UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number:
March 31, 2005 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act). Yes X No ___
As of April 28, 2005 there were 15,536,011 shares of Common Stock outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
------------------- -----------
2005 2004 2004
------- ------- -------
(unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents................ $ 38,883 $ 19,482 $26,232
Service charges receivable............... 3,968 3,565 4,512
Pawn receivables......................... 22,435 19,784 23,429
Short-term advance receivables,
net of allowance of $416, $382
and $552, respectively................. 11,575 10,781 15,465
Inventories.............................. 16,104 14,467 17,644
Prepaid expenses and other current assets 1,178 900 1,378
Income taxes receivable.................. - 3,141 867
------- ------- -------
Total current assets ................. 94,143 72,120 89,527
Property and equipment, net.............. 18,516 15,012 17,376
Goodwill................................. 53,237 53,237 53,237
Other.................................... 2,599 737 799
------- ------- -------
$168,495 $141,106 $160,939
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $ 693 $ 644 $ 856
Accrued expenses......................... 7,297 5,930 8,686
Income taxes payable..................... 1,383 - -
------- ------- -------
Total current liabilities ............ 9,373 6,574 9,542
Deferred income taxes payable............ 7,651 6,255 7,351
------- ------- -------
17,024 12,829 16,893
------- ------- -------
Stockholders' equity:
Preferred stock; $.01 par value;
10,000,000 shares authorized ........ - - -
Common stock; $.01 par value;
90,000,000 shares authorized ........ 167 158 166
Additional paid-in capital ............ 79,911 66,207 78,556
Retained earnings ..................... 83,509 61,912 77,440
Common stock held in treasury ......... (12,116) - (12,116)
------- ------- -------
151,471 128,277 144,046
------- ------- -------
$168,495 $ 141,106 $160,939
======= ======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
----------------------
March 31, March 31,
2005 2004
------- -------
(unaudited)
(in thousands, except per
share amounts)
Revenues:
Merchandise sales......................... $ 24,237 $ 20,471
Pawn service charges...................... 8,954 8,134
Short-term advance service charges........ 12,669 12,003
Check cashing fees........................ 826 910
Other..................................... 313 332
------- -------
46,999 41,850
------- -------
Cost of revenues:
Cost of goods sold........................ 14,590 12,070
Short-term advance loss provision......... 1,581 1,389
Check cashing returned items expense...... 86 73
------- -------
16,257 13,532
------- -------
Gross profit................................... 30,742 28,318
------- -------
Expenses:
Store operating expenses.................. 15,761 14,777
Administrative expense.................... 4,216 4,412
Depreciation.............................. 1,292 921
Interest expense ......................... - 43
Interest income........................... (84) (14)
------- -------
21,185 20,139
------- -------
Income before income taxes..................... 9,557 8,179
Provision for income taxes..................... 3,488 3,001
------- -------
Net income..................................... $ 6,069 $ 5,178
======= =======
Net income per share:
Basic ........................................ $ 0.38 $ 0.34
======= =======
Diluted ...................................... $ 0.36 $ 0.30
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
--------------------
March 31, March 31,
2005 2004
-------- --------
(unaudited, in thousands)
Cash flows from operating activities:
Net income ................................... $ 6,069 $ 5,178
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation .............................. 1,292 921
Short-term advance loss provision .......... 1,581 1,389
Stock option and warrant income tax benefit 598 3,953
Changes in operating assets and liabilities:
Service charges receivable ................. 544 353
Inventories ................................ 554 392
Prepaid expenses and other assets .......... (1,600) 10
Accounts payable and accrued expenses ...... (1,552) (4,312)
Current and deferred income taxes ......... 2,550 (1,228)
-------- --------
Net cash flows from operating activities . 10,036 6,656
-------- --------
Cash flows from investing activities:
Pawn receivables, net ........................ 1,980 982
Short-term advance receivables, net........... 2,309 1,589
Purchases of property and equipment .......... (2,432) (1,515)
-------- --------
Net cash flows from investing activities . 1,857 1,056
-------- --------
Cash flows from financing activities:
Repayments of debt ........................... - (6,000)
Purchase of treasury stock ................... - (1,347)
Proceeds from exercise of stock options and
warrants.................................... 758 3,270
-------- --------
Net cash flows from financing activities . 758 (4,077)
-------- --------
Change in cash and cash equivalents............ 12,651 3,635
Cash and cash equivalents at beginning
of the period................................ 26,232 15,847
-------- --------
Cash and cash equivalents at end of the period. $ 38,883 $ 19,482
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................... $ - $ 43
======== ========
Income taxes ............................... $ 341 $ 277
======== ========
Supplemental disclosure of non-cash investing activity:
Non-cash transactions in connection with pawn
receivables settled through forfeitures of
collateral transferred to inventories ...... $ 8,483 $ 7,117
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
including the notes thereto, include the accounts of First Cash Financial
Services, Inc. (the "Company") and its wholly-owned subsidiaries. In
addition, the accompanying consolidated financial statements include the
accounts of Cash & Go, Ltd., a Texas limited partnership which owns
financial services kiosks inside convenience stores, in which the Company
has a 50% ownership interest. All significant intercompany accounts and
transactions have been eliminated.
