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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(AMENDMENT NO. 1)
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _____________
COMMISSION FILE NUMBER 000-19424
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EZCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2540145
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (512) 314-3400
------------------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange
------------------- on Which Registered
Class A Non-voting Common Stock -------------------
$.01 par value per share The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, all of which is owned
by one record holder who is an affiliate of the registrant. There is no trading
market for the Class B Voting Common Stock. The aggregate market value of the
Class A Non-Voting Common Stock held by non-affiliates of the registrant was $37
million, based on the closing price on the NASDAQ Stock Market on March 31,
2003.
As of November 21, 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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EZCORP, INC.
YEAR ENDED SEPTEMBER 30, 2003
FORM 10-K/A
(Amendment No. 1)
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K/A (this "Amendment") amends the Annual Report
on Form 10-K for the year ended September 30, 2003 filed on December 24, 2003
(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 year 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 Original Filing, 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 Q to the Consolidated
Financial Statements. This Amendment also includes corresponding textual changes
in the Liquidity and Capital Resources section of Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and an
addition to related information in Item 9A, Controls and Procedures. This
Amendment has no effect on the Consolidated Balance Sheets, Statements of
Operations, or Statements of Stockholders' Equity, 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
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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2
EZCORP, INC.
YEAR ENDED SEPTEMBER 30, 2003
INDEX TO FORM 10-K/A
Item Page
No. No.
--- ---
INTRODUCTION
PART I
1. Business 4
2. Properties 16
3. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 19
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 23
7A. Qualitative and Quantitative Disclosures About Market Risk 33
8. Financial Statements and Supplementary Data 35
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 58
9A. Controls and Procedures 58
PART III
10. Directors and Executive Officers of the Registrant 60
11. Executive Compensation 63
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters 69
13. Certain Relationships and Related Party Transactions 71
14. Principal Accounting Fees and Services 72
PART IV
15. Financial Statement Schedules, Exhibits, and Reports on Form 8K 73
Signatures 76
Exhibit Index 77
PART I
ITEM 1. BUSINESS
EZCORP, Inc. (the "Company") is a Delaware corporation with its principal
executive offices located at 1901 Capital Parkway, Austin, Texas 78746. Its
telephone number is (512) 314-3400. Interested parties may access the Company's
filings with the Securities and Exchange Commission through a link in the
Investor Relations section of the Company's website at www.ezcorp.com. Also
available on the Company's website is its Code of Conduct and Ethics. References
to the Company include the subsidiaries listed in Exhibit 22.1. The Company is
primarily engaged in operating pawnshops and payday loan stores which function
as convenient sources of consumer credit and as value-oriented specialty
retailers of primarily previously owned merchandise.
The discussion in this section of this report contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and those discussed elsewhere in this report.
GENERAL
The Company meets the short-term cash needs of the cash and credit constrained
consumer by offering convenient, non-recourse loans collateralized by tangible
personal property, commonly known as pawn loans; by offering short-term
non-collateralized loans, often referred to as payday loans; and by purchasing
customers' merchandise at its pawnshop locations. As a result of its pawn
lending operations and customer purchases, the Company sells used merchandise,
primarily forfeited collateral, to consumers looking for good values.
The Company makes pawn loans in its 280 pawnshops. The income earned on this
activity is pawn service charge revenue. While allowable service charges vary by
state and loan size, 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. In most
states in which the Company operates, collateral is held one month with a 60-day
grace period, after which the collateral is forfeited. In the twelve-month
periods ended September 30, 2001, 2002, and 2003 ("Fiscal 2001", "Fiscal 2002,"
and "Fiscal 2003"), approximately 76% of the pawn loans made by the Company were
redeemed in full or were renewed or extended through the payment of accrued pawn
service charges.
Also in its pawnshops, the Company acquires inventory for its retail sales
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 assessment of the resale value at
the time the property is either accepted as loan collateral or purchased.
Improper assessment of the resale value in either the lending or purchasing
function can result in reduced marketability of the property and the realization
of a lower margin. During Fiscal 2001, 2002, and 2003, the Company realized
gross margins on sales of 39%, 35%, and 36%.
As of September 30, 2003, the Company offered unsecured payday loans in 225 of
its pawnshops, in four EZMONEY payday loan stores which offer only payday loans
("Mono-line" stores), and in an Austin, Texas based payday loan call center.
Introduced to most of the 225 pawnshops in March 2001, this product continues to
mature as the customer base in these stores grows. During Fiscal 2003, the
Company opened four Mono-line EZMONEY payday loan stores. Two of these EZMONEY
stores adjoin existing EZPAWN store locations but have a different entrance,
different signage and different decor. Even though they adjoin an EZPAWN, from
the customers' point of view the EZMONEY store is a separate business. The
Company refers to these as "stores within a store".
Payday loans are made based on a limited review of several factors, including a
customer's employment and check-writing history, and generally are made for
periods of less than 30 days, averaging about 16 days. The service charge for
these loans generally ranges between $15 and $30 per $100 loaned. The
4
average payday loan amount is approximately $325. The profitability of payday
loans is highly dependent on the level of initial loan defaults and subsequent
collection efforts. When measured as a percentage of loans made, the Company
experienced payday loan net default rates (initial loan defaults less loan
defaults subsequently collected as a percentage of loans made) of 8.1%, 6.9% and
5.0% during Fiscal 2001, 2002, and 2003, respectively.
The following components comprised the Company's net revenues (total revenues
less cost of goods sold):
Fiscal Year Ended September 30,
---------------------------------------
2001 2002 2003
---------- ---------- ----------
Pawn service charges 51% 51% 48%
Gross profit from merchandise sales 47% 41% 38%
Gross profit (loss) from jewelry scrapping (1%) -- 3%
Payday loan service charges 2% 7% 10%
Fee revenue 1% 1% 1%
---------- ---------- ----------
Net revenues 100% 100% 100%
The pawnshop industry in the United States is large and highly fragmented. The
industry consists of over 10,000 pawnshops owned primarily by independent
operators who typically own one to three locations. The Company, with 280 pawn
locations, is the second largest operator of pawnshops in the United States;
while the three largest pawnshop operators, including the Company, account for
less than ten percent of the estimated pawnshops.
The payday loan industry in the United States is less fragmented than the
pawnshop industry, with approximately 15,000 locations offering payday loans.
These locations are generally Mono-line payday loan stores, or stores offering
only payday loans, and other businesses offering payday loans in addition to
other products and services, such as check cashing stores and pawnshops. The ten
largest companies, of which the Company is the ninth largest, comprise
approximately 40% of the total number of locations.
LENDING ACTIVITIES
The Company's pawnshops primarily make pawn loans, which typically are
relatively small, non-recourse loans secured by tangible personal property. As
of September 30, 2003, the Company had approximately 675,000 loans outstanding,
representing an aggregate principal balance of $48.0 million. A majority of the
Company's pawn loans are in amounts that permit pawn service charges of 20% per
month or 240% per annum. For Fiscal 2003, pawn service charges accounted for
approximately 28% of the Company's total revenues and 48% of its net revenues.
Collateral for the Company's pawn loans consists of tangible personal property,
generally jewelry, consumer electronics, tools, sporting goods, and musical
instruments. The Company does not investigate the creditworthiness of a pawn
customer, but relies on the estimated resale value of the collateral, the
perceived probability of the loan's redemption, and the estimated time required
to sell the item as a basis for its lending decision. The Company generally
lends from 25% to 65% of the pledged property's estimated resale value depending
on an evaluation of these factors. The sources for the Company's determination
of the resale value of collateral include the Company's computerized valuation
software, catalogues, newspaper advertisements, and previous sales of similar
merchandise.
The collateral is held through the term of the loan, which in most locations is
one month with an automatic 60-day grace period, unless repaid, renewed, or
extended earlier. The Company seeks to maintain a redemption rate (the percent
of loans made that are redeemed, renewed, or extended) of between 70% and 80%,
and in each of the Company's last three fiscal periods, the redemption rate was
within this range. The redemption rate is maintained through compliance with the
Company's lending guidelines. If a borrower does not repay, extend, or renew a
loan, the collateral is forfeited to the Company and becomes inventory available
for sale. The Company does not record loan losses or charge-offs of pawn loans
because the principal amount of an unpaid loan becomes the inventory carrying
cost of the forfeited
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collateral. The Company provides an inventory valuation allowance based on the
type and age of merchandise as well as recent sales trends and margins.
The table below shows the dollar amount of pawn loan activity by the Company for
the fiscal years ended September 30, 2001, 2002 and 2003:
Fiscal Year Ended September 30,
--------------------------------------
2001 2002 2003
---------- ---------- ----------
(Dollars in millions)
Loans made or renewed $ 185.1 $ 189.0 $ 185.8
Loans repaid or renewed (113.8) (113.7) (113.4)
Loans forfeited (71.1) (73.2) (73.7)
---------- ---------- ----------
Net increase (decrease) in pawn loans outstanding at the end
of the year $ 0.2 $ 2.1 $ (1.3)
The redemption rate of pawn loans and the gross profit realized on the sale of
forfeited collateral are dependent on the appraisal of customer merchandise.
Jewelry, which makes up approximately 60% of the value of collateral, can be
appraised based on weight, gold content, style, and value of gemstones, if any.
The other items pawned typically consist of consumer electronics, tools,
sporting goods, and musical instruments. These can be evaluated based on recent
sales experience and the selling price of similar new merchandise, adjusted for
age, wear, and obsolescence. During Fiscal 2001, 2002, and 2003, the Company
realized gross margins on sales of 39%, 35%, and 36%.
At the time a pawn transaction is made, a pawn loan agreement, commonly referred
to as a pawn ticket, is given to the borrower. It sets forth, among other
things, the name and address of the pawnshop and the borrower, the borrower's
identification number from a driver's license, military identification or other
government issued identification, the date of the loan, an identification and
description of the pledged goods (including applicable serial numbers), the
amount financed, the pawn service charge, the maturity date of the loan, the
total amount that must be paid to redeem the pledged goods, and the annual
percentage rate.
Since a majority of the Company's pawn stores are located in Texas, Texas
pawnshop laws and regulations govern most of the Company's operations. In Texas,
pawnshop operations are regulated by the Office of the Consumer Credit
Commissioner in accordance with Chapter 371 of the Texas Finance Code, commonly
known as the Texas Pawnshop Act (the "Pawnshop Act") and Rules of Operation for
Pawnshops (the "Rules"). See "Regulation."
The maximum allowable pawn service charges in the State of Texas are set in
accordance with Texas law under the Pawnshop Act and are based on the dollar
amount of the loan. Historically, the maximum allowable pawn service charges
under Texas law have not changed; however, the loan amounts have periodically
been adjusted.
SCHEDULE OF APPLICABLE LOAN SERVICE CHARGES FOR TEXAS
Maximum
Allowable Annual
Amount Financed per Pawn Loan Pawn Service Charge
----------------------------- -------------------
July 1, 2002 to July 1, 2003 to
June 30, 2003 June 30, 2004
--------------- ---------------
$1 to $150 $1 to $153 240%
$151-$1,000 $154 - $1,020 180%
$1,001-$1,500 $1,021 - $1,530 30%
$1,501 to $12,500 $1,531 to $12,750 12%
6
Under Texas law, there is a ceiling on the maximum allowable pawn loan. For the
year ended June 30, 2003, the loan ceiling was $12,500. From July 1, 2003 to
June 30, 2004, the loan ceiling is $12,750. The Company's average loan amount at
the end of Fiscal 2003 was approximately $71.
In addition to pawn loans, the Company offers unsecured payday loans in 225 of
its pawnshops, in four EZMONEY payday loan stores offering only payday loans,
and in one payday loan call center. In most locations and in the call center,
the Company markets and services payday loans made by County Bank of Rehoboth
Beach, Delaware ("County Bank"), a federally insured Delaware bank; and in a
limited number of locations, the Company makes the loans. The Company may
purchase an 85% participation in the loans made by County Bank. The average
payday loan amount is approximately $325 and the terms are generally less than
30 days, averaging about 16 days. The service charge per $100 loaned is
typically $18 for a seven to 23-day period, but varies in certain locations. The
loans and related service charges reported in the Company's consolidated
financial statements reflect only the Company's participation interest in these
loans.
Unlike pawn loans, payday 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
subsequently collected, the Company charges defaulted loan principal to bad debt
expense upon default, leaving only active loans in the reported balance.
Collections of defaulted loan principal are recorded as a reduction of bad debt
in the period received. Accrued service charges related to defaulted loans are
deducted from service charge revenue upon loan default, and increase service
charge revenue upon collection. The Company provides for a valuation allowance
on both the principal and service charges receivable based on recent default and
collection experience. At September 30, 2003, the valuation allowance was 5.9%
of the payday loan principal and service charges receivable; the actual payday
loan net default rate was 5.0% for the full Fiscal 2003 year. The Company's
payday loan balance represents the principal amount of all active
(non-defaulted) loans net of this valuation allowance.
RETAIL ACTIVITIES
The Company's retail activities liquidate inventory acquired through pawn loan
forfeitures and the purchase of customer 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 in the lending function can result in reduced marketability of the
property and the realization of a lower margin. Jewelry sales represent
approximately half of the Company's total sales with the remaining sales
consisting primarily of consumer electronics, tools, sporting goods, and musical
instruments. The Company believes its ability to offer quality used merchandise
at prices significantly lower than original retail prices attracts
value-conscious customers. During the three most recent fiscal years, sources of
inventory additions were:
Fiscal Year Ended September 30,
--------------------------------------
2001 2002 2003
---------- ---------- ----------
Forfeited pawn loan collateral 91% 89% 87%
Purchases from customers 9% 11% 13%
For Fiscal 2001, 2002, and 2003, retail activities and jewelry scrapping
accounted for approximately 69%, 67%, and 65% of the Company's total revenues,
or 46%, 41%, and 41% of the Company's net revenues, after deducting cost of
goods sold.
Analysis of the sales and inventory data provided by the Company's management
information systems facilitates the design and development of promotional and
merchandising programs and merchandise pricing decisions. Regional and area
managers oversee these promotional and merchandising programs, review
merchandise pricing decisions, and balance inventory levels within markets.
The Company does not give prospective buyers warranties on merchandise sold
through its retail operations. Customers may purchase an item on layaway,
whereby a customer will typically pay a minimum layaway deposit of 20% of an
item's sale price. The Company will hold the item for a 60 to 90-
7
day period during which the customer is required to pay for the item in full.
Layaways are not recorded as sales until the layaway is paid in full. The
initial deposit and subsequent payments are recorded as customer layaway
deposits. As of September 30, 2003, the Company had $1.8 million in customer
layaway deposits.
The Company's overall inventory is stated at the lower of cost or market. The
Company provides an inventory valuation allowance for shrinkage and cost in
excess of market value. The Company estimates this valuation allowance through
study and analysis of sales trends, inventory turnover, inventory aging, margins
achieved on recent sales, and shrinkage. The valuation allowance, including an
allowance for shrinkage, amounted to $1.1 million, $1.7 million, and $1.8
million as of September 30, 2001, 2002, and 2003. At September 30, 2003, total
inventory on hand was $29.8 million, after deducting the inventory valuation
allowance.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. 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.
OPERATIONS
A typical Company pawn store employs five to six full time equivalent employees
("FTEs") consisting of a manager, an assistant manager, and three to four sales
and lending representatives. Each store manager is responsible for ensuring that
his or her store is run in accordance with the Company's policies, procedures,
and operating guidelines. Each store manager reports to one of 34 area managers
who are responsible for the stores within a specific operating area. Area
managers are responsible for the performance of all stores within their area and
report to one of four regional directors. Area managers, store managers, and
assistant managers receive incentive compensation based on their area or store's
performance in comparison to an operating budget. This incentive compensation
typically ranges between 5% and 15% of their total compensation, plus a
gain-sharing component for store and area managers whose stores exceed budgeted
levels of earnings.
Mono-line payday loan stores employ two to three FTEs per location, consisting
of a manager and one to two lending representatives. Each store manager is
responsible for ensuring that his or her store is run in accordance with the
Company's policies, procedures, and operating guidelines. As the number of
Mono-line stores grows, the Company anticipates building an operating
organization similar to its pawn operation, although with a broader span of
control and a smaller area and regional management structure.
The Company has a store level point of sale (POS) system that automates the
recording of most store-level transactions. Financial summary data from all
stores is processed at the corporate office each day and the preceding day's
data are available for management review via the Company's internal network. The
Company's communications network provides two-way communication and information
access between the stores and the corporate office. During 2003, the Company
completed the implementation of its new POS system, which provides additional
store level functionality, enhances reporting and controls, and provides
software and hardware scalability.
The Company has an internal audit staff of approximately 17 employees who
monitor the Company's perpetual inventory system, lending practices, and
regulatory compliance. In addition, they ensure consistent compliance with the
Company's policies and procedures.
8
As of September 30, 2003, the Company employed approximately 1,900 people. The
Company believes that its success is dependent upon its employees' ability to
provide prompt and courteous customer service and to execute the Company's
operating procedures and standards. The Company seeks to hire people who will
become long-term, career employees. To achieve the Company's long-range
personnel goals, it strives to develop its employees through a combination of
learner-controlled instruction, web-based classes, classroom training, and
supervised on-the-job loan and sales training for new employees. All store
associates complete competency checks and all new employees complete a
learner-controlled instruction program. Managers attend on-going management
skills and operations performance training. The Company anticipates that store
manager candidates will be promoted from the ranks of existing store employees
and hired from outside the Company. The Company's career development plan
develops and advances employees within the Company, and provides training for
the efficient integration of experienced retail managers and pawnbrokers from
outside the Company.
At November 21, 2003, the Company operated its pawnshops under the name
"EZPAWN". The Company has registered with the United States Patent and Trademark
Office the names EZPAWN, EZMONEY, EZMONEY Center, and EZCORP, among others.
Additionally, the Company operates under the trade names EZMONEY Payday Loans,
EZMONEY Payroll Advance, Payroll Advance Express, and EZCORP Collection Center.
FUTURE EXPANSION
The Company plans to expand the number of locations it operates through the
development of new locations and through acquisitions. The Company believes that
in the near term the largest growth opportunity is with the EZMONEY payday loan
stores. The Company has announced that it plans to open 75 to 85 EZMONEY stores,
some of which will be adjoining an EZPAWN store, but with a different entrance.
The Company believes this "store within a store" concept offers the potential
for accelerated payday loan growth and leveraging of existing occupancy and
supervisory costs.
The two new stand-alone EZMONEY payday loan stores opened in Fiscal 2003
required an average property and equipment investment of approximately $25,000
each. The two "store within a store" EZMONEY stores added in Fiscal 2003
required an average investment, including some initial design costs, of
approximately $40,000 each. Between October 1, 2003 and December 15, 2003, the
Company opened another 13 EZMONEY "stores within a store" for an average
property and equipment investment of $23,000 each. The five most recently opened
pawn stores required an average gross investment (including inventory, pawn
loans, property, and equipment) of approximately $500,000 per pawnshop during
the first 12 months of operation.
The Company's ability to add new stores is dependent on several variables, such
as the availability of acceptable sites or acquisition candidates, the
regulatory environment, and the availability of qualified personnel. The
Company's ability to add newly established pawnshops in Texas counties having a
population of 250,000 or more is restricted by Texas law, which provides that
applications for new licenses in such counties will be approved only at proposed
locations which are not less than two miles from another licensed pawnshop and
applications to relocate a licensed pawnshop will be approved only for proposed
locations which are not less than one mile from another licensed pawnshop. Any
existing Texas pawnshop may relocate to within one mile of its present location,
regardless of the existence of other pawnshops. The Company's ability to add
newly established pawnshops may be adversely affected by such regulation. See
"Regulation."
COMPETITION
The Company encounters significant competition in connection with its lending
operation. These competitive conditions may adversely affect the Company's
revenues, profitability, and its ability to expand. In its lending business, the
Company competes with other pawnshops, other payday lenders, and other financial
institutions, such as consumer finance companies. Other lenders may lend money
on an unsecured basis, at interest rates that may be lower than the service
charges of the Company, and on other terms that may be more favorable than those
offered by the Company. The Company believes that the primary elements of
competition are the quality of customer service and relationship management,
store location, and the ability to loan competitive amounts at competitive
rates. In addition, the Company
9
believes that the ability to compete effectively will be based increasingly on
strong general management, regional market focus, automated management
information systems, and access to capital.
The Company's competitors for merchandise sales include numerous retail and
wholesale stores, including jewelry stores, discount retail stores, consumer
electronics stores, other pawnshops, other retailers of previously owned
merchandise, electronic commerce retailers, and auction sites. Competitive
factors in the Company's retail operations include the ability to provide the
customer with a variety of merchandise at an exceptional value.
STRATEGIC INVESTMENT
In 1998, the Company acquired 29.5% of the outstanding shares of Albemarle &
Bond Holdings plc ("A&B"). The Company's interest was 28.9% at June 30, 2003,
the most recent date for which A&B has published results. As its largest
shareholder, the Company and its affiliates hold three seats on A&B's board of
directors. A&B is a publicly traded company based in Bristol, England and trades
on the Alternative Investment Market of the London Stock Exchange. At June 30,
2003, A&B operated 53 locations in the United Kingdom that offer pawn loans,
payday loans, check cashing, and retail jewelry. For A&B's 2003 fiscal year,
which ended June 30, 2003, A&B's operating profit increased 18% over the prior
year to approximately Pound Sterling 4.9 million ($7.8 million).
The Company accounts for its investment in A&B under the equity method. In
Fiscal 2003, the Company's interest in A&B's income was $1,412,000. At November
21, 2003, the market value of the Company's investment was approximately $20.9
million, based on the closing price and exchange rates on that date while the
book value of the Company's investment in A&B was $14.7 million.
10
REGULATION
PAWNSHOP OPERATIONS
The Company's pawnshop operations are subject to extensive regulation,
supervision, and licensing under various federal, state, and local statutes,
ordinances, and regulations. Additionally, in many states in which the Company
operates, pawnshops are subject to local regulation at the municipal and county
level. The laws of Texas, Colorado, Oklahoma, Indiana, Florida, Alabama, and
Nevada govern the majority of the Company's pawnshop operations. A summary of
these states' pawnshop statutes and regulations governing the Company's
pawnshops are discussed below.
TEXAS REGULATIONS
The Texas Pawnshop Act and the related Rules of Operation for Pawnshops govern
Texas pawnshops. Pawnshop and pawnshop employees are licensed and supervised by
the Office of Consumer Credit Commissioner ("OCCC").
To be eligible for a license to operate a pawnshop in Texas, an applicant must:
(i) be of good moral character, which in the case of a business entity applies
to each officer, director, and holder of five percent or more of the entity's
outstanding shares; (ii) have net unencumbered assets (as defined in the Texas
Pawnshop Act) of at least $150,000 readily available for use in conducting the
business of each licensed pawnshop; (iii) demonstrate that the applicant has the
financial responsibility, experience, character, and general fitness to command
the confidence of the public in its operation; and (iv) demonstrate that the
pawnshop will be operated lawfully and fairly. Additionally, the pawnshop
employee application inquires about individual applicants' credit history and
criminal record.
