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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 000-19424
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EZCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2540145
(State or other jurisdiction of (IRS Employer 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
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Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Class A Non-voting Common Stock The Nasdaq Stock Market
$.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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. The aggregate market value
of the Class A Non-voting Common Stock held by non-affiliates of the registrant
as of November 20, 2002, based on the closing price on The Nasdaq Stock Market
on such date, was $34 million.
As of November 20, 2002, 10,976,642 shares of the registrant's Class A
Non-Voting Common Stock, par value $.01 per share and 1,190,057 shares of the
registrant's Class B Voting Common Stock, par value $.01 per share were
outstanding.
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EZCORP, INC.
YEAR ENDED SEPTEMBER 30, 2002
INDEX TO FORM 10-K
Item Page
No. No.
- ---- ----
INTRODUCTION
PART I.
1. Business 3
2. Properties 14
3. Legal Proceedings 16
4. Submission of Matters to a Vote of Security Holders 16
PART II.
5. Market for Registrant's Common Equity and Related Stockholder Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 19
7A. Qualitative and Quantitative Disclosures About Market Risk 28
8. Financial Statements and Supplementary Data 29
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 48
PART III.
10. Directors and Executive Officers of the Registrant 49
11. Executive Compensation 52
12. Security Ownership of Certain Beneficial Owners and Management 56
13. Certain Relationships and Related Party Transactions 58
PART IV.
14. Controls and Procedures 60
15. Financial Statement Schedules, Exhibits, and Reports on Form 8K 60
SIGNATURES AND CERTIFICATIONS
PART I
ITEM 1. BUSINESS
EZCORP, Inc. (the "Company") is a Delaware corporation with its principal
executive offices located at 1901 Capital Parkway, Austin, Texas 78746. Its
telephone number is (512) 314-3400. References to the Company include the
subsidiaries listed in Exhibit 22.1. The Company is primarily engaged in
operating pawnshops which function as convenient sources of consumer credit and
as value-oriented specialty retailers of primarily previously owned merchandise.
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.
GENERAL
The Company's primary activity is the making of small, non-recourse loans
secured by tangible personal property, commonly known as pawn loans. The Company
contracts for a pawn service charge to compensate it for each pawn loan. Pawn
service charges, which generally range from 12% to 300% per annum, are
calculated based on the dollar amount and duration of the loan. In the
twelve-month periods ended September 30, 2000, 2001, and 2002 ("Fiscal 2000",
"Fiscal 2001," and "Fiscal 2002"), approximately 77%, 76%, and 76% of the pawn
loans made by the Company were redeemed in full or were renewed or extended
through the payment of accrued pawn service charges. In most states in which the
Company operates, collateral is held one month with a 60-day grace period, after
which the collateral is forfeited.
A secondary, but related, activity of the Company is the sale of merchandise.
The Company acquires inventory for its retail sales primarily through pawn loan
forfeitures and, to a lesser extent, through purchases from customers and
wholesale distributors. The realization of gross profit on sales of inventory
primarily depends on the Company's initial assessment of the property's resale
value. Improper assessment of the resale value of the collateral in the lending
function can result in reduced marketability of the property and the realization
of a lower margin. During Fiscal 2000, 2001, and 2002, the Company realized
gross margins on sales of 37%, 39%, and 36%.
The Company also offers unsecured loans, commonly referred to as "payday loans"
or "payroll advances" in most of its pawnshops. Introduced in March 2001, this
product continues to mature as the customer base grows. Payroll advances are
made based on a customer's credit history and generally are made for periods of
less than 30 days, averaging about 15 days, for a service charge of $18 to $30
per $100 loaned. When measured as a percentage of loans made, the Company
experienced payroll advance net default rates of 8.1% and 6.9% during Fiscal
2001 and 2002, respectively.
The following components comprised the Company's net revenues (total revenues
less cost of goods sold):
Fiscal Year Ended September 30,
-------------------------------
2000 2001 2002
---- ---- ----
Pawn service charges 53% 51% 51%
Gross profit from merchandise sales 49% 48% 42%
Gross profit from jewelry wholesaling and scrapping (2%) (1%) -
Payroll advance service charges - 2% 7%
--- --- ---
Net revenues 100% 100% 100%
The pawnshop industry in the United States is large and highly fragmented. The
industry consists of over 10,000 pawnshops owned primarily by independent
operators who typically own one to three locations. The Company, with 280
locations, is the second largest operator of pawnshops in the United States;
3
while the three largest pawnshop operators, including the Company, account for
less than ten percent of the estimated pawnshops.
As of November 20, 2002, the Company operated 280 locations: 181 in Texas, 24 in
Colorado, 20 in Oklahoma, 18 in Florida, 15 in Indiana, 8 in Alabama, 4 in
Nevada, 3 in Tennessee, 3 in Louisiana, 3 in Mississippi, and 1 in Arkansas.
LENDING ACTIVITIES
The Company is primarily engaged in the business of making pawn loans, which
typically are relatively small, non-recourse loans secured by pledges of
tangible personal property. As of September 30, 2002, the Company had
approximately 675,000 loans outstanding, representing an aggregate principal
balance of $49.2 million. The Company contracts for a pawn service charge to
compensate it for a pawn loan. A majority of the Company's pawn loans are in
amounts that permit pawn service charges of 20% per month or 240% per annum. For
Fiscal 2002, pawn service charges accounted for approximately 29% of the
Company's total revenues and 51% of its net revenues.
Collateral for the Company's pawn loans consists of tangible personal property,
generally jewelry, consumer electronics, tools, sporting goods, and musical
instruments. The Company does not investigate the creditworthiness of a pawn
customer, but relies on the estimated resale value of the pledged property, the
perceived probability of its redemption, and the estimated time required to sell
the item as a basis for its lending decision. The amount that the Company is
willing to lend generally ranges from 20% to 65% of the pledged property's
estimated resale value depending on an evaluation of these factors. The sources
for the Company's determination of the resale value of collateral include the
Company's computerized valuation software, catalogues, newspaper advertisements,
and previous sales of similar merchandise.
The pledged property is held through the term of the loan, which in Texas is one
month with an automatic 60-day grace period, unless repaid, renewed, or extended
earlier. The Company seeks to maintain a redemption rate (the percent of loans
made that are redeemed, renewed, or extended) between 70% and 80%, and in each
of the Company's last three fiscal periods, it achieved this targeted redemption
rate. The redemption rate is maintained through lending guidelines and proper
implementation of the lending guidelines at the store level. If a borrower does
not repay, extend, or renew a loan, the collateral is forfeited to the Company
and then becomes inventory available for sale in the Company's pawnshops. The
Company does not record loan losses or charge-offs of pawn loans because the
principal amount of an unpaid loan becomes the inventory carrying cost of the
forfeited collateral. The Company evaluates the salability of inventory and
provides an allowance for valuation of inventory, based on the type of
merchandise, recent sales trends and margins, and the age of merchandise.
The table below shows the dollar amount of pawn loan activity by the Company for
the fiscal years ended September 30, 2000, 2001 and 2002:
Fiscal Year Ended September 30,
--------------------------------
2000 2001 2002
------- ------- -------
(dollars in millions)
Loans made $ 187.6 $ 185.1 $ 189.0
Loans repaid (122.2) (113.8) (113.7)
Loans forfeited (71.8) (71.1) (73.2)
Loans acquired (sold) (0.6) - -
------- ------- -------
Net increase (decrease) in pawn loans outstanding
at the end of the year $ (7.0) $ 0.2 $ 2.1
The realization of gross profit on sales of inventory primarily depends on the
Company's initial assessment of the property's resale value. Improper assessment
of the resale value of the collateral in the lending function can result in
reduced marketability of the property and the realization of a lower margin.
Jewelry, which constitutes approximately 60% of the principal amount of items
pledged, can be
4
evaluated primarily based on weight, carat content, and value of gemstones, if
any. The other items pawned typically consist of consumer electronics, tools,
sporting goods, and musical instruments. These can be evaluated based on recent
sales experience and the selling price of similar new merchandise, adjusted for
age, wear, and obsolescence. During Fiscal 2000, 2001, and 2002, the Company
realized gross margins on sales of 37%, 39%, and 36%.
At the time a pawn transaction is made, a pawn loan agreement, commonly referred
to as a pawn ticket, is delivered to the borrower. It sets forth, among other
things, the name and address of the pawnshop and the borrower, the borrower's
identification number from his driver's license, military identification or
other government issued identification, the date of the loan, an identification
and description of the pledged goods (including applicable serial numbers), the
amount financed, the pawn service charge, the maturity date of the loan, the
total amount that must be paid to redeem the pledged goods, and the annual
percentage rate.
Of the Company's 280 operating locations as of November 20, 2002, 181 were
located in Texas. Accordingly, Texas pawnshop laws and regulations govern most
of the Company's operations. In Texas, pawnshop operations are regulated by the
Office of the Consumer Credit Commissioner in accordance with Chapter 371 of the
Texas Finance Code, commonly known as the Texas Pawnshop Act (the "Pawnshop
Act") and Rules of Operation for Pawnshops (the "Rules"). See "Regulation".
The maximum allowable pawn service charges for stratified loan amounts made in
the State of Texas are set in accordance with Texas law under the Pawnshop Act.
