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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
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 0-19424
-------------------------------
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, 100% of which is
owned by one record holder who is an affiliate of the registrant. There is no
trading market for the Class B Voting Common Stock.
As of June 30, 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.
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2002, June 30, 2001 and September
30, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations for the Three Months and Nine Months
Ended June 30, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosures about Market Risk. . . . . . . . . . . . . . 15
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PART I
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
June 30, June 30, September 30,
2002 2001 2001
--------------- -------------- -------------
(In thousands)
(Unaudited) (Note A)
Assets:
Current assets:
Cash and cash equivalents $ 1,418 $ 2,626 $ 2,186
Pawn loans 47,648 47,199 47,144
Short-term loans 1,784 800 1,250
Service charges receivable, net 8,635 8,007 8,841
Inventory, net 32,634 33,711 34,231
Deferred tax asset 6,434 7,081 7,413
Prepaid expenses and other current assets 2,359 2,692 2,180
-------- -------- --------
Total current assets 100,912 102,116 103,245
Investment in unconsolidated affiliate 13,932 13,716 13,812
Property and equipment, net 34,214 52,384 44,965
Goodwill, net 11,274 11,782 11,655
Notes receivable from related parties 1,539 3,106 1,589
Other assets, net 3,439 3,548 3,294
-------- -------- --------
Total assets $165,310 $186,652 $178,560
========= ========= ========
Liabilities and stockholders' equity:
Current liabilities:
Current maturities of long-term debt $ 43,445 $ 67,671 $ 15,947
Accounts payable and other accrued expenses 10,620 9,346 9,666
Restructuring reserve 46 481 217
Customer layaway deposits 1,811 2,045 2,081
-------- -------- --------
Total current liabilities 55,922 79,543 27,911
Long-term debt, less current maturities - 91 44,245
Deferred tax liability 1,193 990 1,193
Deferred gains and other long-term liabilities 4,200 2,897 3,254
-------- -------- --------
Total long-term liabilities 5,393 3,978 48,692
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; 10,985,675 issued and
10,976,642 outstanding at June 30, 2002; 10,946,874
issued and 10,937,841 outstanding at June 30, 2001 110 109 109
and September 30, 2001
Class B Voting Common Stock, convertible, par value $.01
per share;
Authorized 1,198,990 shares; 1,190,057 issued and 12 12 12
outstanding
Additional paid-in capital 114,723 114,663 114,664
Accumulated deficit (9,774) (10,515) (11,727)
-------- -------- --------
105,071 104,269 103,058
Treasury stock, at cost (9,033 shares) (35) (35) (35)
Receivable from stockholder (729) (729) (729)
Accumulated other comprehensive loss (312) (374) (337)
-------- -------- --------
Total stockholders' equity 103,995 103,131 101,957
-------- -------- --------
Total liabilities and stockholders' equity $165,310 $186,652 $178,560
======== ======== ========
See Notes to Condensed Consolidated Financial Statements (unaudited).
1
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------ -------------- -------------
(In thousands, except per share amounts)
Revenues:
Sales $ 28,386 $ 29,784 $ 97,775 $ 98,029
Service charges 14,754 13,316 47,427 41,131
-------- -------- -------- --------
43,140 43,100 145,202 139,160
Cost of goods sold 17,601 18,427 60,591 57,960
-------- -------- -------- --------
Net revenues 25,539 24,673 84,611 81,200
Operating expenses:
Operations 19,165 18,345 58,762 56,061
Administrative 3,639 3,010 11,510 10,523
Depreciation and amortization 2,501 2,870 7,631 8,118
Restructuring expense (reversal) -- (696) -- (696)
-------- -------- -------- --------
25,305 23,529 77,903 74,006
-------- -------- -------- --------
Operating income 234 1,144 6,708 7,194
Interest expense, net 972 2,028 3,711 6,548
Equity in net income of unconsolidated affiliate (110) (71) (422) (208)
Loss on sale of assets 186 166 319 162
-------- -------- -------- --------
Income (loss) before income taxes (814) (979) 3,100 692
Income tax expense (benefit) (301) (537) 1,147 48
-------- -------- -------- --------
Net income (loss) $ (513) $ (442) $ 1,953 $ 644
======== ======== ======== ========
Net income (loss) per share, basic and fully diluted $ (0.04) $ (0.04) $ 0.16 $ 0.05
======== ======== ======== ========
Weighted average shares outstanding:
Basic 12,148 12,113 12,133 12,094
======== ======== ======== ========
Fully diluted 12,148 12,113 12,275 12,094
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements (unaudited).
