its 280 pawnshops. The
income earned on this activity is pawn service charge revenue. While allowable
service charges vary by state and loan size, a majority of the Company's 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. The loan duration ranges from 60 to 120 days (the regulated
term plus any grace period offered by the Company), after which the collateral
is forfeited. In the years ended September 30, 2003, 2004, and 2005 ("Fiscal
2003", "Fiscal 2004," and "Fiscal 2005"), approximately 76%, 76% and 77%,
respectively, of the pawn loans made by the Company were redeemed in full or
were renewed or extended through the payment of accrued pawn service charges.
Also in its pawnshops, the Company acquires inventory for its retail sales
primarily through pawn loan forfeitures and, to a lesser extent, through
purchases of customers' merchandise. The realization of gross profit on sales of
inventory depends primarily on the Company's assessment of the resale value at
the time the property is either accepted as loan collateral or purchased.
Improper assessment of the resale value in the lending or purchasing process can
result in the realization of a lower margin or reduced marketability of the
property. During Fiscal 2003, 2004 and 2005, the Company realized gross margins
on sales of 36%, 39%, and 39%, respectively.
As of September 30, 2005, the Company offered signature loans in 234 EZMONEY
loan stores ("Mono-line" stores), 98 of its pawnshops, and in an Austin, Texas
based payday loan call center. Introduced to most of its pawnshops in March
2001, the signature loan product continues to mature as the customer base grows.
During Fiscal 2005, the Company opened 110 Mono-line stores and closed one. Of
the 234 total Mono-line stores, 158 adjoin existing EZPAWN locations but have a
different entrance, signage, decor, and staffing. Even though they adjoin an
EZPAWN, the EZMONEY Mono-line store is a separate business from the customers'
point of view. The Company refers to these as "adjoined stores."
Payday loans are made based on a limited review of customer information and
supporting documents. The duration is generally less than 30 days and averages
about 17 days. The service charge for these loans ranges between $15 and $20 per
$100 loaned. The average payday loan amount is approximately
3
$380. The profitability of payday loans is highly dependent on the level of
initial loan defaults and the subsequent collection of defaulted loans. When
measured as a percentage of payday loan revenues, the Company experienced bad
debt on payday loans of 28%, 34%, and 23% during Fiscal 2003, 2004, and 2005,
respectively.
In the fourth quarter of Fiscal 2005, the EZMONEY stores located in Texas ceased
marketing payday loans and began providing fee-based advice and assistance
("credit services") to consumers in obtaining loans from an unaffiliated lender.
At September 30, 2005, 200 of the Company's 234 signature loan stores offered
credit services. The Company does not make, fund, or participate in the loans
made by the lender, but earns a fee of 20% of the loan amount for assisting the
customer in obtaining credit and by enhancing the borrower's creditworthiness
through the issuance of a letter of credit. If the borrower defaults on his
loan, the Company pays the lender the principal and accrued interest due under
the loan plus an insufficient funds fee. The Company then attempts to collect
the unpaid principal, interest, and insufficient funds fee from the borrower.
The Company considers as its bad debt the amount it pays the lender under
letters of credit, less any amounts it collects from customers. Similar to
payday loans, the profitability of the Company's credit services is highly
dependent on the level of bad debt. When measured as a percentage of credit
service fee revenue, the Company experienced bad debt on credit services of 48%
during Fiscal 2005.
The following components comprised the Company's net revenues (total revenues
less cost of goods sold):
Fiscal Year Ended September 30,
-------------------------------
2003 2004 2005
---- ---- ----
Pawn service charges 48% 42% 38%
Gross profit from merchandise sales 38% 35% 31%
Gross profit from jewelry scrapping 3% 5% 4%
Payday loan and credit service fees 10% 17% 26%
Other fee revenue 1% 1% 1%
--- --- ---
Net revenues 100% 100% 100%
--- --- ---
The pawnshop industry in the United States is large and highly fragmented. The
industry consists of approximately 12,000 pawnshops owned primarily by
independent operators who own one to three locations. The Company, with 280 pawn
locations, is the second largest operator of pawnshops in the United States. The
three largest pawnshop operators, including the Company, account for less than
ten percent of the total estimated pawnshops in the United States.
The signature loan industry in the United States is larger and more concentrated
than the pawn industry. The industry consists of approximately 22,000 locations
that are generally mono-line stores, or stores offering only signature loans,
and other businesses offering signature loans in addition to other products and
services, such as check cashing stores and pawnshops. The ten largest signature
loan companies, which include the Company, comprise approximately 37% of the
total number of locations.
PAWN LENDING ACTIVITIES
The Company's pawnshops primarily make pawn loans, which typically are small,
non-recourse loans secured by tangible personal property. As of September 30,
2005, the Company had approximately 700,000 loans outstanding, representing an
aggregate principal balance of $52.9 million. A majority of the Company's pawn
loans are in amounts that permit pawn service charges of 20% per month, or 240%
annually. For Fiscal 2005, pawn service charges accounted for approximately 24%
of the Company's total revenues and 38% of its net revenues.
Collateral for the Company's pawn loans consists of tangible personal property,
generally jewelry, consumer electronics, tools, sporting goods, and musical
instruments. The Company does not investigate the creditworthiness of a pawn
customer, but relies on the estimated resale value of the collateral and the
perceived probability of the loan's redemption. The Company generally lends from
25% to 65% of the pledged property's estimated resale value depending on an
evaluation of these factors.
4
The sources for the Company's determination of the resale value of collateral
include the Company's computerized valuation software, internet auction sites,
catalogues, newspaper advertisements, and previous sales of similar merchandise.
The collateral is held through the duration of the loan, which in most locations
is 60 to 120 days, unless repaid, renewed, or extended. The Company seeks to
maintain a redemption rate (the percent of loans made that are redeemed,
renewed, or extended) of between 70% and 80%; in each of the Company's last
three fiscal years, the redemption rate was within this range. The redemption
rate is maintained through compliance with the Company's lending guidelines. If
a borrower does not repay, extend, or renew a loan, the collateral is forfeited
to the Company and becomes inventory available for sale. The Company does not
record loan losses or charge-offs of pawn loans because the principal amount of
an unpaid loan becomes the inventory carrying cost of the forfeited collateral.
The Company provides an inventory valuation allowance based on the type and age
of merchandise as well as recent sales trends and margins.
The table below shows the dollar amount of pawn loan activity by the Company for
Fiscal 2003, 2004, and 2005:
Fiscal Year Ended September 30,
-------------------------------
2003 2004 2005
------- ------- -------
(Dollars in millions)
Loans made $ 163.1 $ 170.0 $ 173.0
Loans repaid (90.7) (92.5) (93.3)
Loans forfeited (73.7) (76.4) (75.9)
------- ------- -------
Net increase (decrease) in pawn loans
outstanding at the end of the year $ (1.3) $ 1.1 $ 3.8
======= ======= =======
Loans renewed $ 22.7 $ 23.9 $ 23.2
Loans extended $ 136.4 $ 141.2 $ 144.2
The redemption rate of pawn loans and the gross profit realized on the sale of
forfeited collateral are dependent on the appraisal of customer merchandise.
Jewelry, which makes up approximately 62% of the value of collateral, can be
appraised based on weight, gold content, style, and value of gemstones, if any.
The other items pawned typically consist of consumer electronics, tools,
sporting goods, and musical instruments. These are evaluated based on recent
sales experience and the selling price of similar new merchandise, adjusted for
age, wear, and obsolescence. During Fiscal 2003, 2004, and 2005, the Company
realized gross margins on sales of 36%, 39%, and 39%, respectively.
At the time a pawn transaction is made, a pawn loan agreement is given to the
borrower. It sets forth, among other things, the name and address of the
pawnshop and the borrower, the borrower's identification information, the date
of the loan, and a detailed description of the pledged goods (including
applicable serial numbers), the amount financed, the pawn service charge, the
maturity date of the loan, the total amount that must be paid to redeem the
loan, and the annual percentage rate.
Since a majority of the Company's pawn stores are located in Texas, Texas
pawnshop laws and regulations govern most of the Company's pawn operations. In
Texas, pawnshops are regulated by the Office of the Consumer Credit Commissioner
("OCCC") in accordance with Chapter 371 of the Texas Finance Code, commonly
known as the Texas Pawnshop Act (the "Pawnshop Act") and Rules of Operation for
Pawnshops (the "Rules"). See "Regulation."
The maximum allowable pawn service charges in the State of Texas are set in
accordance with Texas law under the Pawnshop Act and are based on the dollar
amount of the loan. Historically, the maximum allowable pawn service charges
under Texas law have not changed; however, the loan amounts have been adjusted
periodically.
5
APPLICABLE PAWN LOAN SERVICE CHARGES FOR TEXAS
Amount Financed per Pawn Loan
- -------------------------------------
Maximum
July 1, 2004 to July 1, 2005 to Allowable Annual
June 30, 2005 June 30, 2006 Pawn Service Charge
- ----------------- ----------------- -------------------
$ 1 to $ 156 $ 1 to $ 162 240%
$ 157 to $ 1,040 $ 163 to $ 1,080 180%
$1,041 to $ 1,560 $1,081 to $ 1,620 30%
$1,561 to $13,000 $1,621 to $13,500 12%
Under Texas law, there is a ceiling on the maximum allowable pawn loan. For the
year ended June 30, 2005, the loan ceiling was $13,000. From July 1, 2005 to
June 30, 2006, the loan ceiling is $13,500. The Company's average loan amount at
the end of Fiscal 2005 was approximately $76.
CREDIT SERVICES
The Company began offering credit services in its 200 EZMONEY stores in Texas
during the Fiscal 2005 fourth quarter. These services consist of advice and
assistance to consumers in obtaining loans from an unaffiliated lender. The
Company does not make, fund, or participate in the loans made by the lender, but
earns a fee of 20% of the loan amount for assisting the customer in obtaining
credit and by enhancing the borrowers' creditworthiness through the issuance of
a letter of credit. If a borrower defaults on his loan, the Company pays the
lender the principal and accrued interest due under the loan plus an
insufficient funds fee. The Company then attempts to collect the unpaid
principal, interest, and insufficient funds fee from the borrower. The Company
considers as its bad debt the amount it pays the lender under letters of credit,
less any amounts it collects from customers.
The profitability of the Company's credit services is highly dependent on the
level of defaulted loans and the Company's ability to collect the principal,
interest, and insufficient fund fees due under the letters of credit. Although
amounts paid under letters of credit may be subsequently collected, the Company
charges the amounts paid to bad debt expense upon default. Later collections are
recorded as a reduction of bad debt in the period received. The Company also
records as bad debt expense an accrual of expected losses for principal,
interest, and insufficient fund fees it expects to pay the lender on default of
the lender's current loans. This estimate is based on recent default and
collection experience and the amount of loans the lender has outstanding. At
September 30, 2005, the accrual of expected losses was 46% of credit service
fees receivable; the actual bad debt for Fiscal 2005 was 48% of credit service
fee revenue. The loss accrual is included in "Accounts payable and other accrued
expenses" on the Company's balance sheet.
PAYDAY LENDING ACTIVITIES
As of September 30, 2005, the Company offers unsecured payday loans in 98 of its
pawnshops, in 34 Mono-line stores, and in a payday loan call center. Prior to
introducing credit services on July 15, 2005, the Company offered payday loans
in the Mono-line stores currently offering credit services. In most payday loan
locations and in the call center, the Company markets and services payday loans
made by County Bank of Rehoboth Beach, Delaware ("County Bank"), a federally
insured Delaware bank; and in a limited number of locations, the Company makes
the loans. Effective December 31, 2005, County Bank will no longer maintain a
payday loan program. The Company has converted its stores that previously
marketed County Bank loans to its credit services program or discontinued making
signature loans at those locations. The average payday loan amount is
approximately $380 and the terms are generally less than 30 days, averaging
about 17 days. The service charge per $100 loaned ranges between $15 and $20 for
a seven to 23-day period, but varies in certain locations. For Fiscal 2005,
payday loan service charges accounted for approximately 11% of the Company's
total revenues and 18% of its net revenues.
6
Payday loans are unsecured, and their profitability is highly dependent upon the
Company's ability to manage the default rate and collect defaulted loans. The
Company considers a loan defaulted if the loan has not been repaid or renewed by
the maturity date. Although defaulted loans may be subsequently collected, the
Company charges defaulted loan principal to bad debt expense upon default,
leaving only active loans in the reported balance. Collections of defaulted loan
principal are recorded as a reduction of bad debt in the period received.
Accrued service charges related to defaulted loans are deducted from service
charge revenue upon loan default and increase service charge revenue upon
collection. The Company provides for a valuation allowance on both the principal
and service charges receivable based on recent default and collection
experience. At September 30, 2005, the valuation allowance was 51% of payday
loan service charges receivable; the actual bad debt for the full Fiscal 2005
year was 23% of payday loan service charge revenue. The Company's payday loan
balance represents the principal amount of all active (non-defaulted) loans, net
of this valuation allowance.
On October 1, 2005, the Company ceased marketing new payday loans in its call
center. It will continue to service loans in its call center, including renewals
of existing loans, through December 31, 2005, at which time the Company plans to
close its payday loan call center.
RETAIL ACTIVITIES
The Company's retail activities liquidate inventory acquired through pawn loan
forfeitures and the purchase of customer 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 in the lending or purchasing function can result in reduced marketability
of the property and the realization of a lower margin. Jewelry sales represent
approximately half of the Company's total sales with the remaining sales
consisting primarily of consumer electronics, tools, sporting goods, and musical
instruments. The Company believes its ability to offer quality used merchandise
at prices significantly lower than original retail prices attracts
value-conscious customers. During the three most recent fiscal years, sources of
inventory additions were:
Fiscal Year Ended September 30,
-------------------------------
2003 2004 2005
---- ---- ----
Forfeited pawn loan collateral 87% 86% 86%
Purchases from customers 13% 14% 14%
For Fiscal 2003, 2004, and 2005, retail activities and jewelry scrapping
accounted for approximately 65%, 63%, and 58% of the Company's total revenues,
or 41%, 40%, and 35% of the Company's net revenues, after deducting the cost of
goods sold. As a significant portion of the Company's inventory and sales
involve gold jewelry, its results can be heavily influenced by the market price
of gold. This is particularly true for gold scrapping, which comprised 15% of
total sales in Fiscal 2003, 19% in Fiscal 2004, and 20% in Fiscal 2005.
Analysis of the sales and inventory data provided by the Company's management
information systems facilitates the design and development of marketing and
merchandising programs and merchandise pricing decisions. A director of
merchandise planning and the Company's regional and area managers oversee these
marketing and merchandising programs, review merchandise pricing decisions, and
balance inventory levels within markets.
The Company allows customers to return or exchange merchandise sold through its
retail operations within seven days of purchase, but has experienced a very low
rate of returns and exchanges as a percentage of sales. Customers may purchase
an item on layaway, whereby a customer will typically pay a minimum layaway
deposit of 20% of an item's sale price. The Company will hold the item for a 60
to 90-day period, during which the customer is required to pay for the item. The
initial deposit and subsequent payments are recorded as customer layaway
deposits. Layaways are recorded as sales when paid in full. As of September 30,
2005, the Company had $1.7 million in customer layaway deposits.
7
The Company's overall inventory is stated at the lower of cost or market. The
Company provides an inventory valuation allowance for shrinkage and cost in
excess of market value. The Company estimates this valuation allowance through
study and analysis of sales trends, inventory turnover, inventory aging, margins
achieved on recent sales, and shrinkage. The valuation allowance amounted to
$1.8 million, $1.5 million, and $1.9 million as of September 30, 2003, 2004, and
2005. At September 30, 2005, total inventory on hand was $30.3 million, after
deducting the inventory valuation allowance.
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.
OPERATIONS
A typical Company pawn store employs five to six full-time equivalent employees
("FTEs") consisting of a manager, an assistant manager, and three to four sales
and lending representatives. Each store manager is responsible for ensuring that
his or her store is run in accordance with the Company's policies, procedures,
and operating guidelines, and reports to an area manager. Area managers are
responsible for the performance of all stores within their area and report to
one of the Company's regional directors. Area managers, store managers, and
assistant managers receive incentive compensation based on their area or store's
performance in comparison to an operating budget. This incentive compensation
typically ranges between 5% and 30% of their total compensation. Regional
directors' compensation is also variable depending upon the performance of their
respective region.
Signature loan stores typically employ two to three FTEs per location,
consisting of a manager and one to two customer service representatives. Each
store manager is responsible for ensuring that his or her store is run in
accordance with the Company's policies, procedures, and operating guidelines,
and reports to an area manager, who is responsible for the stores within a
specific operating area. Area managers report to one of the EZMONEY regional
directors. As the number of Mono-line stores grows, the Company anticipates
building an operating organization similar to its pawn operation, although with
a broader span of control and a smaller area and regional management structure.
The Company has an internally developed store level point of sale ("POS") system
that automates the recording of store-level pawn transactions. For its signature
loan operations, the Company uses a separate, externally developed POS
specifically designed to handle signature loans. Financial summary data from all
stores is processed at the corporate office each day and the preceding day's
data are available for management review via the Company's internal network. The
Company's communications network provides information access between the stores
and the corporate office.
The Company has an internal audit staff of approximately 19 employees who
monitor the Company's perpetual inventory system, lending practices, and
regulatory compliance. In addition, they ensure consistent compliance with the
Company's policies and procedures.
As of September 30, 2005, the Company employed approximately 2,700 people. The
Company believes that its success is dependent upon its employees' ability to
provide prompt and courteous customer service and to execute the Company's
operating procedures and standards. The Company seeks to hire people who will
become long-term, career employees. To achieve the Company's long-range
personnel goals, it strives to develop its employees through a combination of
learner-controlled instruction, web-based classes, classroom training, and
supervised on-the-job training for new employees. All store associates complete
competency checks and all new employees complete a learner-controlled
instruction program. Managers attend on-going management skills and operations
performance training. The
8
Company anticipates that store manager candidates will be promoted from the
ranks of existing store employees and hired from outside the Company. The
Company's career development plan develops and advances employees within the
Company and provides training for the efficient integration of experienced
managers and associates from outside the Company.
At October 31, 2005, the Company operated its pawnshops under the name "EZPAWN",
its payday loan stores under the name "EZMONEY Payday Loans" and its credit
service stores under the name "EZMONEY Loan Services". The Company has
registered with the United States Patent and Trademark Office the names EZPAWN,
EZMONEY, EZMONEY Center, and EZCORP, among others. Additionally, the Company
operates under the trade names EZMONEY Payroll Advance, Payroll Advance Express,
and EZCORP Collection Center.
FUTURE EXPANSION
The Company plans to expand the number of locations it operates through the
development of new locations and through acquisitions. The Company believes that
in the near term the largest growth opportunity is with the Mono-line stores.
The Company has announced that in Fiscal 2006, it plans to open 115 to 125 new
Mono-line stores.
The 110 new Mono-line payday loan stores opened in Fiscal 2005 required an
average property and equipment investment of approximately $36,200 each. The
Company has not opened a new pawnshop location since Fiscal 2000.
The Company's ability to add new stores is dependent on several variables, such
as the availability of acceptable sites or acquisition candidates, the
regulatory environment, and the availability of qualified personnel. The
Company's ability to add newly established pawnshops in Texas counties having a
population of 250,000 or more is restricted by Texas law, which provides that
applications for new licenses in such counties will be approved only at proposed
locations which are not less than two miles from another licensed pawnshop and
applications to relocate a licensed pawnshop will be approved only for proposed
locations which are not less than one mile from another licensed pawnshop. Any
existing Texas pawnshop may relocate within one mile of its present location,
regardless of the existence of other pawnshops. The Company's ability to add
newly established pawnshops may be adversely affected by such regulation. See
"Regulation."
COMPETITION
The Company encounters significant competition in connection with its lending
operations. These competitive conditions may adversely affect the Company's
revenues, profitability, and its ability to expand. In its lending business, the
Company competes with other pawnshops, payday lenders, and financial
institutions, such as consumer finance companies. Other lenders may lend money
on an unsecured basis, at interest rates that may be lower than the service
charges of the Company, and on other terms that may be more favorable than those
offered by the Company. The Company believes that the primary elements of
competition are the quality of customer service and relationship management,
store location, and the ability to loan competitive amounts at competitive
rates. In addition, the Company believes that the ability to compete effectively
will be based increasingly on strong general management, regional market focus,
automated management information systems, and access to capital.
The Company's competitors for merchandise sales include numerous retail and
wholesale stores, including jewelry stores, discount retail stores, consumer
electronics stores, other pawnshops, other retailers of previously owned
merchandise, electronic commerce retailers, and auction sites. Competitive
factors in the Company's retail operations include the ability to provide the
customer with a variety of merchandise at an exceptional value.
STRATEGIC INVESTMENT
In 1998, the Company acquired 29.5% of the outstanding shares of Albemarle &
Bond Holdings plc ("A&B"). Due to the dilutive effect of new share issuances by
A&B, the Company's interest was 28.7% at June 30, 2005, the most recent date for
which A&B has published results. As its largest shareholder, the Company and its
affiliates hold three seats on A&B's board of directors. A&B is a publicly
traded
9
company based in Bristol, England and trades on the Alternative Investment
Market of the London Stock Exchange. At June 30, 2005, A&B operated 61 locations
in the United Kingdom that offer pawn loans, payday loans, installment loans,
check cashing, and retail jewelry. For A&B's 2005 fiscal year, which ended June
30, 2005, A&B's operating profit increased 14% over the prior year to
approximately (Pound) 6.3 million ($11.8 million).
The Company accounts for its investment in A&B under the equity method. In
Fiscal 2005, the Company's interest in A&B's income was $2,173,000 and the
Company received dividends on its investment totaling $861,000. Based on the
closing price and exchange rates on October 31, 2005, the market value of the
Company's investment in A&B was approximately $35.6 million, compared to its
book value of $17.3 million.
REGULATION
PAWNSHOP OPERATIONS
The Company's pawnshop operations are subject to extensive regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations. The laws of Texas, Colorado, Oklahoma, Indiana,
Florida, Alabama, and Nevada govern the majority of the Company's pawnshop
operations. A summary of these states' applicable pawnshop statutes and
regulations are discussed below.
TEXAS REGULATIONS
The Texas Pawnshop Act and the related Rules of Operation for Pawnshops govern
Texas pawnshops. Pawnshop and pawnshop employees are licensed and supervised by
the OCCC.
To be eligible for a license to operate a pawnshop in Texas, an applicant must:
(i) be of good moral character, which in the case of a business entity applies
to each officer, director, and holder of five percent or more of the entity's
outstanding shares; (ii) have net unencumbered assets (as defined in the Texas
Pawnshop Act) of at least $150,000 readily available for use in conducting the
business of each licensed pawnshop; (iii) demonstrate that the applicant has the
financial responsibility, experience, character, and general fitness to command
the confidence of the public in its operation; and (iv) demonstrate that the
pawnshop will be operated lawfully and fairly. Additionally, each pawnshop
employee must qualify for and maintain a separate pawnshop employee license.
For a new license application in any Texas county, the OCCC provides notice of
the application and the opportunity for a public hearing to the other licensed
pawnshops in the county in which the applicant proposes to operate. In counties
with 250,000 or more people, applications for new licenses are approved only at
locations that are not less than two miles from another licensed pawnshop and
applications to relocate a license are approved only for locations that are not
less than one mile from another licensed pawnshop. Any existing store may
relocate within one mile of its present location, regardless of the existence of
other pawnshops. The Company's ability to open new stores or relocate existing
stores may be adversely affected by these licensing provisions.
The Texas Pawnshop Act also contains provisions related to the operation of
pawnshops and authorizes the Rules. The Rules regulate the day-to-day operation
of the Company's pawnshops including the maximum pawn service charge and
principal loan amount.
Pawn service charges vary based on loan amounts. Historically, the maximum
allowable pawn service charge rates have not changed; however, the loan amounts
have periodically been adjusted. A table of the maximum allowable pawn service
charges under the Texas Pawnshop Act for the various loan amounts is presented
in "Lending Activities". Under Texas law, there is a ceiling on the maximum
allowable pawn loan. For the period July 1, 2003 through June 30, 2004, the loan
ceiling was $12,750. For the period July 1, 2004 through June 30, 2005, the loan
ceiling was $13,000. For the period July 1, 2005 through June 30, 2006, the loan
ceiling is $13,500. Texas requires pawn transactions to be reported to local
authorities.
