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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
--------------- ----------------
COMMISSION FILE NUMBER 000-19424
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-------------------------------
EZCORP, INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2540145
-------------- -------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
--------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
(512) 314-3400
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NA
------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of December 31, 2003, 10,997,831 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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EXPLANATORY NOTE
This Amendment No. 1 on Form 10-Q/A (this "Amendment") amends our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2003 filed on February 9,
2004 (our "Original Filing"). EZCORP, Inc. (the "Company") has filed this
Amendment to correct the classification of certain transactions presented in the
Statements of Cash Flows in our Original Filing. The net effect of the
reclassifications in each period presented is to increase operating cash flows,
while decreasing investing cash flows by an equal and offsetting amount. These
changes were identified during the course of the Company preparing its response
to a comment letter from the U.S. Securities and Exchange Commission regarding
our Annual Report on Form 10-K for the year ended September 30, 2003, as well as
filings of other registrants in our industry.
A description of these reclassifications and a summary showing their effect on
the restated Statements of Cash Flows is provided in Note J to the Condensed
Consolidated Financial Statements. This Amendment also includes corresponding
textual changes in the Liquidity and Capital Resources section of Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, an update to related information in Item 4, Controls and Procedures,
and updated officer certifications required to be currently dated. This
Amendment has no effect on the Condensed Consolidated Balance Sheets or
Statements of Operations, and more specifically, does not affect net income
(loss), earnings (loss) per share, total cash flows, current assets, total
assets, current liabilities, total stockholders' equity or any other information
as presented in our Original Filing.
Other information contained herein has not been updated. Therefore, this
Amendment should be read together with other documents that the Company has
filed with the Securities and Exchange Commission subsequent to the filing of
our Original Filing. Information in such reports and documents updates and
supersedes certain information contained in this Amendment. The filing of this
Amendment shall not be deemed an admission that our Original Filing, when made,
included any known, untrue statement of material fact or knowingly omitted to
state a material fact necessary to make a statement not misleading.
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EZCORP, INC.
INDEX TO FORM 10-Q/A
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2003, December 31, 2002 and
September 30, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the Three Months Ended December 31,
2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31,
2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Interim Condensed Consolidated Financial Statements . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . 16
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
December 31, December 31, September 30,
2003 2002 2003
------------ ------------ -------------
(In thousands)
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents $ 1,402 $ 553 $ 2,496
Pawn loans 46,380 46,714 47,955
Payday loans 5,683 3,037 3,630
Pawn service charges receivable, net 9,602 9,543 8,990
Payday loan service charges receivable, net 1,137 608 735
Inventory, net 32,527 33,686 29,755
Deferred tax asset 8,163 6,418 8,163
Federal income tax receivable - - 328
Prepaid expenses and other assets 3,163 2,486 1,726
--------- --------- ---------
Total current assets 108,057 103,045 103,778
Investment in unconsolidated affiliates 15,144 14,823 14,700
Property and equipment, net 24,701 30,442 25,369
Notes receivable from related parties 1,500 1,506 1,500
Deferred tax asset - non-current 4,391 1,948 4,391
Other assets, net 4,055 3,955 3,952
--------- --------- ---------
Total assets $ 157,848 $ 155,719 $ 153,690
========= ========= =========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses 9,837 10,792 11,101
Customer layaway deposits 1,675 1,733 1,792
Federal income taxes payable 1,012 862 -
--------- --------- ---------
Total current liabilities 12,524 13,387 12,893
Long-term debt, less current maturities 32,450 39,309 31,000
Deferred gains and other long-term liabilities 4,229 4,114 4,319
--------- --------- ---------
Total long-term liabilities 36,679 43,423 35,319
Commitments and contingencies - - -
Stockholders' equity:
Preferred Stock, par value $.01 per share; Authorized
5,000,000 shares; none issued and outstanding - - -
Class A Non-Voting Common Stock, par value $.01 per
share;
Authorized 40,000,000 shares; 11,006,864 issued and
10,997,831 outstanding at December 31, 2003 and September
30, 2003; 10,985,675 issued and 10,976,642
outstanding at December 31, 2002 110 110 110
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; 1,190,057
issued and outstanding 12 12 12
Additional paid-in capital 115,580 114,731 115,580
Accumulated deficit (6,171) (15,275) (9,161)
Less deferred compensation expense (686) - (784)
--------- --------- ---------
108,845 99,578 105,757
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder (729) (729) (729)
Accumulated other comprehensive income 564 95 485
--------- --------- ---------
Total stockholders' equity 108,645 98,909 105,478
--------- --------- ---------
Total liabilities and stockholders' equity $ 157,848 $ 155,719 $ 153,690
========= ========= =========
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended
December 31,
-------------------------
2003 2002
--------- ----------
(In thousands, except per
share amounts)
Revenues:
Sales $ 33,555 $ 34,198
Pawn service charges 15,552 15,634
Payday loan service charges 4,861 3,077
Other 346 290
-------- --------
Total revenues 54,314 53,199
Cost of goods sold 19,273 21,320
-------- --------
Net revenues 35,041 31,879
Operating expenses:
Operations 22,616 21,444
Administrative 5,862 4,297
Depreciation and amortization 1,915 2,267
-------- --------
Total operating expenses 30,393 28,008
-------- --------
Operating income 4,648 3,871
Interest expense, net 448 657
Equity in net income of unconsolidated affiliate (365) (302)
-------- --------
Income before income taxes and cumulative effect of adopting a new
accounting principle 4,565 3,516
Income tax expense 1,575 1,231
-------- --------
Income before cumulative effect of adopting a new accounting principle 2,990 2,285
Cumulative effect of adopting a new accounting principle, net of tax -- (8,037)
-------- --------
Net income (loss) $ 2,990 $(5,752)
======== ========
Income (loss) per common share - basic:
Income before cumulative effect of adopting a new accounting
principle $ 0.25 $ 0.19
Cumulative effect of adopting a new accounting principle, net of tax $ -- $ (0.66)
-------- --------
Net income (loss) $ 0.25 $ (0.47)
======== ========
Income (loss) per common share - assuming dilution:
Income before cumulative effect of adopting a new accounting