For a new license application in any Texas county, the OCCC provides notice of
the application and the opportunity for a public hearing to the other licensed
pawnshops in the county in which the applicant proposes to operate. In counties
with 250,000 or more people, applications for new licenses are approved only at
locations that are not less than two miles from another licensed pawnshop, and
applications to relocate a license are approved only for locations that are not
less than one mile from another licensed pawnshop. Any existing store may
relocate to within one mile of its present location, regardless of the existence
of other pawnshops. The Company's ability to open new stores or relocate
existing stores may be adversely affected by these licensing provisions.
The Texas Pawnshop Act also contains provisions related to the operation of
pawnshops and authorizes the issuance of administrative rules called the Rules
of Operation of Pawnshops (the "Rules"). The Rules regulate the day-to-day
management of the Company's pawnshops including the maximum pawn service charge
and principal loan amount.
Pawn service charges vary based on loan amounts. Historically, the maximum
allowable pawn service charge rates have not changed; however, the loan amounts
have periodically been adjusted. A table of the maximum allowable pawn service
charges under the Texas Pawnshop Act for the various loan amounts is presented
in "Lending Activities". Under Texas law, there is a ceiling on the maximum
allowable pawn loan. For the period July 1, 2002 through June 30, 2003, the loan
ceiling is $12,500. For the period July 1, 2003 through June 30, 2004, the loan
ceiling is $12,750. Texas requires pawn transactions to be reported to local
authorities.
Under the Texas Pawnshop Act and the Rules, a pawnbroker may not do any of the
following: (i) accept a pledge from a person under the age of 18 years; (ii)
make any agreement requiring the personal liability of the borrower; (iii)
accept any waiver of any right or protection accorded to a pawn customer; (iv)
fail to exercise reasonable care to protect pledged goods from loss or damage;
(v) fail to return pledged goods to a pawn customer upon payment of the full
amount due; (vi) make any charge for insurance in connection with a pawn
transaction; (vii) enter into any pawn transaction that has a maturity date of
more than one month; (viii) display for sale in storefront windows or sidewalk
display cases pistols, swords, canes, blackjacks or similar weapons; (ix)
purchase used or second hand personal property unless a record is established
containing the name, address, and identification of the seller, a complete
description
11
of the property, including serial number and a signed statement that the seller
has the right to sell the property; or, (x) accept into pawn or purchase stolen
goods.
The OCCC may, after notice and hearing, suspend or revoke any license for a
Texas pawnshop or employee upon finding that: (i) any fees or charges have not
been paid; (ii) the licensee has violated (knowingly or unknowingly without due
care) any provisions of the Texas Pawnshop Act or any regulation or order; or
(iii) any fact or condition exists which, if it had existed at the time the
original application was filed for a license, would have justified the OCCC in
refusing the license.
COLORADO REGULATIONS
Colorado law requires pawnbrokers to be licensed and bonded by local
municipalities which subject them to extensive and varied regulation and
supervision. Pawn transactions must be reported to local authorities and
pawnbrokers must maintain certain bookkeeping records. Under Colorado law, the
maximum allowable pawn service charge is 240% annually for pawn loans up to $50,
and 120% annually for pawn loans of $50 or more.
OKLAHOMA REGULATIONS
The Oklahoma Pawnshop Act follows a statutory scheme similar to the Texas
Pawnshop Act, requires pawnbrokers to be licensed and bonded, and regulates the
day-to-day operation of the Company's Oklahoma pawnshops. The Oklahoma
Administrator of Consumer Credit administers the Oklahoma Pawnshop Act and has
broad rule-making authority. Additionally, the Oklahoma Administrator of
Consumer Credit is responsible for investigating the general fitness of pawnshop
applicants. Each applicant is required to (i) be of good moral character; (ii)
have net assets of at least $25,000; (iii) show that the pawnshop will be
operated lawfully and fairly; and (iv) not have been convicted of any felony
that directly relates to the duties and responsibilities of pawnbrokering.
Unlike Texas, Oklahoma pawnshop employees are not individually licensed.
In general, the Oklahoma Pawnshop Act prescribes loan amounts and maximum rates
of service charges which pawnbrokers in Oklahoma may charge for lending money.
The regulations provide for a graduated rate structure, similar to the structure
used for federal income tax purposes. Under this rate structure, a $500 loan,
for example, earns interest as follows: (i) the first $150 at 240% annually,
(ii) the next $100 at 180% annually, and (iii) the remaining $250 at 120%
annually. The maximum allowable pawn service charges for the various loan
amounts under the Oklahoma statute are as follows:
Maximum Allowable
Amount Financed Annual Percentage
Per Pawn Loan Rate
------------- ----
$1 to $150 240%
$151 to $250 180%
$251 to $500 120%
$501 to $1,000 60%
$1,001 to $25,000 35%
The principal amount of an Oklahoma pawn loan may not exceed $25,000 per
transaction.
FLORIDA REGULATIONS
Florida pawnshops are governed by the Florida Pawnbrokering Act and accompanying
regulations. The Division of Consumer Services of the Department of Agriculture
and Consumer Services licenses and regulates pawnshops.
The Florida Pawnbrokering Act and regulations require that the pawnshop complete
a Pawnbroker Transaction Form showing the customer name, type of item pawned,
the amount of the pawn loan, and the applicable finance charges. A copy of each
form must be delivered to local law enforcement officials at the end of each
business day.
12
Pawn loans in Florida typically have a 30-day term. The pawnbroker is entitled
to charge two percent (2%) of the amount financed for each 30-day period as
interest, and an additional amount as pawn service charges, provided the total
amount of such charge, inclusive of interest, does not exceed 25% of the amount
financed for each 30-day period. The pawnbroker may charge a minimum pawn
service charge of $5.00 for each 30-day period. Pawn loans may be extended by
agreement, with the charge being one-thirtieth of the original total pawn
service charge for each day by which the loan is extended. For loans redeemed
greater than 60 days after the date made, pawn service charges continue to
accrue at the daily rate of one-thirtieth of the original total pawn service
charge.
The Pawnbrokering Act prohibits pawnbrokers from: (i) falsifying or failing to
make entries in pawn transaction forms, (ii) refusing to allow appropriate law
enforcement officials to inspect their records, (iii) failing to retain records
of pawn transactions for at least two years, (iv) making any agreement requiring
the personal liability of a pawn customer, (v) failing to return pledged goods
upon payment in full of the amount due (unless the pledged goods have been taken
into custody by a court or law enforcement officer or otherwise lost or
damaged); or, (vi) engaging in title loan transactions at licensed pawnshop
locations. Pawnbrokers are also prohibited from entering into pawn transactions
with a person who is under the influence of alcohol or controlled substances, a
person who is under the age of eighteen, or a person using a name other than his
own name or the registered name of his business.
INDIANA REGULATIONS
In Indiana, the Pawnbrokering Law governs pawnshops. The Department of Financial
Institutions (the "Department") regulates the Company's Indiana operations. The
Department requires the licensing of all pawnshops and investigates the general
fitness of pawn license applicants to determine whether the convenience and
needs of the public will be served by granting a pawn license. The Department
has broad investigatory and enforcement authority. It may grant, revoke, and
suspend licenses. For compliance purposes, pawnshops are required to keep books,
accounts, and records to enable the Department to determine if the pawnshop is
complying with the statute. Each pawnshop is required to give authorized agents
of the Department free access to its books and accounts for these purposes.
The Pawnbrokering Law authorizes pawnbrokers to charge and collect the following
annual rates of interest plus pawn service charges: 276% on transactions of $300
or less; 261% on transactions greater than $300 but not exceeding $1,000, and
255% on transactions greater than $1,000. Furthermore, the Pawnbrokering Act
provides for a grace period of 60 days after the initial 30-day term of the
loan. During the grace period, interest and service fees continue to accrue,
subject to proration to the date of loan redemption.
ALABAMA REGULATIONS
The Alabama Pawnshop Act regulates the licensing and operation of Alabama
pawnshops. The Supervisor of the Bureau of Loans of the State Department of
Banking is responsible for licensing and investigating the general fitness of
pawnshop applicants. The Alabama Pawnshop Act requires that certain bookkeeping
records be maintained and made available to the Supervisor and to local law
enforcement authorities. The Alabama Pawnshop Act establishes a maximum
allowable pawn service charge of 300% annually.
NEVADA REGULATIONS
In Nevada, all pawn loans must be held for redemption for at least 120 days
after the date the loan is made. A pawnbroker may charge interest at the rate of
10% per month for money loaned on personal property actually received. In
addition, the pawnbroker may collect an initial set up fee of $5.00. Property
received in pledge may not be removed from the pawnshop until after the receipt
of such property is reported to the sheriff or chief of police, unless redeemed
by the owner.
LOCAL REGULATIONS
At the local level, most of the pawnshops voluntarily or pursuant to state law
or municipal ordinance, provide reports of pawn transactions and purchases from
customers to the local police department on a regular basis. These reports are
designed to provide the local police with a detailed description of the goods
involved, including serial numbers, if any, and the names and addresses of the
customers.
13
A record of each transaction is provided to local law enforcement agencies to
aid in the investigation of property crimes. Goods held to secure pawn loans or
goods purchased which are determined to belong to an individual other than the
pawnshop customer are subject to recovery by the rightful owner. While a risk
exists that pledged or purchased merchandise may be subject to claims of
rightful owners, the Company's claims experience is historically less than 0.5%
of pawn loans made.
There can be no assurance that additional local, state, or federal legislation
will not be enacted or that existing laws and regulations will not be amended
which would materially, adversely impact the Company's operations, financial
condition, and the ability to expand its operations.
The above summaries generally describe the regulatory environments affecting the
majority of the Company's pawnshops. Although state pawnshop laws vary
considerably, the above summaries are representative of the statutes and
regulations in the other states in which the Company operates.
FIREARMS REGULATIONS
With respect to firearm sales, each pawnshop must comply with the regulations
issued by the Bureau of Alcohol, Tobacco, and Firearms (the "ATF"). ATF
regulations require each pawnshop dealing in firearms to maintain a permanent
written record of all transactions involving the receipt or disposition of
firearms.
The Brady Handgun Violence Prevention Act (the "Brady Act") and the related ATF
rules require all federal firearm licensees, in either selling inventoried
firearms or releasing pawned firearms, to have the customer complete appropriate
forms and pass a background check through the National Instant Criminal
Background Check System ("NICS") before the Company may transfer a firearm to
any customer.
The Company complies with the Brady Act and the ATF regulations. The Company
does not believe that compliance with the Brady Act and the ATF regulations
materially affect the Company's operations. There can be no assurance, however,
that compliance with the Brady Act and the ATF regulations, or any future
changes or amendments thereto will not adversely affect the Company's
operations.
PAYDAY LOAN REGULATIONS
The Company's payday loan operations are subject to extensive state and federal
statutes and regulations such as the federal Equal Credit Opportunity Act, the
Fair Credit Reporting Act, the Truth in Lending Act, the Gramm-Leach-Bliley Act,
and the Fair Debt Collection Practices Act. The Company complies with the
requirements of these federal statutes and their regulations with respect to its
payday loan business, and state statutes and regulations where applicable.
During Fiscal 2003, the Company marketed and serviced payday loans on behalf of
County Bank, primarily in Texas, Oklahoma and through a call center. The
Delaware Department of Banking and the Federal Deposit Insurance Corporation
supervise County Bank. These regulators review all aspects of County Bank's
payday loan program as well as the Company's operations. In turn, County Bank
periodically audits the Company's marketing and servicing procedures.
Federal and state legislative and lobbying initiatives to prohibit or restrict
payday lending have been and continue to be aggressively pursued by opponents to
the payday loan product. The initiatives focus on outlawing payday loans
entirely, limiting the finance charges, renewals, number of loans a consumer may
obtain, and the maximum loan amount and amount outstanding at any one time.
County Bank, which makes the loans in the majority of stores where EZPAWN and
EZMONEY market and service payday loans, is regulated by the FDIC. The FDIC has
adopted guidelines for its member banks to follow with respect to payday loans.
The FDIC reviews and monitors County Bank's activities for compliance. Despite
the significant need and consumer demand for the payday loan product, the
possibility exists that federal and state legislation and regulations could be
enacted which could severely restrict or eliminate the Company's ability to
either make payday loans or market and service payday loans for County Bank or
any other financial institution.
14
In order to market and service payday loans for County Bank in Texas, the
Company's pawnshops, EZMONEY payday loan stores, and collection center are
required to be licensed as a regulated lender by the Texas OCCC. The Company's
ability to market and service payday loans in Texas at current fee levels is
dependent upon its continued relationship with County Bank or another similarly
situated financial institution. Without a relationship with a federally insured
bank domiciled in a state that permits these rates, the Company could offer
payday loans at a lower fee level, not in excess of the Texas usury ceiling.
Operating under lower fee levels in Texas would have a material adverse effect
on the Company's payday loan revenues.
In October 2003, the Company began marketing and servicing payday loans for
County Bank in Florida through the Company's pawnshops. Florida law does not
currently require the Company to obtain a license to engage in its current
marketing and servicing responsibilities.
In May 2002, the Company also began marketing payday loans for County Bank
through a call center located in Texas. The call center markets and services
payday loans in eleven states, but has no physical presence in any of those
eleven states. Since the Company is acting on behalf of County Bank, the Company
does not believe the marketing and servicing activities of the call center are
regulated by state lending regulators.
In Colorado, the Company makes payday loans to customers pursuant to state law
and its own underwriting guidelines. Payday loans made by the Company in
Colorado are regulated by the Department of Law, Office of the Attorney General,
Uniform Consumer Credit Code Division (the "UCCC Division"). The Company's
Colorado pawnshops have and are required to maintain a supervised lender's
license issued by the UCCC Division. The UCCC Division maintains regulatory and
supervisory authority over the pawnshops' payday loan activities. Under Colorado
law, the Company is required to maintain certain records related to its payday
loans and include specific information and disclosures in the loan agreement.
The Colorado maximum payday loan amount is $500, exclusive of the service fee.
Colorado law provides for a graduated service fee of 20% of the first $300 and
7.5% of the amount over $300. The loan term may not exceed 31 days and customers
have the right to rescind the loan within one business day after the date the
loan was made. By law, the loan cannot be renewed more than once and if it is
renewed prior to the maturity date, the Company must refund a prorated portion
of the service fee. The Company has elected not to offer renewals in Colorado.
As of November 1, 2003, the Company ceased marketing and servicing payday loans
for County Bank in Oklahoma and began making payday loans to customers pursuant
to state law and its own underwriting guidelines. Payday loans made by the
Company in Oklahoma are regulated by the Oklahoma Department of Consumer Credit
(the "ODCC"). The Company's Oklahoma pawnshops have and are required to maintain
a deferred deposit lender license issued by the ODCC. The ODCC maintains
regulatory and supervisory authority over the pawnshops' payday loan activities.
Under Oklahoma law, the Company is required to maintain certain records related
to its payday loans and include specific information and disclosures in the loan
agreement.
The Oklahoma maximum loan amount is $500 exclusive of the service fee. Oklahoma
law provides for a service fee of 15% of the first $300 and 10% of the amount
over $300. The loan term may not exceed 45 days, and customers have the right to
rescind the loan within one business day after the date the loan was made. The
loan cannot be renewed. The Company must deliver specific disclosures to the
customer related to debt management, credit counseling services and the
customer's rights and responsibilities in the payday loan as well as make
certain determinations about outstanding or prior payday loans.
15
ITEM 2. PROPERTIES
The typical Company pawnshop is a freestanding building or part of a retail
strip center with contiguous parking. Store interiors are designed to resemble
small discount operations and attractively display merchandise by category.
Distinctive exterior design and attractive in-store signage provide an appealing
atmosphere to customers. The typical pawn store has approximately 1,800 square
feet of retail space and approximately 3,200 square feet dedicated to collateral
storage. In 2003, the Company began developing Mono-line payday loan stores. A
Mono-line store is designed to resemble a bank interior and offers only payday
loans. The typical stand-alone Mono-line store is approximately 1,000 square
feet and is located in a retail strip center. In some of its pawnshop locations,
the Company will create a Mono-line "store within a store" of approximately 500
square feet, which has a different entrance, different signage and different
decor. From the customers' perspective, these will be viewed as a separate
business. The Company maintains property and general liability insurance for
each of its stores. The Company's stores are open six or seven days a week,
depending on location.
As of November 21, 2003, the Company owned the real estate and building for one
of its stores and leased 283. The Company also owns the real estate and building
for one non-operating location. Between Fiscal 2001 and 2003, the Company
entered into sale-leaseback transactions with unaffiliated parties for 44 of its
store locations for periods ranging from 10 to 20 years. During Fiscal 2001, the
Company entered into a sale-leaseback transaction with an unaffiliated party for
the real estate and building for its Austin, Texas headquarters for a period of
15 years. The Company generally leases facilities for a term of five to ten
years with one or more options to renew. The Company's existing leases expire on
dates ranging between October 14, 2003 and April 30, 2023, with a small number
of leases on month-to-month terms. All leases provide for specified periodic
rental payments at market rates. Most leases require the Company to maintain the
property and pay the cost of insurance and taxes. The Company believes that the
termination of any one of its leases would not have a material adverse effect on
the Company's operations. The Company's strategy generally is to lease rather
than acquire space for its stores unless the Company finds what it believes is a
superior location at an attractive price.
Below is a summary of changes in the number of store locations during Fiscal
2001, 2002, and 2003. Included in the new stores opened in 2003 are two "store
within a store" Mono-line payday loan stores adjoining existing pawnshop
locations:
Fiscal Year Ended September 30,
--------------------------------------------
2001 2002 2003
------------ ------------ ------------
Store count at beginning of fiscal year 313 283 280
New stores opened -- -- 4
Stores closed pursuant to restructuring plan (24) -- --
Stores closed or consolidated (1) (1) --
Stores sold as operating businesses
------------ ------------
(5) (2) --
------------ ------------ ------------
Store count at end of fiscal year 283 280 284
============ ============ ============
On an ongoing basis, the Company may close or consolidate under performing store
locations as it did in Fiscal 2001 and 2002. In Fiscal 2001 and 2002, the
Company sold its seven California operating locations to a California based
check cashing chain.
16
The following table presents the metropolitan areas or regions (as defined by
the Company) generally served by the Company and the number of locations serving
each market as of September 30, 2003:
Number of
Stores in
Region/Area Each Area
----------- ---------
Texas:
Houston 59
Valley 26
San Antonio 21
Central and Northeast 15
Laredo Area 15
North Texas 15
Austin Area 11
Dallas 11
Panhandle 5
Corpus Christi 7
---------
Total Texas 185
Colorado:
Denver Area 17
Colorado Springs Area 5
Pueblo 2
---------
Total Colorado 24
Oklahoma:
Tulsa Area 10
Oklahoma City Area 8
Other Areas 2
---------
Total Oklahoma 20
Florida:
Tampa 9
Orlando 5
Other Areas 4
---------
Total Florida 18
Indiana:
Indianapolis Area 9
Fort Wayne Area 3
Other Areas 3
---------
Total Indiana 15
Alabama:
Birmingham Area 5
Mobile 2
Other Areas 1
---------
Total Alabama 8
Nevada:
Las Vegas 4
---------
Total Nevada 4
17
Number of
Stores in
Region/Area Each Area
----------- ---------
Tennessee:
Memphis 3
---------
Total Tennessee 3
Louisiana:
New Orleans Area 2
Other Areas 1
---------
Total Louisiana 3
Mississippi:
Jackson 2
Other Areas 1
---------
Total Mississippi 3
Arkansas:
West Helena 1
---------
Total Arkansas 1
---------
Total Company 284
=========
In addition to its store locations, the Company leases its 27,400 square foot
corporate office and 8,100 square foot facility for its jewelry processing
center, payday loan call center, and payday loan collections center located in
Austin, Texas.
18
ITEM 3. 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 ascertained,
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 27, 1991, the Company's Class A Non-voting Common Stock ("Class A
Common Stock") has traded on The NASDAQ Stock Market under the symbol EZPW. As
of November 21, 2003, there were 132 stockholders of record of the Company's
Class A Common Stock. There is no trading market for the Company's Class B
Voting Common Stock ("Class B Common Stock"), and as of November 21, 2003, such
stock was held by one stockholder of record.
The high and low per share price for the Company's Class A Common Stock for the
past two fiscal years, as reported by The NASDAQ Stock Market, were as follows:
High Low
---- ---
Fiscal 2002:
First quarter ended December 31, 2001 $ 1.92 $ 1.14
Second quarter ended March 31, 2002 4.10 1.65
Third quarter ended June 30, 2002 5.00 3.10
Fourth quarter ended September 30, 2002 3.50 2.50
Fiscal 2003:
First quarter ended December 31, 2002 $ 3.90 $ 1.26
Second quarter ended March 31, 2003 4.00 2.55
Third quarter ended June 30, 2003 4.35 3.20
Fourth quarter ended September 30, 2003 6.81 4.04
On November 21, 2003, the Company's Class A Common Stock closed at $7.35 per
share.
During the past three fiscal years, no dividends have been declared or paid. The
Company's credit agreement, which matures March 31, 2005, prohibits the payment
of dividends. Should dividends be paid in the future, the Company's restated
certificate of incorporation provides that cash dividends on common stock, when
declared, must be declared and paid at the same per share amounts on the Class A
Common Stock and the Class B Common Stock.
Any interested party may request a copy of this Annual Report on Form 10-K or of
the Company's Code of Conduct and Ethics, free of charge by submitting a written
request to EZCORP, Inc., Investor Relations, 1901 Capital Parkway, Austin, Texas
78746. The Code of Conduct and Ethics also may be obtained from the Company's
website at www.ezcorp.com.