10
Under the Texas Pawnshop Act and the Rules, a pawnbroker may not do any of the
following: (i) accept a pledge from a person under the age of 18 years; (ii)
make any agreement requiring the personal liability of the borrower; (iii)
accept any waiver of any right or protection accorded to a pawn customer; (iv)
fail to exercise reasonable care to protect pledged goods from loss or damage;
(v) fail to return pledged goods to a pawn customer upon payment of the full
amount due; (vi) make any charge for insurance in connection with a pawn
transaction; (vii) enter into any pawn transaction that has a maturity date of
more than one month; (viii) display for sale in storefront windows or sidewalk
display cases pistols, swords, canes, blackjacks or similar weapons; (ix)
purchase used or second hand personal property unless a record is established
containing the name, address, and identification of the seller, a complete
description of the property, including serial number and a signed statement that
the seller has the right to sell the property; or, (x) accept into pawn or
purchase stolen goods.
The OCCC may, after notice and hearing, suspend or revoke any license for a
Texas pawnshop or employee upon finding that: (i) any fees or charges have not
been paid; (ii) the licensee has violated (knowingly or unknowingly without due
care) any provisions of the Texas Pawnshop Act or any regulation or order; or
(iii) any fact or condition exists which, if it had existed at the time the
original license application was filed would have justified the OCCC in refusing
the license. The OCCC may also take other administrative action against a
licensee including the assessment of fines and penalties.
COLORADO REGULATIONS
Colorado pawnbrokers must be licensed and bonded by local municipalities, which
subject them to extensive and varied regulation and supervision. Pawn
transactions must be reported to local authorities and pawnbrokers must maintain
certain bookkeeping records. As of August 5, 2004, Colorado law allows a maximum
pawn service charge of 240% annually for all pawn loans regardless of the amount
financed. Prior to August 5, 2004, Colorado law allowed a pawn service charge of
240% annually for loans up to $50 and 120% annually for loans greater than $50.
OKLAHOMA REGULATIONS
The Oklahoma Pawnshop Act follows a statutory scheme similar to the Texas
Pawnshop Act, requires pawnbrokers to be licensed and bonded, and regulates the
day-to-day operation of Oklahoma pawnshops. The Oklahoma Administrator of
Consumer Affairs administers the Oklahoma Pawnshop Act and has broad rule-making
authority. Additionally, the Oklahoma Administrator of Consumer Credit is
responsible for investigating the general fitness of pawnshop applicants. Each
applicant is required to (i) be of good moral character; (ii) have net assets of
at least $25,000; (iii) show that the pawnshop will be operated lawfully and
fairly; and (iv) not have been convicted of any felony that directly relates to
the duties and responsibilities of pawnbroking. Unlike Texas, Oklahoma pawnshop
employees are not individually licensed.
In general, the Oklahoma Pawnshop Act prescribes loan amounts and maximum rates
of service charges that pawnbrokers in Oklahoma may charge. The regulations
provide for a graduated rate structure, similar to the structure used for
federal income tax purposes. Under this rate structure, a $500 loan, for
example, earns interest as follows: (i) the first $150 at 240% annually, (ii)
the next $100 at 180% annually, and (iii) the remaining $250 at 120% annually.
The maximum allowable pawn service charges for the various loan amounts under in
Oklahoma are as follows:
Maximum Allowable
Amount Financed Annual Percentage
Per Pawn Loan Rate
- ----------------- -----------------
$ 1 to $ 150 240%
$ 151 to $ 250 180%
$ 251 to $ 500 120%
$ 501 to $ 1,000 60%
$1,001 to $25,000 35%
11
The principal amount of an Oklahoma pawn loan may not exceed $25,000 per
transaction.
FLORIDA REGULATIONS
Florida pawnshops are governed by the Florida Pawnbroking Act and accompanying
regulations. The Division of Consumer Services of the Department of Agriculture
and Consumer Services licenses and regulates pawnshops.
The Florida Pawnbroking Act and regulations require that the pawnshop complete a
Pawnbroker Transaction Form showing the customer name, type of item pawned, the
amount of the pawn loan, and the applicable finance charges. A copy of each form
must be delivered to local law enforcement officials at the end of each business
day.
Pawn loans in Florida have a 30-day minimum term. The pawnbroker is entitled to
charge two percent (2%) of the amount financed for each 30-day period as
interest, and an additional amount as pawn service charges, provided the total
amount of such charge, inclusive of interest, does not exceed 25% of the amount
financed for each 30-day period. The pawnbroker may charge a minimum pawn
service charge of $5.00 for each 30-day period. Pawn loans may be extended by
agreement, with the charge being one-thirtieth of the original total pawn
service charge for each day by which the loan is extended. For loans redeemed
greater than 60 days after the date made, pawn service charges continue to
accrue at the daily rate of one-thirtieth of the original total pawn service
charge.
The Pawnbroking Act prohibits pawnbrokers from: (i) falsifying or failing to
make entries in pawn transaction forms; (ii) refusing to allow appropriate law
enforcement officials to inspect their records; (iii) failing to retain records
of pawn transactions for at least two years; (iv) making any agreement requiring
the personal liability of a pawn customer; (v) failing to return pledged goods
upon payment in full of the amount due (unless the pledged goods have been taken
into custody by a court or law enforcement officer or otherwise lost or
damaged); or (vi) engaging in title loan transactions. Pawnbrokers are also
prohibited from entering into pawn transactions with a person who is under the
influence of alcohol or controlled substances, a person who is under the age of
eighteen, or a person using a name other than his own name or the registered
name of his business.
INDIANA REGULATIONS
In Indiana, the Pawnbroking Law governs pawnshops. The Department of Financial
Institutions (the "Department") regulates the Company's Indiana operations. The
Department requires the licensing of all pawnshops and investigates the general
fitness of pawn license applicants to determine whether the convenience and
needs of the public will be served by granting a pawn license. The Department
has broad investigatory and enforcement authority. It may grant, revoke, and
suspend licenses. Pawnshops are required to keep books, accounts, and records to
enable the Department to determine if the pawnshop is complying with the
statute. Each pawnshop is required to give authorized agents of the Department
free access to its books and accounts for these purposes.
The Indiana Pawnbroking Law prescribes loan amounts and maximum interest rates
that pawnbrokers in Indiana may charge for lending money. The regulations
provide for a graduated rate structure similar to the structure used for federal
income tax purposes. Under this rate structure, for July 1, 2004 through June
30, 2006, a $3,400 loan, for example, earns interest as follows: (i) the first
$990 at 36% annually, (ii) the next $2,310 at 21% annually, and (iii) the
remaining $100 at 15% annually. In addition to interest, the Company may also
charge a service charge of 240% annually. The maximum combined allowable
interest and service charges for the various loan amounts under the Indiana
statute are as follows:
Maximum Allowable
Amount Financed Annual Percentage
Per Pawn Loan Rate
- ----------------- -----------------
$ 1 to $990 276%
$991 to $3,300 261%
$ 3,301 and up 255%
12
The Indiana Pawnbroking Law provides for a grace period of 60 days after the
initial 30-day term of the loan. During the grace period, interest and service
fees continue to accrue and are prorated to the date of loan redemption.
ALABAMA REGULATIONS
The Alabama Pawnshop Act regulates the licensing and operation of Alabama
pawnshops. The Supervisor of the Bureau of Loans of the State Department of
Banking is responsible for licensing and investigating the general fitness of
pawnshop applicants. The Alabama Pawnshop Act requires that certain bookkeeping
records be maintained and made available to the Supervisor and to local law
enforcement authorities. The Alabama Pawnshop Act establishes a maximum
allowable pawn service charge of 300% annually.
NEVADA REGULATIONS
In Nevada, all pawn loans must be held for redemption for at least 120 days
after the date the loan is made. A pawnbroker may charge interest at the rate of
10% per month for money loaned on personal property actually received. In
addition, the pawnbroker may collect an initial set up fee of $5.00. Property
received in pledge may not be removed from the pawnshop until after the receipt
of the property is reported to the sheriff or chief of police, unless redeemed
by the owner.
LOCAL REGULATIONS
At the local level, most of the pawnshops voluntarily or pursuant to state law
or municipal ordinance, provide reports of pawn transactions and purchases from
customers to local law enforcement on a regular basis. These reports are
designed to provide local law enforcement with a detailed description of the
goods involved, including serial numbers, if any, and the names and addresses of
the customers.
A record of each transaction is provided to local law enforcement agencies to
aid in the investigation of property crimes. Goods held to secure pawn loans or
goods purchased which are determined to belong to an individual other than the
pawnshop customer are subject to recovery by the rightful owner. While a risk
exists that pledged or purchased merchandise may be subject to claims of
rightful owners, the Company's claims experience is historically less than 0.5%
of pawn loans made.
There can be no assurance that additional local, state, or federal legislation
will not be enacted or that existing laws and regulations will not be amended
which would materially, adversely impact the Company's operations, financial
condition, and the ability to expand its operations.
The above summaries generally describe the regulatory environments affecting the
majority of the Company's pawnshops. Although state pawnshop laws vary
considerably, the above summaries are representative of the statutes and
regulations in the other states in which the Company operates.
FIREARMS REGULATIONS
With respect to firearm sales, each pawnshop must comply with the regulations
issued by the Bureau of Alcohol, Tobacco, and Firearms (the "ATF"). ATF
regulations require each pawnshop dealing in firearms to maintain a permanent
written record of all transactions involving the receipt or disposition of
firearms.
The Brady Handgun Violence Prevention Act (the "Brady Act") and the related ATF
rules require all federal firearm licensees, in either selling firearms or
releasing pawned firearms, to have the customer complete appropriate forms and
pass a background check through the National Instant Criminal Background Check
System before the Company may transfer a firearm to any customer.
The Company complies with the Brady Act and the ATF regulations. The Company
does not believe that compliance with the Brady Act and the ATF regulations
materially affects the Company's operations. There can be no assurance, however,
that compliance with the Brady Act and the ATF regulations, or any future
changes or amendments to such regulations will not adversely affect the
Company's operations.
13
CREDIT SERVICE ORGANIZATION REGULATIONS
In July 2005, the Company registered as a Credit Service Organization ("CSO") in
Texas and began doing business as EZMONEY Loan Services, providing customers fee
based advice, assistance, and services in obtaining a loan from an unaffiliated
lender. CSOs in Texas are required to register with the Texas Office of the
Secretary of State pursuant to Chapter 393 of the Texas Finance Code. In order
to provide credit services in Texas, the Company registered each location where
it offers credit services and posted a surety bond in the amount of $10,000 per
location. The Company must renew its CSO registration annually.
As a CSO, Texas law requires each location to provide customers a disclosure
statement describing the services to be provided by the Company, the fees,
explanation of the customer's rights, identification of the surety bond company,
and other specified information. This disclosure must be delivered to the
customer prior to the Company entering into any contract with the customer for
credit services. The Company is also required to enter into a written contract
with each customer fully describing the services, the payment terms, the
Company's principal place of business, and agent authorized to receive service.
Customers have three days to cancel a CSO contract. The CSO statute also
prohibits the Company from making false or misleading representations or
statements, receiving compensation solely for referring a customer to a lender
who will or may make the loan on substantially the same terms, and engaging in
fraudulent or deceptive conduct. Violations of the CSO statute could subject the
Company to criminal and civil liability.
In Texas, the Company does business with two unaffiliated lenders. The lenders
are not required to be licensed and are not regulated by a state agency,
provided the interest rate charged on their loans does not exceed 10% annually.
The lenders are authorized to charge a late fee for loans past due more than 10
days and an insufficient funds fee; however, the lenders that the Company does
business with do not assess late fees. The insufficient funds fee is $30. If a
customer defaults on a loan, the letter of credit issued by the Company
authorizes the unaffiliated lender to make demand on the Company for payment of
the principal, interest, and insufficient funds fee, if any. The Company is
obligated to pay the lender on any demand made on the letter of credit pursuant
to the terms and conditions set forth in the letter of credit.
PAYDAY LOAN REGULATIONS
During Fiscal 2005, the Company marketed and serviced payday loans on behalf of
County Bank, in Texas, Florida and through its Austin, Texas based call center.
The Delaware Department of Banking and the Federal Deposit Insurance Corporation
(the "FDIC") supervise County Bank. These regulators review all aspects of
County Bank's payday loan program as well as the Company's operations. In turn,
County Bank periodically audits the Company's marketing and servicing
operations. County Bank has notified the Company that it will cease making
payday loans as of December 31, 2005.
In October 2003, the Company began marketing and servicing payday loans for
County Bank in Florida through the Company's pawnshops. By December 31, 2005,
the Company will have ceased marketing and servicing payday loans in Florida for
County Bank, and will begin offering credit services in its Florida EZMONEY
stores.
In May 2002, the Company also began marketing payday loans for County Bank
through a call center located in Texas. On October 1, 2005, the Company ceased
marketing new payday loans for County Bank in its call center. It will continue
to service County Bank loans in its call center, including renewals of existing
loans, through December 31, 2005, at which time the Company plans to close its
payday loan call center.
In Colorado, the Company makes payday loans to customers pursuant to state law
and its own underwriting guidelines. Payday loans made by the Company in
Colorado are regulated by the Department of Law, Office of the Attorney General,
Uniform Consumer Credit Code Division (the "UCCC Division"). The Company's
Colorado stores have and are required to maintain a supervised lender's license
issued by the UCCC Division. The UCCC Division maintains regulatory and
supervisory authority
14
over the Company's payday loan activities. The Company is required to maintain
certain records related to its payday loans and include specific information and
disclosures in the loan agreement.
The Colorado maximum payday loan amount is $500, exclusive of the service fee.
Colorado law provides for a graduated service fee of 20% of the first $300 and
7.5% of the amount over $300. The loan term may not exceed 40 days, may be
renewed once, and customers have the right to rescind the loan within one
business day after the date the loan was made. By law, the loan cannot be
renewed more than once and if it is renewed prior to the maturity date, the
Company must refund a prorated portion of the service fee.
Payday loans made by the Company in Oklahoma are regulated by the Oklahoma
Department of Consumer Credit (the "ODCC"). The Company's Oklahoma stores making
payday loans are required to maintain a deferred deposit lender license issued
by the ODCC. The ODCC maintains regulatory and supervisory authority over the
pawnshops' payday loan activities. The Company is required to maintain certain
records related to its payday loans and include specific information and
disclosures in the loan agreement.
The Oklahoma maximum loan amount is $500 exclusive of the service fee. Oklahoma
law provides for a service fee of 15% of the first $300 and 10% of the amount
over $300. The loan term may not exceed 45 days, and customers have the right to
rescind the loan within one business day after the date the loan was made. The
loan cannot be renewed. The Company must deliver specific disclosures to the
customer related to the customer's rights and responsibilities in the payday
loan, as well as submit the customer's application and loan status to a state
operated database in order to make certain determinations about outstanding or
prior payday loans.
MISCELLANEOUS STATE AND FEDERAL LENDING STATUTES
The Company's pawn, CSO and payday loan operations are subject to extensive
state and federal statutes and regulations such as the federal Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act and similar state
laws. The Company complies with the requirements of these federal and state
statutes and their regulations with respect to its business operations.
15
ITEM 1A. RISK FACTORS
Important risk factors that could cause results or events to differ from current
expectations are described below. These factors are not intended to be an
all-encompassing list of risks and uncertainties that may affect the operations,
performance, development and result of the Company's business. Readers are
cautioned not to place undue reliance on this discussion, which speaks only as
of the date hereof. The Company undertakes no obligation to release publicly the
results of any revisions to these risk factors 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,
store growth plans, or to reflect the occurrence of unanticipated events.
- - CHANGES IN CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SERVICES COULD
RESULT IN A SIGNIFICANT DECREASE IN REVENUES. Although the Company's customer
base commonly uses its products and services, the Company's failure to meet
changing demands of its customers could result in a significant decrease in
its revenues.
- - CHANGES IN GOVERNMENTAL RULES AND REGULATIONS APPLICABLE TO THE SPECIALTY
FINANCIAL SERVICES INDUSTRY COULD HAVE A NEGATIVE IMPACT ON THE COMPANY'S
LENDING ACTIVITIES. The Company's lending is subject to extensive regulation,
supervision and licensing requirements under various federal, state and local
laws, ordinances and regulations. New laws and regulations or changes in
existing laws and regulations could have a negative impact on the Company's
lending activities.
THE COMPANY'S CSO REVENUES ARE DEPENDENT UPON UNAFFILIATED LENDERS' ABILITY
AND WILLINGNESS TO MAKE LOANS TO THE COMPANY'S CUSTOMERS. The loss of the
relationships with its unaffiliated lenders could significantly decrease the
Company's revenues and earnings.
- - ACHIEVEMENT OF THE COMPANY'S FUTURE FINANCIAL RESULTS IS DEPENDENT UPON ITS
ABILITY TO OPEN AND ACQUIRE NEW STORES. The Company's expansion program is
subject to numerous factors that cannot be predicted or controlled, such as
identifying acceptable locations or attractive acquisition targets and the
Company's ability to attract, train and retain qualified store associates.
- - FLUCTUATIONS IN THE COMPANY'S SALES, PAWN LOAN BALANCES, SALES MARGINS, PAWN
REDEMPTION RATES, AND SIGNATURE LOAN DEFAULT AND COLLECTION RATES COULD HAVE A
MATERIAL ADVERSE IMPACT ON THE COMPANY'S OPERATING RESULTS. The Company
regularly experiences fluctuations in these operating metrics. Changes in any
of these factors, as might be caused by changes in the economic environment or
a significant decrease in gold prices, could materially and adversely affect
the Company's profitability and ability to achieve its planned results.
- - CHANGES IN THE COMPANY'S LIQUIDITY AND CAPITAL REQUIREMENTS COULD LIMIT ITS
ABILITY TO ACHIEVE ITS PLANS. The Company requires continued access to
capital; a significant reduction in cash flows from operations or the
availability of credit could materially and adversely affect the Company's
ability to achieve its planned growth and operating results. Similarly, if
actual costs to build new stores significantly exceed planned costs, this
could materially restrict the Company's ability to build new stores or to
operate new stores profitably. The Company's credit agreement also limits the
allowable amount of capital expenditures in any given fiscal year, which could
limit the Company's ability to build all planned new stores.
- - CHANGES IN COMPETITION FROM VARIOUS SOURCES COULD HAVE A MATERIAL ADVERSE
IMPACT ON THE COMPANY'S ABILITY TO ACHIEVE ITS PLANS. The Company encounters
significant competition in connection with its lending and retail operations
from other pawnshops, cash advance companies and other forms of financial
institutions and other retailers, many of which have significantly greater
financial resources than the Company. Significant increases in these
competitive influences could adversely affect the Company's operations through
a decrease in the number or quality of signature and pawn loans or the
Company's ability to liquidate forfeited collateral at acceptable margins.
16
- - THE COMPANY'S EARNINGS COULD BE NEGATIVELY IMPACTED BY AN UNFAVORABLE OUTCOME
OF LITIGATION OR REGULATORY ACTIONS. From time to time, the Company is
involved in litigation and regulatory actions. The Company is currently a
defendant in several actions. Although the Company believes the resolution of
these actions will not have a material adverse effect on its financial
condition, results of operation or liquidity, there can be no assurance as to
the ultimate outcome of these actions.
- - A FAILURE IN THE COMPANY'S INFORMATION SYSTEMS COULD PREVENT IT FROM
EFFECTIVELY MANAGING AND CONTROLLING ITS BUSINESS OR SERVING ITS CUSTOMERS. We
rely on our information systems to manage and control our stores and business.
Our back-up systems and security measures could fail to prevent a disruption
in the availability of our information systems. Any disruption in the
availability of our information systems could adversely affect our operation,
the ability to serve our customers and our results of operations.
- - A FAILURE OF THE COMPANY'S INTERNAL CONTROLS AND DISCLOSURE CONTROLS AND
PROCEDURES COULD HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY AND ITS
INVESTORS' CONFIDENCE IN OUR REPORTED FINANCIAL INFORMATION. Effective
internal controls and disclosure controls and processes are necessary for us
to provide reliable financial reports and to detect and prevent fraud, and any
failure in those controls could have a material negative impact on our
financial results and the price of the Company's stock.
- - ONE PERSON HOLDS VOTING CONTROL OF THE COMPANY AND CONTROLS THE OUTCOME OF ALL
MATTERS REQUIRING A VOTE OF STOCKHOLDERS, WHICH MAY INFLUENCE THE VALUE OF OUR
PUBLICLY TRADED STOCK. Mr. Phillip E. Cohen controls all of the Company's
Class B Voting Common Stock. He elects all the Company's directors and
controls the outcome of all other issues requiring a vote of stockholders.
Some investors or potential investors may not like this concentration of
control, which may adversely affect the price of the Company's Class A Common
Stock.
- - THE COMPANY FACES OTHER RISKS DISCUSSED UNDER QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK IN ITEM 7A OF THIS FORM 10-K.
- - THE COMPANY ALSO FACES OTHER RISKS INDICATED IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
17
ITEM 2. PROPERTIES
The typical Company pawnshop is a freestanding building or part of a retail
strip center with contiguous parking. Store interiors are designed to resemble
small retail operations and attractively display merchandise by category.
Distinctive exterior design and attractive in-store signage provide an appealing
atmosphere to customers. The typical pawn store has approximately 1,800 square
feet of retail space and approximately 3,200 square feet dedicated to collateral
storage. In 2003, the Company began developing Mono-line payday loan stores. A
Mono-line store is designed to resemble a bank interior and offers only payday
loans or credit services to help a customer obtain short-term signature loans.
The typical stand-alone Mono-line store is approximately 1,000 square feet and
is located in a retail strip center. In some of its pawnshop locations, the
Company operates Mono-line adjoined stores of approximately 300 square feet,
which have a different entrance, signage, decor, and staffing. From the
customers' perspective, these are viewed as a separate business. The Company
maintains property and general liability insurance for each of its stores. The
Company's stores are open six or seven days a week.
As of October 31, 2005, the Company owned the real estate and building for one
location containing an EZPAWN and an adjoining EZMONEY, leased 279 locations
containing EZPAWNs and 157 adjoining EZMONEYs, and leased 76 EZMONEY Mono-line
locations. The Company also owns the real estate and building for one
non-operating location. In Fiscal 2003, the Company sold one parcel of land and
entered into sale-leaseback transactions with unaffiliated parties for three of
its store locations, each with an initial lease term of 15 years. The Company
generally leases facilities for a term of five to ten years with one or more
options to renew. The Company's existing leases expire on dates ranging between
December 15, 2005 and April 30, 2023, with a small number of leases on
month-to-month terms. All leases provide for specified periodic rental payments
at market rates. Most leases require the Company to maintain the property and
pay the cost of insurance and taxes. The Company believes that the termination
of any one of its leases would not have a material adverse effect on the
Company's operations. The Company's strategy generally is to lease rather than
acquire space for its stores unless the Company finds what it believes is a
superior location at an attractive price.
Below is a summary of changes in the number of store locations during Fiscal
2003, 2004, and 2005. Included in the new stores opened in 2003, 2004, and 2005
are two, 93, and 63 EZMONEY stores adjoining existing pawnshop locations. All
other new stores are separate EZMONEY locations.
Fiscal Year Ended September 30,
-------------------------------
2003 2004 2005
---- ---- ----
Store count at beginning of fiscal year 280 284 405
New stores opened 4 121 110
Stores closed or consolidated - - (1)
Stores sold as operating businesses - - -
--- --- ---
Store count at end of fiscal year 284 405 514
=== === ===
On an ongoing basis, the Company may close or consolidate under-performing store
locations. In Fiscal 2005, the Company closed one Mono-line store.
