SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 2002, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 75-2237318
------------------------------- ---------------------------------
(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure 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 Securities Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price on the Nasdaq
National Market on June 28, 2002, the last trading date of registrant's most
recently completed second fiscal quarter is $58,546,268.
As of March 24, 2003, there were 8,887,187 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on July 10, 2003 is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2002
TABLE OF CONTENTS
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PART I
Item 1 Business............................................. 1
Item 2 Properties........................................... 10
Item 3. Legal Proceedings ................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.. 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 11
Item 6. Selected Financial Data ............................. 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 13
Item 7.a Quantitative and Qualitative Disclosure About
Market Risk........................................ 20
Item 8. Financial Statements and Supplementary Data ......... 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 21
PART III
Item 10. Directors and Executive Officers of the Registrant... 21
Item 11. Executive Compensation .............................. 21
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters......... 21
Item 13. Certain Relationships and Related Transactions ...... 22
PART IV
Item 14. Controls and Procedures ............................. 22
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 23
SIGNATURES...................................................... 24
PART I
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Forward Looking Information
This annual report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. Forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "projects," "expects,"
"may," "estimates," "will," "should," "plans," "intends," or "anticipates"
or the negative thereof, or other variations thereon, or comparable
terminology, or by discussions of strategy. Forward-looking statements in
this annual report include, without limitation, the earnings per share
discussion, the expectation of increased pawn growth, the expectation for
additional store openings, and the expectation of growth in the Company's
short-term advance products. These statements are made to provide the
public with management's assessment of the Company's business. Although the
Company believes that the expectations reflected in forward-looking
statements are reasonable, there can be no assurances that such expectations
will prove to be accurate. Security holders are cautioned that such
forward-looking statements involve risks and uncertainties. The forward-
looking statements contained in this report speak only as of the date of
this report, and the Company expressly disclaims any obligation or
undertaking to release any updates or revisions to any such statement to
reflect any change in the Company's expectations or any change in events,
conditions or circumstance on which any such statement is based. Certain
factors may cause results to differ materially from those anticipated by
some of the statements made in this report. Such factors are difficult to
predict and many are beyond the control of the Company, but may include
changes in regional or national economic conditions, the ability to
integrate new stores, the ability to maintain favorable banking
relationships as it relates to short-term lending products, changes in
governmental regulations, unforeseen litigation, changes in interest rates
or tax rates, changes in gold prices, future business decisions and other
uncertainties.
Item 1. Business
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General
First Cash Financial Services, Inc. (the "Company") is the nation's
third largest publicly traded pawnshop operator and currently owns 137 pawn
stores in Texas, Oklahoma, Washington, D.C., Maryland, Missouri, South
Carolina, Virginia and Mexico. The Company's pawn stores engage in both
consumer finance and retail sales activities. The Company's pawn stores
provide a convenient source for consumer advances, advancing money against
pledged tangible personal property such as jewelry, electronic equipment,
tools, sporting goods and musical equipment. These pawn stores also
function as retailers of previously owned merchandise acquired in forfeited
pawn transactions and over-the-counter purchases from customers. The
Company's pawn stores also offer short-term, unsecured advances ("short-term
advances").
The Company also currently owns 62 check cashing and short-term advance
stores in Texas, California, Washington, Oregon, Illinois, South Carolina
and Washington, D.C. These stores provide a broad range of consumer
financial services, including check cashing, short-term advances, money
order sales, wire transfers and bill payment services. In addition, the
Company is a 50% partner in Cash & Go, Ltd., a Texas limited partnership,
which currently owns and operates 44 financial services kiosks located
inside convenience stores. For the year ended December 31, 2002, the
Company's revenues were derived 48% from retail activities, 49% from lending
activities, and 3% from other sources, primarily check-cashing fees. The
Company's primary business plan is to significantly expand its pawn store
operations by opening new stores, in markets such as Mexico, and to
significantly expand its short-term advance operations by opening new
stores, primarily in Texas.
Management believes the pawnshop industry is highly fragmented with
approximately 15,000 stores in the United States. The three publicly traded
pawnshop companies currently operate approximately 870, or less than 6%,
of the pawnshops in the United States. Management believes significant
economies of scale, increased operating efficiencies, and revenue growth are
achievable by increasing the number of stores under operation and
introducing modern merchandising techniques, point-of-sale systems, improved
inventory management and store remodeling. In addition, management believes
that revenues and operating income of its existing pawn stores can be
enhanced by continuing to add consumer financial services, such as short-
term advances, which will attract new customers to its pawn stores, and
provide a broader array of services to its existing customer base. During
the years ended December 31, 2002, 2001 and 2000, the Company added 25, 4
and 2 pawn stores to its network, respectively.
The Company made its initial entry into the check cashing and short-
term advance business in 1998, with the purchase of 11 stores in California
and Washington. Management estimates there are approximately 15,000 such
short-term advance locations throughout the United States. The check
cashing and short-term advance industry is experiencing rapid growth.
During the years ended December 31, 2002, 2001 and 2000, the Company added
13, 14 and 2 check cashing and short-term advance stores to its network,
respectively.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as
otherwise indicated, the term "Company" includes its wholly owned
subsidiaries, American Loan & Jewelry, Inc., WR Financial, Inc., Famous
Pawn, Inc., JB Pawn, Inc., Cash & Go, Inc., One Iron Ventures, Inc., Capital
Pawnbrokers, Inc., Silver Hill Pawn, Inc., Elegant Floors, Inc., First Cash,
S.A. de C.V., American Loan Employee Services, S.A. de C.V., First Cash,
Ltd., First Cash Corp, First Cash Management, LLC, and First Cash, Inc. The
Company's principal executive offices are located at 690 East Lamar Blvd.,
Suite 400, Arlington, Texas 76011, and its telephone number is (817) 460-
3947.
Industry
The pawnshop industry in the United States is an established industry,
with the highest concentration of pawnshops being in the Southeast and
Southwest. The operation of pawnshops is governed primarily by state laws,
and accordingly, states that maintain pawn laws most conducive to profitable
operations have historically seen the greatest development of pawnshops.
The Company believes that the majority of pawnshops are owned by individuals
operating one to three locations. Management further believes that the
highly fragmented nature of the industry is due in part to the lack of
qualified management personnel, the difficulty of developing adequate
financial controls and reporting systems, and the lack of financial
resources.
The check cashing and short-term advance industry is a relatively new
industry, and management estimates that there are approximately 15,000
short-term advance locations throughout the United States. Some states have
enacted formal check cashing laws which regulate the amount of fees that
operators may charge for cashing checks, and in some cases states have
regulated the amount of service charges that may be charged on small
consumer advances, commonly referred to as "short-term advances".
Business Strategy
The Company's primary business plan is to significantly expand its
operations by opening new check cashing and short-term advance stores,
primarily in Texas, and selectively opening new stores in other states, as
well as by opening new pawn stores in selected markets such as Mexico.
New Store Openings
The Company has opened 47 new pawn stores and 38 new check
cashing/short-term advance stores since its inception and currently intends
to open both additional pawn stores and check cashing/short-term advance
stores in locations where management believes appropriate demand and other
favorable conditions exist. Management seeks to locate new stores where
demographics are favorable and competition is limited. It is the Company's
experience that after a suitable location has been identified and a lease
and licenses are obtained, a new store can be ready for business within six
to eight weeks. The investment required to open a new pawn store includes
inventory, funds available for pawns, leasehold improvements, store
fixtures, security systems, computer equipment, and start-up losses.
Although the total investment varies and is difficult to predict for each
location, it has been the Company's experience that between $200,000 and
$300,000 is required to fund a new pawn store for the first six months of
operation. Because existing pawn stores already have an established
customer base, pawn portfolio, and retail-sales business, acquisitions
generally contribute more quickly to revenues than do start-up stores. The
Company estimates that between $200,000 and $300,000 is required to fund a
new check cashing/short-term advance store for the first six months of
operation, which includes investments for leasehold improvements, security
and computer equipment, short-term advance portfolio, funding store
operating cash, and start-up losses.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and
the check cashing/short-term advance industry, as well as the availability
of "mom & pop" sole proprietors willing to sell their stores, the Company
believes that certain acquisition opportunities exist from time to time.
The timing of any future acquisitions is based on identifying suitable
stores and purchasing them on terms that are viewed as favorable to the
Company. Before making an acquisition, management typically studies a
demographic analysis of the surrounding area, considers the number and size
of competing stores, and researches regulatory issues. Specific pawn store
acquisition criteria include an evaluation of the volume of annual pawn
transactions, outstanding receivable balances, historical redemption rates,
the quality and quantity of inventory on hand, and location and condition of
the facility, including lease terms. Factors involved in evaluating the
acquisition of check cashing/short-term advance stores include the annual
volume of transactions, location and condition of facilities, and a
demographic evaluation of the surrounding area to determine the potential
for the Company's short-term advance product.
Store Clusters
Whether acquiring an existing store or opening a new store, the Company
seeks to establish clusters of several stores in a specific geographic area
in order to achieve certain economies of scale relative to supervision,
purchasing and marketing. In Texas, such clusters have been established in
the Dallas/Fort Worth metroplex, the greater Houston metropolitan area, the
Rio Grande Valley area, the Corpus Christi area, the El Paso area and the
central Texas corridor (Austin, San Antonio and surrounding cities). Store
clusters have also been established in the St. Louis, Missouri area, the
Oklahoma City, Oklahoma area, in Washington D.C. and its surrounding
Maryland suburbs, in Baltimore, Maryland, in northern California, in the
Chicago, Illinois area, in South Carolina, in the Pacific Northwest, and in
northern Mexico, near the Texas border. The Company currently plans to
continue its expansion in existing markets in Texas, Washington D.C. and
Mexico, and to enter new markets in other states with favorable demographics
and regulatory environments.
Enhance Productivity of Existing and Acquired Stores
The primary factors affecting the profitability of the Company's
existing store base are the volume of retail sales, the gross profit on
retail sales, the level of pawn loans outstanding, the level of short-term
advances outstanding, the volume of check cashing and other consumer
financial services, and the control of store expenses, including bad debt
expenses related to short-term advances. To increase customer traffic,
which management believes is a key determinant to increasing its stores'
profitability, the Company has taken several steps to distinguish its stores
from traditional pawn and check cashing/short-term advance stores and to
make customers feel more comfortable. In addition to well-lit parking
facilities, typically the stores' exteriors display an attractive and
distinctive awning similar to those used by contemporary convenience and
video rental stores. The Company also has upgraded or refurbished the
interior of certain of its stores and improved merchandise presentation by
categorizing items into departments, improving the lighting and installing
better in-store signage.
Operating Controls
The Company has an organizational structure that it believes is capable
of supporting a larger, multi-country and multi-state store base. Moreover,
the Company has installed an employee-training program for both store and
corporate-level personnel that stresses productivity and professionalism.
The Company utilizes a proprietary computer information system that provides
fully integrated functionality to support point of sale retail operations,
inventory management and loan processing. Each store is connected on a real
time basis to a secured off-site data center located in the Dallas/Fort
Worth Metroplex that houses the centralized database and operating system.
The system provides management the ability to continuously monitor store
transactions and operating results. The Company maintains a well-trained
internal audit staff that conducts regular store visits to test compliance
with financial and operational controls. Management believes that the
current operating and financial controls and systems are adequate for the
Company's existing store base and can accommodate reasonably foreseeable
growth in the near-term.
Pawn Lending Activities
The Company's pawn stores advance money against the security of pledged
goods. The pledged goods are tangible personal property generally
consisting of jewelry, electronic equipment, tools, sporting goods and
musical equipment. The pledged goods provide the only security to the
Company for the repayment of the pawn, as pawns cannot be made which result
in personal liability to the borrower. Therefore, the Company does not
investigate the creditworthiness of the borrower, relying instead on the
marketability and sale value of pledged goods as a basis for its credit
decision. The Company contracts for a pawn service charge in lieu of
interest to compensate it for the pawn loan. The statutory service charges
on pawns at its Texas stores range from 12% to 240% on an annualized basis
depending on the size of the pawn, and from 39% to 300% on an annualized
basis at the Company's Oklahoma stores. Pawns made in the Maryland stores
bear service charges of 144% to 240% on an annualized basis, while pawns in
Virginia earn 120% to 144% annually. In Washington, D.C., a flat $2 charge
per month applies to all pawns of up to $40, and a 48% to 60% annualized
service charge applies to pawns of greater than $40. In Missouri, pawns
bear a total service and storage charge of 180% to 240% on an annualized
basis, and South Carolina rates range from 100% to 300%. In Mexico, pawns
bear an annualized rate of 240%. As of December 31, 2002, the Company's
average pawn per pawn ticket was approximately $65. Service charge revenues
for pawns during the fiscal years ended December 31, 2002, 2001 and 2000
were $21,723,000, $19,715,000 and $20,585,000, respectively, and accounted
for approximately 37%, 37% and, 44%, respectively, of the Company's total
service charge revenues. Receivables from pawn loans at December 31, 2002
and 2001 were $16,624,000 and $13,849,000, respectively.
At the time a pawn transaction is entered into, an agreement, commonly
referred to as a pawn ticket, is delivered to the borrower that sets forth,
among other items, the name and address of the pawnshop, borrower's name,
borrower's identification number from his/her driver's license or other
identification, date, identification and description of the pledged goods,
including applicable serial numbers, amount financed, pawn service charge,
maturity date, total amount that must be paid to redeem the pledged goods on
the maturity date, and the annual percentage rate.
The amount the Company is willing to finance typically is based on a
percentage of the estimated sale value of the collateral. There are no
minimum or maximum pawn to fair market value restrictions in connection with
the Company's lending activities. The basis for the Company's determination
of the sale value includes such sources as catalogs, blue books, and
newspapers. The Company also utilizes its integrated computer information
system to recall recent selling prices of similar merchandise in its own
stores. These sources, together with the employees' experience in selling
similar items of merchandise in particular stores, influence the
determination of the estimated sale value of such items. The Company does
not utilize a standard or mandated percentage of estimated sale value in
determining the amount to be financed. Rather, the employee has the
authority to set the percentage for a particular item and to determine the
ratio of pawn amount to estimated sale value with the expectation that, if
the item is forfeited to the pawnshop, its subsequent sale should yield a
gross profit margin consistent with the Company's historical experience. It
is the Company's policy to value merchandise on a conservative basis to
avoid the risks associated with over-valuation. For the fiscal years ended
December 31, 2002, 2001 and 2000, the Company's annualized yields on average
pawn balances were 143%, 141% and 127%, respectively. Pledged property is
held through the term of the pawn, which is 30 days in Texas, South
Carolina, Missouri, Virginia, Oklahoma and Maryland, with an automatic
extension period of 15 to 60 days depending on state laws, unless the pawn
is earlier paid or renewed. In Washington, D.C and Mexico, pledged property
is held for 30 days. In the event the borrower does not pay or renew a pawn
within 90 days in South Carolina and Missouri, 60 days in Texas and
Oklahoma, 45 days in Maryland and Virginia, and 30 days in Washington, D.C
and 15 days in Mexico, the unredeemed collateral is forfeited to the Company
and becomes inventory available for general liquidation or sale in one of
the Company's stores. The Company does not record pawn losses or charge-
offs if the pawn loan is not repaid, as the principal amount pawned becomes
the carrying cost of the forfeited collateral inventory.
