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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 MARCH 31, 2006
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
of 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
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 March 31, 2006, 12,199,685 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 March 31, 2006,
March 31, 2005 and September 30, 2005 ....................... 1
Condensed Consolidated Statements of Operations for the Three
Months and Six Months Ended March 31, 2006 and 2005 ......... 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended March 31, 2006 and 2005 ........................ 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............................................................ 25
Item 4. Controls and Procedures ................................ 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 27
Item 1A. Risk Factors ......................................... 27
Item 6. Exhibits .............................................. 27
SIGNATURE ............................................................... 28
EXHIBIT INDEX ........................................................... 29
CERTIFICATIONS
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
March 31, March 31, September 30,
2006 2005 2005
--------- --------- -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 26,041 $ 1,405 $ 4,168
Pawn loans 39,044 40,081 52,864
Payday loans, net 1,507 7,711 1,634
Pawn service charges receivable, net 6,598 7,720 9,492
Payday loan service charges receivable, net 250 1,573 272
Credit service fees receivable, net 2,663 -- 3,007
Inventory, net 30,764 26,967 30,293
Deferred tax asset 10,629 9,711 10,534
Note receivable from related party -- 1,500 --
Prepaid expenses and other assets 4,014 3,918 1,998
-------- -------- --------
Total current assets 121,510 100,586 114,262
Investment in unconsolidated affiliate 17,614 17,094 17,348
Property and equipment, net 27,124 26,132 26,964
Deferred tax asset, non-current 4,012 4,946 4,012
Other assets, net 3,471 3,914 2,862
-------- -------- --------
Total assets $173,731 $152,672 $165,448
======== ======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses 16,576 13,359 18,988
Customer layaway deposits 2,147 1,848 1,672
Federal income taxes payable 1,035 271 648
-------- -------- --------
Total current liabilities 19,758 15,478 21,308
Long-term debt -- 6,825 7,000
Deferred gains and other long-term liabilities 3,430 3,778 3,597
-------- -------- --------
Total long-term liabilities 3,430 10,603 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; 12,208,718 issued and
12,199,685 outstanding at March 31, 2006; 11,446,843 issued
and 11,437,810 outstanding at March 31, 2005; 11,878,458
issued and 11,869,425 outstanding at September 30, 2005 121 114 117
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; 1,190,057 issued and
990,057 outstanding 10 10 10
Additional paid-in capital 121,017 116,894 118,219
Retained earnings 29,197 8,880 14,714
Deferred compensation expense (208) (538) (244)
-------- -------- --------
150,137 125,360 132,816
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Accumulated other comprehensive income 441 1,266 762
-------- -------- --------
Total stockholders' equity 150,543 126,591 133,543
-------- -------- --------
Total liabilities and stockholders' equity $173,731 $152,672 $165,448
======== ======== ========
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Six Months
Ended March 31, Ended March 31,
----------------- -------------------
2006 2005 2006 2005
------- ------- -------- --------
(In thousands, except per
share amounts)
Revenues:
Sales $47,605 $40,259 $ 89,958 $ 76,583
Pawn service charges 15,453 14,682 31,967 31,351
Payday loan service charges 1,103 7,828 2,255 16,118
Credit service fees 14,451 -- 29,873 --
Other 329 329 658 674
------- ------- -------- --------
Total revenues 78,941 63,098 154,711 124,726
Cost of goods sold 28,337 23,901 53,998 45,814
------- ------- -------- --------
Net revenues 50,604 39,197 100,713 78,912
Operating expenses:
Operations 27,908 23,988 54,221 46,691
Payday loan bad debt and direct transaction expenses 390 1,495 1,122 3,104
Credit service bad debt and direct transaction expenses 1,935 -- 5,739 --
Administrative 6,695 5,796 13,517 11,663
Depreciation 2,119 2,054 4,225 3,924
Amortization 17 17 34 34
------- ------- -------- --------
Total operating expenses 39,064 33,350 78,858 65,416
------- ------- -------- --------
Operating income 11,540 5,847 21,855 13,496
Interest expense, net 41 275 263 614
Equity in net income of unconsolidated affiliate (673) (636) (1,188) (1,096)
Loss on sale / disposal of assets 23 6 8 43
------- ------- -------- --------
Income before income taxes 12,149 6,202 22,772 13,935
Income tax expense 4,422 2,233 8,289 5,017
------- ------- -------- --------
Net income $ 7,727 $ 3,969 $ 14,483 $ 8,918
======= ======= ======== ========
Net income per common share:
Basic $ 0.59 $ 0.32 $ 1.12 $ 0.72
======= ======= ======== ========
Diluted $ 0.56 $ 0.29 $ 1.06 $ 0.66
======= ======= ======== ========
Weighted average shares outstanding:
Basic 13,067 12,402 12,977 12,383
Diluted 13,838 13,755 13,646 13,542
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
March 31,
-------------------
2006 2005
-------- --------
(In thousands)
Operating Activities:
Net income $ 14,483 $ 8,918
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,259 3,958
Payday loan loss provision 879 2,449
Deferred taxes (95) --
Net loss on sale or disposal of assets 8 43
Share-based compensation 891 294
Income from investment in unconsolidated affiliate (1,188) (1,096)
Changes in operating assets and liabilities:
Service charges and fees receivable, net 3,279 860
Inventory 7 496
Prepaid expenses, other current assets, and other assets, net (2,028) (1,313)
Accounts payable and accrued expenses (2,444) (1,522)
Customer layaway deposits 459 203
Deferred gains and other long-term liabilities (167) (180)
Federal income taxes 421 (1,772)
-------- --------
Net cash provided by operating activities 18,764 11,338
Investing Activities:
Pawn loans made (85,782) (75,809)
Pawn loans repaid 53,718 48,815
Recovery of pawn loan principal through sale of forfeited collateral 46,337 39,164
Payday loans made (10,189) (30,942)
Payday loans repaid 9,437 28,074
Additions to property and equipment (4,385) (4,247)
Acquisitions, net of cash acquired (1,590) --
Dividends from unconsolidated affiliate 601 542
Proceeds from sale of assets 15 --
-------- --------
Net cash provided by investing activities 8,162 5,597
Financing Activities:
Proceeds from exercise of stock options and warrants 1,947 139
Net payments on bank borrowings (7,000) (18,175)
-------- --------
Net cash used in financing activities (5,053) (18,036)
-------- --------
Change in cash and equivalents 21,873 (1,101)
Cash and equivalents at beginning of period 4,168 2,506
-------- --------
Cash and equivalents at end of period $ 26,041 $ 1,405
======== ========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 46,122 $ 35,991
Foreign currency translation adjustment $ 321 $ 439
Issuance of common stock to 401(k) plan $ -- $ 72
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2006
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 and six-month periods ended March 31, 2006 (the "Fiscal 2006
Second Quarter" and the "Fiscal 2006 Year-to-Date Period") 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 a 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. Sales revenue and the related cost are recorded when this inventory is
sold.