18
The following table presents the number of locations serving each metropolitan
area or region (as defined by the Company) as of October 31, 2005:
EZPAWN EZMONEY
Stores in Stores in
Region/Area Each Area Each Area
- ----------- --------- ---------
Texas:
Houston 59 69
Dallas 17 44
San Antonio 21 23
West and Southwest 19 16
Valley 20 8
Austin Area 7 19
Central 10 7
Panhandle 9 6
Corpus Christi 8 6
Laredo Area 11 2
--- ---
Total Texas 181 200
Colorado:
Denver Area 17 14
Colorado Springs Area 7 10
--- ---
Total Colorado 24 24
Oklahoma:
Tulsa Area 10 3
Oklahoma City Area 9 3
Other Areas 1 -
--- ---
Total Oklahoma 20 6
Florida:
Tampa 9 3
Orlando 8 -
Other Areas 1 -
--- ---
Total Florida 18 3
Indiana:
East Indianapolis 7 -
South Indianapolis 8 -
--- ---
Total Indiana 15 -
Alabama:
Birmingham Area 5 -
Mobile 2 -
Other Areas 1 1
--- ---
Total Alabama 8 1
Nevada:
Las Vegas 4 -
--- ---
Total Nevada 4 -
19
EZPAWN EZMONEY
Stores in Stores in
Region/Area Each Area Each Area
- ----------- --------- ---------
Tennessee:
Memphis 3 -
--- ---
Total Tennessee 3 -
Louisiana:
New Orleans Area 2 -
Other Areas 1 -
--- ---
Total Louisiana 3 -
Mississippi:
Jackson 2 -
Other Areas 1 -
--- ---
Total Mississippi 3 -
Arkansas:
West Helena 1 -
--- ---
Total Arkansas 1 -
--- ---
Total Company 280 234
=== ===
In addition to its store locations, the Company leases its 27,400 square foot
corporate office and 8,100 square foot facility for its jewelry processing
center, payday loan call center, and payday loan collections center located in
Austin, Texas.
20
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory actions.
Currently, the Company is a defendant in several actions. While the ultimate
outcome of these actions cannot be ascertained, 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. 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
None.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 27, 1991, the Company's Class A Non-voting Common Stock ("Class A
Common Stock") has traded on The NASDAQ Stock Market under the symbol EZPW. As
of October 31, 2005, there were 116 stockholders of record of the Company's
Class A Common Stock. There is no trading market for the Company's Class B
Voting Common Stock ("Class B Common Stock"), and as of October 31, 2005, such
stock was held by one stockholder of record.
The high and low per share price for the Company's Class A Common Stock for the
past two fiscal years, as reported by The NASDAQ Stock Market, were as follows:
High Low
---- ---
Fiscal 2004:
First quarter ended December 31, 2003 $ 9.00 $ 5.81
Second quarter ended March 31, 2004 11.91 8.40
Third quarter ended June 30, 2004 13.44 7.13
Fourth quarter ended September 30, 2004 10.53 6.55
Fiscal 2005:
First quarter ended December 31, 2004 $ 15.41 $ 7.47
Second quarter ended March 31, 2005 21.69 12.66
Third quarter ended June 30, 2005 16.15 9.37
Fourth quarter ended September 30, 2005 19.14 10.85
On October 31, 2005, the Company's Class A Common Stock closed at $14.69 per
share.
During the past three fiscal years, no dividends have been declared or paid.
Under the terms of the Company's amended and restated credit agreement, which
matures April 1, 2007, payment of dividends is allowed but restricted. Should
dividends be paid in the future, the Company's restated certificate of
incorporation provides that cash dividends on common stock, when declared, must
be declared and paid at the same per share amounts on the Class A Common Stock
and the Class B Common Stock.
Any interested party may request a copy of this Annual Report on Form 10-K or of
the Company's Code of Conduct and Ethics, free of charge by submitting a written
request to EZCORP, Inc., Investor Relations, 1901 Capital Parkway, Austin, Texas
78746. The Code of Conduct and Ethics also may be obtained from the Company's
website at www.ezcorp.com.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
the Company and accompanying notes included elsewhere in this Form 10-K:
SELECTED FINANCIAL DATA
Fiscal Years Ended September 30,
------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
(Amounts in thousands, except per share and store figures)
(a) (a)
Operating Data:
Sales $128,637 $131,046 $134,591 $143,472 $148,410
Pawn service charges 54,666 56,676 58,175 59,090 62,274
Payday loan service charges 2,142 8,251 12,538 23,874 28,954
Credit service fees - - - - 13,246
Other 725 925 1,045 1,361 1,275
-------- -------- -------- -------- --------
Total revenues 186,170 196,898 206,349 227,797 254,159
Cost of goods sold 79,089 84,936 86,100 88,202 90,678
-------- -------- -------- -------- --------
Net revenues 107,081 111,962 120,249 139,595 163,481
Store operating expenses 73,823 74,325 80,688 86,862 95,876
Payday loan bad debt and other direct expenses 1,422 3,940 4,685 9,103 7,808
Credit service bad debt and other direct
expenses - - - - 6,395
Corporate administrative expenses 14,043 15,619 17,008 21,845 23,067
Depreciation and amortization 10,808 10,087 8,775 7,512 8,104
Restructuring expense (696) - - - -
Interest expense, net 8,245 4,770 2,006 1,528 1,275
Equity in net income of unconsolidated
affiliate (267) (604) (1,412) (1,739) (2,173)
Loss on sale of assets 413 327 170 3 79
Impairment of investment - - 1,100 - -
-------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of adopting a new
accounting principle (710) 3,498 7,229 14,481 23,050
Income tax expense (benefit) (142) 1,294 (1,170) 5,358 8,298
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
adopting a new accounting principle (568) 2,204 8,399 9,123 14,752
Cumulative effect of adopting a new
accounting principle, net of tax - - (8,037) - -
-------- -------- -------- -------- --------
Net income (loss) $ (568) $ 2,204 $ 362 $ 9,123 $ 14,752
======== ======== ======== ======== ========
Earnings (loss) per common share, assuming $ (0.05) $ 0.18 $ 0.03 $ 0.70 $ 1.09
dilution
Cash dividends per common share $ - $ - $ - $ - $ -
Weighted average common shares and
share equivalents, assuming dilution 12,104 12,292 12,552 13,122 13,574
Stores operated at end of period 283 280 284 405 514
23
SELECTED FINANCIAL DATA (CONTINUED)
September 30,
------------------------------------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Pawn loans $ 47,144 $ 49,248 $ 47,955 $ 49,078 $ 52,864
Payday loans 1,250 2,326 3,630 7,292 1,634
Inventory 34,231 32,097 29,755 30,636 30,293
Working capital 75,334 86,425 90,885 93,062 92,954
Total assets 178,560 165,970 153,690 164,322 165,448
Long-term debt 60,192 42,245 31,000 25,000 7,000
Stockholders' equity 101,957 104,544 105,478 116,729 133,543
Fiscal Years Ended September 30,
------------------------------------------------------------
Pro forma amounts assuming the new
accounting principle is applied
retroactively: 2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Net income $ 129 $ 2,901 $ 8,399 $ 9,123 $ 14,752
Net income per diluted share 0.01 0.24 0.67 0.70 1.09
Total assets 167,069 155,091 153,959 164,591 165,717
(a) Beginning in Fiscal 2003, the Company adopted Statement of Financial Accounting Standards No. 142, which
ceased amortization of certain indefinite lived intangible assets (See Note B to consolidated financial
statements). Amortization expense and equity in net income of affiliate before Fiscal 2003 are stated on
the historical accounting method, and are not directly comparable to Fiscal 2003 through Fiscal 2005
amounts.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis compares the results of operations for the 12-month
periods ended September 30, 2003, 2004, and 2005 ("Fiscal 2003", "Fiscal 2004",
and "Fiscal 2005"). The discussion should be read in conjunction with, and is
qualified in its entirety by, the accompanying consolidated financial statements
and related notes.
SUMMARY FINANCIAL DATA
Fiscal Years Ended September 30,
--------------------------------
2003 2004 2005
---- ---- ----
NET REVENUES: (Dollars in thousands, except as indicated)
Sales $134,591 $143,472 $148,410
Pawn service charges 58,175 59,090 62,274
Payday loan service charges 12,538 23,874 28,954
Credit service fees - - 13,246
Other 1,045 1,361 1,275
-------- -------- --------
Total revenues 206,349 227,797 254,159
Cost of goods sold 86,100 88,202 90,678
-------- -------- --------
Net revenues $120,249 $139,595 $163,481
======== ======== ========
Income before cumulative effect of adopting a new
accounting principle $ 8,399 $ 9,123 $ 14,752
Cumulative effect of adopting new accounting
principle, net of tax (8,037) - -
-------- -------- --------
Net income $ 362 $ 9,123 $ 14,752
======== ======== ========
OTHER DATA:
Gross margin on sales 36.0% 38.5% 38.9%
Average annual inventory turnover 2.7x 2.8x 3.0x
Average inventory per pawn location at year end $ 106 $ 109 $ 108
Average pawn loan balance per pawn location at year end $ 171 $ 175 $ 189
Average pawn loan at year end (whole dollars) $ 71 $ 70 $ 76
Average yield on pawn loan portfolio 126% 126% 133%
Pawn loan redemption rate 76% 76% 77%
Signature loan bad debt as a percent of signature loan 28% 34% 31%
revenues (a)
(a) Signature loans include payday loans (included in the Company's balance sheet) and loans coordinated
through the Company's credit services (excluded from the Company's balance sheet).
25
SUMMARY FINANCIAL DATA (CONTINUED)
Fiscal Years Ended September 30,
--------------------------------
2003 2004 2005
---- ---- ----
EXPENSES AND INCOME AS A PERCENTAGE OF NET REVENUE (%):
Store operating 67.1 62.2 58.6
Payday loan bad debt & other direct expenses 3.9 6.5 4.8
Credit service bad debt & other direct expenses - - 3.9
Administrative 14.1 15.6 14.1
Depreciation and amortization 7.3 5.4 5.0
Interest, net 1.7 1.1 0.8
Income before income taxes 6.0 10.4 14.1
Income before cumulative effect 7.0 6.5 9.0
STORES IN OPERATION:
Beginning of year 280 284 405
New openings 4 121 110
Sold, combined, or closed - - (1)
---- ---- ----
End of year 284 405 514
==== ==== ====
Average number of locations during the year 280 337 462
COMPOSITION OF ENDING STORES:
EZPAWN locations 280 280 280
Mono-line signature loan locations adjoining EZPAWNs 2 95 158
Mono-line signature loan locations - free standing 2 30 76
---- ---- ----
Total stores in operation 284 405 514
==== ==== ====
EZPAWN locations offering signature loans 225 162 98
Total locations offering signature loans 229 287 332
GENERAL
The Company is primarily a lender or provider of credit services to individuals
who do not have cash resources or access to credit to meet their short-term cash
needs. In 280 EZPAWN locations (as of September 30, 2005), the Company offers
non-recourse loans collateralized by tangible personal property, commonly known
as pawn loans. At these locations, the Company also sells merchandise, primarily
collateral forfeited from its pawn lending operations, to consumers looking for
good value. In 234 EZMONEY ("Mono-line" stores) and 98 EZPAWN locations (as of
September 30, 2005), the Company offers short-term non-collateralized loans,
often referred to as payday loans, or fee based credit services to customers
seeking loans.
The income earned on pawn lending is pawn service charge revenue. While
allowable service charges vary by state and loan size, a majority of the
Company's 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 loan duration ranges between 60 and 120 days, consisting of the
regulated term plus a grace period offered by the Company.
Also in its pawnshops, the Company acquires inventory for its retail sales
primarily through pawn loan forfeitures and, to a lesser extent, through
purchases of customers' merchandise. The realization of gross profit on sales of
inventory depends primarily on the Company's assessment of the resale value at
the time the property is either accepted as loan collateral or purchased.
Improper assessment of the resale value in the lending or purchasing process can
result in the realization of a lower margin or reduced marketability of the
property.
26
As of September 30, 2005, the Company offered credit services or unsecured
payday loans (collectively, "signature loans") in 234 EZMONEY Mono-line stores,
98 of its pawnshops, and in an Austin, Texas based payday loan call center.
The Company earns payday loan service charge revenue on its payday loans. As of
September 30, 2005, the Company markets and services payday loans made by County
Bank of Rehoboth Beach ("County Bank"), a federally insured Delaware bank in 69
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. Effective December 31, 2005, County Bank will no longer maintain a
payday loan program. Most of these locations will begin providing credit
services to consumers in obtaining loans from an unaffiliated lender. In 63 of
its locations, the Company makes payday loans in compliance with state law. The
average payday loan amount is approximately $380 and the terms are generally
less than 30 days, averaging about 17 days. The service charge per $100 loaned
ranges from $15 to $20 for a 7 to 23-day period.
On July 15, 2005, the EZMONEY stores located in Texas ceased marketing payday
loans and began providing fee-based credit services to consumers in obtaining
loans from an unaffiliated lender. At September 30, 2005, 200 of the Company's
234 signature loan stores offered credit services. The Company does not
participate in the loans made by the lender, but earns a fee of 20% of the loan
amount for assisting the customer in obtaining credit and by enhancing the
borrower's creditworthiness through the issuance of a letter of credit. The
average loan obtained by the Company's credit service customers is approximately
$500 and the terms are generally less than 30 days, averaging about 19 days.
In Fiscal 2005, the Company's net income improved to $14.8 million compared to
$9.1 million in Fiscal 2004. Contributing to the earnings improvement was
significant growth in the Company's signature loan business, as well as
improvements in its pawn loan yield and gross profits on merchandise sales.
Partially offsetting these factors was the incremental operating costs at the
109 new Mono-line stores, a full year of expenses at the 121 Mono-line stores
added in Fiscal 2004, and an increase in administrative expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. 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 from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies and estimates
could have a significant impact on its results of operations. Readers should
refer to Note A of the Company's consolidated financial statements for a more
complete review of the Company's other accounting policies and estimates used in
the preparation of its consolidated financial statements.
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 uncollectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans in its ending portfolio. 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
27
condition. In Fiscal 2005, 98.7% ($61.5 million) of recorded pawn service charge
revenue was collected in cash, and 1.3% ($0.8 million) resulted from an increase
in accrued pawn service charges receivable.
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. In Fiscal 2005, 104.2% ($30.2 million) of
recorded payday loan service charge revenue was collected in cash, offset by
4.2% ($1.2 million) from a decrease in accrued payday loan service charges
receivable. The decrease relates to the July 15, 2005 conversion of many stores
from offering payday loans to offering fee-based credit services.
The Company considers a payday 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 $8.0 million and $6.6 million in Fiscal 2004 and Fiscal 2005,
representing 34% and 23% of payday loan service charges in the respective
periods.
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. The accuracy of
the Company's allowance estimate is dependent upon several factors, including
its ability to predict future default rates based on historical trends and
expected future events. Actual loan losses could vary from those estimated due
to variance in any of these factors. 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. Increased defaults and credit
losses may occur during a national or regional economic downturn, or could occur
for other reasons, resulting in the need to increase the allowance. The Company
believes it effectively manages these risks through its underwriting criteria,
closely monitoring the performance of the portfolio, and participating in loans
made by a bank using similar strategies. At September 30, 2005, the allowance
for losses on payday loans was $0.2 million, representing 60% of payday loan
fees receivable.
CREDIT SERVICE REVENUE RECOGNITION: The Company earns credit service fees when
it assists customers in obtaining a loan from an unaffiliated lender. The
Company accrues credit service fees on the percentage of fees the Company
expects to collect. Accrued fees related to defaulted loans are deducted from
credit service fee revenue upon loan default and increase credit service fee
revenue upon subsequent collection.
CREDIT SERVICE BAD DEBT AND OTHER DIRECT EXPENSES: As part of its credit
services, the Company issues a letter of credit to enhance the creditworthiness
of the Company's customers seeking loans from an unaffiliated lender. The letter
of credit assures the lender that if the borrower defaults on his loan, the
Company will pay the lender the principal and accrued interest owed by the
borrower, plus an insufficient funds fee, all of which the Company records as
bad debt and then attempts to collect from the borrower. The Company considers a
loan defaulted, and pays all amounts due under the related letter of credit, if
the loan has not been repaid or renewed by the maturity date. Although amounts
paid under letters of credit may be collected later, the Company charges those
amounts to bad debt upon default. Subsequent recoveries under the letters of
credit are recorded as a reduction of bad debt at the time of collection. The
Company's credit service bad debt, included in credit service bad debt and other
direct expenses, was $6.4 million for Fiscal 2005, representing 48% of credit
service fee revenues in Fiscal 2005. The Company had no bad debt in Fiscal 2003
or Fiscal 2004, as it did not offer credit services in those years.
28
CREDIT SERVICE ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses it expects to incur under letters of credit for loans that are active at
period-end but have not yet matured. Its allowance is based on recent loan
default experience and expected seasonal variations, and includes all amounts it
expects to pay to the unaffiliated lender upon loan default, including loan
principal, accrued interest, and insufficient funds fees, net of the amounts it
expects to subsequently collect from borrowers ("Expected LOC Losses"). Changes
in the valuation allowance are charged to credit service bad debt expense in the
Company's statement of operations. At September 30, 2005, the allowance for
Expected LOC Losses was $1.4 million, representing 46% of credit service fees
receivable.
Based on the same expected loss and collection percentages, the Company also
provides an allowance for its credit service fees it expects not to collect and
charges changes in the credit service fee receivable valuation allowance to
credit service fee revenue. At September 30, 2005, this reserve amounted to $0.3
million, or 9.0% of credit service fees receivable.
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 September 30,
2005, this allowance was approximately $1.9 million, or 5.9% of the gross
inventory balance. Changes in the inventory valuation allowance are recorded as
cost of goods sold. The accuracy of the company's inventory allowance is
dependent on its ability to predict future events based on historical trends.
Unexpected variations in sales margins, inventory turnover, or other factors,
including fluctuations in gold values could increase or decrease the company's
inventory allowance.
RESULTS OF OPERATIONS
FISCAL 2005 COMPARED TO FISCAL 2004
The Company's Fiscal 2005 pawn service charge revenue increased 5.4%, or $3.2
million from Fiscal 2004 to $62.3 million. The growth was due to an improvement
in loan yields to 133% from 126% in Fiscal 2004. Slightly offsetting this was a
0.3% lower average outstanding pawn loan balance in Fiscal 2005.
Fiscal 2005 sales increased $4.9 million from Fiscal 2004 to $148.4 million. The
increase was due to a $2.8 million increase in jewelry scrapping and a $2.1
million increase in same store merchandise sales. Below is a summary of Fiscal
2004 and 2005 sales and margins:
Fiscal Year Ended September 30,
-------------------------------
2004 2005
---- ----
(Dollars in millions)
Merchandise sales $ 116.8 $ 119.0
Jewelry scrapping sales 26.7 29.4
------- -------
Total sales 143.5 148.4
Gross profit on merchandise sales $ 49.1 $ 50.3
Gross profit on jewelry scrapping sales 6.1 7.5
Gross margin on merchandise sales 42.1% 42.3%
Gross margin on jewelry scrapping sales 23.0% 25.3%
Overall gross margin 38.5% 38.9%
Fiscal 2005 overall gross margins on sales increased 0.4 of a percentage point
from Fiscal 2004 to 38.9%. Margins on merchandise sales increased 0.2 of a
percentage point as a result of less discounting and lower loan values on
forfeited collateral. Jewelry scrapping margins improved 2.3 percentage points
due largely to gold prices rising at a faster rate than the Company's increases
in gold loan and purchase
29
values. Future fluctuations in gold prices would have an immediate and direct
impact on the proceeds of scrapped jewelry. In response to these fluctuations,
the Company may adjust the amount it lends on jewelry, as it did in Fiscal 2005,
which would ultimately impact the cost of inventory sold and sales margins.
Inventory shrinkage, included in cost of goods sold, was 1.5% of merchandise
sales in Fiscal 2005 compared to 1.7% in Fiscal 2004.
At September 30, 2005, the Company offered signature loans in 332 locations and
a call center, an increase from September 30, 2004, when the Company offered
signature loans in 287 locations and a call center. Prior to July 15, 2005, the
Company's signature loans consisted of only payday loans. Beginning July 15,
2005, most of its locations offering payday loans ceased marketing payday loans
and began providing fee-based credit services to consumers in obtaining loans
from an unaffiliated lender.
The Company opened 121 signature loan stores in Fiscal 2004, and another 110 in
Fiscal 2005. One Mono-line location was closed in Fiscal 2005. Signature loan
data (combined payday loan and credit service activities) are as follows for
Fiscal 2004 and 2005:
Fiscal Year Ended September 30,
-------------------------------
2004 2005
---- ----
(Dollars in thousands)
Service charge revenue $ 23,874 $ 42,200
Bad debt:
Net defaults, including interest and insufficient fund fees on CSO
loans (7,966) (11,960)
Change in valuation allowance (260) (1,043)
Insufficient funds fees collected and other related costs 159 3
-------- --------
Net bad debt (8,067) (13,000)
Other direct transaction expenses (1,036) (1,203)
Operating expenses at Mono-line stores (3,239) (12,859)
Depreciation and amortization at Mono-line stores (156) (590)
Collection and call center costs (included in administrative expense)
(851) (1,579)
-------- --------
Contribution to operating income $ 10,525 $ 12,969
======== ========
Average signature loan balance outstanding during year (a) $ 5,581 $ 10,118
Signature loan balance at end of year (a) $ 7,292 $ 15,904
Participating locations at end of year, including call center (whole
numbers) 288 333
Signature loan bad debt as a percent of service charge revenue 34% 31%
Signature loan net default rate (a) (b) 5.9% 5.0%
(a) Signature loan balances include payday loans recorded on the Company's balance sheet and the principal portion
of active loans outstanding from CSO lenders, the balance of which is not included on the Company's balance
sheet.
(b) Principal defaults net of collections, as a percent of signature loans made and renewed.
The Contribution to operating income presented above includes the effect of
incremental operating expenses at Mono-line stores. Shared costs at adjoined
Mono-line stores, such as rent and labor, have been excluded from these figures.
Signature loan service charge revenue increased from Fiscal 2004 primarily due
to higher average loan balances at existing stores and the addition of new
Mono-line stores. Although signature loan bad debt has improved three percentage
points as a percent of related service charges, it increased $4.9 million in
Fiscal 2005 due to the increased volume of signature loans. As a percent of
related service charges, the Company's bad debt on payday loans decreased from
34% in Fiscal 2004 to 23% in Fiscal 2005, but bad debt on CSO activities was 48%
of related service charges. To transition customers from County Bank loans to
credit services, the Company relaxed its underwriting criteria during the
transitional period. In doing so, the Company enjoyed a significant increase in
credit services volume, but did experience an
30
increase in the losses on its letters of credit obligations as compared to its
bad debt on payday loans. The Company has made subsequent modifications to its
underwriting for the credit services and expects future bad debt rates to be
lower than those experienced during this transitional 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 September 30, 2005, the valuation
allowance was 60% of payday loan fees receivable, or 7.8% of payday loan
principal and fees receivable.
Store operating expenses increased to $95.9 million in Fiscal 2005 from $86.9
million in Fiscal 2004. The increase was due to $9.6 million additional
operating expenses at new Mono-line stores opened in Fiscal 2005 or stores
opened during Fiscal 2004 with a full year of expenses in Fiscal 2005. Included
in this amount is a one-time cost of $0.6 million related directly to the
conversion of stores from offering payday loans to offering credit services.
Offsetting this was a $0.6 million reduction in same store operating expenses.
Although operating expenses increased in dollars, it represents a 3.6 percentage
point decrease when measured as a percent of net revenue.
Administrative expenses were $23.1 million (14.1% of net revenue) in Fiscal 2005
compared to $21.8 million (15.6% of net revenue) in Fiscal 2004. The $1.3
million increase is due primarily to a $1.9 million increase in labor and
benefits, a $0.8 million increase in legal and professional fees, and a $0.3
million increase in travel expenses, offset by a $1.1 million reduction in
restricted stock grants and related taxes. Also offsetting the increase was the
absence of a $0.7 million impairment of a note receivable from a former Chief
Executive Officer of the Company, as was seen in Fiscal 2004. Included in
administrative expenses are management fees for a related party totaling $1.2
million and $0.8 million in Fiscal 2005 and 2004, as more fully discussed in
Item 13 of this report.
Depreciation and amortization expense increased $0.6 million in Fiscal 2005 to
$8.1 million, primarily due to the net effect of assets placed in service versus
assets that became fully depreciated during the year. Of the total, $0.4 million
related to new stores and $0.2 million related to same stores.