The recovery of the principal and realization of gross profit on sales
of inventory is dependent on the Company's initial assessment of the
property's estimated sale value. Improper assessment of the sale value of
the collateral in the lending function can result in reduced marketability
of the property and sale of the property for an amount less than the
principal amount pawned.
Short-term Advance Activities
The Company's check cashing/short-term advance stores and certain pawn
stores make unsecured, short-term advances for a term of thirty days or
less. Fees for short-term advances may be regulated by state law and are
generally 13.9% to 40% of the amount advanced per transaction. Service
charge revenues for short-term advances during the fiscal years ended
December 31, 2002, 2001 and 2000 were $36,473,000, $33,313,000 and
$26,012,000, respectively, and accounted for approximately 63%, 63% and 56%,
respectively, of the Company's total service charge revenues.
To qualify for a short-term advance, customers generally must have
proof of steady income, a checking account with a minimum of returned items
within a specified period, and valid identification. Upon completing an
application and subsequent approval, the customer writes a check on their
personal checking account for the amount of the advance, plus applicable
fees. At maturity, the customer may either return to the store and pay off
the advance with cash, in which case the check is returned to the customer,
or the store can deposit the check into its checking account. The bank
returns a significant amount of short-term advance checks deposited by the
Company; however, the Company through various means subsequently collects a
large percentage of these bad debts. The profitability of the Company's
check cashing stores is dependent upon adequate collection of these returned
items.
Receivables from short-term advances, net of bad debt valuation
allowances, at December 31, 2002 and 2001 were $10,690,000 and $9,707,000,
respectively. The bad debt valuation allowances were $422,000 and $404,000
at December 31, 2002 and 2001, respectively. The net bad debt expenses
associated with short-term advances during the fiscal years ended December
31, 2002, 2001 and 2000 were $8,669,000, $8,684,000 and $6,346,000,
respectively, which represented 24%, 26% and 24%, respectively, of service
charge revenues from short-term advances.
Retail Activities
The Company acquires merchandise inventory primarily through forfeited
pawns and purchases of used goods from the general public. Sales of
inventory during the years ended December 31, 2002, 2001 and 2000 accounted
for approximately 48%, 49% and 51%, respectively, of the Company's total
revenues for these periods. For the years ended December 31, 2002, 2001 and
2000 the Company realized gross profit margins on merchandise sales of 42%,
36% and 35%, respectively.
By operating multiple stores, the Company is able to transfer inventory
between stores to best meet consumer demand. The Company has established
the necessary internal financial controls to implement such inter-store
transfers.
Merchandise acquired by the Company through defaulted pawns is carried
in inventory at the amount of the related pawn, exclusive of any accrued
service charges. Management believes that this practice lessens the
likelihood that the Company will incur significant, unexpected inventory
devaluations.
The Company does not provide financing to purchasers of its merchandise
nor does it provide the prospective buyer warranties on the merchandise
purchased. Nevertheless, the Company may, at its discretion, refund
purchases if merchandise is returned because it was damaged or not in good
working order when purchased. The Company permits its customers to purchase
inventory on a "layaway" plan. Should the customer fail to make a required
payment, the item is returned to inventory and previous payments are
forfeited to the Company.
Pawnshop Operations
The typical Company store is a free-standing building or part of a
small retail strip shopping center with adequate, well-lit parking.
Management has established a standard store design intended to distinguish
the Company's stores from the competition. The design consists of a well-
illuminated exterior with a distinctive awning and a layout similar to a
contemporary convenience store or video rental store. The Company's stores
are typically open six to seven days a week from 9:00 a.m. to between 6:00
p.m. and 9:00 p.m.
The Company's computer system permits a store manager or clerk to
recall rapidly the cost of an item in inventory, the date it was purchased
as well as the prior transaction history of a particular customer. It also
facilitates the timely valuation of goods by showing values assigned to
similar goods in the past. The Company has networked its stores to permit
the Company's headquarters to more efficiently monitor each store's
operations, including sales, interest income, pawns written and redeemed,
and changes in inventory.
The Company attempts to attract retail shoppers seeking bargain prices
through the use of seasonal promotions, special discounts for regular
customers, prominent display of impulse purchase items such as jewelry and
tools, tent sales and sidewalk sales, and a layaway purchasing plan. The
Company attempts to attract and retain pawn customers by lending a
competitively large percentage of the estimated sale value of items
presented for pledge and by providing quick financing, renewal and
redemption service in an appealing atmosphere.
As of March 24, 2003, the Company operated pawn stores in the following
markets:
Number of
Locations
---------
District of Columbia.................... 2
Maryland................................ 22
Missouri................................ 3
Oklahoma................................ 4
South Carolina.......................... 8
Texas .................................. 61
Virginia................................ 2
Mexico.................................. 35
---------
Total.............................. 137
=========
Each pawnshop employs a manager, one or two assistant managers, and
between one and eight sales personnel, depending upon the size, sales volume
and location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to
an area supervisor who typically oversees four to seven store managers.
Each supervisor reports to one of three regional vice-presidents.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make pawns that achieve
optimum redemption rates, to be effective sales people and to provide prompt
and courteous service. Therefore, the Company trains its employees through
direct instruction and on-the-job pawn and sales experience. The new
employee is introduced to the business through an orientation and training
program that includes on-the-job training in lending practices, layaways,
merchandise valuation and general administration of store operations.
Certain experienced employees receive training and an introduction to the
fundamentals of management to acquire the skills necessary to advance into
management positions within the organization. Management training typically
involves exposure to income maximization, recruitment, inventory control and
cost efficiency. The Company maintains a performance-based compensation
plan for all store employees, based, among other factors, on sales, gross
profits and special promotional contests.
Check Cashing/Short-term Advance Operations
The Company's check cashing/short-term advance locations are typically
part of a retail strip shopping center with adequate, well-lit parking.
Management has established a standard store design intended to distinguish
the Company's stores from the competition. The design consists of a well-
illuminated exterior with a lighted sign, and distinctive, conservative
window signage. The interiors typically feature an ample lobby, separated
from employee work areas by floor-to-ceiling teller windows. The Company's
stores are typically open six to seven days a week from 9:00 a.m. to between
6:00 p.m. and 9:00 p.m.
Computer operating systems in the Company's check cashing/short-term
advance stores allow a store manager or clerk to recall rapidly customer
check cashing histories, short-term advance histories, and other vital
information. The Company attempts to attract customers primarily through
television advertisements and yellow page advertisements.
As of March 24, 2003, the Company operated check cashing/short-term
advance stores in the following markets:
Number of
Locations
---------
California............................. 15
District of Columbia................... 7
Illinois............................... 10
Oregon................................. 3
Texas.................................. 24
Washington............................. 3
---------
Total ............................... 62
=========
Each check cashing store employs a manager, an assistant manager, and
between three and eight tellers, depending upon the size, sales volume and
location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each store manager
reports to an area manager who typically oversees two to five store
managers. Each supervisor reports to one of two regional vice-presidents.
Competition
The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may
adversely affect the Company's revenues, profitability and ability to
expand.
The Company competes primarily with other pawn store operators and
check cashing/short-term advance operators. Both the pawnshop and check
cashing/short-term advance industries are characterized by a large number of
independent owner-operators, some of whom own and operate multiple
locations. The Company believes that the primary elements of competition in
these businesses are store location, the ability to lend competitive amounts
on pawns and short-term advances, customer service, and management of store
employees. In addition, the Company competes with financial institutions,
such as consumer finance companies, which generally lend on an unsecured as
well as on a secured basis. Other lenders may and do lend money on terms
more favorable than those offered by the Company. Many of these competitors
have greater financial resources than the Company.
In its retail operations, the Company's competitors include numerous
retail and wholesale stores, including jewelry stores, discount retail
stores, consumer electronics stores and other pawnshops. Competitive
factors in the Company's retail operations include the ability to provide
the customer with a variety of merchandise items at attractive prices. Many
retailers have significantly greater financial resources than the Company.
Regulation
General
The Company is subject to extensive regulation in several jurisdictions
in which it operates, including jurisdictions that regulate pawn lending,
short-term advance fees and check cashing fees. The Company is also subject
to federal and state regulation relating to the reporting and recording of
certain currency transactions. There can be no assurance that additional
state or federal statutes or regulations will not be enacted at some future
date which could inhibit the ability of the Company to expand, significantly
decrease the service charges for lending money, or prohibit or more
stringently regulate the sale of certain goods, any of which could cause a
significant adverse effect on the Company's future prospects.
State Regulations
The Company operates in seven states that have licensing and/or fee
regulations on pawns, including Texas, Oklahoma, Maryland, Virginia, South
Carolina, Washington, D.C., and Missouri. The Company is licensed in each
of the states in which a license is currently required for it to operate as
a pawnbroker. The Company's fee structures are at or below the applicable
rate ceilings adopted by each of these states. In addition, the Company is
in compliance with the net asset requirements in states where it is required
to maintain certain levels of liquid assets for each pawn store it operates
in the applicable state.
The Company also operates in states, which have licensing, and/or fee
regulations on check cashing and short-term advances, including California,
Washington, Missouri, South Carolina, Oregon, Illinois and Washington, D.C.
The Company is licensed in each of the states in which a license is
currently required for it to operate as a check casher and/or short-term
lender. In addition, in some jurisdictions, check cashing companies or
money transmission agents are required to meet minimum bonding or capital
requirements and are subject to record-keeping requirements.
In Texas, which does not have favorable short-term lending laws, the
Company has entered into an agreement with County Bank of Rehoboth Beach,
Delaware, a federally insured state of Delaware chartered financial
institution, to act as a loan servicer within the state of Texas for County
Bank. As compensation for the Company acting as County Bank's loan
servicer, the Company is entitled to purchase a participation in the loans
made by County Bank. The Company's ability to continue to maintain its
current relationship with County Bank and to continue to service County Bank
loans within the state of Texas is subject to County Bank's ability to
continue to export its loan product to the state of Texas. There can be no
assurance that County Bank will be able to continue to export its loan
product to the state of Texas and the bank's failure to do so could have a
materially adverse impact on the Company's operations and financial
condition.
Federal Regulations
Under the Bank Secrecy Act regulations of the U.S. Department of the
Treasury (the "Treasury Department"), transactions involving currency in an
amount greater than $10,000 or the purchase of monetary instruments for cash
in amounts from $3,000 to $10,000 must be recorded. In general, every
financial institution, including the Company, must report each deposit,
withdrawal, exchange of currency or other payment or transfer, whether by,
through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any person and result in
either cash in or cash out totaling more than $10,000 during any one
business day.
The Money Laundering Suppression Act of 1994 added a section to the
Bank Secrecy Act requiring the registration of "money services businesses,"
like the Company, that engage in check-cashing, currency exchange, money
transmission, or the issuance or redemption of money orders, traveler's
checks, and similar instruments. The purpose of the registration is to
enable governmental authorities to better enforce laws prohibiting money
laundering and other illegal activities. The regulations require money
services businesses to register with the Treasury Department, by filing a
form to be adopted by the Financial Crimes Enforcement Network of the
Treasury Department ("FinCEN"), by December 31, 2001 and to re-register at
least every two years thereafter. The regulations also require that a money
services business maintain a list of names and addresses of, and other
information about, its agents and that the list be made available to any
requesting law enforcement agency (through FinCEN). That agent list must
first be maintained by January 1, 2002 and must be updated at least
annually.
In March 2000, FinCEN adopted additional regulations, implementing the
Bank Secrecy Act that is also addressed to money services businesses. In
pertinent part, those regulations will require money services businesses
like the Company to report suspicious transactions involving at least $2,000
to FinCEN. The regulations generally describe three classes of reportable
suspicious transactions - one or more related transactions that the money
services business knows, suspects, or has reason to suspect (1) involve
funds derived from illegal activity or are intended to hide or disguise such
funds, (2) are designed to evade the requirements of the Bank Secrecy Act,
or (3) appear to serve no business or lawful purpose.
The Gramm-Leach-Bliley Act and its implementing federal regulations
require the Company to generally protect the confidentiality of its
customers' nonpublic personal information and to disclose to its customers
its privacy policy and practices, including those regarding sharing
the customers' nonpublic personal information with third parties. Such
disclosure must be made to customers at the time the customer relationship
is established, at least annually thereafter, and if there is a change in
the Company's privacy policy.
Other
With respect to firearms sales, the Company must comply with the
regulations promulgated by the Department of the Treasury-Bureau of Alcohol,
Tobacco and Firearms, which requires firearms dealers to maintain a
permanent written record of all firearms received or disposed of. The
Company does not currently sell handguns to the public.
Under some municipal ordinances, pawn stores must provide the police
department having jurisdiction copies of all daily transactions involving
pawns and over-the-counter purchases. These daily transaction reports are
designed to provide the local police with a detailed description of the
goods involved including serial numbers, if any, and the name and address of
the owner obtained from a valid identification card. If these ordinances
are applicable, a copy of the transaction ticket is provided to local law
enforcement agencies for processing by the National Crime Investigative
Computer to determine rightful ownership. Goods held to secure pawns or
goods purchased which are determined to belong to an owner other than the
borrower or seller are subject to recovery by the rightful owners.
In connection with pawnshops operated by the Company, there is a risk
that acquired merchandise may be subject to claims of rightful owners.
Historically, the Company has not found these claims to have a material
adverse effect upon results of operations. The Company does not maintain
insurance to cover the costs of returning merchandise to its rightful
owners.
The Company's pawnshop and short-term advance operations are subject
to, and must comply with, extensive regulation, supervision and licensing
from various federal, state and local statutes, ordinances and regulations.
These statutes prescribed, among other things, service charges and interest
rates that may be charged. These regulatory agencies have broad
discretionary authority. 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 could have an adverse impact on the
Company's operations and financial condition.
Proposed Regulations
Governmental action to prohibit or restrict short-term advances has
been advocated over the past few years by consumer-advocacy groups and by
media reports and stories. The consumer groups and media stories typically
focus on the cost to a consumer for that type of short-term advance, which
is higher than the interest typically charged by credit-card issuers to a
more creditworthy consumer. This difference in credit cost is more
significant if a consumer does not promptly repay the short-term advance,
but renews (or "rolls over") that short-term advance for one or more
additional short-term (e.g., two-week) periods. The consumer groups and
media stories typically characterize short-term advance activities as
abusive toward consumers. During the last few years, legislation has been
introduced in the United States Congress and in certain state legislatures,
and regulatory authorities have proposed or publicly addressed the
possibility of proposing regulations, that would prohibit or restrict short-
term advances. So far as the Company is aware, no such federal legislation
or federal regulatory proposal has made any significant progress in the
legislative or regulatory process.
