================================================================================
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 JUNE 30, 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
----------
EZCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2540145
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1901 CAPITAL PARKWAY, AUSTIN, TEXAS 78746
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (512) 314-3400
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of June 30, 2006, 12,236,124 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.
================================================================================
EZCORP, INC.
INDEX TO FORM 10-Q
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2006, June 30, 2005
and September 30, 2005 ................................................. 1
Condensed Consolidated Statements of Operations for the Three Months and
Nine Months Ended June 30, 2006 and 2005 ............................... 2
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended June 30, 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
June 30, June 30, September 30,
2006 2005 2005
-------- -------- -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 22,731 $ 1,972 $ 4,168
Pawn loans 48,932 50,888 52,864
Payday loans, net 1,966 11,089 1,634
Pawn service charges receivable, net 7,037 9,020 9,492
Payday loan service charges receivable, net 329 2,244 272
Credit service fees receivable, net 3,379 -- 3,007
Inventory, net 32,937 28,956 30,293
Deferred tax asset 8,365 9,711 10,534
Prepaid expenses and other assets 3,340 4,697 1,998
-------- -------- --------
Total current assets 129,016 118,577 114,262
Investment in unconsolidated affiliate 17,870 17,110 17,348
Property and equipment, net 27,283 26,147 26,964
Deferred tax asset, non-current 3,669 4,946 4,012
Other assets, net 3,245 4,205 2,862
-------- -------- --------
Total assets $181,083 $170,985 $165,448
======== ======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 18,517 $ 13,651 $ 18,988
Customer layaway deposits 1,734 1,559 1,672
Federal income taxes payable 752 1,452 648
-------- -------- --------
Total current liabilities 21,003 16,662 21,308
Long-term debt -- 21,900 7,000
Deferred gains and other long-term liabilities 3,339 3,687 3,597
-------- -------- --------
Total long-term liabilities 3,339 25,587 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; 12,245,157
issued and 12,236,124 outstanding at June 30, 2006;
11,465,443 issued and 11,456,410 outstanding at
June 30, 2005; 11,878,458 issued and 11,869,425
outstanding at September 30, 2005 121 115 117
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 121,520 116,932 118,219
Retained earnings 34,805 11,009 14,714
Deferred compensation expense (188) (391) (244)
-------- -------- --------
156,268 127,675 132,816
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Accumulated other comprehensive income 508 1,096 762
-------- -------- --------
Total stockholders' equity 156,741 128,736 133,543
-------- -------- --------
Total liabilities and stockholders' equity $181,083 $170,985 $165,448
======== ======== ========
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
2006 2005 2006 2005
------- ------- -------- --------
(In thousands, except per share amounts)
Revenues:
Sales $40,640 $30,994 $130,598 $107,577
Pawn service charges 15,021 14,722 46,988 46,073
Payday loan service charges 1,347 10,231 3,602 26,349
Credit service fees 16,474 -- 46,347 --
Other 304 303 962 977
------- ------- -------- --------
Total revenues 73,786 56,250 228,497 180,976
Cost of goods sold 23,698 18,421 77,696 64,235
------- ------- -------- --------
Net revenues 50,088 37,829 150,801 116,741
Operating expenses:
Operations 27,402 23,693 81,623 70,384
Payday loan bad debt and direct transaction expenses 635 3,413 1,757 6,517
Credit service bad debt and direct transaction
expenses 5,038 -- 10,777 --
Administrative 6,830 5,506 20,347 17,169
Depreciation and amortization 2,143 2,058 6,402 6,016
------- ------- -------- --------
Total operating expenses 42,048 34,670 120,906 100,086
------- ------- -------- --------
Operating income 8,040 3,159 29,895 16,655
Interest (income) expense, net (150) 302 113 916
Equity in net income of unconsolidated affiliate (557) (505) (1,745) (1,601)
(Gain) loss on sale / disposal of assets (70) 36 (62) 79
------- ------- -------- --------
Income before income taxes 8,817 3,326 31,589 17,261
Income tax expense 3,209 1,197 11,498 6,214
------- ------- -------- --------
Net income $ 5,608 $ 2,129 $ 20,091 $ 11,047
======= ======= ======== ========
Net income per common share:
Basic $ 0.42 $ 0.17 $ 1.54 $ 0.89
======= ======= ======== ========
Diluted $ 0.40 $ 0.16 $ 1.44 $ 0.82
======= ======= ======== ========
Weighted average shares outstanding:
Basic 13,219 12,443 13,058 12,403
Diluted 14,186 13,434 13,974 13,507
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
---------------------
2006 2005
--------- ---------
(In thousands)
Operating Activities:
Net income $ 20,091 $ 11,047
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,402 6,016
Payday loan loss provision 1,491 5,635
Deferred taxes 2,512 --
Net loss on sale or disposal of assets (62) 79
Share-based compensation 1,099 441
Income from investment in unconsolidated affiliate (1,745) (1,601)
Changes in operating assets and liabilities:
Service charges and fees receivable, net 2,045 (1,111)
Inventory, net (387) 208
Prepaid expenses, other current assets, and other assets, net (1,145) (900)
Accounts payable and accrued expenses (461) (1,230)
Customer layaway deposits 46 (86)
Deferred gains and other long-term liabilities (258) (271)
Federal income taxes 138 (591)
--------- ---------
Net cash provided by operating activities 29,766 17,636
Investing Activities:
Pawn loans made (139,049) (123,870)
Pawn loans repaid 76,385 69,892
Recovery of pawn loan principal through sale of forfeited collateral 65,271 53,640
Payday loans made (16,361) (51,642)
Payday loans repaid 14,538 42,210
Additions to property and equipment (6,684) (6,339)
Acquisitions, net of cash acquired (1,590) --
Dividends from unconsolidated affiliate 969 861
Proceeds from sale of assets 98 --
--------- ---------
Net cash used in investing activities (6,423) (15,248)
Financing Activities:
Proceeds from exercise of stock options and warrants 2,220 178
Net payments on bank borrowings (7,000) (3,100)
--------- ---------
Net cash used in financing activities (4,780) (2,922)
--------- ---------
Change in cash and equivalents 18,563 (534)
Cash and equivalents at beginning of period 4,168 2,506
--------- ---------
Cash and equivalents at end of period $ 22,731 $ 1,972
========= =========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 66,834 $ 52,168
Foreign currency translation adjustment $ 254 $ 269
Issuance of common stock to 401(k) plan $ 44 $ 72
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 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 nine-month periods ended June 30, 2006 (the "Fiscal 2006
Third 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 the 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 bad debt, included in
payday loan bad debt and direct transaction expenses, was $0.6 million and $1.5
million, representing 44.7% and 41.4% of payday loan service charges for the
Fiscal 2006 Third Quarter and the Fiscal 2006 Year-to-Date Period. In the
comparable 2005 periods (the "Fiscal 2005 Third Quarter" and the "Fiscal 2005
Year-to-Date Period"), payday loan bad debt was $3.1 million and $5.5 million,
representing 30.7% and 20.9% of service charges in the respective periods.