2
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended
June 30,
--------------------------
2002 2001
--------- ---------
(In thousands)
Operating Activities:
Net income $ 1,953 $ 644
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,631 8,118
Restructuring expenses (reversal) -- (696)
Net loss on sale or disposal of assets 319 162
Income from investment in unconsolidated affiliate (422) (208)
Changes in operating assets and liabilities:
Service charges receivable 206 622
Inventory 1,597 1,949
Prepaid expenses, other current assets, and other assets (950) (1,833)
Accounts payable and accrued expenses 1,444 (2,288)
Restructuring reserve (171) (1,623)
Customer layaway deposits (270) (287)
Deferred gains and other long-term liabilities (247) (18)
Federal income taxes 979 4,951
---------- ---------
Net cash provided by operating activities 12,069 9,493
Investing Activities:
Pawn loans forfeited and transferred to inventory 52,345 51,249
Pawn loans made (138,931) (137,784)
Pawn loans repaid 86,082 86,252
---------- ---------
Net increase in loans (504) (283)
Short-term loans (534) (830)
Additions to property, plant, and equipment (1,281) (3,952)
Dividends received from unconsolidated affiliate 327 236
Proceeds from sale of assets 5,902 8,186
---------- ---------
Net cash provided by investing activities 3,910 3,357
Financing Activities:
Net payments on bank borrowings (16,747) (13,350)
---------- ---------
Net cash used in financing activities (16,747) (13,350)
---------- ---------
Change in cash and cash equivalents (768) (500)
Cash and cash equivalents at beginning of period 2,186 3,126
---------- ---------
Cash and cash equivalents at end of period $ 1,418 $ 2,626
========== =========
Non-cash Investing and Financing Activities:
Foreign currency translation adjustment $ 25 $ (278)
Deferred gain on sale-leasebacks $ 1,278 $ 2,763
Issuance of stock to 401k plan $ 60 $ 89
See Notes to Condensed Consolidated Financial Statements (unaudited).
3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
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, 2001.
The Company's business is subject to seasonal variations, and operating results
for the nine-month period ended June 30, 2002 are not necessarily indicative of
the results of operations for the full fiscal year.
The balance sheet at September 30, 2001 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.
NOTE B: RESTRUCTURING
As more fully described in Note C to the Company's audited financial statements
for the year ended September 30, 2001, the Company adopted a restructuring plan
in its fiscal year ended September 30, 2000. Execution of the plan resulted in
the closure of 47 stores by March 31, 2001. No additional store closures are
expected as part of this plan. During the quarter ended June 30, 2002, the
Company expended $47,000 of rent and related costs for closed stores. At June
30, 2002, the remaining restructuring reserve of $46,000 relates primarily to
future rent on closed stores, with leases expiring over the next three years.
The results of operations from the 47 closed stores were not material to the
nine months ended June 30, 2001.
In conjunction with the restructuring in fiscal 2000, the Company recorded an
additional $1.2 million inventory reserve for anticipated losses on sales at
stores to be closed. This amount was charged to cost of goods sold in fiscal
2000 and is excluded from the restructuring reserve discussed above. This
inventory reserve was fully utilized by June 30, 2001 as the related inventory
was sold.
NOTE C: ACCOUNTING PRINCIPLES AND PRACTICES
The provision (benefit) for federal income taxes has been calculated based on
the Company's estimate of its effective tax rate for the full fiscal year.
The Company provides inventory reserves for shrinkage and cost in excess of
market value. The Company estimates these reserves using analysis of sales
trends, inventory aging, sales margins, and inventory shrinkage. At June 30,
2002, June 30, 2001, and September 30, 2001, inventory reserves were $1.0
million, $1.0 million, and $1.1 million, respectively.
Property and equipment is shown net of accumulated depreciation of $55.1
million, $47.6 million and $49.1 million at June 30, 2002, June 30, 2001, and
September 30, 2001, respectively.