The U.S. Office of Comptroller of the Currency has recently initiated
enforcement actions to restrict the ability of nationally chartered banks to
establish or maintain relationships with loan servicers in order to make
out-of-state short-term advance loans. The Company does not currently
maintain nor intend in the future to establish loan-servicing relationships
with nationally chartered banks. The Federal Deposit Insurance Corporation,
("FDIC"), which regulates the ability of state chartered banks to enter into
relationships with loan servicers, has recently proposed draft examiner
guidelines under which such arrangements are permitted. Texas is the only
state in which the Company functions as loan servicer through a relationship
with a state chartered bank, County Bank of Rehoboth Beach, Delaware, that
is subject to the draft FDIC examiner guidelines. The effect of the draft
guidelines on the Company's ability to offer short-term advances in Texas
under its current loan servicing arrangement with County Bank is unknown at
this time. The Company is not aware of any other federal regulatory
initiatives.
Legislation and regulatory action at the state level that affects
consumer lending has recently become effective in a few states and may be
taken in other states. The Company intends to continue, with others in the
short-term advance industry, to oppose legislative or regulatory action that
would prohibit or restrict short-term advances. But if legislative or
regulatory action with that effect were taken on the federal level or in
states such as Texas, in which the Company has a significant number of
stores, that action could have a material adverse effect on the Company's
short-term advance-related activities and revenues. 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 and financial
condition.
Employees
The Company had approximately 1,257 employees as of March 24, 2003,
including approximately 90 persons employed in executive, administrative and
accounting functions. None of the Company's employees are covered by
collective bargaining agreements. The Company considers its employee
relations to be satisfactory.
Insurance
The Company maintains fire, casualty, theft and public liability
insurance for each of its pawn stores and check cashing/short-term advance
locations in amounts management believes to be adequate. The Company
maintains workers' compensation insurance in Maryland, Missouri, California,
Virginia, Washington, Oregon, South Carolina, Illinois, Washington, D.C.,
Oklahoma, as well as excess employer's indemnification insurance in Texas
and equivalent coverage in Mexico. The Company is a non-subscriber under
the Texas Workers' Compensation Act.
Item 2. Properties
-------------------
The Company currently owns the real estate and buildings for three of
its pawn stores and leases 213 pawn stores and check cashing/short-term
advance locations. Leased facilities are generally leased for a term of two
to eight years with one or more options to renew. The Company's existing
leases expire on dates ranging between 2003 and 2016. All current leases
provide for specified periodic rental payments ranging from approximately
$800 to $9,100 per month. Most leases require the Company to maintain the
property and pay the cost of insurance and property taxes. The Company
believes that termination of any particular lease would not have a material
adverse effect on the Company's operations. The Company's strategy is
generally to lease, rather than purchase, space for its pawnshop and check
cashing locations unless the Company finds what it believes is a superior
location at an attractive price. The Company believes that the facilities
currently owned and leased by it as pawn stores and check cashing/short-term
advance locations are suitable for such purpose. The Company considers its
equipment, furniture and fixtures to be in good condition.
The Company currently leases approximately 14,000 square feet in
Arlington, Texas for its executive offices. The lease, which expires March
31, 2004, currently provides for monthly rental payments of approximately
$24,000.
Item 3. Legal Proceedings
--------------------------
In May 2000, three plaintiffs filed a complaint against Famous Pawn,
Inc., a wholly owned subsidiary of the Company, in the United States
District Court for the District of Maryland (Northern Division). The
allegations consists of five counts: (1) violation of the federal Truth in
Lending Act; (2) violation of the federal Racketeer Influenced and Corrupt
Organizations Act; (3) violation of the Maryland Interest and Usury Statute;
(4) violation of the Maryland Consumer Loan Law; and (5) violation of the
Maryland Consumer Protection Act. In February 2003, the Company and
plaintiffs reached a tentative settlement of the complaint, subject to final
approval by the District Court. Under the terms of the proposed settlement
as filed with the District Court, the plaintiffs agreed to dismiss all
allegations and monetary claims made against the Company. The Company, in
order to expedite the conclusion of this matter and avoid the expenses
associated with a trial, has agreed to pay the plaintiffs approximately
$1,100,000, including the plaintiffs' legal fees, and forgive all the
outstanding debt of such customers in the amount of approximately $800,000.
The Company had previously reserved and expensed in prior years an amount
equal to this settlement, and accordingly, the proposed settlement will have
no impact on the Company's operating results. If approved, the proposed
settlement is expected to be completed and funded later in 2003.
Additionally, the Company is from time to time a defendant (actual or
threatened) in certain other lawsuits and arbitration claims encountered in
the ordinary course of its business, the resolution of which, in the opinion
of management, should not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2002.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "FCFS". The following table sets forth the quarterly high
and low closing sales prices per share for the Common Stock, as reported by
the Nasdaq National Market.
Common Stock
Price Range
---------------------
High Low
------- -------
Year Ended December 31, 2001:
Quarter Ended March 31, 2001.......... $ 5.06 $ 2.19
Quarter Ended June 30, 2001........... 7.46 4.94
Quarter Ended September 30, 2001...... 9.05 6.43
Quarter Ended December 31, 2001....... 8.22 6.16
Year Ended December 31, 2002:
Quarter Ended March 31, 2002.......... $ 8.30 $ 7.10
Quarter Ended June 30, 2002........... 10.60 8.00
Quarter Ended September 30, 2002...... 9.57 6.99
Quarter Ended December 31, 2002....... 11.00 7.85
On March 24, 2003, the closing sales price for the Common Stock as
reported by the Nasdaq National Market was $9.37 per share. On March 24,
2003, there were approximately 69 stockholders of record of the Common
Stock.
No cash dividends have been paid by the Company on its Common Stock,
and the Company does not currently intend to pay cash dividends on its
Common Stock. The current policy of the Company's Board of Directors is to
retain earnings, if any, to provide funds for operation and expansion of the
Company's business. Such policy will be reviewed by the Board of Directors
of the Company from time to time in light of, among other things, the
Company's earnings and financial position and limitations imposed by its
revolving line of credit with its syndicate of commercial lenders (the
"Credit Facility"). The Company's Credit Facility contains provisions,
which will allow the Company to repurchase stock and/or pay cash dividends
within certain parameters.
Item 6. Selected Financial Data
--------------------------------
The information below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 and the Company's Consolidated Financial Statements and
related notes thereto required by Item 8.
Five Months Year
Ended Ended
Year Ended December 31, December 31, July 31,
-------------------------------------------- --------------------
2002 2001 2000 1999 1998 1998
-------- -------- -------- -------- -------- --------
(in thousands, except per share amounts and certain operating data)
Income Statement Data:
Revenues:
Merchandise sales $ 56,916 $ 53,893 $ 53,177 $ 50,071 $ 19,154 $ 37,282
Service charges 58,196 53,028 46,597 40,630 12,434 20,332
Check cashing fees 2,659 2,264 2,216 2,184 754 255
Other 1,022 1,242 1,737 1,158 282 346
-------- -------- -------- -------- -------- --------
118,793 110,427 103,727 94,043 32,624 58,215
-------- -------- -------- -------- -------- --------
Cost of goods sold and expenses:
Cost of goods sold 32,890 34,619 34,366 35,157 12,750 25,101
Operating expenses 54,090 48,661 44,836 37,199 11,567 19,317
Interest expense 294 1,395 2,859 2,602 1,122 2,031
Depreciation 2,548 2,283 2,612 1,527 472 922
Amortization - 1,530 1,694 1,475 553 779
Administrative expenses 11,580 9,420 8,217 6,739 2,195 4,124
-------- -------- -------- -------- -------- --------
101,402 97,908 94,584 84,699 28,659 52,274
-------- -------- -------- -------- -------- --------
Income before income taxes 17,391 12,519 9,143 9,344 3,965 5,941
Provision for income taxes 6,451 4,507 3,476 3,097 1,526 2,219
-------- -------- -------- -------- -------- --------
Income from continuing operations 10,940 8,012 5,667 6,247 2,439 3,722
-------- -------- -------- -------- -------- --------
Discontinued operations
Income (loss) from discontinued
operations, net of taxes - 33 (765) 231 130 76
Loss on sale of subsidiary,
net of tax - (175) - - - -
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued
operations - (142) (765) 231 130 76
-------- -------- -------- -------- -------- --------
Cumulative effect of change
in accounting principle - - (2,287) - - -
-------- -------- -------- -------- -------- --------
Net income $ 10,940 $ 7,870 $ 2,615 $ 6,478 $ 2,569 $ 3,798
======== ======== ======== ======== ======== ========
Net income per share:
Basic
Income from continuing
operations $ 1.24 $ 0.92 $ 0.64 $ 0.72 $ 0.31 $ 0.73
Income (loss) from
discontinued operations - (0.02) (0.08) 0.03 0.01 0.01
Cumulative effect of change
in accounting principle - - (0.26) - - -
-------- -------- -------- -------- -------- --------
Net income $ 1.24 $ 0.90 $ 0.30 $ 0.75 $ 0.32 $ 0.74
======== ======== ======== ======== ======== ========
Diluted
Income from continuing
operations $ 1.14 $ 0.87 $ 0.63 $ 0.67 $ 0.28 $ 0.58
Income (loss) from
discontinued operations - (0.02) (0.08) 0.03 0.01 0.01
Cumulative effect of change
in accounting principle - - (0.26) - - -
-------- -------- -------- -------- -------- --------
Net income $ 1.14 $ 0.85 $ 0.29 $ 0.70 $ 0.29 $ 0.59
======== ======== ======== ======== ======== ========
Unaudited pro forma amounts
assuming retroactive
application of change in
accounting principle:
Revenues from continuing
operations $ 118,793 $ 110,427 $ 103,727 $ 89,320 $ 30,897 $ 54,832
Net income from continuing
operations 10,940 8,012 5,667 5,619 2,137 3,142
Basic earnings per share
from continuing operations 1.24 0.92 0.64 0.65 0.27 0.62
Diluted earning per share
from continuing operations 1.14 0.87 0.63 0.60 0.25 0.50
Operating Data:
Locations in operation:
Beginning of the period 158 148 147 133 97 57
Acquisitions - 7 2 4 34 38
Opened 38 11 2 10 2 2
Consolidated/closed (6) (8) (3) - - -
-------- -------- -------- -------- -------- --------
End of the period 190 158 148 147 133 97
======== ======== ======== ======== ======== ========
Receivables $ 27,314 $ 23,556 $ 22,043 $ 23,568 $ 20,392 $ 17,054
Average receivables balance
per store $ 144 $ 149 $ 149 $ 160 $ 153 $ 176
Average inventory per
pawn store $ 104 $ 113 $ 148 $ 183 $ 164 $ 154
Annualized inventory turnover 2.7x 2.3x 1.8x 1.8x 2.0x 2.2x
Gross profit percentage on
merchandise sales 42.2% 35.8% 35.4% 29.8% 33.4% 32.7%
Balance Sheet Data:
Working capital $ 47,187 $ 8,540 $ 41,835 $ 54,333 $ 39,421 $ 31,987
Total assets 130,999 122,806 119,118 128,847 113,325 91,128
Long-term liabilities 33,525 5,277 44,833 55,560 42,699 34,533
Total liabilities 44,479 48,703 53,464 62,324 52,617 39,611
Stockholders' equity 86,520 74,103 65,654 66,523 60,708 51,517
Item 7. Management's Discussion and Analysis of Financial Condition and
-------------------------------------------------------------------------
Results of Operations
---------------------
General
The Company's pawn store revenues are derived primarily from service
charges on pawns, service charges from short-term, unsecured advances
("short-term advances") and the sale of unredeemed goods, or "merchandise
sales." Pawn advances are made for a 30-day term with an automatic
extension of 60 days in South Carolina and Missouri, 30 days in Texas and
Oklahoma, and 15 days in Maryland, Virginia and Mexico. Pawn advances made
in Washington, D.C. are made for a 120-day term with no automatic extension.
All pawn advances are collateralized by tangible personal property placed in
the custody of the Company. The annualized service charge rates on pawns
are set by state laws and range between 12% and 240% in Texas and 39% and
300% in Oklahoma, depending on the size of the pawn. Service charge rates
are 144% to 240% on an annualized basis in Maryland, with a $6 monthly
minimum charge. In Washington, D.C., pawns up to $40 bear a flat $2 charge
per month, while pawns over $40 bear a 48% to 60% annualized rate. Missouri
pawns bear service and storage charges ranging from 180% to 240% per year,
and in Virginia rates range from 120% to 144% annually. Annualized rates in
South Carolina range from 100% to 300%. Service charge rates in Mexico are
240% annually. The Company accrues pawn service charge revenue on a
constant yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. If a pawn is not repaid prior to the expiration of the
automatic extension period, if applicable, the property is forfeited to the
Company and transferred to inventory at a value equal to the principal
amount of the loan, exclusive of accrued interest.
Effective January 1, 2000, the Company changed its method of income
recognition on pawns. The Company now accrues pawn service charge revenue
on a constant-yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. For pawns not repaid, the cost of the forfeited collateral
(inventory) is the cash amount originally pawned. Prior to 2000, the
Company recognized service charge income on a constant-yield basis over the
initial pawn period for all pawns written. Service charges applicable to the
extension periods or additional pawn periods were not recognized as income
until the pawn was repaid or renewed. If the pawn was not repaid, the
carrying value of the forfeited collateral (inventory) was stated at the
lower of cost (the principal amount pawned plus accrued service charges) or
market. The Company believes the accounting change provides a more timely
matching of revenues and expenses with which to measure the results of
operations. The cumulative effect of the accounting method change on all
periods since inception through December 31, 1999 is $2,287,000 (after an
income tax benefit of $1,373,000) and is included as a one-time reduction of
net income for the year ended December 31, 2000.
The Company's check cashing and short-term advance revenues are derived
primarily from check cashing fees, fees on short-term advances, and fees
from the sale of money orders and wire transfers. Short-term advances carry
a 13.9% to 40% service charge, which vary by state and life of the advance.
The Company recognizes service charge income on short-term advances on a
constant-yield basis over the life of the advance, which is generally 30
days or less. The net defaults on short-term advances and changes in the
bad debt valuation reserve are charged to bad debt expense.
Although the Company has had significant increases in revenues due
primarily to new store openings, the Company has also incurred increases in
operating expenses attributable to the additional stores and increases in
administrative expenses attributable to building a management team and the
support personnel required by the Company's growth. Operating expenses
consist of all items directly related to the operation of the Company's
stores, including salaries and related payroll costs, rent, utilities,
equipment depreciation, advertising, property taxes, licenses, supplies,
security and bad debt and collection expenses for both check cashing and
short-term advances. Administrative expenses consist of items relating to
the operation of the corporate office, including the salaries of corporate
officers, area supervisors and other management, accounting and
administrative costs, liability and casualty insurance, outside legal and
accounting fees and stockholder-related expenses.