Historically, the maximum allowable pawn service charges under Texas law have
not changed; however, the stratified loan amounts have been adjusted upward most
years. The maximum allowable pawn service charges under the Pawnshop Act for the
various stratified loan amounts have not changed since September 1, 2001, and
are as follows:
SCHEDULE OF APPLICABLE LOAN SERVICE CHARGES FOR TEXAS
Maximum
Allowable Annual
Amount Financed per Pawn Loan Percentage Rate
- ----------------------------- ----------------
September 1, 2001 to
June 30, 2002
$1 to $150 240%
$151-$1,000 180%
$1,001-$1,500 30%
$1,501 to $12,500 12%
Under Texas law, there is a ceiling on the maximum allowable pawn loan. For the
year ended June 30, 2001, the loan ceiling was $12,000. From July 1, 2001 to
June 30, 2003, the loan ceiling is $12,500. The Company's average loan amount at
the end of Fiscal 2002 was approximately $73.
In addition to pawn loans, the Company offers unsecured loans, commonly referred
to as "payroll advances", or "payday loans" in most of its pawnshops. In a
limited number of locations, the Company makes the payroll advances. In most
locations, the Company markets and services payroll advances made by County
Bank, a federally insured Delaware bank. After origination of the payroll
advances, the Company may purchase an 85% participation in the loans made by
County Bank and marketed by the Company. Payroll advance terms are generally
less than 30 days, averaging about 15 days. The service charge per $100 loaned
is typically $18 per 14-day period, but varies in certain locations. The loans
and related service charges reported in the Company's consolidated financial
statements reflect only the Company's participation interest in these loans.
Unlike pawn loans, payroll advances are unsecured. The Company considers a loan
defaulted if the loan has not been repaid or refinanced by the maturity date.
Although defaulted loans may be collected through subsequent collection efforts,
the Company charges defaulted loans' principal to bad debt upon default. The
principal amount collected is recorded as a reduction of bad debt at the time of
collection.
5
Accrued service charges related to defaulted loans are deducted from service
charge revenue upon loan default, and increase service charge revenue upon
collection. The Company provides for a valuation allowance on both the principal
and service charges receivable based on recent default and collection
experience. At September 30, 2002, the valuation allowance was 5.6% of the
payroll advance loan principal and service charges receivable. The Company's
payroll advance loan balance represents the principal amount of all active
(non-defaulted) loans net of this valuation allowance.
RETAIL ACTIVITIES
Jewelry sales represent approximately half of the Company's total sales with the
remaining sales consisting primarily of consumer electronics, tools, sporting
goods, and musical instruments. The Company believes its ability to offer
quality used merchandise at prices significantly lower than original retail
prices attracts value-conscious customers. During the three most recent fiscal
years, sources of inventory additions were:
Fiscal Year Ended September 30,
-------------------------------
2000 2001 2002
---- ---- ----
Forfeited pawn loan collateral 89% 91% 89%
Purchases from the general public and wholesalers 11% 9% 11%
For Fiscal 2000, 2001, and 2002, retail activities and jewelry scrapping
accounted for approximately 71%, 69%, and 67% of the Company's total revenues,
or 47%, 47%, and 42% of the Company's net revenue, after deducting cost of goods
sold on merchandise sales.
Analysis of the sales and inventory data provided by the Company's management
information systems facilitates the design and development of promotional and
merchandising programs and merchandise pricing decisions. Regional and area
managers implement these promotional and merchandising programs, review
merchandise pricing decisions, and balance inventory levels within markets.
The Company does not give prospective buyers warranties on merchandise sold
through its retail operations, except for certain purchases of new,
wholesale-purchased merchandise, which may have a limited manufacturer's
warranty. Customers may purchase an item on layaway, whereby a customer will
typically pay a layaway deposit of a minimum of 20% of an item's purchase price.
The Company will hold the item for a 90-day period during which the customer is
required to pay for the item in full. Layaways are not recorded as sales until
the layaway is paid in full. The initial deposit and subsequent payments are
recorded as customer layaway deposits. As of September 30, 2002, the Company had
$2.2 million in customer layaway deposits.
The Company's overall inventory is stated at the lower of cost or market. The
Company provides inventory reserves for shrinkage and cost in excess of market
value. The Company estimates these reserves through study and analysis of sales
trends, inventory turnover, inventory aging, margins achieved on recent sales,
and shrinkage. Valuation allowances, including shrinkage reserves, amounted to
$2.2 million (including a $1.1 million restructuring related inventory reserve),
$1.1 million, and $1.7 million as of September 30, 2000, 2001, and 2002. At
September 30, 2002, total inventory on hand was $32.1 million, after deducting
the inventory valuation allowance.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. Due primarily to significant loan redemptions and sales in the income
tax refund season, the Company's cash flow is greatest in its second fiscal
quarter.
6
OPERATIONS
STORE MANAGEMENT
A typical Company store employs five to six people consisting of a manager, an
assistant manager, and three to four sales and lending representatives. Store
managers are specifically responsible for ensuring that their store is run in
accordance with the Company's established policies, procedures, and operating
guidelines. Each store manager reports to one of 34 area managers who are
responsible for the stores within a specific operating area. Area managers are
responsible for the performance of all stores within their area and report to
one of four regional directors. Area managers, store managers, and assistant
managers receive incentive compensation based on their region, area, or store
performance to an operating budget. This incentive compensation typically ranges
between 5% and 15% of their total compensation, plus a gain-sharing component
for store and area managers whose stores exceed planned levels of earnings.
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS
The Company has a store level point of sale (POS) system that automates the
recording of most store-level transactions. Financial summary data from all
stores is processed at the corporate office each day and is available for
management review by early morning for the preceding day's transactions. This
information is available to field management via the Company's internal network.
The Company's communications network provides access to each store from the
corporate offices. The Company has completed the development of a new,
three-tier architecture, store-level system. This new system provides additional
store level functionality, increases service offerings, enhances reporting and
controls, and provides software and hardware scalability. The company installed
this new system in 51 of its stores in Fiscal 2001 and 82 additional stores in
Fiscal 2002. As of November 20, 2002, the new system is installed in 253 stores.
The Company plans to complete the rollout of this new system to its remaining
locations by March 2003.
The Company has an internal audit staff of approximately 20 employees to help
ensure that the Company's policies and procedures are consistently followed. In
addition, the audit department monitors the Company's perpetual inventory
system, lending practices, and regulatory compliance.
HUMAN RESOURCES
As of September 30, 2002, the Company employed approximately 1,900 people. The
Company believes that its success is dependent upon its employees' ability to
make loans that achieve optimum redemption rates, to sell retail merchandise
effectively, and to provide prompt and courteous customer service. The Company
seeks to hire people who will become long-term, career employees. To achieve the
Company's long-range personnel goals, it strives to develop its employees
through a combination of learner-controlled instruction, classroom training, and
supervised on-the-job loan and sales training for new employees. All store
associates go through competency checks and all new employees go through a
learner-controlled instruction program. Managers attend on-going management
skills and operations performance training, which includes effectively
motivating employees and increasing store profitability. The Company's
management believes that its managers, at all levels, are the principal trainers
in the organization.
The Company anticipates that store manager candidates will be promoted primarily
from the ranks of existing store employees. The Company's career development
plan develops and advances employees within the Company, and provides training
for the efficient integration of experienced retail managers and pawnbrokers
from outside the Company.
In Texas, each pawnshop employee must be licensed in order to make loans.
Employee pawnshop licenses are renewed annually. The licensing process and
renewals both include a review of each individual's background.
7
TRADE NAME
At November 20, 2002, the Company operated all of its pawnshops under the name
"EZ Pawn," which is registered with the United States Patent and Trademark
Office. Additionally, the Company operates under the trade names EZMoney Payroll
Advance, Payroll Advance Express, and EZCORP Collection Center.
STORE LOCATIONS
Below is a summary of changes in store locations during Fiscal 2000, 2001, and
2002:
Fiscal Year Ended September 30,
-------------------------------
2000 2001 2002
---- ---- ----
Store count at beginning of fiscal year 331 313 283
New stores opened 5 - -
Stores closed pursuant to restructuring plan (23) (24) -
Stores closed or consolidated - (1) (1)
Stores sold as operating businesses - (5) (2)
--- --- ---
Store count at end of fiscal year 313 283 280
During Fiscal 2000, the Company made the decision to close 54 under-performing
stores as part of a restructuring. In Fiscal 2001, the Company decided not to
close seven of the 54 stores targeted for closure due to their improved
operating performance. On an ongoing basis, the Company may close or consolidate
under performing store locations as it did in Fiscal 2001 and 2002. In Fiscal
2001 and 2002, the Company sold its seven California operating locations to a
California based check cashing chain.
The five stores opened by the Company in Fiscal 2000 required an average gross
investment (including inventory, pawn loans, property, plant, and equipment) of
approximately $500,000 per pawnshop during the first 12 months of operation.
The Company does not expect to open any new locations in the fiscal year ending
September 30, 2003. The Company's ability to add new stores is dependent on
several variables, such as the availability of acceptable sites or acquisition
candidates, the regulatory environment, and the availability of qualified
personnel. The Company's ability to add newly established stores in Texas
counties having a population of 250,000 or more has been adversely affected by
Texas law which provides that, in counties with 250,000 or more residents,
applications for new licenses will be approved only at proposed locations which
are not less than two miles from another licensed pawnshop and applications to
relocate a licensed pawnshop will be approved only for proposed locations which
are not less than one mile from another licensed pawnshop. Any existing store
may relocate to within one mile of its present location, regardless of the
existence of other pawnshops. The Company's ability to add newly established
stores in such counties may be adversely affected by such regulation. See
"Regulation".
