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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 (IRS Employer Identification No.)
of incorporation or organization)
1901 CAPITAL PARKWAY, AUSTIN, TEXAS 78746
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (512) 314-3400
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of December 31, 2005, 11,884,875 shares of the registrant's Class A
Non-voting Common Stock, par value $.01 per share and 990,057 shares of the
registrant's Class B Voting Common Stock, par value $.01 per share were
outstanding.
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EZCORP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2005,
December 31, 2004 and September 30, 2005 ...................... 1
Condensed Consolidated Statements of Operations for the Three
Months Ended December 31, 2005 and 2004 ....................... 2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2005 and 2004 ....................... 3
Notes to Interim Condensed Consolidated Financial Statements ..... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk .. 20
Item 4. Controls and Procedures ..................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................... 23
Item 1A. Risk Factors .............................................. 23
Item 6. Exhibits ................................................... 23
SIGNATURE .................................................................... 24
EXHIBIT INDEX ................................................................ 25
CERTIFICATIONS
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
December 31, December 31, September 30,
2005 2004 2005
------------ ------------ -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 4,270 $ 3,115 $ 4,168
Pawn loans 47,419 44,714 52,864
Payday loans, net 1,532 8,666 1,634
Pawn service charges receivable, net 8,840 9,465 9,492
Payday loan service charges receivable, net 251 1,759 272
Credit service fees receivable, net 3,337 -- 3,007
Inventory, net 34,332 32,317 30,293
Deferred tax asset 10,629 9,711 10,534
Note receivable from related party -- 1,500 --
Prepaid expenses and other assets 4,028 3,733 1,998
-------- -------- --------
Total current assets 114,638 114,980 114,262
Investment in unconsolidated affiliate 17,702 16,527 17,348
Property and equipment, net 26,398 26,049 26,964
Deferred tax asset, non-current 4,012 4,946 4,012
Other assets, net 3,610 4,016 2,862
-------- -------- --------
Total assets $166,360 $166,518 $165,448
======== ======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 16,011 $ 13,831 $ 18,988
Customer layaway deposits 1,941 1,686 1,672
Federal income taxes payable 4,116 3,336 648
-------- -------- --------
Total current liabilities 22,068 18,853 21,308
Long-term debt -- 22,000 7,000
Deferred gains and other long-term liabilities 3,515 3,868 3,597
-------- -------- --------
Total long-term liabilities 3,515 25,868 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; 11,893,908 issued and
11,884,875 outstanding at December 31, 2005;
11,184,201 issued and 11,175,168 outstanding at
December 31, 2004; 11,878,458 issued and 11,869,425
outstanding at September 30, 2005 118 112 117
Class B Voting Common Stock, convertible, par value
$.01 per share; Authorized 1,198,990 shares; Issued
1,190,057; Outstanding 990,057 at December 31,
2005, 1,190,057 at December 31, 2004, and
990,057 at September 30, 2005 10 12 10
Additional paid-in capital 118,838 116,689 118,219
Retained earnings 21,470 4,911 14,714
Deferred compensation expense (225) (685) (244)
-------- -------- --------
140,211 121,039 132,816
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Accumulated other comprehensive income 601 793 762
-------- -------- --------
Total stockholders' equity 140,777 121,797 133,543
-------- -------- --------
Total liabilities and stockholders' equity $166,360 $166,518 $165,448
======== ======== ========
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended December 31,
-------------------------------
2005 2004
------- -------
(In thousands, except
per share amounts)
Revenues:
Sales $42,353 $36,324
Pawn service charges 16,514 16,669
Payday loan service charges 1,152 8,290
Credit service fees 15,422 --
Other 329 345
------- -------
Total revenues 75,770 61,628
Cost of goods sold 25,661 21,913
------- -------
Net revenues 50,109 39,715
Operating expenses:
Operations 26,313 22,703
Payday loan bad debt and direct transaction expenses 732 1,609
Credit service bad debt and direct transaction expenses 3,804 --
Administrative 6,822 5,867
Depreciation 2,106 1,870
Amortization 17 17
------- -------
Total operating expenses 39,794 32,066
------- -------
Operating income 10,315 7,649
Interest expense, net 222 339
Equity in net income of unconsolidated affiliate (515) (460)
(Gain) loss on sale / disposal of assets (15) 37
------- -------
Income before income taxes 10,623 7,733
Income tax expense 3,867 2,784
------- -------
Net income $ 6,756 $ 4,949
======= =======
Net income per common share:
Basic $ 0.52 $ 0.40
Diluted $ 0.50 $ 0.37
Weighted average shares outstanding:
Basic 12,869 12,365
Diluted 13,538 13,237
See Notes to Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
December 31,
-------------------
2005 2004
-------- --------
(In thousands)
Operating Activities:
Net income $ 6,756 $ 4,949
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,123 1,887
Payday loan loss provision 589 1,225
Deferred taxes (95) --
Net (gain) loss on sale or disposal of assets (15) 37
Share-based compensation 574 147
Income from investment in unconsolidated affiliate (515) (460)
Changes in operating assets and liabilities:
Service charges and fees receivable, net 361 (1,071)
Inventory (437) (277)
Prepaid expenses, other current assets, and other assets, net (2,165) (1,213)
Accounts payable and accrued expenses (3,009) (1,116)
Customer layaway deposits 253 41
Deferred gains and other long-term liabilities (82) (90)
Federal income taxes 3,502 1,293
-------- --------
Net cash provided by operating activities 7,840 5,352
Investing Activities:
Pawn loans made (43,405) (38,094)
Pawn loans repaid 24,016 22,042
Recovery of pawn loan principal through sale of forfeited collateral 22,164 19,012
Payday loans made (5,228) (16,211)
Payday loans repaid 4,741 13,612
Additions to property and equipment (1,516) (2,110)
Acquisition, net of cash acquired (1,590) --
Proceeds from sale of assets 15 --
-------- --------
Net cash used in investing activities (803) (1,749)
Financing Activities:
Proceeds from exercise of stock options 65 6
Net payments on bank borrowings (7,000) (3,000)
-------- --------
Net cash used in financing activities (6,935) (2,994)
-------- --------
Change in cash and equivalents 102 609
Cash and equivalents at beginning of period 4,168 2,506
-------- --------
Cash and equivalents at end of period $ 4,270 $ 3,115
======== ========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 25,072 $ 20,416
Foreign currency translation adjustment $ 161 $ (34)
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2005
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Such adjustments are of a
normal, recurring nature except for those related to an acquired business
(described in Note C) and the adoption of a new accounting principle regarding
share-based payments (described in Note J). The accompanying financial
statements should be read with the Notes to Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended
September 30, 2005 ("Fiscal 2005"). The balance sheet at September 30, 2005 has
been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The Company's business is subject to seasonal variations, and operating results
for the three-month period ended December 31, 2005 (the "Fiscal 2006 First
Quarter") are not necessarily indicative of the results of operations for the
full fiscal year.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
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 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 due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of collectible
loans, affecting the Company's earnings and financial condition. If the pawn
loan is not repaid, the forfeited collateral (inventory) is valued at the lower
of cost (pawn loan principal) or market value (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: The Company accrues service charges on the
percentage of payday 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 DIRECT TRANSACTION 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 the allowance for bad debt upon default, leaving only active
loans in the reported balance. Subsequent collections of principal are recorded
as a credit to the allowance for 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 $0.6 million and $1.2 million, representing 52% and 14% of
payday loan service charges for the Fiscal 2006 First Quarter and the quarter
ended December 31, 2004 (the "Fiscal 2005 First Quarter"), respectively.