Year Ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Income statement items as a
percent of total revenues:
Revenues:
Merchandise sales .......... 47.9% 48.8% 51.3%
Service charges ............ 49.0 48.0 44.9
Check cashing fees ......... 2.1 2.1 2.1
Other ...................... 1.0 1.1 1.7
Expenses:
Operating expenses ......... 45.5 44.1 43.2
Interest expense ........... 0.2 1.2 2.8
Depreciation ............... 2.1 2.0 2.5
Amortization ............... - 1.4 1.6
Administrative expenses .... 9.7 8.5 7.9
Gross profit as a percent of
merchandise sales........... 42.2 35.8 35.4
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and related revenues and expenses and
disclosure of gain and loss contingencies at the date of the financial
statements. Such estimates and assumptions are subject to a number of risks
and uncertainties, which may cause actual results to differ materially from
the Company's estimates. The significant accounting policies which we
believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Principles of consolidation - The consolidated financial statements of
the Company include the accounts of its wholly owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated.
In August 1999, the Company entered into a joint venture to form Cash & Go,
Ltd., a company that owns financial services kiosks inside convenience
stores. The Company presently has a 50% ownership interest in the
partnership, which is accounted for by the equity method of accounting as
neither partner has control. The Company records its 50% share of the
partnership's earnings or losses in its consolidated financial statements.
The Company funds substantially all of the working capital requirements of
the joint venture in the form of a loan to the joint venture. This loan is
callable at any time by the Company and bears interest at the prime rate
plus 5%.
Receivables and income recognition - Receivables on the balance sheet
consist of pawn and short-term advances. Pawns are made on the pledge of
tangible personal property. The Company accrues pawn service charge revenue
on a constant-yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. If the pawn is not repaid, the principal amount pawned becomes
the carrying value of the forfeited collateral ("inventory"), which is
recovered through sale. Short-term advances are made for thirty days or
less. The Company recognizes the service charges associated with short-term
advances on a constant-yield basis over the term of the short-term advance.
Bad Debts - An allowance is provided for losses on active short-term
advances and service charges receivable, based upon expected default rates,
net of estimated future recoveries of previously defaulted short-term
advances and service charges receivable. The Company considers short-term
advances to be in default if they are not repaid on the due date, and writes
off the principal amount and service charges receivable as of the default
date, leaving only active advances in the reported balance. Net defaults
and changes in the short-term advance allowance are charged to bad debt
expense, which is included in operating expenses.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal on the
unredeemed goods. The cost of inventories is determined on the specific
identification method. Inventories are stated at the lower of cost or
market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Long-lived assets - Long-lived assets (i.e., property, plant and
equipment and intangible assets) 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. Generally, the
amount of the impairment loss is measured as the difference between the net
book value of the assets and the estimated fair value of the related assets.
During the fourth quarter of 2000 the Company recorded a non-cash pretax
charge in the amount of $765,000 to write-off fixed assets and goodwill
relating to approximately nine stores. Management does not believe any
assets have been additionally impaired at December 31, 2002.
Results of Operations
Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended
December 31, 2001
Total revenues increased 8% to $118,793,000 for the fiscal year ended
December 31, 2002 ("Fiscal 2002") as compared to $110,427,000 for the fiscal
year ended December 31, 2001 ("Fiscal 2001"). The change resulted from an
increase in revenues of $7,266,000 generated by the 56 pawn and check
cashing/short-term advance stores which were opened or acquired during
Fiscal 2001 and Fiscal 2002, an increase of $4,576,000 at the 134 stores
which were in operation during all of Fiscal 2001 and Fiscal 2002, net of a
decrease in revenues of $3,476,000 from the 14 stores closed or consolidated
during Fiscal 2001 and Fiscal 2002. Of the $8,366,000 increase in total
revenues, 36%, or $3,023,000, was attributable to increased merchandise
sales, 62%, or $5,168,000 was attributable to a net increase in service
charges on pawn and short-term advances, 5% or $395,000 was attributable to
increased check cashing fees, and the remaining decrease of $220,000, or 3%,
was attributable to a decrease in other income. Service charges from short-
term advances increased from $33,314,000 in Fiscal 2001 to $36,473,000 in
Fiscal 2002, while service charges from pawns increased from $19,714,000 in
Fiscal 2001 to $21,723,000 in Fiscal 2002. Of the $5,168,000 net increase
in service charges, an increase of $3,159,000 was attributable to short-term
advance service charges, while $2,009,000 was attributable to an increase in
pawn service charges. As a percentage of total revenues, merchandise sales
decreased from 49% to 48% during Fiscal 2002 as compared to Fiscal 2001,
service charges increased from 48% to 49%, check-cashing fees and other
income remained unchanged at 3% during Fiscal 2002 and Fiscal 2001.
The aggregate receivables balance increased 16% from $23,556,000 at
December 31, 2001 to $27,314,000 at December 31, 2002. Of the $3,758,000
increase, an increase of $1,798,000 was attributable to growth at the 38
pawn and check cashing/short-term advance stores opened or acquired since
December 31, 2001, and an increase of $1,960,000 was attributable to the 152
pawn stores and check cashing/short-term advance stores, which were in
operation as of December 31, 2002 and 2001. The aggregate receivables
balance at December 31, 2002 was comprised of $16,624,000 of pawn loan
receivables and $10,690,000 of short-term advance receivables, compared to
$13,849,000 of pawn loan receivables and $9,707,000 of short-term advance
receivables at December 31, 2001. The annualized yield on the average pawn
loan receivables balance was 143% during Fiscal 2002 compared to 141% during
Fiscal 2001. The annualized yield, net of bad debt expense, on the average
short-term advance receivables balance was 273% during Fiscal 2002 compared
to 280% during Fiscal 2001.
Gross profit as a percentage of merchandise sales increased from 36%
during Fiscal 2001 to 42% during Fiscal 2002. Sales of scrap jewelry had a
negative effect on gross profit margins during Fiscal 2001 and Fiscal 2002.
Factoring out the negative impact of scrap jewelry sales, margins would have
been 41% and 44% during Fiscal 2001 and Fiscal 2002, respectively.
Operating expenses increased 11% to $54,090,000 during Fiscal 2002
compared to $48,661,000 during Fiscal 2001, primarily as a result of the net
addition of 32 pawn stores and check cashing/short-term advance stores in
Fiscal 2002, which is a 20% increase in store count. The Company's net bad
debt expense relating to short-term advances decreased from $8,684,000 in
Fiscal 2001 to $8,669,000 in Fiscal 2002 as a result of increased focus on
collection efforts. Administrative expenses increased 23% to $11,580,000
during Fiscal 2002 compared to $9,420,000 during Fiscal 2001 due primarily
to additional employee costs necessary to support the growth in store
counts. Net interest expense decreased to $294,000 in Fiscal 2002 compared
to $1,395,000 in Fiscal 2001 as a result of lower average outstanding debt
balances and lower average interest rates during Fiscal 2002, which were
offset by decreased interest income, which was $664,000 in Fiscal 2002
compared to $928,000 in Fiscal 2001. Amortization expense was not recorded
in Fiscal 2002 due to the January 1, 2002 implementation of a new accounting
pronouncement, SFAS 142, which eliminated the amortization of goodwill.
Amortization expense in Fiscal 2001 was $1,530,000.
For Fiscal 2002 and 2001, the Company's effective federal income tax
rates of 37% and 36%, respectively, differed from the statutory tax rate of
approximately 34% primarily as a result of state income taxes, utilization
of tax net operating loss carry-forwards from acquisitions, and amortization
of non-deductible intangible assets.
Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended
December 31, 2000
Total revenues increased 6% to $110,427,000 for Fiscal 2001 as compared
to $103,727,000 for Fiscal 2000. The change resulted from an increase in
revenues of $2,402,000 generated by the 22 pawn and check cashing/short-term
advance stores which were opened or acquired during Fiscal 2000 and Fiscal
2001, an increase of $5,480,000 at the 136 stores which were in operation
during all of Fiscal 2000 and Fiscal 2001, net of a decrease in revenues of
$1,182,000 from the 11 stores closed or consolidated during Fiscal 2000 and
2001. Of the $6,700,000 increase in total revenues, 11%, or $716,000, was
attributable to increased merchandise sales, 96%, or $6,431,000 was
attributable to a net increase in service charges on pawn and short-term
advances, $48,000 was attributable to increased check cashing fees, and the
remaining decrease of $495,000, or 7%, was attributable to a decrease in
other income. Service charges from short-term advances increased from
$26,012,000 in Fiscal 2000 to $33,314,000 in fiscal 2001, while service
charges from pawns decreased from $20,585,000 in Fiscal 2000 to $19,714,000
in Fiscal 2001. Of the $6,431,000 net increase in service charges, an
increase of $7,302,000 was attributable to short-term advances service
charges, while $871,000 was attributable to a decrease in pawn service
charges. As a percentage of total revenues, merchandise sales decreased
from 51% to 49% during Fiscal 2001 as compared to Fiscal 2000, service
charges increased from 45% to 48%, check cashing fees and other income
decreased from 4% to 3% during Fiscal 2001 as compared to Fiscal 2000.
The aggregate receivables balance increased 7% from $22,043,000 at
December 31, 2000 to $23,556,000 at December 31, 2001. Of the $1,513,000
increase, an increase of $957,000 was attributable to growth at the 18 pawn
and check cashing/short-term advance stores opened or acquired since
December 31, 2000, and an increase of $556,000 was attributable to the 140
pawn stores and check cashing/short-term advance stores, which were in
operation as of December 31, 2001 and 2000. The aggregate receivables
balance at December 31, 2001 was comprised of $13,849,000 of pawn loan
receivables and $9,707,000 of short-term advance receivables, compared to
$14,142,000 of pawn loan receivables and $7,901,000 of short-term advance
receivables at December 31, 2000. The annualized yield on the average pawn
loan receivables balance was 141% during Fiscal 2001 compared to 127% during
Fiscal 2000. The annualized yield, net of bad debt expense, on the average
short-term advance receivables balance was 280% during Fiscal 2001 and 2000.
Gross profit as a percentage of merchandise sales increased from 35%
during Fiscal 2000 to 36% during Fiscal 2001. Sales of scrap jewelry had a
negative effect on gross profit margins during Fiscal 2000 and Fiscal 2001.
Factoring out the negative impact of scrap jewelry sales, margins would have
been 38% and 41% during Fiscal 2000 and Fiscal 2001, respectively.
Operating expenses increased 9% to $48,661,000 during Fiscal 2001
compared to $44,836,000 during Fiscal 2000, primarily as a result of the
addition of 18 pawn stores and check cashing/short-term advance stores in
Fiscal 2001, and increases in net bad debt expense in 2001 due to increases
in the volume of short-term advances in the pawnshops. Of the $3,825,000
increase in operating expenses, an increase of $2,338,000 was attributable
to increased net bad debt on short-term advances. The Company's net bad
debt expense relating to short-term advances increased from $6,346,000 in
Fiscal 2000 to $8,684,000 in Fiscal 2001. During the fourth quarter of 2001
the Company sold its check cashing software business unit. The revenues,
expenses, and costs have been segregated in the accompanying operating
results and reported as a "Loss From Discontinued Operations", which
resulted in $0.02 per share charge in the fourth quarter of 2001. The
Company made the strategic decision to exit the third party check cashing
software business to utilize its staff and resources in its core lending
business, which should further enhance future profitability. The software
and staff continue to support and enhance other aspects of the Company's
operations. Administrative expenses increased 15% to $9,420,000 during
Fiscal 2001 compared to $8,217,000 during Fiscal 2000 due primarily to the
addition of personnel support growth in store counts. Interest expense
decreased to $1,395,000 in Fiscal 2001 compared to $2,859,000 in Fiscal 2000
as a result of lower average outstanding debt balances, lower average
interest rates during Fiscal 2001 and increased interest income, which was
$928,000 in Fiscal 2001 compared to $874,000 in Fiscal 2000.
For Fiscal 2001 and 2000, the Company's effective federal income tax
rates of 36% and 38%, respectively, differed from the statutory tax rate of
approximately 34% primarily as a result of state income taxes, utilization
of tax net operating loss carry-forwards from acquisitions, and amortization
of non-deductible intangible assets.
Liquidity and Capital Resources
The Company's operations and growth have been financed with funds
generated from operations and bank borrowings.
The Company maintains a long-term line of credit with a group of
commercial lenders (the "Credit Facility"). The Credit Facility provides a
$30,000,000 long-term line of credit that matures on August 9, 2005 and
bears interest at the prevailing LIBOR rate (which was approximately 1.4% at
December 31, 2002) plus an applicable margin based on a defined leverage
ratio for the Company. Based on the Company's current leverage ratio, the
margin is 1.375%, the most favorable rate provided under the terms of the
agreement. Amounts available under the Credit Facility are limited to 300%
of the Company's earnings before income taxes, interest, depreciation and
amortization for the trailing twelve months. Under the terms of the Credit
Facility, the Company is required to maintain certain financial ratios and
comply with certain technical covenants. The Company was in compliance with
the requirements and covenants of the Credit Facility as of December 31,
2002 and March 24, 2003. The Company is required to pay an annual
commitment fee of 1/5 of 1% on the average daily-unused portion of
the Credit Facility commitment. The Company's Credit Facility contains
provisions, which will allow the Company to repurchase stock and/or pay cash
dividends within certain parameters. Substantially all of the unencumbered
assets of the Company have been pledged as collateral against indebtedness
under the Credit Facility.
As of December 31, 2002, the Company's primary sources of liquidity
were $12,735,000 in cash and cash equivalents, $3,174,000 in service charges
receivable, $27,314,000 in receivables, $13,648,000 in inventories and
$2,000,000 of available and unused funds under the Company's Credit
Facility. The Company had working capital as of December 31, 2002 of
$47,187,000 and liabilities to equity ratio of 0.5 to 1.
The Company utilized positive cash flows from operations in 2002 to
fund investing and financing activities primarily related to new stores and
to reduce debt. Net cash provided by operating activities of the Company
during the year ended December 31, 2002 was $13,797,000, consisting
primarily of income from continuing operations before non-cash depreciation
of $10,940,000, less an increase in accrued service charges receivable and
inventory of $357,000 and $967,000, respectively, in addition to a decrease
in prepaid expenses and an increase in deferred taxes of $41,000 and
$1,579,000, respectively. Net cash used for investing activities during the
year ended December 31, 2002 was $8,300,000, which was primarily comprised
of cash used in increasing receivables of $3,758,000, cash paid for fixed
asset additions of $4,264,000, and net funding of the Cash & Go, Ltd. joint
venture of $278,000. The opening of 38 new stores in 2002 contributed
significantly to the increase in receivables and the volume of fixed asset
additions. Net cash used by financing activities was $4,014,000 during the
year ended December 31, 2002, which primarily consisted of a net decrease in
the Company's debt of $5,491,000 net of a decrease in notes receivable from
officers of $823,000 and proceeds, including tax benefit, from exercises of
stock options and warrants of $654,000.
The Company funds substantially all of the working capital needs of
Cash & Go, Ltd. The Company's net receivable from the partnership was
$7,351,000 at December 31, 2002.
The profitability and liquidity of the Company is affected by the
amount of pawn loans outstanding, which is controlled in part by the
Company's lending decisions. The Company is able to influence the frequency
of pawn redemption by increasing or decreasing the amount pawned in relation
to the resale value of the pledged property. Tighter credit decisions
generally result in smaller pawns in relation to the estimated resale value
of the pledged property and can thereby decrease the Company's aggregate
pawn balance and, consequently, decrease pawn service charges.