Excluding the benefit of a $0.9 million sale of older bad debt in December 2004,
bad debt for the nine-month period ended June 30, 2005 was $6.4 million, or
24.3% of service charges during the nine-month period. The Company includes
direct transaction expenses in this financial statement line item. These include
Tele-Track charges, electronic debit fees, and other bank fees amounting to 2.4%
and 7.4% of payday loan service charges for the Fiscal 2006 Third Quarter and
the Fiscal 2006 Year-to-Date Period and 2.6% and 3.8% of payday loan service
charges for the comparable 2005 periods.
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 the loan, the
Company will pay the lender the principal and accrued interest owed it by the
borrower, plus any insufficient funds fee, 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 $4.9 million and $10.6 million, representing 29.9% and
22.8% of credit service fee revenues for the Fiscal 2006 Third Quarter and
Year-to-Date Period. The Company includes direct transaction expenses in this
financial statement line item. These include Tele-Track charges, electronic
debit fees, and other bank fees amounting to 0.7% and 0.4% of credit service fee
revenue for the Fiscal 2006 Third Quarter and the Fiscal 2006 Year-to-Date
Period. The Company had no credit service bad debt or direct transaction
expenses in the fiscal 2005 periods, as it did not offer credit services in
those periods.
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 June 30, 2006, the allowance for Expected
LOC Losses was $1.1 million. At that date, the Company's maximum exposure for
losses on letters of credit, if all brokered loans defaulted and none was
collected, was $17.0 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 June 30, 2006,
June 30, 2005, and September 30, 2005, the valuation allowance deducted from the
carrying value of inventory was $2.5 million, $1.9 million, and $1.9 million
(7.1%, 6.0%, and 5.8% of gross inventory). 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 Third 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.
5
Factors that could trigger an impairment review include the following:
significant underperformance relative to historical or projected future cash
flows; significant changes in the manner of use of the assets or the strategy
for the overall business; and significant negative industry trends. When
management determines that the carrying value of tangible long-lived assets may
not be recoverable, impairment is measured based on the excess of the assets'
carrying value over the estimated fair value. No impairment of tangible
long-lived assets has been recognized in the Fiscal 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 June 30, 2006, June
30, 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 $73.5 million, $65.2 million and $67.2 million at June 30, 2006,
June 30, 2005, and September 30, 2005.
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 Nine Months Ended
June 30, June 30,
------------------ -----------------
2006 2005 2006 2005
------- ------- ------- -------
Net income (A) $ 5,608 $ 2,129 $20,091 $11,047
Weighted average outstanding shares of common stock (B) 13,219 12,443 13,058 12,403
Dilutive effect of stock options, warrants, and restricted stock 967 991 916 1,104
------- ------- ------- -------
Weighted average common stock and common stock equivalents (C) 14,186 13,434 13,974 13,507
======= ======= ======= =======
Basic earnings per share (A/B) $ 0.42 $ 0.17 $ 1.54 $ 0.89
======= ======= ======= =======
Diluted earnings per share (A/C) $ 0.40 $ 0.16 $ 1.44 $ 0.82
======= ======= ======= =======
Anti-dilutive options, warrants, and restricted stock grants have been excluded
from the computation of diluted earnings per share because the assumed proceeds
upon exercise, as defined by SFAS No. 123(R), were greater than the cost to
re-acquire the same number of shares at the average market price, 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 March 31, 2006.
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 Third
Quarter was $5.7 million and comprehensive income for the Fiscal 2006
Year-to-Date Period was $19.8 million. For the comparable 2005 periods,
comprehensive income was $2.0 million and $11.3 million. 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 $0.5 million ($0.8 million, net of tax of $0.3 million) at June 30, 2006.