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 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 payday loan bad debt and direct transaction expenses, were
$0.4 million and $0.9 million, representing 5.0% and 5.8% of loans made for the
Fiscal 2006 Second Quarter and the Fiscal 2006 Year-to-Date Period,
respectively. In the comparable 2005 periods (the "Fiscal 2005 Second Quarter"
and the "Fiscal 2005 Year-to-Date Period"), payday loan net defaults were $1.2
million and $2.5 million, representing 2.9% of loans made in both the
three-month and six-month periods. Excluding the benefit of a $0.9 million sale
of older bad debt in December 2004, net defaults for the Fiscal 2005
Year-to-Date Period were $3.4 million, or 3.9% of loans made. The Company
includes direct transaction expenses in this financial statement line item.
These include Tele-Track charges, electronic debit fees, and other bank fees.
These expenses tend to vary directly with transaction volume.
4
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.
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 if applicable, all of which the Company
records as bad debt and then attempts to collect from the borrower. Upon demand,
the Company 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 $1.9 million and $5.6 million, representing 13% and
19% of credit service fee revenues for the Fiscal 2006 Second Quarter and
Year-to-Date Period, respectively. The Company had no credit service bad debt in
the fiscal 2005 periods, as it did not offer credit services in those periods.
The Company includes direct transaction expenses in this financial statement
line item. These include Tele-Track charges, electronic debit fees, 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 March 31, 2006, the allowance for Expected
LOC Losses was $0.5 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 $12.9 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 March 31, 2006,
March 31, 2005, and September 30, 2005, the valuation allowance deducted from
the carrying value of inventory was $2.5 million, $2.1 million, and $1.9 million
(7.6%, 7.1%, 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 Second 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
5
overall business; and significant negative industry trends. When management
determines that the carrying value of tangible long-lived assets may not be
recoverable, impairment is measured based on the excess of the assets' carrying
value over the estimated fair value. No impairment of tangible long-lived assets
has been recognized in the Fiscal 2006 or 2005 Year-to-Date Periods.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. As
part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each jurisdiction in which it
operates. This process involves estimating the actual current tax liability
together with assessing temporary differences in recognition of income for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income. In the event the Company were to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, a valuation allowance would be charged to the income tax
provision in the period such determination 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 March 31, 2006,
March 31, 2005 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 $71.5 million, $63.1 million and $67.2 million at March 31,
2006, March 31, 2005, 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. 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 are 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 Six Months Ended
March 31, March 31,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income (A) $ 7,727 $ 3,969 $14,483 $ 8,918
Weighted average outstanding shares of common stock (B) 13,067 12,402 12,977 12,383
Dilutive effect of stock options, warrants, and restricted stock 771 1,353 669 1,159
------- ------- ------- -------
Weighted average common stock and common stock equivalents (C) 13,838 13,755 13,646 13,542
======= ======= ======= =======
Basic earnings per share (A/B) $ 0.59 $ 0.32 $ 1.12 $ 0.72
======= ======= ======= =======
Diluted earnings per share (A/C) $ 0.56 $ 0.29 $ 1.06 $ 0.66
======= ======= ======= =======
Anti-dilutive options, warrants, and restricted stock grants have been excluded
from the computation of diluted earnings per share because the related 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 income reported for the
Company's Fiscal 2006 Year-to-Date Period represents its percentage interest in
the results of A&B's operations from July 1, 2005 to December 31, 2005.
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 Fiscal 2006 Second
Quarter was $7.6 million and comprehensive income for the Fiscal 2006
Year-to-Date Period was $14.2 million. For the comparable 2005 periods,
comprehensive income was $4.4 million and $9.4 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 $0.4 million ($0.6 million, net of tax of $0.2 million) at March 31,
2006.
7
NOTE H: LONG-TERM DEBT
At March 31, 2006, 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:
March 31, 2006 March 31, 2005 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:
March 31, 2006 March 31, 2005 September 30, 2005
----------------------- ----------------------- -----------------------
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $(242) $ 345 $(211) $ 345 $(226)
Real estate finders' fees 554 (302) 554 (285) 554 (294)
Non-compete agreements 388 (267) 388 (248) 388 (258)
------ ----- ------ ----- ------ -----
Total $1,287 $(811) $1,287 $(744) $1,287 $(778)
====== ===== ====== ===== ====== =====
Total amortization expense from definite-lived intangible assets for the Fiscal
2006 Second Quarter and Fiscal 2006 Year-to-Date Period was approximately
$17,000 and $34,000, respectively. The amortization was unchanged from the same
periods of Fiscal 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 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 for
only 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 includes the following compensation costs related to
our share-based compensation arrangements:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2006 2005 2006 2005
---- ----- ---- -----
(in thousands)
Gross compensation costs
Stock options $300 $ -- $ 855 $ --
Restricted stock 19 147 38 294
---- ---- ----- -----
Total gross compensation costs $319 $147 $ 893 $ 294
Income tax benefits
Stock options $ -- $ -- $ (95) $ --
Restricted stock (7) (52) (14) (104)
---- ---- ----- -----
Total income tax benefits $ (7) $(52) $(109) $(104)
---- ---- ----- -----
Net compensation expense $312 $ 95 $ 784 $ 190
==== ==== ===== =====
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 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 Second Quarter and Fiscal 2005
Year-to-Date Period, respectively, $0.1 million and $0.2 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
9
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 Second Quarters, respectively, $19,000 and
$49,000 was amortized to expense for this grant. During the Fiscal 2006 and 2005
Year-to-Date Periods, respectively, $38,000 and $98,000 was amortized to expense
for this grant. These restricted shares are not included in the Summary of
Option Plans' Activity table below.