20
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with,
and is qualified in its entirety by reference to the financial statements of the
Company and the notes thereto included elsewhere in this Form 10-K:
SELECTED FINANCIAL DATA
Fiscal Years Ended September 30
-------------------------------------------------------------
1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
(Amounts in thousands, except per share and store figures)
(a)(b) (b) (b) (b)
--------- --------- --------- --------- ---------
Operating Data:
Sales $ 129,275 $ 138,850 $ 128,637 $ 131,046 $ 134,591
Pawn service charges 101,892 57,475 54,666 56,676 58,175
Payday loan service charges -- -- 2,142 8,251 12,538
Other 802 1,074 725 925 1,045
--------- --------- --------- --------- ---------
Total revenues 231,969 197,399 186,170 196,898 206,349
Cost of goods sold 113,824 88,054 79,089 84,936 86,100
--------- --------- --------- --------- ---------
Net revenues 118,145 109,345 107,081 111,962 120,249
Store operating expenses 81,963 85,513 75,245 78,265 85,373
Corporate administrative expenses 14,387 19,324 14,043 15,619 17,008
Depreciation and amortization 9,435 10,255 10,808 10,087 8,775
Restructuring expense -- 10,572 (696) -- --
Interest expense 3,691 6,201 8,245 4,770 2,006
Equity in net income of unconsolidated
affiliate (225) (267) (604)
(304) (1,412)
(Gain) loss on sale of assets 268 (280) 413 327 170
Impairment of investment -- -- -- -- 1,100
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle 8,705 (22,015) (710) 3,498 7,229
Income tax expense (benefit) 3,220 (3,785) (142) 1,294 (1,170)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 5,485 (18,230) (568) 2,204 8,399
Cumulative effect of change in accounting
principle -- (14,344) -- -- (8,037)
--------- --------- --------- --------- ---------
Net income (loss) $ 5,485 $ (32,574) $ (568) $ 2,204 $ 362
========= ========= ========= ========= =========
Earnings (loss) per common share, assuming $ 0.46 $ (2.71) $ (0.05) $ 0.18 $ 0.03
dilution
Cash dividends per common share $ 0.05 $ 0.025 $ -- $ -- $ --
Weighted average common shares and
share equivalents, assuming dilution 12,008 12,017 12,104 12,292 12,552
Stores operated at end of period 331 313 283 280 284
(a) Beginning in Fiscal 2000, the Company changed its method of accounting
for pawn service charge revenue and inventory. Prior to Fiscal 2000,
the Company accrued 100% of pawn service charges during a pawn loan,
and the inventory (and ultimately the cost of goods when the inventory
was sold) resulting from forfeited pawn loan collateral was valued at
the amount loaned plus accrued pawn service charges. In Fiscal 2000,
the Company began accruing only pawn service charges expected to be
collected, and inventory (and related costs of goods sold) was valued
at only the amount loaned. Service charges, cost of goods sold and
inventory before Fiscal 2000 are stated on the historical accounting
method, and are not directly comparable to Fiscal 2000, 2001, 2002, and
2003 amounts.
(b) Beginning in Fiscal 2003, the Company adopted SFAS No. 142, which
ceased amortization of certain indefinite lived intangible assets (See
Note B to Consolidated Financial Statements). Amortization expense and
equity in net income of affiliate before Fiscal 2003 are stated on the
historical accounting method, and are not directly comparable to Fiscal
2003 amounts.
21
September 30
------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Pawn loans $ 53,940 $ 46,916 $ 47,144 $ 49,248 $ 47,955
Payday loans -- 33 1,250 2,326 3,630
Inventory 58,241 35,660 34,231 32,097 29,755
Working capital 125,575 72,498 75,334 86,425 90,885
Total assets 234,077 203,793 178,560 165,970 153,690
Long-term debt 83,123 81,112 60,192 42,245 31,000
Stockholders' equity 135,685 102,671 101,957 104,544 105,478
Fiscal Years Ended September 30
----------------------------------------------------------
Pro forma amounts assuming the new
accounting principles are applied
retroactively: 1999 2000 2001 2002 2003
--------- --------- --------- --------- ---------
Net income (loss): $ 2,463 $ (17,515) $ 129 $ 2,901 $ 8,399
Net income (loss) per diluted share 0.21 0.01 0.24 0.67
(1.46)
Total assets 206,074 192,473 167,172 155,193 154,062
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis compares the results of operations for the 12-month
periods ending September 30, 2001, 2002, and 2003 ("Fiscal 2001", "Fiscal 2002",
and "Fiscal 2003"). The discussion should be read in conjunction with, and is
qualified in its entirety by, the accompanying consolidated financial statements
and related notes.
SUMMARY FINANCIAL DATA
Fiscal Years Ended September 30
-------------------------------------
2001 2002 2003
--------- --------- ---------
(Dollars in thousands, except as indicated)
OPERATIONS:
Sales $ 128,637 $ 131,046 $ 134,591
Pawn service charges 54,666 56,676 58,175
Payday loan service charges 2,142 8,251 12,538
Other 725 925 1,045
--------- --------- ---------
Total revenues 186,170 196,898 206,349
Cost of sales 79,089 84,936 86,100
--------- --------- ---------
Net revenues 107,081 111,962 120,249
Restructuring expense (696) -- --
Income (loss) before cumulative effect of a change in
accounting principle (568) 2,204 8,399
Cumulative effect of adopting new accounting
principle, net of tax -- -- (8,037)
--------- --------- ---------
Net income (loss) $ (568) $ 2,204 $ 362
========= ========= =========
OTHER DATA:
Gross margin 38.5% 35.2% 36.0%
Average annual inventory turnover 2.2x 2.6x 2.7x
Average inventory per pawn location at year end $ 121 $ 115 $ 106
Average pawn loan balance per pawn location at year end $ 167 $ 176 $ 171
Average pawn loan at year end (whole dollars) $ 73 $ 73 $ 71
Average yield on pawn loan portfolio 120% 123% 126%
Pawn loan redemption rate 76% 76% 76%
EXPENSES AND INCOME AS A PERCENTAGE OF NET REVENUE (%):
Store operating 70.3 69.9 71.0
Administrative 13.1 14.0 14.1
Depreciation and amortization 10.1 9.0 7.3
Interest 7.7 4.3 1.7
Income (loss) before income taxes (0.1) 3.1 6.0
Income (loss) before cumulative effect (0.5) 2.0 7.0
STORES IN OPERATION:
Beginning of year 313 283 280
New openings -- -- 4
Sold, combined, or closed (30) (3) --
--------- --------- ---------
End of year 283 280 284
Average number of locations during the year 292 281 280
23
GENERAL
The Company's primary lending activity is the making of small, non-recourse
loans secured by tangible personal property through its 280 pawnshops. The
income earned on this activity is pawn service charge revenue. While allowable
service charges vary by state and by amount of the loan, a majority of the
Company's pawn loans are in amounts that permit pawn service charges of 20% per
month or 240% per annum. The Company's average pawn loan amount has historically
averaged between $70 and $75. The allowable term of pawn loans also differs by
state, but is typically 30 days with an automatic 60-day extension.
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.
The Company also offers unsecured payday loans in 230 of its pawnshops, 17
EZMONEY Mono-line stores, and in its call center as of November 21, 2003. In 199
locations and its call center, the Company markets and services payday loans
made by County Bank, a federally insured Delaware bank. After origination of the
loans, the Company may purchase an 85% participation in the loans made by County
Bank and marketed by the Company. In 48 of its locations, the Company makes
payday loans directly, operating under state law. The average payday loan amount
is approximately $325 and the terms are generally less than 30 days, averaging
about 16 days. The service charge per $100 loaned is typically $18 for a 7 to
23-day period, but varies in certain locations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, inventory,
allowance for losses on 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 from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
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 uncollectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could increase or decrease the Company's estimate of uncollectible
loans, affecting the Company's earnings and financial condition. In Fiscal 2003,
99.7% ($58.0 million) of recorded pawn service charge revenue was collected in
cash, and 0.3% ($0.2 million) resulted from an increase in accrued pawn service
charges receivable.
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
24
from service charge revenue upon loan default, and increase service charge
revenue upon subsequent collection. In Fiscal 2003, 98.0% ($12.3 million) of
recorded payday loan service charge revenue was collected in cash, and 2.0%
($0.2 million) resulted from an increase in accrued payday loan service charges
receivable.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: Unlike pawn loans, payday 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 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 also provides an allowance for losses on active payday loans and
related service charges receivable. This estimate is based largely on recent net
default rates and expected seasonal fluctuations in default rates. The accuracy
of the Company's allowance estimate is dependent upon several factors, including
its ability to predict future default rates based on historical trends and
expected future events. Actual loan losses could vary from those estimated due
to variance in any of these factors. Changes in the principal valuation
allowance are charged to bad debt expense, 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. Increased
defaults and credit losses may occur during a national or regional economic
downturn, or could occur for other reasons, resulting in the need to increase
the allowance. The Company believes it effectively manages these risks through
its underwriting criteria, closely monitoring the performance of the portfolio,
and participating in loans made by a bank using similar strategies.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). 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 or market (net realizable value), the
Company provides an allowance for shrinkage and excess, obsolete, or slow-moving
inventory. The Company's inventory valuation allowance is based on the type and
age of merchandise as well as recent sales trends and margins. At September 30,
2003, this allowance was approximately $1.8 million, or 5.8% of the gross
inventory balance. Changes in the inventory valuation allowance are recorded as
cost of goods sold. The accuracy of the Company's inventory allowance is
dependent on its ability to predict future events based on historical trends.
Unexpected variations in sales margins, inventory turnover, or other factors,
including fluctuations in gold prices could increase or decrease the Company's
inventory allowance.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors 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 was recognized in Fiscal 2001, 2002, or
2003.
EFFECT OF ADOPTION OF NEW ACCOUNTING PRINCIPLE: The Company adopted the
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" effective October 1, 2002. Under its provisions,
goodwill and other intangible assets having indefinite lives are no longer
subject to amortization but will be tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the assets might
be impaired. With the adoption of SFAS No. 142, the Company ceased amortization
of goodwill and pawn licenses, which lowered amortization expense approximately
$603,000 annually, beginning October 1, 2002. The Company also ceased goodwill
amortization related to its equity investment in A&B, resulting in a $453,000
annual increase in "equity in net income of unconsolidated affiliates." During
the quarter ended December 31, 2002, the
25
Company completed impairment tests of its goodwill and pawn licenses. The
testing estimated enterprise value based on discounted cash flows and market
capitalization and indicated no impairment of pawn licenses and implied fair
value of goodwill of $0 based on the allocation of enterprise value to all of
the Company's assets and liabilities. This resulted in an $8.0 million, net of
tax, impairment charge for goodwill recorded as a cumulative effect of adopting
a new accounting principle. The Company assesses its goodwill and indefinite
lived intangible assets as of July 1 of each year or more frequently if events
or changes in circumstances indicate impairment. Excluding the cumulative
adjustment recognizing impairment of the Company's goodwill, the Company
concluded that there was no impairment of its indefinite lived intangible assets
in Fiscal 2003.
INCOME TAXES: As part of the process of preparing the consolidated financial
statements, the Company is required to estimate income taxes in each of the
jurisdictions in which it operates. This process involves estimating the actual
current tax liability together with assessing temporary differences in
recognition of income for tax and accounting purposes. These differences result
in deferred tax assets and liabilities, which are included in the Company's
consolidated balance sheet. Management must then assess the likelihood that the
deferred tax assets will be recovered from future taxable income. In the event
that the Company was to determine that it would not be able to realize all or
part of its net deferred tax assets in the future, 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.
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities, and any valuation allowance
recorded against deferred tax assets. No adjustments were made to the Company's
valuation allowance in Fiscal 2001 or 2002. At September 30, 2003, the Company
reversed its $3.7 million valuation allowance on its deferred tax assets, based
on management's estimate of taxable income in the three years following Fiscal
2003. Projected levels of pre-tax earnings over the next three years, primarily
attributable to ordinary and recurring operating results, are sufficient to
generate the $37 million required amount of taxable income to realize the net
deferred tax assets. The Company intends to evaluate the realizability of the
deferred tax assets quarterly by assessing the need for a valuation allowance,
if any. Uncertainties that might impact the realization of the deferred tax
assets include possible declines in revenues and margins.
EQUITY IN NET INCOME OF A&B: 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 income reported for the Company's Fiscal 2003 year
represents its percentage interest in the results of A&B's operations from July
2002 through June 2003.
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"
("APB 25"). In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123, 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, as amended by SFAS No.
148 been adopted. The Company has calculated the fair value of options granted
in these periods using the Black-Scholes option-pricing model and has disclosed
the pro forma impact on net income in Note I to the Consolidated Financial
Statements.
DISCLOSURE AND INTERNAL CONTROLS: Based on an assessment of the effectiveness of
the Company's disclosure controls and procedures, accounting policies, and the
underlying judgments and uncertainties affecting the application of those
policies and procedures, management believes that the Company's consolidated
financial statements provide a meaningful and fair perspective of the Company
26
in all material respects. There have been no significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation. Management identified no
significant deficiencies or material weaknesses in internal controls. Other risk
factors, such as those discussed elsewhere in this annual report as well as
changes in business strategies, could adversely impact the consolidated
financial position, results of operations, and cash flows in future periods.
RESULTS OF OPERATIONS
FISCAL 2003 COMPARED TO FISCAL 2002
The Company's Fiscal 2003 pawn service charge revenue increased 3%, or $1.5
million from Fiscal 2002 to $58.2 million. This represents an increase in same
store pawn service charge revenue ($1.6 million) offset by the decrease in pawn
service charge revenue from closed stores ($0.1 million). The improvement in
same store pawn service charge revenue was due to a three percentage point
improvement in loan yields to 126% in Fiscal 2003. Variations in the annualized
loan yield, as seen between these periods, are due generally to changes in the
statutory fees that can be charged, changes in the level of loan forfeitures and
a mix shift between loans with different yields. Excluding the effect of closed
stores, the Company's Fiscal 2003 average balance of pawn loans outstanding was
0.2% higher and ending pawn loans outstanding were 3% lower than in Fiscal 2002.
Fiscal 2003 sales increased $3.5 million from Fiscal 2002 to $134.6 million. The
increase was due to an increase in same store sales ($1.8 million) and an
increase in jewelry scrapping sales ($1.8 million), offset by a reduction in
sales from closed stores ($0.1 million).
Below is a summary of Fiscal 2002 and 2003 sales and margins:
Fiscal Year Ended September 30,
2002 2003
--------- ---------
(Dollars in millions)
Merchandise sales $ 112.0 $ 113.8
Jewelry scrapping sales 19.0 20.8
--------- ---------
Total sales 131.0 134.6
Gross profit on merchandise sales $ 45.8 $ 45.2
Gross profit on jewelry scrapping sales 0.3 3.3
Gross margin on merchandise sales 40.9% 39.7%
Gross margin on jewelry scrapping sales 1.6% 15.9%
Overall gross margin 35.2% 36.0%
Fiscal 2003 overall gross margins on sales increased 0.8 of a percentage point
from Fiscal 2002 to 36.0%. Margins on merchandise sales, excluding jewelry
scrapping, decreased 1.2 percentage points as a result of higher loan values on
forfeited collateral, more aggressive discounting, and a higher inventory
valuation allowance, primarily on aged general merchandise. Improvements in
jewelry scrapping margins, due largely to higher gold prices, more than offset
the decrease in merchandise sales margins, leading to the improvement in overall
margins. Inventory shrinkage, included in cost of goods sold, was 1.9% of
merchandise sales in Fiscal 2003 compared to 1.5% in Fiscal 2002.
The higher level of gross profit for jewelry scrapping sales, seen in the table
above, is largely due to higher gold prices, which reached historical five-year
highs during Fiscal 2003. Future fluctuations in gold prices would have an
immediate and direct impact on the sales proceeds, or revenue per gram of gold
scrapped. The Company may react to gold price changes by adjusting the amount it
would lend on gold jewelry, which may ultimately impact the cost of scrapped
gold.
27
During 2003, the Company offered payday loans in 225 of its pawnshop locations
and through its Austin, Texas based call center. During the fourth Fiscal 2003
quarter, the Company opened four Mono-line payday loan stores specializing in
payday loans, two of which were carved out of existing pawnshop locations. For
the locations offering payday loans for the full year, average per store payday
loan balances increased 53% to $15,500 per store on September 30, 2003.
Payday loan data are as follows for Fiscal 2002 and 2003:
Fiscal Year Ended September 30,
2002 2003
------------ ------------
(Dollars in thousands)
Service charge revenue $ 8,251 $ 12,538
Bad debt (included in operating expense) (3,138) (3,551)
Other direct transaction expenses (included in operating expense) (802) (1,134)
Collection and call center costs (included in administrative expense) (382) (650)
------------ ------------
Contribution to operating income 3,929 7,203
Average payday loan balance outstanding during year 1,596 2,763
Payday loan balance at end of year 2,326 3,630
Average loan balance per participating location at end of year 10.2 15.8
Participating locations at end of year (whole numbers) 229 230
Net default rate (defaults net of collections, measured as a percent of loans
made) 6.9% 5.0%
The contribution to operating income presented above is the incremental
contribution only and excludes allocation of other costs such as labor, rent,
and overhead.
Payday loan service charge revenue and bad debt expense each increased from
Fiscal 2002 primarily due to higher average loan balances. The loan balance
increased primarily due to the maturing of the product. The Company's
significant improvement in net defaults was primarily due to continued
refinements in the Company's collection efforts and improvements to its
underwriting criteria as it gains more experience with this product.
The Company provides 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 rate. At September 30, 2003, the valuation allowance was 5.9% of the
payday loan principal and fee receivable.
In Fiscal 2003, store operating expenses as a percent of net revenues increased
1.1 percentage points to 71.0%. This increase is largely due to a $2.7 million
increase in labor, incentive compensation, and benefits and a $1.0 million
increase in robberies related primarily to one gang that has been apprehended.
Fiscal 2003 operating expenses also reflect a volume-related $0.7 million
increase in payday loan bad debt and other direct payday loan transaction
expenses, $0.7 million higher rent on computer equipment upgrades, and a $0.4
million increase in rent from the sale-leaseback of previously owned store
locations. The incremental sale-leaseback rent expense was largely offset by
related decreases in depreciation of the sold locations and lower interest
expense from debt retired with the proceeds of the sale-leaseback transactions.
Administrative expenses measured as a percentage of net revenues increased 0.1
of a percentage point from Fiscal 2002 to 14.1%. The increase is due primarily
to higher employment related costs and payday loan related costs. Employment
cost increases reflect increased benefit costs, general inflation, limited staff
additions, and greater incentive compensation related to the Company's improved
overall performance in Fiscal 2003. The increased volume of payday loans in
Fiscal 2003 required the increase in payday loan related costs, primarily labor
in the debt collection area. Included in administrative expenses are management
fees and expense reimbursements paid to a related party totaling $767,000
28
and $498,000 in Fiscal 2003 and 2002, as more fully discussed in Item 13 of this
annual report on Form 10-K.
Depreciation and amortization expense, when measured as a percentage of net
revenue, decreased 1.7 percentage points in Fiscal 2003 to 7.3%. This
improvement is primarily due to ceasing amortization of intangibles upon the
adoption of SFAS No. 142, "Goodwill and Other Intangible Assets" and the
reduction in depreciation resulting from the sale-leaseback of previously owned
locations.
In Fiscal 2003, interest expense decreased to $2.0 million from $4.8 million in
Fiscal 2002. The improvement was driven by lower average debt balances, coupled
with lower effective interest rates. At September 30, 2003, the Company's total
debt was $31.0 million compared to $42.2 million at September 30, 2002.
Decreases in the debt balance were funded primarily by cash flow from
operations.
In Fiscal 2000, the Company invested $1.1 million in an internet related
start-up company. Based on the investee's performance to date, the Company
determined at September 30, 2003 that its investment was fully impaired,
resulting in a $1.1 million impairment charge recorded in Fiscal 2003.
The Fiscal 2003 income tax benefit was $1.2 million. This amount includes the
reversal of a $3.7 million deferred tax asset valuation allowance as the Company
projects its future taxable income will be sufficient to fully realize its net
deferred tax asset. Excluding the removal of the valuation allowance, the
Company's income tax provision would be $2.5 million (35% of pretax income)
compared to an income tax provision of $1.3 million (37% of pretax income) for
Fiscal 2002. The decrease in effective tax rate for Fiscal 2003 is due to
non-deductible items having a smaller percentage impact on pre-tax earnings.
Operating income for Fiscal 2003 increased $1.1 million over Fiscal 2002 to $9.1
million. The $3.3 million increased contribution from payday loans, $2.4 million
improvement in gross profit on sales, and $1.6 million increase in same store
pawn service charges account for most of the improvement. Coupled with these is
a $0.6 million reduction in amortization resulting from the adoption of SFAS No.
142, "Goodwill and Other Intangible Assets," and a $0.7 million reduction in
depreciation expense related to the sale-leaseback of store locations. These
improvements were partially offset by $7.1 million higher operating and
administrative expenses and $0.4 million of rent from the sale-leaseback of
store locations.
Income before the cumulative effect of adopting SFAS No. 142 improved to $8.4
million from $2.2 million in Fiscal 2002. This results principally from a $2.8
million decrease in interest expense, and a $3.7 million reduction in the
deferred tax asset valuation allowance, partially offset by a $1.1 million
impairment of an investment in an internet business. After the non-cash
cumulative effect of adopting SFAS No. 142, the Company's net income was $0.4
million compared to $2.2 million in Fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001
The Company's Fiscal 2002 pawn service charge revenue increased 4%, or $2.0
million from Fiscal 2001 to $56.7 million. This represents an increase in same
store pawn service charge revenue ($2.2 million) offset by the decrease in pawn
service charge revenue from closed stores ($0.2 million). Of the $2.2 million
improvement in same store pawn service charge revenue, $1.2 million was due to
greater average loan balances during the year and $1.0 million was due to a 3
percentage point improvement in loan yields to 123% in Fiscal 2002. Variations
in the annualized loan yield, as seen between these periods, are due generally
to changes in the statutory fees that can be charged, changes in the level of
loan forfeitures and a mix shift between loans with different yields. Excluding
the effect of closed stores, the Company's Fiscal 2002 average balance of pawn
loans outstanding was 2% higher and ending pawn loans outstanding were 6% higher
than in Fiscal 2001.
Fiscal 2002 sales increased $2.4 million from Fiscal 2001 to $131.0 million. The
increase was primarily due to an increase in jewelry scrapping sales ($5.4
million), offset by a reduction in sales from closed stores ($1.7 million) and
lower same store merchandise sales ($1.3 million). Lower merchandise sales
occurred mainly in jewelry largely as a result of lower jewelry inventories
caused by the higher level of jewelry scrapping. Below is a summary of Fiscal
2001 and 2002 sales and margins:
29
Fiscal Year Ended September 30,
2001 2002
------------ ------------
(Dollars in millions)
Merchandise sales $ 115.0 $ 112.0
Jewelry scrapping sales 13.6 19.0
------------ ------------
Total sales 128.6 131.0
Gross profit on merchandise sales $ 50.3 $ 45.8
Gross profit (loss) on jewelry scrapping sales (0.7) 0.3
Gross margin on merchandise sales 43.7% 40.9%
Gross margin on jewelry scrapping sales (5.2%) 1.6%
Overall gross margin 38.5% 35.2%
Fiscal 2002 overall gross margins on sales decreased 3.3 percentage points from
Fiscal 2001 to 35.2%. Margins on merchandise sales, excluding jewelry scrapping,
decreased 2.8 percentage points as a result of higher loan values on forfeited
collateral, more aggressive discounting, and higher inventory valuation
allowance, primarily on aging general merchandise. The change in merchandise
sales margins comprised 0.2 of a percentage point of the change in overall gross
margins. Although margins on jewelry scrapping improved in Fiscal 2002 due
largely to higher gold prices, the 39% increase in volume of these low margin
sales (jewelry generally is scrapped at a loss or small margin) had a 3.1
percentage point negative effect on overall margins. Inventory shrinkage,
included in cost of goods sold, was 1.5% of merchandise sales in Fiscal 2002
compared to 1.4% in Fiscal 2001.