COMPETITION
The Company encounters significant competition in connection with the operation
of its business. These competitive conditions may adversely affect the Company's
revenues, profitability, and its ability to expand. In connection with the
lending of money, the Company competes primarily with other pawnshops. The
Company believes that the primary elements of competition in the pawnshop
business are store location, the ability to loan competitive amounts on items
pawned, management of store-level employees, and the quality of customer
service. In addition, the Company believes that the ability to compete
effectively will be based increasingly on strong general management, regional
market focus, automated management information systems, and access to capital.
Some of the Company's competitors may have greater financial resources than the
Company.
To a certain extent, the Company also competes with other types of financial
institutions such as consumer finance companies and payroll advance lenders.
Other lenders lend money on an unsecured basis, at interest rates that may be
lower than the service charges of the Company, and on other terms that may be
more favorable than those offered by the Company.
8
The Company's competitors, in connection with the sale of merchandise, include
numerous retail and wholesale stores, including jewelry stores, discount retail
stores, consumer electronics stores, other pawnshops, other retailers of
previously owned merchandise, electronic commerce retailers, and auction sites.
Competitive factors in the Company's retail operations include the ability to
provide the customer with a variety of merchandise at an exceptional value. On a
retail level, the Company competes with numerous other retailers who have
significantly greater financial resources than the Company.
STRATEGIC INVESTMENT
In 1998, the Company acquired 29.5% of the outstanding shares of Albemarle &
Bond Holdings plc ("A&B"). The Company's interest was 28.9% at June 30, 2002,
the most recent date for which A&B has published results. As its largest
shareholder, the Company holds two seats on A&B's board of directors. A&B is a
publicly traded company based in Bristol, England and trades on the Alternative
Investment Market of the London Stock Exchange. At June 30, 2002, A&B operated
51 locations in the United Kingdom that offer pawn loans, payroll advances,
check cashing, and retail jewelry. For A&B's 2002 fiscal year, which ended June
30, 2002, A&B's operating profit increased 43% over the prior year to
approximately Pound Sterling 4.2 million.
The Company accounts for its investment in A&B under the equity method. In
Fiscal 2002, the Company's equity interest in A&B's income was $604,000, after
$453,000 of goodwill amortization. At November 20, 2002, the market value of the
Company's investment was approximately $16.0 million, based on the closing price
and exchange rates on that date while the book value of the Company's investment
in A&B was $13.3 million.
REGULATION
PAWNSHOP OPERATIONS
The Company's pawnshop operations are subject to extensive regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations. Additionally, in many states in which the Company
operates, pawnshops are subject to local regulation at the municipal and county
level. The laws of Texas, Colorado, Oklahoma, Indiana, Florida, Alabama, and
Nevada govern the majority of the Company's pawnshop operations. A summary of
the state pawnshop statutes and regulations governing the majority of the
Company's pawnshops are discussed below.
TEXAS REGULATIONS
The Texas Pawnshop Act and the related Rules of Operation for Pawnshops govern
Texas pawnshops. Pawnshop and pawnshop employees are licensed and supervised by
the Office of Consumer Credit Commissioner ("OCCC").
To be eligible for a license to operate a pawnshop in Texas, an applicant must:
(i) be of good moral character, which in the case of a business entity applies
to each officer, director, and holder of five percent or more of the entity's
outstanding shares; (ii) have net unencumbered assets (as defined in the Texas
Pawnshop Act) of at least $150,000 readily available for use in conducting the
business of each licensed pawnshop; (iii) demonstrate that the applicant has the
financial responsibility, experience, character, and general fitness to command
the confidence of the public in its operation; and (iv) demonstrate that the
pawnshop will be operated lawfully and fairly. Additionally, the pawnshop
employee application inquires about individual applicants' credit history and
criminal record.
For a new license application in any Texas county, the OCCC provides notice of
the application and the opportunity for a public hearing to the other licensed
pawnshops in the county in which the applicant proposes to operate. In counties
with 250,000 or more people, applications for new licenses are approved only at
locations that are not less than two miles from another licensed pawnshop, and
applications to relocate a license are approved only for locations that are not
less than one mile from another licensed pawnshop. Any existing store may
relocate to within one mile of its present location, regardless of the existence
of other pawnshops. The Company's ability to open new stores or relocate
existing stores may be adversely affected by the licensing provisions of the
Texas Pawnshop Act.
9
The Texas Pawnshop Act also contains provisions related to the operation of
pawnshops and authorizes the issuance of administrative rules called the Rules
of Operation of Pawnshops (the "Rules"). The Rules regulate the day-to-day
management of the Company's pawnshops including the maximum pawn service charge
and principal loan amount.
Pawn service charges vary based on stratified loan amounts. Historically, the
maximum allowable pawn service charge rates have not changed; however, the
stratified loan amounts have been adjusted upward generally on an annual basis.
A table of the maximum allowable pawn service charges under the Texas Pawnshop
Act for the various stratified loan amounts is presented in "Lending
Activities". Under Texas law, there is a ceiling on the maximum allowable pawn
loan. For the period July 1, 2001 through June 30, 2003, the loan ceiling is
$12,500. Texas requires pawn transactions to be reported to local authorities.
Under the Texas Pawnshop Act and the Rules, a pawnbroker may not do any of the
following: (i) accept a pledge from a person under the age of 18 years; (ii)
make any agreement requiring the personal liability of the borrower; (iii)
accept any waiver of any right or protection accorded to a pawn customer; (iv)
fail to exercise reasonable care to protect pledged goods from loss or damage;
(v) fail to return pledged goods to a pawn customer upon payment of the full
amount due; (vi) make any charge for insurance in connection with a pawn
transaction; (vii) enter into any pawn transaction that has a maturity date of
more than one month; (viii) display for sale in storefront windows or sidewalk
display cases pistols, swords, canes, blackjacks or similar weapons; (ix)
purchase used or second hand personal property unless a record is established
containing the name, address, and identification of the seller, a complete
description of the property, including serial number and a signed statement that
the seller has the right to sell the property; or, (x) accept into pawn or
purchase stolen goods.
The OCCC may, after notice and hearing, suspend or revoke any license for a
Texas pawnshop or employee upon finding that: (i) any fees or charges have not
been paid; (ii) the licensee has violated (knowingly or unknowingly without due
care) any provisions of the Texas Pawnshop Act or any regulation or order; or
(iii) any fact or condition exists which, if it had existed at the time the
original application was filed for a license, would have justified the OCCC in
refusing the license.
COLORADO REGULATIONS
Colorado law requires pawnbrokers to be licensed and bonded. It also requires
that pawn transactions be reported to local authorities and that certain
bookkeeping records be maintained. Under Colorado law, the maximum allowable
pawn service charge is 240% annually for pawn loans up to $50, and 120% annually
for pawn loans of $50 or more. Pawnshops in Colorado are also subject to local
regulation and supervision.
OKLAHOMA REGULATIONS
The Oklahoma Pawnshop Act governs the Company's Oklahoma pawnshops. Following a
statutory scheme similar to the Texas Pawnshop Act, the Oklahoma Pawnshop Act
requires pawnbrokers to be licensed and bonded and regulates the day-to-day
operation of the pawnshops. The Oklahoma Administrator of Consumer Credit
administers the Oklahoma Pawnshop Act and has broad rule-making authority.
Additionally, the Oklahoma Administrator of Consumer Credit is responsible for
investigating the general fitness of pawnshop applicants. Each applicant is
required to (i) be of good moral character; (ii) have net assets of at least
$25,000; (iii) show that the pawnshop will be operated lawfully and fairly; and
(iv) not have been convicted of any felony that directly relates to the duties
and responsibilities of pawnbrokering. Unlike Texas, Oklahoma pawnshop employees
are not individually licensed.
In general, the Oklahoma Pawnshop Act prescribes stratified loan amounts and
maximum rates of service charges which pawnbrokers in Oklahoma may charge for
lending money. The regulations provide for a graduated rate structure, similar
to the structure used for federal income tax purposes. Under this rate
structure, a $500 loan, for example, earns interest as follows: (i) the first
$150 at 240% annually, (ii) the next $100 at 180% annually, and (iii) the
remaining $250 at 120% annually. The maximum allowable pawn service charges for
the various stratified loan amounts under the Oklahoma statute are as follows:
10
Maximum Allowable
Amount Financed Annual Percentage
Per Pawn Loan Rate
----------------- -----------------
$1 to $150 240%
$151 to $250 180%
$251 to $500 120%
$501 to $1,000 60%
$1,001 to $25,000 36%
The principal amount of an Oklahoma pawn loan may not exceed $25,000 per
transaction.
FLORIDA REGULATIONS
Florida pawnshops are governed by the Florida Pawnbrokering Act and accompanying
regulations. The Division of Consumer Services of the Department of Agriculture
and Consumer Services licenses and regulates pawnshops.
The Florida Pawnbrokering Act and regulations require that the pawnshop complete
a Pawnbroker Transaction Form showing the customer name, type of item pawned,
the amount of the pawn loan, and the applicable finance charges. A copy of each
form must be delivered to local law enforcement officials at the end of each
business day.