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
------ ---------------------
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
Granted -- --
Vested -- --
Forfeited -- --
------ -----
Non-vested balance at March 31, 2006 40,000 $9.77
====== =====
As of March 31, 2006, there was $0.2 million of unrecognized compensation cost
related to RSAs. The Company expects to recognize this cost over a weighted
average period of 2.8 years.
The following table summarizes the impact of adopting SFAS No. 123(R) on the
noted items:
Three Months Ended Six Months Ended
March 31, 2006 March 31, 2006
---------------------- ----------------------
Intrinsic Intrinsic
Value Fair Value Value Fair Value
Method Method Method Method
--------- ---------- --------- ----------
(In thousands, except per share amounts)
Income before income taxes $12,449 $12,149 $23,627 $22,772
Net income $ 8,042 $ 7,727 $15,258 $14,483
Earnings per share:
Basic $ 0.62 $ 0.59 $ 1.18 $ 1.12
Diluted $ 0.58 $ 0.56 $ 1.11 $ 1.06
Cash flow provided by operating activities $10,924 $10,924 $18,764 $18,764
Cash flow used in financing activities $ 1,882 $ 1,882 $(5,053) $(5,053)
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.
10
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) (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
Granted -- --
Forfeited (5,000) $10.61
Expired -- --
Exercised (294,450) $ 6.38
--------- ------
Outstanding at March 31, 2006 1,455,440 $ 8.08 5.6 $31,199
Vested and Expected to Vest at March 31, 2006 1,358,820 $ 8.03 5.4 $29,197
Vested at March 31, 2006 921,300 $ 7.57 5.1 $20,222
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
periods:
Three Months Ended, Six Months Ended,
March 31, 2005 March 31, 2005
------------------- -----------------
Risk-free interest rate 3.67% 3.48%
Dividend yield 0% 0%
Volatility factor of the expected market
price of the Company's common stock 92.13% 91.75%
Expected life of the options 5.5 years 5.5 years
Weighted average grant date fair value
of options granted $10.81 $7.39
No options were granted in the Fiscal 2006 Second Quarter or Year-to-Date
Period. 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 March 31, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $3.0 million.
The weighted average period over which these costs will be amortized is 2.7
years.
The total intrinsic value of stock options exercised was $4.4 million in the
Fiscal 2006 Second Quarter, and $4.6 million in the Fiscal 2006 Year-to-Date
Period. The total intrinsic value of stock options exercised was $0.9 million in
the Fiscal 2005 Second Quarter and Year-to-Date Period.
11
At March 31, 2006, 102,200 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 and warrant exercises resulted in the issuance of 294,810 shares of
Class A Non-voting Common Stock in the Fiscal 2006 Second Quarter, and 310,260
shares in the Fiscal 2006 Year-to-Date Period. The proceeds from the exercises
totaled $1.9 million in the Fiscal 2006 Second Quarter and $1.95 million in the
Fiscal 2006 Year-to-Date Period.
Stock option and warrant exercises resulted in the issuance of 58,658 shares of
Class A Non-voting Common Stock in the Fiscal 2005 Second Quarter, and 61,458
shares in the Fiscal 2005 Year-to-Date Period for total proceeds of $133,000 and
$139,000, respectively.
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 Six Months Ended
March 31, 2005 March 31, 2005
------------------ ----------------
(In thousands,
except per share amounts)
Net income, as reported $3,969 $8,918
Add: share-based employee compensation included
in reported net income, net of related tax effects 95 191
Deduct: total share-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (259) (518)
------ ------
Pro forma net income $3,805 $8,591
====== ======
Earnings per share - basic:
As reported $ 0.32 $ 0.72
Pro forma $ 0.31 $ 0.69
Earnings per share - diluted:
As reported $ 0.29 $ 0.66
Pro forma $ 0.28 $ 0.63
At March 31, 2006, warrants to purchase 22,036 shares of Class A Non-voting
Common Stock and 4,074 shares of Class B Voting 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.
Second Quarter Ended March 31, 2006 vs. Second Quarter Ended March 31, 2005
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended March 31, 2006 and
2005 ("Fiscal 2006 Second Quarter" and "Fiscal 2005 Second Quarter,"
respectively):
Three Months
Ended March 31, (a)
------------------- % or Point
2006 2005 Change (b)
------- ------- ----------
Net revenues:
Sales $47,605 $40,259 18.2%
Pawn service charges 15,453 14,682 5.3%
Payday loan service charges 1,103 7,828 (85.9)%
Credit service fees 14,451 -- 100%
Other 329 329 0.0%
------- -------
Total revenues 78,941 63,098 25.1%
Cost of goods sold 28,337 23,901 18.6%
------- -------
Net revenues $50,604 $39,197 29.1%
======= =======
Other data:
Gross margin on sales 40.5% 40.6% (0.1) pts.
Average annual inventory turnover 3.5x 3.2x 0.3x
Average inventory per pawn location at quarter end $ 109 $ 96 13.5%
Average pawn loan balance per pawn location at quarter end $ 139 $ 143 (2.8)%
Average yield on pawn loan portfolio 149% 144% 5 pts.
Pawn loan redemption rate 79% 79% --
Signature loan bad debt as a percentage of signature loan
revenues 14% 15% (1) pt.
Expenses and income as a percentage of net revenues (%):
Operations 55.1 61.2 (6.1) pts.
Payday loan bad debt and direct transaction expenses 0.8 3.8 (3.0) pts.
Credit service bad debt and direct transaction expenses 3.8 -- 3.8 pts
Administrative 13.2 14.8 (1.6) pts.
Depreciation and amortization 4.2 5.3 (1.1) pts.
Interest expense, net 0.1 0.7 (0.6) pts.