Additionally, small advances in relation to the pledged property's estimated
resale value tend to increase pawn redemptions and improve the Company's
liquidity. Conversely, providing larger pawns in relation to the estimated
resale value of the pledged property can result in an increase in the
Company's pawn service charge income. Also, larger average pawn balances
can result in an increase in pawn forfeitures, which increases the quantity
of goods on hand and, unless the Company increases inventory turnover,
reduces the Company's liquidity. The Company's renewal policy allows
customers to renew pawns by repaying all accrued interest on such pawns,
effectively creating a new pawn transaction.
The amount of short-term advances outstanding and related potential bad
debt expense also affect the profitability and liquidity of the Company. An
allowance for losses is provided on active short-term advances and service
charges receivable, based upon expected default rates, net of estimated
future recoveries of previously defaulted short-term advances and service
charges receivable. The Company considers short-term advances to be in
default if they are not repaid on the due date, and writes off the principal
amount and service charges receivable as of the default date, leaving only
active receivables in the reported balances. Net defaults and changes in
the short-term advance allowance are charged to bad debt expense, which is
included in operating expenses.
In addition to these factors, merchandise sales and the pace of store
expansions affect the Company's liquidity. Management believes that the
Credit Facility and cash generated from operations will be sufficient to
accommodate the Company's current operations for fiscal 2003. The Company
has no significant capital commitments. The Company currently has no
written commitments for additional borrowings or future acquisitions;
however, the Company intends to continue to grow and may seek additional
capital to facilitate expansion. The Company will evaluate acquisitions, if
any, based upon opportunities, acceptable financing, purchase price,
strategic fit and qualified management personnel.
The Company currently intends to continue to engage in a plan of
expansion primarily through new store openings. During fiscal 2003, the
Company currently plans to open between 40 and 50 new stores, comprised of
both check cashing/short-term advance locations, primarily located in
Texas, and pawnshops, primarily in Mexico. The majority of this expansion
will be funded through the Company's existing Credit Facility. Management
believes that the Company has the ability to obtain an increase to the
Credit Facility if necessary to complete funding of the expansion plans.
While the Company continually looks for, and is presented with potential
acquisition candidates, the Company has no definitive plans or commitments
for further acquisitions. If the Company encounters an attractive
opportunity to acquire or open a new store in the near future, the Company
will seek additional financing, the terms of which will be negotiated on a
case-by-case basis. Between January 1, 2003 and March 24, 2003, the Company
opened 3 new check cashing/short-term advance locations and 5 pawnshops.
Contractual Commitments. A schedule of contractual commitments at December
31, 2002 is as follows:
Operating Long-term
Fiscal Leases Debt
------ ------ ------
2003 ................ $ 7,695 $ 901
2004 ................ 6,555 602
2005 ................ 5,381 28,000
2006 ................ 4,241 -
2007 ................ 3,076 -
Thereafter .......... 5,262 -
------ ------
$32,210 $29,503
====== ======
Related Parties
In June 1998, in conjunction with the purchase of 11 check cashing
stores, the Company entered into lease agreements relating to one store
location and certain office space located in California. These properties
were partially owned through September 2000 by Mr. Blake Miraglia, an
employee of the Company at that time. Total lease payments made pursuant to
these leases were $130,000 during the fiscal year ended December 31, 2000,
which approximated market rates. In addition, the Company has an
outstanding, unsecured note payable due July 5, 2003, bearing interest at
7%, to Mr. Miraglia, which amounted to $320,000 and $800,000 as of December
31, 2002 and 2001, respectively, including accrued interest. Mr. Miraglia
terminated his employment with the Company in October 2002.
As of December 31, 2002 and 2001, the Company had notes receivable
outstanding from certain of its officers totaling $4,228,000 and $5,051,000,
respectively. These notes are secured by a total of 554,000 shares of
common stock of the Company owned by these individuals, term life insurance
policies, and bear interest at three percent. These notes are due upon the
sale of the underlying shares of common stock. During the fiscal years
ended December 31, 2002 and 2001, the outstanding notes receivable from
officers had repayments of $823,000 and $775,000, respectively.
Inflation
The Company does not believe that inflation has had a material effect
on the amount of pawns and short-term advances made or unredeemed goods sold
by the Company or its results of operation.
Seasonality
The Company's retail business is seasonal in nature with its highest
volume of sales of unredeemed goods occurring during the first and fourth
calendar quarters of each year. The Company's lending and short-term
advance activities are also seasonal, with the highest volume of lending
activity occurring during the third and fourth calendar quarters of each
year.
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, which is
effective as of January 1, 2002. The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS No. 142, goodwill is no longer
amortized, but reviewed for impairment annually, or more frequently if
certain indicators arise. The Company has completed the transitional fair
value impairment test and determined that no impairment of recorded goodwill
existed at January 1, 2002. The Company has also determined that no
impairment existed at December 31, 2002.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 143,
Accounting for Asset Retirement Obligations, and released SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets in October
2001. SFAS No. 143 addresses reporting for obligations associated with the
retirement of tangible long-lived assets and the related asset retirement
costs. SFAS No. 143 is effective for fiscal years beginning after June 15,
2002 with earlier application permitted. SFAS No. 144 supercedes earlier
guidance with respect to such accounting and is effective for years
beginning after December 15, 2001. The adoption of SFAS No. 143 will not
have a material effect on the Company's financial statements. The adoption
of SFAS No. 144 did not have a material effect on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, and provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of
SFAS No. 123 to require more prominent and frequent disclosures in financial
statements about the effects of stock based compensation. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective for
financial statements issued for fiscal years ending after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December
15, 2002. See notes 2 and 12 of the Company's Notes to Consolidated
Financial Statements for the required disclosures about the effects of
stock-based compensation on reported net income.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No.
51. FIN 46 addresses consolidation by business enterprises of variable
interest entities (formerly special purpose entities). In general, a
variable interest entity is a corporation, partnership, trust or any other
legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. The objective of FIN 46 is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved
with variable interest entities. FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. The Company is evaluating the applicability of FIN 46 to its
existing investment in Cash & Go, Ltd., a Texas limited partnership. A
description of Cash & Go, Ltd.'s activities, financial results and the
Company's exposures to potential loss from involvement in the partnership
are provided in Note 2.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates, foreign exchange rates, and gold prices. The
Company does not engage in speculative or leveraged transactions, nor does
it hold or issue financial instruments for trading purposes.
Interest Rate Risk
The Company is exposed to market risk in the form of interest rate
risk. At December 31, 2002, the Company had $28 million outstanding under
its revolving line of credit. This revolving line is priced with a variable
rate based on LIBOR or a base rate, plus an applicable margin based on a
defined leverage ratio for the Company. See "Note 8 - Revolving Credit
Facility". Based on the average outstanding indebtedness during the year
ended December 31, 2002, a 10% increase in interest rates would have
increased the Company's interest expense by approximately $2,692,000 for the
year ended December 31, 2002.
The Company's cash and cash equivalents are invested in money market
accounts. Accordingly, the Company is subject to changes in market interest
rates. However, the Company does not believe a change in these rates would
have a material adverse effect on the Company's operating results, financial
condition, and cash flows.
Foreign Currency Risk
The Company's pawn loans in Mexico are contracted and valued in US
dollars and therefore the Company bears limited exchange risk from its
operations in Mexico. The Company maintained certain peso denominated bank
balances at December 31, 2002, which converted to a US dollar equivalent of
$382,000.
Gold Price Risk
A significant and sustained decline in the price of gold would
negatively impact the value of jewelry inventories held by the Company and
the value of jewelry pledged as collateral by pawn customers. As a result,
the Company's profit margins on existing jewelry inventories would be
negatively impacted, as would be the potential profit margins on jewelry
currently pledged as collateral by pawn customers in the event it is
forfeited by the pawn customer. In addition, a decline in gold prices could
result in a lower balance of pawn loans outstanding for the Company as
customers would receive lower loan amounts for individual pieces of jewelry.
The Company's believes that many customers would be willing to add
additional items of value to their pledge in order to obtain the desired
loan amount, thus mitigating a portion of this risk.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements prepared in accordance with Regulation S-X are
included in a separate section of this report. See the index to Financial
Statements at Item 14(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure
--------------------
There have been no disagreements concerning matters of accounting
principles or financial statement disclosure between the Company and
Deloitte & Touche LLP requiring disclosure hereunder.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
------------------------------------------------------------
The information required by this item with respect to the directors,
executive officers and compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the information provided under the headings
"Election of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company's Annual Meeting
of Stockholders.
Item 11. Executive Compensation
--------------------------------
The information required by this item is incorporated by reference from
the information provided under the heading "Executive Compensation" of the
Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Equity Compensation Plan Information
The following table gives information about the Company's common stock
that may be issued upon the exercise of options under its 1990 Stock Option
Plan (approved by the shareholders) and 1999 Stock Option Plan (approved by
the shareholders) as of December 31, 2002. Additionally, the Company issues
warrants to purchase shares of common stock to certain key members of
management, members of the Board of Directors that are not employees or
officers, and to other third parties. The issuance of warrants is not
approved by shareholders, and each issuance is generally negotiated between
the Company and such recipients. The issuance of warrants to outside
consultants is accounted for using the fair value method prescribed by FAS
No. 123.
Number of securities
remaining available for
Number of securities to Weighted average future issuance under
be issued upon exercise exercise price equity compensation plans
of outstanding options, of outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column A)
Plan Category (A) (B) (C)
------------- --- --- ---
Equity Compensation Plans
Approved by Security
Holders 1,110,750 $ 5.24 1,639,250
Equity Compensation Plans
Not Approved by
Security Holders 1,389,661 $ 6.92 -
--------- ---------
Total 2,500,411 $ 6.18 1,639,250
========= =========
Other information required by this item is incorporated herein by
reference from the information provided under the heading "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
--------------------------------------------------------
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
PART IV
-------
Item 14. Controls and Procedures
---------------------------------
Based on their evaluation as of a date within 90 days of the filing
date of this Annual Report on Form 10-K, the Company's principal executive
officer and principal financial officer have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-
14(c) under the Exchange Act) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission
rules and forms. There were no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the date of their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken.
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
-------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: Page
Report of Independent Auditors..................... F-1
Consolidated Balance Sheets........................ F-2
Consolidated Statements of Income.................. F-3
Consolidated Statements of Cash Flows.............. F-4
Consolidated Statements of Changes in Stockholders'
Equity........................................... F-5
Notes to Consolidated Financial Statements......... F-6
(b) Reports on Form 8-K.:
December 19, 2002 Item 5. Other Events
(c) Exhibits:
3.1(5) Amended Certificate of Incorporation
3.2(6) Amended Bylaws
4.2a(2) Common Stock Specimen
10.3(1) First Cash, Inc. 1990 Stock Option Plan
10.8(8) Employment Agreement -- Rick Powell
10.15(8) Employment Agreement -- Rick L. Wessel
10.59(4) Acquisition Agreement - Miraglia, Inc.
10.60(3) Audited Financial Statements of Miraglia, Inc. for the
ten months ended May 31, 1998.
10.61(5) Acquisition Agreement for Twelve Pawnshops in South
Carolina
10.62(5) Acquisition Agreement for One Iron Ventures, Inc.
10.63(5) First Cash Financial Services, Inc. 1999 Stock Option
Plan
10.64(9) First Addendum to Executive Employment Agreement -
Rick Powell
10.65(9) First Addendum to Executive Employment Agreement -
Rick Wessel
10.66(10) Second Addendum to Executive Employment Agreement -
Rick Powell
10.67(10) Second Addendum to Executive Employment Agreement -
Rick Wessel
18.1(7) Letter re Change in Accounting Principle
21.0(10) Subsidiaries
23.1(10) Independent Auditors' Consent of Deloitte & Touche LLP
23.2(10) Consent of Brewer & Pritchard, P.C.
99.1(10) Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2(10) Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
(d) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
(1) Filed as an exhibit to the Company's Registration Statement on Form
S-18 (No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to Form 8-K dated September 22, 1998.
(4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended July 31, 1998 (File No. 0 - 19133) and incorporated herein
by reference.
(5) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 22, 1999 (File No. 333-71077) and incorporated herein by
reference.
(6) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0 - 19133) and incorporated herein
by reference.
(7) Filed as an exhibit to the quarterly report on Form 10-Q for the
quarter ended March 31, 2000 (File No. 0 - 19133) and incorporated
herein by reference.
(8) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 0 - 19133) and incorporated herein
by reference.
(9) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 0 - 19133) and incorporated herein
by reference.
(10) Filed herewith.
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.
FIRST CASH FINANCIAL SERVICES, INC.
/s/PHILLIP E. POWELL
--------------------------------------------
Phillip E. Powell, Chief Executive Officer
March 24, 2003
/s/R. DOUGLAS ORR
--------------------------------------------
R. Douglas Orr, Principal Accounting Officer
March 24, 2003
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 Capacity Date
--------- -------- ----
/s/PHILLIP E. POWELL Chairman of the Board and March 24, 2003
--------------------- Chief Executive Officer
Phillip E. Powell
/s/RICK L. WESSEL Director, President, March 24, 2003
--------------------- Secretary and Treasurer
Rick L. Wessel
/s/JOE R. LOVE Director March 24, 2003
---------------------
Joe R. Love
/s/RICHARD T. BURKE Director March 24, 2003
---------------------
Richard T. Burke
/s/TARA SCHUCHMANN Director March 24, 2003
---------------------
Tara Schuchmann
CERTIFICATION
-------------
I, Phillip E. Powell, certify that:
1. I have reviewed this annual report on Form 10-K of First Cash Financial
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 24, 2003
/s/PHILLIP E. POWELL
-----------------------
Phillip E. Powell
Chief Executive Officer
CERTIFICATION
-------------
I, R. Douglas Orr, certify that:
1. I have reviewed this annual report on Form 10-K of First Cash Financial
Services, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 24, 2003
/s/ R. DOUGLAS ORR
-----------------------
R. Douglas Orr
Chief Financial Officer
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of First Cash
Financial Services, Inc. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years ended December 31, 2002, 2001
and 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc. and subsidiaries at December 31, 2002 and 2001,
and the consolidated results of its operations and its cash flows for each
of the years ended December 31, 2002, 2001 and 2000 in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 2, effective January 1, 2002, in connection with the
adoption of Statement of Financial Accounting Standards No. 142 Goodwill
and Other Intangible Assets, the Company ceased amortization of goodwill.