For most of Fiscal 2002, the Company offered payday loans in 205 of its pawnshop
locations. In the second half of Fiscal 2002, the Company began offering payday
loans in another 23 of its pawnshops and through its Austin, Texas based call
center. For the 205 locations offering payday loans for the full year, average
per store payday loan balances increased 81% to $10,900 per store on September
30, 2002.
Payday loan data are as follows for Fiscal 2001 and 2002:
Fiscal Year Ended September 30,
2001 2002
------------ ------------
(Dollars in thousands)
Service charge revenue $ 2,142 $ 8,251
Bad debt (included in operating expense) (1,247) (3,138)
Other direct transaction expenses (included in operating expense) (175) (802)
Collection and call center costs (included in administrative expense) -- (382)
------------ ------------
Contribution to operating income 720 3,929
Average payday loan balance outstanding during year 430 1,596
Payday loan balance at end of year 1,250 2,326
Average loan balance per participating location at end of year 6.1 10.2
Participating locations at end of year (whole numbers) 205 229
Net default rate (defaults net of collections, measured as a percent of loans
made) 8.1% 6.9%
The contribution to operating income presented above is the incremental
contribution only and excludes other costs such as labor, rent, and other
overhead costs.
Payday loan service charge revenue and bad debt expense each increased from
Fiscal 2001 primarily due to higher average loan balances. The loan balance
increased due to the maturing of the product and a growth in the number of
locations offering the loans.
30
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 as the basis for its valuation allowance, rather than reserving the annual
rate. At September 30, 2002, the valuation allowance was 5.6% of the payday loan
principal and fees receivable.
In Fiscal 2002, store operating expenses as a percent of net revenues decreased
0.4 of a percentage point to 69.9%. Fiscal 2002 operating expenses reflect a
volume-related $2.5 million increase in payday loan bad debt and other direct
payday loan transaction expenses, and a $1.4 million increase in rent from the
sale-leaseback of previously owned store locations. Despite these increases,
store operating expenses decreased as a percent of net revenues due to the
effects of greater net revenues and an improvement in other store operating
expenses. The incremental sale-leaseback rent was largely offset by related
decreases in depreciation of the sold locations and lower interest expense from
debt retired with the proceeds from the sale-leasebacks.
Administrative expenses measured as a percentage of net revenues increased 0.9
of a percentage point from Fiscal 2001 to 14.0%. The increase is due primarily
to higher employment related costs and payday loan collection costs. Employment
cost increases reflect limited staff additions, general inflation, and greater
incentive compensation related to the Company's improved overall performance in
Fiscal 2002. The increased volume of payday loans in Fiscal 2002 required the
increase in payday loan collection costs, primarily labor in the debt collection
area. Included in administrative expenses are expense reimbursements paid to a
related party totaling $498,000 and $426,000 in Fiscal 2002 and 2001, as more
fully discussed in Item 13 of this annual report on Form 10-K.
Depreciation and amortization expense, when measured as a percentage of net
revenue, decreased 1.1 percentage points in Fiscal 2002 to 9.0%. This
improvement is primarily due to the reduction in depreciable assets through the
sale-leaseback of previously owned locations.
In Fiscal 2002, interest expense decreased by $3.5 million to $4.8 million.
Lower average debt balances led to $2.9 million of the improvement, while lower
effective interest rates contributed the remaining $0.6 million. At September
30, 2002, the Company's total debt was $42.2 million compared to $60.2 million
at September 30, 2001. Decreases in the debt balance were funded primarily by
cash flow from operations and $6.5 million of proceeds from the sale-leaseback
of previously owned locations.
The Fiscal 2002 income tax provision was $1.3 million (37% of pretax income)
compared to an income tax benefit of $0.1 million (20% of pretax loss) for
Fiscal 2001. The increase in effective tax rate for Fiscal 2002 compared to the
Fiscal 2001 benefit is due to non-tax deductible items having a smaller
percentage effect on larger pre-tax earnings.
Operating income for Fiscal 2002 increased $0.3 million over Fiscal 2001 to $8.0
million. The $3.3 million greater contribution from payday loans and $2.2
million increase in same store pawn service charges account for most of the
overall improvement. These improvements were largely offset by lower gross
profits on sales ($3.5 million) and increased rent from the sale-leaseback of
store locations ($1.4 million), combined with higher administrative costs. After
a $3.5 million decrease in interest expense and smaller changes in other
non-operating items, Fiscal 2002 net income improved to $2.2 million from Fiscal
2001's $0.6 million net loss.
RESTRUCTURING
Pursuant to a restructuring plan, the Company decided to close 54 stores and
recorded a pretax charge of $11.8 million ($7.8 million net of tax) in Fiscal
2000. In June 2001, the Company re-evaluated seven remaining stores that had not
been closed, and decided to continue their operation, based on their improved
operating performance and future outlook. Accordingly, the Company reversed the
$1.3 million restructure accrual related to these seven stores. The Company
recorded an additional $0.3 million restructure expense for the 47 stores
previously closed, primarily to account for higher than estimated costs of
settling leases, resulting in a net credit to restructuring expense of $1.0
million in the period
31
ended June 30, 2001, $0.3 million of which is included in cost of sales. At
September 30, 2003, the Company no longer had a balance in the restructuring
reserve.
LIQUIDITY AND CAPITAL RESOURCES
Certain transactions presented in the restated Statements of Cash Flows for the
years ended September 30, 2003, 2002 and 2001, respectively, 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 Q to the Consolidated Financial Statements.
In Fiscal 2003, The Company's $15.3 million cash flow from operations consisted
of (i) net income plus several non-cash items, aggregating to $13.2 million and
(ii) $2.1 million of changes in operating assets and liabilities, primarily
prepaid expenses and other assets. The Company's $16.9 million Fiscal 2002 cash
flow from operations consisted of (i) net income plus several non-cash items,
aggregating to $16.1 million and (ii) $0.8 million of changes in operating
assets and liabilities, primarily accounts payable. The primary difference
between cash flow from operations for Fiscal 2002 and Fiscal 2003 is a higher
level of income taxes paid in cash in Fiscal 2003. In Fiscal 2002, the Company
had the benefit of a net operating loss carry-forward, which was fully utilized
during Fiscal 2002.
In Fiscal 2003, the Company invested $2.5 million in property and equipment,
$4.9 million in funding payday loans net of repayments, and increased its cash
balance by $1.0 million. These changes and an $11.2 million reduction in debt
were funded by the cash flow from operations discussed above, $1.0 million in
proceeds from the sale of assets, $0.5 million of dividends from Albemarle &
Bond Holding, plc, and a $2.8 million net cash inflow resulting from pawn loans
made and repaid and the recovery of pawn loan principal through the sale of
forfeited collateral.
During the fiscal year ending September 30, 2004, the Company plans to open 75
to 85 Mono-line payday loan stores, including those adjoining EZPAWN stores at
an expected aggregate capital expenditure of approximately $2.5 million, plus
the funding of working capital and start-up losses at these stores. While the
Company anticipates that these new stores will contribute to increased future
earnings, it expects they will have a negative effect on earnings in their first
year of operation.
The Company anticipates that cash flow from operations and availability under
its revolving credit facility will be adequate to fund planned store growth,
capital expenditures, and working capital requirements during the coming year.
The Company's $42.5 million credit agreement (increased from $40 million on June
5, 2003) 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. 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%. Terms of the agreement require, among other things, that
the Company meet certain financial covenants that the Company believes will be
achieved based upon its current and anticipated performance. In addition,
payment of dividends is prohibited and additional debt is restricted. At
September 30, 2003, the Company had $31.0 million outstanding on the revolving
credit facility.
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.
32
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical information provided herein are forward-looking
and may contain information about financial results, economic conditions,
trends, and known uncertainties. The Company cautions the reader that actual
results could differ materially from those 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 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in interest rates, foreign currency exchange rates, and
gold prices. The Company 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 in 2004 than they did in 2003, the
Company's annual interest expense would be increased by approximately $155,000.
This amount is determined by considering the impact of the hypothetical interest
rates on the Company's variable-rate debt at September 30, 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 year ended June 30, 2003 (included in the Company's September 30,
2003 results on a three-month lag as described above) was approximately a
$505,000 increase to shareholders' equity. On September 30, 2003, the U.K. pound
closed at 1.00 to 1.66710 U.S. dollars, a strengthening from 1.6503 at June 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.
33
The Company's earnings and financial position could be affected by changes in
the regulatory environment for payday loans, primarily the rates allowed and the
Company's association with County Bank. The Federal Deposit Insurance
Corporation ("FDIC") has set forth guidelines governing companies which market
payday loans for federally chartered banks, such as the Company's relationship
with County Bank. While the Company believes its arrangement with County Bank
falls within these guidelines, changes in the guidelines or any finding that the
Company's arrangement does not comply could have a material adverse effect on
the Company's financial position and results of operations, the amount of which
cannot be reasonably determined.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors 36
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2002 and 2003 37
Consolidated Statements of Operations for each of the Three Fiscal Years
Ended September 30, 2003 38
Consolidated Statements of Cash Flows for each of the Three Fiscal Years
Ended September 30, 2003 39
Consolidated Statements of Stockholders' Equity for each of the Three Fiscal Years
Ended September 30, 2003 40
Notes to Consolidated Financial Statements 41
35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
EZCORP, Inc.
We have audited the accompanying consolidated balance sheets of EZCORP, Inc. and
its subsidiaries as of September 30, 2002 and 2003, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2003. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Albemarle & Bond Holdings, plc, an equity investee, which
statements reflect total assets constituting 9.6% in 2003, and 8.0% in 2002, and
equity in income constituting 19.5% in 2003, 17.3% in 2002, and 37.6% in 2001 of
consolidated income before income taxes and the cumulative effect of adopting a
new accounting principle. Those statements were audited by Solomon Hare.
We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of EZCORP, Inc. and its
subsidiaries at September 30, 2002 and 2003, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2003, in conformity with accounting principles generally
accepted in the United States. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note B to the consolidated financial statements, effective
October 1, 2002, the Company adopted the Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangibles". Also, as described in Note
Q, the consolidated statements of cash flows for the three years ended September
30, 2003 have been restated.
ERNST & YOUNG LLP
Austin, Texas
November 6, 2003 (except for Note Q,
as to which the date is November 24, 2004)
36
CONSOLIDATED BALANCE SHEETS
September 30,
------------------------------
2002 2003
------------- -------------
Assets: (In thousands)
Current assets:
Cash and cash equivalents $ 1,492 $ 2,496
Pawn loans 49,248 47,955
Payday loans 2,326 3,630
Pawn service charges receivable, net 8,819 8,990
Payday loan service charges receivable, net 485 735
Inventory, net 32,097 29,755
Deferred tax asset 6,418 8,163
Federal income tax receivable 359 328
Prepaid expenses and other assets 1,898 1,726
------------- -------------
Total current assets 103,142 103,778
Investment in unconsolidated affiliates 14,406 14,700
Property and equipment, net 32,190 25,369
Goodwill, net 11,148 --
Notes receivable from related parties 1,522 1,500
Deferred tax asset - non-current -- 4,391
Other assets, net 3,562 3,952
------------- -------------
Total assets $ 165,970 $ 153,690
============= =============
Liabilities and stockholders' equity Current liabilities:
Current maturities of long-term debt $ 2,936 $ --
Accounts payable and other accrued expenses 11,615 11,101
Customer layaway deposits 2,166 1,792
------------- -------------
Total current liabilities 16,717 12,893
Long-term debt, less current maturities 39,309 31,000
Deferred tax liability 1,191 --
Deferred gains and other long-term liabilities 4,209 4,319
------------- -------------
Total long-term liabilities 44,709 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; 10,985,675 issued
and 10,976,642 outstanding in 2002; 11,006,864 110 110
issued and 10,997,831 outstanding in 2003
Class B Voting Common Stock, convertible, par value $.01
per share; Authorized 1,198,990 shares; 1,190,057 12 12
issued and outstanding
Additional paid-in capital 114,729 115,580
Accumulated deficit (9,523) (9,161)
Less deferred compensation expense -- (784)
------------- -------------
105,328 105,757
Treasury stock, at cost (9,033 shares) (35) (35)
Receivable from stockholder (729) (729)
Accumulated other comprehensive income (loss) (20) 485
------------- -------------
Total stockholders' equity 104,544 105,478
------------- -------------
Total liabilities and stockholders' equity $ 165,970 $ 153,690
============= =============
See notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
-----------------------------------
2001 2002 2003
--------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Sales $ 128,637 $ 131,046 $ 134,591
Pawn service charges 54,666 56,676 58,175
Payday loan service charges 2,142 8,251 12,538
Other 725 925 1,045
--------- --------- ---------
Total revenues 186,170 196,898 206,349
Costs of goods sold 79,089 84,936 86,100
--------- --------- ---------
Net revenues 107,081 111,962 120,249
Operating expenses:
Operations 75,245 78,265 85,373
Administrative 14,043 15,619 17,008
Depreciation 10,085 9,405 8,685
Amortization 723 682 90
Restructuring expense (reversal) (696) -- --
--------- --------- ---------
Total operating expenses 99,400 103,971 111,156
--------- --------- ---------
Operating income 7,681 7,991 9,093
Interest expense, net 8,245 4,770 2,006
Equity in net income of unconsolidated affiliate (267) (604) (1,412)
Loss on sale of assets 413 327 170
Impairment of investment -- -- 1,100
--------- --------- ---------
Income (loss) before income taxes and cumulative effect
of adopting a new accounting principle (710) 3,498 7,229
Income tax expense (benefit) (142) 1,294 (1,170)
--------- --------- ---------
Income (loss) before cumulative effect of adopting a new
accounting principle $ (568) $ 2,204 $ 8,399
Cumulative effect of adopting a new accounting
principle, net of tax -- -- (8,037)
--------- --------- ---------
Net income (loss) $ (568) $ 2,204 $ 362
========= ========= =========
Income (loss) per common share - basic:
Income (loss) before cumulative effect of adopting a new
accounting principle $ (0.05) $ 0.18 $ 0.69
Cumulative effect of adopting a new accounting
principle, net of tax $ -- $ -- $ (0.66)
--------- --------- ---------
Net income (loss) $ (0.05) $ 0.18 $ 0.03
========= ========= =========
Income (loss) per common share - assuming dilution:
Income (loss) before cumulative effect of adopting a new
accounting principle $ (0.05) $ 0.18 $ 0.67
Cumulative effect of adopting a new accounting
principle, net of tax $ -- $ -- $ (0.64)
--------- --------- ---------
Net income (loss) $ (0.05) $ 0.18 $ 0.03
========= ========= =========
Weighted average shares outstanding:
Basic 12,104 12,143 12,181
Assuming dilution 12,104 12,292 12,552
See notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
--------------------------------------------
2001 2002 2003
------------ ------------ ------------
Restated Restated Restated
(In thousands)
Operating Activities:
Net income (loss) $ (568) $ 2,204 $ 362
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of adopting new accounting principle -- -- 8,037
Depreciation and amortization 10,808 10,087 8,775
Payday loan loss provision 1,247 3,138 3,551
Deferred taxes (223) 993 (7,327)
Restructuring expenses (696) -- --
Net loss on sale or disposal of assets 413 327 170
Impairment of investment -- -- 1,100
Deferred compensation expense 6 6 3
Income from investment in unconsolidated affiliate (267) (604) (1,412)
Changes in operating assets and liabilities:
Service charges receivable, net (205) (463) (421)
Inventory 432 264 868
Notes receivable from related parties 1,567 67 22
Prepaid expenses, other current assets, and other
assets, net (1,559) (878) 2,803
Accounts payable and accrued expenses (1,800) 2,567 (450)
Restructuring reserve (1,887) (183) (34)
Customer layaway deposits (251) 85 (374)
Deferred gains and other long-term liabilities (145) (341) (363)
Federal income taxes 5,045 (359) 31
------------ ------------ ------------
Net cash provided by operating activities 11,917 16,910 15,341
Investing Activities:
Pawn loans made (163,158) (167,281) (163,125)
Pawn loans repaid 91,872 91,937 90,691
Recovery of pawn loan principal through sale of forfeited
collateral 72,055 75,110 75,201
Payday loans made (6,226) (16,600) (24,051)
Payday loans repaid 3,762 12,386 19,196
Additions to property and equipment (4,456) (2,042) (2,491)
Dividends from unconsolidated affiliate 236 327 523
Proceeds from sale of assets 13,978 6,506 964
------------ ------------ ------------
Net cash provided by (used in) investing activities 8,063 343 (3,092)
Financing Activities:
Net payments on bank borrowings (20,920) (17,947) (11,245)
------------ ------------ ------------
Net cash used in financing activities (20,920) (17,947) (11,245)
------------ ------------ ------------
Change in cash and equivalents (940) (694) 1,004
Cash and equivalents at beginning of period 3,126 2,186 1,492
------------ ------------ ------------
Cash and equivalents at end of period $ 2,186 $ 1,492 $ 2,496
============ ============ ============
Cash paid during the periods for:
Interest $ 7,818 $ 3,981 $ 3,017
Income taxes $ 320 $ 866 $ 3,163
Non-cash investing and financing activities:
Pawn loans forfeited and transferred to inventory $ 71,058 $ 73,240 $ 73,727
Deferred gain on sale-leaseback $ 3,281 $ 1,388 $ 506
Issuance of common stock to 401(k) plan $ 89 $ 60 $ 64
Foreign currency translation adjustment $ (241) $ 317 $ 505
See notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
------------------- Additional Retained Deferred Receivable Other
Par Paid In Earnings/ Compensation Treasury From Comprehensive
Shares Value Capital (Deficit) Expense Stock Stockholder Income (Loss) Total
--------- --------- --------- --------- --------- --------- --------- -------------- --------
(In thousands)
Balances at Sept. 30, 2000 12,096 $ 121 $ 114,569 $ (11,159) $ -- $ (35) $ (729) $ (96) $102,671
Issuance of common
stock to 401(k) plan 41 -- 89 -- -- -- -- -- 89
Amortization of stock
option compensation -- -- 6 -- -- -- -- -- 6
Foreign currency
translation adjustment -- -- -- -- -- -- -- (241) (241)
Net loss -- -- -- (568) -- -- -- -- (568)
--------
Total comprehensive loss -- -- -- -- -- -- -- -- (809)
--------- --------- --------- --------- --------- --------- --------- --------- --------
Balances at Sept. 30, 2001 12,137 121 114,664 (11,727) -- (35) (729) (337) 101,957
Issuance of common
stock to 401(k) plan 39 1 59 -- -- -- -- -- 60
Amortization of stock
option compensation -- -- 6 -- -- -- -- -- 6
Foreign currency
translation adjustment -- -- -- -- -- -- -- 317 317
Net income -- -- -- 2,204 -- -- -- --
2,204
--------
Total comprehensive
income -- -- -- -- -- -- -- -- 2,521
--------- --------- --------- --------- --------- --------- --------- --------- --------
Balances at Sept. 30, 2002 12,176 122 114,729 (9,523) -- (35) (729) (20) 104,544
Issuance of common
Stock to 401(k) plan 21 -- 64 -- -- -- -- -- 64
Amortization of stock
option compensation -- -- 3 -- -- -- -- -- 3
Issuance of restricted
shares to employee -- -- 784 -- (784) -- -- -- --
Foreign currency
translation adjustment -- -- -- -- -- -- -- 505 505
Net income -- -- -- 362 -- -- -- -- 362
--------
Total comprehensive
income -- -- -- -- -- -- -- -- 867
--------- --------- --------- --------- --------- --------- --------- --------- --------
Balances at Sept. 30, 2003 12,197 $ 122 $ 115,580 $ (9,161) $ (784) $ (35) $ (729) $ 485 $105,478
========= ========= ========= ========= ========= ========= ========= ========= ========
See notes to consolidated financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: EZCORP, Inc. (the "Company") is engaged primarily in operating
pawnshops and payday loan stores. As of September 30, 2003, the Company operated
280 pawn locations in 11 states, offered payday loans in 225 of its pawnshops,
and offered payday loans in four "Mono-line" stores, specializing in payday
loans, as well as an Austin, Texas based payday loan call center. The stores
function as sources of customer credit and the pawnshops function as specialty
retailers primarily of previously owned merchandise.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The Company
accounts for its 28.9% interest in Albemarle & Bond Holdings, plc ("A&B") using
the equity method.
PAWN LOAN REVENUE RECOGNITION: Pawn loans are made on the pledge of tangible
personal property. Pawn service charges on pawn loans are recorded using the
interest method for all pawn loans the Company deems to be collectible based on
historical redemption rates. If the pawn loan is not repaid, the forfeited
collateral (inventory) is valued at the lower of cost (pawn loan principal) or
market (net realizable value) of the property. When this inventory is sold,
sales revenue and the related cost are recorded at the time of sale.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans are unsecured and generally made
for periods of less than 30 days. In most locations, the Company markets payday
loans made by County Bank of Rehoboth Beach, Delaware ("County Bank"), and may
purchase an 85% participation in the loans made by County Bank. In a limited
number of locations, the Company makes payday loans without the participation of
County Bank. The loans and related fees reported in the Company's consolidated
financial statements reflect both the Company's participation interest in loans
made by County Bank and loans made directly by the Company. Finance charges on
payday loans are recorded using the interest method.
ALLOWANCE FOR LOSSES ON PAYDAY LOANS: The Company charges defaulted payday loans
to bad debt expense when they default, leaving only active loans in the reported
balance. The amount collected from defaulted loans is recorded as a reduction of
bad debt expense at the time of collection. The Company provides for a valuation
allowance on both the principal and fees receivable, based on recent net default
rates. Net defaults and changes in the principal valuation allowance are charged
to bad debt expense. Fees related to defaulted loans and changes to the fee
receivable valuation allowance are charged to service charge revenue. In Fiscal
2002 and 2003, the Company's bad debt expense, included in store operating
expense, was $3.1 million and $3.6 million, respectively.
TOTAL REVENUES: In Fiscal 2003, the Company's total revenues were comprised of
28% pawn service charges, 65% sales, 6% payday loan service charges, and 1%
other fee revenue. In Fiscal 2002, the Company's total revenues were comprised
of 29% pawn service charges, 67% merchandise sales, and 4% payday loan service
charges.
CASH AND CASH EQUIVALENTS: The Company considers investments with maturities of
90 days or less when purchased to be cash equivalents.