Pawn loans in Florida typically have a 30-day term. The pawnbroker is entitled
to charge two percent of the amount financed for each 30 day period as interest,
and an additional amount as pawn service charges, provided the total amount of
such charge, inclusive of interest, does not exceed 25% of the amount financed
for each 30 day period in a pawn transaction. The pawnbroker may charge a
minimum pawn service charge of $5.00 for each 30-day period. Pawn loans may be
extended by agreement, with the charge being one-thirtieth of the original total
pawn service charge for each day by which the loan is extended. For loans
redeemed greater than 60 days after the date made, pawn service charges continue
to accrue at the daily rate of one-thirtieth of the original total pawn service
charge.
The Pawnbrokering Act prohibits pawnbrokers from: (i) falsifying or failing to
make entries in pawn transaction forms, (ii) refusing to allow appropriate law
enforcement officials to inspect their records, (iii) failing to maintain
records of pawn transactions for at least two years, (iv) making any agreement
requiring the personal liability of a pawn customer, failing to return pledged
goods upon payment in full of the amount due (unless the pledged goods have been
taken into custody by a court or law enforcement officer or otherwise lost or
damaged); or, (v) engaging in title loan transactions at licensed pawnshop
locations. Pawnbrokers are also prohibited from entering into pawn transactions
with a person who is under the influence of alcohol or controlled substances, a
person who is under the age of eighteen, or a person using a name other than his
own name or the registered name of his business.
INDIANA REGULATIONS
In Indiana, the Pawnbrokering Law governs pawnshops. The Department of Financial
Institutions (the "Department") regulates the Company's Indiana operations. The
Department requires the licensing of all pawnshops and investigates the general
fitness of pawn license applicants to determine whether the convenience and
needs of the public will be served by granting a pawn license. The Department
has broad investigatory and enforcement authority. It may grant, revoke, and
suspend licenses. For compliance purposes, pawnshops are required to keep books,
accounts, and records to enable the Department to determine if the pawnshop is
complying with the statute. Each pawnshop is required to give authorized agents
of the Department free access to its books and accounts for these purposes.
The Pawnbrokering Law authorizes pawnbrokers to charge and collect the following
annual rates of interest plus pawn service charges: 276% annually on
transactions of $300 or less; 261% annually on transactions greater than $300
but not exceeding $1,000, and 255% annually on transactions greater than $1,000.
Furthermore, the Pawnbrokering Act provides for a grace period of 60 days after
the initial
11
30-day term of the loan. During the grace period, interest and service fees
continue to accrue, subject to a daily proration depending on the date of the
loan redemption.
ALABAMA REGULATIONS
The Alabama Pawnshop Act regulates the licensing and operation of Alabama
pawnshops. The Supervisor of the Bureau of Loans of the State Department of
Banking is responsible for licensing and investigating the general fitness of
pawnshop applicants. The Alabama Pawnshop Act requires that certain bookkeeping
records be maintained and made available to the Supervisor and to local law
enforcement authorities. The Alabama Pawnshop Act establishes a maximum
allowable pawn service charge of 300% annually.
NEVADA REGULATIONS
In Nevada, all pawn loans must be held for redemption for at least 120 days
after the date the loan is made. A pawnbroker may charge interest at the rate of
10% per month for money loaned on the security of personal property actually
received. In addition, the pawnbroker may collect an initial set up fee of $5.
Property received in pledge may not be removed from the pawnshop until after the
receipt of such property is reported to the sheriff or chief of police, unless
redeemed by the owner.
LOCAL REGULATIONS
At the local level, each pawnshop, voluntarily or pursuant to state law or
municipal ordinance, provides daily transaction reports of pawn loans and
over-the-counter purchases to the local police department. These daily
transaction reports are designed to provide the local police with a detailed
description of the goods involved, including serial numbers, if any, and the
names and addresses of the customers.
A copy of each transaction ticket is provided to local law enforcement agencies
to allow processing by the National Crime Investigative Computer to determine
rightful ownership. Goods held to secure pawn loans or goods purchased which are
determined to belong to an individual other than the pawnshop customer are
subject to recovery by the rightful owner. While a risk exists that pledged or
purchased merchandise may be subject to claims of rightful owners, the Company's
claims experience is historically less than 0.5% of pawn loans made.
There can be no assurance that additional local, state, or federal legislation
will not be enacted or that existing laws and regulations will not be amended
which would materially, adversely impact the Company's operations, financial
condition, and the ability to expand its operations.
The above summaries generally describe the regulatory environments affecting the
majority of the Company's pawnshops. Although state pawnshop laws vary
considerably, the above summaries are representative of the statutes and
regulations in the other states in which the Company operates.
FIREARMS REGULATIONS
With respect to firearm sales, each pawnshop must comply with the regulations
issued by the Bureau of Alcohol, Tobacco, and Firearms (the "ATF"). ATF
regulations require each pawnshop dealing in firearms to maintain a permanent
written record of all transactions involving the receipt or disposition of
firearms.
The Brady Handgun Violence Prevention Act (the "Brady Act") and the related ATF
rules require all federal firearm licensees, in either selling inventoried
firearms or releasing pawned firearms, to have the customer complete appropriate
forms and pass a background check through the National Instant Criminal
Background Check System ("NICS") before the Company may transfer a firearm to
any customer.
The Company complies with the Brady Act and the ATF regulations. The Company
does not believe that compliance with the Brady Act and the ATF regulations
materially affect the Company's operations. There can be no assurance, however,
that compliance with the Brady Act and the ATF regulations, or any future
changes or amendments thereto will not adversely affect the Company's
operations.
12
PAYROLL ADVANCE LOAN REGULATIONS
The Company's payroll advance loan operations are subject to extensive state and
federal statutes and regulations such as the federal Equal Credit Opportunity
Act, Fair Credit Reporting Act, the Truth in Lending Act, the Gramm-Leach-Bliley
Act, and the Fair Debt Collection Practices Act. The Company complies with the
requirements of these federal statutes and their regulations with respect to its
payroll advance loan business, and state statutes and regulations where
applicable.
In Texas and Oklahoma, the Company markets and services payroll advances on
behalf of County Bank of Rehoboth Beach, DE. The Delaware Department of Banking
and the Federal Deposit Insurance Corporation supervise County Bank. These
regulators scrutinize all aspects of County Bank's payroll advance program as
well as the Company's operations.
There is significant scrutiny of the payroll advance industry by state and
federal regulators as well as consumer groups. As a result, there can be no
assurance that additional state or federal legislation will not be enacted or
that existing laws and regulations will not be amended which would materially,
adversely impact the Company's payroll advance operations.
In Texas, in order to market and service payroll advances for County Bank, the
Company's pawnshops and collection center are required to be licensed as a
regulated lender by the Texas OCCC. The Company's ability to market and service
payroll advances in Texas at current fee levels is dependent upon its continued
relationship with County Bank or another similarly situated financial
institution. Without a relationship with a federally insured bank domiciled in a
state that permits these rates, the Company could offer payroll advances at a
lower fee level, not in excess of the Texas usury ceiling. While Delaware law
governs the payroll advances made by County Bank, the Company's payroll advance
loan activities in Texas are subject to review and regulation by the OCCC.
In Colorado, the Company makes payroll advances to customers pursuant to its own
underwriting guidelines. Payroll advances made by the Company in Colorado are
regulated by the Department of Law, Office of the Attorney General, Uniform
Consumer Credit Code Division (the "UCCC Division"). The Company's Colorado
pawnshops have and are required to maintain a supervised lender's license issued
by the UCCC Division. The UCCC Division maintains regulatory and supervisory
authority over the pawnshops' payroll advance activities. Under Colorado law,
the Company is required to maintain certain records related to its payroll
advances and include specific information and disclosures in the loan agreement.
The Colorado maximum loan amount is $500, exclusive of the service fee. Colorado
law provides for a graduated service fee: twenty percent (20%) of the first $300
and 7.5% of the amount over $300. The loan term may not exceed 31 days, and
customers have the right to rescind the loan within one business day after the
date the loan was made. The loan cannot be renewed more than once and if it is
renewed prior to the maturity date, the Company must refund a prorated portion
of the service fee.
The Oklahoma Department of Consumer Credit asserts that marketers and servicers
acting on behalf of a federal or state chartered bank, like the Company, may be
subject to licensing and regulation under Oklahoma's Credit Services
Organization Act. The Company's position is that as a licensed pawnbroker, its
payroll advance activities are excluded from licensing and regulation under the
Credit Services Organization Act. If a determination is made that the Company's
position is incorrect, the Company may be required to alter or cease its payroll
advance activities in Oklahoma and may be subject to litigation and regulatory
action.
13
ITEM 2. PROPERTIES
The typical Company pawnshop is a freestanding building or part of a retail
strip center with contiguous parking. Store interiors are designed to resemble
small discount operations and attractively display merchandise by category.
Distinctive exterior design and attractive in-store signage provide an appealing
atmosphere to customers. The typical store has approximately 1,800 square feet
of retail space and approximately 3,200 square feet dedicated to collateral
storage. The Company maintains property and general liability insurance for each
of its pawnshops. The Company's stores are open six or seven days a week,
depending on location.
As of November 20, 2002, the Company owned the real estate and buildings for
four of its pawnshops and leased 276. The Company also owns the real estate and
building for two non-operating locations. During Fiscal 2001 and 2002, the
Company sold to various unaffiliated parties and leased back the real estate and
buildings for 19 and 22 of its pawnshop locations with 10 to 20 year terms.