Such unaudited consolidated financial statements are condensed and do
not include all disclosures and footnotes required by generally accepted
accounting principles in the United States of America for complete financial
statements. Such interim period financial statements should be read in
conjunction with the Company's consolidated financial statements which are
included in the Company's December 31, 2004 Annual Report on Form 10-K. The
condensed consolidated financial statements as of March 31, 2005 and for the
three month periods ended March 31, 2005 and 2004 are unaudited, but in
management's opinion, include all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows for such interim periods.
Operating results for the period ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the full fiscal year.
Certain amounts in prior year comparative presentations have been
reclassified in order to conform to the 2005 presentation.
Note 2 - Revolving Credit Facility
The Company maintains a long-term line of credit with two commercial
lenders (the "Credit Facility"). The Credit Facility provides a $25,000,000
long-term line of credit that matures on April 15, 2006 and bears interest
at the prevailing LIBOR rate (which was approximately 2.9% at March 31,
2005) plus a fixed interest rate margin of 1.375%. Amounts available under
the Credit Facility are limited to 300% of the Company's earnings before
income taxes, interest, and depreciation for the trailing twelve months.
At March 31, 2005, the Company had $25,000,000 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 March 31, 2005 and April 28, 2005.
The Company is required to pay an annual commitment fee of 1/8 of 1% on
the average daily-unused portion of the Credit Facility commitment. The
Company's Credit Facility contains provisions that 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 3 - Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
Three Months Ended
--------------------
March 31, March 31,
2005 2004
-------- --------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 6,069 $ 5,178
======== ========
Denominator:
Weighted-average common shares
for calculating basic earnings
per share 16,063 15,431
Effect of dilutive securities:
Stock options and warrants 950 1,648
-------- --------
Weighted-average common
shares for calculating diluted
earnings per share 17,013 17,079
======== ========
Basic earnings per share $ 0.38 $ 0.34
======== ========
Diluted earnings per share $ 0.36 $ 0.30
======== ========
Note 4 - Employee Stock Incentive Plans
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. Accordingly, no stock-
based employee compensation cost is reflected in net income as all options
and warrants granted had an exercise price greater than or equal to the
market value of the underlying common stock on the date of grant. In
accordance with SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, the following table illustrates the effect on net
income and earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Three Months Ended
--------------------
March 31, March 31,
2005 2004
-------- --------
Net income, as reported $ 6,069 $ 5,178
Less: Stock-based employee
compensation determined under the
fair value requirements of SFAS 123,
net of income tax benefits 7,392 2,356
-------- --------
Adjusted net income $ (1,323) $ 2,822
======== ========
Earnings per share:
Basic, as reported $ 0.38 $ 0.34
Basic, adjusted $ (0.08) $ 0.18
Diluted, as reported $ 0.36 $ 0.30
Diluted, adjusted $ (0.08) $ 0.17
The fair values were determined using a Black-Scholes option-pricing
model using the following assumptions:
Three Months Ended
--------------------
March 31, March 31,
2005 2004
-------- --------
Dividend yield - -
Volatility 45.0% 52.7%
Risk-free interest rate 3.5% 3.5%
Expected life 5.0 years 5.5 years
In December 2004, the FASB issued Statement No. 123(R), Share Based
Payments ("FAS 123(R)"). This statement, which will be effective for the
Company beginning in 2006, requires that companies recognize compensation
expense equal to the fair value of stock options or other share-based
payments. The Company issued stock options to purchase 2,076,000 shares of
common stock to certain employees and directors in January 2005 under its
existing stock option plans. These options were issued in seven equal
layers to each recipient with exercise prices for the layers set at $25.00,
$30.00, $35.00, $40.00, $45.00, $50.00 and $55.00. The options were fully
vested as of the date of grant, and accordingly, the Company will not record
share based compensation expense related to these options when FAS 123(R)
is adopted. The Company anticipates that it will record share based
compensation expense, net of income taxes, in 2006 of approximately $300,000
related to the vesting of other previously issued options.