INVENTORY: Inventory is stated at the lower of cost (specific identification) or
market (net realizable value). Inventory consists of merchandise acquired from
forfeited pawn loans, merchandise purchased from customers, and merchandise
acquired from the acquisition of other pawnshops. The Company provides an
allowance for shrinkage and valuation based on management's evaluation of the
market value of the merchandise. At September 30, 2002 and 2003, the valuation
allowance deducted from the carrying value of inventory amounted to $1,650,000
and $1,828,000, respectively.
41
SOFTWARE DEVELOPMENT COSTS: The Company accounts for software development costs
in accordance with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of
Computer Software Developed for or Obtained for Internal Use," which requires
the capitalization of certain costs incurred in connection with developing or
obtaining software for internal use. During 2001, 2002, and 2003 approximately
$1,979,000, $8,000, and $233,000 was capitalized in connection with the
development and acquisition of internal software systems. Included in the 2001
cost is $278,000 of capitalized interest. No interest was capitalized in 2002 or
2003. Capitalized costs are amortized by the straight-line method over the
estimated useful lives of each system, ranging from two to eight years.
CUSTOMER LAYAWAY DEPOSITS: Customer layaway deposits are recorded as deferred
revenue until the entire related sales price has been collected and the related
merchandise has been delivered to the customer.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Provisions
for depreciation are computed on a straight line basis using estimated useful
lives of 30 years for buildings and 2 to 10 years for furniture, equipment,
leasehold improvements, and software development costs.
INTANGIBLE ASSETS: The Company adopted the Statement of Financial Accounting
Standards ("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 an indefinite useful life are no longer subject to
amortization but will be tested for impairment at least annually. The effects of
the adoption of this new accounting principle are discussed in Note B.
LONG-LIVED ASSETS: Long-lived assets (i.e., property and equipment) are reviewed
for impairment whenever events or changes in circumstances indicate that the net
book value of the asset may not be recoverable. An impairment loss is recognized
if the sum of the expected future cash flows (undiscounted and before interest)
from the use of the asset is less than the net book value of the asset. The
amount of the impairment loss, if any, is measured as the difference between the
net book value and the estimated fair value of the related assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments is
determined by reference to various market data and other valuation techniques,
as appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values, due primarily to their short-term
nature. The Company considers investments with maturities of 90 days or less
when purchased to be cash equivalents.
FOREIGN CURRENCY TRANSLATION: The Company's equity investment in A&B is
translated into U.S. dollars at the exchange rate as of A&B's balance sheet date
(June 30). The related interest in A&B's net income is translated at the average
exchange rate for each six-month period reported by A&B. Resulting translation
adjustments are reflected as a separate component of stockholders' equity.
ADVERTISING: Advertising costs are expensed as incurred. Advertising expense was
approximately $1,146,000, $1,154,000, and $1,189,000 for the fiscal years ended
September 30, 2001, 2002, and 2003, respectively.
INCOME TAXES: The Company files a consolidated income tax return with its wholly
owned subsidiaries. Deferred taxes are recorded based on the liability method
and result primarily from differences in the timing of the recognition of
certain revenue and expense items for federal income tax purposes and financial
reporting purposes.
STOCK-BASED COMPENSATION: The Company accounts for its stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and related Interpretations. The
Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation Transition and Disclosure." The Company has
41
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. For the purpose of pro forma disclosures required, the estimated
fair value of the options is expensed over the options' vesting periods. The
following table represents the effect on net income (loss) if the Company had
applied the fair value recognition provisions of SFAS No. 123, as amended by
SFAS No. 148, to stock-based compensation:
Years ended September 30,
-------------------------------------------
2001 2002 2003
------------ ------------ ------------
(In thousands, except per share amounts)
Net income (loss), as reported $ (568) $ 2,204 $ 362
Less: pro forma compensation expense 447 505 552
------------ ------------ ------------
Net income (loss), pro forma $ (1,015) $ 1,699 $ (190)
Earnings (loss) per share, pro forma - Basic $ (0.08) $ 0.14 $ (0.02)
Earnings (loss) per share, pro forma - Assuming
dilution $ (0.08) $ 0.14 $ (0.02)
See Note I.
SEGMENTS: The Company accounts for its operations in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." No
segment disclosures have been made as the Company considers its business
activities as a single segment.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
difference may be material.
RECLASSIFICATIONS: Certain prior year financial statement balances have been
reclassified to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In January 2003, the Financial
Accounting Standards Board ("FASB") issued Financial Interpretation No. 46 (FIN
46), an interpretation of Accounting Research Bulletin No. 51, which requires
the Company to consolidate variable interest entities for which it is deemed to
be the primary beneficiary and disclose information about variable interest
entities in which it has a significant variable interest. FIN 46 became
effective immediately for variable interest entities formed after January 31,
2003, and effective for periods ending after December 15, 2003, for any variable
interest entities formed prior to February 1, 2003. The Company believes
adoption of FIN 46 will have no effect on its consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
which requires that the extinguishment of debt not be considered an
extraordinary item under the Accounting Principles Board ("APB") Opinion No. 30
("APB 30"), "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," unless the debt extinguishment meets the
"unusual in nature and infrequent of occurrence" criteria in APB 30. The Company
adopted SFAS No. 145 and related rules as of October 1, 2002. The adoption of
SFAS No. 145 had no effect on the Company's financial position or results of
operations.
The Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" effective January 1, 2003, resulting in no impact to the
Company's results of operations or financial position. SFAS No. 146 nullifies
EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)" and requires that costs associated with an exit or disposal
activity be recognized only when the liability is incurred (that is, when it
meets the definition of a liability in the FASB's conceptual framework). SFAS
No. 146 also establishes fair value as the objective for initial measurement of
liabilities related to exit or disposal activities.
43
Effective July 1, 2003, the Company adopted SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities," which amended
and clarified financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The adoption of this statement had no impact on the
Company's operating results or financial position.
The Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity" effective July 1, 2003.
This Statement established standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). The
adoption of this Statement had no impact on the Company's results of operations
or financial position.
NOTE B: CHANGE IN ACCOUNTING PRINCIPLE
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 no longer subject to
amortization but will be tested for impairment annually, or more frequently if
events or changes in circumstances indicate that the assets might be impaired.
With the adoption of SFAS No. 142, the Company ceased amortization of goodwill
and pawn licenses, which lowered amortization expense approximately $603,000
annually, beginning October 1, 2002. The Company also ceased goodwill
amortization related to its equity investment in A&B, which resulted in a
$453,000 annual increase in "equity in net income of unconsolidated affiliates."
During the quarter ended December 31, 2002, the Company, with the assistance of
independent valuation specialists, completed impairment tests of its goodwill
and pawn licenses. The testing estimated enterprise value based on discounted
cash flows and market capitalization and indicated no impairment of pawn
licenses and an implied fair value of goodwill of $0 based on the allocation of
enterprise value to all of the Company's assets and liabilities. This resulted
in an $8.0 million, net of tax, impairment charge for goodwill, recorded as a
cumulative effect of adopting a new accounting principle. In accordance with
SFAS No. 142, the Company also reassessed the useful lives of intangible assets
other than goodwill and pawn licenses, resulting in no change. The Company
assesses its goodwill and indefinite lived intangible assets as of July 1 of
each year or more frequently if events or changes in circumstances indicate
impairment. Excluding the cumulative adjustment recognizing impairment of the
Company's goodwill, the Company concluded that there was no impairment of its
indefinite lived intangible assets in Fiscal 2003.
44
The following table presents the results of the Company on a comparable basis as
if SFAS No. 142 had been effective for all periods presented.
Years Ended September 30,
-------------------------------------------
2001 2002 2003
------------ ------------ ------------
(In thousands, except per share amounts)
Net income (loss) as reported $ (568) $ 2,204 $ 362
Goodwill and pawn license amortization, net of tax 398 398 --
Amortization of goodwill related to A&B, net of tax 299 299 --
Cumulative effect of adopting a new accounting principle, net of tax -- -- 8,037
------------ ------------ ------------
Adjusted net income $ 129 $ 2,901 $ 8,399
Basic earnings (loss) per share:
Net income (loss) as reported $ (0.05) $ 0.18 $ 0.03
Goodwill and pawn license amortization, net of tax 0.03 0.03 --
Amortization of goodwill related to A&B, net of tax 0.03 0.03 --
Cumulative effect of adopting new accounting principle, net of tax -- -- 0.66
------------ ------------ ------------
Adjusted net income $ 0.01 $ 0.24 $ 0.69
Diluted earnings (loss) per share:
Net income (loss) as reported $ (0.05) $ 0.18 $ 0.03
Goodwill and pawn license amortization, net of tax 0.03 0.03 --
Amortization of goodwill related to A&B, net of tax 0.03 0.03 --
Cumulative effect of adopting a new accounting principle, net of tax -- -- 0.64
------------ ------------ ------------
Adjusted net income $ 0.01 $ 0.24 $ 0.67
============ ============ ============
The following table presents the carrying amount for each major class of
indefinite-lived intangible asset at the specified dates:
September 30,
2002 2003
------------ ------------
(In thousands)
Goodwill $ 11,148 $ --
Pawn licenses 1,549 1,549
------------ ------------
Total $ 12,697 $ 1,549
============ ============
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible assets at the
specified dates:
September 30, 2002 September 30, 2003
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------ ------------ ------------ ------------
(In thousands)
License application fees $ 742 $ 530 $ 742 $ 561
Real estate finders' fees 554 210 554 249
Non-compete agreements 388 199 388 219
------------ ------------ ------------ ------------
Total $ 1,684 $ 939 $ 1,684 $ 1,029
============ ============ ============ ============
Total amortization expense from definite-lived intangible assets was
approximately $107,000, $72,000, and $90,000 for the years ended September 30,
2001, 2002, and 2003. The following table presents the
45
Company's estimate of amortization expense for definite-lived intangible assets
for each of the five succeeding fiscal years as of September 30, 2003:
Amortization
Fiscal Year Expense
------------ -------
(In thousands)
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 C: RESTRUCTURING CHARGE
Pursuant to a restructuring plan, the Company decided to close 54 stores and
recorded a pretax charge of $11.8 million ($7.8 million net of tax) in Fiscal
2000. In June 2001, the Company re-evaluated seven remaining stores that had not
been closed, and decided to continue their operation, based on their improved
operating performance and future outlook. Accordingly, the Company reversed the
$1.3 million restructure accrual related to these seven stores. The Company
recorded an additional $0.3 million restructure expense for the 47 stores
previously closed, primarily to account for lease obligations costing more than
originally estimated, resulting in a net credit to restructuring expense of $1.0
million in the period ended June 30, 2001, $0.3 million of which is included in
cost of sales. The Company utilized $0.2 million of the reserve during Fiscal
2002 and the remaining balance of $34,000 during Fiscal 2003. At September 30,
2003, the Company no longer had a balance in the restructuring reserve.
NOTE D: EARNINGS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per share is shown in the table below:
Years Ended September 30,
2001 2002 2003
------------ ------------ ------------
(In thousands)
Numerator
Numerator for basic and diluted earnings per share:
Income (loss) before cumulative effect of adopting
a new accounting principle $ (568) $ 2,204 $ 8,399
Cumulative effect of adopting a new accounting
principle, net of tax -- -- (8,037)
------------ ------------ ------------
Net income (loss) (568) 2,204 362
============ ============ ============
Denominator
Denominator for basic earnings per share:
Weighted average shares 12,104 12,143 12,181
Effect of dilutive securities:
Warrants and options -- 149 371
------------ ------------ ------------
Dilutive potential common shares -- 149 371
------------ ------------ ------------
Denominator for diluted earnings per share: adjusted weighted
average shares and assumed conversions 12,104 12,292 12,552
============ ============ ============
Basic earnings (loss) per share $ (0.05) $ 0.18 $ 0.03
============ ============ ============
Diluted earnings (loss) per share $ (0.05) $ 0.18 $ 0.03
============ ============ ============
46
Outstanding options to purchase shares of common stock were as follows:
Years Ended September 30,
2001 2002 2003
------------- ------------- -------------
Total options outstanding
Weighted average shares subject to options 1,289,441 1,460,689 2,001,344
Average exercise price per share $ 8.57 $ 7.70 $ 6.14
Anti-dilutive options outstanding
Weighted average shares subject to options 1,289,441 937,701 910,810
Average exercise price per share $ 8.57 $ 10.87 $ 10.69
Options outstanding in 2001 were excluded from the computation of loss per share
because the Company incurred a loss for that year.
NOTE E: INVESTMENTS
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 29% of the total outstanding shares. The shares were
acquired in 1998 at a total cost of $12.8 million. A&B is primarily engaged in
pawnbrokering, retail jewelry sales and check cashing in England and Wales. The
investment is accounted for using the equity method. Since A&B's fiscal year end
is June 30, 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 income reported for the Company's fiscal year end of September 30
represents its percentage interest in the results of A&B's operations from July
1 to June 30. The undistributed earnings included in the Company's consolidated
accumulated deficit are $1.4 million as of September 30, 2003. A&B's shares are
listed on the Alternative Investment Market of the London Stock Exchange and at
November 21, 2003, the market value of this investment was approximately $20.9
million, based on the closing market price and foreign currency exchange rate on
that date.
Below is summarized financial information for A&B's most recently reported
results, converted to U.S. dollars using the foreign exchange rates applicable
for each of the dates and time periods indicated:
As of June 30,
2002 2003
------------ ------------
($000's)
Current assets $ 30,061 $ 36,145
Noncurrent assets 7,122 8,654
------------ ------------
Total assets $ 37,183 $ 44,799
============ ============
Current liabilities $ 3,860 $ 3,926
Noncurrent liabilities 13,035 16,090
Equity shareholders' funds 20,288 24,783
------------ ------------
Total liabilities and stockholders' equity $ 37,183 $ 44,799
============ ============
47
Years ended June 30,
------------------------------------------
2001 2002 2003
------------ ------------ ------------
($000's)
Turnover (gross revenues) $ 20,927 $ 25,731 $ 32,094
Gross profit 14,594 17,656 22,468
Profit after tax (net income) before change in
accounting policy (a) 2,462 3,700 4,827
Profit after tax (net income) after change in
accounting policy (a) 2,462 3,227 4,827
(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."
At September 30, 2003, the recorded balance of the Company's investment in A&B,
accounted for on the equity method, was $14.7 million. The Company's equity in
net assets of A&B was $7.2 million. The difference between the recorded balance
and the Company's equity in A&B's net assets represents the $7.1 million of
unamortized goodwill which resulted from the initial purchase, plus the
cumulative difference resulting from A&B's earnings, dividend payments, and
translation gain since the date of investment.
In 2000, the Company invested $1.1 million in an internet related start-up
company and accounted for it under the cost method. Based on the investee's
performance to date, the Company determined at September 30, 2003 that its
investment was fully impaired, resulting in a $1.1 million impairment charge
recorded in Fiscal 2003.
NOTE F: PROPERTY AND EQUIPMENT
Major classifications of property and equipment were as follows:
September 30,
----------------------------
2002 2003
------------ ------------
(In thousands)
Land $ 401 $ 44
Buildings and improvements 33,252 33,418
Furniture and equipment 34,678 36,402
Software 20,908 21,141
Construction in progress 108 56
------------ ------------
Total 89,347 91,061
Less accumulated depreciation (57,157) (65,692)
------------ ------------
$ 32,190 $ 25,369
============ ============
48
NOTE G: ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consisted of the following:
September 30,
2002 2003
------------ ------------
(In thousands)
Trade accounts payable $ 2,923 $ 1,948
Accrued payroll and related expenses 3,909 4,462
Accrued interest 889 234
Accrued rent and property taxes 1,285 1,775
Other accrued expenses 2,609 2,682
------------ ------------
$ 11,615 $ 11,101
============ ============
NOTE H: LONG-TERM DEBT
Long-term debt consisted of:
September 30,
2002 2003
------------ ------------
(In thousands)
Note payable to bank under credit agreement $ 42,245 $ 31,000
Less current maturities 2,936 --
------------ ------------
$ 39,309 $ 31,000
============ ============
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
September 30, 2003, availability of funds under the Company's credit agreement
was $10.8 million. 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 September 30, 2003, the applicable interest rate was 4.5%. 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.
The Company has a $0.7 million letter of credit as required by an insurance
policy.
NOTE I: COMMON STOCK, WARRANTS, AND OPTIONS
The capital stock of the Company consists of two classes of common stock
designated as Class A Non-Voting Common Stock ("Class A Common Stock") and Class
B Voting Common Stock ("Class B Common Stock"). The rights, preferences, and
privileges of the Class A and Class B Common Stock are similar except that each
share of Class B Common Stock has one vote and each share of Class A Common
Stock has no voting privileges. All Class A Common Stock is publicly held.
Holders of Class B Common Stock may, individually or as a class, convert some or
all of their shares into Class A Common Stock. Class A Common Stock becomes
voting common stock upon the conversion of all Class B Common Stock to Class A
Common Stock. The Company is required to reserve such number of authorized but
unissued shares of Class A Common Stock as would be issuable upon conversion of
all outstanding shares of Class B Common Stock.
49
At September 30, 2003, warrants to purchase 23,579 shares of Class A Common
Stock and 4,074 shares of Class B Common Stock at $6.17 per share were
outstanding. The warrants are exercisable through July 25, 2009.
The Company has an Incentive Stock Option Plan (the "1991 Plan") under which
options to purchase Class A Common Stock were granted to employees until
adoption of the EZCORP, Inc 1998 Incentive Plan (the "1998 Plan") discussed
below. Options granted under the 1991 Plan were granted at exercise prices equal
to or greater than the fair market value of the Class A Common Stock on the date
of grant. Grants under the 1991 Plan provide for accelerated vesting upon a
change in control of the Company.
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the adoption of the 1998 Incentive Stock Option Plan (the "1998 Plan"),
which provided for the issuance of shares for stock option awards of up to
1,275,000 of the Company's Class A Common Stock. In approving the 1998 Plan, the
Compensation Committee resolved that no further options would be granted under
any previous plans. The number of shares eligible to be awarded under the 1998
Plan is 1,275,000, and was not increased to 1,955,000 as was disclosed in the
Annual Report for the year ended September 30, 2002.
On November 5, 1998, the Compensation Committee of the Board of Directors
approved a grant of 1,023,000 options to executive officers, exercisable at
$10.00 per share, and, except as discussed below, vesting on October 6, 2008. As
of September 30, 2003, 450,000 of these options remained outstanding (options
granted less options canceled due to employee termination) and none had been
exercised. The terms of this grant provide for accelerated vesting upon
achievement of certain debt to equity ratios and levels of earnings per share.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2003, 520,000 of these options remained outstanding (options
granted less options canceled due to employee termination) and none had been
exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005.
On September 17, 2003, the Board of Directors approved the adoption of the
EZCORP, Inc. 2003 Incentive Plan (the "2003 Plan"). The 2003 Plan permits grants
of the same types of options, SARs and LSARs as the 1991 and 1998 plans and
provides for stock option awards of up to 500,000 of the Company's Class A
Common Stock. In approving this plan, the Board of Directors resolved that no
further options would be granted under the 1998 Plan. As of September 30, 2003,
the Company had 102,000 active options outstanding to executive officers
(options granted less options canceled due to employee termination) under the
2003 Plan at a price of $6.27. None of these options are vested.
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, Sterling Brinkley, subject to his acceptance of the stock award
agreement. The closing price of the Company's stock on September 17, 2003 was
$6.27. The restriction requires that Mr. Brinkley remain employed with the
Company through September 17, 2005. The Company also agreed to reimburse Mr.
Brinkley for the income tax consequences resulting from the award. These
restricted shares are not included in the Summary of Option Plan Activity or
Range of Options Outstanding tables below.
Also on September 17, 2003, the Compensation Committee of the Board of Directors
approved a grant of 100,000 options to the Chairman of the Board, Sterling
Brinkley, exercisable at $6.27 per share. Forty percent of these options vest on
September 15, 2004, and 60% vest on September 15, 2005.
In Fiscal 2001, 2002, and 2003, the Compensation Committee of the Board of
Directors approved additional grants of options under the 1998 and 2003 Plans at
exercise prices ranging from $2.00 to $15.00. Under the 1991 Plan, the 1998 Plan
and the 2003 Plan, options typically vest at 20% each year and are fully vested
in five years. They have a contractual life of ten years. No options have been
exercised pursuant to any Plan. Total options available for grant at September
30, 2003 under the 2003 Plan were 236,000. A summary of the option plans'
activity follows:
50
SUMMARY OF OPTION PLAN ACTIVITY
Number Price Range Weighted
of Shares of Shares Average
---------------- --------------- ---------------
Outstanding at September 30, 2000 998,306 $ 2.00 - $21.75 $ 10.73
Granted 386,800 $ 2.00 - $ 2.41 $ 2.01
Forfeited (119,883) $ 2.00 - $21.75 $ 5.10
Expired -- -- --
Exercised -- -- --
--------------- --------------- ---------------
Outstanding at September 30, 2001 1,265,223 $ 2.00 - $21.75 $ 8.60
--------------- --------------- ---------------
Granted 236,000 $ 2.00 - $ 3.60 $ 2.03
Forfeited (49,500) $ 2.00 - $21.75 $ 3.33
Expired -- -- --
Exercised -- -- --
--------------- --------------- ---------------
Outstanding at September 30, 2002 1,451,723 $ 2.00 - $21.75 $ 7.71
--------------- --------------- ---------------
Granted 876,000 $ 2.30 - $ 6.27 $ 3.05
Forfeited (200,030) $ 2.00 - $13.00 $ 3.64
Expired (14,700) $21.75 $ 21.75
Exercised -- -- --
--------------- --------------- ---------------
Outstanding at September 30, 2003 2,112,993 $ 2.00 - $15.00 $ 6.13
--------------- --------------- ---------------
RANGE OF OPTIONS OUTSTANDING
Weighted Exercisable
Weighted Average Shares
Number of Average Remaining Weighted
Range of Shares Exercise Contractual Avg. Exer.