principle $ 0.23 $ 0.18
Cumulative effect of adopting a new accounting principle, net of tax $ -- $ (0.65)
Net income (loss) $ 0.23 $ (0.47)
======== ========
Weighted average shares outstanding:
Basic 12,188 12,167
Assuming dilution 12,847 12,361
See Notes to Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended
December 31,
------------------------
2003 2002
--------- ---------
Restated
(In thousands)
Operating Activities:
Net income (loss) $ 2,990 $(5,752)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of adopting a new accounting principle -- 8,037
Depreciation and amortization 1,915 2,267
Payday loan loss provision 1,558 939
Deferred compensation expense 98 2
Income from investment in unconsolidated affiliate (365) (302)
Changes in operating assets and liabilities:
Service charges receivable, net (1,014) (847)
Inventory (21) 258
Notes receivable from related parties -- 17
Prepaid expenses, other current assets, and other assets, net (1,560) 2,061
Accounts payable and accrued expenses (1,264) (779)
Customer layaway deposits (117) (433)
Deferred gains and other long-term liabilities (90) (95)
Deferred taxes -- (3,139)
Federal income taxes 1,340 1,221
-------- --------
Net cash provided by operating activities 3,470 3,455
Investing Activities:
Pawn loans made (38,896) (39,668)
Pawn loans repaid 21,228 21,742
Recovery of pawn loan principal through sale of forfeited collateral 16,492 18,613
Payday loans made (11,123) (6,236)
Payday loans repaid 7,512 4,586
Additions to property and equipment (1,227) (495)
-------- --------
Net cash used in investing activities (6,014) (1,458)
Financing Activities:
Net proceeds (payments) on bank borrowings 1,450 (2,936)
-------- --------
Net cash provided by (used in) financing activities 1,450 (2,936)
-------- --------
Change in cash and equivalents (1,094) (939)
Cash and equivalents at beginning of period 2,496 1,492
-------- --------
Cash and equivalents at end of period $ 1,402 $ 553
======== ========
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 19,243 $ 20,460
Foreign currency translation adjustment $ 79 $ 115
See Notes to Interim Condensed Consolidated Financial Statements (unaudited).
3
EZCORP, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 2003
NOTE A: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring entries) considered necessary for a fair presentation have
been included. The accompanying financial statements should be read with the
Notes to Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended September 30, 2003. The balance sheet at
September 30, 2003 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
The Company's business is subject to seasonal variations, and operating results
for the three-month period ended December 31, 2003 are not necessarily
indicative of the results of operations for the full fiscal year.
NOTE B: SIGNIFICANT ACCOUNTING POLICIES
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of collectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of collectible
loans, affecting the Company's earnings and financial condition.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans and related service charges
reported in the Company's consolidated financial statements reflect only the
Company's participation interest in these loans. The Company accrues service
charges on the percentage of loans the Company deems to be collectible using the
interest method. Accrued service charges related to defaulted loans are deducted
from service charge revenue upon loan default, and increase service charge
revenue upon subsequent collection.
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
later, 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's payday loan bad debt expense, included in store operating expense, was
$1.6 million and $0.9 million for the three-month periods ended December 31,
2003 and 2002, representing 5.6% of loans made in each period.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: The Company also provides an allowance for
losses on active payday loans and related service charges receivable. Changes in
the principal valuation allowance are charged to bad debt expense, a component
of operations expense in the Company's statement of operations. Changes in the
service charge receivable valuation allowance are charged to payday loan service
charge revenue.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on the type and age
of merchandise as well as recent sales trends and margins. At December 31, 2003,
December 31, 2002, and September 30, 2003, the valuation allowance deducted from
the carrying value of inventory was $1.2 million, $2.2 million, and $1.8 million
(3.6%, 6.1%, and 5.8% of gross inventory), respectively. Changes in the
inventory valuation allowance are recorded as cost of goods sold.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable.
4
Factors which could trigger an impairment review include the following:
significant underperformance relative to historical or projected future cash
flows; significant changes in the manner of use of the assets or the strategy
for the overall business; and significant negative industry trends. When
management determines that the carrying value of tangible long-lived assets may
not be recoverable, impairment is measured based on the excess of the assets'
carrying value over the estimated fair value. No impairment of tangible
long-lived assets has been recognized in the quarters ended December 31, 2003
and 2002.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. As
part of the process of preparing the consolidated financial statements, the
Company is required to estimate income taxes in each of the jurisdictions in
which it operates. This process involves estimating the actual current tax
liability together with assessing temporary differences in recognition of income
for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood that the deferred tax assets will be
recovered from future taxable income. In the event the Company was to determine
that it would not be able to realize all or part of its net deferred tax assets
in the future, a valuation allowance would be charged to the income tax
provision in the period such determination was made. Likewise, should the
Company determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, a decrease to a valuation
allowance would increase income in the period such determination was made. The
Company evaluates the realizability of its deferred tax assets quarterly by
assessing the need for a valuation allowance, if any. No adjustments were made
to the Company's valuation allowance in the quarters ended December 31, 2003 and
2002.
STOCK-BASED COMPENSATION: The Company accounts for its stock based compensation
plans in accordance with the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations ("APB 25"). Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock Based Compensation," as amended by SFAS
No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure,"
encourages expensing the fair value of employee stock options, but allows an
entity to continue to account for stock based compensation to employees under
APB 25 with disclosures of the pro forma effect on net income had the fair value
accounting provisions of SFAS No. 123 been adopted. The Company has calculated
the fair value of options granted in these periods using the Black-Scholes
option-pricing model and has determined the pro forma impact on net income. See
Note H, Common Stock, Warrants, and Options.
PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated
depreciation of $67.6 million, $59.4 million and $65.7 million at December 31,
2003, December 31, 2002, and September 30, 2003, respectively.
Certain prior year balances have been reclassified to conform to the fiscal 2003
presentation.
5
NOTE C: EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share amounts):
Three Months Ended
December 31,
-------------------------
2003 2002
-------------------------
Numerator
Income before cumulative effect of adopting a new accounting principle $ 2,990 $ 2,285
Cumulative effect of adopting a new accounting principle, net of tax -- (8,037)
-------- --------
Net income (loss) $ 2,990 $ (5,752)
Denominator ======== ========
Denominator for basic earnings per share: weighted average shares 12,188 12,167
Effect of dilutive securities:
Warrants and options 659 194
-------- --------
Dilutive potential common shares 659 194
-------- --------
Denominator for diluted earnings per share: adjusted weighted average shares
and assumed conversions 12,847 12,361
======== ========
Basic earnings (loss) per share $ 0.25 $ (0.47)
======== ========
Diluted earnings (loss) per share $ 0.23 $ (0.47)
======== ========
The following table presents the weighted average shares subject to options
outstanding during the periods indicated. Anti-dilutive options have been
excluded from the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be anti-dilutive.
Three Months Ended
December 31,
-----------------------------
2003 2002
-----------------------------
Total options outstanding
Weighted average shares subject to options 2,134,420 1,961,383
Average exercise price per share $ 6.13 $ 6.32
Anti-dilutive options outstanding
Weighted average shares subject to options 812,563 933,618
Average exercise price per share $ 11.31 $ 10.77
NOTE D: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), approximately 29% of A&B's total outstanding shares. The Company
accounts for its investment in A&B using the equity method. Since A&B's fiscal
year ends three months prior to the Company's fiscal year, the income reported
by the Company for its investment in A&B is on a three-month lag. In accordance
with U.K. securities regulations, A&B files only semi-annual financial reports,
for its fiscal periods ending December 31 and June 30. The Company estimates
A&B's results of operations for the September 30 quarter for its financial
statements. The income reported for the Company's quarter ended December 31,
2003 represents its percentage interest in the results of A&B's operations from
July 1, 2003 to September 30, 2003, as estimated.
6
Below is summarized financial information for A&B's most recently reported
results (in thousands of U.S. dollars, using average exchange rates for the
periods indicated):
Year ended June 30,
-------------------
2003 2002
---- ----
Turnover (gross revenues) $ 32,094 $ 25,731
Gross profit 22,468 17,656
Profit after tax (net income) before change in accounting policy (a) 4,827 3,700
Profit after tax (net income) after change in accounting policy (a) 4,827 3,227
(a) According to A&B's annual report, "Cumulative goodwill written off
against reserves amounting to [U.S. $690,000 (2002: $628,000)] acquired
prior to adoption of FRS 10 [Financial Reporting Standard 10 in
accordance with United Kingdom Generally Accepted Accounting
Principles] has not been reinstated, as permitted by the transitional
provisions of FRS 10. A prior year adjustment was made in 2002 to
reflect the implementation of FRS 19."
NOTE E: CONTINGENCIES
From time to time, the Company is involved in litigation and regulatory actions
arising from its normal business operations. Currently, the Company is a
defendant in several actions, some of which involve claims for substantial
amounts. While the ultimate outcome of these actions cannot be determined, after
consultation with counsel, the Company believes the resolution of these actions
will not have a material adverse effect on the Company's financial condition,
results of operations, or liquidity. However, there can be no assurance as to
the ultimate outcome of these actions.
NOTE F: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) and other revenues,
expenses, gains and losses that are excluded from net income (loss) but are
included as a component of total stockholders' equity. Comprehensive income for
the quarter ended December 31, 2003 was $3.1 million, and comprehensive loss for
the quarter ended December 31, 2002 was $5.6 million. The difference between
comprehensive income (loss) and net income (loss) results primarily from the
effect of foreign currency translation adjustments determined in accordance with
SFAS No. 52, "Foreign Currency Translation." The accumulated balance of foreign
currency activity excluded from net income (loss) is presented in the Condensed
Consolidated Balance Sheets as "Accumulated other comprehensive income."
NOTE G: LONG-TERM DEBT
The Company's $42.5 million credit agreement matures March 31, 2005.
Availability of funds under the revolving credit facility is tied to loan and
inventory balances, and advances are secured by the Company's assets. At
December 31, 2003, $10.1 million was available under the credit agreement. The
Company may choose either a Eurodollar rate or the agent bank's base rate.
Interest accrues at the Eurodollar rate plus 250 to 325 basis points or the
agent bank's base rate plus 100 to 175 basis points, depending on the leverage
ratio computed at the end of each quarter, subject to a minimum rate of 4.5%. At
December 31, 2003, the effective rate was 4.6%. The Company also pays a
commitment fee of 37.5 basis points on the unused amount of the revolving
facility. Terms of the agreement require, among other things, that the Company
meet certain financial covenants. In addition, payment of dividends is
prohibited and additional debt is restricted.
NOTE H: COMMON STOCK, WARRANTS, AND OPTIONS
The Company accounts for its stock based compensation plans as described in Note
B, "Significant Accounting Policies." For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over the options'
vesting period.