In Fiscal 2005, interest expense decreased to $1.3 million from $1.5 million in
Fiscal 2004. The improvement resulted primarily from lower average debt balances
outstanding during the year. At September 30, 2005, the Company's total debt was
$7.0 million compared to $25.0 million at September 30, 2004. Decreases in the
debt balance were funded by cash flow from operations after funding all
investment activity.
The Fiscal 2005 income tax expense was $8.3 million, or 36% of pre-tax income,
compared to $5.4 million, or 37% of pre-tax income in Fiscal 2004. The decrease
in the Fiscal 2005 effective tax rate is primarily due to non-deductible
executive compensation in Fiscal 2004 that did not recur in Fiscal 2005.
Operating income for Fiscal 2005 improved $8.0 million over Fiscal 2004 to $22.2
million. The $2.4 million increased contribution from signature loans, $3.2
million increase in same store pawn service charges, $2.5 million improvement in
gross profit on sales, and $0.6 million reduction in same store operating
expenses account for most of the improvement. These improvements were partially
offset by the $1.3 million increase in administrative expenses.
After a $0.3 million improvement in interest expense, the $0.4 million increased
equity in Albemarle & Bond's earnings, and other smaller items, income before
income taxes grew to $23.1 million from $14.5 million in Fiscal 2004. After
income taxes, net income improved from $9.1 million in Fiscal 2004 to $14.8
million in Fiscal 2005.
31
FISCAL 2004 COMPARED TO FISCAL 2003
The Company's Fiscal 2004 pawn service charge revenue increased 1.6%, or $0.9
million from Fiscal 2003 to $59.1 million. The improvement was due to a 1.7%
larger average outstanding pawn loan balance in Fiscal 2004, with yields
remaining constant at 126%.
Fiscal 2004 sales increased $8.9 million from Fiscal 2003 to $143.5 million. The
increase was due to a $5.9 million increase in jewelry scrapping and a $3.0
million increase in same store merchandise sales.
Below is a summary of Fiscal 2003 and 2004 sales and margins:
Fiscal Year Ended September 30,
-------------------------------
2003 2004
---- ----
(Dollars in millions)
Merchandise sales $ 113.8 $ 116.8
Jewelry scrapping sales 20.8 26.7
------- -------
Total sales 134.6 143.5
Gross profit on merchandise sales $ 45.2 $ 49.1
Gross profit on jewelry scrapping sales 3.3 6.1
Gross margin on merchandise sales 39.7% 42.1%
Gross margin on jewelry scrapping sales 15.9% 23.0%
Overall gross margin 36.0% 38.5%
Fiscal 2004 overall gross margins on sales increased 2.5 percentage points from
Fiscal 2003 to 38.5%. Margins on merchandise sales increased 2.4 percentage
points as a result of less discounting and more conservative loan values on
forfeited collateral. Jewelry scrapping margins improved 7.1 percentage points
due largely to higher gold values. Future fluctuations in gold values would have
an immediate and direct impact on the proceeds of scrapped jewelry. In response
to these fluctuations, the Company may adjust the amount it lends on jewelry,
which would ultimately impact the cost of inventory sold and sales margins.
Inventory shrinkage, included in cost of goods sold, was 1.7% of merchandise
sales in Fiscal 2004 compared to 1.9% in Fiscal 2003.
At September 30, 2004, the Company offered payday loans in 287 locations and a
call center. This is an increase from September 30, 2003, when the Company
offered payday loans in 229 locations and a call center. During Fiscal 2003 and
2004, respectively, the Company opened four and 121 Mono-line stores
specializing in payday loans. Ninety-five Mono-line stores adjoin EZPAWN
locations that offered payday loans prior to the opening of the adjoined
Mono-line stores.
32
Payday loan data are as follows for Fiscal 2003 and 2004:
Fiscal Year Ended September 30,
-------------------------------
2003 2004
---- ----
(Dollars in thousands)
Service charge revenue $ 12,538 $ 23,874
Bad debt:
Net defaults on loans (3,505) (7,966)
Change in valuation allowance (91) (260)
Insufficient funds fees collected and other related costs 45 159
-------- --------
Net bad debt (3,551) (8,067)
Other direct transaction expenses (1,134) (1,036)
Incremental operating expenses at Mono-line stores (40) (3,239)
Incremental depreciation and amortization at Mono-line stores (2) (156)
Collection and call center costs (included in administrative expense)
(650) (851)
-------- --------
Contribution to operating income $ 7,161 $ 10,525
======== ========
Average payday loan balance outstanding during year $ 2,763 $ 5,581
Payday loan balance at end of year $ 3,630 $ 7,292
Average loan balance per participating location at end of year $ 16 $ 25
Participating locations at end of year, including call center (whole 230 288
numbers)
Bad debt as a percent of service charge revenue 28% 34%
Net default rate (a) 5.0% 5.9%
(a) Principal defaults net of collections, as a percent of loans made
and renewed.
The Contribution to operating income presented above includes the effect of
incremental operating expenses at Mono-line stores. Shared costs at adjoined
Mono-line stores, such as rent and labor, have been excluded from these figures.
Payday loan service charge revenue increased from Fiscal 2003 primarily due to
higher average loan balances at existing stores and the addition of new
Mono-line stores. Payday loan bad debt also increased $4.5 million in Fiscal
2004. Approximately 75% of the increase in bad debt was related to the higher
average loan balances, while 25% was caused by the increase in the net default
rate from 28% to 34% of related service charge revenues. Slightly offsetting the
increase in bad debt was a $0.1 million reduction in other payday loan direct
transaction expenses.
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 September 30, 2004, the valuation
allowance was 6.3% of payday loan principal and fees receivable.
Store operating expenses increased to $86.9 million in Fiscal 2004 from $80.7
million in Fiscal 2003, representing a 4.9 percentage point decrease when
measured as a percent of net revenue. Of the total $6.2 million increase, $3.2
million related to new Mono-line stores. The remaining $3.0 million increase was
largely due to a $2.5 million increase in labor and labor related costs and a
$0.4 million increase in facility repairs and maintenance.
Administrative expenses were $21.8 million (15.6% of net revenue) in Fiscal 2004
compared to $17.0 million (14.1% of net revenue) in Fiscal 2003. The $4.8
million increase is due primarily to $1.6 million in restricted stock grants and
related taxes, a $1.4 million increase in legal and professional fees, and a
$0.8 million increase in incentive compensation related to the Company's
improved performance. Also contributing to the increase was the impairment of a
$0.7 million note receivable from a former Chief Executive Officer of the
Company due to its doubtful collection. Included in administrative expenses are
33
management fees and expense reimbursements for a related party totaling $802,000
and $767,000 in Fiscal 2004 and 2003, as more fully discussed in Item 13 of this
report.
Depreciation and amortization expense decreased $1.3 million in Fiscal 2004 to
$7.5 million, primarily due to the net effect of assets that became fully
depreciated versus assets placed in service during the year.
In Fiscal 2004, interest expense decreased to $1.5 million from $2.0 million in
Fiscal 2003. The improvement resulted from lower average debt balances and lower
effective interest rates. At September 30, 2004, the Company's total debt was
$25.0 million compared to $31.0 million at September 30, 2003. Decreases in the
debt balance were funded by cash flow from operations after funding all
investment activity.
In Fiscal 2000, the Company invested $1.1 million in an internet related
start-up company. Based on the investee's performance, the Company determined at
September 30, 2003 that its investment was fully impaired, and recorded a $1.1
million impairment charge in Fiscal 2003. Fiscal 2004 had no similar impairment.
The Fiscal 2004 income tax expense was $5.4 million, or 37% of pre-tax income,
compared to an income tax benefit of $1.2 million in Fiscal 2003. The Fiscal
2003 benefit includes the reversal of a $3.7 million deferred tax asset
valuation allowance as the Company projected during that period that its future
taxable income would be sufficient to fully realize its deferred tax asset.
Excluding the reversal of the valuation allowance, the Company's Fiscal 2003
income tax provision would have been $2.5 million, or 35% of pre-tax income. The
increase in the Fiscal 2004 effective tax rate is due to an increase in
non-deductible executive compensation and an increase in state income taxes.
Operating income for Fiscal 2004 improved $5.2 million over Fiscal 2003 to $14.3
million. The $6.8 million improvement in gross profit on sales and $3.4 million
increased contribution from payday loans account for most of the improvement.
Coupled with these are a $0.9 million increase in same store pawn service
charges and a $1.3 million reduction in depreciation expense. These improvements
were partially offset by the $4.8 million increase in administrative expenses
and $3.0 million increase in same store operating expenses.
After a $0.5 million improvement in interest expense, the absence of a $1.1
million investment impairment as was seen in Fiscal 2003, and other smaller
items, income before income taxes and the cumulative effect of adopting SFAS No.
142 improved to $14.5 million from $7.2 million in Fiscal 2003. After the
changes in income taxes and the Fiscal 2003 cumulative effect of adopting SFAS
No. 142, net income improved from $0.4 million in Fiscal 2003 to $9.1 million in
Fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 2005, the Company's $31.7 million cash flow from operations consisted
of (i) net income plus several non-cash items, aggregating to $28.1 million, and
(ii) $3.6 million of changes in operating assets and liabilities, primarily
accounts payable and accrued expenses. In Fiscal 2004, the Company's $27.2
million cash flow from operations consisted of (i) net income plus several
non-cash items, aggregating to $22.3 million, and (ii) $4.9 million of changes
in operating assets and liabilities, primarily accounts payable, accrued
expenses, and federal income taxes. The primary differences between cash flow
from operations for Fiscal 2004 and Fiscal 2005 are an increase in signature
loan fees collected, gross profit on sales of inventory, and pawn service
charged collected.
In Fiscal 2005, the Company invested $9.2 million in property and equipment,
$3.6 million in funding pawn loans, net of repayments and recoveries through the
sale of forfeited collateral, and $1.0 million in funding payday loans net of
repayments. These changes, an $18.0 million reduction in debt, and a $1.7
million increase in cash on hand were funded by the cash flow from operations
discussed above, the $0.9 million of dividends from Albemarle & Bond Holding,
plc, and the $0.9 million proceeds from the exercise of employee stock options.
34
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 (in
thousands):
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 $ 7,000 $ - $ 7,000 $ - $ -
Interest on long-term debt obligations 704 469 235 - -
Capital lease obligations - - - - -
Operating lease obligations 96,108 14,610 25,360 18,737 37,401
Purchase obligations - - - - -
Other long-term liabilities - - - - -
--------- -------- ------- -------- --------
Total $ 103,812 $ 15,079 $32,595 $ 18,737 $ 37,401
========= ======== ======= ======== ========
In addition to the contractual obligations in the table above, the Company is
obligated by letters of credit issued to unaffiliated lenders as part of its
credit service operations. At September 30, 2005, the Company's maximum exposure
for losses on letters of credit, if all brokered loans defaulted and none was
collected, was $15.7 million. This amount includes principal, interest, and
insufficient funds fees.
During the fiscal year ending September 30, 2006, the Company plans to open an
additional 115 to 125 EZMONEY Mono-line stores for an expected capital
expenditure of approximately $4.5 million, plus the funding of working capital
and start-up losses at these stores. The Company believes that these new stores
will create a drag on earnings in their first six to nine months of operations
before turning profitable.
The Company's credit agreement matures April 1, 2007 and provides for a $40.0
million revolving credit facility. Under the terms of the agreement, the Company
had the ability to borrow an additional $18.1 million at September 30, 2005,
after allowing for $14.3 million in the principal portion of letters of credit
issued under its CSO program. Advances are secured by the Company's assets.
Terms of the agreement require, among other things, that the Company meet
certain financial covenants. Payment of dividends and additional debt are
allowed but restricted. The long-term debt obligation included in the table
above is the balance outstanding on the Company's revolving credit agreement at
September 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 will be applicable through the maturity date of the credit
agreement on April 1, 2007.
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.
35
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, 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. The
Company intends that all forward-looking statements be subject to the safe
harbors created by these laws. 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. All forward-looking statements are based on current expectations
regarding important risk factors. Many of these risks and uncertainties are
beyond the ability of the Company to control, and, in many cases, the Company
cannot predict all of the risks and uncertainties that could cause its actual
results to differ materially from those expressed in the forward-looking
statements. Actual results could differ materially from those expressed in the
forward-looking statements, and readers should not regard those statements as a
representation by the Company or any other person that the results expressed in
the statements will be achieved. Important risk factors that could cause results
or events to differ from current expectations are described in Item 1A, "Risk
Factors," of this Annual Report on Form 10-K. These factors are not intended to
be an all-encompassing list of risks and uncertainties that may affect the
operations, performance, development and result of the Company's business.
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
obligation 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, store growth plans, or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
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 values. The Company also is exposed to regulatory risk in relation to its
credit services and payday loans. The Company does not use derivative financial
instruments.
The Company's earnings and financial position may be affected by changes in gold
values 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 values. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold values 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 in 2006 than they did in 2005, the
Company's annual interest expense would be increased by approximately $35,000.
This amount is determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate debt at September 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 year ended June 30, 2005 (included in the Company's September 30, 2005
results
36
on a three-month lag as described above) was approximately a $65,000
decrease, net of tax effect, to shareholders' equity. On September 30, 2005, the
U.K. pound weakened to 1.00 to 1.76280 U.S. dollars from 1.80480 at June 30,
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.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Reports of Independent Registered Public Accounting Firms 39
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2004 and 2005 41
Consolidated Statements of Operations for each of the Three Fiscal Years
Ended September 30, 2005 42
Consolidated Statements of Cash Flows for each of the Three Fiscal Years
Ended September 30, 2005 43
Consolidated Statements of Stockholders' Equity for each of the Three Fiscal Years
Ended September 30, 2005 44
Notes to Consolidated Financial Statements 45
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
EZCORP, Inc.
Austin, Texas
We have audited the accompanying consolidated balance sheets of EZCORP, Inc. and
subsidiaries as of September 30, 2005 and 2004 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. Our audits also include the financial statement schedule listed in
the index at Item 15(a)(2). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EZCORP, Inc. at
September 30, 2005 and 2004, and the results of its operations and its cash
flows for each of the years then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of EZCORP, Inc.'s
internal control over financial reporting as of September 30, 2005, based on
criteria established in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated November 18, 2005 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Dallas, Texas
November 18, 2005
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
EZCORP, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of EZCORP, Inc. and its subsidiaries for
the year ended September 30, 2003. Our audit also included the financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of EZCORP, Inc. and
its subsidiaries' operations and their cash flows for the year ended September
30, 2003, in conformity with accounting principles generally accepted in the
United States. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As discussed in Note B to the consolidated financial statements, effective
October 1, 2002, the Company adopted the Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangibles."
/s/ ERNST & YOUNG LLP
Austin, Texas
December 7, 2004
40
CONSOLIDATED BALANCE SHEETS
September 30,
----------------------
2004 2005
-------- --------
Assets: (In thousands)
Current assets:
Cash and cash equivalents $ 2,506 $ 4,168
Pawn loans 49,078 52,864
Payday loans, net 7,292 1,634
Pawn service charges receivable, net 8,679 9,492
Payday loan service charges receivable, net 1,474 272
Credit service fees receivable, net - 3,007
Inventory, net 30,636 30,293
Deferred tax asset 9,711 10,534
Prepaid expenses and other assets 2,321 1,998
-------- --------
Total current assets 111,697 114,262
Investment in unconsolidated affiliate 16,101 17,348
Property and equipment, net 25,846 26,964
Note receivable from related party 1,500 -
Deferred tax asset, non-current 4,946 4,012
Other assets, net 4,232 2,862
-------- --------
Total assets $164,322 $165,448
======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 14,947 $ 18,988
Customer layaway deposits 1,645 1,672
Federal income taxes payable 2,043 648
-------- --------
Total current liabilities 18,635 21,308
Long-term debt 25,000 7,000
Deferred gains and other long-term liabilities 3,958 3,597
-------- --------
Total long-term liabilities 28,958 10,597
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; 11,181,401 issued and 11,172,368
outstanding in 2004; 11,878,458 issued and 11,869,425
outstanding in 2005 112 117
Class B Voting Common Stock, convertible, par value $.01 per
share; Authorized 1,198,990 shares; Issued 1,190,057;
Outstanding 1,190,057 at September 30, 2004 and 990,057 at
September 30, 2005 12 10
Additional paid-in capital 116,683 118,219
Retained earnings (accumulated deficit) (38) 14,714
Deferred compensation expense (832) (244)
-------- --------
115,937 132,816
Treasury stock, at cost (9,033 shares) (35) (35)
Accumulated other comprehensive income 827 762
-------- --------
Total stockholders' equity 116,729 133,543
-------- --------
Total liabilities and stockholders' equity $164,322 $165,448
======== ========
See notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
--------------------------------------
2003 2004 2005
--------- --------- --------
(In thousands, except per share amounts)
Revenues:
Sales $ 134,591 $ 143,472 $ 148,410
Pawn service charges 58,175 59,090 62,274
Payday loan service charges 12,538 23,874 28,954
Credit service fees - - 13,246
Other 1,045 1,361 1,275
--------- --------- --------
Total revenues 206,349 227,797 254,159
Costs of goods sold 86,100 88,202 90,678
--------- --------- --------
Net revenues 120,249 139,595 163,481
Operating expenses:
Operations 80,688 86,862 95,876
Payday loan bad debt and other direct expenses 4,685 9,103 7,808
Credit service bad debt and other direct expenses - - 6,395
Administrative 17,008 21,845 23,067
Depreciation 8,685 7,435 8,036
Amortization 90 77 68
--------- --------- --------
-- -- --
Total operating expenses 111,156 125,322 141,250
--------- --------- --------
Operating income 9,093 14,273 22,231
Interest expense, net 2,006 1,528 1,275
Equity in net income of unconsolidated affiliate (1,412) (1,739) (2,173)
Loss on sale / disposal of assets 170 3 79
Impairment of investment 1,100 - -
--------- --------- --------
Income before income taxes and cumulative effect
of adopting a new accounting principle 7,229 14,481 23,050
Income tax expense (benefit) (1,170) 5,358 8,298
--------- --------- --------
Income before cumulative effect of adopting a new
accounting principle $ 8,399 $ 9,123 $ 14,752
Cumulative effect of adopting a new accounting
principle, net of tax (8,037) - -
--------- --------- --------
Net income $ 362 $ 9,123 $ 14,752
========= ========= ========
Income per common share - basic:
Income before cumulative effect of adopting a new
accounting principle $ 0.69 $ 0.74 $ 1.19
Cumulative effect of adopting a new accounting
principle, net of tax (0.66) - -
--------- --------- --------
Net income $ 0.03 $ 0.74 $ 1.19
========= ========= ========
Income per common share - assuming dilution:
Income before cumulative effect of adopting a new
accounting principle $ 0.67 $ 0.70 $ 1.09
Cumulative effect of adopting a new accounting
principle, net of tax (0.64) - -
--------- --------- --------
Net income $ 0.03 $ 0. 70 $ 1.09
========= ========= ========
Weighted average shares outstanding:
Basic 12,181 12,256 12,434
Assuming dilution 12,552 13,122 13,574
See notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
------------------------------------
2003 2004 2005
------- -------- -------
(In thousands)
Operating Activities:
Net income $ 362 $ 9,123 $14,752
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of adopting new accounting principle 8,037 - -
Depreciation and amortization 8,775 7,512 8,104
Payday loan loss provision 3,551 8,225 6,627
Deferred taxes (7,327) (2,103) 111
Net loss on sale or disposal of assets 170 3 79
Impairment of investment 1,100 - -
Impairment of receivable from stockholder - 729 -
Deferred compensation expense 3 538 588
Income from investment in unconsolidated affiliate (1,412) (1,739) (2,173)
Changes in operating assets and liabilities:
Service charges and fees receivable, net (421) (428) (2,618)
Inventory 868 83 193
Notes receivable from related parties 22 - 1,500
Prepaid expenses, other current assets, and other assets, net 2,803 (545) 1,625
Accounts payable and accrued expenses (450) 3,964 4,107
Restructuring reserve (34) - -
Customer layaway deposits (374) (147) 27
Deferred gains and other long-term liabilities (363) (361) (361)
Federal income taxes 31 2,371 (837)
------- -------- -------
Net cash provided by operating activities 15,341 27,225 31,724
Investing Activities:
Pawn loans made (163,125) (170,019) (172,991)
Pawn loans repaid 90,691 92,457 93,315
Recovery of pawn loan principal through sale of forfeited collateral 75,201 75,475 76,040
Payday loans made (24,051) (52,501) (59,466)
Payday loans repaid 19,196 40,614 58,497
Additions to property and equipment (2,491) (7,963) (9,227)
Dividends from unconsolidated affiliate 523 680 861
Proceeds from sale of assets 964 - -
------- -------- -------
Net cash used in investing activities (3,092) (21,257) (12,971)
Financing Activities:
Proceeds from exercise of stock options - 450 909
Debt issuance costs - (408) -
Net payments on bank borrowings (11,245) (6,000) (18,000)
------- -------- -------
Net cash used in financing activities (11,245) (5,958) (17,091)
------- -------- -------
Change in cash and equivalents 1,004 10 1,662
Cash and equivalents at beginning of period 1,492 2,496 2,506
------- -------- -------
Cash and equivalents at end of period $ 2,496 $ 2,506 $ 4,168
======= ======== =======
Cash paid during the periods for:
Interest $ 3,017 $ 1,746 $ 943
Income taxes $ 3,163 $ 5,286 $ 9,244
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $73,727 $ 76,439 $75,890
Deferred gain on sale-leaseback $ 506 $ - $ -
Issuance of common stock to 401(k) plan $ 64 $ 69 $ 72
Foreign currency translation adjustment $ 505 $ 342 $ 65
Tax benefit from exercise of stock options $ - $ - $ 558
See notes to consolidated financial statements.
43
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Retained Accumulated
--------------- Additional Earnings Deferred Receivable Other
Par Paid In (Accumulated Compensation Treasury From Comprehensive
Shares Value Capital Deficit) Expense Stock Stockholder Income (Loss) Total
------ ----- ---------- ------------ --------- -------- ----------- ------------- --------
(In thousands)
Balances at Sept. 30, 12,176 $ 122 $ 114,729 $ (9,523) $ - $ (35) $ (729) $ (20) $104,544
2002
Issuance of Common
Stock to 401(k) plan 21 - 64 - - - - - 64
Amortization of stock
option compensation - - 3 - - - - - 3
Issuance of restricted
shares to employee - - 784 - (784) - - - -
Foreign currency
translation
adjustment - - - - - - - 505 505
Net income - - - 362 - - - - 362
--------
Total comprehensive
income - - - - - - - - 867
------ ----- --------- --------- --------- ------- ---------- ---------- --------
Balances at Sept. 30, 2003 12,197 122 115,580 (9,161) (784) (35) (729) 485 105,478
Issuance of Common
Stock to 401(k) plan 9 - 69 - - - - - 69
Issuance of restricted
shares to employee - - 586 - - - - (48) 538
Stock options exercised 165 2 448 - - - - - 450
Receivable from
stockholder
written off - - - - - - 729 - 729
Foreign currency
translation
adjustment - - - - - - - 342 342
Net income - - - 9,123 - - - - 9,123
Total comprehensive
income - - - - - - - - 9,465
------ ----- --------- --------- --------- ------- ---------- ---------- --------
Balances at Sept. 30, 2004 12,371 124 116,683 (38) (832) (35) - 827 116,729
Issuance of Common
Stock to 401(k) plan 4 - 72 - - - - - 72
Amortization of
deferred compensation - - - - 588 - - - 588
Vesting of restricted
stock 125 - - - - - - - -
Stock options
exercised 368 3 906 - - - - - 909
Tax benefit from
exercise of stock
options - - 558 - - - - - 558
Foreign currency
translation
adjustment - - - - - - - (65) (65)
Net income - - - 14,752 - - - - 14,752
--------
Total comprehensive
income - - - - - - - - 14,687
------ ----- --------- --------- --------- ------- ---------- ---------- --------
Balances at Sept. 30, 2005 12,868 $ 127 $ 118,219 $ 14,714 $ (244) $ (35) $ - $ 762 $133,543
====== ===== ========= ========= ========= ======= ========== ========== ========
See notes to consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: EZCORP, Inc. (the "Company") is primarily a lender or provider of
credit services to individuals who do not have cash resources or access to
credit to meet their short-term cash needs. At September 30, 2005, the Company
offered non-recourse loans collateralized by tangible personal property,
commonly known as pawn loans, in 280 EZPAWN locations. At these locations, the
Company also sells merchandise, primarily collateral forfeited from its pawn
lending operations, to consumers looking for good value. In 234 EZMONEY
locations and 98 EZPAWN locations, the Company offered short-term
non-collateralized loans, often referred to as payday loans, or fee based credit
services to customers seeking loans. The Company commenced its fee based credit
services July 15, 2005.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The Company
accounts for its 28.7% interest in Albemarle & Bond Holdings, plc ("A&B") using
the equity method.