Excluding the benefit of a $0.9 million sale of older bad debt, net defaults for
the prior year Fiscal 2005 First Quarter were $2.1 million, or 25% of payday
loan service charges in the period. The Company includes direct transaction
expenses in this financial statement line item. These include Tele-Track charges
and ACH and other bank fees. These expenses tend to vary directly with
transaction volume.
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
4
statement of operations. Changes in the service charge receivable valuation
allowance are charged to payday loan service charge revenue.
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 DIRECT TRANSACTION 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
direct transaction expenses, was $3.8 million for the Fiscal 2006 First Quarter,
representing 24% of credit service fee revenues for the period. The Company had
no credit service bad debt in the Fiscal 2005 First Quarter, as it did not offer
credit services in that period. The Company includes direct transaction expenses
in this financial statement line item. These include Tele-Track charges and ACH
and other bank fees. These expenses tend to vary directly with transaction
volume.
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 December 31, 2005, the allowance for
Expected LOC Losses was $1.1 million. At that date, the Company's maximum
exposure for losses on letters of credit, if all brokered loans defaulted and
none was collected, was $16.6 million. This amount includes principal, interest,
and insufficient funds fees. Based on the expected loss and collection
percentages, the Company also provides an allowance for the credit service fees
it expects not to collect, and charges changes in the credit service fee
receivable valuation allowance to credit service fee revenue.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on the type and age
of merchandise as well as recent sales trends and margins. At December 31, 2005,
December 31, 2004, and September 30, 2005, the valuation allowance deducted from
the carrying value of inventory was $2.2 million, $2.0 million, and $1.9 million
(6.0%, 5.8%, and 5.8% of gross inventory), respectively. Changes in the
inventory valuation allowance are recorded as cost of goods sold.
INTANGIBLE ASSETS: Goodwill and other intangible assets having indefinite lives
are not subject to amortization, but are tested for impairment annually on July
1, or more frequently if events or changes in circumstances indicate that the
assets might be impaired. The Company recognized no impairment of its intangible
assets in the Fiscal 2006 or Fiscal 2005 First Quarter. Intangible assets with
definite lives are amortized over their estimated useful lives.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors that could trigger an
impairment review include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy for the overall business; and significant
negative industry trends. When management determines that the carrying value of
tangible long-lived assets may not be recoverable, impairment is measured based
on the excess of the assets'
5
carrying value over the estimated fair value. No impairment of tangible
long-lived assets has been recognized in the Fiscal 2006 or Fiscal 2005 First
Quarter.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. As
part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each jurisdiction in which it
operates. This process involves estimating the actual current tax liability
together with assessing temporary differences in recognition of income for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income. In the event the Company were to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, a valuation allowance would be charged to the income tax
provision in the period such determination 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 December 31, 2005,
December 31, 2004 and September 30, 2005, the Company had no valuation allowance
on its deferred tax assets.
SHARE-BASED COMPENSATION: Prior to October 1, 2005, the Company accounted for
its share-based employee compensation plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations ("APB
25"), as permitted by Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation." For periods prior to October 1,
2005, share-based employee compensation cost was recognized in the Statement of
Operations only for restricted stock grants and options granted at prices below
market price on the date of grant. Effective October 1, 2005, the Company
adopted the fair value recognition provisions of SFAS No. 123(R), as described
in Note J, "Share-based Compensation."
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $69.4 million, $61.1 million and $67.2 million at December 31,
2005, December 31, 2004, and September 30, 2005, respectively.
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.
Certain prior year balances have been reclassified to conform to the Fiscal 2006
presentation.
NOTE C: ACQUISITION
On December 5, 2005, the Company acquired all outstanding stock of Texas Diamond
& Gold, a single-store pawn company for $1.6 million. The results of Texas
Diamond & Gold have been consolidated with that of the Company since the
acquisition date. The purchase price allocation for this acquisition is
preliminary and subject to revision as more detailed analyses are completed and
additional information about the fair value of assets and liabilities becomes
available. Any change in the fair value of the net assets of Texas Diamond &
Gold will change the amount of the purchase price allocable to goodwill.
Goodwill of $0.6 million was recorded as part of this acquisition. Pro forma
results of operations have not been presented because the effects of this
acquisition were not material to the Company.
NOTE D: EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options, warrants, and restricted stock awards.