7
The Company's pro forma results are as follows:
Three Months Ended
December 31,
----------------------------------------
2003 2002
(In thousands, except per share amounts)
----------------------------------------
Net income (loss), as reported $ 2,990 $ (5,752)
Add: stock based employee compensation expense included in
reported net income (loss), net of related tax effects 99 1
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects (257) (129)
--------- ---------
Pro forma net income (loss) $ 2,832 $ (5,880)
========= =========
Earnings (loss) per share - basic:
As reported $ 0.25 $ (0.47)
Pro forma $ 0.23 $ (0.48)
Earnings (loss) per share - assuming dilution:
As reported $ 0.23 $ (0.47)
Pro forma $ 0.22 $ (0.48)
On September 17, 2003, the Compensation Committee of the Board of Directors
approved an award of 125,000 shares of restricted stock to the Chairman of the
Board. The Company also agreed to reimburse the Chairman for the income tax
consequences resulting from the award. The market value of the restricted stock
on the award date was $0.8 million, which is being amortized over the two-year
restriction period expiring September 17, 2005. During the quarter ended
December 31, 2003, $0.1 million of this cost was amortized to expense. The
Company expects to amortize an additional $0.1 million of stock compensation
cost each quarter until the award's restrictions lapse in September 2005. In the
quarter ended December 31, 2003, the Company reimbursed $0.8 million for the
Chairman's taxes related to the award. The reimbursement was charged to
administrative expense.
NOTE I: CHANGE IN ACCOUNTING PRINCIPLE -- GOODWILL AND OTHER INTANGIBLE ASSETS
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective October 1, 2002. Under the provisions of SFAS No. 142, goodwill and
other intangible assets having indefinite lives are not subject to amortization
but are tested for impairment annually, or more frequently if events or changes
in circumstances indicate that the assets might be impaired. During the quarter
ended December 31, 2002, the Company completed impairment tests of its goodwill
and pawn licenses; its indefinite lived intangible assets. The testing indicated
no impairment of pawn licenses and an $8.0 million impairment charge for
goodwill, recorded as a cumulative effect of adopting a new accounting
principle. The Company's implied fair value of goodwill was $0 as a result of
the Company's allocation of enterprise value to all of the Company's assets and
liabilities. With the assistance of independent valuation specialists,
enterprise value was estimated based on discounted cash flows and market
capitalization.
At each balance sheet date presented above, the balance of pawn licenses -- the
only major class of indefinite lived intangible assets at each of these dates --
was $1.5 million.
8
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible assets at the
specified dates:
December 31, 2003 December 31, 2002 September 30, 2003
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
--------------------------------------------------------------------------------------
(In thousands)
License application
fees $ 742 $ 569 $ 742 $ 538 $ 742 $ 561
Real estate finders'
fees 554 257 554 220 554 249
Non-compete agreements
388 223 388 204 388 219
------ ------ ------ ------ ------ ------
Total $1,684 $1,049 $1,684 $ 962 $1,684 $1,029
====== ====== ====== ====== ====== ======
Total amortization expense from definite-lived intangible assets for the
three-month periods ended December 31, 2003 and 2002 was approximately $20,000
and $23,000, respectively. The following table presents the Company's estimate
of amortization expense for definite lived intangible assets for each of the
five succeeding fiscal years as of October 1, 2003 (in thousands):
Fiscal Year Amortization Expense
----------- --------------------
2004 $ 77
2005 68
2006 67
2007 67
2008 66
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
NOTE J: RESTATEMENT OF THE STATEMENTS OF CASH FLOWS
In addressing comments from the staff of the Securities and Exchange Commission,
the Company restated its Condensed Consolidated Statements of Cash Flows to
reclassify certain transactions between the operating and investing sections of
the Statements of Cash Flows. The Company has reviewed its classification of
cash flows arising from the forfeiture and subsequent sale of pawn loan
collateral. The Company determined that investing cash flows representing a
return of pawn loans receivable which were reported on the dates of loan
forfeiture should have been reported on the dates that the forfeited collateral
was sold. The previously reported cash flows have been adjusted to remove the
non-cash transfer of forfeited collateral from pawn loans to inventory, and to
report as a cash flow from investing activities the portion of sales proceeds
representing the return of amounts previously loaned. The effect of this
adjustment is to increase cash provided by operating activities and to decrease
cash flows from investing activities in the amounts of $2.8 million and $1.8
million in the quarters ended December 31, 2003 and 2002, respectively. The
Company also determined that it should have reported its payday loan loss
provision as an adjustment to reconcile net income to cash provided by operating
activities rather than including it in the net change in payday loans in
investing activities. The effect of the adjustment to correct this is to
increase cash flows from operating activities and to decrease cash flows from
investing activities in the amounts of $1.6 million and $0.9 million in the
quarters ended December 31, 2003 and 2002, respectively. Additionally, the
Company previously included renewed pawn loans as both a loan repaid and a loan
made. Because a customer need only pay accrued pawn service charges but not the
loan principal in order to renew a loan, the Company has restated its statements
of cash flows to exclude the principal portion of renewed loans from both loans
made and repaid. The effect of this adjustment is to reduce pawn loans made and
repaid by $6.1 million and $5.8 million in the quarters ended December 31, 2003
and 2002, respectively. As pawn loans made and repaid are each reported as
investing activities, there was no net effect on operating or investing cash
flows as a result of this adjustment.