During Fiscal 2001, the Company sold to an unaffiliated party and leased back
the real estate and building for its Austin, Texas headquarters. The Company
generally leases facilities for a term of five to ten years with one or more
options to renew. The Company's existing leases expire on dates ranging between
February 28, 2003 and May 31, 2022, with a small number of leases on
month-to-month terms. All leases provide for specified periodic rental payments
and such leases provide for market rental rates. Most leases require the Company
to maintain the property and pay the cost of insurance and taxes. The Company
believes that the termination of any one of its leases would not have a material
adverse effect on the Company's operations. The Company's strategy generally is
to lease, rather than acquire, space for its pawnshop locations unless the
Company finds what it believes is a superior location at an attractive price.
The following table presents the metropolitan areas or regions (as defined by
the Company) generally served by the Company and the number of pawnshop
locations serving each such market as of November 20, 2002:
Number of
Locations in
Area/Region Each Area
- ----------- ------------
Texas:
Houston 59
San Antonio 21
Austin Area 7
Valley 26
Central and Northeast 15
Dallas 11
Laredo Area 15
North Texas 15
Panhandle 5
Corpus Christi 7
---
Total Texas 181
Colorado:
Denver Area 17
Colorado Springs Area 5
Pueblo 2
---
Total Colorado 24
Oklahoma:
Oklahoma City Area 8
Tulsa Area 10
Other Areas 2
---
Total Oklahoma 20
14
Number of
Locations in
Area/Region Each Area
- ----------- ------------
Florida:
Tampa 9
Orlando 5
Other Areas 4
---
Total Florida 18
Indiana:
Indianapolis Area 9
Fort Wayne Area 3
Other Areas 3
---
Total Indiana 15
Alabama:
Birmingham Area 5
Mobile 2
Other Areas 1
---
Total Alabama 8
Nevada:
Las Vegas 4
---
Total Nevada 4
Tennessee:
Memphis 3
---
Total Tennessee 3
Louisiana:
New Orleans Area 2
Other Areas 1
---
Total Louisiana 3
Mississippi:
Jackson 2
Other Areas 1
---
Total Mississippi 3
Arkansas:
West Helena 1
---
Total Arkansas 1
---
Total Company 280
===
In addition to its store locations, the Company leases its 27,400 square foot
corporate office and 8,100 square foot jewelry processing center located in
Austin, Texas.
15
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising from its normal business operations. Currently, the Company is a
defendant in several lawsuits. Some of these lawsuits involve claims for
substantial amounts. While the ultimate outcome of these lawsuits cannot be
ascertained, after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect on the
Company's financial condition. There can be no assurance, however, that this
will be the case.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 27, 1991, the Company's Class A Non-voting Common Stock ("Class A
Common Stock") has traded on The NASDAQ Stock Market under the symbol EZPW. As
of November 20, 2002, there were 168 stockholders of record of the Company's
Class A Common Stock. There is no trading market for the Company's Class B
Voting Common Stock ("Class B Common Stock"), and as of November 20, 2002, such
stock was held by one stockholder of record.
The high and low per share price for the Company's Class A Common Stock for the
past two fiscal years, as reported by The NASDAQ Stock Market, were as follows:
High Low
----- -----
Fiscal 2001:
First quarter ended December 31, 2000 $1.81 $0.66
Second quarter ended March 31, 2001 2.63 0.75
Third quarter ended June 30, 2001 2.75 2.12
Fourth quarter ended September 30, 2001 2.50 1.51
Fiscal 2002:
First quarter ended December 31, 2001 $1.92 $1.14
Second quarter ended March 31, 2002 4.10 1.65
Third quarter ended June 30, 2002 5.00 3.10
Fourth quarter ended September 30, 2002 3.50 2.50
On November 20, 2002, the Company's Class A Common Stock closed at $3.10 per
share.
During the past two fiscal years, no dividends have been declared or paid. The
Company's credit agreement, which matures March 31, 2005, prohibits the payment
of dividends. Should dividends be paid in the future, the Company's restated
certificate of incorporation provides that cash dividends on common stock, when
declared, must be declared and paid share and share alike on the Class A Common
Stock and the Class B Common Stock.
17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with,
and is qualified in its entirety by reference to the financial statements of the
Company and the notes thereto included elsewhere in this Form 10-K:
SELECTED FINANCIAL DATA
Fiscal Years Ended September 30
--------------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(Amounts in thousands, except per share and store figures)
(a) (a)
Operating Data:
Sales $112,307 $130,077 $139,753 $129,362 $131,971
Service charges 85,087 101,892 57,646 56,808 64,927
-------- -------- -------- -------- --------
Total revenues 197,394 231,969 197,399 186,170 196,898
Cost of goods sold 94,084 113,824 88,054 79,089 84,936
-------- -------- -------- -------- --------
Net revenues 103,310 118,145 109,345 107,081 111,962
Store operating expenses 66,742 81,963 85,513 75,245 78,265
Corporate administrative expenses 12,838 14,387 19,324 14,043 15,619
Depreciation and amortization 7,596 9,435 10,255 10,808 10,087
Restructuring expense - - 10,572 (696) -
Interest expense 1,398 3,691 6,201 8,245 4,770
Equity in net income of unconsolidated
affiliate (95) (304) (225) (267) (604)
(Gain) loss on sale of assets (28) 268 (280) 413 327
-------- -------- -------- -------- --------
Income (loss) before income taxes 14,859 8,705 (22,015) (710) 3,498
Income tax expense (benefit) 5,646 3,220 (3,785) (142) 1,294
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle 9,213 5,485 (18,230) (568) 2,204
Cumulative effect of change in accounting
principle - - (14,344) - -
-------- -------- -------- -------- --------
Net income (loss) $ 9,213 $ 5,485 $(32,574) $ (568) $ 2,204
======== ======== ======== ======== ========
Earnings (loss) per common share, diluted $ 0.77 $ 0.46 $ (2.71) $ (0.05) $ 0.18
Cash dividends per common share $ 0.0125 $ 0.05 $ 0.025 $ - $ -
Weighted average common shares and
share equivalents-diluted 12,014 12,008 12,017 12,104 12,292
Stores operated at end of period 286 331 313 283 280
September 30
------------------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Pawn loans $ 49,632 $ 53,940 $ 46,916 $ 47,144 $ 49,248
Payroll advances - - 33 1,250 2,326
Inventory 44,011 58,241 35,660 34,231 32,097
Working capital 104,648 125,575 72,498 75,334 86,425
Total assets 189,911 234,077 203,793 178,560 165,970
Long-term debt 48,133 83,123 81,112 60,192 42,245
Stockholders' equity 130,554 135,685 102,671 101,957 104,544
(a) Beginning in Fiscal 2000, the Company changed its method of accounting
for pawn service charge revenue and inventory, as described in Management's
Discussion and Analysis. Service charges, cost of goods sold and inventory
before Fiscal 2000 are stated on the historical accounting method, and are not
directly comparable to Fiscal 2000, 2001, and 2002 amounts.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis compares the results of operations for the 12-month
periods ending September 30, 2000, 2001, and 2002 ("Fiscal 2000", "Fiscal 2001",
and "Fiscal 2002"). The discussion should be read in conjunction with, and is
qualified in its entirety by, the accompanying financial statements and related
notes.
SUMMARY FINANCIAL DATA
Fiscal Years Ended September 30
----------------------------------------------
2000 2001 2002
-------- -------- --------
(Dollars in thousands, except as indicated)
OPERATIONS:
Sales $139,753 $129,362 $131,971
Service charges 57,646 56,808 64,927
-------- -------- --------
Total revenues 197,399 186,170 196,898
Cost of sales 88,054 79,089 84,936
-------- -------- --------
Net revenues 109,345 107,081 111,962
Restructuring expense 10,572 (696) -
Income (loss) before cumulative effect of a change in
accounting principle (18,230) (568) 2,204
Cumulative effect on prior years (to September 30,
1999) of change in method of revenue recognition, net (14,344) - -
-------- -------- --------
Net Income (loss) $(32,574) $ (568) $ 2,204
======== ======== ========
OTHER DATA:
Gross margin 37.1% 38.9% 35.6%
Average annual inventory turnover 2.1x 2.2x 2.6x
Average inventory per location at year end $ 114 $ 121 $ 115
Average pawn loan balance per location at year end $ 150 $ 167 $ 176
Average pawn loan at year end (whole dollars) $ 70 $ 73 $ 73
Average yield on pawn loan portfolio 125% 120% 123%
Redemption rate 77% 76% 76%
EXPENSES AND INCOME AS A PERCENTAGE OF NET REVENUE (%):
Store operating 78.2 70.3 69.9
Administrative 17.7 13.1 14.0
Depreciation and amortization 9.4 10.1 9.0
Interest 5.7 7.7 4.3
Income (loss) before income taxes (20.1) (0.1) 3.1
Income (loss) before cumulative effect (16.7) (0.5) 2.0
STORES IN OPERATION:
Beginning of year 331 313 283
New openings 5 - -
Sold, combined, or closed (23) (30) (3)
-------- -------- --------
End of year 313 283 280
Average number of locations during the year 333 292 281
19
GENERAL
The Company's primary activity is the making of small, non-recourse loans
secured by tangible personal property. The income earned on this activity is
pawn service charge revenue. While allowable service charges vary by state and
by amount of the loan, a majority of the Company's pawn loans are in amounts
that permit pawn service charges of 20% per month or 240% per annum. The
Company's average pawn loan amount has historically averaged between $70 and
$75. The allowable term of pawn loans also differs by state, but is typically 30
days with an automatic 60-day extension.