Certain prior year balances have been reclassified to conform to the fiscal 2002
presentation.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
NOTE D: EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings
per share (in thousands, except per share data):
Three Months Ended Nine Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
------- ------ ------- ------
Numerator
Numerator for basic and diluted earnings per share: net income (loss) $ (513) $ (442) $ 1,953 $ 644
======= ====== ======= ======
Denominator
Denominator for basic earnings per share: weighted average shares 12,148 12,113 12,133 12,094
Effect of dilutive securities:
Warrants and options -- -- 142 --
------- ------ ------- ------
Dilutive potential common shares -- -- 142 --
------- ------ ------- ------
Denominator for diluted earnings per share: adjusted weighted
average shares and assumed conversions 12,148 12,113 12,275 12,094
======= ====== ======= ======
Basic and diluted earnings (loss) per share $ (0.04) $ (0.04) $ 0.16 $ 0.05
======= ====== ======= ======
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. Options outstanding at June
30, 2002 and 2001 were excluded from the computation of loss per share because
the Company incurred a loss in the three-month period of each year.
Three Months Ended Nine Months Ended
June 30 June 30
----------------------- ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Total options outstanding
Weighted average shares subject to options 1,456,699 1,352,594 1,462,918 1,377,412
Average exercise price per share $ 7.71 $ 8.21 $ 7.69 $ 8.18
Anti-dilutive options outstanding
Weighted average shares subject to options 935,508 949,102 937,792 1,377,412
Average exercise price per share $ 10.89 $ 10.85 $ 10.88 $ 8.18
NOTE E: INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), a company organized in the United Kingdom, representing 29% of A&B's
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. The income reported for the Company's nine-month period ended
June 30, 2002 represents its percentage interest in the results of A&B's
operations from July 2001 through March 2002, reduced by the amortization of
goodwill.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
NOTE F: CONTINGENCIES
From time to time, the Company is involved in litigation and claims arising from
its normal business operations. Currently, the Company is a defendant in several
lawsuits, some of which involve claims for substantial amounts. While the
ultimate outcome of these lawsuits cannot be ascertained, based on consultation
with legal counsel, the Company believes the resolution of these suits will not
have a material adverse effect on the Company's financial condition or results
of operations. However, there can be no assurance as to the ultimate outcome of
these matters.
NOTE G: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total shareholders' equity. Comprehensive income (loss) for the three and nine
months ended June 30, 2002 was approximately $(0.6) million and $2.0 million,
and the comprehensive loss for the three and nine months ended June 30, 2001 was
approximately $(0.7) million and $0.4 million, respectively. The difference
between comprehensive income and net income is the effect of foreign currency
translation adjustments in accordance with Statement of Financial Accounting
Standards 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 loss."
NOTE H: LONG-TERM DEBT
The Company's credit agreement, maturing October 1, 2002, provides for a $45
million revolving credit facility and a term loan of approximately $15 million,
both of which are secured by substantially all of the Company's assets.
Availability under the revolving credit facility is based on loan and inventory
balances. Interest on the revolving credit facility accrues at the agent bank's
prime rate ("Prime") plus 300 basis points, and is payable monthly at Prime plus
100 basis points. The accrued but unpaid interest is payable upon the earlier of
the refinancing or maturity of the revolving credit facility. Until its
retirement on June 7, 2002, interest on the term loan accrued and was paid
monthly at Prime plus 350 basis points. The Company pays a commitment fee of 25
basis points on the unused amount of the revolving facility.
The Company believes that the financial covenants established in the credit
facility will be achieved based upon the Company's current and anticipated
performance. Based upon the performance to date and management's expected
performance for the remainder of Fiscal 2002, including the availability under
the revolving credit facility, the Company believes that there is adequate
liquidity to fund the Company's operations. However, material shortfalls or
variances from anticipated performance could require the Company to seek a
further amendment to the credit facility or alternate sources of financing, or
to limit capital expenditures to an amount less than that currently anticipated
or permitted under the credit facility.
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2002
NOTE I: RECENT PRONOUNCEMENTS: GOODWILL AND OTHER INTANGIBLE ASSETS - SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). The standard provides that effective October 1, 2002, goodwill
and other intangible assets having an indefinite useful life acquired in
business combinations completed after June 30, 2001, are no longer subject to
amortization to earnings. The useful lives of other intangible assets must be
reassessed at that time, and the remaining amortization periods adjusted
accordingly. Goodwill and other intangible assets having an indefinite useful
life will be tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the assets might be impaired.
The Company will adopt the provisions of SFAS No. 142 for its Fiscal 2003 year,
and will complete impairment testing prior to March 31, 2003. Management has not
yet determined the impact, if any, that adoption of this pronouncement will have
on its financial position or results of operations. There can be no assurance
that at the time the review is completed an impairment charge will not be
recorded.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
Third Quarter Ended June 30, 2002 vs. Third Quarter Ended June 30, 2001
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the three months ended June 30, 2002 and 2001.