9
A summary of the effects of these corrections is as follows:
Three Months Ended December 31, 2003
As Previously
Reported Adjustments As Restated
-------- ----------- -----------
(in thousands)
Net cash provided by (used in) operating activities $ (839) $ 4,309 $ 3,470
Net cash used in investing activities (1,705) (4,309) (6,014)
Net cash provided by financing activities 1,450 -- 1,450
------- -------
Change in cash and cash equivalents (1,094) -- (1,094)
Cash and equivalents at beginning of period 2,496 -- 2,496
------- ------- -------
Cash and equivalents at end of period $ 1,402 $ -- $ 1,402
======= ======= =======
Three Months Ended December 31, 2002
As Previously
Reported Adjustments As Restated
-------- ----------- -----------
(in thousands)
Net cash provided by operating activities $ 669 $ 2,786 $ 3,455
Net cash provided by (used in) investing activities 1,328 (2,786) (1,458)
Net cash used in financing activities (2,936) -- (2,936)
------- ------- -------
Change in cash and cash equivalents (939) -- (939)
Cash and equivalents at beginning of period 1,492 -- 1,492
------- ------- -------
Cash and equivalents at end of period $ 553 $ -- $ 553
======= ======= =======
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
First Quarter Ended December 31, 2003 vs. First Quarter Ended December 31, 2002
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three-month periods ended December 31, 2003
and 2002 ("Fiscal 2004 Quarter" and "Fiscal 2003 Quarter," respectively):
Three Months Ended % or
December 31, (a) Point
2003 2002 Change(b)
------------------------------------------
Net revenues:
Sales $33,555 $34,198 (1.9)%
Pawn service charges 15,552 15,634 (0.5)%
Payday loan service charges 4,861 3,077 58.0%
Other 346 290 19.3%
------- -------
Total revenues 54,314 53,199 2.1%
Cost of goods sold 19,273 21,320 (9.6)%
------- -------
Net revenues $35,041 $31,879 9.9%
======= =======
Other data:
Gross margin 42.6% 37.7% 4.9 pts.
Average annual inventory turnover 2.4x 2.5x (0.1)x
Average inventory per pawn location at quarter end $ 116 $ 120 (3.3)%
Average pawn loan balance per pawn location at $ 166 $ 167 (0.6)%
quarter end
Average yield on pawn loan portfolio 132% 130% 2 pts.
Pawn loan redemption rate 76% 75% 1 pt.
Expenses and income as a percentage of net revenues (%):
Store operating 64.5 67.3 (2.8) pts.
Administrative 16.7 13.5 3.2 pts.
Depreciation and amortization 5.5 7.1 (1.6) pts.
Interest, net 1.3 2.1 (0.8) pts.
Income before income taxes and cumulative effect 13.0 11.0 2.0 pts.
Income before cumulative effect 8.5 7.2 1.3 pts.
Stores in operation:
Beginning of period 284 280
New openings 19 -
Sold, combined or closed - -
------- -------
End of period 303 280
======= =======
Average number of stores during the period 293 280
======= =======
a In thousands, except percentages, inventory turnover and store count.
b In comparing the period differences between dollar amounts or per store counts, a percentage change is used.
In comparing the period differences between two percentages, a percentage point (pt.) change is used.
11
OVERVIEW
The Company meets the short-term cash needs of the cash and credit constrained
consumer by offering convenient, non-recourse loans secured by tangible personal
property, commonly known as pawn loans, and short-term non-collateralized loans,
often referred to as payday loans. The Company makes pawn loans in its 280
EZPAWN pawnshops, located in eleven states. The Company makes payday loans in
226 of its EZPAWN locations, 23 EZMONEY Payday Loans locations ("EZMONEY
stores"), and its Austin, Texas based call center.
The Company earns pawn service charge revenue on its pawn lending activity.
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, but varies depending on
the evaluation of each item pawned and prevailing gold prices. The allowable
term of pawn loans also differs by state, but is typically 30 days with an
automatic 60-day extension.
The Company earns payday loan service charge revenue on its payday loans. In 201
locations and its call center, the Company markets and services payday loans
made by County Bank of Rehoboth Beach ("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. In
48 of its locations, the Company makes payday loans under state law. The average
payday loan amount is approximately $370 and the terms are generally less than
30 days, averaging about 17 days. The service charge per $100 loaned is
typically $18 for a 7 to 23-day period, but varies in certain locations.
In its 280 EZPAWNs, the Company sells merchandise acquired primarily through
pawn loan forfeitures and, to a lesser extent, through purchases of customers'
merchandise. The realization of gross profit on sales of inventory primarily
depends on the Company's initial assessment of the property's resale value.
Improper assessment of the resale value of the collateral in the lending
function can result in reduced marketability of the property and the realization
of a lower margin.
In the Fiscal 2004 Quarter, the Company saw significant growth in its payday
loan balances and related earnings contribution. The Company also realized
improvements in its gross margins on merchandise sales primarily due to
effective liquidation of aged general merchandise and due to market-driven price
increases on gold jewelry sold to refiners. The Company's income improved to
$3.0 million in the Fiscal 2004 Quarter from $2.3 million before the cumulative
effect of adopting a new accounting principle in the Fiscal 2003 Quarter.
RESULTS OF OPERATIONS
The following discussion compares the results of operations for the Fiscal 2004
Quarter to the Fiscal 2003 Quarter. The discussion should be read in conjunction
with the accompanying financial statements and related notes.
The Company's Fiscal 2004 Quarter pawn service charge revenue decreased 0.5%, or
$0.1 million from the Fiscal 2003 Quarter to $15.6 million. This decrease was
due to lower average loan balances during the Fiscal 2004 Quarter, largely
offset by a two percentage point improvement in loan yields to 132% in the
Fiscal 2004 Quarter. Variations in the annualized loan yield, as seen between
these periods, are due generally to changes in statutory fees that can be
charged, changes in the level of loan forfeitures and a mix shift between loans
with different yields. The Company's average balance of pawn loans outstanding
during the Fiscal 2004 Quarter was 2% lower and ending pawn loans outstanding
were 1% lower than in the Fiscal 2003 Quarter.