7
NOTE H: LONG-TERM DEBT
At June 30, 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:
June 30, June 30, September 30,
2006 2005 2005
-------- -------- -------------
(In thousands)
Pawn licenses $1,549 $1,549 $1,549
Goodwill 631 -- --
------ ------ ------
Total $2,180 $1,549 $1,549
====== ====== =====
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible asset at the
specified dates:
June 30, 2006 June 30, 2005 September 30, 2005
----------------------- ----------------------- -----------------------
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
-------- ------------ -------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $(250) $ 345 $(218) $ 345 $(226)
Real estate finders' fees 556 (306) 554 (289) 554 (294)
Non-compete agreements 388 (272) 388 (253) 388 (258)
------ ----- ------ ----- ------ -----
Total $1,289 $(828) $1,287 $(760) $1,287 $(778)
====== ===== ====== ===== ====== =====
Total amortization expense from definite-lived intangible assets for the Fiscal
2006 Third Quarter and Fiscal 2006 Year-to-Date Period was approximately $17,000
and $51,000. 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 June 30, Nine Months Ended June 30,
--------------------------- --------------------------
2006 2005 2006 2005
---- ---- ------ -----
(in thousands)
Gross compensation costs
Stock options $187 $ -- $1,042 $ --
Restricted stock 19 147 57 441
---- ---- ------ -----
Total gross compensation costs $206 $147 $1,099 $ 441
Income tax benefits
Stock options $ -- $ -- $ (95) $ --
Restricted stock (7) (52) (21) (156)
---- ---- ------ -----
Total income tax benefits $ (7) $(52) $ (116) $(156)
---- ---- ------ -----
Net compensation expense $199 $ 95 $ 983 $ 285
==== ==== ====== =====
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 Third Quarter and Fiscal 2005
Year-to-Date Period, $0.1 million and $0.3 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 were
subject to earlier vesting based on the occurrence of certain objectives. The
market value of the restricted stock on the award date was $0.6 million, which
was being amortized over a three-year period based on the Company's initial
expectation that earlier vesting objectives would be met. One-third of the
shares vested January 15, 2005 based on the attainment of the goals for
accelerated vesting. Effective October 1, 2005, the Company determined it no
longer believed the requirements would be met for accelerated vesting of the
remaining unvested shares. Accordingly, the
9
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 Third Quarters, $19,000 and $49,000 was amortized to expense for this
grant. During the Fiscal 2006 and 2005 Year-to-Date Periods, $57,000 and
$147,000 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. Throughout the
nine months ended June 30, 2006, the Company has had 40,000 shares of non-vested
restricted stock awards outstanding, with a weighted average grant-date fair
value of $9.77 per share. No restricted shares have been granted, vested, or
forfeited during the period. At June 30, 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 2.5 years.
The following table summarizes the impact of adopting SFAS No. 123(R) on the
noted items:
Three Months Ended Nine Months Ended
June 30, 2006 June 30, 2006
---------------------- -----------------------
Intrinsic Intrinsic
Value Fair Value Value Fair Value
Method Method Method Method
--------- ---------- ---------- ----------
(In thousands, except per share amounts)
Income before income taxes $ 9,004 $ 8,817 $ 32,631 $31,589
Net income $ 5,795 $ 5,608 $ 21,038 $20,091
Earnings per share:
Basic $ 0.44 $ 0.42 $ 1.61 $ 1.54
Diluted $ 0.40 $ 0.40 $ 1.49 $ 1.44
Cash flow provided by operating activities $11,003 $11,003 $ 29,766 $29,766
Cash flow provided by (used in) financing
activities $ 273 $ 273 $(4,780) $(4,780)
A summary of the option plans' activity for the most recently reported period
follows:
SUMMARY OF OPTION PLANS' ACTIVITY
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (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
Granted -- --
Forfeited (42,600) $ 9.31
Expired -- --
Exercised (34,850) $ 7.79
--------- ------
Outstanding at June 30, 2006 1,377,990 $ 8.05 5.2 $40,839
Vested and Expected to Vest at June 30, 2006 1,269,668 $ 7.97 5.1 $37,735
Vested at June 30, 2006 575,590 $ 6.26 6.1 $18,092
10
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.
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
Year-to-Date Period:
Nine Months
Ended
June 30, 2005
-------------
Risk-free interest rate 3.48%
Dividend yield 0%
Volatility factor of the expected market price of the Company's
common stock 91.75%
Expected life of the options 5.5 years
Weighted average grant date fair value of options granted $7.39
No options were granted in the Fiscal 2006 Third Quarter, the Fiscal 2006
Year-to-Date Period, or the Fiscal 2005 Third Quarter. The Company considered
the contractual life of the options and the past behavior of employees in
estimating the expected life of options granted. The estimated expected life
cannot exceed the contractual term, and cannot be less than the vesting term.
The volatility factor was estimated using the actual volatility of the Company's
stock over the most recently completed time period equal to the estimated life
of each option grant. Although no adjustment was made in the period presented
above, the Company considers excluding from its volatility factor discrete
events which have had a significant effect on its historical volatility but have
a remote chance of recurring.
As of June 30, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $2.7 million.
The weighted average period over which these costs will be amortized is 2.5
years.
The total intrinsic value of stock options exercised was $0.8 million in the
Fiscal 2006 Third Quarter, and $5.4 million in the Fiscal 2006 Year-to-Date
Period. The total intrinsic value of stock options exercised was $0.2 million in
the Fiscal 2005 Third Quarter and $1.1 million Fiscal 2005 Year-to-Date Period.
Under the 2003 Incentive Plan, 142,200 shares were available for grant at June
30, 2006. This plan 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 35,040 shares of
Class A Non-voting Common Stock in the Fiscal 2006 Third Quarter, and 345,300
shares in the Fiscal 2006 Year-to-Date Period. The proceeds from the exercises
totaled $0.3 million in the Fiscal 2006 Third Quarter and $2.2 million in the
Fiscal 2006 Year-to-Date Period.
Stock option and warrant exercises resulted in the issuance of 18,600 shares of
Class A Non-voting Common Stock in the Fiscal 2005 Third Quarter, and 80,058
shares in the Fiscal 2005 Year-to-Date Period for total proceeds of $38,000 and
$178,000.