6
Components of basic and diluted earnings per share are as follows (in thousands,
except per share amounts):
Three Months Ended
December 31,
------------------
2005 2004
------- -------
Net income (A) $ 6,756 $ 4,949
Weighted average outstanding shares of common stock (B) 12,869 12,365
Dilutive effect of stock options, warrants, and restricted stock 669 872
------- -------
Weighted average common stock and common stock equivalents (C) 13,538 13,237
======= =======
Basic earnings per share (A/B) $ 0.52 $ 0.40
======= =======
Diluted earnings per share (A/C) $ 0.50 $ 0.37
======= =======
Anti-dilutive options, warrants, and restricted stock grants have been excluded
from the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be anti-dilutive.
NOTE E: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 29% of the total outstanding shares. The investment is
accounted for using the equity method. Since A&B's fiscal year ends three months
prior to the Company's fiscal year, the income reported by the Company for its
investment in A&B is on a three-month lag. In accordance with United Kingdom
securities regulations, A&B files only semi-annual financial reports, for its
fiscal periods ending December 31 and June 30. The Company estimates A&B's
results of operations for the September 30 quarter for its financial statements.
The income reported for the Company's quarter ended December 31, 2005 represents
its percentage interest in the results of A&B's operations from July 1, 2005 to
September 30, 2005, as estimated.
Below is summarized financial information for A&B's most recently reported
results (using average exchange rates for the periods indicated):
Six Months Ended December 31,
-----------------------------
2005 2004
------- -------
(in thousands)
Turnover (gross revenues) $26,391 $23,399
Gross profit 18,207 16,243
Profit after tax (net income) 4,134 3,799
NOTE F: 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 determined, after consultation with counsel,
the Company believes the resolution of these actions will not have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity. However, there can be no assurance as to the ultimate outcome of
these actions.
NOTE G: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total stockholders' equity. Comprehensive income for the quarters ended December
31, 2005 and 2004 were $6.6 million and $4.9 million, respectively. The
difference between comprehensive income and net income results primarily from
the effect of foreign currency translation adjustments determined in accordance
with SFAS No. 52, "Foreign Currency Translation." The accumulated balance of
foreign currency activity excluded from net income is presented as "Accumulated
other comprehensive income" in the Condensed Consolidated Balance Sheets, and
amounted to $0.6 million ($0.9 million, net of tax of $0.3 million) at December
31, 2005.
7
NOTE H: LONG-TERM DEBT
At December 31, 2005, the Company had no outstanding debt. The Company's credit
agreement provides for a $40 million revolving credit facility, secured by the
Company's assets, and matures April 1, 2007. 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
annually 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 I: GOODWILL AND OTHER INTANGIBLE ASSETS
The Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." Under the provisions of
SFAS No. 142, goodwill and other intangible assets having indefinite lives are
not subject to amortization but are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the assets might
be impaired. No indicators of impairment were identified in any period presented
above.
The following table presents the balance of each major class of indefinite-lived
intangible asset at the specified dates:
December 31, 2005 December 31, 2004 September 30, 2005
----------------- ----------------- ------------------
(In thousands)
Pawn licenses $1,500 $1,500 $1,500
Goodwill 631 -- --
------ ------ ------
Total $2,131 $1,500 $1,500
====== ====== ======
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible asset at the
specified dates:
December 31, 2005 December 31, 2004 September 30, 2005
----------------------- ----------------------- -----------------------
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $(234) $ 345 $(203) $ 345 $(226)
Real estate finders' fees 554 (298) 554 (281) 554 (294)
Non-compete agreements 388 (262) 388 (243) 388 (258)
------ ----- ------ ----- ------ -----
Total $1,287 $(794) $1,287 $(727) $1,287 $(778)
====== ===== ====== ===== ====== =====
Total amortization expense from definite-lived intangible assets was
approximately $17,000 in each of the quarters ended December 31, 2005 and 2004.
The following table presents the Company's estimate of amortization expense for
definite-lived intangible assets for each of the five succeeding fiscal years as
of October 1, 2005 (in thousands):
Fiscal Year Amortization Expense
- ----------- --------------------
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.
8
NOTE J: SHARE-BASED COMPENSATION
Prior to October 1, 2005, the Company accounted for its share-based employee
compensation plans under the recognition and measurement provisions of APB 25,
as permitted by SFAS No. 123. For periods prior to October 1, 2005, share-based
employee compensation cost was recognized in the Statement of Operations only
for restricted stock grants and options granted at prices below market price on
the date of grant. Effective October 1, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), "Share-based Payment," using the
modified prospective transition method. Under that transition method,
compensation cost recognized in all periods subsequent to September 30, 2005
includes (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of October 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted on or after October 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The fair value of grants is amortized to
compensation expense on a straight-line basis over the vesting period for both
cliff vesting and graded vesting grants. The grant-date fair value of options is
estimated using the Black-Scholes-Merton option-pricing model and is amortized
to expense over the options' vesting periods. In accordance with the modified
prospective transition provisions, results for prior periods have not been
restated, and pro forma results are disclosed below for the pre-adoption period.
The Company's net income for the Fiscal 2006 First Quarter includes $574,000 of
compensation costs ($555,000 for stock options and $19,000 for restricted stock)
and $102,000 of income tax benefits ($95,000 for stock options and $7,000 for
restricted stock) related to our share-based compensation arrangements. The
Company's net income for the Fiscal 2005 First Quarter includes $147,000 of
compensation costs and $52,000 of income tax benefits related to the
amortization of restricted stock grants, with no expense recognized for stock
options in that period. All options and restricted stock relate to the Company's
Class A Non-voting Common Stock.
Our independent directors have been granted non-qualified stock options that
vest one year from grant and expire in ten years. Non-qualified and incentive
stock options have been granted to our officers and employees under our 1991,
1998, and 2003 Incentive Plans. Most options have a contractual life of ten
years and provide for graded vesting over five years, but some vest over a
six-year period, and some provide for cliff vesting. Certain of the options
granted to officers also provide for accelerated vesting upon a change in
control or upon the achievement of certain income targets and/or new store
opening targets. Outstanding options have been granted with strike prices
ranging from $2.00 per share to $16.06 per share. These were granted at or above
the market price at the time of grant, and had no intrinsic value on the grant
date.