In the Fiscal 2004 Quarter, 96.1% ($14.9 million) of recorded pawn service
charge revenue was collected in cash, and 3.9% ($0.7 million) resulted from an
increase in accrued pawn service charges receivable. In the Fiscal 2003 Quarter,
95.4% ($14.9 million) of recorded pawn service charge revenue was collected in
cash, and 4.6% ($0.7 million) resulted from an increase in accrued pawn service
charges receivable. The accrual of pawn service charges is dependent on the
Company's estimate of collectible loans in its portfolio at the end of each
quarter. Consistent with prior year treatment, the Company increased its
estimate of collectible loans at December 31, 2003 in anticipation of higher
loan redemptions during the income tax refund season occurring in the following
quarter.
12
Sales decreased $0.6 million in the Fiscal 2004 Quarter compared to the Fiscal
2003 Quarter, to $33.6 million. The decrease was primarily due to lower same
store merchandise sales ($0.5 million) and a decrease in jewelry scrapping sales
($0.1 million). The decrease in merchandise sales resulted primarily from the
Company's efforts to improve its gross profit and margins, as demonstrated in
the table below:
Quarter Ended December 31,
2003 2002
------- -------
(Dollars in millions)
Merchandise sales $ 31.1 $ 31.5
Jewelry scrapping sales 2.5 2.7
------- -------
Total sales 33.6 34.2
Gross profit on merchandise sales $ 13.5 $ 12.9
Gross profit on jewelry scrapping sales 0.8 0.0
Gross margin on merchandise sales 43.4% 40.7%
Gross margin on jewelry scrapping sales 32.2% 1.0%
Overall gross margin 42.6% 37.7%
The Fiscal 2004 Quarter overall gross margins on sales increased 4.9 percentage
points from the Fiscal 2003 Quarter to 42.6%. This resulted from improved
margins on same store merchandise sales and the effect higher recent gold prices
had on jewelry scrapping. Margins on merchandise sales, excluding jewelry
scrapping, increased 2.7 percentage points due to more effective liquidation of
aged general merchandise in the Fiscal 2004 Quarter. During the Fiscal 2004
Quarter, the inventory valuation allowance was reduced $0.6 million as a result
of the improved liquidation of aged merchandise. In the comparable Fiscal 2003
Quarter, the inventory allowance was increased $0.5 million due to the less
favorable liquidation of aged merchandise during that quarter. Changes in the
inventory valuation allowance are recorded in cost of goods sold, directly
impacting the Company's gross margins. Inventory shrinkage, also included in
cost of goods sold, was 1.7% of merchandise sales in the Fiscal 2004 Quarter
compared to 1.1% in the Fiscal 2003 Quarter.
Payday loan data are as follows:
Quarter Ended December 31,
2003 2002
------- -------
(Dollars in thousands)
Service charge revenue $ 4,861 $ 3,077
Bad debt (included in operating expense) (1,558) (939)
Other direct expenses (included in operating expense) (281) (358)
Collection and call center costs (included in administrative expense) (183) (143)
------- -------
Contribution to operating income $ 2,839 $ 1,637
======= =======
Average payday loan balance outstanding during quarter $ 4,451 $ 2,501
Payday loan balance at end of quarter $ 5,683 $ 3,037
Average loan balance per participating location at end of quarter $ 22.7 $ 13.3
Participating locations at end of quarter (whole numbers) 250 229
Net default rate (defaults net of collections, measured as a percent of
loans made) 5.6% 5.6%
The Contribution to operating income presented above is the incremental
contribution only and excludes other costs such as labor, rent, and other
overhead costs.
Payday loan service charge revenue and bad debt expense each increased from the
Fiscal 2003 Quarter primarily due to higher average loan balances. The maturing
of the product, a growth in the number of locations offering the loans, and the
introduction of EZMONEY stores increased the loan balance. In the Fiscal 2004
Quarter, 91.7% ($4.5 million) of recorded payday loan service charge revenue was
collected in cash, and 8.3% ($0.4 million) resulted from an increase in accrued
payday loan service charges receivable. In the comparable Fiscal 2003 Quarter,
13
96.0% ($3.0 million) of recorded payday loan service charge revenue was
collected in cash, and 4.0% ($0.1 million) was due to an increase in accrued
payday loan service charges receivable. The 55% increase in accrued payday loan
service charges receivable during the Fiscal 2004 Quarter was commensurate with
the 57% growth in the related payday loans receivable. The Company anticipates
continued growth in payday loans as it continues the expansion of additional
EZMONEY stores and the product matures in its current locations.
The Company provides for a valuation allowance on both the principal and fees
receivable for payday loans. Due to the short-term nature of these loans, the
Company uses recent net default rates and anticipated seasonal changes in the
rate of defaults as the basis for its valuation allowance, rather than reserving
the annual or quarterly rate. Actual loan losses could vary from those estimated
due to variance in any of these factors, as well as any national or regional
economic downturn. At December 31, 2003, the valuation allowance was $0.4
million, or 5.2% of the payday loan principal and fees receivable, compared to
$0.2 million, or 4.8% of payday loan principal and fees receivable at December
31, 2002.
Although store operating expenses decreased 2.8 percentage points when measured
as a percentage of net revenues, it increased 5.5% ($1.2 million) in dollar
terms, to $22.6 million. This was due primarily to a $0.6 million volume-related
increase in bad debt from payday loans and a 4.7% ($0.5 million) increase in
store labor and benefits.
Administrative expenses increased 36.4% ($1.6 million) from the Fiscal 2003
Quarter to $5.9 million, representing a 3.2 percentage point increase when
measured as a percent of net revenues. The primary drivers of this were a $0.6
million increase in accrued incentive compensation related to the Company's
improved performance and $0.9 million for restricted stock awarded to the
Company's chairman as a long-term incentive. The market value of the restricted
stock on the award date was $0.8 million, which is being amortized over the
two-year restriction period. In the Fiscal 2004 Quarter, $0.1 million of this
cost was amortized to expense. The remaining $0.8 million of the Fiscal 2004
Quarter cost is for the one-time charge for related taxes paid on the chairman's
behalf as a term of the award. The Company expects to amortize an additional
$0.1 million of stock compensation cost each quarter until the award's
restrictions lapse in September 2005.