Three Months Ended % or
June 30,(a) Point
2002 2001 Change(b)
-------- -------- ------------
Net revenues:
Sales $ 28,386 $ 29,784 (4.7)%
Service charges 14,754 13,316 10.8%
-------- --------
Total revenues 43,140 43,100 0.0%
Cost of goods sold 17,601 18,427 (4.5)%
-------- --------
Net revenues $ 25,539 $ 24,673 3.5%
======== ========
Other data:
Gross profit as a percent of sales 38.0% 38.1% (0.1) pts.
Average annual inventory turnover 2.2x 2.2x 0.0x
Inventory per store at end of period $ 117 $ 117 0.0%
Pawn loan balance per store at end of period $ 170 $ 163 4.3%
Short-term loan balance per store at end of period $ 6 $ 3 100.0%
Average yield on pawn loan portfolio 116% 116% 0 pts.
Expenses as a percent of total revenues:
Operations 44.4% 42.6% 1.8 pts.
Administrative 8.4% 7.0% 1.4 pts.
Depreciation and amortization 5.8% 6.7% (0.9) pts.
Interest, net 2.3% 4.7% (2.4) pts.
Locations in operation:
Beginning of period 280 289
Acquired -- --
Established -- --
Sold, combined or closed -- --
-------- --------
End of period 280 289
======== ========
Average locations in operation during the period(c) 280 289
(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.
(c) Average locations in operation during the period are calculated based on the
average of the locations operating at the beginning and end of such period.
8
Nine Months Ended June 30, 2002 vs. Nine Months Ended June 30, 2001
The following table sets forth selected, unaudited, consolidated financial data
with respect to the Company for the nine months ended June 30, 2002 and 2001.
Nine Months Ended % or
June 30,(a) Point
2002 2001 Change(b)
-------- -------- ------------
Net revenues:
Sales $ 97,775 $ 98,029 (0.3)%
Service charges 47,427 41,131 15.3%
-------- --------
Total revenues 145,202 139,160 4.3%
Cost of goods sold 60,591 57,960 4.5%
-------- --------
Net revenues $ 84,611 $ 81,200 4.2%
======== ========
Other data:
Gross profit as a percent of sales 38.0% 40.9% (2.9) pts.
Average annual inventory turnover 2.5x 2.1x 0.4x
Inventory per store at end of the period $ 117 $ 117 0.0%
Pawn loan balance per store at end of period $ 170 $ 163 4.3%
Short-term loan balance per store at end of period $ 6 $ 3 100.0%
Average annualized yield on loan portfolio 124% 121% 3 pts.
Expenses as a percent of total revenues:
Operations 40.5% 40.3% 0.2 pt.
Administrative 7.9% 7.6% 0.3 pt.
Depreciation and amortization 5.3% 5.8% (0.5) pt.
Interest, net 2.6% 4.7% (2.1) pts.
Locations in operation:
Beginning of period 283 313
Acquired -- --
Established -- --
Sold, combined or closed 3 24
-------- --------
End of period 280 289
======== ========
Average locations in operation during the period(c) 281 294
(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.
(c) Average locations in operation during the period are calculated based on the
average of the locations operating at the beginning and end of such period.
9
GENERAL OVERVIEW AND SIGNIFICANT ACCOUNTING POLICIES
EZCORP, Inc. (the "Company") is primarily engaged in operating pawnshops which
function as convenient sources of consumer credit and as value oriented
retailers of primarily previously owned merchandise. The Company also offers
short-term loans, commonly referred to as "payday loans" in most of its
pawnshops. At June 30, 2002, the Company operated 280 pawnshops in eleven states
compared to 289 in twelve states at June 30, 2001.
The Company has three main sources of revenue: pawn service charges, sales of
primarily forfeited collateral, and fees on short-term loans. For the nine-month
fiscal 2002 period, pawn service charges, sales, and short-term loan fees
comprised 29%, 67%, and 4% of total revenues compared to 29%, 70%, and 1% for
the nine-month fiscal 2001 period. After deducting the cost of goods sold, net
revenues for the nine-month fiscal 2002 period are comprised of 50% pawn service
charges, 44% gross profit on merchandise sales, and 6% short-term loan fees
compared to 50%, 49%, and 1% for the nine-month fiscal 2001 period.