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 market value of the restricted stock on the award date was $0.8
million, which was amortized over the two-year restriction period that expired
September 17, 2005. During the Fiscal 2005 First Quarter, $0.1 million of this
cost was amortized to expense.
On January 15, 2004, the Compensation Committee of the Board of Directors
approved an award of 60,000 shares of restricted stock to the Company's Chief
Executive Officer. The shares will vest on January 1, 2009, provided he remains
continuously employed by the Company through the vesting date. The shares are
subject to earlier vesting based on the occurrence of certain objectives. The
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. Effective October 1, 2005, the Company determined it no
longer believed the requirements would be met for accelerated vesting of the
remaining unvested shares. Accordingly, the remaining unamortized deferred
compensation of $0.2 million is being amortized ratably over the vesting period
ending January 1, 2009. During the Fiscal 2006 and 2005 First Quarters,
respectively, $19,000 and $49,000 was amortized to expense for this grant. These
restricted shares are not included in the Summary of Option Plans' Activity
table below.
9
We measure the fair value of restricted stock awards ("RSAs") based upon the
market price of the underlying common stock as of the grant date. If the Company
were to begin to pay dividends, the estimated fair value of future RSA grants
would be reduced by the present value of expected dividends, discounted using
the prevailing risk-free interest rate at the grant date. The following RSA
activity has occurred under our existing plans:
Weighted Average
Grant-Date Fair Value
Shares per share
-------------- ---------------------
(in thousands)
Restricted Stock Awards:
Non-vested balance at October 1, 2005 40,000 $9.77
Granted -- --
Vested -- --
Forfeited -- --
------ -----
Non-vested balance at December 31, 2005 40,000 $9.77
As of December 31, 2005, there were $0.2 million of unrecognized compensation
costs related to RSAs. The Company expects to recognize these costs over a
weighted average period of 3.0 years.
The following table summarizes the impact of adopting SFAS No. 123(R) on the
noted items:
Three Months Ended December 31, 2005
------------------------------------
Intrinsic Value Fair Value
Method Method
--------------- ----------
(In thousands, except per share
amounts)
Income before income taxes $11,178 $10,623
Net income $ 7,216 $ 6,756
Earnings per share:
Basic $ 0.56 $ 0.52
Diluted $ 0.53 $ 0.50
Cash flow provided by operating activities $ 7,840 $ 7,840
Cash flow used in financing activities $(6,935) $(6,935)
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits
of deductions resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows
resulting from excess tax benefits (the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options) to
be classified as financing cash flows. There were no such cash flows in the
periods presented.
A summary of the option plans' activity for the most recently reported period
follows:
SUMMARY OF OPTION PLANS' ACTIVITY
Weighted Average
Weighted Remaining Aggregate
Average Contractual Term Intrinsic Value
Shares Exercise Price (years) (in thousands)
--------- -------------- ---------------- ---------------
Outstanding at September 30, 2005 1,799,900 $7.80
Granted -- --
Forfeited (29,560) $9.07
Expired -- --
Exercised (15,450) $4.19
--------- -----
Outstanding at December 31, 2005 1,754,890 $7.81 5.2 $12,080
Exercisable at December 31, 2005 1,207,950 $7.25 5.0 $ 9,260
10
The weighted average remaining contractual term and aggregate intrinsic value of
options outstanding in the table above are calculated only for those options
vested at period-end or expected to vest, based on expected forfeitures.
The Black-Scholes-Merton option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting 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-Merton option valuation model, the
Company used the following weighted average assumptions for the Fiscal 2005
First Quarter:
Three Months Ended,
December 31, 2004
-------------------
Risk-free interest rate 3.44%
Dividend yield 0%
Volatility factor of the expected market
price of the Company's common stock 91.66%
Expected life of the options 5.5 years
Weighted average grant date fair value of options granted $6.58
No options were granted in the Fiscal 2006 First Quarter. The Company considered
the contractual life of the options and the past behavior of employees in
estimating the expected life of options granted. The estimated expected life
cannot exceed the contractual term, and cannot be less than the vesting term.
The volatility factor was estimated using the actual volatility of the Company's
stock over the most recently completed time period equal to the estimated life
of each option grant. Although no adjustment was made in the period presented
above, the Company considers excluding from its volatility factor discrete
events which have had a significant effect on its historical volatility but have
a remote chance of recurring.
As of December 31, 2005, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was $2.8 million. The weighted
average period over which these costs will be amortized is 2.9 years.
The total intrinsic value of stock options exercised was $163,000 in the Fiscal
2006 First Quarter, and $19,000 in the Fiscal 2005 First Quarter. The Company
realized no income tax benefit from these exercises.
At December 31, 2005, 98,000 shares were available for future grant under the
2003 Incentive Plan, which covers stock options, warrants, and restricted stock
awards. Awards that expire or are canceled without delivery of shares under the
2003 Incentive Plan generally become available for issuance. The Company issues
new shares to satisfy stock option exercises.
Stock option exercises resulted in the issuance of 15,450 shares of Class A
Non-voting Common Stock for total proceeds of $65,000 in the Fiscal 2006 First
Quarter. Stock option exercises resulted in the issuance of 2,800 shares of
Class A Non-voting Common Stock for total proceeds of $6,000 in the Fiscal 2005
First Quarter.