Exercise Prices Outstanding Price Life (Years) Exercisable Price
--------------- ----------- ------- ------------- ----------- -----------
$ 2.00-$ 4.24 1,160,520 $ 2.48 8.27 267,014 $ 2.47
$ 6.27-$ 6.27 139,000 $ 6.27 5.33 -- $ --
$10.00-$10.00 516,500 $ 10.00 5.24 63,200 $ 10.00
$12.00-$12.75 68,973 $ 12.34 2.54 68,973 $ 12.34
$13.00-$15.00 228,000 $ 13.99 3.26 148,000 $ 13.85
------------- ---------- ------- ---- ------- -------
$ 2.00-$15.00 2,112,993 $ 6.13 6.61 547,187 $ 7.66
Pro forma information regarding net income (loss) is required by SFAS No. 123,
as amended by SFAS No. 148, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123, as amended by SFAS No. 148. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition, this option
valuation model requires the input of highly subjective assumptions including
the expected stock price volatility. In applying the Black-Scholes option
valuation model, the Company used the following weighted average assumptions for
the years ended September 30, 2001, 2002, and 2003, respectively:
September 30,
-----------------------------------------
2001 2002 2003
----------- ----------- -----------
Risk-free interest rate 5.50% 2.58% 2.82%
Dividend yield 0% 0% 0%
Volatility factor of the expected market price of the
Company's common stock 1.490 0.99 0.56
Expected life of the options 5 years 5 years 5 years
Weighted average fair value of options granted:
Exercise price greater than market value at date of grant $ 0.99 $ 1.19 $ 1.47
Exercise price equal to market value at date of grant $ -- $ 2.32 $ 2.33
Exercise price less than market value on the date of grant $ 2.30 $ -- $ --
51
Shares of reserved common stock at September 30, 2003, were as follows:
Class A Class B
------------ ------------
Stock compensation plans 1,971,973 --
Stock warrants 23,579 4,074
Conversion of Class B Common Stock 1,198,990 --
------------ ------------
3,194,542 4,074
============ ============
Pro forma information regarding net income (loss) is presented in Note A.
NOTE J: INCOME TAXES
The income tax provision (benefit) attributable to continuing operations is as
follows:
Years Ended September 30,
-------------------------------------
2001 2002 2003
---------- ---------- ----------
(In thousands)
Current
Federal $ -- $ 301 $ 3,046
State -- -- --
---------- ---------- ----------
-- 301 3,046
Deferred
Federal (142) 993 (4,216)
State -- -- --
---------- ---------- ----------
$ (142) $ 1,294 $ (1, 170)
========== ========== ==========
The income tax provision (benefit) is included in the financial statements as
follows:
Years Ended September 30,
-------------------------------------
2001 2002 2003
---------- --------- ----------
(In thousands)
Continuing operations $ (142) $ 1,294 $ (1,170)
Cumulative effect of adopting
a new accounting principle -- -- (3,111)
---------- --------- ----------
$ (142) $ 1,294 $ (4,281)
========== ========== ==========
A reconciliation of income taxes calculated at the statutory rate and the
provision (benefit) for income taxes attributable to continuing operations is as
follows:
Years Ended September 30,
-----------------------------------------------
2001 2002 2003
------------- ------------- -------------
(In thousands)
Income taxes at the federal statutory rate $ (242) $ 1,189 $ 2,458
State income tax, net of federal benefit -- -- --
Change in valuation allowance -- -- (3,700)
Other 100 105 72
------------- ------------- -------------
$ (142) $ 1,294 $ (1,170)
============= ============= =============
Significant components of the Company's deferred tax liabilities and assets as
of September 30 are as follows:
52
2002 2003
------------- -------------
(In thousands)
Deferred tax liabilities:
Tax over book amortization $ 6,210 $ 3,962
Prepaid expenses 199 576
Other 322 --
------------- -------------
Total deferred tax liabilities 6,731 4,538
Deferred tax assets:
Book over tax depreciation 6,921 8,481
Tax over book inventory 5,955 5,671
Accrued liabilities 252 480
Provision for store closings and related charges 11 --
Pawn service charge receivable 2,271 2,142
Tax carry-forwards 248 248
Other -- 70
------------- -------------
Total deferred tax assets 15,658 17,092
------------- -------------
Net deferred tax asset 8,927 12,554
Valuation allowance (3,700) --
------------- -------------
Net deferred taxes $ 5,227 $ 12,554
============= =============
The Company eliminated the valuation allowance of $3.7 million based on
management belief that it is more likely than not that the Company's net
deferred tax asset will be realized as a result of expected future taxable
income from operations and implementation of certain tax planning strategies, if
required.
Substantially all of the Company's operating income was generated from domestic
operations during 2002 and 2003. At September 30, 2002 and 2003, the Company has
provided deferred income taxes on all undistributed earnings from its foreign
unconsolidated affiliate. Such earnings have been reinvested in foreign
operations except for dividends at September 30, 2002 and 2003 of approximately
$327,000 and $523,000, respectively. Furthermore, any taxes paid to foreign
governments on those earnings may be used in whole or in part as credits against
the U.S. tax on any dividends distributed from such earnings.
As of September 30, 2003, the Company had an alternative minimum tax credit
carry-forward of $248,000, which does not expire. Utilization of the credit
carry-forward may be subject to a substantial limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986, should a change in
ownership occur. The Company has no net operating loss carry-forward at
September 30, 2003.
NOTE K: RELATED PARTY TRANSACTIONS
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff,
an affiliate of the general partner of the majority stockholder, provided
management consulting and investment banking services to the Company for a
$33,333 monthly retainer. These services include ongoing consultation with
respect to offerings by the Company of its securities, including, but not
limited to, the form, timing, and structure of such offerings. In addition to
the retainer, Morgan Schiff has earned fees from the Company in prior years for
other business and financial consulting services related to specific
transactions. Morgan Schiff received $33,333 per month from October 1999 to June
2000 for its services as a financial advisor, and waived its retainer from July
2000 to October 2002. Effective October 1, 2003, the monthly retainer was
increased to $100,000 per month, inclusive of most expenses.
53
The table below summarizes the retainer and expense reimbursements for
out-of-pocket expenses paid to Morgan Schiff by the Company during Fiscal 2001,
2002, and 2003 (in $000's):
2001 2002 2003
------------ ------------ ------------
Monthly retainer $ -- $ -- $ 367
Expense reimbursements 426 498 400
------------ ------------ ------------
Total $ 426 $ 498 $ 767
============ ============ ============
In 1994, the Company loaned the former President and Chief Executive Officer,
Vincent Lambiase, $729,000 to purchase 50,000 shares of Class A Common Stock.
The loan is shown as a reduction of stockholders' equity in these financial
statements. In connection with Mr. Lambiase's separation from the Company in
2000, the maturity date of the loan was extended to the earlier of (a) ten
business days following the first day that the closing price for the Company's
stock is equal to or exceeds $10 per share, or (b) August 1, 2005. Additionally,
under the agreement, all accrued and unpaid interest due on the loan is forgiven
until the first day that the closing price for the Company's stock is equal to
or exceeds $6 per share. On September 17, 2003, the Company's stock closed at
$6.27. Mr. Lambiase became responsible for interest beginning on September 18,
2003 through December 31, 2003 (payable on December 31, 2003) and for each year
until maturity in August 2005. As of September 30, 2003, the amount owed is
approximately $729,000 plus accrued interest of approximately $25,400. Any
forgiveness of interest and related income tax costs are charged as compensation
expense. During Fiscal 2001, 2002, and 2003, the Company recognized compensation
expense of $124,000, $49,000, and $72,000, respectively.
In October 1994, the Board of Directors approved agreements that provide
incentive compensation to the Chairman, Sterling Brinkley, and Mr. Lambiase,
based on growth in the share price of the Company's Class A Common Stock. Each
executive was advanced $1.5 million evidenced by a recourse promissory note,
initially due in 2005 and bearing interest at the minimum rate allowable for
federal income tax purposes (2.12% for Fiscal 2003 for Mr. Brinkley).
Mr. Lambiase repaid his $1.5 million loan August 14, 2001. As stipulated by a
loan amendment dated August 15, 2000, the Company forgave the related accrued
interest on this date and reimbursed Mr. Lambiase for the income tax
consequences of the interest forgiven.
Under the terms of Mr. Brinkley's $1.5 million loan, as amended, the loan
principal will be forgiven if, prior to October 1, 2005, a stock price target of
$28.25 is attained. The loan provides that upon Mr. Brinkley's death or
disability or certain changes in control the then remaining principal and
interest will be forgiven. As of September 30, 2003, the stock price target had
not been attained and the amount owed was approximately $1.5 million plus
accrued interest of $32,000. Accrued interest is forgiven based upon continued
employment, and the Company is required to reimburse Mr. Brinkley for the income
tax consequences of forgiveness of any portion of the debt.
Under the $1.5 million loan to Mr. Brinkley, charges to operations consist of
forgiveness of interest and related income tax costs and totaled approximately
$169,000, $63,000, and $58,000 for years ended September 30, 2001, 2002, and
2003, respectively. In Fiscal 2001, the interest forgiveness and related income
tax costs related to Mr. Lambiase's $1.5 million loan were $127,000 and were
charged to the Company's restructuring reserve.
In February 2000, the Company loaned Mr. Rotunda $200,000 as an employment
incentive. The principal and interest of the loan were subject to forgiveness in
equal increments over a three-year period conditioned upon Mr. Rotunda's
continued employment with the Company on February 24th of each year. The Company
was required to reimburse Mr. Rotunda for the income tax consequence of any
portion of the forgiveness. In Fiscal 2003 the remaining balance of this loan of
$66,667 plus accrued interest of $1,651 was forgiven. During years 2001, 2002,
and 2003, charges to operations consist of forgiveness of
54
loan principal and interest and related income tax costs and totaled
approximately $132,800, $120,400, and $113,960, respectively.
NOTE L: LEASES
The Company leases various facilities and certain equipment under operating
leases. Future minimum rentals due under non-cancelable leases are as follows
for each of the years ending September 30:
(In thousands)
2004 $ 11,712
2005 9,753
2006 8,291
2007 6,560
2008 4,401
Thereafter 25,164
----------
$ 65,881
==========
The Company subleases some of the above facilities. Future minimum rentals
expected under these subleases amount to $10,750 in 2004.
After an initial lease term of generally 5 to 10 years, the Company's lease
agreements typically allow renewals in five-year increments. The Company's lease
agreements generally include rent escalations throughout the initial lease term.
Such rent escalations are included in the above numbers. For financial reporting
purposes, the aggregate rentals over the lease term are expensed on a
straight-line basis.
Net rent expense for the years ending September 30, 2001, 2002, and 2003 was
$13.0 million, $13.9 million, and $15.5 million, respectively. Net rent expense
includes the collection of sublease rent revenue of approximately $234,000,
$161,000, and $75,000 for years ending September 30, 2001, 2002, and 2003.
During Fiscal 2001, 2002, and 2003, the Company completed several sale-leaseback
transactions of some of its previously owned facilities. Losses on such sales
were recognized immediately, and gains on such sales were deferred and are being
amortized as a reduction of lease expense over the terms of the related leases.
Future rentals pursuant to these sale-leasebacks are included in the above
schedule of future minimum rentals. Terms of these leases are consistent with
the terms on the Company's other lease agreements.
NOTE M: EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options. If Mr. Rotunda's employment is terminated, other than for
cause, he is entitled to receive a severance payment equal to his annual
compensation. Mr. Rotunda's $200,000 loan by the Company was fully forgiven
pursuant to its terms as of February 24, 2003.
NOTE N: 401(k) PLAN
The Company sponsors a 401(k) Plan under which eligible employees of the Company
may contribute up to a maximum percentage allowable not to exceed the limits of
Code Sections 401(k), 402(g), 404 and 415. To be eligible, an employee must be
at least 21 years old and have been employed by the Company for at least six
months. The Company, in its sole discretion, may match in the form of the
Company's Class A Common Stock. Contribution expense related to the plan for
2001, 2002, and 2003 was approximately $89,000, $60,000 and $64,000,
respectively.
55
NOTE O: 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 ascertained,
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.
NOTE P: QUARTERLY INFORMATION (UNAUDITED)
Year Ended September 30
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
(In thousands, except per share amounts)
FISCAL 2003
Total revenues $ 53,199 $ 53,022 $ 46,903 $ 53,225
Net revenues 31,879 30,350 27,189 30,831
Net income before cumulative effect of adopting a new
accounting principle 2,285 1,498 53 4,563
Cumulative effect of change in accounting principle (8,037) -- -- --
Net income (loss) (5,752) 1,498 53 4,563
Income (loss) per common share, basic
Net income before cumulative effect of adopting a new
accounting principle $ 0.19 $ 0.12 $ 0.00 $ 0.37
Net income (loss)
(0.47) 0.12 0.00 0.37
Income (loss) per common share, assuming dilution
Net income before cumulative effect of adopting a new
accounting principle $ 0.18 $ 0.12 $ 0.00 $ 0.36
Net income (loss) (0.47) 0.12 0.00 0.36
FISCAL 2002
Total revenues $ 54,582 $ 47,481 $ 43,140 $ 51,695
Net revenues 31,412 27,661 25,539 27,350
Net income (loss) 1,372 1,094 (513) 251
Net income (loss) per share $ 0.11 $ 0.09 $ (0.04) $ 0.02
In the quarter ended September 20, 2003, the Company decreased its valuation
allowance placed on its deferred tax asset by $3.7 million based on the
Company's improved operating results and outlook for continued earnings growth.
This resulted in a $3.7 million decrease to the tax provision for the quarter
and had a favorable net income effect of $3.7 million ($0.30 per share). Also
during the quarter, the Company recorded a $1.1 million impairment of investment
made in 2000 in an internet related start-up. This impairment had an unfavorable
effect on net income of $715,000 ($0.06 per share). Excluding these two items,
net income for the quarter was $1,578,000 ($0.12 per share).
NOTE Q: RESTATEMENT OF THE STATEMENTS OF CASH FLOWS
The Statements of Cash Flows for the three years ended September 30, 2003 have
been restated 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,
56
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 decrease cash provided by operating activities and to
increase cash flows from investing activities in the amounts of $1.0 million,
$1.9 million, and $1.5 million in Fiscal 2001, 2002, and 2003, 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 $1.2 million, $3.1 million, and $3.6
million in Fiscal 2001, 2002, and 2003, 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 $21.9 million, $21.7 million, and $22.7 million in Fiscal 2001, 2002,
and 2003, 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.
A summary of the effects of these corrections is as follows:
Year Ended September 30, 2001
------------------------------------------------
As Previously
Reported Adjustments As Restated
-------------- ------------- -------------
(in thousands)
Net cash provided by operating activities $ 11,667 $ 250 $ 11,917
Net cash provided by (used in) investing activities 8,313 (250) 8,063
Net cash used in financing activities (20,920) (20,920)
------------- -------------
Change in cash and cash equivalents (940) (940)
Cash and equivalents at beginning of period 3,126 3,126
------------- -------------
Cash and equivalents at end of period $ 2,186 $ -- $ 2,186
============= ============= =============
Year Ended September 30, 2002
------------------------------------------------
As Previously
Reported Adjustments As Restated
-------------- ------------- -------------
(in thousands)
Net cash provided by operating activities $ 15,642 $ 1,268 $ 16,910
Net cash provided by (used in) investing activities 1,611 (1,268) 343
Net cash used in financing activities (17,947) (17,947)
------------- -------------
Change in cash and cash equivalents (694) (694)
Cash and equivalents at beginning of period 2,186 2,186
------------- -------------
Cash and equivalents at end of period $ 1,492 $ -- $ 1,492
============= ============= =============
Year Ended September 30, 2003
------------------------------------------------
As Previously
Reported Adjustments As Restated
-------------- ------------- -------------
(in thousands)
Net cash provided by operating activities $ 13,264 $ 2,077 $ 15,341
Net cash provided by (used in) investing activities (1,015) (2,077) (3,092)
Net cash used in financing activities (11,245) (11,245)
------------- ------------
Change in cash and cash equivalents 1,004 1,004
Cash and equivalents at beginning of period 1,492 1,492
------------- ------------
Cash and equivalents at end of period $ 2,496 $ -- $ 2,496
============= ============= ============
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters
with its independent certified public accountants to report under this Item 9.
ITEM 9A. CONTROLS AND PROCEDURES
The Company restated its Consolidated Statements of Cash Flows for the years
ended September 30, 2003, 2002 and 2001. For a description of the restatement of
the Consolidated Statements of Cash Flows and the amendment of related
disclosures, see the Explanatory Note on Page 2 of this Form 10-K/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 September 30, 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 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 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 Q to the 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
58
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.
59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of November 21, 2003 were
as follows:
Name Age Title
---- --- -----
Sterling B. Brinkley(1) 51 Chairman of the Board of Directors
Joseph L. Rotunda(1)(3) 56 President, Chief Executive Officer, and Director
Dan N. Tonissen(1)(3) 53 Senior Vice President, Chief Financial Officer,
Assistant Secretary, and Director
Gary C. Matzner(4) 55 Director
Mark C. Pickup(2)(4) 53 Director
Richard D. Sage(2)(4) 63 Director
Robert F. Bloom 52 Vice President of Operations Administration
Daniel M. Chism 35 Controller and Assistant Secretary
Robert A. Kasenter 57 Vice President of Human Resources
John R. Kissick 61 Vice President of Strategic Development
Connie L. Kondik 39 Vice President, Secretary, and General Counsel
Michael Volpe 39 Vice President of Store Operations
Tom B. Young 54 Vice President and Chief Information Officer
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Section 401(k) Plan Committee
(4) Member of Audit Committee
Mr. Brinkley has served as either Chairman of the Board or Chairman of the
Executive Committee of the Board of Directors of the Company since 1989. Mr.
Brinkley serves as a Director of Albemarle & Bond Holdings plc, which the
Company owns approximately 29%. In addition, Mr. Brinkley is President and
Chairman of the Board of MS Pawn Corporation, the general partner of MS Pawn
Limited Partnership. Mr. Brinkley has also served as Chairman of the Board or
Chairman of the Executive Committee of Crescent Jewelers, Inc., an affiliate of
the Company, since 1988 and currently serves as interim Chief Executive Officer;
from 1990 to December 2003, he served as Chairman of the Board or Chairman of
the Executive Committee of Friedman's, Inc, also an affiliate of the Company.
From 1986 to 1990, Mr. Brinkley served as a Managing Director of Morgan Schiff &
Co., Inc., an affiliate of the Company. See "Security Ownership of Certain
Beneficial Owners and Management."
Mr. Rotunda joined the Company as director, President, and Chief Operating
Officer in February 2000 and assumed the role of Chief Executive Officer of the
Company in August 2000. From 1998 to 2000, he was Chief Operating Officer of G&K
Services, Inc, a $500 million provider of uniform and textile products. From
1991 to 1998 he progressed through several officer positions to Executive Vice
President and Chief Operating Officer of Thorn Americas, Inc. Mr. Rotunda also
currently serves as a Director of Easyhome, Ltd., Toronto, Canada.
Mr. Tonissen has served as a director, Senior Vice President, Chief Financial
Officer, and Assistant Secretary of the Company since August 1994. Prior to
1994, he held senior level financial positions with La Salsa Holding Company,
Valley Grain Products, Inc., and Denny's, Inc.
Mr. Matzner has served as director of the Company since July 2002. He has been
Senior Counsel with the law firm of McDermott, Will & Emery since August 2002.
From 1997 to July 2002, Mr. Matzner was President of Nobel Health Services,
Inc., a provider of health care consulting services. From 1999 to May 2001, Mr.
Matzner was also President of Oakridge Outpatient Center, Inc.
60
Mr. Pickup has served as director of the Company since 1993. He served as
President and Co-Chief Executive Officer of Crescent Jewelers, Inc. from 1993 to
1995 and Chief Financial Officer of Crescent Jewelers, Inc. from 1992 to 1995.
Since 1993, Mr. Pickup has also served as a director of Friedman's, Inc. Prior
to 1992, Mr. Pickup was a partner in the firm of Ernst & Young LLP.
Mr. Sage has served as director of the Company since July 1995. He was a
co-founder of AmeriHealth, Inc., which owned and managed hospitals. He served as
Treasurer of AmeriHealth, Inc. from April 1983 to October 1995 and was a member
of the board of directors of AmeriHealth, Inc. from April 1983 to December 1994.
Mr. Sage was a Director of Champion Healthcare Corporation from January 1995 to
August 1996. Since June 1993, he has been associated with Sage Law Offices in
Miami, Florida.
Mr. Bloom joined the Company in June 2000 and served in several capacities until
becoming the Vice President of Operations Administration in October 2003. From
January 1999 to April 2000, he served as the Metromedia Restaurant Group
Regional Vice President of Franchise Operations for the Family Steakhouse
division. Prior to 1999, he served as the Vice President of the Rural Division
for Thorn Americas, Vice President and General Manager - Thorn Leasing Concepts,
and Vice President Operations Administration for Thorn Americas, Inc.
Mr. Chism has served as Controller and Assistant Secretary of the Company since
August 1999. From 1996 to 1999, Mr. Chism served as Audit Manager for Ernst &
Young LLP, where he also served as an audit Senior and audit staff member from
1991 to 1995. From 1995 to 1996, Mr. Chism served as a Director of Internal
Audit and a Departmental Controller for VarTec Telecom, Inc.
Mr. Kasenter joined the Company in August 2003 as Vice President of Human
Resources. He has been a director of the Donnkenny Apparel Board since 2001. Mr.
Kasenter has been the President & Chief Executive Officer of Strategic Executive
Actions, a Chicago-based management consulting firm specializing in human
resource crisis issues, since 1999. Prior to that, he was the Executive Vice
President of Human Resources and Corporate Communications for Montgomery Ward
for 13 years. He was employed by Montgomery Ward from June 1968 to May 1999 in
various store operations and corporate staff positions.
Mr. Kissick has served as Vice President of Strategic Development since August
2001. From 1991 to 1998 he served as Vice President of Strategic Planning for
Thorn Americas, Inc. Prior to 1991, he held senior marketing positions at
Reynolds and Reynolds, Hobart Corporation, and Pizza Hut.
Ms. Kondik has served as General Counsel since June 2000, Secretary since
January 2001, and Vice President since January 2003. From June 1995 to June
2000, Ms. Kondik served as Sr. Associate General Counsel, Vice-President, and
Assistant Secretary of Empire Funding Corp. and TMI Financial, Inc., a national
sub-prime mortgage lender and servicer.
Mr. Volpe joined the Company in October 2003 as Vice President of Store
Operations. From August 2001 to October 2003, he was a multi-unit manager for
Toys "R" Us in the Chicago Area. Prior to that, Mr. Volpe spent ten years in
several positions with Montgomery Ward, including the National Director of
Hardlines and District Manager positions.
Mr. Young has served as the Chief Information Officer of the Company since May
2000. From 1995 to 1999 he served as the Director of Retail Systems for Cracker
Barrel Old Country Stores. Prior to 1995 he served as Director of Systems and
Director of Telecommunications for Service Merchandise.
61
COMMITTEES OF THE BOARD
The Board of Directors held seven meetings during the year ended September 30,
2003. The Board of Directors has appointed four committees: an Executive
Committee, an Audit Committee, a Compensation Committee, and a Section 401(k)
Plan Committee. The members of the Executive Committee for Fiscal 2003 were Mr.