Pawn service charge revenue for a period is the sum of pawn service charges
collected and the change in the pawn service charge receivable. The pawn service
charge receivable represents the service charges that would be paid if all
accrued loan fees were paid in full at the end of the period, less an allowance
for expected loan forfeitures. The expected level of forfeitures within the
ending pawn loan balance is based on recent loan redemption statistics adjusted
for seasonal changes expected to occur over the next ninety days. From quarter
to quarter, the pawn service charge receivable fluctuates with the seasonal
fluctuations in loan volumes and redemption rates.
Same store pawn service charge revenues vary due to changes in average loan
balances and changes in the average yield on these balances. Average yields vary
due to changes in expected loan forfeitures and mix shifts in the loan portfolio
between loans with different yields.
The Company introduced short-term loans during the quarter ended March 31, 2001.
Unlike pawn loans, short-term loans 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 through subsequent collection efforts, the Company charges
defaulted loans to bad debt expense immediately upon default, leaving only
current loans in the reported balance. Collections of defaulted loans are
recorded as a reduction of bad debt expense at the time of collection. In
addition to writing off loans immediately upon default, the Company also records
a valuation allowance on both the principal and fees receivable from current
loans, based on recent and anticipated net default rates. Net defaults and
changes in the principal valuation allowance are charged to bad debt expense.
Changes in the fee receivable valuation allowance are charged to service charge
revenue.
The Company offers short-term loans in 217 of its locations at June 30, 2002
compared to 212 locations a year ago. In 199 of the locations providing
short-term loans, the Company markets and services loans on behalf of County
Bank, a federally insured Delaware banking corporation. After origination of the
loans, the Company can purchase an 85% participation in the loans marketed for
County Bank. The loans and related fees reported in the Company's financial
statements reflect only the Company's participation in such loans.
FISCAL 2000 RESTRUCTURING CHARGE
During the Company's fourth fiscal 2000 quarter, the Company made the decision
to close up to 54 stores. As of June 30, 2001, 47 of the 54 stores had closed.
In June 2001, the Company re-evaluated the seven remaining stores and decided to
continue their operation, based on improved performance and future outlook for
these stores. Accordingly, the Company reversed the $1.3 million restructure
accrual related to these seven stores. The Company recorded an additional $0.3
million restructure expense for the 47 stores previously closed, primarily to
account for lease obligations in excess of original estimates, resulting in a
net credit to restructuring expense of $1.0 million in the period ended June 30,
2001. Of the $1.0 million net credit, $0.7 million is for the anticipated
administrative costs and loss from disposing of the seven stores' fixed and
intangible assets and is recorded as a credit to restructuring expense, where
the charge was recorded in September 2000. The remaining $0.3 million was
10
originally charged to cost of goods sold to reduce these stores' inventory to
liquidation value, and was credited to cost of goods sold in June 2001, as the
Company no longer expected to sell this inventory at liquidation prices.
RESULTS OF OPERATIONS
THIRD QUARTER ENDED JUNE 30, 2002 VS. THIRD QUARTER ENDED JUNE 30, 2001
The following discussion compares results for the three-month period ended June
30, 2002 ("Fiscal 2002 Quarter") to the three-month period ended June 30, 2001
("Fiscal 2001 Quarter"). The discussion should be read in conjunction with the
accompanying financial statements and related notes.
For the Fiscal 2002 Quarter, pawn service charge revenue increased $0.1 million
from the Fiscal 2001 Quarter to $12.8 million, due to slightly higher average
loan balances and yields in the Fiscal 2002 Quarter. Of the $12.8 million total,
$12.5 million was collected during the period, and $0.3 million arose from an
increase in the pawn service charge receivable. In the Fiscal 2001 Quarter, the
$12.7 million pawn service charge revenue is comprised of $12.1 million
collected during the period and $0.6 million from an increase in the pawn
service charge receivable.
For the Fiscal 2002 Quarter, sales decreased $1.4 million from the Fiscal 2001
Quarter to approximately $28.4 million. This decrease was the combined result of
lower same store sales ($1.5 million) and sales from closed stores ($0.1
million), offset by higher levels of jewelry scrapping ($0.4 million).
Annualized inventory turnover for the Fiscal 2002 Quarter was unchanged from the
comparable prior year period at 2.2 times.