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 in its ending portfolio. 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. If the pawn loan is
not repaid, the forfeited collateral (inventory) is valued at the lower of cost
(pawn loan principal) or market (net realizable value) of the property. When
this inventory is sold, sales revenue and the related cost are recorded at the
time of sale.
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.
PAYDAY LOAN BAD DEBT AND OTHER 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 $3.5
million, $8.0 million and $6.6 million, representing 28%, 34% and 23% of payday
loan service charges for the years ended September 30, 2003, 2004 and 2005,
("Fiscal 2003," "Fiscal 2004" and "Fiscal 2005") respectively.
PAYDAY LOAN ALLOWANCE FOR LOSSES: 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. At September 30,
2003, 2004 and 2005, the allowance for losses on payday loans was $0.3 million,
$0.6 million, and $0.2 million, respectively, representing 37%, 40%, and 60%,
respectively, of payday loan fees receivable.
CREDIT SERVICE REVENUE RECOGNITION: The Company earns credit service fees when
it assists customers in obtaining a loan from an unaffiliated lender. The
Company accrues credit service fees on the percentage of fees the Company
expects to collect. Accrued fees related to defaulted loans are deducted from
credit
45
service fee revenue upon loan default, and increase credit service fee revenue
upon subsequent collection.
CREDIT SERVICE BAD DEBT AND OTHER DIRECT EXPENSES: As part of its credit
services, the Company issues a letter of credit to enhance the creditworthiness
of the Company's customers seeking loans from an unaffiliated lender. The letter
of credit assures the lender that if the borrower defaults on his loan, the
Company will pay the lender the principal and accrued interest owed it by the
borrower, plus an insufficient funds fee, all of which the Company records as
bad debt and then attempts to collect from the borrower. The Company considers a
loan defaulted, and pays all amounts due under the related letter of credit, if
the loan has not been repaid or renewed by the maturity date. Although amounts
paid under letters of credit may be collected later, the Company charges those
amounts to bad debt upon default. Subsequent recoveries under the letters of
credit are recorded as a reduction of bad debt at the time of collection. The
Company's credit service bad debt, included in credit service bad debt and other
direct expenses, was $6.4 million for the year ended September 30, 2005,
("Fiscal 2005"), representing 48% of credit service fee revenues in Fiscal 2005.
The Company had no credit service bad debt in the years ended September 30, 2003
and 2004 ("Fiscal 2003" and "Fiscal 2004"), as it did not offer credit services
in those years.
CREDIT SERVICE ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses it expects to incur under letters of credit for loans that are active at
period-end but have not yet matured. Its allowance is based on recent loan
default experience and expected seasonal variations, and includes all amounts it
expects to pay to the unaffiliated lender upon loan default, including loan
principal, accrued interest, and insufficient funds fees, net of the amounts it
expects to subsequently collect from borrowers ("Expected LOC Losses"). Changes
in the valuation allowance are charged to credit service bad debt expense in the
Company's statement of operations. At September 30, 2005, the allowance for
Expected LOC Losses was $1.4 million, representing 46% of credit service fees
receivable. The Company's maximum exposure for losses on letters of credit, if
all loans defaulted and none was collected, was $15.7 million at September 30,
2005.
Based on the expected loss and collection percentages, the Company also provides
an allowance for its credit service fees it expects not to collect, and charges
changes in the credit service fee receivable valuation allowance to credit
service fee revenue. At September 30, 2005, this reserve amounted to $0.3
million, or 9.0% of credit service fees receivable.
The Company had no credit service operations or allowances in Fiscal 2003 and
Fiscal 2004.
TOTAL REVENUES: In Fiscal 2005, the Company's total revenues were comprised of
25% pawn service charges, 58% sales, and 17% signature loan fees (payday loans
and credit services). In Fiscal 2004, the Company's total revenues were
comprised of 26% pawn service charges, 63% sales, 10% payday loan service
charges, and 1% other fee revenue.
CASH AND CASH EQUIVALENTS: The Company considers investments with maturities of
90 days or less when purchased to be cash equivalents.
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 September 30, 2004
and 2005, the valuation allowance deducted from the carrying value of inventory
amounted to $1,545,000 and $1,860,000 (4.8% and 5.8% of gross inventory),
respectively. Changes in the inventory valuation allowance are recorded as cost
of goods sold.
SOFTWARE DEVELOPMENT COSTS: The Company accounts for software development costs
in accordance with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use," which
46
requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. During 2003, 2004, and 2005
approximately $233,000, $134,000, and $196,000 was capitalized in connection
with the development and acquisition of internal software systems. No interest
was capitalized in 2003, 2004, or 2005. Capitalized costs are amortized by the
straight-line method over the estimated useful lives of each system, ranging
from five to eight years.
CUSTOMER LAYAWAY DEPOSITS: Customer layaway deposits are recorded as deferred
revenue until the entire related sales price has been collected and the related
merchandise has been delivered to the customer.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Provisions
for depreciation are computed on a straight-line basis using estimated useful
lives of 30 years for buildings and 2 to 8 years for furniture, equipment, and
software development costs. Leasehold improvements are depreciated over the
shorter of their estimated useful life - typically 10 years - or the reasonably
assured lease term at the inception of the lease. Property and equipment is
shown net of accumulated depreciation of $59.3 million and $67.2 million at
September 30, 2004 and 2005, 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.
INTANGIBLE ASSETS: The Company adopted the Statement of Financial Accounting
Standards ("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 an indefinite useful life are no longer subject to
amortization but will be tested for impairment at least annually. The effects of
the adoption of this new accounting principle are discussed in Note B, "Change
in Accounting Principle."
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets (i.e., property and equipment) 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 Fiscal 2004 or 2005.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments is
determined by reference to various market data and other valuation techniques,
as appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values, due primarily to their short-term
nature. The Company considers investments with maturities of 90 days or less
when purchased to be cash equivalents.
47
FOREIGN CURRENCY TRANSLATION: The Company's equity investment in A&B is
translated into U.S. dollars at the exchange rate as of A&B's balance sheet date
of June 30. The related interest in A&B's net income is translated at the
average exchange rate for each six-month period reported by A&B. Resulting
translation adjustments are reflected as a separate component of stockholders'
equity.
COSTS OF GOODS SOLD: Included in costs of goods sold is the historical cost of
inventory sold, inventory shrinkage, and any change in the Company's allowance
for inventory shrinkage and valuation. Also included is the cost of the
Company's central jewelry processing unit, as it relates directly to sales of
precious metals to refiners.
OPERATIONS EXPENSE: Included in operations expense are costs related to
operating the Company's stores. These costs include labor, other direct expenses
such as utilities, supplies, and banking fees, and other indirect expenses such
as store rent, building repairs and maintenance, advertising, and store property
taxes and insurance.
ADMINISTRATIVE EXPENSE: Included in administrative expense are costs related to
the Company's executive and administrative offices. This includes executive,
administrative and regional salaries, wages and incentive compensation,
professional fees, license fees, and costs related to the operation of the
Company's administrative offices such as rent, property taxes, insurance, and
information technology. Also included in administrative expense are costs of the
Company's payday loan call center and bad debt collection center.
ADVERTISING: Advertising costs are expensed as incurred. Advertising expense was
approximately $1,189,000, $1,202,000, and $1,440,000 for the fiscal years ended
September 30, 2003, 2004, and 2005, respectively.
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. At
June 30, 2004, the Company increased its estimate of the effective tax rate for
its fiscal year ending September 30, 2004 from 34.5% to 37.0%, as more fully
discussed in Note I, "Income Taxes." 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. As of September 30, 2004 and 2005, 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.
48
The following table presents the effect on net income (loss) if the Company had
applied the fair value recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, to stock-based compensation:
Years ended September 30,
-------------------------------------
2003 2004 2005
-------- -------- --------
(In thousands, except per share amounts)
Net income, as reported $ 362 $ 9,123 $ 14,752
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects - 350 376
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (364) (879) (1,048)
-------- -------- --------
Pro forma net income (loss) $ (2) $ 8,594 $ 14,080
Earnings per share, basic:
As reported $ 0.03 $ 0.74 $ 1.19
Pro forma $ 0.00 $ 0.70 $ 1.13
Earnings per share, assuming dilution:
As reported $ 0.03 $ 0.70 $ 1.09
Pro forma $ 0.00 $ 0.65 $ 1.04
See Note H, "Common Stock, Warrants, and Options."
SEGMENTS: The Company accounts for its operations in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." No
segment disclosures have been made as the Company considers its business
activities as a single segment.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
difference may be material.
RECLASSIFICATIONS: Certain prior year financial statement balances have been
reclassified to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: 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 could 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.
49
The Company expects to adopt SFAS No. 123R using the modified prospective
method, and expects to continue to estimate the fair value of stock options
using the Black-Scholes option pricing model so that fair value estimates will
be computed on a basis comparable with prior year pro forma compensation expense
calculations. The amount of expense will depend largely on option exercises,
forfeitures, cancellations, and any grants occurring during the year, and
therefore cannot be reasonably estimated.
NOTE B: CHANGE IN ACCOUNTING PRINCIPLE
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 no longer subject to
amortization but will be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the assets might be impaired.
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill
and pawn licenses, which lowered amortization expense approximately $603,000
annually, beginning October 1, 2002. The Company also ceased goodwill
amortization related to its equity investment in A&B, which resulted in a
$453,000 annual increase in "equity in net income of unconsolidated affiliates."
During the quarter ended December 31, 2002, the Company, with the assistance of
independent valuation specialists, completed impairment tests of its goodwill
and pawn licenses. 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. In
accordance with SFAS No. 142, the Company also reassessed the useful lives of
intangible assets other than goodwill and pawn licenses, resulting in no change.
The Company assesses its goodwill and indefinite lived intangible assets as of
July 1 of each year or more frequently if events or changes in circumstances
indicate impairment. Excluding the cumulative adjustment recognizing impairment
of the Company's goodwill, the Company concluded that there was no impairment of
its indefinite lived intangible assets in Fiscal 2003, 2004, and 2005.
The following table presents the results of the Company on a comparable basis as
if SFAS No. 142 had been effective for all periods presented.
Years Ended September 30,
-------------------------------
2003 2004 2005
------- ------- ------
(In thousands, except per share amounts)
Net income, as reported $ 362 $ 9,123 $14,752
Cumulative effect of adopting a new accounting principle, net of tax 8,037 - -
------- ------- -------
Adjusted net income $ 8,399 $ 9,123 $14,752
====== ====== =======
Basic earnings per share:
Net income as reported $ 0.03 $ 0.74 $ 1.19
Cumulative effect of adopting new accounting principle, net of tax 0.66 - -
------- ------- -------
Adjusted net income $ 0.69 $ 0.74 $ 1.19
====== ====== =======
Diluted earnings per share:
Net income as reported $ 0.03 $ 0.70 $ 1.09
Cumulative effect of adopting a new accounting principle, net of tax 0.64 - -
------- ------- -------
Adjusted net income $ 0.67 $ 0.70 $ 1.09
======= ======= =======
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.
50
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible assets at the
specified dates:
September 30, 2004 September 30, 2005
----------------------- -----------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $ 195 $ 345 $ 226
Real estate finders' fees 554 277 554 294
Non-compete agreements 388 238 388 258
-------- ------------ -------- ------------
Total $ 1,287 $ 710 $ 1,287 $ 778
======== ============ ======== ============
Total amortization expense from definite-lived intangible assets was
approximately $90,000, $77,000, and $68,000 for the years ended September 30,
2003, 2004, and 2005. 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 September 30, 2005:
Amortization
Fiscal Year Expense
- ----------- ------------
(In thousands)
2006 $ 67
2007 67
2008 66
2009 57
2010 42
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
NOTE C: EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share is shown in the table below:
Years Ended September 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(In thousands)
Numerator
Numerator for basic and diluted earnings per share:
Income before cumulative effect of adopting
a new accounting principle $ 8,399 $ 9,123 $ 14,752
Cumulative effect of adopting a new accounting
principle, net of tax (8,037) - -
---------- ---------- ----------
Net income 362 9,123 14,752
========== ========== ==========
Denominator
Denominator for basic earnings per share: weighted average shares 12,181 12,256 12,434
Effect of dilutive securities:
Options and warrants 371 806 1,006
Restricted common stock grants - 60 134
---------- ---------- ----------
Dilutive potential common shares 371 866 1,140
---------- ---------- ----------
Denominator for diluted earnings per share: adjusted weighted
average shares and assumed conversions 12,552 13,122 13,574
========== ========== ==========
Basic earnings per share $ 0.03 $ 0.74 $ 1.19
========== ========== ==========
Diluted earnings per share $ 0.03 $ 0.70 $ 1.09
========== ========== ==========
51
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 exercise price was greater than the average
market price of the common shares so the effect would be anti-dilutive.
Outstanding options to purchase shares of common stock were as follows:
Years Ended September 30,
---------------------------------------------
2003 2004 2005
------------- ------------- -------------
Total options outstanding
Weighted average shares subject to options 2,001,344 2,255,604 2,089,908
Average exercise price per share $ 6.14 $ 6.61 $ 6.95
Anti-dilutive options outstanding
Weighted average shares subject to options 910,810 1,033,471 59,679
Average exercise price per share $ 10.69 $ 10.91 $ 14.92
During Fiscal 2004, there were 42,787 of weighted average shares of restricted
stock outstanding that were anti-dilutive. None were anti-dilutive in Fiscal
2005.
NOTE D: INVESTMENTS
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 29% of the total outstanding shares. The shares were
acquired in 1998 at a total cost of $12.8 million. A&B is primarily engaged in
pawnbroking, retail jewelry sales, check cashing, and lending in the United
Kingdom. The investment is accounted for using the equity method. Since A&B's
fiscal year end is June 30, the income reported by the Company for its
investment in A&B is on a three-month lag. In accordance with United Kingdom
securities regulations, A&B files only semi-annual financial reports, for its
fiscal periods ending December 31 and June 30. The income reported for the
Company's fiscal year end of September 30 represents its percentage interest in
the results of A&B's operations from July 1 to June 30. In Fiscal 2004 and 2005,
the Company received dividends from A&B of $680,000 and $861,000, respectively.
The undistributed earnings included in the Company's consolidated retained
earnings are $3.8 million as of September 30, 2005. A&B's shares are listed on
the Alternative Investment Market of the London Stock Exchange and at October
31, 2005, the market value of this investment was approximately $35.6 million,
based on the closing market price and currency exchange rate on that date.
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 United Kingdom Generally Accepted Accounting Principles ("UK
GAAP").
52
Below is summarized financial information for A&B's most recently reported
results (using the exchange rate as of June 30 of each year for balance sheet
items and average exchange rates for income statement items for the periods
indicated):
As of June 30,
------------------------
2004 2005
---------- ----------
(In thousands)
Current assets $ 44,787 $ 51,451
Non-current assets 8,649 9,475
---------- ----------
Total assets $ 53,436 $ 60,926
========== ==========
Current liabilities $ 7,356 $ 7,627
Non-current liabilities 15,927 18,837
Equity shareholders' funds 30,153 34,463
---------- ----------
Total liabilities and equity shareholders' funds $ 53,436 $ 60,926
========== ==========
Years ended June 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(In thousands)
Turnover (gross revenues) $ 32,094 $ 38,891 $ 44,620
Gross profit 22,468 27,613 32,555
Profit after tax (net income) 4,827 6,024 7,539
At September 30, 2005, the recorded balance of the Company's investment in A&B,
accounted for on the equity method, was $17.3 million. The Company's equity in
net assets of A&B was $10.6 million. The difference between the recorded balance
and the Company's equity in A&B's net assets represents the $6.7 million of
unamortized goodwill which resulted from the initial purchase, plus the
cumulative difference resulting from A&B's earnings, dividend payments, and
translation gain since the date of investment.
In 2000, the Company invested $1.1 million in an internet related start-up
company and accounted for it under the cost method. Based on the investee's
performance, the Company determined at September 30, 2003 that its investment
was fully impaired, resulting in a $1.1 million impairment charge recorded in
Fiscal 2003.
NOTE E: PROPERTY AND EQUIPMENT
Major classifications of property and equipment were as follows:
September 30,
------------------------
2004 2005
---------- ----------
(In thousands)
Land $ 44 $ 44
Buildings and improvements 34,775 38,527
Furniture and equipment 28,901 33,296
Software 21,275 21,407
Construction in progress 131 934
---------- ----------
Total 85,126 94,208
Less accumulated depreciation (59,280) (67,244)
---------- ----------
$ 25,846 $ 26,964
========== ==========
53
NOTE F: ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consisted of the following:
September 30,
------------------------
2004 2005
---------- ----------
(In thousands)
Trade accounts payable $ 3,333 $ 3,760
Accrued payroll and related expenses 6,449 6,398
Accrued interest 136 145
Accrued rent and property taxes 2,285 3,099
Accrual for expected losses on CSO letters of credit - 1,391
Other accrued expenses 2,744 4,195
---------- ----------
$ 14,947 $ 18,988
========== ==========
NOTE G: LONG-TERM DEBT
Long-term debt consisted of:
September 30,
------------------------
2004 2005
---------- ----------
(In thousands)
Note payable to bank under credit agreement $ 25,000 $ 7,000
Less current maturities - -
---------- ----------
$ 25,000 $ 7,000
========== ==========
At September 30, 2005, the Company's credit agreement provided for a $40.0
million revolving credit facility with an effective rate of 4.9375% and a
maturity date of April 1, 2007. The effective interest rate at September 30,
2004 was 3.5%. Advances are secured by the Company's assets. The Company may
choose either a Eurodollar rate or the agent bank's base rate. Interest accrues
at the Eurodollar rate plus 150 to 275 basis points or the agent bank's base
rate plus 0 to 125 basis points, depending on the leverage ratio computed at the
end of each quarter. The Company also pays a commitment fee of 37.5 basis points
on the unused amount of the revolving facility. Terms of the agreement require,
among other things, that the Company meet certain financial covenants. Payment
of dividends and additional debt are allowed but restricted.
NOTE H: COMMON STOCK, WARRANTS, AND OPTIONS
The capital stock of the Company consists of two classes of common stock
designated as Class A Non-Voting Common Stock ("Class A Common Stock") and Class
B Voting Common Stock ("Class B Common Stock"). The rights, preferences, and
privileges of the Class A and Class B Common Stock are similar except that each
share of Class B Common Stock has one vote and each share of Class A Common
Stock has no voting privileges. All Class A Common Stock is publicly held.
Holders of Class B Common Stock may, individually or as a class, convert some or
all of their shares into Class A Common Stock. Class A Common Stock becomes
voting common stock upon the conversion of all Class B Common Stock to Class A
Common Stock. The Company is required to reserve such number of authorized but
unissued shares of Class A Common Stock as would be issuable upon conversion of
all outstanding shares of Class B Common Stock.
At September 30, 2005, warrants to purchase 22,396 shares of Class A Common
Stock and 4,074 shares of Class B Common Stock at $6.17 per share were
outstanding. The warrants are not mandatorily redeemable, and are exercisable at
the option of the holder through July 25, 2009.
The Company has an Incentive Stock Option Plan (the "1991 Plan") under which
options to purchase Class A Common Stock were granted to employees until
adoption of the EZCORP, Inc 1998 Incentive Plan (the
54
"1998 Plan") discussed below. Options granted under the 1991 Plan were granted
at exercise prices equal to or greater than the fair market value of the Class A
Common Stock on the date of grant. Grants under the 1991 Plan provide for
accelerated vesting upon a change in control of the Company.
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the adoption of the 1998 Plan, which provided for the issuance of
shares for stock option awards of up to 1,275,000 of the Company's Class A
Common Stock. In approving the 1998 Plan, the Compensation Committee resolved
that no further options would be granted under any previous plans.
On November 5, 1998, the Compensation Committee of the Board of Directors
approved a grant of 1,023,000 options to executive officers, exercisable at
$10.00 per share, and, except as discussed below, vesting on October 6, 2008. As
of September 30, 2005, 450,000 of these options remained outstanding (options
granted less options canceled due to employee termination) and none had been
exercised. The terms of this grant provide for accelerated vesting upon
achievement of certain debt to equity ratios and levels of earnings per share.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2005, 294,500 of these options remained outstanding, 135,000
options have been canceled due to employee termination, and 140,500 options have
been exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005. As of September 30, 2005, 72,500 options are exercisable.
On September 17, 2003, the Board of Directors approved the adoption of the
EZCORP, Inc. 2003 Incentive Plan (the "2003 Plan"). The 2003 Plan permits grants
of the same types of options, stock appreciation rights ("SARs") and limited
stock appreciation rights ("LSARs") as the 1991 and 1998 Plans and provides for
stock option awards of up to 900,000 of the Company's Class A Common Stock. In
approving this plan, the Board of Directors resolved that no further options
would be granted under the 1998 Plan.
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 was amortized over the two-year
restriction period ended September 17, 2005. The Company amortized to expense
$0.4 million of this cost in each of the fiscal years ended September 30, 2004
and 2005. 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. These restricted shares are
not included in the Summary of Option Plan Activity or Range of Options
Outstanding tables below.
Also on September 17, 2003, the Compensation Committee of the Board of Directors
approved a grant of 100,000 options to the Chairman of the Board, exercisable at
$6.27 per share. Forty percent of these options vested September 15, 2004, and
the remaining 60% vested September 15, 2005.
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 Company also agreed to reimburse him for the income tax
consequences resulting from the award. 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 market value of the restricted stock on the award date
was $0.6 million, which was being amortized over a three-year period based on
the Company's initial expectation that earlier vesting objectives would be met.
One third of the shares vested January 15, 2005 based on the attainment of the
goals for accelerated vesting. During the Fiscal 2004 and 2005 Periods, $0.1
million and $0.2 million of this cost was amortized to expense, respectively.
Effective October 1, 2005, the Company determined it no longer believes the
requirements will be met for accelerated vesting. Accordingly, the remaining
unamortized deferred compensation of $0.2 million will be amortized ratably over
the vesting period ending January 1, 2009.
55
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. These restricted shares
are not included in the Summary of Option Plan Activity or Range of Options
Outstanding tables below.
Also on January 15, 2004, the Compensation Committee of the Board of Directors
approved a grant of 324,000 options to key individuals exercisable at $9.77 per
share, and except as discussed below, vesting on January 1, 2009. An additional
grant under the same conditions was granted on April 19, 2004 at an exercise
price of $10.60 per share. As of September 30, 2005, all options remain
outstanding and none have been exercised. The terms of the grant provide for
accelerated vesting upon achievement of certain objectives.
In Fiscal 2003, 2004, and 2005, the Compensation Committee of the Board of
Directors approved additional grants of options under the 1998 and 2003 Plans at
exercise prices ranging from $2.00 to $16.06. Under the 1991 Plan, the 1998 Plan
and the 2003 Plan, options typically vest at 20% each year and are fully vested
in five years. They have a contractual life of ten years. Total options
available for grant at September 30, 2005 under the 2003 Plan were 71,500. A
summary of the option plans' activity follows:
SUMMARY OF OPTION PLAN ACTIVITY
Price Range of
Number of Shares Shares Weighted Average
--------------------------------------------------------
Outstanding at September 30, 2002 1,451,723 $ 2.00 - $21.75 $ 7.71
---------------- --------------- ----------------
Granted 876,000 $ 2.30 - $ 6.27 $ 3.05
Forfeited (200,030) $ 2.00 - $13.00 $ 3.64
Expired (14,700) $21.75 $ 21.75
Exercised - - -
---------------- --------------- ----------------
Outstanding at September 30, 2003 2,112,993 $ 2.00 - $15.00 $ 6.13
---------------- --------------- ----------------
Granted 412,500 $ 5.92 - $12.15 $ 9.60
Forfeited (113,240) $ 2.00 - $ 4.00 $ 2.48
Expired (128,000) $13.00 - $14.50 $ 13.98
Exercised (165,800) $ 2.00 - $ 6.27 $ 2.70
---------------- --------------- ----------------
Outstanding at September 30, 2004 2,118,453 $ 2.00 - $15.00 $ 6.80
---------------- --------------- ----------------
Granted 105,000 $ 8.86 - $16.06 $ 10.58
Forfeited (21,690) $ 2.00 - $ 8.86 $ 5.97
Expired (34,973) $12.50 - $12.75 $ 12.67
Exercised (366,890) $ 2.00 - $10.00 $ 2.46
---------------- --------------- ----------------
Outstanding at September 30, 2005 1,799,900 $ 2.00 - $16.06 $ 7.80
---------------- --------------- ----------------
RANGE OF OPTIONS OUTSTANDING
Weighted Exercisable
Weighted Average Shares
Number of Average Remaining Weighted
Range of Shares Exercise Contractual Avg. Exer.