Depreciation and amortization expense decreased $0.4 million in the Fiscal 2004
Quarter to $1.9 million. This improvement is primarily due to the reduction in
depreciable assets through the 2003 sale-leaseback of three previously owned
locations and assets that became fully depreciated over the past year.
In the Fiscal 2004 Quarter, interest expense decreased by $0.2 million to $0.4
million as a result of lower average debt balances and lower effective interest
rates. At December 31, 2003, the Company's total debt was $32.5 million compared
to $39.3 million at December 31, 2002.
The Fiscal 2004 Quarter income tax provision was $1.6 million (34.5% of pretax
income) compared to $1.2 million (35% of pretax income) for the Fiscal 2003
Quarter. The decrease in effective tax rate between these periods is due to
non-tax deductible items having a smaller percentage impact on larger pre-tax
earnings.
On October 1, 2002, the Company adopted SFAS No. 142 regarding goodwill and
other intangible assets. During the Fiscal 2003 Quarter, the Company completed
its transitional impairment tests, resulting in a non-cash $8.0 million, net of
tax impairment charge for goodwill, recorded as a cumulative effect of adopting
a new accounting principle.
Operating income for the Fiscal 2004 Quarter increased $0.8 million from the
Fiscal 2003 Quarter to $4.6 million. The $1.2 million greater contribution from
payday loans and $1.4 million higher gross profit on sales were somewhat offset
by $1.9 million additional labor, benefits, and incentive compensation expense.
After a $0.4 million decrease in depreciation and amortization, a $0.2 million
decrease in interest expense, and smaller changes in other non-operating items,
income before the cumulative effect of adopting a new accounting principle
improved to $3.0 million in the Fiscal 2004 Quarter from $2.3 million in the
Fiscal 2003 Quarter. The Company's net income for the Fiscal 2004 Quarter was
$3.0 million, compared to a net loss of $5.8 million after the cumulative effect
of adopting a new accounting principle in the Fiscal 2003 Quarter.
14
LIQUIDITY AND CAPITAL RESOURCES
Certain transactions presented in the restated Statements of Cash Flows for the
quarters ended December 31, 2003 and 2002 have been reclassified between certain
sections of the Statements of Cash Flows. A summary of these reclassifications
showing their effect on the restated Statements of Cash Flows is provided in
Note J to the Condensed Consolidated Financial Statements.
In both the Fiscal 2004 Quarter and the Fiscal 2003 Quarter, the Company's
operating activities produced $3.5 million. Cash from the sale of inventory
(less the portion representing a recovery of pawn loan principal) increased $1.8
million in the Fiscal 2004 Quarter and payday loan service charges collected
increased $1.5 million due primarily to the growth in the underlying loan
portfolio. Largely offsetting these increases in cash flows was the payment of
$0.7 million to settle previously accrued workers' compensation claims and $0.8
million of payroll taxes related to the restricted stock award discussed above.
Among other smaller changes, the Company also paid $0.4 million more in
incentive compensation than it did in the Fiscal 2003 Quarter and used $0.3
million more in the Fiscal 2004 Quarter for the direct purchase of customers'
merchandise. Pawn service charges collected in cash were approximately equal in
each of the quarters presented.
The Company used $6.0 million of cash for investing activities during the Fiscal
2004 Quarter, consisting of $3.6 million invested in payday loans net of
repayments, $1.2 million invested in pawn loans net of repayments and recovery
through the sale of forfeited collateral, and $1.2 million in property and
equipment. The investing activities were funded through $3.5 million of cash
flows from operating activities, $1.1 million of cash on hand, and bank
borrowings of $1.5 million.
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations in the full fiscal years ending September 30:
Operating Lease Revolving
Obligations Credit Facility Total
--------------- --------------- --------
(in thousands)
2004 $ 11,995 $ -- $ 11,995
2005 10,156 32,450 42,606
2006 8,706 -- 8,706
2007 6,954 -- 6,954
2008 4,788 -- 4,788
Thereafter 25,220 -- 25,220
-------- -------- --------
Total $ 67,819 $ 32,450 $100,269
======== ======== ========
In the remaining nine months of the fiscal year ending September 30, 2004, the
Company also plans to open an additional 50 to 70 EZMONEY payday loan stores for
an expected aggregate capital expenditure of approximately $2.0 million, plus
the funding of working capital and start-up losses at these stores. While the
Company anticipates that these new stores will increase future earnings, it
expects they will have a negative effect on earnings and cash flow in their
first year of operation.
The Company's $42.5 million credit agreement matures March 31, 2005.
Availability of funds under the revolving credit facility is tied to loan and
inventory balances, and advances are secured by the Company's assets. At
December 31, 2003, $10.1 million was available under the credit agreement. Terms
of the agreement require, among other things, that the Company meet certain
financial covenants. In addition, payment of dividends is prohibited and
additional debt is restricted. While there can be no assurance that the
Company's efforts will be successful, it is currently negotiating an extension
of its credit agreement such that its principal will not be due in 2005, and
anticipates extending it at terms at least as favorable as those in its current
agreement.
The Company anticipates that cash flow from operations and availability under
its revolving credit facility will be adequate to fund its contractual
obligations, planned store growth, capital expenditures, and working capital
requirements during the coming year.
15
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow is greatest in its second fiscal quarter
primarily due to a high level of loan redemptions and sales in the income tax
refund season.
USE OF ESTIMATES AND ASSUMPTIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates its estimates and
judgments, including those related to revenue recognition, inventory, allowance
for losses on payday loans, long-lived and intangible assets, income taxes,
contingencies and litigation. Management bases its estimates on historical
experience, observable trends, and various other assumptions that are believed
to be reasonable under the circumstances. Management uses this information to
make judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ materially from
the estimates under different assumptions or conditions.