For the Fiscal 2002 Quarter, gross profits as a percentage of sales decreased
0.1 of a percentage point from the Fiscal 2001 Quarter to 38.0 percent. In the
Fiscal 2001 Quarter, a $0.3 million inventory reserve was reversed from cost of
goods sold as part of the decision to continue operations at seven stores
previously identified for closure in the Company's 2000 restructuring, as
discussed above. A similar credit is not present in the Fiscal 2002 Quarter,
causing a decrease in margins (1.1 percentage points). Excluding this Fiscal
2001 credit, margins improved 1.0 percentage point. That improvement is
comprised of increased margins on merchandise sales (1.8 of a percentage point),
offset by higher jewelry scrapping (0.4 of a percentage point) and an increase
in inventory shrinkage (0.4 of a percentage point).
Short-term loan service charges increased to $2.0 million in the Fiscal 2002
Quarter from $0.6 million in the prior year quarter. The Company experienced net
default rates (defaults net of collections measured as a percent of loans made)
of 5.5% during the Fiscal 2002 Quarter compared to 8.6% in the Fiscal 2001
Quarter. Bad debt expense, included in operations expense, was $0.6 million,
compared to $0.4 million in the comparable Fiscal 2001 Quarter.
In the Fiscal 2002 Quarter, operations expenses as a percentage of total
revenues increased 1.8 percentage points from the Fiscal 2001 Quarter to 44.4
percent. Efficiencies in same store operations expense (0.6 of a percentage
point) were more than offset by bad debt and operating expenses related to the
Company's growing short-term loan program (1.1 percentage points) and an
increase in rent from sale-leasebacks of store locations (1.3 percentage
points). This increase in sale-leaseback rent is offset by decreases in
depreciation and interest expense, as noted below.
Administrative expenses increased 1.4 percentage points to 8.4 percent,
primarily due to the non-capital costs of upgrading the Company's
enterprise-wide computer system (0.8 of a percentage point), an expense the
Company does not expect to recur for several years. Also contributing to the
increase in administrative expenses was an increase in compensation expense (0.6
of a percentage point), half of which was directly related to growth in the
Company's short-term loan program.
In the Fiscal 2002 Quarter, depreciation and amortization as a percent of total
revenues decreased 0.9 of a percentage point from the Fiscal 2001 Quarter to 5.8
percent. Since the Fiscal 2001 Quarter, the Company has completed
sale-leasebacks of several previously owned properties. As a result, these
properties are no longer depreciated. Interest expense as a percent of total
revenue decreased 2.4 percentage points from the Fiscal 2001 Quarter to 2.3
percent, primarily due to a $26.6 million (39%) decrease in average debt
balances. Proceeds from the
11
sale-leaseback of previously owned properties, coupled with cash flow from
operations, funded the decrease in average debt balances.
Operating income decreased $0.9 million from the Fiscal 2001 Quarter. Excluding
the $0.3 million enterprise-wide software upgrade in the Fiscal 2002 Quarter and
the $0.7 million restructuring expense reversal in the comparable 2001 period,
operating income improved $0.1 million. This improvement was due to a $0.9
million growth in net revenues, primarily short-term loan fees, offset by $0.8
million higher operations expense, primarily sale-leaseback rent and short-term
loan related expenses. After lower interest expense in the Fiscal 2002 Quarter,
loss before income taxes improved $0.2 million. Because the Company expects its
taxable income for the year to exceed Fiscal 2001 levels, a smaller income tax
benefit was recorded, resulting in a net loss of $0.5 million, compared to a
$0.4 million net loss in the Fiscal 2001 Quarter.
NINE MONTHS ENDED JUNE 30, 2002 VS. NINE MONTHS ENDED JUNE 30, 2001
The following discussion compares results for the nine-month period ended June
30, 2002 ("Fiscal 2002 Period") to the nine-month period ended June 30, 2001
("Fiscal 2001 Period"). The discussion should be read in conjunction with the
accompanying financial statements and related notes.
In the Fiscal 2002 Period, pawn service charge revenue increased $1.5 million
from the Fiscal 2001 Period to $41.9 million primarily due to a three percentage
point higher annualized loan yield ($1.0 million) and greater average loan
volumes ($0.7 million). Slightly offsetting these improvements was a reduction
in pawn service charges from closed stores ($0.2 million). The $41.9 million
pawn service charge revenue is comprised of $42.2 million collected during the
period, offset by a $0.3 million decrease in the pawn service charge receivable.