11
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to options granted under the Company's stock option plans in periods prior to
adoption of SFAS No. 123(R). For purposes of this pro forma disclosure, the
value of the options is estimated using the Black-Scholes-Merton option-pricing
formula and is amortized to expense over the options' vesting periods:
Three Months Ended
December 31, 2004
------------------
(In thousands,
except per
share amounts)
Net income, as reported $4,949
Add: share-based employee compensation included in reported
net income, net of related tax effects
95
Deduct: total share-based employee compensation expense
determined under fair value based method for
all awards, net of related tax effects (259)
------
Pro forma net income $4,785
======
Earnings per share - basic:
As reported $ 0.40
Pro forma $ 0.39
Earnings per share - diluted:
As reported $ 0.37
Pro forma $ 0.36
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.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
First Quarter Ended December 31, 2005 vs. First Quarter Ended December 31, 2004
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended December 31, 2005
and 2004 ("Fiscal 2006 First Quarter" and "Fiscal 2005 First Quarter,"
respectively):
Three Months Ended
December 31, (a) % or
------------------ Point
2005 2004 Change(b)
------- ------- ---------
Net revenues:
Sales $42,353 $36,324 16.6%
Pawn service charges 16,514 16,669 (0.9)%
Payday loan service charges 1,152 8,290 (86.1)%
Credit service fees 15,422 -- 100.0%
Other 329 345 (4.6)%
------- -------
Total revenues 75,770 61,628 22.9%
Cost of goods sold 25,661 21,913 17.1%
------- -------
Net revenues $50,109 $39,715 26.2%
======= =======
Other data:
Gross margin on sales 39.4% 39.7% (0.3) pts.
Average annual inventory turnover 3.1x 2.7x 0.4x
Average inventory per pawn location at quarter end $ 122 $ 115 6.1%
Average pawn loan balance per pawn location at quarter end $ 169 $ 160 5.6%
Average yield on pawn loan portfolio 132% 142% (10) pts.
Pawn loan redemption rate 75% 76% (1) pt.
Signature loan bad debt as a percentage of signature loan revenues 26% 14% 12 pts.
Expenses and income as a percentage of net revenues (%):
Operations 52.5 57.2 (4.7) pts.
Payday loan bad debt and direct transaction expenses 1.5 4.1 (2.6) pts.
Credit service bad debt and direct transaction expenses 7.6 -- 7.6 pts.
Administrative 13.6 14.8 (1.2) pts.
Depreciation and amortization 4.2 4.8 (0.6) pt.
Interest expense, net 0.4 0.9 (0.5) pt.
Income before income taxes 21.2 19.5 1.7 pts.
Net income 13.5 12.5 1.0 pt.
Stores in operation:
Beginning of period 514 405
New openings 8 40
Acquired 1 --
------- -------
End of period 523 445
======= =======
Average number of locations during the period 517 424
Composition of ending locations:
EZPAWN locations 281 280
Mono-line signature loan locations adjoining EZPAWNs 158 128
Mono-line signature loan locations - free standing 84 37
------- -------
Total locations in operation 523 445
======= =======
EZPAWN locations offering signature loans 83 129
Total locations offering signature loans 325 295
(a) In thousands, except percentages, inventory turnover and store count.
(b) In comparing the period differences between dollar amounts or per store
counts, a percentage change is used. In comparing the period differences
between two percentages, a percentage point (pt.) change is used.
13
EFFECT OF ADOPTING A NEW ACCOUNTING PRINCIPLE FOR SHARE-BASED COMPENSATION
Prior to October 1, 2005, the Company accounted for its share-based employee
compensation plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations ("APB 25"), as permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation." For periods prior to October 1, 2005, share-based employee
compensation cost was recognized in the Statement of Operations only for
restricted stock grants and options granted at prices below market price on the
date of grant. Effective October 1, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), "Share-based Payment," using the
modified prospective transition method. Under that transition method,
compensation cost recognized in all periods subsequent to September 30, 2005
includes (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of October 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted on or after October 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The grant-date fair value of options is estimated
using the Black-Scholes-Merton option-pricing model and is amortized to expense
over the options' vesting periods. In accordance with the modified prospective
transition provisions, results for prior periods have not been restated. The
Company's net income for the three months ended December 31, 2005 includes
$574,000 of compensation costs ($555,000 for stock options and $19,000 for
restricted stock) and $102,000 of income tax benefits ($95,000 for stock options
and $7,000 for restricted stock) related to our share-based compensation
arrangements. The Company's net income for the three months ended December 31,
2004 includes $147,000 of compensation costs and $52,000 of income tax benefits
related to the amortization of restricted stock grants, with no expense
recognized for stock options in that period. At December 31, 2005, the
unamortized fair value of share-based awards to be amortized over their
remaining vesting periods was $2.8 million. The weighted average period over
which these costs will be amortized is 2.9 years. Based on current outstanding
options, the Company expects to recognize share-based compensation expense of
approximately $0.3 million in each of the remaining three quarters of Fiscal
2006. The expense recognized in the first quarter of Fiscal 2006 was higher than
the amount expected for the next three quarters due to the acceleration of
vesting of certain options, in accordance with their terms.
OVERVIEW
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 281 EZPAWN locations (as of December 31, 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 242 EZMONEY stores and 83 EZPAWN locations (as of December 31,
2005), the Company offers short-term non-collateralized loans, often referred to
as payday loans, or fee-based credit services to customers seeking loans
(collectively, "signature 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 ranges between
$70 and $85 but varies depending on the valuation of each item pawned. The loan
term ranges between 60 and 120 days, consisting of the regulated term and grace
period.
In August and November 2005, the Company began reducing the loan term on pawn
loans from 90 to 60 days in 67 and 148 of its pawn locations, respectively.
Forty-three locations had previously made the change. The Company believes this
change will bring about an approximate 15% reduction in its pawn portfolio
(those loans between 60 and 90 days old) with very little or no impact on earned
pawn service charge revenues. This change also creates a one-time doubling of
forfeitures as loans made 90 and 60 days earlier simultaneously forfeit for a
30-day period, resulting in a higher level of inventory available for sale. In
the 67 stores converted in August 2005, the Company experienced this doubling of
forfeitures as loans matured during the Fiscal 2006 First Quarter. In the 148
stores converted in November 2005, the Company will experience this doubling
during the Company's fiscal 2006 second quarter, which will end on March 31,
2006.
14
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.
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 December 31, 2005, 210 of the Company's
242 signature loan stores and 51 of the Company's 281 pawn 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. To build their credit histories, customers may also request
that the Company report their payments to an external credit-reporting agency.
The average loan obtained by the Company's credit service customers is
approximately $460 and the terms are generally less than 30 days, averaging
about 17 days.
The Company earns payday loan service charge revenue on its payday loans. In 64
of its locations, the Company makes payday loans in compliance with state law.