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:
11
Three Months Ended Nine Months Ended
June 30, 2005 June 30, 2005
------------------ -----------------
(In thousands, except per
share amounts)
Net income, as reported $2,129 $11,047
Add: share-based employee compensation included in reported net income,
net of related tax effects 95 285
Deduct: total share-based employee compensation expense determined
under fair value based method for all awards, net of related tax
effects (260) (778)
------ -------
Pro forma net income $1,964 $10,554
====== =======
Earnings per share - basic:
As reported $ 0.17 $ 0.89
Pro forma $ 0.16 $ 0.85
Earnings per share - diluted:
As reported $ 0.16 $ 0.82
Pro forma $ 0.15 $ 0.78
At June 30, 2006, warrants to purchase 21,846 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.
NOTE K: RECENT PRONOUNCEMENTS: ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). To be recognized in
the financial statements, FIN 48 requires that a tax position is
more-likely-than-not to be sustained upon examination, based on the technical
merits of the position. In making the determination of sustainability, companies
must presume tax positions will be examined by the appropriate taxing authority
with full knowledge of all relevant information. FIN 48 also prescribes how such
benefit should be measured, including the consideration of any penalties and
interest. It requires that the new standard be applied to the balances of tax
assets and liabilities as of the beginning of the period of adoption and that a
corresponding adjustment be made to the opening balance of retained earnings.
FIN 48 will be effective for the Company in the fiscal year ending September 30,
2008. The Company is evaluating the potential effect of FIN 48, but does not
expect it to have a material effect on the Company's consolidated financial
position or results of operations.
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.
Third Quarter Ended June 30, 2006 vs. Third Quarter Ended June 30, 2005
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended June 30, 2006 and
2005 ("Fiscal 2006 Third Quarter" and "Fiscal 2005 Third Quarter"):
Three Months
Ended June 30,(a)
----------------- % or Point
2006 2005 Change(b)
------- ------- ----------
Net revenues:
Sales $40,640 $30,994 31.1%
Pawn service charges 15,021 14,722 2.0%
Payday loan service charges 1,347 10,231 (86.8)%
Credit service fees 16,474 -- 100%
Other 304 303 0.3%
------- -------
Total revenues 73,786 56,250 31.2%
Cost of goods sold 23,698 18,421 28.6%
------- -------
Net revenues $50,088 $37,829 32.4%
======= =======
Other data:
Gross margin on sales 41.7% 40.6% 1.1%
Average annual inventory turnover 3.0x 2.7x 0.3x
Average inventory per pawn location at quarter end $ 118 $ 103 14.6%
Average pawn loan balance per pawn location at quarter
end $ 175 $ 182 (3.8)%
Average yield on pawn loan portfolio 136% 130% 6 pts.
Pawn loan redemption rate 77% 78% (1) pt.
Signature loan bad debt as a percentage of signature
loan revenues 31% 31% (0) pts.
Expenses and income as a percentage of net revenues (%):
Operations 54.7 62.6 (7.9) pts.
Payday loan bad debt and direct transaction expenses 1.3 9.0 (7.7) pts.
Credit service bad debt and direct transaction
expenses 10.1 -- 10.1 pts
Administrative 13.6 14.6 (1.0) pts.
Depreciation and amortization 4.3 5.4 (1.1) pts.
Interest (income) expense, net (0.3) 0.8 (1.1) pts.
Income before income taxes 17.6 8.8 8.8 pts.
Net income 11.2 5.6 5.6 pts.
Stores in operation:
Beginning of period 544 472
New openings 25 12
Sold, combined, or closed (1) (1)
------- -------
End of period 568 483
======= =======
Average number of stores during the period 550 477
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY signature loan locations adjoining EZPAWNs 165 144
EZMONEY signature loan locations - free standing 123 59
------- -------
Total stores in operation 568 483
======= =======
EZPAWN locations offering signature loans 82 112
Total locations offering signature loans 370 315
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
Nine Months Ended June 30, 2006 vs. Nine Months Ended June 30, 2005
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the nine-month periods ended June 30, 2006 and
2005 ("Fiscal 2006 Year-to-Date Period" and "Fiscal 2005 Year-to-Date Period"):
Nine Months Ended
June 30, (a)
------------------- % or Point
2006 2005 Change (b)
-------- -------- ------------
Net revenues:
Sales $130,598 $107,577 21.4%
Pawn service charges 46,988 46,073 2.0%
Payday loan service charges 3,602 26,349 (86.3)%
Credit service fees 46,347 -- 100%
Other 962 977 (1.5)%
-------- --------
Total revenues 228,497 180,976 26.3%
Cost of goods sold 77,696 64,235 21.0%
-------- --------
Net revenues $150,801 $116,741 29.2%
======== ========
Other data:
Gross margin on sales 40.5% 40.3% 0.2%
Average annual inventory turnover 3.2x 2.9x 0.3x
Average inventory per pawn location at period end $ 118 $ 103 14.6%
Average pawn loan balance per pawn location at period
end $ 175 $ 182 (3.8)%
Average yield on pawn loan portfolio 137% 137% (0) pts.
Pawn loan redemption rate 77% 78% (1) pt.
Signature loan bad debt as a percentage of signature
loan revenues 24% 21% 3 pts.
Expenses and income as a percentage of net revenues (%):
Operations 54.1 60.3 (6.2) pts.
Payday loan bad debt and direct transaction expenses 1.2 5.6 (4.4) pts.
Credit service bad debt and direct transaction
expenses 7.1 -- 7.1 pts.
Administrative 13.5 14.7 (1.2) pts.
Depreciation and amortization 4.2 5.2 (1.0) pts.
Interest expense, net 0.1 0.8 (0.7) pts.