In the Fiscal 2001 Period, the $40.4 million pawn service charge revenue was
comprised of $41.2 million collected during the period, less a $0.8 million
decrease in the pawn service charge receivable.
For the Fiscal 2002 Period, sales decreased $0.3 million from the Fiscal 2001
Period to approximately $97.8 million. This decrease was the result of a
reduction in sales from closed stores ($1.2 million) and lower same store sales
($1.3 million), offset by higher levels of jewelry scrapping ($2.2 million).
Annualized inventory turnover was 2.5 times compared to 2.1 times for the same
period last year.
In the Fiscal 2002 Period, gross profits as a percentage of sales decreased 2.9
percentage points from the Fiscal 2001 Period to 38.0 percent. Higher levels of
jewelry scrapping (2.0 percentage points), lower margins on merchandise sales
(0.5 of a percentage point), and higher inventory shrinkage (0.1 of a percentage
point) account for the majority of the drop in margin. Additionally, in the
Fiscal 2001 Period, a $0.3 million inventory reserve was reversed from cost of
goods sold as part of the decision to continue operations at seven stores
previously identified for closure in the Company's 2000 restructuring, as
discussed above. A similar credit is not present in the Fiscal 2002 Period,
causing the remainder of the decrease in margins (0.3 of a percentage point).
Short-term loan service charges increased to $5.5 million in the Fiscal 2002
Period from $0.7 million in the Fiscal 2001 Period. The Company experienced net
default rates (defaults net of collections measured as a percent of loans made)
of 6.7% during the Fiscal 2002 Period compared to 8.1% in the prior year. Bad
debt expense, included in operations expense, was $2.2 million, compared to $0.4
million in the Fiscal 2001 Period.
In the Fiscal 2002 Period, operations expenses as a percentage of total revenues
increased 0.2 of a percentage point from the Fiscal 2001 Period to 40.5 percent.
This increase results from bad debt and operating expenses related to the
Company's growing short-term loan program (1.6 percentage points) and an
increase in rent from sale-leasebacks of store locations (0.9 of a percentage
point). Offsetting these increases were savings due to closed stores (2.2
percentage points) and greater operating efficiencies at stores open both
periods (0.1 of a percentage point). The increase in sale-leaseback rent is
offset by decreases in depreciation and interest expense, as noted below.
Administrative expenses increased 0.3 of a percentage point to 7.9 percent in
the Fiscal 2002 Period, primarily due to higher compensation expense (0.3 of a
percentage point) and the non-capital costs of upgrading the Company's
12
enterprise-wide computer system (0.1 of a percentage point), offset by lower
professional fees and services (0.1 of a percentage point).
In the Fiscal 2002 Period, depreciation and amortization as a percent of total
revenue decreased 0.5 of a percentage point from the Fiscal 2001 Period to 5.3
percent due to the elimination of depreciation on assets sold, primarily through
sale-leasebacks, offset by an increase in depreciation of software placed in use
during December 2000. Interest expense as a percent of total revenue decreased
2.1 percentage points from the Fiscal 2001 Period to 2.6 percent, primarily due
to a $27.4 million (36%) decrease in average debt balances. Proceeds from the
sale-leaseback of previously owned properties, coupled with cash flow from
operations, funded the decrease in average debt balances.
Operating income decreased $0.5 million from the Fiscal 2001 Period. Excluding
the $0.4 million spent in the nine-month 2002 period to upgrade the Company's
enterprise-wide software and the $0.7 million restructuring expense reversal in
the Fiscal 2001 Period, operating income improved $0.6 million. This improvement
was mostly due to a $3.4 million growth in net revenues, primarily short-term
loan fees, offset by $2.7 million higher operations expense, mainly
sale-leaseback rent and short-term loan related expenses. After lower interest
expense and higher income tax expense, net income increased $1.3 million to $2.0
million in the Fiscal 2002 Period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the nine-month Fiscal 2002 Period
was $12.1 million compared to $9.5 million provided in the Fiscal 2001 Period.
Excluding a $5.0 million tax refund included in the nine-month Fiscal 2001
period, cash provided by operating activities increased $7.6 million. The
Company's new short-term loan product, higher levels of jewelry scrapping, and
lower expenditures for closed stores account for most of the increase in cash
provided by operating activities. Net cash provided by investing activities was
$3.9 million for the Fiscal 2002 Period compared to $3.4 million provided in the
Fiscal 2001 Period. The change is primarily due to a $2.7 million decrease in
capital expenditures offset by $2.3 million lower proceeds from the sale of
assets, primarily sale-leasebacks of store locations. During the Fiscal 2002
Period, the Company used the cash flow from operating and investing activities,
as well as cash on hand, to reduce its outstanding bank borrowings by $16.7
million, compared to a reduction of $13.4 million in the Fiscal 2001 Period.