Income before income taxes 24.0 15.8 8.2 pts.
Net income 15.3 10.1 5.2 pts.
Stores in operation:
Beginning of period 523 445
New openings 22 27
Sold, combined, or closed (1) --
------- -------
End of period 544 472
======= =======
Average number of stores during the period 530 456
Composition of ending stores:
EZPAWN locations 281 280
EZMONEY signature loan locations adjoining EZPAWNs 165 135
EZMONEY signature loan locations - free standing 98 57
------- -------
Total stores in operation 544 472
======= =======
EZPAWN locations offering signature loans 83 121
Total locations offering signature loans 346 313
(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
Six Months Ended March 31, 2006 vs. Six Months Ended March 31, 2005
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the six-month periods ended March 31, 2006 and
2005 ("Fiscal 2006 Year-to-Date Period" and "Fiscal 2005 Year-to-Date Period,"
respectively):
Six Months
Ended March 31, (a)
------------------- % or Point
2006 2005 Change (b)
-------- -------- ----------
Net revenues:
Sales $ 89,958 $ 76,583 17.5%
Pawn service charges 31,967 31,351 2.0%
Payday loan service charges 2,255 16,118 (86.0)%
Credit service fees 29,873 -- 100%
Other 658 674 (2.4)%
-------- --------
Total revenues 154,711 124,726 24.0%
Cost of goods sold 53,998 45,814 17.9%
-------- --------
Net revenues $100,713 $ 78,912 27.6%
======== ========
Other data:
Gross margin on sales 40.0% 40.2% (0.2) pts.
Average annual inventory turnover 3.3x 3.0x 0.3x
Average inventory per pawn location at period end $ 109 $ 96 13.5%
Average pawn loan balance per pawn location at period end $ 139 $ 143 (2.8)%
Average yield on pawn loan portfolio 140% 143% (3) pts.
Pawn loan redemption rate 77% 78% (1) pt.
Signature loan bad debt as a percentage of signature loan
revenues 20% 15% 5 pts.
Expenses and income as a percentage of net revenues (%):
Operations 53.8 59.2 (5.4) pts.
Payday loan bad debt and direct transaction expenses 1.1 3.9 (2.8) pts.
Credit service bad debt and direct transaction expenses 5.7 -- 5.7 pts.
Administrative 13.4 14.8 (1.4) pts.
Depreciation and amortization 4.2 5.0 (0.8) pts.
Interest expense, net 0.3 0.8 (0.5) pts.
Income before income taxes 22.6 17.7 4.9 pts.
Net income 14.4 11.3 3.1 pts.
Stores in operation:
Beginning of period 514 405
New openings 30 67
Acquired 1 --
Sold, combined or closed (1) --
-------- --------
End of period 544 472
======== ========
Average number of stores during the period 523 439
Composition of ending stores:
EZPAWN locations 281 280
EZMONEY signature loan locations adjoining EZPAWNs 165 135
EZMONEY signature loan locations - free standing 98 57
-------- --------
Total stores in operation 544 472
======== ========
EZPAWN locations offering signature loans 83 121
Total locations offering signature loans 346 313
(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.
14
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 for only
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 includes the following compensation costs related to our
share-based compensation arrangements:
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2006 2005 2006 2005
---- ---- ----- -----
(in thousands)
Gross compensation costs
Stock options $300 $ -- $ 855 $ --
Restricted stock 19 147 38 294
---- ---- ----- -----
Total gross compensation costs $319 $147 $ 893 $ 294
Income tax benefits
Stock options $ -- $ -- $ (95) $ --
Restricted stock (7) (52) (14) (104)
---- ---- ----- -----
Total income tax benefits $ (7) $(52) $(109) $(104)
---- ---- ----- -----
Net compensation expense $312 $ 95 $ 784 $ 190
==== ==== ===== =====
At March 31, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $3 million. The
weighted average period over which these costs will be amortized is 2.7 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 two quarters of Fiscal 2006. The expense recognized in the first
quarter of Fiscal 2006 was higher than the amount expected for the next two
quarters due to the acceleration of vesting of certain options in that quarter,
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 March 31, 2006), 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 263 EZMONEY stores and 83 EZPAWN locations (as of March 31,
2006), 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.
15
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 reduced its pawn portfolio approximately 15% for the loans in these
stores that were between 60 and 90 days old, with very little or no impact on
earned pawn service charge revenues. This change also created a one-time
doubling of forfeitures as loans made 90 and 60 days earlier simultaneously
forfeited for a 30-day period, resulting in a higher level of inventory
available for sale (beginning inventory plus forfeitures and purchases). In the
67 stores converted in August 2005, the Company experienced this doubling of
forfeitures as loans matured during the quarter ended December 31, 2005. In the
148 stores converted in November 2005, the Company experienced this doubling of
forfeitures as loans matured during the quarter ended March 31, 2006. As a
result, inventory available for sale increased over the prior year period 11%
and 16% for the December and March quarters.
In its pawnshops, the Company acquires inventory for its retail sales 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 March 31, 2006, 225 of the Company's 263
EZMONEY 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 typically
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 Company also offers an optional service to improve or
establish customers' credit histories by reporting their payments to an external
credit-reporting agency. The average loan obtained by the Company's credit
service customers is approximately $460 and the term is generally less than 30
days, averaging about 18 days.
The Company earns payday loan service charge revenue on its payday loans. In 70
of its locations, the Company makes payday loans in compliance with state law.
Through December 2005, 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. 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 now provide credit services to consumers
in obtaining loans from an unaffiliated lender. The average payday loan amount
is approximately $390 and the term is generally less than 30 days, averaging
about 20 days. The service charge per $100 loaned ranges from $15 to $20 for a 7
to 23-day period.
In the Fiscal 2006 Second Quarter compared to the Fiscal 2005 Second 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.
The Company's net income improved to $7.7 million in the Fiscal 2006 Second
Quarter from $4.0 million in the Fiscal 2005 Second Quarter.