Income before income taxes 20.9 14.8 6.1 pts.
Net income 13.3 9.5 3.8 pts.
Stores in operation:
Beginning of period 514 405
New openings 55 79
Acquired 1 --
Sold, combined or closed (2) (1)
-------- --------
End of period 568 483
======== ========
Average number of stores during the period 532 451
Composition of ending stores:
EZPAWN locations 280 280
EZMONEY signature loan locations adjoining EZPAWNs 165 144
EZMONEY signature loan locations - free standing 123 59
-------- --------
Total stores in operation 568 483
======== ========
EZPAWN locations offering signature loans 82 112
Total locations offering signature loans 370 315
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, as more fully described in Note J of the
financial statements included in this report. 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 Nine Months
Ended June 30, Ended June 30,
-------------- --------------
2006 2005 2006 2005
---- ---- ------ -----
(in thousands)
Gross compensation costs
Stock options $187 $ -- $1,042 $ --
Restricted stock 19 147 57 441
---- ---- ------ -----
Total gross compensation costs $206 $147 $1,099 $ 441
Income tax benefits
Stock options $ -- $ -- $ (95) $ --
Restricted stock (7) (52) (21) (156)
---- ---- ------ -----
Total income tax benefits $ (7) $(52) $ (116) $(156)
---- ---- ------ -----
Net compensation expense $199 $ 95 $ 983 $ 285
==== ==== ====== =====
At June 30, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $2.7 million.
The weighted average period over which these costs will be amortized is 2.5
years. Based on current outstanding options, the Company expects to recognize
share-based compensation expense of approximately $0.3 million in the remaining
quarter of Fiscal 2006. The expense recognized in the first quarter of Fiscal
2006 was higher than the amount expected for the other quarters in Fiscal 2006
due to the acceleration of vesting of certain options in that quarter, in
accordance with their terms.
OVERVIEW
The Company is a lender or provider of credit services to individuals who do not
have cash resources or access to credit to meet their short-term cash needs. In
280 EZPAWN locations (as of June 30, 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 288 EZMONEY stores and 82 EZPAWN locations (as of June 30, 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 total
loan term, consisting of the primary term and grace period, ranges between 60
and 120 days.
The Company began reducing the total loan term on pawn loans from 90 days to 60
days in 67 of its pawn locations in August 2005 and another 148 in November
2005. 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
15
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 unaffiliated lenders. At June 30, 2006, 232 of the Company's 288
EZMONEY stores and 51 of the Company's 280 pawn stores offered credit services.
The Company does not participate in the loans made by the lenders, 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 $480 and the term is generally less than 30
days, averaging about 16 days.
The Company earns payday loan service charge revenue on its payday loans. In 87
of its locations, the Company makes payday loans in compliance with state law.
The average payday loan amount is approximately $380 and the term is generally
less than 30 days, averaging about 19 days. The service charge per $100 loaned
ranges from $15 to $22 for a 7 to 23-day period. 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 the locations previously marketing County Bank loans now provide credit
services to consumers in obtaining loans from unaffiliated lenders.
In the Fiscal 2006 Third Quarter compared to the Fiscal 2005 Third Quarter, the
Company saw significant growth in its signature loan contribution and an
increase in the gross profit on sales. Somewhat offsetting these were higher
operating costs, primarily due to newly opened stores, and administrative costs.
The Company's net income improved to $5.6 million in the Fiscal 2006 Third
Quarter from $2.1 million in the Fiscal 2005 Third Quarter.
RESULTS OF OPERATIONS
Third Quarter Ended June 30, 2006 vs. Third Quarter Ended June 30, 2005
The following discussion compares the results of operations for the Fiscal 2006
Third Quarter to the Fiscal 2005 Third Quarter. The discussion should be read in
conjunction with the accompanying financial statements and related notes.
The Company's Fiscal 2006 Third Quarter pawn service charge revenue increased
2.0%, or $0.3 million from the Fiscal 2005 Third Quarter to $15.0 million. This
increase was due to a six percentage point improvement in loan yields to 136%,
partially offset by a 2.7% lower average pawn loan balance during the Fiscal
2006 Third Quarter. During the last fifteen 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 Third Quarter. The
higher yield and lower ending pawn portfolio resulted largely from the
conversion of 215 pawn stores from offering 90-day loan terms to offering 60-day
terms, as discussed above.
In the Fiscal 2006 Third Quarter, 97.1% ($14.6 million) of recorded pawn service
charge revenue was collected in cash, and 2.9% ($0.4 million) resulted from an
increase in accrued pawn service charges receivable. In the comparable Fiscal
2005 Third Quarter, 91.2% ($13.4 million) of recorded pawn service charge
revenue was collected in cash, and
16
8.8% ($1.3 million) resulted from an increase 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 June 30, 2006 in
anticipation of lower loan redemptions following the summer lending season.