A secondary, but related, activity of the Company is the sale of merchandise.
The Company acquires inventory for its retail sales primarily through pawn loan
forfeitures and, to a lesser extent, through purchases from customers and
wholesale distributors. The realization of gross profit on sales of inventory
primarily depends on the Company's initial assessment of the property's resale
value. Improper assessment of the resale value of the collateral in the lending
function can result in reduced marketability of the property and the realization
of a lower margin.
The Company also offers unsecured payroll advances in most of its pawnshops. In
a limited number of locations, the Company makes payroll advances. In most
locations, the Company markets and services payroll advances made by County
Bank, a federally insured Delaware bank. After origination of the loans, the
Company may purchase an 85% participation in the loans made by County Bank and
marketed by the Company. The average payroll advance amount is just over $300
and the terms are generally less than 30 days, averaging about 15 days. The
service charge per $100 loaned is typically $18 per 14-day period, but varies in
certain locations.
In Fiscal 2000, the Company adopted a restructuring plan, including the closure
of several under-performing stores. The restructuring plan and its effects are
described more fully below.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, inventory,
allowance for losses on payroll advances, long-lived and intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, observable trends, and various other assumptions that are
believed to be reasonable under the circumstances. Management uses this
information to make judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
REVENUE RECOGNITION: Pawn service charges are recorded using the interest method
for all pawn loans the Company deems to be collectible. The Company bases its
estimate of uncollectible loans on several factors, including recent redemption
rates, historical trends in redemption rates, and the amount of loans due in the
following three months. If future redemption rates, loan extensions, or other
factors vary from historical trends used in the Company's estimate, the
Company's earnings and financial condition would be affected. In Fiscal 2002,
99.6% ($56.4 million) of recorded pawn service charge revenue was collected in
cash, and 0.4% ($0.2 million) resulted from an increase in accrued pawn service
charges receivable.
Payroll advances and related service charges reported in the Company's
consolidated financial statements reflect only the Company's participation
interest in these loans. The Company accrues service
20
charges on the loans the Company deems to be collectible. Accrued service
charges related to defaulted loans are deducted from service charge revenue upon
loan default, and increase service charge revenue upon subsequent collection.
ALLOWANCE FOR LOSSES ON PAYROLL ADVANCES: Unlike pawn loans, payroll advances
are unsecured, and their profitability is highly dependent upon the Company's
ability to manage the default rate and collect defaulted loans. The Company
considers a loan defaulted if the loan has not been repaid or refinanced by the
maturity date. Although defaulted loans may be collected subsequently, the
Company charges defaulted loans' 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 also provides an allowance for losses on active payroll advances and
related service charges receivable. This estimate is based largely on recent net
default rates and expected seasonal fluctuations in default rates. The accuracy
of the Company's allowance estimate is dependent upon several factors, including
its ability to predict future default rates based on historical trends and
expected future events. Actual loan losses could vary from those estimated due
to variance in any of these factors. Changes in the principal valuation
allowance are charged to bad debt expense. Changes in the service charge
receivable valuation allowance are charged to service charge revenue. Increased
defaults and credit losses may occur during a national or regional economic
downturn, or could occur for other reasons, resulting in the need to increase
the allowance. The Company believes it effectively manages these risks by using
a credit scoring system, closely monitoring the performance of the portfolio,
and participating in loans made by a bank using similar strategies.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). Accordingly, the Company does not record
loan loss reserves or charge-offs on the principal portion of pawn loans. In
order to state inventory at the lower of cost or market (net realizable value),
the Company provides a reserve for shrinkage and excess, obsolete, or
slow-moving inventory. The Company's inventory reserve is based on the type and
age of merchandise as well as recent sales trends and margins. At September 30,
2002, this reserve was approximately $1.7 million, or 4.9% of the gross
inventory balance. Changes in the inventory reserve are recorded as cost of
goods sold. The Company's inventory reserve is dependent on its ability to
predict future events based on historical trends. Unexpected variations in sales
margins, turnover, or other factors, including fluctuations in gold prices or
new product offerings could increase or decrease the Company's inventory
reserves.
In addition to its ordinary inventory reserve, the Company reserved another $1.1
million of its inventory at September 30, 2000 as part of its restructuring
plan. This reserve wrote down to estimated realizable value the inventory at
stores targeted for closure. This additional reserve was fully utilized in
Fiscal 2001 as the related inventory was sold.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS: The Company assesses the
impairment of long-lived and intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
considered important which could trigger an impairment review include the
following: significant underperformance relative to historical or projected
future cash flows; significant changes in the manner of use of the assets or the
strategy for the overall business; and significant negative industry trends.
When management determines that the carrying value of long-lived and intangible
assets may not be recoverable, impairment is measured based on the excess of the
assets' carrying value over the estimated fair value. No impairment was
recognized in Fiscal 2000, 2001, or 2002, other than as part of the Company's
restructuring in Fiscal 2000.
The Company will adopt Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets," October 1, 2002. The Company will
cease to amortize goodwill and pawn licenses in its fiscal year ending September
30, 2003. This will lower amortization expense in Fiscal 2003 by $603,000. The
Company also currently amortizes goodwill related to its equity investment in
A&B. This $453,000 annual amortization, recorded as a reduction to "equity in
net income of unconsolidated affiliate," also will cease in Fiscal 2003. The
Company will perform an annual impairment test, and
21
expects to complete its first test by March 31, 2003. Management has not yet
determined the impact, if any, that this impairment test will have upon its
recorded balances of goodwill or pawn licenses. There can be no assurance that
at the time the test is completed an impairment charge will not be recorded.
INCOME TAXES: As part of the process of preparing the consolidated financial
statements, the Company is required to estimate income taxes in each of the
jurisdictions in which it operates. This process involves estimating the actual
current tax liability together with assessing temporary differences in
recognition of income for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in the Company's
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income and, to the
extent it believes that recovery is not likely, it must establish a valuation
allowance against the deferred tax asset. An expense must be included within the
tax provision in the statement of operations for any increase in the valuation
allowance for a given period.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against net deferred tax assets. The Company recorded a valuation
allowance of $3.7 million at September 30, 2000, due to uncertainties related to
the ability to utilize a portion of the deferred tax assets. The valuation
allowance was based on management's estimate of taxable income in the three
years following Fiscal 2000, including the expected taxable gains on the sale of
properties. The valuation allowance was not adjusted in Fiscal 2001 or 2002
because management believes that it is more likely than not that the net
deferred tax asset will be realized. Projected levels of pre-tax earnings over
the next three years, primarily attributable to ordinary and recurring operating
results, are sufficient to generate the $15 million required amount of taxable
income to realize the net deferred tax assets. The Company intends to evaluate
the realizability of the deferred tax assets quarterly by assessing the need for
additional valuation allowance, if any. Uncertainties that might impact the
realization of the deferred tax assets include possible declines in sales,
margins and revenues.
In the event that the Company was to determine that it would not be able to
realize all or part of its net deferred tax assets in the future, an increase to
the valuation allowance would be charged to income 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 the valuation allowance would increase income in
the period such determination was made.
DISCLOSURE AND INTERNAL CONTROLS: Based on an assessment of the effectiveness of
the Company's disclosure controls and procedures, accounting policies, and the
underlying judgments and uncertainties affecting the application of those
policies and procedures, management believes that the Company's consolidated
financial statements provide a meaningful and fair perspective of the Company in
all material respects. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation. Management identified no
significant deficiencies or material weaknesses in internal controls. Other risk
factors, such as those discussed elsewhere in this annual report as well as
changes in business strategies, could adversely impact the consolidated
financial position, results of operations, and cash flows in future periods.
RESULTS OF OPERATIONS
FISCAL 2002 COMPARED TO FISCAL 2001
The Company's Fiscal 2002 pawn service charge revenue increased 4%, or $2.0
million from Fiscal 2001 to $56.7 million. This represents an increase in same
store pawn service charge revenue ($2.2 million) offset by the decrease in pawn
service charge revenue from closed stores ($0.2 million). Of the $2.2 million
improvement in same store pawn service charge revenue, $1.2 million was due to
greater average loan balances during the year and $1.0 million was due to a 3
percentage point improvement in loan yields to 123% in Fiscal 2002. Variations
in the annualized loan yield, as seen between these periods, are due generally
to changes in the level of loan forfeitures and a mix shift between loans with
different
22
yields. Excluding the effect of closed stores, the Company's Fiscal 2002 average
balance of pawn loans outstanding was 2% higher and ending pawn loans
outstanding were 6% higher than in Fiscal 2001.
Fiscal 2002 sales increased $2.6 million from Fiscal 2001 to $132.0 million. The
increase was primarily due to an increase in jewelry scrapping sales ($5.4
million), offset by a reduction in sales from closed stores ($1.7 million) and
lower same store merchandise sales ($1.3 million). Lower merchandise sales
occurred mainly in jewelry largely as a result of lower jewelry inventories
caused by the higher level of jewelry scrapping. Below is a summary of Fiscal
2001 and 2002 sales and margins:
Fiscal Year Ended September 30,
-------------------------------
2001 2002
------ ------
(Dollars in millions)
Merchandise sales $115.0 $112.0
Jewelry scrapping sales 13.7 19.1
Other revenues 0.7 0.9
------ ------
Total sales 129.4 132.0
Gross profit on merchandise sales $ 50.3 $ 45.8
Gross profit (loss) on jewelry scrapping sales (0.7) 0.3
Gross margin on merchandise sales 43.7% 40.9%
Gross margin on jewelry scrapping sales (5.2%) 1.6%
Overall gross margin 38.9% 35.6%
Fiscal 2002 overall gross margins on sales decreased 3.3 percentage points from
Fiscal 2001 to 35.6%. Margins on merchandise sales, excluding jewelry scrapping,
decreased 2.8 percentage points as a result of higher loan values on forfeited
collateral, more aggressive discounting, and higher inventory reserves,
primarily on aging general merchandise. The change in merchandise sales margins
comprised 0.2 of a percentage point of the change in overall gross margins.