RESULTS OF OPERATIONS
Second Quarter Ended March 31, 2006 vs. Second Quarter Ended March 31, 2005
The following discussion compares the results of operations for the Fiscal 2006
Second Quarter to the Fiscal 2005 Second Quarter. The discussion should be read
in conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2006 Second Quarter pawn service charge revenue increased
5.3%, or $0.8 million from the Fiscal 2005 Second Quarter to $15.5 million. This
increase was due to a five percentage point improvement in loan yields to 149%
and a 1.9% higher average pawn loan balance during the Fiscal 2006 Second
Quarter. During the last twelve months, the Company raised its loan values on
gold jewelry in response to an increase in gold market values and similar
changes by its competitors. This contributed approximately $0.5 million to the
increase in pawn service charges in the Fiscal 2006 Second Quarter. Although the
average pawn loan balance was higher, the ending pawn loan balance was 2.6%
lower than at March 31, 2005. The higher yield and lower ending pawn portfolio
16
resulted largely from the conversion of 148 pawn stores from offering 90-day
loan terms to offering 60-day terms, as discussed above.
In the Fiscal 2006 Second Quarter, 114.5% ($17.7 million) of recorded pawn
service charge revenue was collected in cash offset by a $2.2 million decrease
in accrued pawn service charges receivable. In the comparable Fiscal 2005 Second
Quarter, 111.9% ($16.4 million) of recorded pawn service charge revenue was
collected in cash offset by a $1.7 million decrease in accrued pawn service
charges receivable. This pattern is consistent with the seasonal nature of the
pawn lending business. The accrual of pawn service charges is dependent on the
size of the loan portfolio and the Company's estimate of collectible loans in
its portfolio at the end of each quarter. Consistent with prior year treatment,
the Company decreased its estimate of collectible loans at March 31, 2006 in
anticipation of lower loan redemptions following the income tax refund season.
Sales increased $7.3 million in the Fiscal 2006 Second Quarter compared to the
Fiscal 2005 Second Quarter, to $47.6 million. The increase was primarily due to
a $5.5 million increase in same store merchandise sales and a $1.6 million
increase in jewelry scrapping sales driven by increased gold prices. The
increase in merchandise sales is largely due to the higher levels of loan
forfeitures available for sale during the Fiscal 2006 Second Quarter compared to
the Fiscal 2005 Second Quarter. As described above, 148 stores shortened their
pawn loan term from 90 days to 60 days in the Fiscal 2006 Second Quarter. This
created a one-time doubling of pawn loan forfeitures for a thirty-day period in
the affected stores. This doubling of loan forfeitures and a higher average pawn
loan balance produced the higher levels of inventory available for sale. The
table below summarizes the sales volume, gross profit, and gross margins on the
Company's sales:
Quarter Ended March 31,
-----------------------
2006 2005
----- -----
(Dollars in millions)
Merchandise sales $39.0 $33.3
Jewelry scrapping sales 8.6 7.0
----- -----
Total sales $47.6 $40.3
Gross profit on merchandise sales $16.3 $14.3
Gross profit on jewelry scrapping sales $ 3.0 $ 2.0
Gross margin on merchandise sales 41.7% 43.0%
Gross margin on jewelry scrapping sales 35.1% 29.1%
Overall gross margin 40.5% 40.6%
The Fiscal 2006 Second Quarter overall gross margin on sales decreased 0.1 of a
percentage point from the Fiscal 2005 Second Quarter to 40.5%. This resulted
primarily from a 1.3 percentage point decrease in margins on merchandise sales
due to less efficient liquidation of aged general merchandise in the Fiscal 2006
Second Quarter and the resulting increase in the inventory valuation reserve.
During the Fiscal 2006 Second Quarter, the inventory valuation allowance was
increased $0.4 million. In the comparable Fiscal 2005 Second Quarter, the
inventory valuation allowance was increased $0.1 million. Changes in the
inventory valuation allowance are recorded in cost of goods sold, directly
impacting the Company's gross margins. Offsetting the decrease in margins on
merchandise sales was a 6.0 percentage point increase in margins on jewelry
scrapping sales. Inventory shrinkage, included in the merchandise cost of goods
sold, improved to 1.0% of merchandise sales in the Fiscal 2006 Second Quarter,
compared to 1.5% in the Fiscal 2005 Second Quarter.
In the Fiscal 2006 Second Quarter, the Company raised its retail prices on gold
jewelry in response to higher gold values. The Company also increased the amount
it paid to purchase jewelry from customers and loaned on jewelry, which resulted
in a higher cost of goods as those loans defaulted and the collateral was sold.
The net effect increased gross profit on merchandise sales approximately $0.2
million and jewelry scrapping sales approximately $1.4 million. The increase in
gross profit from jewelry scrapping sales was partially offset by a decrease in
the total gold weight scrapped in the Fiscal 2006 Second Quarter compared to the
Fiscal 2005 Second Quarter.
17
Signature loan data are as follows:
Quarter Ended March 31,
-----------------------
2006 2005
------- -------
(Dollars in thousands)
Service charge revenue $15,554 $ 7,828
Bad debt:
Net defaults, including interest and insufficient
funds fees on brokered loans (2,568) (1,209)
Change in valuation allowance 626 (15)
Other related costs, net of insufficient funds fees collected (215) 48
------- -------
Net bad debt (2,157) (1,176)
Direct transaction expenses (168) (319)
Operating expenses at EZMONEY stores (6,318) (2,819)
Depreciation and amortization at EZMONEY stores (308) (140)
Collection and call center costs (included in administrative expense) (383) (393)
------- -------
Contribution to operating income $ 6,220 $ 2,981
======= =======
Average signature loan balance outstanding during quarter (a) $14,600 $ 7,819
Signature loan balance at end of quarter (a) $13,547 $ 7,711
Participating locations at end of quarter 346 313
Signature loan bad debt, as a percent of service charge revenue 14% 15%
Direct transaction expenses, as a percent of service charge revenue 1% 4%
Net default rate (a) (b) 3.3% 2.9%
(a) 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.