Sales increased $9.6 million in the Fiscal 2006 Third Quarter compared to the
Fiscal 2005 Third Quarter, to $40.6 million. The increase was primarily due to a
$3.3 million increase in same store merchandise sales and a $6.1 million
increase in jewelry scrapping sales driven by increased gold prices. The
increase in merchandise sales is largely due to a $9.2 million increase in
inventory available for sale in the period. Greater inventory at the beginning
of the quarter, along with an increase in pawn loans maturing in the Fiscal 2006
Third Quarter, which produced a higher level of loan forfeitures, drove the
increase in inventory available for sale. The table below summarizes the sales
volume, gross profit, and gross margins on the Company's sales:
Quarter Ended
June 30,
-------------
2006 2005
----- -----
(Dollars in
millions)
Merchandise sales $29.6 $26.1
Jewelry scrapping sales 11.0 4.9
----- -----
Total sales $40.6 $31.0
Gross profit on merchandise sales $12.7 $11.3
Gross profit on jewelry scrapping sales $ 4.2 $ 1.2
Gross margin on merchandise sales 43.0% 43.4%
Gross margin on jewelry scrapping sales 38.1% 25.5%
Overall gross margin 41.7% 40.6%
The Fiscal 2006 Third Quarter overall gross margin on sales increased 1.1
percentage points from the Fiscal 2005 Third Quarter to 41.7%. This resulted
primarily from a 12.6 percentage point improvement in margins on jewelry
scrapping sales, offset by a 0.4 percentage point decrease in margins on
merchandise sales. The inventory valuation allowance remained unchanged in the
Fiscal 2006 Third Quarter, compared to a decrease of $0.2 million in the
allowance in the Fiscal 2005 Third Quarter. Absent this change, gross margins on
merchandise sales improved 0.2 of a percentage point. Changes in the inventory
valuation allowance are recorded in cost of goods sold, directly impacting the
Company's gross margins. Inventory shrinkage, included in the merchandise cost
of goods sold, improved to 1.2% of merchandise sales in the Fiscal 2006 Third
Quarter, compared to 1.4% in the Fiscal 2005 Third Quarter.
In the Fiscal 2006 Second Quarter and Third 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 $0.3 million and jewelry scrapping sales
approximately $1.9 million. The increase in gross profit from jewelry scrapping
sales was further improved by scrapping 53% more volume in the Fiscal 2006 Third
Quarter compared to the Fiscal 2005 Third Quarter.
17
Signature loan data are as follows:
Quarter Ended
June 30,
-----------------
2006 2005
------- -------
(Dollars in
thousands)
Service charge revenue $17,821 $10,231
Bad debt:
Net defaults, including interest on brokered loans (4,520) (2,928)
Change in valuation allowance (669) (259)
Other related costs, net of insufficient funds fees collected (342) 44
------- -------
Net bad debt (5,531) (3,143)
Direct transaction expenses (142) (270)
Operating expenses at EZMONEY stores (6,890) (3,687)
Depreciation and amortization at EZMONEY stores (336) (218)
Collection and call center costs (included in administrative expense) (395) (368)
------- -------
Contribution to operating income $ 4,527 $ 2,545
======= =======
Average signature loan balance outstanding during quarter (a) $15,845 $ 9,481
Signature loan balance at end of quarter (a) $17,870 $11,089
Participating locations at end of quarter 370 315
Signature loan bad debt, as a percent of service charge revenue 31% 31%
Direct transaction expenses, as a percent of service charge revenue 1% 3%
Net default rate (a) (b) 5.0% 5.2%
(a) Signature loan balances include payday loans (net of valuation allowance)
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 74% from the Fiscal 2005 Third
Quarter primarily due to higher average loan balances at existing stores and the
addition of new EZMONEY stores. In the Fiscal 2006 Third Quarter, 95.5% ($17.0
million) of recorded signature loan service charge revenue was collected in cash
and 4.5% ($0.8 million) resulted from an increase in accrued service charges
receivable. In the comparable Fiscal 2005 Third Quarter, 93.4% ($9.5 million) of
recorded signature loan service charge revenue was collected in cash and 6.6%
($0.7 million) resulted from an increase in accrued service charges receivable.
Although signature loan bad debt increased, it remained constant at 31% of
related revenues in the Fiscal 2006 Third Quarter, compared to 31% in the Fiscal
2005 Third Quarter. Direct transaction expenses improved to 1% of related
revenues, from 3% in the Fiscal 2005 Third 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 June
30, 2006, the valuation allowance was 39% of signature loan fees receivable
(7.0% of the outstanding signature loan principal and fees receivable), compared
to 33% of signature loan fees receivable (5.6% of the outstanding signature loan
principal and fees receivable) at June 30, 2005.
Operations expense improved to 54.7% of net revenues ($27.4 million) in the
Fiscal 2006 Third Quarter from 62.6% of net revenues ($23.7 million) in the
Fiscal 2005 Third Quarter. Of the total dollar increase of $3.7 million, $3.2
million related to the growth in EZMONEY stores. These increases were comprised
mostly of additional labor, rent, and other increases from new stores.
18
Administrative expenses in the Fiscal 2006 Third Quarter were $6.8 million
compared to $5.5 million in the Fiscal 2005 Third Quarter, a decrease of 1.0
percentage point to 13.6% 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 $0.3 million increase in professional fees and travel.
Depreciation and amortization expense was $2.1 million in Third Quarter of
Fiscal 2006 and 2005. Depreciation on assets placed in service was offset by
assets that became fully depreciated in the period.
In the Fiscal 2006 Third Quarter, the Company earned $0.2 million of interest
income, compared to interest expense of $0.3 million in the Fiscal 2005 Third
Quarter. The Company had an average cash balance of $23.6 million and no debt
throughout the Fiscal 2006 Third Quarter, compared to an average debt balance of
$14.5 million in the Fiscal 2005 Third Quarter. The Company's net interest
income for the Fiscal 2006 Third Quarter is comprised of interest on its
invested cash less fees on its line of credit.
The Fiscal 2006 Third Quarter income tax expense was $3.2 million (36.4% of
pretax income) compared to $1.2 million (36.0% of pretax income) for the Fiscal
2005 Third 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 less a decrease in
expected state taxes and the smaller impact other non-deductible items are
expected to have in relation to increased earnings in the year ending September
30, 2006.