During the period from January 1, 2005 through March 31, 2005, the
Company issued 104,400 shares of common stock relating to the exercise of
outstanding stock options and warrants for an aggregate exercise price of
$1,357,000, including income tax benefit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Cash Financial Services, Inc. (the "Company") is a leading
provider of specialty consumer finance products. The Company currently has
300 locations in eleven U.S. states and six states in Mexico. The Company's
pawn stores engage in both consumer finance and retail sales activities and
are a convenient source for small consumer advances ("pawns") secured by
pledged tangible personal property such as jewelry, electronic equipment,
tools, sporting goods and musical equipment. The pawn stores also retail
previously-owned merchandise acquired through collateral forfeitures and
over-the-counter purchases from customers. Many of the Company's U.S. pawn
stores offer short-term, unsecured advances ("short-term advances"), which
are also known as payday advances.
The Company also operates stand-alone payday advance stores in several
U.S. states. These stores provide a broad range of consumer financial
services products, including short-term or payday advances, check cashing,
money orders, money 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 40 kiosks located inside convenience
stores, which offer short-term advances and check cashing.
OPERATIONS AND LOCATIONS
The following table details store counts for the three-month period
ended March 31, 2005:
Three Months Ended March 31, 2005
-----------------------------------
Pawn Payday Advance Total
Stores Stores Stores
------ ------ ------
Beginning total 197 87 284
New stores opened 10 5 15
Closed stores (2) - (2)
------ ------ ------
Ending total 205 92 297
====== ====== ======
At March 31, 2005, a total of 69 pawn stores also offered the payday
advance product in addition to pawn loans and retail sales. For the three-
month period ended March 31, 2005, the Company's 50% owned joint venture,
Cash & Go, Ltd. operated a total of 40 kiosks located inside convenience
stores in the state of Texas, which are not included in the above chart. No
kiosks were opened or closed during the three months ended March 31, 2005.
For the quarter ended March 31, 2005, the Company's revenues were
derived 52% from merchandise sales, 19% from service charges on pawn loans,
27% from service charges on short-term advances, and 2% from other sources,
primarily check cashing fees.
Stores included in the same-store revenue calculations are those stores
that were opened prior to the beginning of the prior year comparative fiscal
period and are still open. Also included are stores that were relocated
during the year within a specified distance serving the same market, where
there is not a significant change in store size and where there is not a
significant overlap or gap in timing between the opening of the new store
and the closing of the existing store. During the periods reported, the
Company has not had store expansions that involved a significant change in
the size of retail showrooms, and accordingly, no expanded stores have been
excluded from the same-store calculations. Sales of scrap jewelry are
included in same-store revenue calculations. Revenues from the Cash & Go,
Ltd. kiosks are included in same-store calculations for 2004 as the revenues
from the kiosks were included in the consolidated revenues for Fiscal 2004.
Although the Company has had significant increases in revenues due to
new store openings in 2004 and 2005, the Company has also incurred increases
in operating expenses attributable to the additional stores. 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, advertising, property taxes, licenses, supplies
and security. Administrative expenses consist of items relating to the
operation of the corporate office, including the compensation and benefit
costs of corporate officers, area supervisors and other operations
management, accounting and administrative costs, information technology
costs, liability and casualty insurance, outside legal and accounting fees
and stockholder-related expenses.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles 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. Both the significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating the reported financial results and the effects of recent
accounting pronouncements have been reported in the Company's 2004 Annual
Report on Form 10-K.