As discussed in Note 3 to the financial statements, the Company changed
its method of accounting for income recognition on pawns in 2000.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 24, 2003
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------- -------
(in thousands, except share data)
ASSETS
Cash and cash equivalents.................... $ 12,735 $ 11,252
Service charges receivable................... 3,174 2,817
Receivables.................................. 27,314 23,556
Inventories.................................. 13,648 12,681
Prepaid expenses and other current assets.... 1,161 1,226
Income taxes receivable...................... 109 434
------- -------
Total current assets ....................... 58,141 51,966
Property and equipment, net.................. 11,750 10,034
Intangible assets, net of accumulated
amortization of $8,448...................... 53,194 53,194
Receivable from Cash & Go, Ltd............... 7,351 7,073
Other........................................ 563 539
------- -------
$130,999 $122,806
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt............ $ 900 $ 1,385
Revolving credit facility.................... - 32,000
Accounts payable and accrued expenses........ 10,054 10,041
------- -------
Total current liabilities .................. 10,954 43,426
Revolving credit facility.................... 28,000 -
Long-term debt, net of current portion....... 602 1,608
Deferred income taxes........................ 4,923 3,669
------- -------
44,479 48,703
------- -------
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding............................... - -
Common stock; $.01 par value; 20,000,000
shares authorized; 9,525,368 and 9,417,868
shares issued, respectively; 8,871,187 and
8,763,687 shares outstanding, respectively 96 95
Additional paid-in capital ................. 51,908 51,255
Retained earnings .......................... 41,759 30,819
Notes receivable from officers ............. (4,228) (5,051)
Common stock held in treasury, at cost,
654,181 and 654,181 shares, respectively . (3,015) (3,015)
------- -------
86,520 74,103
------- -------
$130,999 $122,806
======= =======
Commitments and contingencies (see Note 11)
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(in thousands, except per share amounts)
Revenues:
Merchandise sales ..................... $ 56,916 $ 53,893 $ 53,177
Service charges ....................... 58,196 53,028 46,597
Check cashing fees .................... 2,659 2,264 2,216
Other ................................. 1,022 1,242 1,737
------- ------- -------
118,793 110,427 103,727
------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold .................... 32,890 34,619 34,366
Operating expenses .................... 54,090 48,661 44,836
Interest expense ...................... 294 1,395 2,859
Depreciation .......................... 2,548 2,283 2,612
Amortization .......................... - 1,530 1,694
Administrative expenses ............... 11,580 9,420 8,217
------- ------- -------
101,402 97,908 94,584
------- ------- -------
Income before income taxes ............... 17,391 12,519 9,143
Provision for income taxes ............... 6,451 4,507 3,476
------- ------- -------
Income from continuing operations......... 10,940 8,012 5,667
------- ------- -------
Discontinued operations (Note 14):
Income (loss) from discontinued
operations, net of tax............... - 33 (765)
Loss on sale of subsidiary, net of tax. - (175) -
------- ------- -------
Loss from discontinued operations......... - (142) (765)
------- ------- -------
Cumulative effect of change in
accounting principle.................... - - (2,287)
------- ------- -------
Net income ............................... $ 10,940 $ 7,870 $ 2,615
======= ======= =======
Net income per share:
Basic
Income from continuing operations.... $ 1.24 $ 0.92 $ 0.64
Loss from discontinued operations.... - (0.02) (0.08)
Cumulative effect of change
in accounting principle............ - - (0.26)
------- ------- -------
Net income........................... $ 1.24 $ 0.90 $ 0.30
======= ======= =======
Diluted
Income from continuing operations.... $ 1.14 $ 0.87 $ 0.63
Loss from discontinued operations.... - (0.02) (0.08)
Cumulative effect of change
in accounting principle............ - - (0.26)
------- ------- -------
Net income........................... $ 1.14 $ 0.85 $ 0.29
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------
2002 2001 2000
------- ------- -------
(in thousands)
Cash flows from operating activities:
Income from continuing operations......... $ 10,940 $ 8,012 $ 5,667
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization.......... 2,548 3,813 4,306
Income (loss) from discontinued
operations........................... - 592 (108)
Changes in operating assets and
liabilities, net of effect of
purchases of existing stores:
Service charges receivable ............ (357) (89) 728
Inventories ........................... (967) 4,687 1,616
Prepaid expenses and other assets...... 41 (746) (323)
Accounts payable and accrued expenses.. 13 3,509 1,546
Current and deferred income taxes...... 1,579 (107) 1,196
------- ------- -------
Net cash flows from operating activities 13,797 19,671 14,628
------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in receivables.... (3,758) (1,110) 1,021
Purchases of property and equipment....... (4,264) (1,891) (2,055)
Acquisition of existing operations........ - (1,394) (1,200)
Proceeds from sale of discontinued
operations.............................. - 230 -
Increase in receivable from
Cash & Go, Ltd.......................... (278) (2,775) (2,764)
------- ------- -------
Net cash flows from investing activities.. (8,300) (6,940) (4,998)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt ....................... 7,000 14,200 6,000
Repayments of debt ....................... (12,491) (22,869) (16,252)
Notes receivable from officers............ 823 775 (3,234)
Purchase of treasury stock ............... - (500) (250)
Proceeds from exercise of options and
warrants................................ 654 304 -
------- ------- -------
Net cash flows from financing activities.. (4,014) (8,090) (13,736)
------- ------- -------
Change in cash and cash equivalents......... 1,483 4,641 (4,106)
Cash and cash equivalents at beginning
of the year............................... 11,252 6,611 10,717
------- ------- -------
Cash and cash equivalents at end of the year $ 12,735 $ 11,252 $ 6,611
======= ======= =======
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest ................................ $ 964 $ 2,394 $ 2,813
======= ======= =======
Income taxes ............................ $ 4,907 $ 4,533 $ 2,013
======= ======= =======
Supplemental disclosure of non-cash
investing and financing activities:
Non-cash transactions in connection with
various acquisitions:
Fair market value of assets acquired
and goodwill......................... $ - $ 2,302 $ 1,222
Less assumption of liabilities and
costs of acquisition............... - (908) (22)
------- ------- -------
Net cash paid.......................... $ - $ 1,394 $ 1,200
======= ======= =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Notes
Common Stock Paid- Preferred Stock Receivable Treasury Stock
-------------- In --------------- Retained From --------------
Shares Amount Capital Shares Amount Earnings Officers Shares Amount Total
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
(in thousands)
Balance at December 31, 1999 9,321 $ 93 $ 50,953 - - $ 20,334 $ (2,592) 471 $(2,265) $ 66,523
Notes receivable from
officers - - - - - - (3,234) - - (3,234)
Purchase of treasury stock - - - - - - - 54 (250) (250)
Net income - - - - - 2,615 - - - 2,615
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 2000 9,321 93 50,953 - - 22,949 (5,826) 525 (2,515) 65,654
Exercise of stock options
and warrants, including
income tax benefit of $22 97 2 302 - - - - - - 304
Notes receivable from
officers - - - - - - 775 - - 775
Purchase of treasury stock - - - - - - - 129 (500) (500)
Net income - - - - - 7,870 - - - 7,870
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 2001 9,418 95 51,255 - - 30,819 (5,051) 654 (3,015) 74,103
Exercise of stock options
and warrants, including
income tax benefit of $229 107 1 653 - - - - - - 654
Notes receivable from
officers - - - - - - 823 - - 823
Net income - - - - - 10,940 - - - 10,940
------ ------ ------- ------ ------ -------- -------- ------ ------ -------
Balance at December 31, 2002 9,525 $ 96 $ 51,908 - - $ 41,759 $ (4,228) 654 $(3,015) $ 86,520
====== ====== ======= ====== ====== ======== ======== ====== ====== =======
The accompanying notes are an
integral part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
First Cash Financial Services, Inc. (the "Company") was incorporated in
Texas on July 5, 1988 and was reincorporated in Delaware in April 1991. The
Company is engaged in the operation of pawn stores which lend money on the
collateral of pledged personal property, and which retail previously-owned
merchandise acquired through pawn forfeitures. In addition to making short-
term secured pawns, most of the Company's pawn stores offer short-term
unsecured advances ("short-term advances"). The Company also operates check
cashing and short-term advance stores that provide short-term advances,
check cashing services, and other related financial services. As of
December 31, 2002, the Company owned 131 pawn stores and 59 check cashing
and short-term advance stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in the preparation of these financial statements.
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly owned
subsidiaries. All significant inter-company accounts and transactions have
been eliminated. In August 1999, the Company entered into a partnership to
form Cash & Go, Ltd., a Texas limited partnership, which owns financial
services kiosks inside convenience stores. The Company presently has a 50%
ownership interest in the partnership, which is accounted for by the equity
method of accounting as neither partner has control. The Company records
its 50% share of the partnership's earnings or losses in its consolidated
financial statements. The Company funds substantially all of the working
capital requirements of the partnership in the form of a loan to the
partnership. This loan is callable at any time by the Company, bears
interest at the prime rate plus 5%, and is secured by substantially all of
Cash & Go, Ltd.'s assets.
Summarized financial information for Cash & Go, Ltd. as of December 31,
2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000 are
as follows:
December 31, December 31,
2002 2001
------ ------
(in thousands)
Current assets .......................... $ 6,191 $ 5,647
Non-current assets ..................... 950 1,458
Current note payable to First Cash
Financial Services, Inc................ (7,972) (7,455)
Other current liabilities ............... (411) (415)
------ ------
Net liabilities ..................... $(1,242) $ (765)
====== ======
Company's net receivable from
Cash & Go, Ltd.:
Note receivable from Cash & Go, Ltd.... $ 7,972 $ 7,455
Company's share of net liabilities..... (621) (382)
------ ------
$ 7,351 $ 7,073
====== ======
Year Ended December 31,
--------------------------
2002 2001 2000
----- ----- -----
(in thousands)
Revenues ......................... $7,093 $6,788 $3,512
Expenses ......................... 7,571 6,979 3,836
----- ----- -----
Net loss before taxes ........ $ (478) $(191) $ (324)
===== ===== =====
Company's share of pretax net loss $ (239) $ (96) $ (162)
===== ===== =====
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at date of
acquisition to be cash equivalents.
Receivables and income recognition - Receivables on the accompanying
balance sheet consist of pawn and short-term advances. Pawns are made on
the pledge of tangible personal property. The Company accrues pawn service
charge revenue on a constant-yield basis over the life of the pawn for all
pawns that the Company deems collection to be probable based on historical
pawn redemption statistics. If the pawn is not repaid, the principal
amount pawned becomes the carrying value of the forfeited collateral
("inventory"), which is recovered through sale. Short-term advances are
made for thirty days or less. The Company recognizes the service charges
associated with short-term advances on a constant yield basis over the term
of the short-term advance.
Bad Debts - An allowance is provided on current short-term advances and
service charges receivable, based upon expected default rates, net of
estimated future recoveries of previously defaulted short-term advances and
service charges receivable. The Company considers short-term advances to be
in default if they are not repaid on the due date, and writes off the
principal amount and service charges receivable as of the default date. Net
defaults and changes in the short-term advance allowance are charged to bad
debt expense, which is included in operating expenses.
Operating expenses - Costs incurred in operating the pawn stores and
check-cashing stores have been classified as operating expenses. Operating
expenses include salary and benefit expense of store employees, rent and
other occupancy costs, bank charges, security, net returned checks,
utilities, cash shortages and other costs incurred by the stores.
Layaway and deferred revenue - Interim payments from customers on
layaway sales are credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Inventories - Inventories represent merchandise purchased directly from
the public and merchandise acquired from forfeited pawns. Inventories
purchased directly from customers are recorded at cost. Inventories from
forfeited pawns are recorded at the amount of the pawn principal on the
unredeemed goods. The cost of inventories is determined on the specific
identification method. Inventories are stated at the lower of cost or
market; accordingly, inventory valuation allowances are established when
inventory carrying values are in excess of estimated selling prices, net of
direct costs of disposal. Management has evaluated inventory and determined
that a valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is determined on the straight-line method based on estimated
useful lives of thirty-one years for buildings and three to five years for
equipment. The costs of improvements on leased stores are capitalized as
leasehold improvements and are amortized on the straight-line method over
the applicable lease period, or useful life if shorter.
Maintenance and repairs are charged to expense as incurred; renewals
and betterments are charged to the appropriate property and equipment
accounts. Upon sale or retirement of depreciable assets, the cost and
related accumulated depreciation is removed from the accounts, and the
resulting gain or loss is included in the results of operations in the
period retired.
Intangible assets - Intangible assets consist of the excess of purchase
price over net assets acquired and non-compete agreements. Excess purchase
price over net assets acquired was amortized on a straight-line basis over
an estimated useful life of forty years through December 31, 2001, and
payments relative to non-compete agreements were amortized over their
estimated useful lives, generally ranging from five to ten years. See new
Accounting Standards below.
Long-lived assets - Long-lived assets (i.e., property, plant and
equipment and intangible assets with definite lives) 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. Generally, the amount of the impairment loss is measured as
the difference between the net book value of the assets and the estimated
fair value of the related assets. During the fourth quarter of 2000 the
Company recorded a non-cash pretax charge in the amount of $765,000 to
write-off fixed assets and goodwill relating to approximately nine stores.
Management does not believe any assets have been additionally impaired at
December 31, 2002.
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.
Income taxes - The Company uses the liability method of computing
deferred income taxes on all material temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases.
Advertising - The Company expenses the costs of advertising the first
time the advertising takes place. Advertising expense for the fiscal years
ended December 31, 2002, 2001 and 2000, was $1,332,000, $1,070,000 and
$1,283,000, respectively.
Stock-Based Compensation - The Company's stock-based employee
compensation plan is described in Note 12. The expense recognition and
measurement principles of APB 25, Accounting for Stock Issued to Employees,
and related interpretations are followed in accounting for this plan. No
stock-based employee compensation has been charged to earnings because the
exercise prices of all stock options granted under this plan have been equal
to the market value of the Company's common stock at the date of the grant.
The following presents information about net income and earnings per share
as if the Company had applied the fair value expense recognition
requirements of Statement of Financial Accounting Standards ("SFAS") 123,
Accounting for Stock-Based Compensation, to all employee stock options
granted under the plan (in thousands, except per share data).
Year Ended December 31,
---------------------------
2002 2001 2000
------ ------ ------
Net income, as reported................ $10,940 $ 7,870 $ 2,615
Less: Stock-based employee compensation
determined under the fair value
requirements of SFAS 123, net of
income tax benefits.................. 1,252 899 1,174
------ ------ ------
Pro forma net income................... $ 9,688 $ 6,971 $ 1,441
====== ====== ======
Earnings per share:
Basic, as reported................... $ 1.24 $ 0.90 $ 0.30
Basic, pro forma..................... $ 1.10 $ 0.80 $ 0.16
Diluted, as reported................. $ 1.14 $ 0.85 $ 0.29
Diluted, pro forma................... $ 1.01 $ 0.75 $ 0.16
Pursuant to the requirements of SFAS 123, the weighted-average fair
value of the individual employee stock options granted during 2002, 2001 and
2000 have been estimated as $4.66, $2.90 and $1.96, respectively, on the
date of the grant. The fair values were determined using a Black-Scholes
option-pricing model using the following assumptions:
Year Ended December 31,
---------------------------
2002 2001 2000
------ ------ ------
Dividend yield.............. - - -
Volatility.................. 58.0% 55.0% 80.0%
Risk-free interest rate..... 3.5% 3.8% 5.0%
Expected life............... 7 years 7 years 7 years
Earnings per share - Basic net income per share is computed by dividing
net income by the weighted average number of shares outstanding during the
year. Diluted net income per share is calculated by giving effect to the
potential dilution that could occur if securities or other contracts to
issue common shares were exercised and converted into common shares during
the year.