(b) 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 increased 99% from the Fiscal 2005 Second
Quarter primarily due to higher average loan balances at existing stores and the
addition of new EZMONEY stores. In the Fiscal 2006 Second Quarter, 104.3% ($16.2
million) of recorded signature loan service charge revenue was collected in
cash, offset by a $0.7 million decrease in accrued signature loan service
charges receivable, as is seasonally expected. In the comparable Fiscal 2005
Second Quarter, 102.4% ($8.0 million) of recorded signature loan service charge
revenue was collected in cash, offset by a $0.2 million decrease in accrued
signature loan service charges receivable.
Although signature loan bad debt increased in dollar terms, it improved to 14%
of related revenues in the Fiscal 2006 Second Quarter, compared to 15% in the
Fiscal 2005 Second Quarter. Direct transaction expenses also improved to 1% of
related revenues, from 4% in the Fiscal 2005 Second Quarter. The higher
transaction expenses in the prior year period related primarily to loans offered
by County Bank, which the Company no longer markets.
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 March
31, 2006, the valuation allowance was 26% of signature loan fees receivable
(4.8% of the outstanding signature loan principal and fees receivable), compared
to 29% of signature loan fees receivable (4.9% of the outstanding signature loan
principal and fees receivable) at March 31, 2005.
Operations expense improved to 55.1% of net revenues ($27.9 million) in the
Fiscal 2006 Second Quarter from 61.2% of net revenues ($24.0 million) in the
Fiscal 2005 Second Quarter. Of the total dollar increase of $3.9 million, $3.5
million related to the growth in EZMONEY stores.
18
Administrative expenses in the Fiscal 2006 Second Quarter were $6.7 million
compared to $5.8 million in the Fiscal 2005 Second Quarter, a decrease of 1.6
percentage points when measured as a percent of net revenue. The dollar increase
was due primarily to a $0.7 million increase in administrative labor and
benefits and a $0.2 million increase in stock compensation recognized as a
result of adopting SFAS No. 123(R), as described above.
Depreciation and amortization expense was $2.1 million in Second Quarter of
Fiscal 2006 and 2005. Depreciation on new assets placed in service was offset by
the reduction of depreciation on assets that became fully depreciated in the
period.
In the Fiscal 2006 Second Quarter, interest expense decreased to $41,000 from
$275,000 in the Fiscal 2005 Second Quarter. The Company had no debt throughout
the Fiscal 2006 Second Quarter, compared to an average debt balance of $14.5
million and an ending debt balance of $6.8 million in the Fiscal 2005 Second
Quarter. Although the Company had no debt outstanding in the Fiscal 2006 Second
Quarter, it paid a $37,500 commitment fee on its line of credit, and amortized
$88,000 of deferred financing costs. These amounts are recorded as interest
expense. These expenses were partially offset by interest earned on invested
cash. The Company's deferred financing costs are now fully amortized; however,
the Company is obligated to pay $37,500 in commitment fee quarterly until its
credit agreement matures April 1, 2007.
The Fiscal 2006 Second Quarter income tax expense was $4.4 million (36.4% of
pretax income) compared to $2.2 million (36.0% of pretax income) for the Fiscal
2005 Second 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 Second Quarter increased $5.7 million from
the Fiscal 2005 Second Quarter to $11.5 million, primarily due to the $3.2
million greater contribution from signature loans, the $2.9 million increase in
gross profit from sales, and the $0.8 million increase in pawn service charges,
offset by a $0.9 million increase in administrative expenses. After a $2.2
million increase in income taxes related to the increased earnings and other
smaller items, net income improved to $7.7 million in the Fiscal 2006 Second
Quarter from $4.0 million in the Fiscal 2005 Second Quarter.
Six Months Ended March 31, 2006 vs. Six Months Ended March 31, 2005
The following discussion compares the results of operations for the Fiscal 2006
Year-to-Date Period to the Fiscal 2005 Year-to-Date Period. The discussion
should be read in conjunction with the accompanying financial statements and
related notes.
The Company's Fiscal 2006 Year-to-Date Period pawn service charge revenue
increased 2.0%, or $1.6 million from the Fiscal 2005 Year-to-Date Period to
$32.0 million. This increase was due to a 4.1% increase in the average pawn loan
balance during the period, offset by a three percentage point decrease in loan
yields, to 140%. During the last twelve months, the Company raised its loan
values on gold jewelry in response to an increase in gold market values and
similar changes by its competitors. This contributed approximately $1.3 million
to the increase in pawn service charges in the Fiscal 2006 Year-to-Date Period.
Although the average pawn loan balance was higher, the ending pawn loan balance
was 2.6% lower than at March 31, 2005. The lower ending pawn portfolio resulted
largely from the Fiscal 2006 conversion of 215 pawn stores from offering 90-day
loan terms to offering 60-day terms, as discussed above.
In the Fiscal 2006 Year-to-Date Period, 109.1% ($34.9 million) of recorded pawn
service charge revenue was collected in cash, offset by a $2.9 million decrease
in accrued pawn service charges receivable. In the Fiscal 2005 Year-to-Date
Period, 103.1% ($32.3 million) of recorded pawn service charge revenue was
collected in cash offset by a $1.0 million decrease in accrued pawn service
charges receivable. This pattern is consistent with the seasonal nature of the
pawn lending business. The ending pawn service charge accrual in the Fiscal 2006
Year-to-Date Period was also affected by the shorter loan term offered in 215
pawn stores. The accrual of pawn service charges is dependent on the size of the
loan portfolio and the Company's estimate of collectible loans in its portfolio
at the end of each quarter. Consistent with prior year treatment, the Company
decreased its estimate of collectible loans at March 31, 2006 in anticipation of
lower loan redemptions following the income tax refund season.