In December 2004, the FASB issued Statement No. 123(R), Share Based
Payments ("FAS 123(R)"). This statement, which will be effective for the
Company beginning in 2006, requires that companies recognize compensation
expense equal to the fair value of stock options or other share-based
payments. The Company issued options to purchase 2,076,000 shares of common
stock to certain employees and directors in January 2005 under its existing
stock option plans. These options were issued in seven equal layers to each
recipient with exercise prices for the layers set at $25.00, $30.00, $35.00,
$40.00, $45.00, $50.00 and $55.00. The options were fully-vested as of the
date of grant, and accordingly, the Company will not record share based
compensation expense related to these options when FAS 123(R) is adopted.
The Company designed the terms and conditions of this option grant in a
manner so as to provide meaningful long-term performance-based incentives
for the management team and to reduce future share based compensation
expense under FAS 123(R). The Company anticipates that it will record share
based compensation expense, net of income taxes, in 2006 of approximately
$300,000 related to the vesting of other previously issued options.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 compared to the three months ended
March 31, 2004
Total revenues increased 12% to $46,999,000 for the three months ended
March 31, 2005 ("the First Quarter of 2005") as compared to $41,850,000 for
the three months ended March 31, 2004 ("the First Quarter of 2004"). The
change was comprised of an increase in revenues of $3,080,000 generated by
the 67 new pawn and payday advance stores which were open since January 1,
2004, a same-store increase totaling $2,323,000 at the stores which were in
operation during all of the First Quarter of both 2004 and 2005, net of a
decrease in revenues of $254,000 from five stores that were closed since
January 1, 2004. Same-store revenues increased 7% for the First Quarter of
2005 as compared to the same quarter last year. This increase represented
the net effect of larger same-store revenue increases in newer stores opened
in 2002 and 2003, less smaller revenue increases in the stores opened or
acquired prior to 2002.
Of the $5,149,000 increase in total revenues, 73%, or $3,766,000,
was attributable to increased merchandise sales, 16%, or $820,000 was
attributable to an increase in pawn service charges, 13%, or $666,000 was
attributable to an increase in short-term advance service charges, while
other income, comprised primarily of check cashing fees, decreased 2% or
$103,000. The year-over-year increases in merchandise sales and pawn
service charges of 18% and 10%, respectively, resulted from the maturation
of new pawn stores opened over the past three years and same-store revenue
increases in mature domestic pawn stores. Short-term or payday advance
service charges increased 6%, which is reflective of a smaller percentage
increase in the number of new locations offering the payday advance product
and a resulting larger percentage base of mature stores, which also include
the 40 Cash & Go, Ltd. kiosks. In addition, the Company noted that payday
advance revenues during the First Quarter of 2005 were negatively impacted
by the 2005 calendar, which contained only twelve Fridays, compared to a
typical quarter that has thirteen Fridays. For the payday advance product,
a significant number of the new advances are either written on Fridays
and/or scheduled for collection on Fridays and the twelve-Friday First
Quarter of 2005 negatively impacted both gross and net payday advance
profitability compared to the prior year quarter which had thirteen Fridays.
A significant component of the increase in merchandise sales was non-
retail bulk sales of scrap jewelry merchandise, which increased from
$3,439,000 in the First Quarter of 2004 to $5,269,000 in the First Quarter
of 2005. As a percentage of total revenues, merchandise sales increased
from 49% to 52% during the First Quarter of 2005 as compared to the First
Quarter of 2004, pawn service charges remained unchanged at 19%, short-term
advance service fees decreased from 29% to 27%, and check cashing fees and
other income as a percentage of total revenues decreased from 3% to 2%
during the First Quarter of 2004 and the First Quarter of 2005.
The pawn receivables balance increased 13% from $19,784,000 at March
31, 2004 to $22,435,000 at March 31, 2005. The pawn receivables balance in
the Company's domestic stores at March 31, 2005 was $14,886,000, which
represented an increase of 5% over the prior year. Pawn receivables in the
Mexico stores at March 31, 2005 were $7,549,000, an increase of 36% over the
prior year. Of the $2,651,000 total increase in pawn receivables, $884,000
was attributable to the growth at the stores which were in operation as of
March 31, 2005 and 2004, and $1,767,000 was attributable to the new stores
opened since March 31, 2004. The net short-term advance receivables balance
increased 7% from $10,781,000 at March 31, 2004 to $11,575,000 at March 31,
2005. Of the $794,000 increase, $235,000 was attributable to the growth in
short-term advance receivable balances at the stores which were in operation
as of March 31, 2005 and 2004 and $559,000 was attributable to the new
stores opened since March 31, 2004. The Company's loss provision reserve on
short-term advance receivables increased from $382,000 at March 31, 2004 to
$416,000 at March 31, 2005.