In the Fiscal 2006 and Fiscal 2005 First Quarters, the Company also marketed and
serviced payday loans made by County Bank of Rehoboth Beach ("County Bank"), a
federally insured Delaware bank in some of its locations and in its call center.
After origination of the loans, the Company could purchase a 90% participation
in the loans made by County Bank and marketed by the Company. As of December 31,
2005, County Bank no longer maintains a payday loan program. Most of these
locations began providing credit services to consumers in obtaining loans from
an unaffiliated lender. 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 December 5, 2005, the Company acquired all outstanding stock of Texas Diamond
& Gold, a single-store pawn company for $1.6 million. The results of Texas
Diamond & Gold have been consolidated with that of the Company since the
acquisition date. Pro forma results of operations have not been presented
because the effects of this acquisition were not material to the Company.
In the Fiscal 2006 First Quarter compared to the Fiscal 2005 First Quarter, the
Company saw significant growth in its signature loan contribution and an
increase in the gross profit on sales. Somewhat offsetting this was higher
operating costs, primarily due to newly opened stores, and administrative costs,
particularly share compensation expense. The Company's net income improved to
$6.8 million in the Fiscal 2006 First Quarter from $4.9 million in the Fiscal
2005 First Quarter.
15
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the Fiscal 2006
First Quarter to the Fiscal 2005 First Quarter. The discussion should be read in
conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2006 First Quarter pawn service charge revenue decreased
0.9%, or $0.2 million from the Fiscal 2005 First Quarter to $16.5 million. The
Company's average balance of pawn loans outstanding during the Fiscal 2006 First
Quarter was 6.6% higher and ending pawn loans outstanding were 6.0% higher than
in the Fiscal 2005 First Quarter. Pawn service charge revenue decreased slightly
on a higher average loan balance primarily due to a higher level of loan
forfeitures in the Fiscal 2006 First Quarter compared to the Fiscal 2005 First
Quarter.
In the Fiscal 2006 First Quarter, 103.9% ($17.2 million) of recorded pawn
service charge revenue was collected in cash, offset by a 3.9% ($0.7 million)
decrease in accrued pawn service charges receivable. In the Fiscal 2005 First
Quarter, 95.3% ($15.9 million) of recorded pawn service charge revenue was
collected in cash, and 4.7% ($0.8 million) resulted from an increase in accrued
pawn service charges receivable. The accrual of pawn service charges is
dependent on the size of the pawn portfolio at the end of the period and the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. The Company believes the primary cause of the decrease in the pawn
service charge receivable during the Fiscal 2006 First Quarter, compared to an
increase in the Fiscal 2005 First Quarter, is due to the change in loan terms
discussed above and the lower level of loan redemptions.
Sales increased $6.0 million in the Fiscal 2006 First Quarter compared to the
Fiscal 2005 First Quarter, to $42.4 million. The increase was due to a $3.6
million (11.4%) increase in merchandise sales, and a $2.4 million (55.5%)
increase in jewelry scrapping sales. The increase in sales is largely due to the
11% higher levels of inventory available for sale (beginning inventory plus loan
forfeitures and customer purchases) during the Fiscal 2006 First Quarter
compared to the Fiscal 2005 First Quarter. The table below summarizes the sales
volume, gross profit, and gross margins on the Company's sales during the
quarters presented:
Quarter Ended December 31,
--------------------------
2005 2004
----- -----
(Dollars in millions)
Merchandise sales $35.7 $32.0
Jewelry scrapping sales 6.7 4.3
----- -----
Total sales 42.4 36.3
Gross profit on merchandise sales $14.9 $13.2
Gross profit on jewelry scrapping sales 1.8 1.2
Gross margin on merchandise sales 41.7% 41.3%
Gross margin on jewelry scrapping sales 27.0% 27.2%
Overall gross margin 39.4% 39.7%
The Fiscal 2006 First Quarter overall gross margin on sales decreased 0.3 of a
percentage point from the Fiscal 2005 First Quarter to 39.4%. This resulted
primarily from an increase in the portion of total sales comprised of jewelry
scrapping sales, which realize a lower margin than merchandise sales. Margins on
merchandise sales improved 0.4 of a percentage point. During the Fiscal 2006
First Quarter, the Company increased its inventory valuation allowance $0.3
million, a charge to cost of goods sold, primarily due to higher cost of aged
general merchandise sold. In the Fiscal 2005 First Quarter, the inventory
valuation allowance was increased $0.4 million. Inventory shrinkage, included in
costs of goods sold, improved to 1.2% of merchandise sales in the Fiscal 2006
First Quarter, compared to 1.7% in the Fiscal 2005 First Quarter.
16
Signature loan data are as follows:
Quarter Ended December 31,
--------------------------
2005 2004
------- -------
(Dollars in thousands)
Service charge revenue $16,574 $ 8,290
Bad debt:
Net defaults, including interest and insufficient
funds fees on brokered loans (4,592) (2,238)
Change in valuation allowance 241 108
Sale of older bad debt (a) -- 905
Other related costs, net of insufficient funds
fees collected (23) 40
------- -------
Net bad debt (4,374) (1,185)
Direct transaction expenses (162) (424)
Operating expenses at EZMONEY stores (5,029) (2,321)
Depreciation and amortization at EZMONEY stores (215) (103)
Collection and call center costs (included in
administrative expense) (372) (340)
------- -------
Contribution to operating income $ 6,422 $ 3,917
======= =======
Average signature loan balance outstanding during
quarter (b) $15,450 $ 7,569
Signature loan balance at end of quarter (b) $17,036 $ 8,666
Participating locations at end of quarter 325 295
Signature loan bad debt, excluding sale of older bad
debt, as a percent of service charge revenue (a) 26% 25%
Direct transaction expenses, as a percent of service
charge revenue 1% 5%
Net default rate (b) (c) 5.0% 2.9%
Net default rate, excluding sale of older bad debt
(a) (b) (c) 5.0% 4.9%
(a) Older bad debts were originated between fiscal 2001 and fiscal 2004.