19
Sales increased $13.4 million in the Fiscal 2006 Year-to-Date Period compared to
the Fiscal 2005 Year-to-Date Period, to $90.0 million. The increase was
primarily due to a $9.1 million increase in same store merchandise sales and a
$4.0 million increase in jewelry scrapping sales, driven by increased gold
prices. The increase in merchandise sales is largely due to the higher levels of
loan forfeitures available for sale during the Fiscal 2006 Year-to-Date Period
compared to the Fiscal 2005 Year-to-Date Period. As described above, 215 stores
shortened their pawn loan term from 90 days to 60 days in the Fiscal 2006
Year-to-Date Period. This created a one-time doubling of pawn loan forfeitures
for a thirty-day period in the affected stores. This doubling of loan
forfeitures and a higher average pawn loan balance produced the higher levels of
inventory available for sale. The table below summarizes the sales volume, gross
profit, and gross margins on the Company's sales:
Six Months
Ended March 31,
---------------
2006 2005
----- -----
(Dollars in
millions)
Merchandise sales $74.7 $65.3
Jewelry scrapping sales 15.3 11.3
----- -----
Total sales $90.0 $76.6
Gross profit on merchandise sales $31.1 $27.6
Gross profit on jewelry scrapping sales $ 4.8 $ 3.2
Gross margin on merchandise sales 41.7% 42.2%
Gross margin on jewelry scrapping sales 31.5% 28.4%
Overall gross margin 40.0% 40.2%
The Fiscal 2006 Year-to-Date Period overall gross margin on sales decreased 0.2
of a percentage point from the Fiscal 2005 Year-to-Date Period to 40.0%. The 0.5
of a percentage point decrease in merchandise sales margins was largely offset
by a 3.1 percentage point increase in the gross margin on jewelry scrapping
sales. Included in the Fiscal 2006 Year-to-Date cost of goods sold is a $0.7
million increase in the inventory valuation allowance, compared to a $0.5
million increase in the comparable Fiscal 2005 Year-to-Date Period. Inventory
shrinkage, included in the merchandise cost of goods sold, improved to 1.1% of
merchandise sales in the Fiscal 2006 Year-to-Date Period, compared to 1.6% in
the Fiscal 2005 Year-to-Date Period.
In the Fiscal 2006 Year-to-Date Period, the Company raised its retail prices on
gold jewelry in response to higher gold values. The Company also increased the
amount it paid to purchase jewelry from customers and loaned on jewelry, which
resulted in a higher cost of goods as those loans defaulted and the collateral
was sold. The net effect increased gross profit on merchandise sales
approximately $0.4 million and jewelry scrapping sales approximately $1.8
million.
20
Signature loan data are as follows:
Six Months
Ended March 31,
------------------
2006 2005
-------- -------
(Dollars in
thousands)
Service charge revenue $ 32,128 $16,118
Bad debt:
Net defaults, including interest and insufficient (6,821) (3,447)
funds fees on brokered loans
Change in valuation allowance 867 93
Sale of older bad debt (c) -- 905
Other related costs, net of insufficient funds fees collected (577) 87
-------- -------
Net bad debt (6,531) (2,362)
Direct transaction expenses (330) (742)
Operating expenses at EZMONEY stores (12,508) (5,140)
Depreciation and amortization at EZMONEY stores (563) (243)
Collection and call center costs (included in administrative expense) (755) (732)
-------- -------
Contribution to operating income $ 11,441 $ 6,899
======== =======
Average signature loan balance outstanding during period (a) $ 14,000 $ 7,555
Signature loan balance at end of period (a) $ 13,547 $ 7,711
Participating locations at end of period 346 313
Signature loan bad debt, excluding sale of older bad debt, as a percent of service
charge revenue (c) 20% 20%
Signature loan bad debt, as a percent of service charge revenue 20% 15%
Direct transaction expenses, as a percent of service charge revenue 1% 5%
Net default rate (a) (b) 4.2% 2.9%
Net default rate, excluding sale of older bad debt (a) (b) (c) 4.2% 3.9%
(a) 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.
(b) Principal defaults net of collections, as a percentage of signature loans
made and renewed.
(c) Older bad debts were originated between fiscal 2001 and fiscal 2004.
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 increased 99% from the Fiscal 2005
Year-to-Date Period primarily due to higher average loan balances at existing
stores and the addition of new EZMONEY stores. In the Fiscal 2006 Year-to-Date
Period, 101.1% ($32.5 million) of recorded signature loan service charge revenue
was collected in cash, offset by a $0.4 million decrease in accrued signature
loan service charges receivable. In the comparable Fiscal 2005 Year-to-Date
Period, 99.4% ($16.0 million) of recorded signature loan service charge revenue
was collected in cash, and 0.6% ($0.1 million) was due to an increase in accrued
signature loan service charges receivable.
Signature loan bad debt remained unchanged at 20% of related revenues in the
Fiscal 2006 Year-to-Date Period, compared to the Fiscal 2005 Year-to-Date Period
excluding the sale of older bad debt. In December 2004, 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 benefit of
this sale, signature loan bad debt was 15% of related revenues in the Fiscal
2005 Year-to-Date Period. Generally on a weekly basis, the Company now sells bad
debt as it ages beyond 60 days. The Company believes that, in today's market,
selling this debt is more efficient than other alternatives.
Signature loan direct transaction expenses improved to 1% of related revenues,
from 5% in the Fiscal 2005 Year-to-Date Period. The higher transaction expenses
in the prior year period related primarily to loans offered by County Bank,
which the Company no longer markets.
21
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 March
31, 2006, the valuation allowance was 26% of signature loan fees receivable
(4.8% of the outstanding signature loan principal and fees receivable), compared
to 29% of signature loan fees receivable (4.9% of the outstanding signature loan
principal and fees receivable) at March 31, 2005.
Operations expense improved to 53.8% of net revenues ($54.2 million) in the
Fiscal 2006 Year-to-Date Period from 59.2% of net revenues ($46.7 million) in
the Fiscal 2005 Year-to-Date Period. Of the total dollar increase of $7.5
million, $7.4 million related to the growth in EZMONEY stores.
Administrative expenses in the Fiscal 2006 Year-to-Date Period were $13.5
million compared to $11.7 million in the Fiscal 2005 Year-to-Date Period, a
decrease of 1.4 percentage points when measured as a percent of net revenue. The
dollar increase was due primarily to a $1.4 million increase in administrative
labor and benefits and a $0.6 million increase in stock compensation recognized
as a result of adopting SFAS No. 123(R), as described above.