Although margins on jewelry scrapping improved in Fiscal 2002 due largely to
higher gold prices, the 39% increase in volume of these low margin sales
(jewelry generally is scrapped at a loss or small margin) had a 3.1 percentage
point negative effect on overall margins. Inventory shrinkage, included in cost
of goods sold, was 1.5% of merchandise sales in Fiscal 2002 compared to 1.4% in
Fiscal 2001.
Payroll advance data are as follows for Fiscal 2001 and 2002:
Fiscal Year Ended September 30,
-------------------------------
2001 2002
------- -------
(Dollars in thousands)
Service charge revenue $ 2,142 $ 8,251
Bad debt (included in operating expense) (1,247) (3,138)
Other direct expenses (included in operating expense) (175) (802)
Collection costs (included in administrative expense) - (332)
------- -------
Contribution to operating income 720 3,979
Average payroll advance balance outstanding during year 430 1,596
Payroll advance loan balance at end of year 1,250 2,326
Average loan balance per participating location at end of year 6.1 10.2
Participating locations at end of year (whole numbers) 205 229
Net default rate (defaults net of collections, measured as a percent of
loans made) 8.1% 6.9%
The Contribution to operating income presented above is the incremental
contribution only and excludes other costs such as labor, rent, and other
overhead costs.
23
Payroll advance service charge revenue and bad debt expense each increased from
Fiscal 2001 primarily due to higher average loan balances. The loan balance
increased due to the maturing of the product and a growth in the number of
locations offering the loans.
The Company provides for a valuation allowance on both the principal and fees
receivable for payroll advances. Due to the short-term nature of these loans,
the Company uses recent net default rates and anticipated seasonal changes in
the rate as the basis for its valuation allowance, rather than reserving the
annual rate. At September 30, 2002, the valuation allowance was 5.6% of the
payroll advance principal and fees receivable.
In Fiscal 2002, store operating expenses as a percent of net revenues decreased
0.4 of a percentage point to 69.9%. Fiscal 2002 operating expenses reflect a
volume-related $2.5 million increase in payroll advance bad debt and other
direct expenses, and a $1.4 million increase in rent from the sale-leaseback of
previously owned store locations. Despite these increases, store operating
expenses decreased as a percent of net revenues due to the effects of greater
net revenues and an improvement in other store operating expenses. The
incremental sale-leaseback rent was largely offset by related decreases in
depreciation of the sold locations and lower interest expense from debt retired
with the proceeds from the sale-leasebacks.
Administrative expenses measured as a percentage of net revenues increased 0.9
of a percentage point from Fiscal 2001 to 14.0%. The increase is due primarily
to higher employment related costs and payroll advance collection costs.
Employment cost increases reflect limited staff additions, general inflation,
and greater incentive compensation related to the Company's improved overall
performance in Fiscal 2002. The increased volume of payroll advances in Fiscal
2002 required the increase in payroll advance collection costs, primarily labor.
Depreciation and amortization expense, when measured as a percentage of net
revenue, decreased 1.1 percentage points in Fiscal 2002 to 9.0%. This
improvement is primarily due to the reduction in depreciable assets through the
sale-leaseback of previously owned locations.
In Fiscal 2002, interest expense decreased by $3.5 million to $4.8 million.
Lower average debt balances led to $2.9 million of the improvement, while lower
effective interest rates contributed the remaining $0.6 million. At September
30, 2002, the Company's total debt was $42.2 million compared to $60.2 million
at September 30, 2001. Decreases in the debt balance were funded primarily by
cash flow from operations and $6.5 million of proceeds from the sale-leaseback
of previously owned locations.
The Fiscal 2002 income tax provision was $1.3 million (37% of pretax income)
compared to an income tax benefit of $0.1 million (20% of pretax loss) for
Fiscal 2001. The increase in effective tax rate for Fiscal 2002 compared to the
Fiscal 2001 benefit is due to non-tax deductible items having a smaller
percentage effect on larger pre-tax earnings.
Operating income for Fiscal 2002 increased $0.3 million over Fiscal 2001 to $8.0
million. The $3.3 million greater contribution from payroll advances and $2.2
million increase in same store pawn service charges account for most of the
overall improvement. These improvements were largely offset by lower gross
profits on sales ($3.5 million) and increased rent from the sale-leaseback of
store locations ($1.4 million), combined with higher administrative costs. After
a $3.5 million decrease in interest expense and smaller changes in other
non-operating items, Fiscal 2002 net income improved to $2.2 million from Fiscal
2001's $0.6 million net loss.
FISCAL 2001 COMPARED TO FISCAL 2000
While the Company's average store count during Fiscal 2001 was down 12.3% from
Fiscal 2000 due to the restructuring, its pawn service charge revenue decreased
only 4.9%, or $2.8 million from Fiscal 2000 to $54.7 million. This represents an
increase in same store pawn service charge revenue ($0.6 million) offset by the
decrease in pawn service charge revenue from the forty-seven closed stores ($3.4
million). Greater average loan balances during the year contributed $2.4 million
of the increase in same store
24
pawn service charges, while lower pawn loan yields offset this amount by $1.8
million. Pawn loan yields were 120% in Fiscal 2001 compared to 124% in Fiscal
2000. Variations in the annualized loan yield, as seen between these periods,
are due generally to changes in the level of loan forfeitures and a mix shift
between loans with different yields. At September 30, 2001, same store pawn loan
balances were 4% above September 30, 2000.
Fiscal 2001 merchandise sales decreased approximately $10.4 million from Fiscal
2000 to $129.4 million primarily due to a reduction in sales from closed stores
($11.2 million). Also contributing to the change were increases in wholesale
jewelry sales ($4.7 million), offset by a decrease in same store merchandise
sales ($3.7 million or 3%). Below is a summary of Fiscal 2000 and 2001 sales and
margins:
Fiscal Year Ended September 30,
2000 2001
------ ------
(Dollars in millions)
Merchandise sales $129.9 $115.0
Jewelry scrapping sales 9.0 13.7
Other revenues 0.9 0.7
------ ------
Total sales 139.8 129.4
Gross profit on merchandise sales $ 52.7 $ 50.3
Gross profit (loss) on jewelry scrapping sales (1.9) (0.7)
Gross margin on merchandise sales 40.6% 43.7%
Gross margin on jewelry scrapping sales (20.7%) (5.2%)
Overall gross margin 37.1% 38.9%
Fiscal 2001 overall gross margins on sales improved 1.8 percentage points from
Fiscal 2000 to 38.9%. Margins on merchandise sales, excluding jewelry scrapping,
improved 3.1 percentage points, partially due to the absence of a restructuring
charge to cost of goods as was seen in Fiscal 2000 (1.4 percentage points). This
improvement in merchandise sales margins comprised 5.1 percentage points of the
improvement in overall gross margins. The increase in jewelry scrapping (jewelry
generally is scrapped at a loss or small margin) reduced the overall gross
margin improvement by 3.3 percentage points. Inventory shrinkage was 1.4% of
merchandise sales in Fiscal 2001 compared to 1.1% in Fiscal 2000.
At the end of Fiscal 2001, the Company offered payroll advances in 205 of its
pawnshops. In five locations, the Company made the loans. In 200 locations, the
Company marketed payroll advances made by County Bank. Payroll advance service
charge revenue increased $2.0 million from Fiscal 2000 to $2.1 million as a
result of offering the loans in 196 additional locations. The Company offered
payroll advances in only nine locations in Fiscal 2000, the results of which
were immaterial.
During Fiscal 2001, the Company experienced a net default rate of 8.1%. The
Company's bad debt expense, included in store operating expense, was $1.2
million. The Company provides for a valuation allowance on both the principal
and fees receivable, based on recent net default rates. At September 30, 2001,
the valuation allowance was 9.5% of the payroll advance loan principal and fees
receivable. This reserve differed from the annual net default rate as it
reflects more recent net default rates and trends.
In Fiscal 2001, store operating expenses as a percent of net revenues decreased
7.9 percentage points to 70.3%. Administrative expenses decreased 4.6 percentage
points from Fiscal 2000 to 13.1% of net revenues. This expense level improvement
was largely due to improved cost management and the closure of 47 lower volume
stores. On a per average store basis, operating expenses in Fiscal 2001 were up
slightly to $258,000 from $257,000 in Fiscal 2000. Administrative expenses per
average store decreased 17% during Fiscal 2001 to $48,000, compared to $58,000
in Fiscal 2000.
Depreciation and amortization expense, when measured as a percent of net
revenue, increased 0.7 of a percentage point in Fiscal 2001 to 10.1%, primarily
due to beginning depreciation of the Company's new point-of-sale computer system
placed in service in the first quarter of Fiscal 2001.