Gross profit margins on total merchandise sales were 40% during the
First Quarter of 2005 compared to 41% during the First Quarter of 2004.
Retail merchandise margins, which exclude bulk scrap jewelry sales, were 44%
during the First Quarter of 2005 compared to 45% during the First Quarter
of 2004. The Company's loss provision relating to short-term advances
increased from $1,389,000 in the First Quarter of 2004 to $1,581,000 in the
First Quarter of 2005. As a percentage of short-term advance service charge
revenues, the loss provision increased from 11.6% during the First Quarter
of 2004 to 12.5% during the First Quarter of 2005. Management considers
these fluctuations to be within the expected range of variability.
Store operating expenses increased 7% to $15,761,000 during the First
Quarter of 2005 compared to $14,777,000 during the First Quarter of
2004, primarily as a result of the net addition of 62 pawn and check
cashing/short-term advance stores since January 1, 2004, which is a
26% increase in store count. Administrative expenses decreased 4% to
$4,216,000 during the First Quarter of 2005 compared to $4,412,000 during
the First Quarter of 2004, which is attributable to net reductions in total
administrative and supervisory compensation expense, net decreases in
certain Mexico administrative expenses and other seasonal and/or non-
recurring factors affecting comparability to the prior year. Full year
administrative expenses for 2005 are expected to increase in comparison to
2004. The Company had no interest expense during the First Quarter of 2005
as a result of paying off all outstanding debt during Fiscal 2004. Interest
income increased from $14,000 in the First Quarter of 2004 to $84,000 in the
First Quarter of 2005, due primarily to interest income earned on increased
levels of invested cash and cash equivalents.
For the First Quarter of 2004 and 2005, the Company's effective federal
income tax rates of 37% and 36%, respectively, differed from the statutory
tax rate of approximately 35% primarily as a result of state and foreign
income taxes. The reduction in the 2005 effective tax rate is a result of
recording certain tax benefits related to the Company's Mexico operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and store openings have been financed with
funds generated from operations.
The Company maintains a long-term line of credit with two commercial
lenders (the "Credit Facility"). The Credit Facility provides a $25,000,000
long-term line of credit that matures on April 15, 2006 and bears interest
at the prevailing LIBOR rate (which was approximately 2.9% at April 28,
2005) plus a fixed interest rate margin of 1.375%. 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 March 31, 2005, the Company had $25,000,000 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 March 31, 2005 and April 28,
2005. The Company is required to pay an annual commitment fee of 1/8 of 1%
on the average daily-unused portion of the Credit Facility commitment. The
Company's Credit Facility contains provisions that 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 March 31, 2005, the Company's primary sources of liquidity were
$38,883,000 in cash and cash equivalents, $37,978,000 in receivables,
$16,104,000 in inventories and $25,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital
of $84,770,000 as of March 31, 2005, and total equity exceeded total
liabilities by a ratio of 9 to 1.
The Company utilized positive cash flows from operations in the Three-
Month 2005 Period to fund investing and financing activities primarily
related to opening new stores. Net cash provided by operating activities of
the Company during the three months ended March 31, 2005 was $10,036,000,
consisting primarily of net income of $6,069,000 plus non-cash adjustments
for depreciation, short-term advance loss provision, tax benefit from the
exercise of employee stock options, and a change in tax balances of
$1,292,000, $1,581,000, $598,000, and $2,550,000, respectively, in addition
to a decrease in service charge receivables and inventory of $544,000 and
$554,000, respectively, net of an increase in prepaid assets of $1,600,000
and a decrease in accounts payable and accrued expenses of $1,552,000. Net
cash provided by investing activities during the three months ended March
31, 2005 was $1,857,000, which was primarily comprised of net cash inflows
from pawn receivable activity of $1,980,000, net cash inflows from short-
term advance receivable activity of $2,309,000, net of cash paid for fixed
asset additions of $2,432,000. The opening of 15 new stores and purchases
of corporate fixed assets during the Three-Month 2005 Period contributed
significantly to the volume of fixed asset additions. Net cash provided by
financing activities was $758,000 during the three months ended March 31,
2005, which consisted of net proceeds from exercises of stock options and
warrants.