(b) Signature loan balances include payday loans recorded on the Company's
balance sheet and the principal portion of active brokered loans
outstanding from independent lenders, the balance of which is not included
on the Company's balance sheet.
(c) Principal defaults net of collections, as a percentage of signature loans
made and renewed.
The Contribution to operating income presented above includes the effect of
incremental operating expenses at EZMONEY stores. Shared operating costs at
adjoined EZMONEY stores, such as rent and labor, have been excluded from these
figures.
Signature loan service charge revenue doubled from the Fiscal 2005 First Quarter
primarily due to higher average loan balances at existing stores and the
addition of new EZMONEY stores. In the Fiscal 2006 First Quarter, 98.1% ($16.3
million) of recorded signature loan service charge revenue was collected in
cash, and 1.9% ($0.3 million) resulted from an increase in accrued service
charges receivable. In the Fiscal 2005 First Quarter, 96.6% ($8.0 million) of
recorded signature loan service charge revenue was collected in cash, and 3.4%
($0.3 million) resulted from an increase in accrued service charges receivable.
Signature loan bad debt was $4.4 million (26% of signature loan service charge
revenue) in the Fiscal 2006 First Quarter. This was an increase of $2.3 million
compared to the Fiscal 2005 First Quarter bad debt of $2.1 million (25% of
service charge revenues) excluding the sale of older bad debt. During the Fiscal
2005 First Quarter, the Company sold its older bad debt (originated between
fiscal 2001 and fiscal 2004) to an outside agency for net proceeds of
approximately $0.9 million. Including the effect of this sale, signature loan
bad debt was $1.2 million (14% of signature loan service charge revenues) in the
Fiscal 2005 First Quarter. The Company now sells, normally on a weekly basis,
bad debts as they age beyond 60 days. The Company believes that, in today's
market, selling this debt is more efficient than other alternatives.
The Company provides a valuation allowance for expected losses on signature
loans and the related 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
December 31, 2005, the valuation allowance was 37% of signature loan fees
receivable (6.4% of the outstanding signature loan principal and fees
receivable),
17
compared to 26% of signature loan fees receivable (4.2% of the signature loan
principal and fees receivable) at December 31, 2004.
Operations expense increased to $26.3 million in the Fiscal 2006 First Quarter
from $22.7 million in the Fiscal 2005 First Quarter, representing a 4.7
percentage point decrease when measured as a percentage of net revenue. Of the
total increase, $2.7 million related to EZMONEY stores (primarily new stores),
and $0.9 million related to EZPAWN stores.
Administrative expenses in the Fiscal 2006 First Quarter increased to $6.8
million from $5.9 million in the Fiscal 2005 First Quarter, but decreased 1.2
percentage points when measured as a percent of net revenue. The increase was
due primarily to a $0.6 million charge for share-based compensation in the
Fiscal 2006 First Quarter, compared to $0.1 million in the Fiscal 2005 First
Quarter. The increased expense was due to the current year adoption of SFAS No.
123(R) as described above under "Effect of Adopting a New Accounting Principle
for Share-based Compensation." In addition to the share-based compensation
expense, the Company also experienced a $0.6 million increase in administrative
labor, offset by smaller decreases in other administrative expenses in the
Fiscal 2006 First Quarter.
Depreciation and amortization expense increased $0.2 million to $2.1 million in
the Fiscal 2006 First Quarter, compared to the Fiscal 2005 First Quarter.
Depreciation on assets placed in service outweighed the reduction from assets
that were retired or became fully depreciated.
In the Fiscal 2006 First Quarter, interest expense decreased to $0.2 million
from $0.3 million in the Fiscal 2005 First Quarter due to lower average debt
balances. The Company had no debt at December 31, 2005, compared to $22.0
million at December 31, 2004. Decreases in the debt balance were funded by cash
flow from operations after funding all investment activity. Assuming the Company
remains debt-free, it would expect to continue to pay a commitment fee of
$37,500 quarterly through the April 1, 2007 maturity date of its current credit
agreement. In the quarter ending March 31, 2006, the Company will amortize to
interest expense the remaining $88,000 of deferred financing costs. This is
equal to the amount amortized in the comparable period of Fiscal 2005.
The Fiscal 2006 First Quarter income tax expense was $3.9 million (36.4% of
pretax income) compared to $2.8 million (36.0% of pretax income) for the Fiscal
2005 First Quarter. The increase in effective tax rate between these periods is
due to the recognition of non-deductible expense for incentive stock options
(from the SFAS No. 123(R) adoption) expected for the year. This was offset by a
decrease in expected state taxes and the smaller impact other non-deductible
items are expected to have on increased earnings in the year ending September
30, 2006.
Operating income for the Fiscal 2006 First Quarter increased $2.7 million from
the Fiscal 2005 First Quarter to $10.3 million, primarily due to the $2.5
million greater contribution from signature loans and the $2.3 million increase
in gross profit from sales, offset by $0.9 million higher administrative
expenses, along with smaller changes in other items. After a $1.1 million
increase in income taxes related primarily to the increased earnings, net income
improved to $6.8 million in the Fiscal 2006 First Quarter from $4.9 million in
the Fiscal 2005 First Quarter.
LIQUIDITY AND CAPITAL RESOURCES
In the Fiscal 2006 First Quarter, the Company's $7.8 million cash flow from
operations consisted of (i) net income plus several non-cash items, aggregating
to $9.4 million, offset by (ii) $1.6 million of changes in operating assets and
liabilities, primarily federal income taxes, accounts payable, accrued expenses,
prepaid expenses, and other current and non-current assets. In the Fiscal 2005
First Quarter, the Company's $5.4 million cash flow from operations consisted of
(i) net income plus several non-cash items, aggregating to $7.8 million, offset
by (ii) $2.4 million of changes in operating assets and liabilities, primarily
prepaid expenses, other current and non-current assets, accounts payable,
accrued expenses, and federal income taxes.