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended December 31,
---------------------------
2002 2001 2000
------ ------ ------
Numerator:
Net income for calculating
basic and diluted earnings per share $10,940 $ 7,870 $ 2,615
====== ====== ======
Denominator:
Weighted-average common shares for
calculating basic earnings per share 8,833 8,699 8,813
Effect of dilutive stock options
and warrants 794 569 56
------ ------ ------
Weighted-average common shares for
calculating diluted earnings per share 9,627 9,268 8,869
====== ====== ======
Basic earnings per share $ 1.24 $ 0.90 $ 0.30
Diluted earnings per share $ 1.14 $ 0.85 $ 0.29
Pervasiveness of estimates - The preparation of financial statements in
conformity with accounting principals generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues
and expenses and disclosure of gain and loss contingencies at the date of
the financial statements. Such estimates and assumptions are subject to a
number of risks and uncertainties, which may cause actual results to differ
materially from the Company's estimates.
Reclassification - Certain amounts as of December 31, 2001 have been
reclassified in order to conform to the 2002 presentation.
New Accounting Standards - In June 2001, the FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, which is effective as of January 1, 2002. The Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets, effective January 1, 2002. Under SFAS
No. 142, goodwill is no longer amortized, but reviewed for impairment
annually, or more frequently if certain indicators arise. The Company has
completed the transitional fair value impairment test and determined that no
impairment of recorded goodwill existed at January 1, 2002. The Company has
also determined that no impairment existed at December 31, 2002.
Subsequent impairment losses, if any, will be reflected in operating
income or loss in the consolidated statement of income for the period in
which such loss is realized. Had the Company been accounting for its
goodwill under SFAS No. 142 for the year ended December 31, 2002, 2001 and
2000, the Company's net income would have been as follows:
Year Ended December 31,
---------------------------
2002 2001 2000
------ ------ ------
Reported net income $10,940 $ 7,870 $ 2,615
Add: amortization of costs in excess
of net assets acquired, net of tax - 979 1,084
------ ------ ------
Adjusted net income $10,940 $ 8,849 $ 3,699
====== ====== ======
Basic earnings per share:
Reported net income $ 1.24 $ 0.90 $ 0.30
Adjusted net income $ 1.24 $ 1.01 $ 0.42
Diluted earnings per share:
Reported net income $ 1.14 $ 0.85 $ 0.29
Adjusted net income $ 1.14 $ 0.96 $ 0.41
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 143, Accounting for Asset
Retirement Obligations in August 2001 and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets in October 2001. SFAS No. 143
addresses reporting for obligations associated with the retirement of
tangible long-lived assets and the related asset retirement costs. SFAS No.
143 is effective for fiscal years beginning after June 15, 2002 with earlier
application permitted. SFAS No. 144 supercedes earlier guidance with
respect to such accounting and is effective for years beginning after
December 15, 2001. The adoption of SFAS No. 143 will not have a material
effect on the Company's financial statements. The adoption of SFAS No.
144 did not have a material effect on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires
recording costs associated with exit or disposal activities at their fair
values when a liability has been incurred. Under previous guidance, certain
exit costs were accrued upon management's commitment to an exit plan, which
is generally before an actual liability has been incurred. The provisions
of this statement are effective for exit or disposal activities that are
initiated after December 31, 2002.
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This statement amends SFAS No. 123, Accounting for Stock-Based
Compensation, and provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. This statement also amends the disclosure requirements of
SFAS No. 123 to require more prominent and frequent disclosures in financial
statements about the effects of stock based compensation. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective for
financial statements issued for fiscal years ending after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December
15, 2002. See notes 2 and 12 of the Company's Notes to Consolidated
Financial Statements for the required disclosures about the effects of
stock-based compensation on reported net income.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No.
51. FIN 46 addresses consolidation by business enterprises of variable
interest entities (formerly special purpose entities). In general, a
variable interest entity is a corporation, partnership, trust or any other
legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. The objective of FIN 46 is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved
with variable interest entities. FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply to variable interest entities
created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
June 15, 2003. The Company is evaluating the applicability of FIN 46 to its
existing investment in Cash & Go, Ltd., a Texas limited partnership. A
description of Cash & Go, Ltd.'s activities and financial results and the
Company's exposures to potential loss from involvement in the partnership
are provided in Note 2.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company changed its method of income
recognition on pawns. The Company now accrues pawn service charge revenue on
a constant-yield basis over the life of the pawn for all pawns that the
Company deems collection to be probable based on historical pawn redemption
statistics. For pawns not repaid, the cost of the forfeited collateral
(inventory) is the cash amount originally pawned. Prior to 2000, the Company
recognized service charge income on a constant-yield basis over the initial
pawn period for all pawns written. Service charges applicable to the
extension periods or additional pawn periods were not recognized as income
until the pawn was repaid or renewed. If the pawn was not repaid, the
carrying value of the forfeited collateral (inventory) was stated at the
lower of cost (the principal amount pawned plus accrued service charges) or
market. The Company believes the accounting change provides a timelier
matching of revenues and expenses with which to measure the results of
operations. The cumulative effect of the accounting method change on all
periods since inception through December 31, 1999 is $2,287,000 (after an
income tax benefit of $1,373,000) and is included as a one-time reduction of
net income for the year ended December 31, 2000.
Operating results for Fiscal 2000 have been calculated using the new
accounting method. The effect for Fiscal 2000 of adopting the change in
income recognition on pawns was to decrease net income before cumulative
effect of change in accounting principle $9,000, and decrease net income
$2,296,000 ($0.26 per share.)
NOTE 4 - BUSINESS ACQUISITIONS
In December 2001, the Company acquired 100% of the outstanding common
stock of WR Financial, Inc., which operates 7 stores in Texas, for a total
purchase price of $1,394,000, consisting of cash. The Company financed
substantially the all cash purchase price for its fiscal 2001 acquisition
through its Credit Facility. The purchase price for this acquisition was
determined based upon the volume of annual pawn and sales transactions,
outstanding receivable balances, inventory on hand, location and condition
of the facilities, and projected future operating results.
In December 2000, the Company acquired the assets of one pawn store in
LaFeria, Texas, and one pawn store in Laredo, Texas. The aggregate purchase
price for these two acquisitions was $1,200,000, including legal,
consulting, assumed liabilities and other costs incidental to the
acquisitions. The Company financed substantially the all cash purchase
price for its fiscal 2000 acquisitions through its Credit Facility. The
purchase price for these acquisitions was determined based upon the volume
of annual pawn and sales transactions, outstanding receivable balances,
inventory on hand, location and condition of the facilities, and projected
future operating results.
All of these acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the purchase price was allocated to
assets and liabilities acquired based upon their estimated fair market
values at the dates of acquisition. The excess purchase price over the fair
market value of the net tangible assets acquired and identifiable intangible
assets has been recorded as goodwill. Goodwill, net of accumulated
amortization, resulting from acquisitions was $53,194,000 as of December 31,
2002 and 2001. The results of operations of the acquired companies are
included in the consolidated financial statements from their respective
dates of acquisition.
NOTE 5 - RELATED PARTY TRANSACTIONS
In June 1998, in conjunction with the purchase of 11 check cashing
stores, the Company entered into lease agreements relating to one store
location and certain office space located in California. These properties
were partially owned through September 2000 by Mr. Blake Miraglia, an
employee of the Company at that time. Total lease payments made pursuant to
these leases were $130,000 during the fiscal year ended December 31,
2000, which approximated market rates. In addition, the Company has an
outstanding, unsecured note payable due July 5, 2003, bearing interest at
7%, to Mr. Miraglia, which amounted to $320,000 and $800,000 as of December
31, 2002 and 2001, respectively, including accrued interest. Mr. Miraglia
terminated his employment with the Company in October 2002.
As of December 31, 2002 and 2001, the Company had notes receivable
outstanding from certain of its officers totaling $4,228,000 and $5,051,000,
respectively. These notes are secured by a total of 554,000 shares of
common stock of the Company owned by these individuals, term life insurance
policies, and bear interest at three percent. These notes are due upon the
sale of the underlying shares of common stock. During the fiscal years
ended December 31, 2002 and 2001, the outstanding notes receivable from
officers had repayments of $823,000 and $775,000, respectively.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, December 31,
2002 2001
------- -------
Land ............................ $ 672 $ 672
Buildings ....................... 1,002 1,002
Leasehold improvements .......... 1,794 2,104
Furniture, fixtures and equipment 20,109 15,922
------- -------
23,577 19,700
Less: accumulated depreciation.. (11,827) (9,666)
------- -------
$ 11,750 $ 10,034
======= =======
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
December 31, December 31,
2002 2001
------- -------
Accounts payable ...................... $ 1,104 $ 628
Money orders and wire transfers payable 791 1,232
Accrued compensation .................. 2,692 1,502
Layaway deposits ...................... 1,382 1,198
Sales and property taxes payable....... 959 931
Lending activity settlements payable... 1,123 2,662
Other ................................. 2,003 1,888
------- -------
$ 10,054 $ 10,041
======= =======
NOTE 8 - REVOLVING CREDIT FACILITY
The Company maintains a long-term line of credit with a group of
commercial lenders (the "Credit Facility"). The Credit Facility provides a
$30,000,000 long-term line of credit that matures on August 9, 2005 and
bears interest at the prevailing LIBOR rate (which was approximately 1.4% at
December 31, 2002) plus an applicable margin based on a defined leverage
ratio for the Company. Based on the Company's existing leverage ratio, the
margin is currently 1.375%, the most favorable rate provided under the terms
of the agreement. Amounts available under the Credit Facility are limited
to 300% of the Company's earnings before income taxes, interest,
depreciation and amortization for the trailing twelve months. At December
31, 2002, the Company had $2,000,000 available for additional borrowings.
Under the terms of the Credit Facility, the Company is required to maintain
certain financial ratios and comply with certain technical covenants. The
Company was in compliance with the requirements and covenants of the Credit
Facility as of December 31, 2002 and March 24, 2003. The Company is
required to pay an annual commitment fee of 1/5 of 1% on the average daily-
unused portion of the Credit Facility commitment. The Company's Credit
Facility contains provisions which will allow the Company to repurchase
stock and/or pay cash dividends within certain parameters. Substantially
all of the unencumbered assets of the Company have been pledged as
collateral against indebtedness under the Credit Facility.
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of the following (in thousands, except payment
information):
December 31, December 31,
2002 2001
------ ------
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,257; matures December 31, 2004;
secured by real estate $ 392 $ 439
Note payable to a bank; bearing interest at
LIBOR plus 2%; monthly principal and interest
payments of $5,518; matures December 31, 2004;
secured by real estate 310 364
Notes payable to five former shareholders of
Miraglia, Inc.; bearing interest at 7%;
quarterly principal payments of $300,000
and quarterly interest payments based upon
the unpaid balance until maturity at July 5,
2003; unsecured 800 2,000
Other notes payable - 190
------ ------
1,502 2,993
Less: current portion (900) (1,385)
------ ------
$ 602 $ 1,608
====== ======
Long-term debt is scheduled to mature as follows (in thousands):
Fiscal
------
2003 ............... $ 900
2004 ............... 602
-----
$1,502
=====
NOTE 10 - INCOME TAXES
Components of the provision for income taxes consist of the following
(in thousands):
Year Ended December 31,
-----------------------
2002 2001 2000
----- ----- -----
Current:
Federal .............. $4,437 $2,609 $2,627
State and foreign .... 760 1,042 399
----- ----- -----
5,197 3,651 3,026
Deferred ................ 1,254 856 450
----- ----- -----
$6,451 $4,507 $3,476
===== ===== =====
The principal current and non-current deferred tax liabilities consist
of the following at December 31, 2002 and 2001 (in thousands):
December 31, December 31,
2002 2001
------ ------
Deferred tax liabilities (assets):
Intangible asset amortization .......... $ 4,951 $ 3,834
Depreciation ........................... 1,181 1,107
Change in accounting principle ......... (1,288) (1,135)
Net operating loss benefit carry-forward (93) (198)
State income taxes ..................... 272 204
Service charges receivable ............. 46 46
Legal accruals ......................... (430) (430)
Other .................................. 284 241
------ ------
Net deferred tax liability .......... $ 4,923 $ 3,669
====== ======
Reported as:
Non-current liabilities -
deferred income taxes................. $ 4,923 $ 3,669
====== ======
The provision for income taxes differs from the amounts determined by
applying the expected federal statutory tax rate to income from continuing
operations before income taxes. The following is a reconciliation of such
differences (in thousands):
Year Ended December 31,
-----------------------
2002 2001 2000
----- ----- -----
Tax at the federal statutory rate $5,913 $4,256 $3,109
State and foreign income taxes,
net of federal tax benefit 400 646 278
Other, net 138 (395) 89
----- ----- -----
$6,451 $4,507 $3,476
===== ===== =====
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under
operating leases with terms generally ranging from three to ten years. Most
facility leases contain renewal and/or purchase options. Remaining future
minimum rentals due under non-cancelable operating leases are as follows (in
thousands):
Fiscal
------
2003 ............... $ 7,695
2004 ................ 6,555
2005 ................ 5,381
2006 ................ 4,241
2007 ................ 3,076
Thereafter .......... 5,262
-------
$ 32,210
=======
Rent expense under such leases was $7,251,000, $6,515,000 and
$6,311,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
In May 2000, three plaintiffs filed a complaint against Famous Pawn,
Inc., a wholly owned subsidiary of the Company, in the United States
District Court for the District of Maryland (Northern Division). The
allegations consists of five counts: (1) violation of the federal Truth in
Lending Act; (2) violation of the federal Racketeer Influenced and Corrupt
Organizations Act; (3) violation of the Maryland Interest and Usury Statute;
(4) violation of the Maryland Consumer Loan Law; and (5) violation of the
Maryland Consumer Protection Act. In February 2003, the Company and
plaintiffs reached a tentative settlement of the complaint, subject to final
approval by the District Court. Under the terms of the proposed settlement
as filed with the District Court, the plaintiffs agreed to dismiss all
allegations and monetary claims made against the Company. The Company, in
order to expedite the conclusion of this matter and avoid the expenses
associated with a trial, has agreed to pay the plaintiffs approximately
$1,100,000, including the plaintiffs' legal fees, and forgive all the
outstanding debt of such customers in the amount of approximately $800,000.
The Company had previously reserved and expensed in prior years an amount
equal to this settlement, and accordingly, the proposed settlement will have
no impact on the Company's operating results. If approved, the proposed
settlement is expected to be completed and funded later in 2003.
Additionally, the Company is from time to time a defendant (actual or
threatened) in certain other lawsuits and arbitration claims encountered in
the ordinary course of its business, the resolution of which, in the opinion
of management, should not have a material adverse effect on the Company's
financial position, results of operations, or cash flows.