Operating income for the Fiscal 2006 Third Quarter increased $4.9 million from
the Fiscal 2005 Third Quarter to $8.0 million, primarily due to the $4.4 million
increase in gross profit from sales, the $2.0 million greater contribution from
signature loans and the $0.3 million increase in pawn service charges, offset by
a $1.3 million increase in administrative expenses and a $0.5 million increase
in pawn store operating expenses. After a $0.5 million improvement in net
interest, a $2.0 million increase in income taxes related to the increased
earnings, and other smaller items, net income improved to $5.6 million in the
Fiscal 2006 Third Quarter from $2.1 million in the Fiscal 2005 Third Quarter.
Nine Months Ended June 30, 2006 vs. Nine Months Ended June 30, 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 $0.9 million from the Fiscal 2005 Year-to-Date Period to
$47.0 million. This increase was due to a 2.0% increase in the average pawn loan
balance during the period. Loan yields were unchanged at 137%. During the last
fifteen 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 $1.8 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 3.8% lower than at June 30,
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, 105.2% ($49.4 million) of recorded pawn
service charge revenue was collected in cash, offset by a 5.2% ($2.4 million)
decrease in accrued pawn service charges receivable. In the Fiscal 2005
Year-to-Date Period, 99.3% ($45.7 million) of recorded pawn service charge
revenue was collected in cash and 0.7% ($0.4 million) resulted from an increase
in accrued pawn service charges receivable. The ending pawn service charge
accrual in the Fiscal 2006 Year-to-Date Period was lower primarily due to 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 also decreased its estimate of
collectible loans at June 30, 2006 in anticipation of lower loan redemptions
following the summer lending season.
Sales increased $23.0 million in the Fiscal 2006 Year-to-Date Period compared to
the Fiscal 2005 Year-to-Date Period, to $130.6 million. The increase was
primarily due to a $12.4 million increase in same store merchandise sales and a
$10.1 million increase in jewelry scrapping sales, driven by an increase in gold
prices and in the amount of gold scrapped. The increase in merchandise sales is
largely due to the higher levels of loan forfeitures available for sale
19
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:
Nine Months
Ended June 30,
----------------
2006 2005
------ -------
(Dollars in
millions)
Merchandise sales $104.3 $ 91.4
Jewelry scrapping sales 26.3 16.2
------ ------
Total sales $130.6 $107.6
Gross profit on merchandise sales $ 43.9 $ 38.9
Gross profit on jewelry scrapping sales $ 9.0 $ 4.4
Gross margin on merchandise sales 42.1% 42.5%
Gross margin on jewelry scrapping sales 34.3% 27.5%
Overall gross margin 40.5% 40.3%
The Fiscal 2006 Year-to-Date Period overall gross margin on sales improved 0.2
of a percentage point from the Fiscal 2005 Year-to-Date Period to 40.5%. This
resulted primarily from a 6.8 percentage point improvement in margins on jewelry
scrapping sales, offset by a 0.4 percentage point decrease in margins on
merchandise 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
$0.3 million increase in the comparable Fiscal 2005 Year-to-Date Period. Absent
this change, gross margins on merchandise sales were unchanged. Inventory
shrinkage, included in merchandise cost of goods sold, improved to 1.1% of
merchandise sales in the Fiscal 2006 Year-to-Date Period, compared to 1.5% 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 $0.6 million and jewelry scrapping sales approximately $3.6
million. The increase in gross profit from jewelry scrapping sales was further
improved by scrapping 24% more volume in the Fiscal 2006 Year-to-Date Period
compared to the Fiscal 2005 Year-to-Date Period.
20
Signature loan data are as follows:
Nine Months Ended
June 30,
-------------------
2006 2005
-------- --------
(Dollars in
thousands)
Service charge revenue $ 49,949 $26,349
Bad debt:
Net defaults, including interest on brokered loans (11,341) (6,375)
Change in valuation allowance 198 (165)
Sale of older bad debt (c) -- 905
Other related costs, net of insufficient funds fees collected (919) 130
-------- -------
Net bad debt (12,062) (5,505)
Direct transaction expenses (472) (1,012)
Operating expenses at EZMONEY stores (19,314) (8,907)
Depreciation and amortization at EZMONEY stores (898) (461)
Collection and call center costs (included in administrative expense) (1,150) (1,101)
-------- -------
Contribution to operating income $ 16,053 $ 9,363
======== =======
Average signature loan balance outstanding during period (a) $ 15,299 $ 8,310
Signature loan balance at end of period (a) $ 17,870 $11,089
Participating locations at end of period 370 315
Signature loan bad debt, as a percent of service charge revenue 24% 21%
Signature loan bad debt, excluding sale of older bad debt, as a percent
of service charge revenue (c) 24% 24%
Direct transaction expenses, as a percent of service charge revenue 1% 4%
Net default rate (a) (b) 4.5% 3.8%
Net default rate, excluding sale of older bad debt (a) (b) (c) 4.5% 4.4%
(a) Signature loan balances include payday loans (net of valuation allowance)
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 90% 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, 99.1% ($49.5 million) of recorded signature loan service charge revenue
was collected in cash and 0.9% ($0.4 million) resulted from an increase in
accrued signature loan service charges receivable. In the comparable Fiscal 2005
Year-to-Date Period, 97.1% ($25.6 million) of recorded signature loan service
charge revenue was collected in cash and 2.9% ($0.8 million) resulted from an
increase in accrued signature loan service charges receivable.
Signature loan bad debt remained unchanged at 24% 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 21% 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 4% 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 June
30, 2006, the valuation allowance was 39% of signature loan fees receivable
(7.0% of the outstanding signature loan principal and fees receivable), compared
to 33% of signature loan fees receivable (5.6% of the outstanding signature loan
principal and fees receivable) at June 30, 2005.