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 condensed 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, but did identify and
take corrective action related to a significant deficiency in its disclosure
controls and procedures surrounding the preparation of its Condensed
Consolidated Statements of Cash Flows, as more thoroughly discussed in Item 4,
"Controls and Procedures" below. Other risk factors, such as those discussed
elsewhere in this interim report as well as changes in business strategies,
could adversely impact the consolidated financial position, results of
operations, and cash flows in future periods.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold prices. The Company also is exposed to regulatory risk in relation to its
payday loans. 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. If
interest rates average 50 basis points more during the remaining nine months of
the fiscal year ending September 30, 2004 than they did in the comparable period
of 2003, the Company's interest
16
expense during those nine months would increase by approximately $122,000. This
amount is determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate debt at December 31, 2003.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to the equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment representing the strengthening in the U.K. pound
during the quarter ended September 30, 2003 (included in the Company's December
31, 2003 results on a three-month lag as described above) was approximately a
$79,000 increase to stockholders' equity. On December 31, 2003, the U.K. pound
closed at 1.00 to 1.7785 U.S. dollars, a strengthening from 1.6671 at September
30, 2003. No assurance can be given as to the future valuation of the U.K. pound
and how further movements in the pound could affect future earnings or the
financial position of the Company.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q 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 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, pawn redemption rates, payday loan default
and collection rates, labor and employment matters, competition, operating risk,
acquisition and expansion risk, changes in the number of expected store
openings, changes in expected returns from new stores, 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 4. CONTROLS AND PROCEDURES
The Company restated its Condensed Consolidated Statements of Cash Flows for the
quarter ended December 31, 2003 and the years ended September 30, 2003, 2002 and
2001. For a description of the restatement of the Condensed Consolidated
Statements of Cash Flows and the amendment of related disclosures, see the
Explanatory Note on the second page of this Form 10-Q/A.
Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, management of the Company has
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of December 31, 2003 ("Evaluation
Date").
In making this evaluation, we considered matters relating to the restatement of
the previously issued Consolidated Statements of Cash Flows and the amendment of
related disclosures. The Company determined that a significant deficiency
existed in its disclosure controls surrounding the preparation of the Statements
of Cash Flows. The Company has taken steps to improve the control processes
surrounding the preparation and review of the Statements of Cash Flows.
Specifically, key personnel involved in the preparation and review of the
Company's financial statements have undertaken research of both authoritative
guidance and industry practices in order to improve their understanding of cash
flow presentation issues relevant to the consumer finance industry. Management
also will institute more rigorous reviews of the elements contained in the
Statement of Cash Flows to be certain that it accurately captures only cash
items consistent with the requirements of the Financial Accounting Standards
Board's
17
Statement of Financial Accounting Standards No. 95 -- Statement of Cash Flows
("SFAS 95"), and properly segregates transactions between the different
activities presented in the Consolidated Statements of Cash Flows. There were no
other significant deficiencies, and therefore there were no other corrective
actions taken.
In light of, among other things, the facts and circumstances relating to the
restatement, the Chief Executive Officer and Chief Financial Officer concluded
the significant deficiency noted above and the restatement itself were not
reflective of any material weakness in the disclosure controls and procedures.
In support of this conclusion, the Chief Executive Officer and Chief Financial
Officer noted that the Company's restatement of its Consolidated Statements of
Cash Flows for the quarter ended December 31, 2003 and the years ended September
30, 2003, 2002 and 2001 is, in substance, only a reclassification of certain
items as well as an elimination of certain non-cash items in the Consolidated
Statements of Cash Flows, as more fully described in Note J to the Condensed
Consolidated Financial Statements. Also, to management's knowledge no investor
has expressed to the Company any confusion or uncertainty about the Company's
disclosure approach during that period of time.
The reclassification is the result of an interpretation of the Company's
business characteristics in relation to generally accepted accounting principles
pursuant to the requirements of SFAS 95, which calls for the exclusion of
non-cash transactions from the statement of cash flows.
Management assessed the magnitude of any actual or potential misstatement
resulting from the changes described above and concluded that the magnitude of
any actual or potential misstatement was limited to the classification of
certain items in the "Cash Flows from Operating Activities" and "Cash Flows from
Investing Activities" sections of the Consolidated Statements of Cash Flows and
did not affect any other part of the Consolidated Statements of Cash Flows or
any of the Company's other financial statements.
Based upon the evaluation described above, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Additionally,
there were no significant changes in the Company's internal controls or other
factors that could significantly affect those controls subsequent to the date of
their evaluation.
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, does not expect that the Company's disclosure controls and
procedures or internal controls will prevent all possible error and fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected.
18
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory actions
arising from its normal business operations. Currently, the Company is a
defendant in several actions, some of which involve claims for substantial
amounts. While the ultimate outcome of these actions cannot be determined, after
consultation with counsel, the Company believes the resolution of these actions
will not have a material adverse effect on the Company's financial condition,
results of operation, or liquidity. There can be no assurance, however, as to
the ultimate outcome of these actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Incorporated by
Number Description Reference to
------ ----------- ------------
31.1 Certification of Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Filing Date Item Reported Information Reported
-------- ------- ------------- --------------------
8-K 1/19/04 Item 12 -- Quarterly earnings announcement and related press
Results of release.
Operations and
Financial
Condition
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCORP, INC.
(Registrant)
Date: November 24, 2004 By:/s/ DAN N. TONISSEN
----------------------
(Signature)
Dan N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
20
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to Page
------- ----------- --------------- ----
31.1 Certification of Chief Executive 22
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial 23
Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive 24
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial 25
Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
21