For purposes of its internal liquidity assessments, the Company
considers net cash changes in pawn receivables and short-term advance
receivables to be closely related to operating cash flows. For the Three-
Month 2005 Period the total cash flows from operations were $10,036,000,
while net cash inflows related to pawn receivable activity and short-term
advance receivable activity were $1,980,000 and $2,309,000, respectively.
The combined net cash flows from operations and pawn and short-term advance
receivables totaled $14,325,000 for the Three-Month 2005 Period. For the
comparable Three-Month 2004 Period, cash flows from operations were
$6,656,000 and net cash inflows related to pawn receivables and short-term
advance receivables were $982,000 and $1,589,000, respectively. The
combined net cash flows from operations and pawn and short-term advance
receivables totaled $9,227,000 for the Three-Month 2004 Period.
The profitability and liquidity of the Company is affected by the
amount of pawn receivables outstanding, which is controlled in part by the
Company's pawn lending decisions. The Company is able to influence the
frequency of pawn redemptions by increasing or decreasing the amount
advanced in relation to the resale value of the pawned property. Tighter
credit decisions generally result in smaller pawn advances in relation to
the estimated resale value of the pledged property and can thereby decrease
the Company's aggregate pawn receivable 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 the related loss
provision 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 the short-term advance loss
provision.
In addition to these factors, merchandise sales and the pace of store
expansions affect the Company's liquidity. Management believes that cash
generated from operations should be sufficient to accommodate the Company's
current operations for Fiscal 2005. The Company has no significant capital
commitments.
While the Company continually looks for, and is presented with
potential acquisition opportunities, the Company currently has no definitive
plans or commitments for acquisitions. The Company will evaluate potential
acquisitions, if any, based upon growth potential, purchase price, strategic
fit and quality of management personnel among other factors. If the Company
encounters an attractive opportunity to acquire new stores in the near
future, the Company may seek additional financing, the terms of which will
be negotiated on a case-by-case basis.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS
Forward-Looking Information
This quarterly 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," "should," "plans," "intends," "could," or "anticipates,"
or the negative thereof, or other variations thereon, or comparable
terminology, or by discussions of strategy. Forward-looking statements in
this quarterly report include, without limitation, the Company's earnings
forecast for 2005, its expectations for new store openings in 2005, and its
cash flow expectations for 2005. Such statements are subject to future
adjustments, pending regulatory and legislative initiatives, which are
described herein and in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004. 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 quarterly report speak only as of the
date of this statement, 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 release. Such factors are difficult
to predict and many are beyond the control of the Company. Recently
issued federal regulations and enforcement actions, as well as proposed
state-level legislation, affecting the payday advance industry could affect
the Company's financial results and growth expectations in certain markets;
however, the impact of the new regulations, enforcement actions and
legislation cannot be estimated at the current time. Other such factors may
include changes in regional, national or international economic conditions,
changes or increases in competition, the ability to open and integrate
new stores, the ability to maintain favorable banking relationships as it
relates to short-term lending products, changes in other governmental
regulations, unforeseen litigation, changes in interest rates, changes in
tax rates or policies, changes in gold prices, changes in foreign currency
exchange rates, future business decisions, and other uncertainties.
Payday Advance Regulatory Developments
The Company's short-term or payday advance operations are generally
regulated directly by the various states in which the product is offered.
In the State of Texas, the Company has entered into an agreement with County
Bank of Rehoboth Beach, Delaware ("County Bank"), a federally insured State
of Delaware chartered financial institution, to act as a loan servicer
within the state for County Bank. The Company is licensed as a regulated
servicing agent by the State of Texas. The Federal Deposit Insurance
Corporation ("FDIC") regulates the ability of state chartered banks to enter
into relationships with out-of-state payday loan servicers, and maintains
guidelines under which such arrangements are permitted. Texas is the
only state in which the Company functions as a loan servicer through
a relationship with a state chartered bank that is subject to the FDIC
guidelines for payday lending.