Depreciation and amortization expense was $4.3 million in the Fiscal 2006
Year-to-Date Period compared to $4.0 million in the Fiscal 2005 Year-to-Date
Period. Depreciation on new assets placed in service, primarily related to the
construction of new EZMONEY stores, exceeded the reduction of depreciation on
assets that became fully depreciated or were retired in the period.
In the Fiscal 2006 Year-to-Date Period, interest expense decreased to $0.3
million from $0.6 million in the Fiscal 2005 Year-to-Date Period. The Company
had an average outstanding debt balance of $3.0 million in the Fiscal 2006
Year-to-Date Period and ended debt-free, compared to an average debt balance of
$18.3 million and ending debt of $6.8 million in the prior year period. The
Company is obligated to pay $37,500 in commitment fee quarterly until its credit
agreement matures April 1, 2007.
The Fiscal 2006 Year-to-Date Period income tax expense was $8.3 million (36.4%
of pretax income) compared to $5.0 million (36.0% of pretax income) for the
Fiscal 2005 Year-to-Date Period. 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 Year-to-Date Period increased $8.4 million
from the Fiscal 2005 Year-to-Date Period to $21.9 million, primarily due to the
$5.2 million increase in gross profit from sales, the $4.5 million greater
contribution from signature loans, and the $0.6 million increase in pawn service
charges, offset by a $1.9 million increase in administrative expenses. After a
$3.3 million increase in income taxes related to the increased earnings and
other smaller items, net income improved to $14.5 million in the Fiscal 2006
Year-to-Date Period from $8.9 million in the Fiscal 2005 Year-to-Date Period.
LIQUIDITY AND CAPITAL RESOURCES
In the Fiscal 2006 Year-to-Date Period, the Company's $18.8 million cash flow
from operations consisted of (i) net income plus several non-cash items,
aggregating to $19.2 million, offset by (ii) $0.4 million of changes in
operating assets and liabilities. In the Fiscal 2005 Year-to-Date Period, the
Company's $11.3 million cash flow from operations consisted of (i) net income
plus several non-cash items, aggregating to $14.5 million, offset by (ii) $3.2
million of changes in operating assets and liabilities, primarily accrued
expenses, federal income taxes, prepaid expenses, and other assets.
The Company's investing activities provided $8.2 million of cash during the
Fiscal 2006 Year-to-Date Period, consisting primarily of the $14.3 million
excess of pawn loan repayments and principal recovery through the sale of
forfeited collateral over pawn loans made and the $0.6 million of dividends
received from an unconsolidated affiliate. Partially offsetting this was $4.4
million invested in property and equipment, $1.6 million used to acquire a pawn
store, and $0.8 million invested in payday loans net of repayments. Cash flows
from operations and investing activities, as well as $1.9 million received from
the exercise of stock options and warrants, funded the $7.0 million debt
reduction during the Fiscal 2006 Year-to-Date Period, and increased the cash on
hand by $21.9 million.
22
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 More than 5
Contractual Obligations Total 1 year 1-3 years 3-5 years years
----------------------- ------- --------- --------- --------- -----------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Interest and commitment fee on
long-term obligations 186 186 -- -- --
Capital lease obligations -- -- -- -- --
Operating lease obligations 98,675 15,362 26,634 19,906 36,773
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
------- ------- ------- ------- -------
Total $98,861 $15,548 $26,634 $19,906 $36,773
======= ======= ======= ======= =======
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 March 31, 2006, the Company's maximum exposure for
losses on letters of credit, if all brokered loans defaulted and none was
collected, was $12.9 million. This amount includes principal, interest, and
insufficient funds fees.
In the remaining six months of the fiscal year ending September 30, 2006, the
Company also plans to open an additional 80 to 90 EZMONEY stores for an expected
aggregate capital expenditure of approximately $3.0 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 March 31, 2006. 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 $28.0 million at March 31, 2006, after
allowing for $12.0 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 March 31, 2006, it remains contractually obligated to pay
the line of credit commitment fee, including $36,000 accrued commitment fee at
March 31, 2006. 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, cash on hand, 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.
23
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 signature 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.
24
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 December 31, 2005 (included in the Company's March 31, 2006
results on a three-month lag as described above) was approximately a $160,000
decrease, net of tax effect, to stockholders' equity. On March 31, 2006, the
U.K. pound strengthened to 1.00 to 1.7398 U.S. dollars from 1.7208 at December
31, 2005. No assurance can be given as to the future valuation of the U.K. pound
and how further movements in the pound could affect future earnings or the
financial position of the Company.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, 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 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.
25
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 March 31, 2006 ("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.
26
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
------- -----------
10.97 Credit Services and Loan Administration Agreement dated
April 11, 2006 between Texas EZPAWN, L.P. and NCP Finance
Limited Partnership
10.98 Guaranty dated April 11, 2006 from EZCORP, Inc. to NCP
Finance Limited Partnership
10.99 Credit Services Organization and Lender Agreement dated
April 12, 2006 between Texas EZMONEY, L.P. and Integrity
Texas Funding, L.P.
10.100 Credit Services Organization and Lender Agreement dated
November 9, 2005 between Texas EZPAWN, L.P. and Integrity
Texas Funding, L.P.
10.101 Credit Services Organization and Lender Agreement dated
November 30, 2005 between EZPAWN Florida, Inc. and Integrity
Florida Funding, L.P.
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
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCORP, INC.
(Registrant)
Date: May 10, 2006 By: /s/ DAN N. TONISSEN
------------------------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer & Director
28
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.97 Credit Services and Loan Administration Agreement dated April 11, 2006
between Texas EZPAWN, L.P. and NCP Finance Limited Partnership
10.98 Guaranty dated April 11, 2006 from EZCORP, Inc. to NCP Finance Limited
Partnership
10.99 Credit Services Organization and Lender Agreement dated April 12, 2006
between Texas EZMONEY, L.P. and Integrity Texas Funding, L.P.
10.100 Credit Services Organization and Lender Agreement dated November 9,
2005 between Texas EZPAWN, L.P. and Integrity Texas Funding, L.P.
10.101 Credit Services Organization and Lender Agreement dated November 30,
2005 between EZPAWN Florida, Inc. and Integrity Florida Funding, L.P.
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
29