Exercise Prices Outstanding Price Life (Years) Exercisable Price
- --------------- ----------- -------- ------------ ----------- -----------
$ 2.00-$ 2.90 480,900 $ 2.41 6.60 169,510 $ 2.29
$ 3.50-$ 4.24 37,000 $ 4.00 7.64 14,800 $ 4.00
$ 5.92-$ 8.86 243,000 $ 7.15 8.35 123,600 $ 6.34
$ 9.77-$ 16.06 1,039,000 $ 10.57 5.25 311,500 $ 11.45
- --------------- --------- -------- ---- ------- -----------
$ 2.00-$ 16.06 1,799,900 $ 7.80 6.08 619,410 $ 7.75
Pro forma information regarding net income (loss) is required by SFAS No. 123,
as amended by SFAS No. 148, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123, as amended by SFAS No. 148. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting
56
restrictions and are fully transferable. In addition, this option valuation
model requires the input of highly subjective assumptions including the expected
stock price volatility. In applying the Black-Scholes option valuation model,
the Company used the following weighted average assumptions for the years ended
September 30, 2003, 2004, and 2005, respectively:
September 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
Risk-free interest rate 2.82% 3.22% 3.24%
Dividend yield 0% 0% 0%
Volatility factor of the expected market price of the
Company's common stock 0.56 0.38 0.41
Expected life of the options 5 years 10 years 10 years
Weighted average fair value of options granted:
Exercise price greater than market value at date of grant $ 1.47 $ - $ -
Exercise price equal to market value at date of grant $ 2.33 $ 5.20 $ 6.11
Exercise price less than market value on the date of grant $ - $ - $ -
Shares of reserved common stock at September 30, 2005, were as follows:
Class A Class B
---------- ----------
Stock compensation plans 1,551,310 -
Stock warrants 22,396 4,074
Conversion of Class B Common Stock 998,990 -
---------- ----------
2,572,696 4,074
========== ==========
Pro forma information regarding net income (loss) is presented in Note A,
"Organization and Summary of Significant Accounting Policies."
NOTE I: INCOME TAXES
The income tax provision (benefit) attributable to continuing operations is as
follows:
Years Ended September 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(In thousands)
Current
Federal $ 3,046 $ 7,400 $ 8,121
State - 61 67
---------- ---------- ----------
3,046 7,461 8,188
Deferred
Federal (4,216) (2,103) 110
State - - -
---------- ---------- ----------
$ (1, 170) $ 5,358 $ 8,298
========== ========== ==========
The income tax provision (benefit) is included in the financial statements as
follows:
Years Ended September 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(In thousands)
Continuing operations $ (1,170) $ 5,358 $ 8,298
Cumulative effect of adopting a new accounting
principle (3,111) - -
---------- ---------- ----------
$ (4,281) $ 5,358 $ 8,298
========== ========== ==========
57
A reconciliation of income taxes calculated at the statutory rate and the
provision (benefit) for income taxes attributable to continuing operations is as
follows:
Years Ended September 30,
------------------------------------
2003 2004 2005
---------- ---------- ----------
(In thousands)
Income taxes at the federal statutory rate $ 2,458 $ 5,068 $ 8,068
State income tax, net of federal benefit - 61 93
Change in valuation allowance (3,700) - -
Other 72 229 137
---------- ---------- ----------
$ (1,170) $ 5,358 $ 8,298
========== ========== ==========
In the quarter ended June 30, 2004, the Company increased its estimate of the
effective tax rate for the Fiscal 2004 period from 34.5% to 37.0%. The increase
resulted primarily from the determination in the quarter that certain executive
compensation would not be deductible for federal income tax purposes in 2004 and
from an increase in expected state income taxes. This, combined with the
Company's continued growth in earnings and projected future earnings, also
increased the tax rate at which the Company expects its net deferred tax assets
to be realized. The one-time benefit received as a result of the revaluation of
the Company's deferred tax assets due to the increase in the expected future tax
rate is included in the "Other" category in the 2004 rate reconciliation above.
The Company's effective tax rate was 36.0% in Fiscal 2005.
Significant components of the Company's deferred tax liabilities and assets as
of September 30 are as follows:
2004 2005
---------- ----------
(In thousands)
Deferred tax liabilities:
Tax over book amortization $ 3,935 $ 3,764
Foreign income and dividends 844 1,309
Prepaid expenses 167 321
---------- ----------
Total deferred tax liabilities 4,946 5,394
Deferred tax assets:
Book over tax depreciation 9,330 8,347
Tax over book inventory 6,185 6,266
Accrued liabilities 1,235 1,901
Pawn service charges receivable 2,464 2,694
Tax carry-forwards 389 389
Impairment of receivable from stockholder - 343
---------- ----------
Total deferred tax assets 19,603 19,940
---------- ----------
Net deferred tax asset 14,657 14,546
Valuation allowance - -
---------- ----------
Net deferred tax asset $ 14,657 $ 14,546
========== ==========
In Fiscal 2003, the Company eliminated the valuation allowance of $3.7 million
based on management's belief that it was more likely than not that the Company's
net deferred tax asset would be realized as a result of expected future taxable
income from operations and implementation of certain tax planning strategies, if
required.
Substantially all of the Company's operating income was generated from domestic
operations during 2004 and 2005. At September 30, 2004 and 2005, the Company has
provided deferred income taxes on all undistributed earnings from its foreign
unconsolidated affiliate. Such earnings have been reinvested in foreign
operations except for dividends at September 30, 2004 and 2005 of approximately
$680,000 and
58
$861,000, respectively. Furthermore, any taxes paid to foreign governments on
those earnings may be used in whole or in part as credits against the U.S. tax
on any dividends distributed from such earnings.
The Company has no net operating loss carry-forward or alternative minimum tax
credit carry-forward at September 30, 2005.
NOTE J: RELATED PARTY TRANSACTIONS
As of October 1, 2004, the Company entered into a financial advisory services
agreement with Madison Park, L.L.C. ("Madison Park"), an affiliate of the
controlling stockholder. The agreement requires Madison Park to provide ongoing
advice and consultation with respect to mergers, acquisitions, divestitures,
strategic planning, corporate development, investor relations, treasury, and
other advisory services for a monthly fee of $100,000, inclusive of most
expenses. The Madison Park agreement has a three-year term and the Company has
the right to terminate the agreement at any time. Madison Park can terminate
only at the end of any one of the Company's fiscal years. Prior to entering into
the agreement with Madison Park, the Audit Committee obtained a fairness opinion
from a qualified, independent financial advisory firm. The fairness opinion
supported the fees for the services to be rendered based on the terms of the
agreement and the Company's strategic plan. Philip E. Cohen is a principal in
Morgan Schiff, Madison Park, and the general partner of the controlling
stockholder. In Fiscal 2005, total payments to Madison Park amounted to
$1,200,000.
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff
& Co., Inc. ("Morgan Schiff"), an affiliate of the general partner of the
controlling stockholder, provided financial advisory services to the Company
through October 1, 2004 for a monthly fee, inclusive of most expenses. These
services included advice and consultation with respect to mergers, acquisitions,
divestitures, strategic planning, corporate development, investor relations,
treasury, and other advisory services. As a result of entering the agreement
with Madison Park, the Company elected not to renew its financial advisory
services agreement with Morgan Schiff at October 1, 2004. Through April 30,
2004, Morgan Schiff received a financial advisory fee of $100,000 per month,
inclusive of most expenses. As of May 1, 2004, the Company withheld the payment
of the monthly fee pending the outcome of a review by the Audit Committee of the
historical expenses paid by the Company to Morgan Schiff. The Audit Committee
presented a preliminary report including findings with respect to the historical
expense review.
Based on the review and the findings of the Audit Committee performed in
consultation with its independent counsel and financial advisors, the Company
determined that it overpaid expenses to Morgan Schiff in prior years. The Audit
Committee did not find any evidence of wrongdoing or bad faith on the part of
Morgan Schiff and Morgan Schiff disagreed with the Audit Committee's preliminary
findings. The Audit Committee recommended that the Company seek a recovery from
Morgan Schiff in the amount of $400,000. Based on the Audit Committee's
recommendation, the Company offset monthly fees due Morgan Schiff in the amount
of $400,000, and reduced by that amount its Administrative Expense and Accounts
Payable for the year ended September 30, 2004. The Audit Committee and the
Company have determined not to take any further action on this matter at this
time.
The table below summarizes the monthly fee earned and expense reimbursements
paid to Morgan Schiff by the Company during Fiscal 2003, 2004, and 2005 (in
thousands):
2003 2004 2005
---------- ---------- ----------
Monthly retainer $ 367 $ 1,200 $ -
Expense reimbursements 400 (398) -
---------- ---------- ----------
Total $ 767 $ 802 $ -
========== ========== ==========
In 1994, the Company loaned a former chief executive ("CEO") $729,112.50 to
purchase 50,000 shares of 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 equals or
59
exceeds $10 per share, or (b) August 1, 2005. Additionally, under the agreement,
all accrued and unpaid interest due on the loan was forgiven until the first day
that the closing price for the Company's stock equaled or exceeded $6 per share.
On September 17, 2003, the Company's stock closed at $6.27. As a result, the
former CEO became responsible for the payment of interest from September 18,
2003 through December 31, 2003. He paid accrued interest through December 31,
2003. Forgiveness of interest and related income tax costs prior to September
18, 2003 were charged as compensation expense. During Fiscal 2003, 2004, and
2005, the Company recognized compensation expense of $72,000, $0, and $0,
respectively. On January 16, 2004 the Company's stock closed at $10.34 thereby
accelerating the due date of the note. The former CEO defaulted in the payment
of the note after it became due. On September 22, 2004, the Company obtained a
judgment confirming an arbitration award on the note in the amount of
$969,398.55 (principal of $729,112.50 and accrued interest of $240,286.05) plus
post-judgment interest. On October 19, 2004, the former CEO filed a Chapter 7
bankruptcy seeking to discharge all of his debts including the debt represented
by the judgment. A full valuation allowance has been recorded for the note, as
its collection is doubtful.
In October 1994, the Board of Directors approved an agreement that provided
incentive compensation to the Chairman, Sterling Brinkley, based on growth in
the share price of the Company's Class A Common Stock. Mr. Brinkley was advanced
$1.5 million evidenced by a recourse promissory note, due in 2005 and bearing
interest at the minimum rate allowable for federal income tax purposes (2.33%
for Fiscal 2005).
Under the terms of Mr. Brinkley's $1.5 million loan, as amended, the loan
principal would have been forgiven if, prior to its October 1, 2005 maturity
date, a stock price target of $28.25 had been attained. Mr. Brinkley repaid his
note in full in September 2005. Accrued interest was forgiven based upon
continued employment, and the Company was required to reimburse Mr. Brinkley for
the income tax consequences of the interest forgiveness. Charges to operations
consist of forgiveness of interest and related income tax costs and totaled
approximately $58,000, $41,000, and $60,000 for the years ended September 30,
2003, 2004, and 2005, respectively.
In February 2000, the Company loaned Mr. Rotunda $200,000 as an employment
incentive. The principal and interest of the loan were subject to forgiveness in
equal increments over a three-year period conditioned upon Mr. Rotunda's
continued employment with the Company on February 24th of each year. The Company
was required to reimburse Mr. Rotunda for the income tax consequence of any
portion of the forgiveness. In Fiscal 2003, the remaining balance of this loan
of $66,667 plus accrued interest of $1,651 was forgiven. During 2003, charges to
operations consist of forgiveness of loan principal and interest and related
income tax costs and totaled $113,960.
NOTE K: LEASES
The Company leases various facilities and certain equipment under operating
leases. Future minimum rentals due under non-cancelable leases are as follows
for each of the years ending September 30:
(In thousands)
--------------
2006 $ 14,610
2007 13,377
2008 11,983
2009 10,207
2010 8,530
Thereafter 37,401
---------
$ 96,108
=========
The Company subleases some of the above facilities. Future minimum rentals
expected under these subleases amount to $9,600 in each of the fiscal years
ending between 2006 and 2010, and $36,800 thereafter.
60
After an initial lease term of generally 5 to 10 years, the Company's lease
agreements typically allow renewals in five-year increments. The Company's lease
agreements generally include rent escalations throughout the initial lease term.
Such rent escalations are included in the above numbers. For financial reporting
purposes, the aggregate rentals over the lease term, including lease renewal
options that are reasonably assured, are expensed on a straight-line basis.
Net rent expense for the years ending September 30, 2003, 2004, and 2005 was
$15.5 million, $15.5 million, and $16.7 million, respectively. Net rent expense
includes the collection of sublease rent revenue of approximately $75,000,
$55,000, and $47,000 for years ending September 30, 2003, 2004, and 2005.
During Fiscal 2001, 2002, and 2003, the Company completed several sale-leaseback
transactions of some of its previously owned facilities. Losses on such sales
were recognized immediately, and gains on such sales were deferred and are being
amortized as a reduction of lease expense over the terms of the related leases.
The remaining unamortized long-term portion of these deferred gains, amounting
to $3.6 million at September 30, 2005, is included in "Deferred gains and other
long-term liabilities" in the Company's consolidated balance sheet. The
short-term portion, included in "Accounts payable and other accrued expenses"
was $0.4 million at September 30, 2005. Future rentals pursuant to these
sale-leasebacks are included in the above schedule of future minimum rentals.
Terms of these leases are consistent with the terms on the Company's other lease
agreements.
NOTE L: EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options. If Mr. Rotunda's employment is terminated, other than for
cause, he is entitled to receive a severance payment equal to his annual
compensation.
NOTE M: 401(k) PLAN
The Company sponsors a 401(k) Plan under which eligible employees of the Company
may contribute up to a maximum percentage allowable not to exceed the limits of
Code Sections 401(k), 402(g), 404 and 415. To be eligible, an employee must be
at least 21 years old and have been employed by the Company for at least six
months. The Company, in its sole discretion, may match in the form of the
Company's Class A Common Stock. Contribution expense related to the plan for
2003, 2004, and 2005 was approximately $64,000, $61,000 and $72,000,
respectively.
NOTE N: CONTINGENCIES
From time to time, the Company is involved in litigation and regulatory actions.
Currently, the Company is a defendant in several actions. While the ultimate
outcome of these actions cannot be ascertained, 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. There can be no assurance, however, as to the ultimate outcome of
these actions.
61
NOTE O: QUARTERLY INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
YEAR ENDED SEPTEMBER 30, 2005
Total revenues $ 61,628 $ 63,098 $ 56,250 $ 73,183
Net revenues 39,715 39,197 37,829 46,740
Net income 4,949 3,969 2,129 3,705
Income per common share, basic
Net income 0.40 0.32 0.17 0.30
Income per common share, assuming dilution
Net income 0.37 0.29 0.16 0.27
YEAR ENDED SEPTEMBER 30, 2004
Total revenues $ 54,314 $ 58,289 $ 51,141 $ 64,053
Net revenues 35,041 35,772 31,801 36,981
Net income 2,990 3,007 253 2,873
Income per common share, basic
Net income 0.25 0.25 0.02 0.23
Income per common share, assuming dilution
Net income 0.23 0.23 0.02 0.22
In the quarter ended June 30, 2004, the Company increased its estimate of the
effective tax rate for its fiscal year ending September 30, 2004 from 34.5% to
37.0%. The increase resulted primarily from the determination that certain
executive compensation would not be deductible for federal income tax purposes
in 2004 and from an increase in expected state income taxes. The increase in the
effective income tax rate lowered net income in the quarter ended June 30, 2004
by $248,000, or $0.02 per share (basic and assuming dilution).
NOTE P: 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 Fiscal 2005 and Fiscal 2004
was $14.7 million and $9.5 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 of $1.2 million is presented, net of tax of
$0.4 million, in the consolidated balance sheets as "Accumulated other
comprehensive income."
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective October 6, 2004, the Company engaged BDO Seidman, LLP to audit the
Company's consolidated financial statements beginning with the year ended
September 30, 2004, and informed Ernst & Young, its previous independent
accountant, that it planned to dismiss Ernst & Young as its independent
accountant. On December 15, 2004, the Company formally dismissed Ernst & Young
LLP as its independent accountant. The change was the result of a proposal and
competitive bidding process involving several accounting firms. The decision to
dismiss Ernst & Young LLP and to retain BDO Seidman, LLP was recommended by the
Audit Committee of the Company's Board of Directors and approved by the Board of
Directors.
The Company had no disagreements on accounting or financial disclosure matters
with either of its independent certified public accountants - BDO Seidman, LLP
or Ernst & Young LLP - to report under this Item 9.
63
ITEM 9A. CONTROLS AND PROCEDURES
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 Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), 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 CEO and
CFO concluded that the Company's disclosure controls and procedures were
effective.
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.
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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
the Company's internal control over financial reporting. This internal control
system has been designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation and fair
presentation of the Company's published consolidated financial statements.
Management has assessed the effectiveness of the Company's internal control over
financial reporting as of September 30, 2005. To make this assessment,
management utilized the criteria for effective internal control over financial
reporting described in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of September 30, 2005, the Company's
internal control over financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2005 has been audited by BDO Seidman,
LLP, an independent registered public accounting firm, as stated in their report
which appears in this annual report on Form 10-K.
/s/ Joseph L. Rotunda /s/ Dan N. Tonissen
- --------------------- -------------------
Joseph L. Rotunda Dan N. Tonissen
President, Chief Executive Officer Senior Vice President,
& Director Chief Financial Officer &
November 12, 2005 Director
November 12, 2005
64
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
EZCORP, Inc.
Austin, Texas
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting and Scope of
Management's Report, that EZCORP, Inc. maintained effective internal control
over financial reporting as of September 30, 2005, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). EZCORP,
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that EZCORP, Inc. maintained effective
internal control over financial reporting as of September 30, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, EZCORP, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2005, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of September 30, 2005 and 2004 and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended of
EZCORP, Inc. and our report dated November 18, 2005 expressed an unqualified
opinion thereon.
/s/ BDO Seidman, LLP
Dallas, Texas
November 18, 2005
65
ITEM 9B. OTHER INFORMATION
None.
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of October 31, 2005 were
as follows:
Name Age Title
- ---- --- -----
Sterling B. Brinkley (1) 53 Chairman of the Board of Directors
Joseph L. Rotunda (1) (3) 58 President, Chief Executive Officer, and Director
Dan N. Tonissen (1) (3) 55 Senior Vice President, Chief Financial Officer,
Assistant Secretary, and Director
Thomas C. Roberts (2) (4) 63 Director
Gary C. Matzner (4) 57 Director
Richard D. Sage (2) (4) 65 Director
Daniel M. Chism 37 Controller and Assistant Secretary
Robert A. Kasenter 59 Senior Vice President of Administration
John R. Kissick 63 Vice President of Strategic Development
Connie L. Kondik 41 Vice President, Secretary, and General Counsel
Michael Volpe 41 Vice President of EZPAWN Operations
Robert Jackson 50 Vice President and Chief Information Officer
Eric Fosse 42 Vice President of EZMONEY Operations
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Section 401(k) Plan Committee
(4) Member of Audit Committee
Mr. Brinkley has served as either Chairman of the Board or Chairman of the
Executive Committee of the Board of Directors of the Company since 1989. Mr.
Brinkley serves as a Director of Albemarle & Bond Holdings plc, which the
Company owns approximately 29%. In addition, Mr. Brinkley was President and
Chairman of the Board of MS Pawn Corporation, the general partner of MS Pawn
Limited Partnership until 2004. Mr. Brinkley has also served as Chairman of the
Board or Chairman of the Executive Committee of Crescent Jewelers, Inc., an
affiliate of the Company, since 1988 and currently serves as Chief Executive
Officer. Crescent Jewelers, Inc., a private company, filed for Chapter 11
bankruptcy protection in August 2004. From 1990 to December 2003, he served as
Chairman of the Board or Chairman of the Executive Committee of Friedman's,
Inc., a publicly traded affiliate of the Company. In January 2005, Friedman's,
Inc. filed for Chapter 11 bankruptcy. From 1986 to 1990, Mr. Brinkley served as
a Managing Director of Morgan Schiff & Co., Inc., an affiliate of the Company.
See "Security Ownership of Certain Beneficial Owners and Management."
Mr. Rotunda joined the Company as director, President, and Chief Operating
Officer in February 2000 and assumed the role of Chief Executive Officer of the
Company in August 2000. From 1998 to 2000, he was Chief Operating Officer of G&K
Services, Inc., a $500 million provider of uniform and textile products. From
1991 to 1998 he progressed through several officer positions to Executive Vice
President and Chief Operating Officer of Thorn Americas, Inc. Mr. Rotunda also
currently serves as a Director of Easyhome, Ltd., Toronto, Canada.
Mr. Tonissen has served as a director, Senior Vice President, Chief Financial
Officer, and Assistant Secretary of the Company since August 1994. Prior to
1994, he held senior level financial positions with La Salsa Holding Company,
Valley Grain Products, Inc., and Denny's, Inc.
Mr. Roberts has served as a director and as Chairman of the Audit Committee of
the Company's Board of Directors since January 2005. From 1970 to 1985, Mr.
Roberts was with Schlumberger, Ltd., where he was an Executive Vice President
and Chief Financial Officer from 1977 to 1979 and President of
67
Schlumberger's worldwide electronics operations from 1979 until 1985. From 1985
until 1989, he was President of Control Data Computer Systems and Services and a
member of the Control Data Board of Directors. Since 1990, Mr. Roberts has been
a private investor and is currently Chairman of the Board of Directors and
Chairman of the Trust Committee of Pensco, Inc., a financial services company.
Mr. Matzner has served as director of the Company since July 2002. He has been
Senior Counsel with the law firm of McDermott, Will & Emery since August 2002,
and has been the Mayor of the Village of Pinecrest, Florida since November 2004.
From 1997 to July 2002, Mr. Matzner was President of Nobel Health Services,
Inc., a provider of health care consulting services. From 1999 to May 2001, Mr.
Matzner was also President of Oakridge Outpatient Center, Inc.
Mr. Sage has served as director of the Company since July 1995. He was a
co-founder of AmeriHealth, Inc., which owned and managed hospitals. He served as
Treasurer of AmeriHealth, Inc. from April 1983 to October 1995 and was a member
of the board of directors of AmeriHealth, Inc. from April 1983 to December 1994.
Mr. Sage was a Director of Champion Healthcare Corporation from January 1995 to
August 1996. Since June 1993, he has been associated with Sage Law Offices in
Miami, Florida.
Mr. Chism has served as Controller and Assistant Secretary of the Company since
August 1999. From 1996 to 1999, Mr. Chism served as Audit Manager for Ernst &
Young LLP, where he also served as an audit senior and audit staff member from
1991 to 1995. From 1995 to 1996, Mr. Chism served as a Director of Internal
Audit and a Departmental Controller for VarTec Telecom, Inc.
Mr. Kasenter joined the Company in August 2003 as Vice President of Human
Resources and in October 2004 was promoted to Senior Vice President of
Administration. He was a director of the Donnkenny Apparel Board from 2001 until
April 2005, at which time Donnkenny filed for Chapter 11 bankruptcy protection
and was sold. Mr. Kasenter was the President & Chief Executive Officer of
Strategic Executive Actions, a Chicago-based management consulting firm
specializing in human resource crisis issues, from 1999 to 2003. From 1968 to
1999, Mr. Kasenter was employed in various operating and administrative
positions and ultimately served as the Executive Vice President of Human
Resources and Corporate Communications for Montgomery Ward.