During the nine months ended June 30, 2002, the Company completed sales or
sale-leasebacks of 22 owned properties for proceeds of $5.9 million. At June 30,
2002, 8 additional properties were held for sale or sale-leaseback, however
there can be no assurance that the Company will be successful in selling any of
these properties.
The Company's credit agreement matures on October 1, 2002 and provides for a $45
million revolving credit facility and a term loan of approximately $15 million,
both of which are secured by substantially all of the Company's assets.
Availability under the revolving credit facility is based on loan and inventory
balances. The term facility was repaid in full on June 7, 2002.
The Company's credit agreement requires, among other things, that the Company
meet certain financial covenants. Specifically, the Company must operate within
specified levels of consolidated net worth, leverage ratio, capital
expenditures, inventory turnover, fixed charge coverage ratio, and EBITDA
(earnings before interest, taxes, depreciation and amortization). The Company
believes that these covenants will be achieved based upon the Company's current
and anticipated performance. Based upon performance to date and management's
expected performance for the remainder of Fiscal 2002, including the
availability under the revolving credit facility, the Company believes that
there is adequate liquidity to fund the Company's operations and its planned
capital expenditures. However, material shortfalls or variances from anticipated
performance could require the Company to seek a further amendment to its credit
agreement or alternate sources of financing, or to limit capital expenditures to
an amount less than currently anticipated or permitted under the credit
agreement. The Company is in the process of renegotiating its line of credit and
believes this will be complete prior to the October 1, 2002 maturity date.
The outstanding balance under the $45 million revolving credit facility bears
interest at the agent bank's prime rate plus 300 basis points, but is payable
monthly at Prime plus 100 basis points. The accrued but unpaid interest is
payable upon the earlier of the refinancing or the maturity of the revolving
credit facility. Until its retirement,
13
interest on the term loan accrued and was paid monthly at Prime plus 350 basis
points. The Company pays a commitment fee of 25 basis points of the unused
amount of the revolving facility. At June 30, 2002, the Company had $43.4
million outstanding on the revolving facility, and availability of $0.9 million.
SEASONALITY
Historically, pawn service charge revenues are highest in the fourth fiscal
quarter (July, August and September) due to higher loan demand during the summer
months and merchandise sales are highest in the first and second fiscal quarters
(October through March) due to the holiday season and tax refunds.
14
ITEM 3. QUALITATIVE AND QUANTITATIVE 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 and foreign currency exchange rates.
The Company does not use derivative financial instruments.
The Company's earnings are affected by changes in interest rates due to the
impact those changes have on its variable-rate debt instruments. The Company's
long-term debt at June 30, 2002 is comprised entirely of variable-rate debt
instruments. If interest rates average 25 basis points more during the remainder
of fiscal 2002, the Company's interest expense for the year would increase by
$27,000. This amount is determined by considering the impact of the hypothetical
interest rate increase on the Company's variable rate long-term debt at June 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. The translation adjustment representing the weakening in
the U.K. pound during the quarter ended March 31, 2002 (included in the
Company's June 30, 2002 results on a three-month lag as described above) was
approximately $0.1 million. On June 30, 2002, the U.K. pound closed at 0.6526 to
1.00 U.S. dollar, a decrease from 0.7015 at March 31, 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.
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 yield on loan portfolios, loan forfeiture rates, labor and employment
matters, competition, operating risk, charges related to store closings,
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 or properties offered for sale-leaseback.
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.
15
PART II
ITEM 1. 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 or results of operations. However, there can be no
assurance as to the ultimate outcome of these matters.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Incorporated by
Number Description Reference to
------- ----------- ---------------
99.1 Certification Required by Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the
quarter ended June 30, 2002.
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EZCORP, INC.
(Registrant)
Date: August 13, 2002 By:/s/ Daniel N. Tonissen
-------------------------
(Signature)
Daniel N. Tonissen
Senior Vice President,
Chief Financial Officer &
Director
17
EXHIBIT INDEX
Exhibit Incorporated by
Number Description Reference to
------- ----------- ---------------
99.1 Certification Required by Section 906 of
the Sarbanes-Oxley Act of 2002