The Company used $0.8 million of cash for investing activities. During the
Fiscal 2006 First Quarter, the Company invested $1.6 million for the acquisition
of a pawn store, invested $1.5 million in property and equipment, and invested
$0.5 million in payday loans net of repayments. Pawn loan repayments and
principal recovery through the sale of forfeited collateral exceeded pawn loans
made by $2.8 million, partially offsetting investing cash uses. Cash flow from
operations funded the investing activities and the repayment of $7.0 million of
outstanding debt in the quarter.
18
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations (in thousands):
Payments due by Period
---------------------------------------------------------
Less than 1 More than
Contractual Obligations Total year 1-3 years 3-5 years 5 years
- ----------------------- ------- ----------- --------- --------- ---------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Interest and commitment fee on
long-term obligations 243 205 38
Capital lease obligations -- -- -- -- --
Operating lease obligations 96,611 14,914 25,811 19,108 36,778
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
------- ------- ------- ------- -------
Total $96,854 $15,119 $25,849 $19,108 $36,778
======= ======= ======= ======= =======
In addition to the contractual obligations in the table above, the Company is
obligated under letters of credit issued to unaffiliated lenders as part of its
credit service operations. At December 31, 2005, the Company's maximum exposure
for losses on letters of credit, if all brokered loans defaulted and none was
collected, was $16.6 million. This amount includes principal, interest, and
insufficient funds fees.
In the remaining nine months of the fiscal year ending September 30, 2006, the
Company also plans to open an additional 107 to 117 EZMONEY payday loan stores
for an expected aggregate capital expenditure of approximately $3.9 million,
plus the funding of working capital and start-up losses at these stores. While
the Company anticipates that these new stores will increase future earnings, it
expects they will have a negative effect on earnings and cash flow in their
first year of operation.
The Company had no debt outstanding at December 31, 2005. The Company's credit
agreement provides for a $40 million revolving credit facility, secured by the
Company's assets, and matures April 1, 2007. Under the terms of the agreement,
the Company had the ability to borrow an additional $24.5 million at December
31, 2005, after allowing for $15.5 million in the principal portion of letters
of credit issued under its credit service program. 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. Although
the Company had no outstanding debt at December 31, 2005, it remains
contractually obligated to pay the unpaid interest of $55,000 at December 31,
2005 and the line of credit commitment fee. These amounts are included in the
contractual obligations table above, assuming the current outstanding balance,
interest rate, and commitment fee will be applicable through the maturity of the
credit agreement on April 1, 2007. The outstanding debt balance fluctuates based
on cash needs and the interest rate varies in response to the Company's leverage
ratio.
The Company anticipates that cash flow from operations and availability under
its revolving credit agreement will be adequate to fund its contractual
obligations, planned store growth, capital expenditures, and working capital
requirements during the coming year.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow typically is greatest in its second fiscal
quarter primarily due to a high level of loan redemptions and sales in the
income tax refund season.
19
USE OF ESTIMATES AND ASSUMPTIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, inventory, allowance
for losses on payday loans, long-lived and intangible assets, income taxes,
contingencies and litigation. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances. Management uses this information to
make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
the estimates under different assumptions or conditions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in 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. For further discussion, readers
should see "Risk Factors" in Part II, Item 1A of this quarterly report on Form
10-Q.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to its equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment representing the weakening in the U.K. pound during
the quarter ended September 30, 2005 (included in the Company's December 31,
2005 results on a three-month lag as described above) was approximately a
$161,000 decrease, net of tax effect, to stockholders' equity. On December 31,
2005, the U.K. pound weakened to 1.00 to 1.7208 U.S. dollars from 1.7628 at
September 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.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, 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, planned store
openings, and known uncertainties. These statements are often, but not always,
made through the use of words or phrases such as "may," "should," "could,"
"predict," "potential," "believe," "expect," "anticipate," "seek," "estimate,"
"intend," "plan," "projection," "outlook," "expect," and similar expressions.
All forward-looking statements are based on current expectations regarding
important risk factors. Many of these risks and uncertainties are beyond the
Company's 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
20
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 Quarterly Report on Form 10-Q and
in the section entitled "Risk Factors" in our Annual Report on Form 10-K for the
year ended September 30, 2005. 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.
21
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, management of the Company has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2005 ("Evaluation
Date"). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
(b) Changes in Internal Controls
There were no changes in the Company's internal controls that occurred during
the Company's last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
22
PART II
ITEM 1. 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 determined, after consultation with counsel,
the Company believes the resolution of these actions will not have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity. However, there can be no assurance as to the ultimate outcome of
these actions.
ITEM 1A. RISK FACTORS
Important risk factors that could cause results or events to differ from current
expectations are described in Part I, Item 1A, "Risk Factors" of the Company's
Annual Report on Form 10-K for the year ended September 30, 2005. These factors
are supplemented by those discussed under "Quantitative and Qualitative
Disclosures about Market Risk" in Part I, Item 3 of this Quarterly Report on
Form 10-Q, in Part II, Item 7A of the Company's Annual Report on Form 10-K for
the year ended September 30, 2005, and in the following item:
- - THE COMPANY'S EARNINGS AND FINANCIAL POSITION ARE AFFECTED BY CHANGES IN
GOLD VALUES AND THE RESULTING IMPACT ON PAWN LENDING AND JEWELRY SALES; A
SIGNIFICANT OR SUDDEN CHANGE IN GOLD VALUES MAY HAVE A MATERIAL IMPACT ON
THE COMPANY'S EARNINGS. Sales proceeds and the Company's ability to
liquidate excess jewelry inventory at an acceptable margin are dependent
upon gold values. The Company periodically changes its lending guidelines
on gold jewelry as gold values change and in response to other market
factors, such as competitor loan values. The impact on the Company's
financial position and results of operations of a hypothetical change in
gold values cannot be reasonably estimated because the market and
competitive response to changes in gold values is not known; however,
changes in gold values would likely lead to changes in sales, sales
margins, and pawn service charge revenues.
ITEM 6. EXHIBITS
(a) Exhibit
Number Description
------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCORP, INC.
(Registrant)
Date: February 9, 2006 By: /s/ DAN N. TONISSEN
------------------------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
24
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
25