NOTE 12 - EMPLOYEE STOCK OPTION PLAN AND OUTSTANDING WARRANTS
On October 30, 1990, the Company's Board of Directors adopted the 1990
Stock Option Plan (the "1990 Plan"). The 1990 Plan provides for the
issuance of incentive stock options and non-qualified stock options to key
employees and directors of the Company. The total number of shares of
Common Stock authorized and reserved for issuance under the 1990 Plan is
250,000 shares. The exercise price for each stock option granted under the
1990 Plan may not be less than the fair market value of the Common Stock on
the date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1990 Plan have a maximum duration of five years and vest
in up to four equal installments, commencing on the first anniversary of the
date of grant. As of December 31, 2002, options to purchase 16,000 shares
of Common Stock were available for grant under the 1990 Plan. Options to
purchase 117,000 shares were vested at December 31, 2002.
On January 14, 1999, the Company's shareholders adopted the 1999 Stock
Option Plan (the "1999 Plan"). The 1999 Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of Common Stock
authorized and reserved for issuance under the 1999 Plan is 2,500,000
shares. The exercise price for each stock option granted under the 1999
Plan may not be less than the fair market value of the Common Stock on the
date of the grant, unless, in the case of incentive stock options, the
optionee owns greater than 10% of the total combined voting power of all
classes of capital stock of the Company, in which case the exercise price
may not be less than 110% of the fair market value of the Common Stock on
the date of the grant. Unless otherwise determined by the Board, options
granted under the 1999 Plan have a maximum duration of ten years unless, in
the case of incentive stock options, the optionee owns at least 10% of the
total combined voting power of all classes of capital stock of the Company,
in which case the maximum duration is five years. As of December 31, 2002,
options to purchase 1,391,000 shares of Common Stock were available for
grant under the 1999 Plan. Options to purchase 790,000 shares of common
stock under the 1999 Plan were vested as of December 31, 2002.
The Company also issues warrants to purchase shares of Common Stock to
certain key members of management, to members of the Board of Directors who
are not employees or officers of the Company and to outside consultants and
advisors in connection with various acquisitions, debt offerings and
consulting engagements. In accordance with the provisions of FAS 123, the
issuance of warrants to outside consultants and advisors is accounted for
using the fair value method prescribed by FAS 123. Warrants granted to
outside consultants and advisors prior to December 15, 1995 are accounted
for using methods prescribed by APB 25.
Stock option and warrant activity for fiscal 2000, 2001 and 2002 is
summarized in the accompanying chart (in thousands, except exercise price).
Exercisable
-----------------
Weighted
Weighted Average
Average Exercise
Options Warrants Exercise Price Number Price
------- -------- -------------- ------ -----
December 31, 1999 641 1,891 $ 9.88 2,075 $ 9.84
Granted 475 - 2.00
Cancelled (65) (630) 14.35
---- ------
December 31, 2000 1,051 1,261 6.92 1,816 6.28
Granted 270 65 4.48
Exercised (84) (13) 3.12
Cancelled (57) (310) 11.24
---- ------
December 31, 2001 1,180 1,003 5.99 1,689 5.30
Granted 130 522 8.00
Exercised (62) (45) 4.13
Cancelled (137) (90) 10.56
---- ------
December 31, 2002 1,111 1,390 $ 6.18 2,186 $ 6.01
===== ======
Options and warrants outstanding as of December 31, 2002 are as follows
(in thousands, except exercise price and life):
Total Warrants
Exercise and Remaining Currently
Price Options Life Exercisable
----- ------- ---- -----------
$2.00 375 8.0 350
2.00 14 3.5 14
4.00 245 8.1 215
4.00 9 3.5 9
4.63 515 8.0 515
4.63 17 3.5 17
8.00 16 0.1 16
8.00 67 2.3 67
8.00 33 5.1 33
8.00 547 9.3 350
8.00 35 9.8 -
8.00 350 10.1 350
10.00 14 3.5 14
10.00 250 6.3 225
10.00 3 6.9 -
12.00 11 3.5 11
----- -----
2,501 2,186
===== =====
NOTE 13 - FIRST CASH 401(k) PLAN
The First Cash 401(k) Plan (the "Plan") is provided by the Company for
all full-time employees who have been employed with the Company for one
year. Under the Plan, a participant may contribute up to 15% of earnings,
with the Company matching the first 3% at a rate of 50%. The employee and
company contributions are paid to a corporate trustee and invested in
various funds. Contributions made to participants' accounts become fully
vested upon completion of five years of service. The total Company
contributions to the Plan were $220,000, $162,000 and $146,000 for the years
ended December 31, 2002, 2001 and 2000, respectively.
NOTE 14 - DISCONTINUED OPERATIONS INFORMATION
On November 30, 2001, the Company sold all of its common stock of its
subsidiary, Miraglia, Inc. to a former employee of the Company for
approximately $230,000 in cash. The sale resulted in a pretax loss of
$273,000. The disposal of the software company and, accordingly, its
operating results are segregated and reported as discontinued operations in
the accompanying Consolidated Statements of Income. Prior year financial
statements have been reclassified to conform to the current year
presentation.
The condensed statements of operations relating to the discontinued
software operations for the years ended December 31, 2001 and 2000 are
presented below:
Year Ended December 31,
-----------------------
2001 2000
------ ------
Revenues $ 1,897 $ 2,131
Costs and expenses 1,846 3,367
------ ------
Income (loss) before income taxes 51 (1,236)
Income tax benefit (expenses) (18) 471
------ ------
Net income (loss) $ 33 $ (765)
====== ======
NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands, except per share data)
for the fiscal years ended December 31, 2002 and 2001 are set fourth below.
The Company's operations are subject to seasonal fluctuations.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2002
----
Total revenue $ 28,451 $ 26,867 $ 29,755 $ 33,720
Total expenses 24,086 23,337 25,727 28,252
Net income 2,794 2,259 2,578 3,309
Diluted earnings per share
from net income 0.30 0.23 0.27 0.34
Diluted weighted average shares 9,457 9,742 9,570 9,741
2001
----
Total revenue $ 28,144 $ 26,399 $ 26,094 $ 29,790
Total expenses 24,771 24,018 23,251 25,868
Income from continuing operations 2,159 1,524 1,819 2,510
Gain (loss) from discontinued
operations (33) 26 54 (189)
Net income 2,126 1,550 1,873 2,321
Diluted earnings per share
from continuing operations 0.24 0.17 0.20 0.27
Diluted loss per share from
discontinued operations - - - (0.02)
Diluted earnings per share
from net income 0.24 0.17 0.20 0.25
Diluted weighted average shares 8,971 9,284 9,411 9,407
Exhibit 10.66
SECOND ADDENDUM TO
EXECUTIVE EMPLOYMENT AGREEMENT
This Second Addendum to Executive Employment Agreement (the "Addendum")
is made this 24th day of October 2002, by and between First Cash Financial
Services, Inc. (the "Company"), a Delaware corporation, and Phillip Eric
Powell (the "Executive"). The Company and Executive may be hereinafter
collectively referred to as the "Parties."
RECITALS
A. Executive is employed by the Company pursuant to an Executive
Employment Agreement dated as of September 30, 2000 (the "Original
Agreement") "), as amended by the First Addendum to Executive
Employment Agreement dated March 21, 2002.
B. The Parties jointly wish to make additions to the Original Agreement.
C. The additions to the Original Agreement are set forth in this Addendum.
AGREEMENT:
NOW, THEREFORE, in consideration of the promises, terms, covenants and
conditions set forth herein and in the Original Agreement, and for other
good and valuable consideration, the receipt of which is undisputed and
hereby acknowledged, the Parties agree as follows:
1. Extension of Term. Executive has met the stipulated performance
criteria established by the Board. Accordingly, pursuant to the Original
Agreement, Executive's term of Employment has been extended through December
31, 2007.
2. Base Salary. As a result of Executive meeting the stipulated
performance criteria established by the Board for 2001, the Executive's
annual base salary was increased to $500,000 for the period from January 1,
2002 until December 31, 2002. Again as a result of Executive meeting the
stipulated performance criteria for 2002, the Executive's annual base salary
for the period from January 1, 2003 until December 31, 2003 was increased to
$600,000. During the remaining term of Executive's employment, Executive's
annual base salary shall not be decreased, but shall be adjusted annually in
each December at a rate of no less than 10% of the current year's base
salary. In addition, the compensation committee of the Board may determine
such other adjustments as may be appropriate based on the Executive's
performance during the most recent performance period, in accordance with
the Company's compensation policies.
3. Interpretation.
a. No Other Additions. Sections 1 and 2 of this Addendum constitute the
only additions to the Original Agreement, all other terms and conditions
therein shall remain unaltered.
b. Definitions. All capitalized terms used herein and not otherwise
defined shall have the same meaning assigned to them in the Original
Agreement.
c. Severability. Should any one or more of the provisions of this
Addendum be determined to be illegal or unenforceable, all other provisions
of this Addendum shall be given effect separately from the provision or
provisions determined to be illegal or unenforceable and shall not be
effected thereby.
d. Choice of Law. This Addendum shall be governed by, and construed in
accordance with, the laws of the State of Texas.
f. Headings. The headings of sections and paragraphs of this Addendum
have been inserted for convenience of reference only and do not constitute a
part of this Addendum.
g. Counterparts. This Addendum may be executed in multiple counterparts
with the same effect as if all parties had signed the same document. All
such counterparts shall be deemed an original, shall be construed together
and shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be duly
executed and delivered as of the day first above written.
FIRST CASH FINANCIAL SERVICES, INC.
By: /s/ RICHARD T. BURKE
--------------------
Richard T. Burke
Director
EXECUTIVE
/s/PHILLIP ERIC POWELL
----------------------
Phillip Eric Powell
Exhibit 10.67
SECOND ADDENDUM TO
EXECUTIVE EMPLOYMENT AGREEMENT
This Second Addendum to Executive Employment Agreement (the "Addendum")
is made this 24th day of October 2002, by and between First Cash Financial
Services, Inc. (the "Company"), a Delaware corporation, and Rick L. Wessel
(the "Executive"). The Company and Executive may be hereinafter
collectively referred to as the "Parties."
RECITALS
A. Executive is employed by the Company pursuant to an Executive
Employment Agreement dated as of September 30, 2000 (the "Original
Agreement"), as amended by the First Addendum to Executive Employment
Agreement dated March 21, 2002.
B. The Parties jointly wish to make additions to the Original Agreement.
C. The additions to the Original Agreement are set forth in this Addendum.
AGREEMENT:
NOW, THEREFORE, in consideration of the promises, terms, covenants and
conditions set forth herein and in the Original Agreement, and for other
good and valuable consideration, the receipt of which is undisputed and
hereby acknowledged, the Parties agree as follows:
1. Extension of Term. Executive has met the stipulated performance
criteria established by the Board. Accordingly, pursuant to the Original
Agreement, Executive's term of Employment has been extended through December
31, 2007.
2. Base Salary. As a result of Executive meeting the stipulated
performance criteria established by the Board for 2001, the Executive's
annual base salary was increased to $350,000 for the period from January 1,
2002 until December 31, 2002. Again as a result of Executive meeting the
stipulated performance criteria for 2002, the Executive's annual base salary
for the period from January 1, 2003 until December 31, 2003 was increased to
$450,000. During the remaining term of Executive's employment, Executive's
annual base salary shall not be decreased, but shall be adjusted annually in
each December at a rate of no less than 10% of the current year's base
salary. In addition, the compensation committee of the Board may determine
such other adjustments as may be appropriate based on the Executive's
performance during the most recent performance period, in accordance with
the Company's compensation policies.
3. Interpretation.
a. No Other Additions. Sections 1 and 2 of this Addendum constitute the
only additions to the Original Agreement, all other terms and conditions
therein shall remain unaltered.
b. Definitions. All capitalized terms used herein and not otherwise
defined shall have the same meaning assigned to them in the Original
Agreement.
c. Severability. Should any one or more of the provisions of this
Addendum be determined to be illegal or unenforceable, all other provisions
of this Addendum shall be given effect separately from the provision or
provisions determined to be illegal or unenforceable and shall not be
effected thereby.
d. Choice of Law. This Addendum shall be governed by, and construed in
accordance with, the laws of the State of Texas.
f. Headings. The headings of sections and paragraphs of this Addendum
have been inserted for convenience of reference only and do not constitute a
part of this Addendum.
g. Counterparts. This Addendum may be executed in multiple counterparts
with the same effect as if all parties had signed the same document. All
such counterparts shall be deemed an original, shall be construed together
and shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be duly
executed and delivered as of the day first above written.
FIRST CASH FINANCIAL SERVICES, INC.
By:/s/PHILLIP E. POWELL
----------------------
Phillip E. Powell
Chief Executive Officer
EXECUTIVE
/s/RICK L. WESSEL
-----------------
Rick L. Wessel
Exhibit 21.0
FIRST CASH FINANCIAL SERVICES, INC.
SUBSIDIARIES
Percentage
Country/State of Owned
Subsidiary Name Incorporation by Registrant
--------------- ------------- -------------
American Loan and Jewelry, Inc. Texas 100%
WR Financial, Inc. Texas 100%
Famous Pawn, Inc. Maryland 100%
JB Pawn, Inc. Texas 100%
Cash & Go, Inc. California 100%
Capital Pawnbrokers, Inc. Maryland 100%
Silver Hill Pawn, Inc. Maryland 100%
Elegant Floors, Inc. Maryland 100%
One Iron Ventures, Inc. Illinois 100%
First Cash, S.A. de C.V. Mexico 100%
American Loan Employee
Services, S.A. de C.V. Mexico 100%
First Cash, Ltd. Texas 100%
First Cash Corp Delaware 100%
First Cash Management, LLC Delaware 100%
First Cash, Inc. Nevada 100%
Cash & Go, Ltd. Texas 49.5%
Cash & Go Management, LLC Texas 50%
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-71077 of First Cash Financial Services, Inc. on Form S-3 and
Registration Statement No. 333-73391 on Form S-8 of our report dated January
29, 2002 (which report expresses an unqualified opinion and includes
explanatory paragraphs relating to the Company's adoption effective January
1, 2002 of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, and change in method of accounting for income
recognition on pawns in 2000), appearing in this Annual Report on Form 10-K
of First Cash Financial Services, Inc. for the year ended December 31, 2002.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 24, 2003
Exhibit 23.2
CONSENT
The Board of Directors
First Cash Financial Services, Inc.
We consent to the incorporation by reference of our legal opinion contained
in the Registration Statement on Form S-3 dated January 22, 1999, File No.
333-71077 and in the Registration Statement on Form S-8 dated March 5, 1999,
File No. 333-73391.
BREWER & PRITCHARD, P.C.
Houston, Texas
March 24, 2003
EXHIBIT 99.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SABARNES-OXLEY ACT OF 2002
In connection with the Annual Report of First Cash Financial Services, Inc.
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Phillip E. Powell, Chairman of the Board and Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: March 24, 2003
/s/ PHILLIP E. POWELL
--------------------------------------
Phillip E. Powell
Chairman of the Board and Chief Executive Officer
EXHIBIT 99.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SABARNES-OXLEY ACT OF 2002
In connection with the Annual Report of First Cash Financial Services, Inc.
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, R. Douglas Orr, Chief Accounting Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: March 24, 2003
/s/ R. DOUGLAS ORR
--------------------------------------
R. Douglas Orr
Chief Financial Officer