Operations expense improved to 54.1% of net revenues ($81.6 million) in the
Fiscal 2006 Year-to-Date Period from 60.3% of net revenues ($70.4 million) in
the Fiscal 2005 Year-to-Date Period. Of the total dollar increase of $11.2
million, $10.4 million related to the growth in EZMONEY stores. These increases
were comprised mostly of additional labor, rent, and other increases from new
stores.
Administrative expenses in the Fiscal 2006 Year-to-Date Period were $20.3
million compared to $17.2 million in the Fiscal 2005 Year-to-Date Period, a
decrease of 1.2 percentage points to 13.5% when measured as a percent of net
revenue. The dollar increase was due primarily to a $2.1 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 $6.4 million in the Fiscal 2006
Year-to-Date Period compared to $6.0 million in the Fiscal 2005 Year-to-Date
Period. Depreciation on assets placed in service, primarily related to the
construction of new EZMONEY stores, exceeded the reduction from assets that
became fully depreciated or were retired in the period.
In the Fiscal 2006 Year-to-Date Period, interest expense decreased to $0.1
million from $0.9 million in the Fiscal 2005 Year-to-Date Period. The Company
had an average outstanding debt balance of $2.1 million and an average cash
balance of $14.7 million in the Fiscal 2006 Year-to-Date Period, compared to an
average debt balance of $17.9 million in the prior year period. The Company's
earnings on its invested cash balance in the Fiscal 2006 Year-to-Date Period
offset most of the interest and line of credit fees paid in the period.
The Fiscal 2006 Year-to-Date Period income tax expense was $11.5 million (36.4%
of pretax income) compared to $6.2 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 less a
decrease in expected state taxes and the smaller impact other non-deductible
items are expected to have in relation to increased earnings in the year ending
September 30, 2006.
Operating income for the Fiscal 2006 Year-to-Date Period increased $13.2 million
from the Fiscal 2005 Year-to-Date Period to $29.9 million, primarily due to the
$9.6 million increase in gross profit from sales, the $6.7 million greater
contribution from signature loans, and the $0.9 million increase in pawn service
charges, offset by a $3.2 million increase in administrative expenses and a $0.8
million increase in pawn store operating expenses. After a $5.3 million increase
in income taxes related to the increased earnings, a $0.8 million decrease in
net interest, and other smaller items, net income improved to $20.1 million in
the Fiscal 2006 Year-to-Date Period from $11.0 million in the Fiscal 2005
Year-to-Date Period.
LIQUIDITY AND CAPITAL RESOURCES
In the Fiscal 2006 Year-to-Date Period, the Company's $29.8 million cash flow
from operations consisted of net income plus several non-cash items, primarily
depreciation and the change in deferred taxes. In the Fiscal 2005 Year-to-Date
Period, the Company's $17.6 million cash flow from operations consisted of net
income plus several non-cash items, aggregating to $21.6 million, offset by $4.0
million of changes in operating assets and liabilities, primarily accounts
payable, accrued expenses, service charges receivable, prepaid expenses, and
other current and non-current assets.
The Company's $6.4 million of cash used in investing activities during the
Fiscal 2006 Year-to-Date Period were funded primarily by cash flow from
operations. During the Fiscal 2006 Year-to-Date Period, the Company invested
$6.7 million in property and equipment, $1.8 million in payday loans made net of
repayments, and $1.6 million for
22
the acquisition of a pawn store. Pawn loan repayments and principal recovery
through the sale of forfeited collateral exceeded pawn loans made by $2.6
million, partially offsetting investing cash uses. Further offsetting the
investing cash uses was $1.0 million of dividends received from the Company's
investment in Albemarle and Bond. Cash flows from operations, as well as $2.2
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 cash on hand by $18.6 million.
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations (in thousands):
Payments due by Period
-------------------------------------
Less More
than 1 1-3 3-5 than 5
Contractual Obligations Total year years years years
- ----------------------- -------- ------- ------- ------- -------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Interest and commitment fee on long-term
obligations 149 149 -- -- --
Capital lease obligations -- -- -- -- --
Operating lease obligations 100,151 15,568 26,957 20,274 37,352
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
-------- ------- ------- ------- -------
Total $100,300 $15,717 $26,957 $20,274 $37,352
======== ======= ======= ======= =======
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 June 30, 2006, the Company's maximum exposure for
losses on letters of credit, if all brokered loans defaulted and none was
collected, was $17.0 million. This amount includes principal, interest, and
insufficient funds fees.
In the remaining three months of the fiscal year ending September 30, 2006, the
Company also plans to open approximately 45 EZMONEY stores for an expected
aggregate capital expenditure of approximately $1.6 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 June 30, 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 $24.1 million at June 30, 2006, after
allowing for $15.9 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. The Company remains
contractually obligated to pay the line of credit commitment fee, including
$36,000 accrued commitment fee at June 30, 2006. These amounts are included in
the contractual obligations table above, assuming no borrowings, and that the
current commitment fee will be applicable through the maturity of the credit
agreement on April 1, 2007. Cash and debt balances fluctuate based on cash needs
and the interest rate on debt, if any, varies in response to the Company's
leverage ratio.
The Company anticipates that cash flow from operations and cash on hand 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
23
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.
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 strengthening in the U.K. pound
during the quarter ended March 31, 2006 (included in the Company's June 30, 2006
results on a three-month lag as described above) was approximately a $67,000
increase, net of tax effect, to stockholders' equity. On June 30, 2006, the U.K.
pound strengthened to 1.00 to 1.8163 U.S. dollars from 1.7398 at March 31, 2006.
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 results 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 June 30, 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
- ----------- -----------
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: August 7, 2006 By: /s/ DAN N. TONISSEN
------------------------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer & Director
28
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
29