Mr. Kissick has served as Vice President of Strategic Development since August
2001. From 1991 to 1998 he served as Vice President of Strategic Planning for
Thorn Americas, Inc. Prior to 1991, he held senior marketing positions at
Reynolds and Reynolds, Hobart Corporation, and Pizza Hut.
Ms. Kondik has served as General Counsel since June 2000, Secretary since
January 2001, and Vice President since January 2003. From June 1995 to June
2000, Ms. Kondik served as Sr. Associate General Counsel, Vice-President, and
Assistant Secretary of Empire Funding Corp. and TMI Financial, Inc., a national
sub-prime mortgage lender and servicer.
Mr. Volpe joined the Company in October 2003 as Vice President of Store
Operations. From August 2001 to October 2003, he was a multi-unit manager for
Toys "R" Us in the Chicago Area. Prior to that, Mr. Volpe spent ten years in
several positions with Montgomery Ward, including the National Director of
Hardlines and District Manager positions.
Mr. Jackson joined the Company in May 2004 as Vice President & Chief Information
Officer. He was Chief Information Officer at DuPont Photomasks, Inc. from 1997
to 2004 where he also served as Controller from 1995 to 1996. Prior to 1995, Mr.
Jackson held senior financial leadership positions in the U.S. and South America
at E.I. DuPont de Nemours.
Mr. Fosse joined the Company in September 2004 as Vice President of EZMONEY
Payday Loans. From 1991 to 2004, Mr. Fosse was employed in various operating
positions and ultimately served as a Regional Vice President of G&K Services, a
provider of garment and facility services to businesses across the United States
and Canada.
68
COMMITTEES OF THE BOARD
The Board of Directors held eight meetings during the year ended September 30,
2005. The Board of Directors has appointed four committees: an Executive
Committee, an Audit Committee, a Compensation Committee, and a Section 401(k)
Plan Committee. The members of the Executive Committee for Fiscal 2005 were Mr.
Brinkley, Mr. Rotunda, and Mr. Tonissen. The Executive Committee held several
informal meetings during Fiscal 2005, and all members attended. The Audit
Committee, comprised of Messrs. Roberts, Sage and Matzner, held four meetings in
Fiscal 2005. Messrs. Roberts and Sage attended all Audit Committee meetings, and
Mr. Matzner attended three of the four meetings. All audit committee members are
independent directors and are financially literate. Mr. Roberts is the
committee's chairman and is an "audit committee financial expert" as defined in
the applicable rules and regulations of the Securities and Exchange Act of 1934.
The Compensation Committee, comprised of Mr. Sage and Mr. Roberts, held one
meeting during Fiscal 2005. All actions taken by the committee during the year
were by Written Unanimous Consent. The committee that administers the Section
401(k) Plan consists of Mr. Rotunda and Mr. Tonissen. Both members attended the
one informal meeting held by the 401(k) Committee during Fiscal 2005. All Fiscal
2005 actions of this committee were by Written Unanimous Consents or by board
resolutions. All directors attended at least 75% of the total number of meetings
of the Board and of the committees on which they serve.
The NASDAQ stock market, on which the Company's stock is traded, typically
requires registrants' boards to utilize a nominating committee to nominate
prospective members of the board. EZCORP is a controlled company, with all its
voting stock controlled by one individual. Accordingly, the Company is exempt
from the requirement to have a nominating committee, and its directors are
appointed by its voting shareholder.
CODE OF CONDUCT AND ETHICS
The Company has in place a Code of Conduct and Ethics applicable to all
employees, as well as the Board of Directors and executive officers. Copies of
the Company's Code of Conduct and Ethics are available, free of charge by
submitting a written request to EZCORP, Inc., Investor Relations, 1901 Capital
Parkway, Austin, Texas 78746 or may be obtained from the Company's website at
www.ezcorp.com.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based primarily on statements received from officers and directors and a review
of the relevant Forms 3, 4, and 5, all officers, directors, and beneficial
owners of more than ten percent of any class of equity securities were timely,
except as noted below, throughout the fiscal year in filing all reports required
by Section 16(a) of the Exchange Act.
Richard Sage, Gary Matzner, and Robert Jackson each filed a Form 4 on October 7,
2004, two days after the deadline of October 5, 2004. Each of the filings
reported a single grant of stock options awarded to each individual on October
1, 2004.
69
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table presents compensation earned for services during Fiscal
2003, 2004, and 2005 by the Company's Chief Executive Officer and each of the
Company's four most highly compensated executive officers whose total annual
compensation exceeded $100,000 (collectively, the "Named Executive Officers").
Long Term
Annual Compensation Compensation All other
Salary Bonus Other Restricted Stock Compensation
Name and Principal Position Year ($) ($) ($) Awards ($) ($)(2)
---- ------- ------- ------- ---------------- ------------
Sterling B. Brinkley 2003 373,365 31,800 - 783,750 1,349
Chairman of the Board (1) (6) 2004 473,077 22,650 759,847 - 3,238
2005 497,650 - - - 1,625
Joseph L. Rotunda 2003 469,154 538,318 74,812 - 1,475
President, Chief Executive Officer and 2004 522,885 787,500 414,298 586,200 3,378
Director (3) (4) 2005 575,481 721,875 - - 1,912
Dan N. Tonissen 2003 259,577 102,050 - - 819
Senior Vice President, Chief Financial 2004 272,500 170,898 - - 2,327
Officer, Assistant Secretary and Director 2005 289,346 165,300 - - 1,086
Robert A. Kasenter 2003 27,692 - 38,000 - 251
Senior Vice President of 2004 160,000 78,000 - - 1,364
Administration (5) 2005 188,846 100,244 - - 722
Michael Volpe 2003 - - - - -
Vice President of EZPAWN Operations (5) 2004 152,615 77,040 97,858 - 1,353
2005 166,250 57,276 41,458 - 633
Eric Fosse 2003 - - - - -
Vice President of EZMONEY 2004 - - - - -
Operations (5) 2005 168,269 78,313 150,437 - 665
(1) On September 17, 2003, Mr. Brinkley was awarded 125,000 shares of
restricted Class A Common Stock. The market value of this restricted stock
grant on September 17, 2003 was $0.8 million. At the grant date, the
Company also agreed to reimburse Mr. Brinkley for the income tax
consequences of the award. According to the terms of the grant, the
restrictions lapsed September 17, 2005.
(2) This category includes the value of any life insurance and disability
premiums paid on behalf of the named executive.
(3) On January 15, 2004, Mr. Rotunda was awarded 60,000 shares of restricted
Class A Common Stock with a fair value of $0.6 million on that date. The
Company also agreed to reimburse Mr. Rotunda for the income tax
consequences of the award. The restriction requires Mr. Rotunda to remain
employed by the Company until January 1, 2009 at which time any unvested
shares will vest. The shares are subject to earlier vesting based on the
occurrence of certain objectives. 20,000 shares vested on January 15, 2005
based on the achievement of certain of those objectives. As of September
30, 2005, the market value of the 60,000 shares was $1.0 million.
(4) Mr. Rotunda's Other Annual Compensation in 2004 includes $336,223 for
payment of taxes related to the restricted stock award, $51,272 expenses
related to a country club membership plus taxes, and $26,803 for auto
allowance plus taxes.
(5) Mr. Kasenter's, Mr. Volpe's, and Mr. Fosse's Other Annual Compensation is
for relocation to Austin, Texas.
(6) Mr. Brinkley's 2004 Other Annual Compensation includes $746,163 for
payment of taxes related to the restricted stock award on September 17,
2003 and the 2004 forgiveness of interest on his note.
70
EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options. If Mr. Rotunda's employment is terminated, other than for
cause, he is entitled to receive a severance payment equal to his annual
compensation.
INSIDER NOTES
In 1994, the Company loaned a former chief executive ("CEO") $729,112.50 to
purchase 50,000 shares of 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 equals or exceeds $10 per share, or (b) August 1, 2005.
Additionally, under the agreement, all accrued and unpaid interest due on the
loan was forgiven until the first day that the closing price for the Company's
stock equaled or exceeded $6 per share. On September 17, 2003, the Company's
stock closed at $6.27. As a result, the former CEO became responsible for the
payment of interest from September 18, 2003 through December 31, 2003. He paid
accrued interest through December 31, 2003. Forgiveness of interest and related
income tax costs prior to September 18, 2003 were charged as compensation
expense. During Fiscal 2003, 2004, and 2005, the Company recognized compensation
expense of $72,000, $0, and $0, respectively. On January 16, 2004 the Company's
stock closed at $10.34 thereby accelerating the due date of the note. The former
CEO defaulted in the payment of the note after it became due. On September 22,
2004, the Company obtained a judgment confirming an arbitration award on the
note in the amount of $969,398.55 (principal of $729,112.50 and accrued interest
of $240,286.05) plus post-judgment interest. On October 19, 2004, the former CEO
filed a Chapter 7 bankruptcy seeking to discharge all of his debts including the
debt represented by the judgment. A full valuation allowance has been recorded
for the note, as its collection is doubtful.
In October 1994, the Board of Directors approved an agreement that provided
incentive compensation to the Chairman, Sterling Brinkley, based on growth in
the share price of the Company's Class A Common Stock. Mr. Brinkley was advanced
$1.5 million evidenced by a recourse promissory note, due in 2005 and bearing
interest at the minimum rate allowable for federal income tax purposes (2.33%
for Fiscal 2005).
Under the terms of Mr. Brinkley's $1.5 million loan, as amended, the loan
principal would have been forgiven if, prior to its October 1, 2005 maturity
date, a stock price target of $28.25 had been attained. Mr. Brinkley repaid his
note in full in September 2005. Accrued interest was forgiven based upon
continued employment, and the Company was required to reimburse Mr. Brinkley for
the income tax consequences of the interest forgiveness. Charges to operations
consist of forgiveness of interest and related income tax costs and totaled
approximately $58,000, $41,000, and $60,000 for the years ended September 30,
2003, 2004, and 2005, respectively.
In February 2000, the Company loaned Mr. Rotunda $200,000 as an employment
incentive. The principal and interest of the loan were subject to forgiveness in
equal increments over a three-year period conditioned upon Mr. Rotunda's
continued employment with the Company on February 24th of each year. The Company
was required to reimburse Mr. Rotunda for the income tax consequence of any
portion of the forgiveness. In Fiscal 2003, the remaining balance of this loan
of $66,667 plus accrued interest of $1,651 was forgiven. During 2003, charges to
operations consist of forgiveness of loan principal and interest and related
income tax costs and totaled $113,960.
71
DIRECTOR COMPENSATION
The table below summarizes payments made to outside directors during Fiscal
2005:
Meeting
Compensation Audit Attendance
Name Board Service Committee Committee Fee Total
---- ------------- ------------ --------- ---------- ---------
Thomas C. Roberts $ 18,000 $ 6,000 $ 4,500 $ 9,250 $ 37,750
Richard D. Sage 24,000 6,000 4,000 13,250 47,250
Gary C. Matzner 24,000 - 6,000 11,000 41,000
------------- ------------ --------- ---------- ---------
$ 66,000 $ 12,000 $ 14,500 $ 33,500 $ 126,000
============= ============ ========= ========== =========
The Company had no other outside directors during Fiscal 2005.
STOCK OPTIONS
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the grant of 350,000 options to Mr. Brinkley and 100,000 options to Mr.
Tonissen that remain outstanding. The options are exercisable at $10 per share,
vest on October 6, 2008, and have a contractual life of ten years. The terms of
this grant provide for accelerated vesting upon achievement of certain debt to
equity ratios and levels of earnings per share. If any of these options fail to
qualify as incentive options under the Internal Revenue Code, the Company has
agreed to pay a bonus to each optionee at the time and in the amount of any
resulting tax savings realized by the Company.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2005, 294,500 of these options remained outstanding, 135,000
options have been canceled due to employee termination, and 140,500 options have
been exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005. As of September 30, 2005, 72,500 options are exercisable.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved a grant of 100,000 options to Mr. Brinkley, exercisable at $6.27 per
share. Forty percent of these options vested on September 15, 2004, and the
remaining 60% vested on September 15, 2005.
Also on January 15, 2004, the Compensation Committee of the Board of Directors
approved a grant of 324,000 options to key individuals exercisable at $9.77 per
share, and except as discussed below, vesting on January 1, 2009. An additional
grant under the same conditions was granted on April 19, 2004 at an exercise
price of $10.60 per share. As of September 30, 2005, all options remain
outstanding and none have been exercised. The terms of the grant provide for
accelerated vesting upon achievement of certain objectives.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Named Executive Officers received no option or SAR grants in the fiscal year
ended September 30, 2005.
72
AGGREGATE OPTIONS/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise of
stock options (or tandem SARs) and freestanding SARs in Fiscal 2005 and the
value of unexercised options and SARs held by each of the Named Executive
Officers at the end of the Company's last fiscal year.
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
On Value Options/SARs at Options/SARs at
Exercise Realized FY-End (#) FY-End ($)(1)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- --------- ------------------------- -------------------------
Sterling B. Brinkley
Chairman of the Board - - 100,000 / 350,000 $979,000 / $2,121,000
Joseph L. Rotunda
President, Chief Executive
Officer and Director 260,000 4,195,404 200,000 / 90,000 $1,212,000 / $1,214,100
Dan N. Tonissen
Senior Vice President, Chief
Financial Officer, Assistant
Secretary and Director 20,000 273,240 82,000 / 208,000 $679,200 / $1,779,480
Robert A. Kasenter
Senior Vice President of
Administration - - 30,000 / 55,000 $244,000 / $428,900
Michael Volpe
Vice President of EZPAWN
Operations - - 24,000 / 56,000 $166,300 / $413,840
Eric Fosse
Vice President of
EZMONEY Operations - - 4,000 / 16,000 $29,520 / $118,080
(1) Values stated are based upon the closing price of $16.06 per share of the
Company's Class A Common Stock on The NASDAQ Stock Market on September 30, 2005,
the last trading day of the fiscal year.
COMPENSATION PURSUANT TO PLANS
STOCK INCENTIVE PLAN
The Company's 1991 Incentive Stock Option Plan (the "1991 Plan") provided for
(i) the granting of incentive stock options to purchase Class A Common Stock,
(ii) the granting of nonqualified stock options to purchase Class A Common
Stock, (iii) the granting of stock appreciation rights ("SARs"), and (iv) the
granting of limited stock appreciation rights ("LSARs") .
The options, SARs, and LSARs are not transferable except by will and by the laws
of descent and distribution, and under other limited circumstances. The 1991
Plan is intended to be qualified under Rule 16b-3 promulgated by the Securities
and Exchange Commission, which Rule generally exempts certain option grants and
certain stock or cash awards from the provisions of Section 16(b) under the
Securities Exchange Act of 1934.
Options granted under the 1991 Plan were granted at exercise prices equal to or
above the fair market value on the date of the grant. In October 1994, the Board
of Directors amended the Plan to provide
73
accelerated vesting upon a change in control of the Company. As of September 30,
2005, the Company had 30,000 active options outstanding to executive officers
under the 1991 Plan at $12.00. Of these options, all are vested and none has
been exercised.
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 1998 Incentive Plan (the "1998 Plan").
The 1998 Plan permits grants of the same types of options, SARs and LSARs as the
1991 Plan and provides for the issuance of shares for stock option awards of up
to 1,275,000 of the Company's Class A Common Stock. In approving such plan, the
Compensation Committee resolved that no further options would be granted under
any previous plans. As of September 30, 2005, the Company had 969,500 active
options outstanding to executive officers under the 1998 Plan at prices ranging
from $2.00 to $15.00. Of these options, 599,200 are vested. During Fiscal 2005,
304,500 options have been exercised.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2005, 294,500 of these options remained outstanding 135,000
options have been canceled due to employee termination, and 140,500 options have
been exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005. As of September 30, 2005, 72,500 options are exercisable.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 2003 Incentive Plan (the "2003 Plan").
The 2003 Plan permits grants of the same types of options, SARs and LSARs as the
1991 and 1998 Plans and provides for stock option awards of up to 900,000 of the
Company's Class A Common Stock. As of September 30, 2005, the Company had
454,000 active options outstanding to executive officers (options granted less
options canceled due to employee termination) under the 2003 Plan at prices
ranging from $5.92 to $12.15. Of these options, 206,800 are vested.
Also, on September 17, 2003, the Board of Directors approved an award of 125,000
shares of restricted stock to the Chairman of the Board. The closing price of
the Company's stock on September 17, 2003 was $6.27. The restriction requires
that Mr. Brinkley remain employed with the Company through September 17, 2005.
The Company also agreed to reimburse Mr. Brinkley for the income tax
consequences resulting from the award.
On January 15, 2004, the Board of Directors approved an award of 60,000 shares
of restricted stock to the Company's Chief Executive Officer valued at $0.6
million. 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.
401(k) PLAN
On June 6, 1991, the Company adopted the EZCORP, Inc. 401(k) Plan (the "401(k)
Plan"), a savings and profit sharing plan intended to qualify under Section
401(k) of the Code. Under the 401(k) Plan, employees of the Company and those
subsidiaries that adopt it may contribute up to a maximum percentage allowable
not to exceed the limits of Code Sections 401(k), 402(g), 404 and 415. (not to
exceed $14,000 in 2005, except if over age 50 and have met the $14,000 limit,
then can contribute an additional $4,000) to the plan trust. The Company may
match 25% of an employee's contributions up to 6% of his compensation. Employer
contributions may be made in the form of or invested in Class A Common Stock.
Contribution expense related to the 401(k) Plan for 2005 was approximately
$72,000. The Company's contributions vest based on the employee's length of
service with the Company and its subsidiaries, with 25% of the total
contributions vesting each year once the employee has two years of service (for
the purposes of the 401(k) plan, a year of service is defined as 1,000 hours
worked). On termination of employment, an employee will receive all of his
contributions and any vested portion of the Company's contributions, as adjusted
by any earnings and losses.
74
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has appointed a Compensation Committee currently
comprised of Mr. Sage and Mr. Roberts. Mr. Sage serves as a director and is also
a member of the Audit Committee of the Board of Directors. Mr. Roberts serves as
a director and a member of the Audit Committee of the Board of Directors.
75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Phillip Ean Cohen indirectly controls the Company through his ownership of all
of the issued and outstanding stock of MS Pawn Corporation, the sole general
partner of MS Pawn Limited Partnership ("MS Pawn"), which owns 100% of the Class
B Voting Common Stock of the Company. The table below sets forth information
regarding the beneficial ownership of the Company's Common Stock as of October
31, 2005 for (i) each of the Company's current directors, (ii) each of the Named
Executive Officers, (iii) beneficial owners known to the registrant to own more
than five percent of any class of the Company's voting securities, and (iv) all
current officers and directors as a group.
Class A Non-Voting Class B Voting
Common Stock Common Stock
Name and Address of the ------------------------- ------------------ Voting
Beneficial Owners(a) Number Percent Number Percent Percent
----------------------- --------- ------- ------- ------- -------
MS Pawn Limited Partnership (b) (g) 999,516(h) 7.76%(h) 994,131 100% 100%
MS Pawn Corporation
Phillip Ean Cohen
1901 Capital Parkway
Austin, Texas 78746
Sterling B. Brinkley (c) 236,640 1.98% - - -
315 11th Street
Oakland, CA 94607
Joseph L. Rotunda (d) 444,303 3.65% - - -
1901 Capital Parkway
Austin, TX 78746
Dan N. Tonissen (e) 171,000 1.42% - - -
1901 Capital Parkway
Austin, Texas 78746
Thomas C. Roberts - - - - -
1901 Capital Parkway
Austin, Texas 78746
Gary C. Matzner (l) 9,800 0.08% - - -
2601 S. Bayshore Dr.
Miami, Florida 33133
Richard D. Sage (m) 12,231 0.10% - - -
13636 Deering Bay Drive
Coral Gables, Florida 33158
Robert A. Kasenter (i) 30,000 0.25% - - -
1901 Capital Parkway
Austin, Texas 78746
Michael Volpe (k) 28,000 0.24% - - -
1901 Capital Parkway
Austin, Texas 78746
Eric Fosse (j) 4,000 0.03% - - -
1901 Capital Parkway
Austin, Texas 78746
All officers and directors as a group (b) (f) 1,077,124 8.54% - - -
- ----------
(a) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Class B Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
76
(b) MS Pawn Corporation is the general partner of MS Pawn and has the sole
right to vote its shares of Class B Common Stock and to direct their
disposition. Mr. Cohen is the sole stockholder of MS Pawn Corporation. See
"Certain Relationships and Related Transactions."
(c) Includes options to acquire 100,000 shares of Class A Common Stock at
$6.27 per share and warrants to acquire 1,191 shares of Class A Common
Stock at $6.17 per share. Does not include options to acquire 350,000
shares of Class A Common Stock at $10.00 per share, none of which are
currently exercisable.
(d) Includes options to acquire 50,000 shares of Class A Common Stock at $2.00
per share, 90,000 shares of Class A Common Stock at $2.57 per share,
50,000 shares of Class A Common Stock at $10.00 per share, 50,000 shares
of Class A Common Stock at $13.00 per share and 50,000 shares of Class A
Common Stock at $15.00 per share. Does not include 60,000 shares of
restricted stock.
(e) Includes options to acquire 4,000 shares of Class A Common Stock at $2.00
per share, 92,000 shares of Class A Common Stock at $2.57 per share,
20,000 shares of Class A Common Stock at $9.77 per share, 30,000 shares of
Class A Common Stock at $12.00 per share. Does not include options to
acquire 100,000 shares of Class A Common Stock at $10.00 per share, 40,000
shares of Class A Common Stock at $9.77 per share, or 4,000 shares of
Class A Common Stock at $2.00 per share, none of which are currently
exercisable.
(f) Includes 13 persons' options to acquire 733,700 shares of Class A Common
Stock at prices ranging from $2.00 to $16.06 per share and warrants to
acquire 1,222 shares of Class A Common Stock at $6.17 per share.
(g) Includes warrants for 4,093 shares of Class A Common Stock, warrants for
4,074 shares of Class B Common Stock held by MS Pawn, and warrants for
1,292 shares of Class A Common Stock held by Mr. Cohen.
(h) The number of shares and percentage reflect Class A Common Stock and
warrants, together with Class B Common Stock and warrants, which are
convertible to Class A Common Stock.
(i) Includes options to acquire 10,000 shares of Class A Common Stock at $4.24
per share and 20,000 shares of Class A Common Stock at $9.77 per share.
Does not include options to acquire 15,000 shares of Class A Common Stock
at $4.24 per share or 40,000 shares of Class A Common Stock at $9.77 per
share, none of which are currently exercisable.
(j) Includes options to acquire 4,000 shares of Class A Common Stock at $8.68
per share. Does not include options to acquire 16,000 shares of Class A
Common Stock at $8.68 per share that are not currently exercisable.
(k) Includes options to acquire 8,000 shares of Class A Common Stock at $5.92
per share and 20,000 shares of Class A Common Stock at $9.77 per share.
Does not include options to acquire 12,000 shares of Class A Common Stock
at $5.92 per share, or 40,000 shares of Class A Common Stock at $9.77 per
share, none of which are currently exercisable.
(l) Includes options to acquire 1,800 shares of Class A Common Stock at $2.57
per share, 3,000 shares of Class A Common Stock at $6.27 per share, and
5,000 shares of Class A Common Stock at $8.86 per share. Does not include
options to acquire 1,200 shares of Class A Common Stock at $2.57 per share
or 5,000 shares of Class A Common Stock at $16.06 per share, none of which
are currently exercisable.
(m) Includes options to acquire 2,400 shares of Class A Common Stock at $2.00
per share, 1,800 shares of Class A Common Stock at $2.57 per share, 3,000
shares of Class A Common Stock at $6.27 per share, 5,000 shares of Class A
Common Stock at $8.86 per share and warrants to acquire 31 shares of Class
A Common Stock at $6.17 per share. Does not include options to acquire 600
shares of Class A Common Stock at 2.00 per share, 1,200 shares of Class A
Common Stock at $2.57 per share, or 5,000 shares of Class A Common Stock
at $16.06 per share, none of which are currently exercisable.