Brinkley, Mr. Rotunda, and Mr. Tonissen. The Executive Committee held one formal
meeting during Fiscal 2003, and all members attended. The Audit Committee,
comprised of Mr. Pickup, Mr. Sage, and Mr. Matzner, held five meetings in Fiscal
2003 that all members attended. All audit committee members are independent
directors and are financially literate. Mr. Pickup is an "audit committee
financial expert" as defined in the applicable rules and regulations of the
Securities and Exchange Act of 1934. The Compensation Committee, comprised of
Mr. Pickup and Mr. Sage, held two informal meetings during Fiscal 2003 of which
both members attended. All actions taken during the year were by Written
Unanimous Consent. The committee that administers the Section 401(k) Plan
consists of Mr. Rotunda and Mr. Tonissen. All Fiscal 2003 actions of this
committee were by Written Unanimous Consents in lieu of meetings. All directors
attended at least 75% of the total number of meetings of the Board and of the
committees on which they serve.
CODE OF CONDUCT AND ETHICS
The Company has in place a Code of Conduct and Ethics applicable to all
employees, as well as the Board of Directors and executive officers. Copies of
the Company's Code of Conduct and Ethics are available, free of charge by
submitting a written request to EZCORP, Inc., Investor Relations, 1901 Capital
Parkway, Austin, Texas 78746 or may be obtained from the Company's website at
www.ezcorp.com.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based primarily on statements received from officers and directors and a review
of the relevant Forms 3, 4, and 5, all officers, directors, and beneficial
owners of more than ten percent of any class of equity securities were timely
throughout the fiscal year in filing all reports required by Section 16(a) of
the Exchange Act.
62
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth compensation earned for services during Fiscal
2001, 2002, and 2003 by the Company's Chief Executive Officer, and each of the
Company's four most highly compensated executive officers whose total annual
compensation exceeded $100,000 (such persons collectively herein referred to as
the "Named Executive Officers").
Long Term All other
Annual Compensation Compensation Compensation
Restricted
Stock Awards
Name and Principal Position Year Salary($) Bonus($) Other($) ($)(1) ($)(2)
---- -------- -------- -------- ------------ ------------
Sterling B. Brinkley 2001 25,472 87,000 81,605 -- 1,669
Chairman of the Board 2002 260,384 34,486 -- -- 1,332
2003 373,365 31,800 -- 783,750 1,349
Joseph L. Rotunda 2001 400,000 78,298 75,852 -- 2,622
President, Chief Executive Officer and 2002 437,692 409,680 87,417 -- 1,512
Director (3) 2003 469,154 538,318 74,812 -- 1,475
Dan N. Tonissen 2001 240,000 -- 28,018 -- 1,830
Senior Vice President, Chief Financial 2002 249,615 70,875 -- -- 1,134
Officer, Assistant Secretary and Director 2003 259,577 102,050 -- -- 819
Robert F. Bloom 2001 161,539 -- -- -- 1,179
Vice President 2002 167,753 41,076 -- -- 762
2003 172,789 56,874 -- -- 551
Daniel M. Chism 2001 129,810 -- -- -- 313
Controller and Assistant Secretary 2002 133,782 33,475 -- -- 626
2003 137,827 39,095 -- -- 439
Tom B. Young 2001 126,780 -- -- -- 590
Vice President and Chief Information 2002 131,803 38,016 -- -- 990
Officer (4) 2003 135,831 52,360 42,347 -- 1,159
(1) On September 17, 2003, Mr. Brinkley was awarded 125,000 shares of
restricted Class A Common Stock. The restriction requires Mr. Brinkley to
remain employed by the Company until September 17, 2005 at which time the
shares will be vested. The closing price of the Company's stock on
September 17, 2003 was $6.27. The Company also agreed to reimburse Mr.
Brinkley for the income tax consequences of the award. As of September 30,
2003, the market value of these shares was $760,000.
(2) This category includes the value of any life insurance premiums paid on
behalf of the named executive.
(3) Mr. Rotunda's Other Annual Compensation includes $45,640 for payment of
taxes for Fiscal 2003 and $19,806 for auto allowance plus taxes.
(4) Mr. Young's Other Annual Compensation is for relocation to Austin, Texas.
EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options. If Mr. Rotunda's employment is terminated, other than for
cause, he is entitled to receive a severance payment equal to his annual
compensation. Mr. Rotunda's $200,000 loan by the Company was fully forgiven
pursuant to its terms as of February 24, 2003.
63
INSIDER NOTES
In 1994, the Company loaned the former President and Chief Executive Officer,
Vincent Lambiase, $729,000 to purchase 50,000 shares of Class A Common Stock.
The loan is shown as a reduction of stockholders' equity in these financial
statements. In connection with Mr. Lambiase's separation from the Company in
2000, the maturity date of the loan was extended to the earlier of (a) ten
business days following the first day that the closing price for the Company's
stock is equal to or exceeds $10 per share, or (b) August 1, 2005. Additionally,
under the agreement, all accrued and unpaid interest due on the loan is forgiven
until the first day that the closing price for the Company's stock is equal to
or exceeds $6 per share. On September 17, 2003, the Company's stock closed at
$6.27. Mr. Lambiase became responsible for interest beginning on September 18,
2003 through December 31, 2003 (payable on December 31, 2003) and for each year
until the note matures in August 2005. As of September 30, 2003, the amount owed
is approximately $729,000 plus accrued interest of approximately $25,400. Any
forgiveness of interest and related income tax costs are charged as compensation
expense. During Fiscal 2001, 2002, and 2003, the company recognized compensation
expense of $124,000, $49,000, and $72,000 respectively.
In October 1994, the Board of Directors approved agreements that provide
incentive compensation to the Chairman, Sterling Brinkley, and Mr. Lambiase,
based on growth in the share price of the Company's Class A Common Stock. Each
executive was advanced $1.5 million evidenced by a recourse promissory note, due
in 2005 and bearing interest at the minimum rate allowable for federal income
tax purposes (2.12% for Fiscal 2003).
Mr. Lambiase repaid his $1.5 million loan August 14, 2001. As stipulated by a
loan amendment dated August 15, 2000, the company forgave the related accrued
interest on this date and reimbursed Mr. Lambiase for the income tax
consequences of the interest forgiven.
Under the terms of Mr. Brinkley's $1.5 million loan, as amended, the loan
principal will be forgiven if, prior to October 1, 2005, a stock price target of
$28.25 is attained. The loan provides that upon Mr. Brinkley's death or
disability or certain changes in control the then remaining principal and
interest will be forgiven. Through September 30, 2003, the stock price target
had not been attained. As of September 30, 2003, the amount owed is $1.5 million
plus accrued interest of $32,000. Accrued interest is forgiven based upon
continued employment, and the Company is required to reimburse Mr. Brinkley for
the income tax consequences of forgiveness of any portion of the debt.
Under the $1.5 million loan to Mr. Brinkley, charges to operations consist of
forgiveness of interest and related income tax costs and totaled approximately
$169,000, $63,000, and $58,000 for the years ended September 30, 2001, 2002, and
2003, respectively. In Fiscal 2001, the interest forgiveness and related income
tax costs related to Mr. Lambiase's $1.5 million loan were $127,000 and were
charged to the Company's restructuring reserve. In Fiscal 2003, only Mr.
Brinkley's $1.5 million loan is outstanding.
In February 2000, the Company loaned Mr. Rotunda $200,000 as an employment
incentive. The principal and interest of the loan were subject to forgiveness in
equal increments over a three-year period conditioned upon Mr. Rotunda's
continued employment with the Company on February 24th of each year. The Company
was required to reimburse Mr. Rotunda for the income tax consequence of any
portion of the forgiveness. In Fiscal 2003 the remaining balance of this loan of
$66,667 plus accrued interest of $1,651 was forgiven. During years 2001, 2002,
and 2003, charges to operations consist of forgiveness and related income tax
costs and totaled approximately $132,800, $120,400, and $113,960, respectively.
DIRECTOR COMPENSATION
Mr. Pickup received $31,500 during 2003 as compensation for his service as a
director and Chairman of the Audit Committee. Mr. Sage and Mr. Matzner each
received $13,500 as compensation for board service. Mr. Lambiase received $9,000
as compensation for board service prior to his resignation in April 2003. No
other outside director received compensation from the Company during Fiscal
2003.
64
STOCK OPTIONS
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the grant of 350,000 options to Mr. Brinkley and 100,000 options to Mr.
Tonissen that remain outstanding. The options are exercisable at $10 per share,
vest on October 6, 2008, and have a contractual life of ten years. The terms of
this grant provide for accelerated vesting upon achievement of certain debt to
equity ratios and levels of earnings per share. If any of these options fail to
qualify as incentive options under the Internal Revenue Code, the Company has
agreed to pay a bonus to each optionee at the time and in the amount of any
resulting tax savings realized by the Company.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2003, 520,000 of these options remained outstanding (options
granted less options canceled due to employee termination) and none had been
exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved a grant of 100,000 options to Mr. Brinkley, exercisable at $6.27 per
share. Forty percent of these options vest on September 15, 2004, and 60% vest
on September 15, 2005.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of %of Total
Securities Options/ Potential Realizable Value
Underlying SARs Exercise or At Assumed Annual Rates of
Options/ Granted to Base Stock Price Appreciation for
SARs Employees in Price Expiration Option Term (2)
Name Granted (1) Fiscal Year ($/Sh) Date 5% 10%
---- -------------- -------------- -------------- -------------- -------------- --------------
Sterling B. Brinkley
Chairman of the Board (3) 100,000 11% $ 6.27 9/17/2013 $ 394,317 $ 999,277
Joseph L. Rotunda
President, Chief Executive 150,000 17% $ 2.57 10/30/2012 $ 176,469 $ 509,341
Officer and Director
Dan N. Tonissen
Senior Vice President, 100,000 11% $ 2.57 10/30/2012 $ 117,646 $ 339,561
Chief Financial Officer,
Assistant Secretary and
Director
Robert F. Bloom
Vice President of 100,000 11% $ 2.57 10/30/2012 $ 117,646 $ 339,561
Operations Administration
65
Number of %of Total
Securities Options/ Potential Realizable Value
Underlying SARs Exercise or At Assumed Annual Rates of
Options/ Granted to Base Stock Price Appreciation for
SARs Employees in Price Expiration Option Term (2)
Name Granted (1) Fiscal Year ($/Sh) Date 5% 10%
---- -------------- -------------- -------------- -------------- -------------- --------------
Daniel M. Chism
Controller and Assistant 2,000 0% $ 6.27 9/17/2013 $ 7,886 $ 19,986
Secretary 7,000 1% $ 2.57 10/01/2012 $ 11,086 $ 28,308
Tom B. Young
Vice President and Chief 50,000 6% $ 2.57 10/30/2012 $ 58,823 $ 169,780
Information Officer
(1) Stock options typically become exercisable in five equal installments
beginning one year after the date of grant.
(2) As suggested by the Securities and Exchange Commission's rules on executive
compensation disclosure, the Company projected the potential realizable
value of each grant of options or freestanding SARs, assuming that the
market price of the underlying security appreciates in value from the date
of grant to the end of the option or SAR term at annualized rates of 5% and
10%.
(3) Excludes 125,000 shares of restricted stock award granted to Mr. Brinkley
on September 17, 2003.
66
AGGREGATE OPTIONS/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise of
stock options (or tandem SARs) and freestanding SARs in Fiscal 2003 and the
value of unexercised options and SARs held by each of the Named Executive
Officers at the end of the Company's last fiscal year.
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
On Value Options/SARs at Options/SARs at
Exercise Realized FY-End (#) FY-End ($)(1)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Sterling B. Brinkley
Chairman of the Board -- -- 125,000/450,000 -/-
Joseph L. Rotunda
President, Chief Executive Officer and -- -- 253,334/296,666 $648,003/$798,497
Director
Dan N. Tonissen
Senior Vice President, Chief
Financial Officer, Assistant -- -- 58,313/216,000 $ 16,320/$416,280
Secretary and Director
Robert F. Bloom
Vice President of Operations -- -- 14,000/126,000 $ 45,120/$ 98,080
Administration
Daniel M. Chism
Controller and Assistant Secretary -- -- 11,400/19,600 $ 13,872/$ 59,658
Tom B. Young
Vice President and Chief Information -- -- 14,000/76,000 $ 45,120/$273,580
Officer
(1) Values stated are based upon the closing price of $6.08 per share of the
Company's Class A Common Stock on The NASDAQ Stock Market on September 30, 2003,
the last trading day of the fiscal year.
COMPENSATION PURSUANT TO PLANS
STOCK INCENTIVE PLAN
The Company's 1991 Incentive Stock Option Plan (the "1991 Plan") provides for
(i) the granting of incentive stock options to purchase Class A Common Stock,
(ii) the granting of nonqualified stock options to purchase Class A Common
Stock, (iii) the granting of stock appreciation rights ("SARs"), and (iv) the
granting of limited stock appreciation rights ("LSARs").
The options, SARs, and LSARs are not transferable except by will and by the laws
of descent and distribution, and under other limited circumstances. The 1991
Plan is intended to be qualified under Rule 16b-3 promulgated by the Securities
and Exchange Commission, which Rule generally exempts certain option grants and
certain stock or cash awards from the provisions of Section 16(b) under the
Securities Exchange Act of 1934.
Options granted under the 1991 Plan were granted at exercise prices equal to or
above the fair market value on the date of the grant. In October 1994, the Board
of Directors amended the Plan to provide accelerated vesting upon a change in
control of the Company. As of September 30, 2003, the Company had 179,313 active
options outstanding to executive officers under the 1991 Plan at prices ranging
from $12.00 to $14.00. Of these options, 179,313 are vested and none has been
exercised.
67
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 1998 Incentive Plan (the "1998 Plan").
The 1998 Plan permits grants of the same types of options, SARs and LSARs as the
1991 Plan and provides for the issuance of shares for stock option awards of up
to 1,275,000 of the Company's Class A Common Stock. In approving such plan, the
Compensation Committee resolved that no further options would be granted under
any previous plans. The number of shares eligible to be awarded under the 1998
Plan is 1,275,000, and was not increased to 1,955,000 as was disclosed in the
Annual Report for the year ended September 30, 2002. As of September 30, 2003,
the Company had 1,459,000 active options outstanding to executive officers
(options granted less options canceled due to employee termination) under the
1998 Plan at prices ranging from $2.00 to $15.00. Of these options, 304,734 are
vested and none have been exercised.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 570,000 options to executive officers, exercisable at $2.57
per share, and, except as discussed below, vesting on October 20, 2008. As of
September 30, 2003, 520,000 of these options remained outstanding (options
granted less options canceled due to employee termination) and none had been
exercised. The terms of this grant provides for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004,
and 2005.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 2003 Incentive Plan (the "2003 Plan").
The 2003 Plan permits grants of the same types of options, SARs and LSARs as the
1991 and 1998 plans and provides for stock option awards of up to 500,000 of the
Company's Class A Common Stock. As of September 30, 2003, the Company had
102,000 active options outstanding to executive officers (options granted less
options canceled due to employee termination) under the 2003 Plan at a price of
$6.27. None of these options are vested.
Also, on September 17, 2003, the Board of Directors approved an award of 125,000
shares of restricted stock to the Chairman of the Board. The closing price of
the Company's stock on September 17, 2003 was $6.27. The restriction requires
that Mr. Brinkley remain employed with the Company through September 17, 2005.
The Company also agreed to reimburse Mr. Brinkley for the income tax
consequences resulting from the award.
401(k) PLAN
On June 6, 1991, the Company adopted the EZCORP, Inc. 401(k) Plan (the "401(k)
Plan"), a savings and profit sharing plan intended to qualify under Section
401(k) of the Code. Under the 401(k) Plan, employees of the Company and those
subsidiaries that adopt it may contribute up to a maximum percentage allowable
not to exceed the limits of Code Sections 401(k), 402(g), 404 and 415. (not to
exceed $12,000 in 2003, except if over age 50 and have met the $12,000 limit,
then can contribute an additional $2,000) to the plan trust. The Company may
match 25% of an employee's contributions up to 6% of his compensation. Employer
contributions may be made in the form of or invested in Class A Common Stock.
Contribution expense related to the 401(k) Plan for 2003 was approximately
$64,000. The Company's contributions vest based on the employee's length of
service with the Company and its subsidiaries, with 25% of the total
contributions vesting each year once the employee has two years of service (for
the purposes of the 401(k) plan, a year of service is defined as 1,000 hours
worked). On termination of employment, an employee will receive all of his
contributions and any vested portion of the Company's contributions, as adjusted
by any earnings and losses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has appointed a Compensation Committee comprised of Mr.
Pickup and Mr. Sage. Both Mr. Pickup and Mr. Sage serve as directors and are
also members of the Audit Committee of the Board of Directors.
68
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Phillip Ean Cohen indirectly controls the Company through his ownership of all
of the issued and outstanding stock of MS Pawn Corporation, the sole general
partner of MS Pawn Limited Partnership ("MS Pawn"), which owns 100% of the Class
B Voting Common Stock of the Company. The table below sets forth information
regarding the beneficial ownership of the Company's Common Stock as of November
21, 2003 for (i) each of the Company's current directors, (ii) each of the Named
Executive Officers, (iii) beneficial owners known to the registrant to own more
than five percent of any class of the Company's voting securities, and (iv) all
current officers and directors as a group.
Class A Non-Voting Class B Voting
Common Stock Common Stock Voting
Name and Addres of the ---------------------------- ----------------------
Beneficial Owners(a) Number Percent Number Percent Percent
---------------------- ------------ --------- --------- ------- -------
MS Pawn Limited Partnership(b)(g) 1,388,857(h) 11.39%(h) 1,194,131 100% 100%
MS Pawn Corporation
Phillip Ean Cohen
350 Park Avenue, 8th Floor
New York, New York 10022
Sterling B. Brinkley(c) 325,615 2.93% -- -- --
350 Park Avenue, 8th Floor
New York, New York 10022
Joseph L. Rotunda(d) 343,500 3.03% -- -- --
1901 Capital Parkway
Austin, TX 78746
Dan N. Tonissen(e) 82,313 0.74% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Gary Matzner(m) 600 0.01% -- -- --
2601 S. Batshore Dr.
Miami, Florida 33133
Mark C. Pickup(l) 5,600 0.05% -- -- --
6734 Corte Segunda
Martinez, California 94553
Richard D. Sage(n) 1,831 0.02% -- -- --
13636 Deering Bay Drive
Coral Gables, Florida 33158
Robert F. Bloom(i) 38,000 0.34% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Daniel M. Chism(j) 15,200 0.14% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Tom B. Young(k) 28,000 0.25% -- -- --
1901 Capital Parkway
Austin, Texas 78746
All officers and directors as a group(b)(f) 869,459 7.46% -- -- --
69
(a) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Class B Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
(b) MS Pawn Corporation is the general partner of MS Pawn and has the sole
right to vote its shares of Class B Common Stock and to direct their
disposition. Mr. Cohen is the sole stockholder of MS Pawn Corporation. See
"Certain Relationships and Related Transactions." Mr. Cohen also owns
189,341 shares of Class A Common Stock directly.
(c) Includes options to acquire 125,000 shares of Class A Common Stock at
$14.00 per share and warrants to acquire 1,191 shares of Class A Common
Stock at $6.17 per share. Does not include options to acquire 350,000
shares of Class A Common Stock at $10.00 per share or 100,000 shares of
Class A Common Stock at $6.27 per share, none of which are currently
exercisable. It also does not include 125,000 shares of restricted stock
awarded. Between November 24, 2003 and November 26, 2003, 90,800 shares of
Class A Common Stock were sold with prices ranging between $7.30 and $7.57
per share.
(d) Includes options to acquire 50,000 shares of Class A Common Stock at $4.00
per share, 22,500 shares of Class A Common Stock at $2.57 per share,
200,000 shares of Class A Common Stock at $2.00 per share, 50,000 shares of
Class A Common Stock at $10.00 per share and 20,000 shares of Class A
Common Stock at $13.00 per share. Does not include options to acquire
127,500 shares of Class A Common Stock at $2.57 per share, 30,000 shares of
Class A Common Stock at $13.00 per share, or 50,000 shares of Class A
Common Stock at $15.00 per share, none of which are currently exercisable.
(e) Includes options to acquire 24,313 shares of Class A Common Stock at $12.75
per share, 30,000 shares of Class A Common Stock at $12.00 per share,
15,000 share of Class A Common Stock at $2.57 per share, and 8,000 shares
of Class A Common Stock at $2.00 per share. Does not include options to
acquire 100,000 shares of Class A Common Stock at $10.00 per share, 85,000
shares of Class A Common Stock at $2.57 per share, or 12,000 shares of
Class A Common Stock at $2.00 per share, none of which are currently
exercisable.
(f) Includes 13 persons' options to acquire 656,213 shares of Class A Common
Stock at prices ranging from $2.00 to $15.00 per share and warrants to
acquire 1,222 Class A Common Stock shares at $6.17 per share.
(g) Includes warrants for 4,093 shares of Class A Common Stock and 4,074 shares
of Class B Common Stock held by MS Pawn and warrants for 1,292 shares of
Class A Common Stock held by Mr. Cohen.
(h) The number of shares and percentage reflect Class A Common Stock, together
with Class B Common Stock, which is convertible to Class A Common Stock.
(i) Includes options to acquire 14,000 shares of Class A Common Stock at $2.00
per share, 15,000 shares of Class A Common Stock at $2.57 per share, and
6,000 shares of Class A Common Stock at $4.00 per share. Does not include
options to acquire 16,000 shares of Class A Common Stock at $2.00 per
share, 4,000 shares of Class A Common Stock at $4.00 per share, or 85,000
shares of Class A Common Stock at $2.57 per share, none of which are
currently exercisable.
(j) Includes options to acquire 8,000 shares of Class A Common Stock at $10.00
per share, 1,400 shares of Class A Common Stock at $2.57 per share and
5,800 shares of Class A Common Stock at $2.00 per share. Does not include
options to acquire 6,200 shares of Class A Common Stock at $2.00 per share,
2,000 shares of Class A Common Stock at $10.00 per share, 5,600 shares of
Class A Common Stock at $2.57 per share, or 2,000 shares of Class A Common
Stock at $6.27 per share, none of which are currently exercisable.
(k) Includes options to acquire 14,000 shares of Class A Common Stock at $2.00
per share, 7,500 shares of Class A Common Stock at $2.57 per share and
6,000 shares of Class A Common Stock at $4.00 per share. Does not include
options to acquire 16,000 shares of Class A Common Stock at $2.00 per
share, 42,500 shares of Class A Common Stock at $2.57 per share, nor 4,000
shares of Class A Common Stock at $4.00 per share, none of which are
currently exercisable.
(l) Includes options to acquire 1,200 shares of Class A Common Stock at $2.00
per share and 1,800 shares of Class A Common Stock at $2.57 per share. Does
not include options to acquire 1,800 shares of Class A Common Stock at
$2.00 per share, 7,200 shares of Class A Common Stock at
70
$2.57 per share, or 9,000 shares of Class A Common Stock at $6.27 per
share, none of which are currently exercisable.