25
In Fiscal 2001, interest expense increased $2.0 million to $8.2 million. Higher
effective interest rates increased interest expense $2.3 million, while lower
average debt balances offset the increase by $0.3 million. At September 30,
2001, the Company's total long-term debt was $60.2 million compared to $81.1
million at September 30, 2000.
The income tax benefit for Fiscal 2001 was $0.1 million (20% of pretax loss)
compared to an income tax benefit of $3.8 million (17% of pretax loss) for
Fiscal 2000. A valuation allowance of $3.7 million was established during the
year ended September 30, 2000, to offset certain deferred tax assets due to
uncertainties regarding the realization of the deferred tax assets. Exclusive of
the deferred tax asset valuation allowance, the Fiscal 2000 income tax benefit
was $7.5 million (34% of pretax loss). The decrease in effective tax rate for
Fiscal 2001 compared to the Fiscal 2000 benefit before valuation allowance is
due to non-tax deductible items having a greater percentage effect on a smaller
pre-tax loss.
Excluding restructuring charges, operating income for Fiscal 2001 increased
$12.7 million over Fiscal 2000 to $7.0 million. Same store net revenue growth
($6.1 million), expense management ($5.0 million) and the closure of
under-performing stores ($2.2 million) account for the earnings improvement,
offset by the increase in depreciation and amortization ($0.6 million).
Including the effect of the Fiscal 2000 restructuring charge, operating income
(loss) improved $24.0 million, to $7.7 million in Fiscal 2001. After an increase
in interest expense and other non-operating items, the Fiscal 2001 net loss
improved to $0.6 million from Fiscal 2000's $18.2 million net loss before the
$14.3 million cumulative effect of the accounting change adopted in Fiscal 2000.
ACCOUNTING CHANGE
During the second quarter of Fiscal 2000, the Company changed its method of
revenue recognition on pawn loans by reducing the accrual of pawn service charge
revenues to the estimated amount that will be realized through loan collection,
and recording forfeited collateral at the lower of the principal balance of the
loan or estimated market value. Previously, pawn service charges were accrued on
all loans, and the carrying value of the forfeited collateral was the lower of
cost (principal amount of loan plus accrued pawn service charges) or market.
The Company believes the new method of revenue recognition is preferable in that
it better aligns reported net revenues and earnings with current economic trends
in its business and the management of the Company. In addition, the Company
believes the new method improves comparability of its operating results and
financial position with similar companies. This change was made effective
October 1, 1999, the first day of the Company's fiscal 2000 year.
The $14.3 million cumulative effect of this accounting change on prior years
(net of a tax benefit of $7.4 million) increased net loss for the year ended
September 30, 2000. Of the $2.71 net loss per share for the year ended September
30, 2000, $1.19 per share is attributable to the cumulative effect of the
accounting change.
RESTRUCTURING
Pursuant to a restructuring plan, the Company decided to close 54 stores and
recorded a pretax charge of $11.8 million ($7.8 million net of tax) during the
fourth quarter of Fiscal 2000. The total pretax charge included $9.6 million
resulting from closed stores and approximately $1.0 million related to severance
of administrative staff and other restructuring costs. The $11.8 million pretax
charge included a $1.2 million write down of inventory (included in Cost of
goods sold on the Consolidated Statement of Operations).
In June 2001, the Company re-evaluated seven remaining stores that had not been
closed, and decided to continue their operation, based on their improved
operating performance and future outlook. Accordingly, the Company reversed the
$1.3 million restructure accrual related to these seven stores, net of $0.3
million related to stores previously closed.
26
The results of operations from the 47 closed stores were as follows (in
thousands):
Fiscal Years Ended September 30,
--------------------------------
2000 2001 2002
------- ----- ----
Total revenues $15,367 $ 939 $-
Operating loss (3,212) (461) -
At September 30, 2002, the Company had a remaining restructuring reserve of
$34,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's $15.6 million Fiscal 2002 cash flow from operations consisted of
$12.0 million of earnings before depreciation, amortization, and other non-cash
items and $3.6 million of changes in operating assets and liabilities, primarily
inventory and accounts payable. In Fiscal 2001, The Company's $11.7 million cash
flow from operations consisted of $9.7 million of earnings before non-cash
items, a $5.0 million income tax refund, and the collection of a $1.5 million
note receivable, reduced by $1.9 million restructuring expenditures and $2.6
million of other changes in operating assets and liabilities.
In Fiscal 2002, the Company invested $2.0 million in property and equipment,
$2.1 million in pawn loan growth, and $1.1 million in funding the net increase
in payroll advances. These investments and a $17.9 million reduction in debt
were funded by cash flow from operating activities of $15.6 million, $6.5
million in proceeds from the sale of assets (primarily the sale-leaseback of
owned properties), $0.3 million of dividends from its equity investment in
Albemarle & Bond Holding, plc, and $0.7 million of cash on hand.
The Company anticipates that cash flow from operations and availability under
its revolving credit facility will be adequate to fund planned capital
expenditures, working capital requirements, and required debt payments during
the coming year. However, there can be no assurance that cash flow from
operating activities will be adequate for these expenditures.
Effective October 30, 2002, the Company amended and restated its credit
agreement. The amendment extends the maturity date to March 31, 2005 and
provides for a $47.5 million revolving credit facility through March 3, 2003,
and $40 million thereafter. Advances under the credit agreement are secured by
substantially all of the Company's assets. Availability under the revolving
credit facility is tied to loan and inventory balances. Interest on the
revolving credit facility will be the Eurodollar rate plus 250 to 325 basis
points or the agent bank's base rate ("Prime") plus 100 to 175 basis points. The
Company pays a commitment fee of 37.5 basis points on the unused amount of the
revolving facility. Terms of the agreement require, among other things, that the
Company meet certain financial covenants and that no dividends be paid. The
Company believes that the financial covenants established in its credit facility
will be achieved based upon the Company's current and anticipated performance.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. Due primarily to significant loan redemptions and sales in the income
tax refund season, the Company's cash flow is greatest in its second fiscal
quarter.
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical information provided herein are forward-looking
and may contain information about financial results, economic conditions,
trends, and known uncertainties. The Company cautions the reader that actual
results could differ materially from those
27
expected by the Company depending on the outcome of certain factors, including
without limitation (i) fluctuations in the Company's inventory and loan
balances, inventory turnover, average yields on loan portfolios, redemption
rates, labor and employment matters, competition, operating risk, acquisition,
and expansion risk, liquidity, and capital requirements and the effect of
government and environmental regulations, and (ii) adverse changes in the market
for the Company's services. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligations to release publicly the results of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereon, including without limitation,
changes in the Company's business strategy or planned capital expenditures, or
to reflect the occurrence of unanticipated events.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold prices. The Company does not use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
prices and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold prices. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold prices cannot be reasonably estimated.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its debt, all of which is variable-rate debt at
September 30, 2002. Under its amended and restated credit agreement dated
October 30, 2002, the Company's effective interest rate was reduced by
approximately 300 basis points. If interest rates average 300 basis points less
in 2003 than they did in 2002, the Company's annual interest expense would
decrease by approximately $1.3 million. This amount is determined by considering
the impact of the hypothetical interest rates on the Company's variable-rate
debt at September 30, 2002.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in Albemarle & Bond Holdings,
plc ("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 financial position and results of operations 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 year ended June 30, 2002 (included in the Company's
September 30, 2002 results on a three-month lag as described above) was
approximately $317,000. On November 20, 2002, the U.K. pound closed at 1.00 to
1.5811 U.S. dollars, an increase (strengthening) from 1.5328 at June 30, 2002.
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.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 30
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2001 and 2002 31
Consolidated Statements of Operations for each of the Three Fiscal Years
Ended September 30, 2002 32
Consolidated Statements of Cash Flows for each of the Three Fiscal Years
Ended September 30, 2002 33
Consolidated Statements of Stockholders' Equity for each of the Three Fiscal Years
Ended September 30, 2002 34
Notes to Consolidated Financial Statements 35
29
REPORT OF INDEPENDENT AUDITORS
Board of Directors
EZCORP, Inc.
We have audited the accompanying consolidated balance sheets of EZCORP, Inc. and
its subsidiaries as of September 30, 2001 and 2002, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2002. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EZCORP,
Inc. and its subsidiaries at September 30, 2001 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note B to the financial statements, in the year ended September
30, 2000 the Company changed its method of accounting for revenue recognition on
pawn loans.
ERNST & YOUNG LLP
Austin, Texas
November 5, 2002
30
CONSOLIDATED BALANCE SHEETS
September 30,
-----------------------
2001 2002
-------- --------
(In thousands)
Assets:
Current assets:
Cash and cash equivalents $ 2,186 $ 1,492
Pawn loans 47,144 49,248
Payroll advances 1,250 2,326
Service charges receivables, net 8,841 9,304
Inventory, net 34,231 32,097
Deferred tax asset 7,413 6,418
Federal income tax receivable - 359
Prepaid expenses and other assets 2,180 1,898
-------- --------
Total current assets 103,245 103,142
Investment in unconsolidated affiliates 13,812 14,406
Property and equipment, net 44,965 32,190
Goodwill, net 11,655 11,148
Notes receivable from related parties 1,589 1,522
Other assets, net 3,294 3,562
-------- --------
Total assets $178,560 $165,970
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt $ 15,947 $ 2,936
Accounts payable and other accrued expenses 9,666 11,581
Restructuring reserve 217 34
Customer layaway deposits 2,081 2,166
-------- --------
Total current liabilities 27,911 16,717
Long-term debt, less current maturities