77
Securities authorized under equity compensation plans as of September 30, 2005,
were as follows:
Number of Securities Remaining
Number of Securities Weighted Average Available for Future Issuance Under
to be Issued Upon Exercise Price of Equity Compensation Plans
Exercise of Outstanding (Excluding Securities Reflected in
Outstanding Options Option Column (a))
Plan Category (a) (b) (c)
------------- -------------------- ----------------- -----------------------------------
Equity compensation plans
approved by security
holders 1,799,900 $ 7.80 71,500
Equity compensation plans not
approved by security
holders - - -
--------- ------- ------
Total 1,799,900 $ 7.80 71,500
========= ======= ======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning the $200,000 February 2000 loan from the Company to
Mr. Rotunda, see "Executive Compensation, Employment Agreements."
As of October 1, 2004, the Company entered into a financial advisory services
agreement with Madison Park, L.L.C. ("Madison Park"), an affiliate of the
controlling stockholder. The agreement requires Madison Park to provide ongoing
advice and consultation with respect to mergers, acquisitions, divestitures,
strategic planning, corporate development, investor relations, treasury, and
other advisory services for a monthly fee of $100,000, inclusive of most
expenses. The Madison Park agreement has a three-year term and the Company has
the right to terminate the agreement at any time. Madison Park can terminate
only at the end of any one of the Company's fiscal years. Prior to entering into
the agreement with Madison Park, the Audit Committee obtained a fairness opinion
from a qualified, independent financial advisory firm. The fairness opinion
supported the fees for the services to be rendered based on the terms of the
agreement and the Company's strategic plan. Philip E. Cohen is a principal in
Morgan Schiff, Madison Park, and the general partner of the controlling
stockholder. In Fiscal 2005, total payments to Madison Park amounted to
$1,200,000.
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff
& Co., Inc. ("Morgan Schiff"), an affiliate of the general partner of the
controlling stockholder, provided financial advisory services to the Company
through October 1, 2004 for a monthly fee, inclusive of most expenses. These
services included advice and consultation with respect to mergers, acquisitions,
divestitures, strategic planning, corporate development, investor relations,
treasury, and other advisory services. As a result of entering the agreement
with Madison Park, the Company elected not to renew its financial advisory
services agreement with Morgan Schiff at October 1, 2004. Through April 30,
2004, Morgan Schiff received a financial advisory fee of $100,000 per month,
inclusive of most expenses. As of May 1, 2004, the Company withheld the payment
of the monthly fee pending the outcome of a review by the Audit Committee of the
historical expenses paid by the Company to Morgan Schiff. The Audit Committee
presented a preliminary report including findings with respect to the historical
expense review.
Based on the review and the findings of the Audit Committee performed in
consultation with its independent counsel and financial advisors, the Company
determined that it overpaid expenses to Morgan Schiff in prior years. The Audit
Committee did not find any evidence of wrongdoing or bad faith on the part of
Morgan Schiff and Morgan Schiff disagreed with the Audit Committee's preliminary
findings. The Audit Committee recommended that the Company seek a recovery from
Morgan Schiff in the amount of $400,000. Based on the Audit Committee's
recommendation, the Company offset monthly fees due Morgan Schiff in the amount
of $400,000, and reduced by that amount its Administrative Expense and Accounts
Payable for the year ended September 30, 2004. The Audit Committee and the
Company have determined not to take any further action on this matter at this
time.
78
The table below summarizes the monthly fee earned and expense reimbursements
paid to Morgan Schiff by the Company during Fiscal 2003, 2004, and 2005 (in
thousands):
2003 2004 2005
---- ------ ----
Monthly retainer $367 $1,200 $ -
Expense reimbursements 400 (398) -
---- ------ ----
Total $767 $ 802 $ -
==== ====== ====
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by BDO Seidman, LLP during the years
ended September 30, 2004 and 2005 are:
Years Ended September 30,
-------------------------
2004 2005
-------- ---------
Audit fees:
Audit of financial statements $160,000 $ 246,145
Audit pursuant to section 404 of the
Sarbanes-Oxley Act - 200,000
Quarterly reviews and other audit fees - 69,453
-------- ---------
Total audit fees 160,000 515,598
Audit related fees - 16,033
Tax fees - -
All other fees - 6,440
-------- ---------
Total fees for services $160,000 $ 538,071
======== =========
Fees for professional services provided by the Company's previous independent
accountant, Ernst & Young LLP, during the years ended September 30, 2004 and
2005 are:
Years Ended September 30,
-------------------------
2004 2005
-------- ---------
Audit fees $ 50,650 $ 57,265
Audit related fees 28,616 32,589
Tax fees:
Tax compliance 121,055 110,000
Tax consulting 148,880 43,700
All other fees - -
-------- ---------
Total fees for services $349,201 $ 243,554
======== =========
The Audit Committee of the Company's Board of Directors has adopted a policy of
pre-approving all fees to be paid to the Company's independent audit firm,
regardless of the type of service. All non-audit services were reviewed with the
Audit Committee, which concluded that the provision of such services by Ernst &
Young LLP and BDO Seidman, LLP, as appropriate, was compatible with the
maintenance of that firm's independence in the conduct of its auditing
functions.
79
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of EZCORP, Inc. and
subsidiaries are included in Item 8:
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of September 30, 2004 and 2005
Consolidated Statements of Operations for each of the three years in the period
ended September 30, 2005
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 2005
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended September 30, 2005
Notes to Consolidated Financial Statements.
(2) The following Financial Statement Schedule is included herein:
Schedule II-Valuation Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission ("SEC") are not required
under the related instructions or are inapplicable, and therefore, have been
omitted.
(3) Listing of Exhibits (included herein)
(b) Through the fourth quarter ended September 30, 2005, the Company
filed the following Current Reports on Form 8-K: Four dated November 13, 2004,
January 20, 2005, April 20, 2005, and July 20, 2005 were to report the issuance
of a press release regarding its results of operations for the fiscal quarters
ended September 30, 2004, December 31, 2004, March 31, 2005, and June 30, 2005,
respectively; one dated December 13, 2004 announcing a revision to its previous
announcement of earnings for the quarter ended September 30, 2004; two dated
October 12, 2004 (later amended on December 15, 2004 on Form 8-K/A) and June 30,
2005 announcing changes in the independent registered public accounting firms
for the Company and the Company's 401(k) Plan and Trust, respectively; one dated
January 5, 2005 announcing the election of a new Director to its Board of
Directors; and one dated July 15, 2005 announcing the offering of a new service.
80
EZCORP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS
(In millions)
ADDITIONS
Balance at ----------------------- Balance
Beginning Charged to Charged to at End
Description of Period Expense Other Accts Deductions of Period
- ----------- ---------- ---------- ----------- ---------- ---------
Allowance for valuation of inventory:
Year ended September 30, 2003.................................. $ 1.7 $ 0.1 $ - $ - $ 1.8
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2004.................................. 1.8 (0.3) - - 1.5
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2005.................................. $ 1.5 $ 0.4 $ - $ - $ 1.9
---------- ---------- ----------- ---------- ---------
Allowance for uncollectible pawn service charges receivable:
Year ended September 30, 2003.................................. $ 6.7 $ (0.4) $ - $ - $ 6.3
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2004.................................. 6.3 0.7 - - 7.0
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2005.................................. $ 7.0 $ 0.6 $ - $ - $ 7.6
---------- ---------- ----------- ---------- ---------
Allowance for losses on payday loans:
Year ended September 30, 2003.................................. $ 0.1 $ 3.6 $ - $ 3.5 $ 0.2
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2004.................................. 0.2 8.1 - 7.8 0.5
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2005.................................. $ 0.5 $ 6.6 $ - $ 7.0 $ 0.1
---------- ---------- ----------- ---------- ---------
Allowance for valuation of deferred tax assets:
Year ended September 30, 2003.................................. $ 3.7 $ (3.7) $ - $ - $ -
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2004.................................. - - - - -
---------- ---------- ----------- ---------- ---------
Year ended September 30, 2005.................................. $ - $ - $ - $ - $ -
---------- ---------- ----------- ---------- ---------
81
LISTING OF EXHIBITS
See Exhibit Index immediately following signature page.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
December 13, 2005
By: /s/ Joseph L. Rotunda
---------------------
(Joseph L. Rotunda)
(President & Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------------------------------- -------------------------------------- -----------------
/s/ Sterling B. Brinkley Chairman of the Board December 13, 2005
- ---------------------------------
Sterling B. Brinkley
/s/ Joseph L. Rotunda President, Chief Executive December 13, 2005
- --------------------------------- Officer & Director
Joseph L. Rotunda (Principal Executive Officer)
/s/ Dan N. Tonissen Senior Vice President, Chief December 13, 2005
- --------------------------------- Financial Officer, Assistant Secretary
Dan N. Tonissen & Director (Principal Financial and
Accounting Officer)
/s/ Gary C. Matzner Director December 13, 2005
- ---------------------------------
Gary C. Matzner
/s/ Richard D. Sage Director December 13, 2005
- ---------------------------------
Richard D. Sage
/s/ Thomas C. Roberts Director December 13, 2005
- ---------------------------------
Thomas Roberts
83
EXHIBIT INDEX
Page Number if Incorporated by
Number Description Filed herein Reference to
- ------ ----------------------------------- -------------- ----------------------------------------------------------
3.1 Amended and Restated Certificate of Exhibit 3.1 to the Registration Statement on Form S-1
Incorporation of the Company effective August 23, 1991 (File No. 33-41317)
3.1 A Certificate of Amendment to Exhibit 3.1A to the Registration Statement on Form S-1
Certificate of Incorporation of effective July 15, 1996 (File No. 33-41317)
the Company
3.2 Bylaws of the Company. Exhibit 3.2 to the Registration Statement on Form S-1
effective August 23, 1991 (File No. 33-41317)
3.3 Amendment to the Bylaws. Exhibit 3.3 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994 (File No. 0-19424)
3.4 Amendment to the Certificate of Exhibit 3.4 to Registrant's Annual Report on Form 10-K for
Incorporation of the Company. the year ended September 30, 1994 (File No. 0-19424)
3.5 Amendment to the Certificate of Exhibit 3.5 to Registrant's Annual Report on Form 10-K for
Incorporation of the Company the year ended September 30, 1997
3.6 Amendment to the Certificate of Exhibit 3.6 to Registrant's Quarterly Report on Form 10-Q
Incorporation of the Company for the quarter ended March 31, 1998
4.1 Specimen of Class A Non-voting Exhibit 4.1 to the Registration Statement on Form S-1
Common Stock certificate of the effective August 23, 1991 (File No. 33-41317)
Company.
10.2 Omitted N/A
10.3 Omitted N/A
10.4 Omitted N/A
84
10.5 Security Agreement executed by Exhibit 10.5 to Registrant's Annual
EZPAWN Texas, Inc. (substantially the Report on Form 10-K for the year
same agreement also was executed by ended September 30, 1992
EZPAWN Oklahoma, Inc.; EZPAWN (File No. 0-19424)
Mississippi, Inc.; EZPAWN Arkansas,
Inc.; EZPAWN Colorado, Inc.;
EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston
Financial Corporation).
10.6 Guaranty Agreement executed by Exhibit 10.6 to Registrant's Annual
EZPAWN Texas, Inc. (substantially the Report on Form 10-K for the year
same agreement also was executed by ended September 30, 1992
EZPAWN Oklahoma, Inc.; EZPAWN (File No. 0-19424)
Mississippi, Inc.; EZPAWN Arkansas,
Inc.; EZPAWN Colorado, Inc.;
EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston
Financial Corporation).
10.7 Omitted N/A
10.8 Omitted N/A
10.9 Omitted N/A
10.10 Letter agreement executed December Exhibit 10.10 to the Registration
20, 1990 between Morgan Schiff & Co., Statement on Form S-1 effective
Inc. ("Morgan Schiff") and the August 23, 1991
Company. (File No. 33-41317)
10.11 Stock Purchase Agreement be- Exhibit 10.11 to the Registration
tween the Company, Courtland L. Statement on Form S-1 effective
Logue, Jr., Courtland L. Logue, August 23, 1991
Sr., James D. McGee, M. Frances (File No. 33-41317)
Spears, Porter A. Stratton and
Steve A. Stratton dated as of May
18, 1989.
10.12 Capitalization and Subscription Exhibit 10.12 to the Registration
Agreement between MS Pawn Statement on Form S-1 effective
Limited Partnership ("MS Pawn") August 23, 1991
and the Company, dated as of July (File No. 33-41317)
25, 1989.
10.13 Omitted N/A
10.14 Omitted N/A
85
10.15 Omitted N/A
10.16 Omitted N/A
10.17 Omitted N/A
10.18 Warrant Certificate issued by the Exhibit 10.18 to the Registration
Company to MS Pawn on July 25, Statement on Form S-1 effective
1989. August 23, 1991
(File No. 33-41317)
10.19 Amendment to the Stock Purchase Exhibit 10.19 to the Registration
Agreement dated as of June 19, 1989 Statement on Form S-1 effective
Between the Company and the August 23, 1991
Stockholders of the Predecessor (File No. 33-41317)
Company.
10.20 Second Amendment to Stock Pur- Exhibit 10.20 to the Registration
chase Agreement dated as of April 20, Statement on Form S-1 effective
1990 between the Company and the August 23, 1991
Stockholders of the Predecessor (File No. 33-41317)
Company.
10.21 Omitted N/A
10.22 Omitted N/A
10.23 Omitted N/A
10.24 Omitted N/A
10.25 Omitted N/A
10.27 Omitted N/A
10.28 Omitted N/A
10.29 Omitted N/A
10.30 Omitted N/A
10.31 Omitted N/A
10.32 Omitted N/A
10.33 Omitted N/A
10.34 Omitted N/A
10.35 Stockholders' Agreement dated as Exhibit 10.35 to the Registration
of July 25, 1989 between the Statement on Form S-1 effective
Company, MS Pawn and Courtland August 23, 1991
L. Logue, Jr. (File No. 33-41317)
86
10.36 Joinder Agreement to the StockHolders' Exhibit 10.36 to the Registration
Agreement dated as of May 1, 1991 Statement on Form S-1 effective
between the Company MS Pawn, Mr. August 23, 1991
Kofnovec, Mr. Gary, (File No. 33-41317)
Mr. Ross and Ms. Berger.
10.37 Incentive Stock Option Plan. Exhibit 10.37 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.38 401(k) Plan. Exhibit 10.38 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.39 Section 125 Cafeteria Plan. Exhibit 10.39 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.40 Omitted N/A
10.41 Omitted N/A
10.42 Omitted N/A
10.43 Omitted N/A
10.44 Omitted N/A
10.45 Lease between Logue, Inc. and E-Z Exhibit 10.45 to the Registration
Corporation for real estate located Statement on Form S-1 effective
at 1166 Airport Boulevard, Austin, August 23, 1991
Texas, dated July 25, 1989. (File No. 33-41317)
10.46 Lease between Logue, Inc. and E-Z Exhibit 10.46 to the Registration
Corporation for real estate located Statement on Form S-1 effective
at 5415 North Lamar Boulevard, August 23, 1991
Austin, Texas, dated July 25, 1989 (File No. 33-41317)
10.47 Agreement of Lease between LDL Exhibit 10.47 to the Registration
Partnership and Logue-Drouin Statement on Form S-1 effective
Industries, Inc. for real property August 23, 1991
at 8540 Broadway Blvd., Houston, (File No. 33-41317)
Texas, dated May 3, 1988 and related
Assignment of Lease.
10.48 Lease Agreement between C Minus Exhibit 10.48 to the Registration
Corporation and Logue-Drouin Statement on Form S-1 effective
Industries, Inc. DBA E-Z Pawn #5 August 23, 1991
for real property located at 5209 (File No. 33-41317)
Cameron Road, Austin, Texas,
dated December 28, 1987.
87
10.49 Lease Agreement between Logue, Exhibit 10.49 to the Registration
Inc. and E-Z Corporation for real Statement on Form S-1 effective
Property located at 901 E. 1st St., August 23, 1991
Austin, Texas, dated July 25, 1989. (File No. 33-41317)
10.50 Agreements between the Company Exhibit 10.50 to the Registration
and MS Pawn dated February 18, Statement on Form S-1 effective
1992 for the payment of $1.377 March 16, 1992
million of Series A Increasing Rate (File No. 33-45807)
Senior Subordinated Notes held by
MS Pawn.
10.51 Agreement Regarding Reservation Exhibit 10.51 to Registrant's
of Shares. Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993
(File No. 0-19424)
10.52 Omitted N/A
10.53 Omitted N/A
10.54 Omitted N/A
10.55 Omitted N/A
10.56 Omitted N/A
10.57 Omitted N/A
10.58 Omitted N/A
10.59 Omitted N/A
10.60 Loan Agreement between Sterling B. Exhibit 10.60 to Registrant's Annual
Brinkley and the Company dated Report on Form 10-K for the year
October 7, 1994 (an identical ended September 30, 1995
document exists with respect to (File No. 0-19424)
Vincent A. Lambiase).
10.61 Promissory Note between Sterling Exhibit 10.61 to Registrant's Annual
B. Brinkley and the Company in the Report on Form 10-K for the year
original principal amount of ended September 30, 1995
$1,500,000 attached thereto (an (File No. 0-19424)
identical document exists with respect
to Vincent A. Lambiase).
10.62 July 1, 1994 Employment Agreement Exhibit 10.62 to Registrant's Annual
between the Company and Vincent Report on Form 10-K for the year
A. Lambiase and Promissory Note in ended September 30, 1995
the amount of $729,112.50 in (File No. 0-19424)
connection therewith.
10.63 EZCORP, Inc. Incentive Stock Option Exhibit 10.63 to Registrant's
Award Agreement, Employee Form Annual Report on Form 10-K
For the year ended September
30,1998 (File No.0-19424)
88
10.64 EZCORP, Inc. Incentive Stock Option Exhibit 10.64 to Registrant's
Award Agreement, Executive Form Annual Report on Form 10-K
for the year ended September
30, 1998 (File No. 0-19424)
10.71 Omitted N/A
10.72 Omitted N/A
10.73 Omitted N/A
10.74 Omitted N/A
10.75 Omitted N/A
10.76 Omitted N/A
10.77 Credit Agreement between the Exhibit 10.77 to Registrant's Annual
Company and Wells Fargo Bank Report on Form 10-K for the year
(Texas), N.A., as Agent and Issuing ended September 30, 1998
Bank, re: $110 million Revolving Credit (File No. 0-19424)
Loan
10.78 First Amendment to Credit Agreement Exhibit 10.78 to Registrant's Annual
Between the Company and Wells Report on Form 10-K for the year
Fargo Bank (Texas), N.A., as Agent Ended September 30, 1999
and Issuing Bank, re: $110 million (File No. 0-19424)
Revolving Credit Loan.
10.79 Second Amendment to Credit Exhibit 10.79 to Registrant's
Agreement and Waiver between the Quarterly Report on Form 10-Q for
Company and Wells Fargo Bank the quarter ended March 31, 2000
(Texas), N.A., as Agent and Issuing (File No. 0-19424)
Bank, re: $85 million Revolving Credit
Loan.
10.80 Limited Waiver between the Company Exhibit 10.80 to Registrant's
and Wells Fargo Bank Texas, N.A., as Quarterly Report on Form 10-Q for
Agent and Issuing Bank, re: $85 million the quarter ended June 30, 2000
Revolving Credit Loan. (File No. 0-19424)
10.81 Amended and Restated Credit Exhibit 10.81 to Registrant's Annual
Agreement between the Company and Report on Form 10-K for the year
Wells Fargo Bank Texas, N.A., as ended September 30, 2000
Agent and Issuing Bank, re: $85 million (File No. 0-19424)
Credit Facility.
10.82 Waivers of Selected Sections of Credit Exhibit 10.82 to Registrant's
Agreement between the Company and Quarterly Report on Form 10-Q for
Wells Fargo Bank, N.A., as Agent and the quarter ended June 30, 2001
Issuing Bank, re: $85 million Credit (File No. 0-19424)
Facility.
10.83 First Amendment to Amended and Exhibit 10.83 to Registrant's
Restated Credit Agreement between Quarterly Report on Form 10-Q for
the Company and Wells Fargo Bank, the quarter ended June 30, 2001
N.A., as Agent and Issuing Bank, re: (File No. 0-19424)
$85 million Credit Facility.
10.84 Second Amendment to Amended and Exhibit 10.84 to Registrant's Annual
89
Restated Credit Agreement between Report on Form 10-K for the year
the Company and Wells Fargo Bank, ended September 30, 2001
N.A., as Agent and Issuing Bank, re: (File No. 0-19424)
$85 million Credit Facility.
10.85 Third Amendment to Amended and Exhibit 10.85 to Registrant's Annual
Restated Credit Agreement between Report on Form 10-K for the year
the Company and Wells Fargo Bank, ended September 30, 2001
N.A., as Agent and Issuing Bank, re: (File No. 0-19424)
$85 million Credit Facility.
10.86 Fourth Amendment to Amended and Exhibit 10.86 to Registrant's Current
Restated Credit Agreement between Report on Form 8-K dated
the Company and Wells Fargo Bank, September 30, 2002
N.A., as Agent and Issuing Bank, re: (File No. 0-19424)
$85 million Credit Facility.
10.87 Second Amended and Restated Credit Exhibit 10.87 to Registrant's Current
Agreement between the Company and Report on Form 8-K dated October
Wells Fargo Bank Texas, N.A., as 30, 2002
Agent and Issuing Bank, re: re- (File No. 0-19424)
syndication of Credit Facility, with a
maturity date of March 31, 2005.
10.88 EZCORP, Inc. 2003 Incentive Plan. Exhibit 10.88 to Registrant's Annual
Report on Form 10-K for the year
ended September 30, 2003
(File No. 0-19424)
10.89 Third Amended and Restated Credit Exhibit 10.89 to Registrant's
Agreement between the Company and Quarterly Report on Form 10-Q for
Wells Fargo Bank Texas, N.A., as the quarter ended March 30, 2004
Agent and Issuing Bank, re: $40 (File No. 0-19424)
million Credit Facility
10.90 Amended Charter of the Audit Exhibit 10.90 to Registrant's Annual
Committee of the Board of Directors of Report on Form 10-K for the year
EZCORP, Inc. dated October 26, 2004 endedSeptember 30, 2004
(File No. 0-19424)
10.91 Advisory Services Agreement between Exhibit 10.91 to Registrant's Annual
EZCORP, Inc. and Madison Park LLC Report on Form 10-K for the year
effective October 1, 2004 ended September 30, 2004
(File No. 0-19424)
10.92 First Amendment to Third Amended and Exhibit 10.92 to Registrant's
Restated Credit Agreement between the Quarterly Report on Form 10-Q for
Company and Wells Fargo Bank, N.A., as the quarter ended June 30, 2005
Agent and Issuing Bank, re: $40 million (File No. 0-19424)
Credit Facility
10.93 Second Amendment to Third Amended and N/A
Restated Credit Agreement between the
Company and Wells Fargo Bank, N.A., as
Agent and Issuing Bank, re: $40 million
Credit Facility *
10.94 EZCORP Supplemental Executive Exhibit 10.94 to Registrant's Current
90
Retirement Plan effective December 1, Report on Form 8-K dated
2005 November 28, 2005
(File No. 0-19424)
10.95 Charter of the Audit Committee of the N/A
Board of Directors of EZCORP, Inc.
dated November 8, 2005
10.96 EZCORP Fiscal Year 2006 Incentive N/A
Compensation Plan.* +
16.1 Letter Regarding Change in Certifying Exhibit 16.1 to Registrant's Current
Accountant from Ernst & Young LLP to Report on Form 8-K dated October
SEC dated October 11, 2004 6, 2004 (File No. 0-19424)
20.1 Omitted N/A
21.1 Subsidiaries of Registrant.* N/A
23.1 Consent of Independent Registered N/A
Public Accounting Firm.*
23.2 Consent of Independent Registered N/A
Public Accounting Firm.*
31.1 Certification of Chief Executive Officer N/A
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of Chief Financial Officer N/A
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of Chief Executive Officer N/A
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
32.2 Certification of Chief Financial Officer N/A
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
- -----------------
* Filed herewith.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
91