(m) Includes options to acquire 600 shares of Class A Common Stock at $2.57
per share. Does not include options to acquire 2,400 shares of Class A
Common Stock at $2.57 per share, nor 3,000 shares of Class A Common Stock
at $6.27 per share, none of which are currently exercisable.
(n) Includes options to acquire 1,200 shares of Class A Common Stock at $2.00
per share, 600 shares of Class A Common Stock at $2.57 per share and
warrants to acquire 31 shares of Class A Common Stock at $6.17 per share.
Does not include options to acquire 1,800 shares of Class A Common Stock
at 2.00 per share, 2,400 shares of Class A Common Stock at $2.57 per
share, or 3,000 shares of Class A Common Stock at $6.27 per share, none of
which are currently exercisable.
Securities authorized under equity compensation plans as of September 30, 2003,
were as follows:
Number of Securities Remaining
Number of Securities Available for Future Issuance Under
to be Issued Upon Weighted Average Equity Compensation Plans
Exercise of Exercise Price of (Excluding Securities Reflected in
Outstanding Options Outstanding Option Column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security holders 2,112,993 $ 6.13 236,000
Equity compensation plans not
approved by security holders -- -- --
--------- --------- ---------
Total 2,112,993 $ 6.13 236,000
========= ========= =========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning the $200,000 loan from the Company to Mr. Rotunda,
see "Executive Compensation, Employment Agreements."
The Company and Morgan Schiff & Co., Inc. ("Morgan Schiff"), whose sole
stockholder is Mr. Cohen, are parties to a Financial Advisory Agreement renewed
January 1, 2000, pursuant to which Morgan Schiff receives certain fees for its
provision of financial advisory services to the Company. These services include,
among other matters, ongoing consultation with respect to the business and
financial strategies of the Company. Morgan Schiff waived the monthly advisory
fee from July 2000 through October 2002. The financial advisory fee was
reinstated in November 2002 at $33,333 per month. Effective October 1, 2003, the
monthly retainer was increased to $100,000 per month, inclusive of most
expenses.
71
The table below summarizes the retainer and expense reimbursements for
out-of-pocket expenses paid to Morgan Schiff by the Company during Fiscal 2001,
2002, and 2003 (in $000's):
2001 2002 2003
------ ------ ------
Monthly retainer $ -- $ -- $ 367
Expense reimbursements 426 498 400
------ ------ ------
Total $ 426 $ 498 $ 767
====== ====== ======
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company has paid the following fees to Ernst & Young LLP for services
provided during the years ended September 30, 2002 and 2003:
Years Ended September 30,
-------------------------
2002 2003
-------- --------
Audit fees $258,000 $263,000
Audit related fees -- 7,000
Tax fees:
Tax compliance 45,000 75,000
Tax consulting 34,190 44,010
Assistance with IRS exam 71,120 82,835
All other fees 2,480 3,500
-------- --------
Total fees for services $410,790 $475,345
======== ========
The Audit Committee of the Company's Board of Directors has adopted a policy of
pre-approving all fees to be paid to the Company's independent audit firm,
regardless of the type of service. All non-audit services were reviewed with the
Audit Committee, which concluded that the provision of such services by Ernst &
Young LLP was compatible with the maintenance of that firm's independence in the
conduct of its auditing functions.
72
PART IV
ITEM 15. FINANCIAL STATEMENT SCHEDULES, EXHIBITS, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of EZCORP, Inc. and
subsidiaries are included in Item 8:
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Consolidated Balance Sheets as of September 30, 2002 and 2003
Consolidated Statements of Operations for each of the three years in the period
ended September 30, 2003
Consolidated Statements of Cash Flows for each of the three years in the period
ended September 30, 2003
Consolidated Statements of Stockholders' Equity for each of the three years in
the period ended September 30, 2003
Notes to Consolidated Financial Statements.
(2) The following Financial Statement Schedule is included herein:
Schedule II-Valuation Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore, have been omitted.
(3) Listing of Exhibits (included herein)
(b) Through the fourth quarter ended September 30, 2003, the Company
filed two Current Reports on Form 8-K dated April 22, 2003 and July 22, 2003 to
report the issuance of a press release regarding its results of operations for
the fiscal quarters ended March 31, 2003, and June 30, 2003, respectively.
73
EZCORP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS
(In millions)
ADDITIONS
------------------------
Balance at Balance
Beginning Charged to Charged to at End
Description of Period Expense Other Accts Deductions of Period
----------- ---------- ---------- ----------- ---------- ---------
Allowance for valuation of inventory:
Year ended September 30, 2001 .............................. $ 2.2 $ 0.2 $ -- $ 1.3 $ 1.1
------ ------ ------ ------ ------
Year ended September 30, 2002 .............................. 1.1 0.6 -- -- 1.7
------ ------ ------ ------ ------
Year ended September 30, 2003 .............................. $ 1.7 $ 0.1 $ -- $ -- $ 1.8
------ ------ ------ ------ ------
Allowance for uncollectible pawn service charges receivable:
Year ended September 30, 2001 .............................. $ 5.7 $ 0.3 $ -- $ -- $ 6.0
------ ------ ------ ------ ------
Year ended September 30, 2002 .............................. 6.0 0.7 -- -- 6.7
------ ------ ------ ------ ------
Year ended September 30, 2003 .............................. $ 6.7 $ (0.4) $ -- $ -- $ 6.3
------ ------ ------ ------ ------
Allowance for losses on payday loans:
Year ended September 30, 2001 .............................. $ -- $ 1.2 $ -- $ 1.1 $ 0.1
------ ------ ------ ------ ------
Year ended September 30, 2002 .............................. 0.1 3.1 -- 3.1 0.1
------ ------ ------ ------ ------
Year ended September 30, 2003 .............................. $ 0.1 $ 3.6 $ -- $ 3.5 $ 0.2
------ ------ ------ ------ ------
Allowance for valuation of deferred tax assets:
Year ended September 30, 2001 .............................. $ 3.7 $ -- $ -- $ -- $ 3.7
------ ------ ------ ------ ------
Year ended September 30, 2002 .............................. 3.7 -- -- -- 3.7
------ ------ ------ ------ ------
Year ended September 30, 2003 .............................. $ 3.7 $ (3.7) $ -- $ -- $ --
------ ------ ------ ------ ------
74
LISTING OF EXHIBITS
See Exhibit Index immediately following signature page.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
November 24, 2004
By: /s/ Joseph L. Rotunda
------------------------------------
(Joseph L. Rotunda)
(President & Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Sterling B. Brinkley Chairman of the Board November 24, 2004
----------------------------------
Sterling B. Brinkley
/s/ Joseph L. Rotunda President, Chief Executive November 24, 2004
---------------------------------- Officer & Director
Joseph L. Rotunda (Principal Executive Officer)
/s/ Dan N. Tonissen Senior Vice President, Chief November 24, 2004
---------------------------------- Financial Officer, Assistant Secretary
Dan N. Tonissen & Director (Principal Financial and
Accounting Officer)
/s/ Gary C. Matzner Director November 24, 2004
----------------------------------
Gary C. Matzner
/s/ Richard D. Sage Director November 24, 2004
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Richard D. Sage
76
EXHIBIT INDEX
Page Number if Incorporated by
Number Description Filed herein Reference to
------ ----------- ------------ ------------
3.1 Amended and Restated Certificate of Exhibit 3.1 to the Registration
Incorporation of the Company Statement on Form S-1
effective August 23, 1991
(File No. 33-41317)
3.1A Certificate of Amendment to Exhibit 3.1A to the Registration
Certificate of Incorporation of Statement on Form S-1 effective
the Company July 15, 1996 (File No. 33-1317)
3.2 Bylaws of the Company. Exhibit 3.2 to the Registration
Statement on Form S-1 effective
August 23, 1991 (File No.
33-41317)
3.3 Amendment to the Bylaws. Exhibit 3.3 to Registrant's
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1994
(File No. 0-19424)
3.4 Amendment to the Certificate of Exhibit 3.4 to Registrant's
Incorporation of the Company. Annual Report on Form 10-K for
the year ended September 30, 1994
(File No. 0-19424)
3.5 Amendment to the Certificate of Exhibit 3.5 to Registrant's
Incorporation of the Company Annual Report on Form 10-K for
the year ended September 30, 1997
3.6 Amendment to the Certificate of Exhibit 3.6 to Registrant's
Incorporation of the Company Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998
4.1 Specimen of Class A Non-voting Exhibit 4.1 to the Registration
Common Stock certificate of the Statement on Form S-1 effective August
Company. 23, 1991 (File No. 33-41317)
10.2 Omitted N/A
10.3 $5 million Revolving Credit Note - Exhibit 10.3 to Registrant's Annual
Franklin Federal Bancorp. Report on Form 10-K for the year
ended September 30, 1992 (File
No. 0-19424)
10.4 Omitted N/A
77
10.5 Security Agreement executed by Exhibit 10.5 to Registrant's Annual
EZPAWN Texas, Inc. (substantially the same Report on Form 10-K for the year ended
agreement also was executed by EZPAWN September 30, 1992
Oklahoma, Inc.; EZPAWN Mississippi, Inc.; (File No. 0-19424)
EZPAWN Arkansas, Inc.; EZPAWN Colorado,
Inc.; EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston Financial
Corporation).
10.6 Guaranty Agreement executed by Exhibit 10.6 to Registrant's Annual
EZPAWN Texas, Inc. (substantially the same Report on Form 10-K for the year ended
agreement also was executed by EZPAWN September 30, 1992 (File No. 0-19424)
Oklahoma, Inc.; EZPAWN Mississippi, Inc.;
EZPAWN Arkansas, Inc.; EZPAWN Colorado,
Inc.; EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston Financial
Corporation).
10.7 Loan Agreement between the Company, as Exhibit 10.7 to Registrant's Annual
Borrower, and Franklin Federal Bancorp, Report on Form 10-K for the year ended
FSB, as lender, dated April 30, 1993. September 30, 1993 (File No.
0-19424)
10.8 Omitted N/A
10.9 Omitted N/A
10.10 Letter agreement executed December Exhibit 10.10 to the Registration
20, 1990 between Morgan Schiff & Co., Statement on Form S-1 effective
Inc. ("Morgan Schiff") and the August 23, 1991
Company. (File No. 33-41317)
10.11 Stock Purchase Agreement be- Exhibit 10.11 to the Registration
tween the Company, Courtland L. Statement on Form S-1 effective
Logue, Jr., Courtland L. Logue, August 23, 1991
Sr., James D. McGee, M. Frances (File No. 33-41317)
Spears, Porter A. Stratton and
Steve A. Stratton dated as of May
18, 1989.
78
10.12 Capitalization and Subscription Exhibit 10.12 to the Registration
Agreement between MS Pawn Statement on Form S-1 effective
Limited Partnership ("MS Pawn") August 23, 1991
and the Company, dated as of July (File No. 33-41317)
25, 1989.
10.13 Omitted N/A
10.14 Consulting Agreement between Exhibit 10.14 to Registrant's Annual
the Company and Courtland L. Logue, Report on Form 10-K for the year
Sr., dated February 15, 1993 ended September 30, 1993
(File No. 0-19424)
10.15 Omitted N/A
10.16 Junior Subordinated Note due Exhibit 10.16 to Registration
1996 issued July 25, 1989 to Court- Statement on Form S-1 effective
land L. Logue, Sr. in the original August 23,1991
Principal amount of $238,319.95. (File No. 33-41317)
10.17 Omitted N/A
10.18 Warrant Certificate issued by the Exhibit 10.18 to the Registration
Company to MS Pawn on July 25, Statement on Form S-1 effective
1989. August 23, 1991
(File No. 33-41317)
10.19 Amendment to the Stock Purchase Exhibit 10.19 to the Registration
Agreement dated as of June 19, 1989 Statement on Form S-1 effective
Between the Company and the August 23, 1991
Stockholders of the Predecessor (File No. 33-41317)
Company.
10.20 Second Amendment to Stock Pur- Exhibit 10.20 to the Registration
chase Agreement dated as of April 20, Statement on Form S-1 effective
1990 between the Company and the August 23, 1991
Stockholders of the Predecessor (File No. 33-41317)
Company.
10.21 Omitted N/A
10.22 Omitted N/A
10.23 Omitted N/A
10.24 Omitted N/A
10.25 Omitted N/A
10.27 Omitted N/A
10.28 Omitted N/A
10.29 Omitted N/A
79
10.30 Omitted N/A
10.31 Omitted N/A
10.32 Omitted N/A
10.33 Omitted N/A
10.34 Omitted N/A
10.35 Stockholders' Agreement dated as Exhibit 10.35 to the Registration
of July 25, 1989 between the Com- Statement on Form S-1 effective
pany, MS Pawn and Courtland L. August 23, 1991
Logue, Jr. (File No. 33-41317)
10.36 Joinder Agreement to the Stock- Exhibit 10.36 to the Registration
Holders' Agreement dated as of Statement on Form S-1 effective
May 1, 1991 between the Company August 23, 1991
MS Pawn, Mr. Kofnovec, Mr. Gary, (File No. 33-41317)
Mr. Ross and Ms. Berger.
10.37 Incentive Stock Option Plan. Exhibit 10.37 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.38 401(k) Plan. Exhibit 10.38 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.39 Section 125 Cafeteria Plan. Exhibit 10.39 to the Registration
Statement on Form S-1 effective
August 23, 1991
(File No. 33-41317)
10.40 Lease of 1970 Cessna 210K Aircraft Exhibit 10.40 to the Registration
Between Courtland L. Logue, Jr. and Statement on Form S-1 effective
Transamerica Pawn Corporation, August 23, 1991
dated July 25, 1989. (File No. 33-41317)
10.41 Omitted N/A
10.42 Omitted N/A
10.43 Omitted N/A
10.44 Lease of Cessna P210 Aircraft Exhibit 10.44 to the Registration
Between Courtland L. Logue, Jr. Statement on Form S-1 effective
and Transamerica Pawn Corporation, August 23, 1991
dated December 29, 1989. (File No. 33-41317)
80
10.45 Lease between Logue, Inc. and E-Z Exhibit 10.45 to the Registration
Corporation for real estate located Statement on Form S-1 effective
at 1166 Airport Boulevard, Austin, August 23, 1991
Texas, dated July 25, 1989. (File No. 33-41317)
10.46 Lease between Logue, Inc. and E-Z Exhibit 10.46 to the Registration
Corporation for real estate located Statement on Form S-1 effective
at 5415 North Lamar Boulevard, August 23, 1991
Austin, Texas, dated July 25, 1989 (File No. 33-41317)
10.47 Agreement of Lease between LDL Exhibit 10.47 to the Registration
Partnership and Logue-Drouin Statement on Form S-1 effective
Industries, Inc. for real property August 23, 1991
at 8540 Broadway Blvd., Houston, (File No. 33-41317)
Texas, dated May 3, 1988 and related
Assignment of Lease.
10.48 Lease Agreement between C Minus Exhibit 10.48 to the Registration
Corporation and Logue-Drouin Statement on Form S-1 effective
Industries, Inc. DBA E-Z Pawn #5 August 23, 1991
for real property located at 5209 (File No. 33-41317)
Cameron Road, Austin, Texas,
dated December 28, 1987.
10.49 Lease Agreement between Logue, Exhibit 10.49 to the Registration
Inc. and E-Z Corporation for real Statement on Form S-1 effective
Property located at 901 E. 1st St., August 23, 1991
Austin, Texas, dated July 25, 1989. (File No. 33-41317)
10.50 Agreements between the Company Exhibit 10.50 to the Registration
and MS Pawn dated February 18, Statement on Form S-1 effective
1992 for the payment of $1.377 March 16, 1992
million of Series A Increasing Rate (File No. 33-45807)
Senior Subordinated Notes held by
MS Pawn.
10.51 Agreement Regarding Reservation Exhibit 10.51 to Registrant's
of Shares. Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993
(File No. 0-19424)
10.52 Omitted N/A
10.53 Omitted N/A
10.54 Omitted N/A
10.55 Omitted N/A
10.56 Omitted N/A
10.57 Omitted N/A
81
10.58 Omitted N/A
10.59 Omitted N/A
10.60 Loan Agreement between Sterling B. Exhibit 10.60 to Registrant's Annual
Brinkley and the Company dated Report on Form 10-K for the year
October 7, 1994 (an identical document ended September 30, 1995 (File
exists with respect to No. 0-19424)
Vincent A. Lambiase).
10.61 Promissory Note between Sterling Exhibit 10.61 to Registrant's Annual
B. Brinkley and the Company in the Report on Form 10-K for the year
original principal amount of ended September 30, 1995 (File
$1,500,000 attached thereto (an No. 0-19424)
identical document exists with respect
to Vincent A. Lambiase).
10.62 July 1, 1994 Employment Agreement Exhibit 10.62 to Registrant's Annual
between the Company and Vincent Report on Form 10-K for the year
A. Lambiase and Promissory Note in ended September 30, 1995
the amount of $729,112.50 in (File No. 0-19424)
connection therewith.
10.63 EZCORP, Inc. Incentive Stock Option Exhibit 10.63 to Registrant's
Award Agreement, Employee Form Annual Report on Form 10-K
For the year ended September
30,1998 (File No.0-19424)
10.64 EZCORP, Inc. Incentive Stock Option Exhibit 10.64 to Registrant's
Award Agreement, Executive Form Annual Report on Form 10-K
for the year ended September
30, 1998 (File No. 0-19424)
10.71 Amended and restated Loan Agreement between Exhibit 10.71 to Registrant's
the Company, as Borrower, and Franklin Quarterly Report on Form 10-Q for
Federal Bancorp, FSB, as Lender, dated the quarter ended March 31, 1994
March 17, 1994. (File No. 0-19424)
10.72 First Amendment to Amended and Restated Form 10-Q for the quarter ended
Loan Agreement between the Company and December 31, 1994
First Interstate Bank of Texas, N.A. as (File No. 0-19424)
Agent, re: Revolving Credit Loan.
10.73 Second Amendment to Amended and Restated Form 10-Q for the quarter ended
Loan Agreement between the June 30, 1995
Company and First Interstate Bank of (File No. 0-19424)
Texas, N.A. as Agent, re: Revolving Credit
Loan.
82
10.74 Third Amendment to Amended and Restated Form 10-Q for the quarter ended June 30,
Loan Agreement between the Company and 1996
Wells Fargo Bank (Texas), N.A. as Agent, (File No. 0-19424)
re: Revolving Credit Loan.
10.75 Fourth Amendment to Amended and Restated Form 10-Q for the quarter ended March
Loan Agreement between the Company and Wells 31, 1998
Fargo Bank (Texas), N.A. as Agent, re: (File No. 0-19424)
Revolving Credit Loan.
10.76 Fifth Amendment to Amended and Restated Exhibit 10.76 to Registrant's Annual
Loan Agreement between the Company and Report on Form 10-K for the year ended
Wells Fargo Bank (Texas), N.A. as Agent, September 30, 1998
re: Revolving Credit Loan. (File No, 0-19424)
10.77 Credit Agreement between the Company and Exhibit 10.77 to Registrant's Annual
Wells Fargo Bank (Texas), N.A., as Agent Report on Form 10-K for the year ended
and Issuing Bank, re: $110 million September 30, 1998
Revolving Credit Loan (File No. 0-19424)
10.78 First Amendment to Credit Agreement Exhibit 10.78 to Registrant's Annual
Between the Company and Wells Fargo Bank Report on Form 10-K for the year
(Texas), N.A., as Agent and Issuing Bank, Ended September 30, 1999 (File
re: $110 million Revolving Credit Loan. No. 0-19424)
10.79 Second Amendment to Credit Agreement and Exhibit 10.79 to Registrant's Quarterly
Waiver between the Company and Wells Fargo Report on Form 10-Q for the quarter
Bank (Texas), N.A., as Agent and Issuing ended March 31, 2000
Bank, re: $85 million Revolving Credit Loan. (File No. 0-19424)
10.80 Limited Waiver between the Company and Exhibit 10.80 to Registrant's Quarterly
Wells Fargo Bank Texas, N.A., as Agent and Report on Form 10-Q for the quarter
Issuing Bank, re: $85 million Revolving ended June 30, 2000
Credit Loan. (File No. 0-19424)
10.81 Amended and Restated Credit Agreement Exhibit 10.81 to Registrant's Annual
between the Company and Wells Fargo Bank Report on Form 10-K for the year ended
Texas, N.A., as Agent and Issuing Bank, re: September 30, 2000
$85 million Credit Facility. (File No. 0-19424)
10.82 Waivers of Selected Sections of Credit Exhibit 10.82 to Registrant's Quarterly
Agreement between the Company and Wells Report on Form 10-Q for the quarter
Fargo Bank, N.A., as Agent and Issuing ended June 30, 2001
Bank, re: $85 million Credit Facility. (File No. 0-19424)
10.83 First Amendment to Amended and Restated Exhibit 10.83 to Registrant's Quarterly
Credit Agreement between the Company and Report on Form 10-Q for the quarter
Wells Fargo Bank, N.A., as Agent and ended June 30, 2001
Issuing Bank, re: $85 million Credit (File No. 0-19424)
Facility.
83
10.84 Second Amendment to Amended and Restated Exhibit 10.84 to Registrant's Annual
Credit Agreement between the Company and Report on Form 10-K for the year ended
Wells Fargo Bank, N.A., as Agent and September 30, 2001
Issuing Bank, re: $85 million Credit (File No. 0-19424)
Facility.
10.85 Third Amendment to Amended and Restated Exhibit 10.85 to Registrant's Annual
Credit Agreement between the Company and Report on Form 10-K for the year ended
Wells Fargo Bank, N.A., as Agent and September 30, 2001
Issuing Bank, re: $85 million Credit (File No. 0-19424)
Facility.
10.86 Fourth Amendment to Amended and Restated Exhibit 10.86 to Registrant's Current
Credit Agreement between the Company and Report on Form 8-K dated September 30,
Wells Fargo Bank, N.A., as Agent and 2002
Issuing Bank, re: $85 million Credit (File No. 0-19424)
Facility.
10.87 Second Amended and Restated Credit Exhibit 10.87 to Registrant's Current
Agreement between the Company and Wells Report on Form 8-K dated October 30,
Fargo Bank Texas, N.A., as Agent and 2002
Issuing Bank, re: re-syndication of Credit (File No. 0-19424)
Facility, with a maturity date of March 31,
2005.
10.88 EZCORP, Inc. 2003 Incentive Plan. * N/A
20.1 Independent Auditors' Report to the N/A
Shareholders of Albemarle & Bond Holdings
PLC. *
21.1 Subsidiaries of Registrant.* N/A
23.1 Consent of Independent Auditors.* N/A
31.1 Certification of Chief Executive Officer N/A
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of Chief Financial Officer N/A
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of Chief Executive Officer N/A
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
32.2 Certification of Chief Financial Officer N/A
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
-------------
* Filed herewith.
84