On March 2, 2005, the FDIC issued revised payday lending guidelines for
FDIC-supervised banks. The revised guidelines include a requirement that
such banks develop procedures to ensure that a payday loan is not provided
to any customer with payday loans outstanding from any bank for more than
three months in the previous twelve months. It currently remains to be
determined what procedures may be proposed by the lending banks or accepted
by the FDIC in order to meet these guidelines. The FDIC-supervised banks
are currently in the process of reviewing the revised guidelines and expect
to implement any necessary changes in lending procedures to comply with
them. The Company's payday advance revenues from Texas locations totaled
$30,554,000 in Fiscal 2004 and represented approximately 17% of the
Company's total revenues for 2004. For the quarter ended March 31, 2005,
payday revenues from Texas locations totaled $6,810,000 and represented
approximately 14.5% of the Company's total revenues for the first quarter.
The Company expects that implementation of the revised guidelines could have
a negative effect on some portion of its payday lending revenues in its
Texas locations. Until FDIC-supervised banks complete their review of the
revised guidelines and the FDIC approves the revised procedures expected to
be developed by the banks providing payday loans, the exact timing and
amount of the financial impact of the revised guidelines cannot be
estimated.
In a separate matter, on March 11, 2005, the FDIC issued an Order to
Cease and Desist (the "Order") to County Bank to address alleged unsafe and
unsound banking practices related to the bank's short-term loan, or payday
advance, program. County Bank consented to issuance of the Order without
admitting to or denying the alleged charges. The Order requires that County
Bank address certain alleged deficiencies in the operation of its short-term
loan program, specifically including management supervisory functions,
oversight and control over third-party short-term loan servicing agents,
internal control systems, information systems, internal audit systems,
certain lending practices, and compliance with existing FDIC regulations
concerning short-term loan programs. The FDIC has provided specific time
tables ranging from 15 to 90 days from the date of the Order for County
Bank to achieve compliance with the specified directives. County Bank has
informed the Company that it expects to meet the requirements of the Order.
While the Company does not expect that actions taken by County Bank to
achieve compliance with the Order will have a significant impact on the
Company's short-term loan (payday advance) servicing operations with County
Bank, the ultimate effect of any such actions cannot be determined
at the current time. Additionally, were the FDIC to eventually suspend or
significantly restrict County Bank's short-term loan program, such action
would negatively impact the Company's ability to offer the payday advance
product in its Texas locations.
In addition to federal legislative and regulatory oversight, the
consumer finance industry is also subject to legislative initiatives and
regulatory actions at the state level. If state-level legislative or
regulatory actions that had negative effects on the consumer finance
industry were taken in states where the Company has a significant number of
stores, those actions could have a material, adverse effect on the
Company's lending 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 have
a materially adverse impact on the Company's operations and financial
condition.
Other
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, national or international economic conditions,
changes in competition from various sources including both financial
services entities and retail businesses, the ability to integrate new
stores, changes in governmental regulations, unforeseen litigation, changes
in capital markets, changes in interest rates, changes in tax rates or
policies, the ability to maintain a loan servicing relationship with an out-
of-state bank necessary to generate service charges from short-term advances
in the Texas market, future business decisions, changes in gold prices,
changes in foreign currency exchange rates, and other risks and
uncertainties indicated in the Company's 2004 Annual Report to
Stockholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates, gold prices and foreign currency exchange rates
and are described in detail in the Company's 2004 Annual Report on Form
10-K. The Company does not engage in speculative or leveraged transactions,
nor does it hold or issue financial instruments for trading purposes.
There have been no material changes to the Company's exposure to market
risks since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company.
Accordingly, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer,
management of the Company has evaluated the effectiveness of the
design and operation of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) as of March 31, 2005. Based upon
that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of March 31, 2005, the Company's
disclosure controls and procedures are effective in timely alerting
them to the material information relating to the Company required to
be included in its periodic filings with the Securities and Exchange
Commission.
(b) Changes in Internal Control Over Financial Reporting
There has been no significant change in the Company's internal
control over financial reporting that was identified in connection
with management's evaluation, as described above, that has
materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation and
arbitration previously reported in the Company's 2004 Annual Report to
Stockholders filed on Form 10-K.
ITEM 2. CHANGES IN SECURITIES
During the period from January 1, 2005 through April 28, 2005, the
Company issued 36,250 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $544,000
(including income tax effect). During the period from January 1, 2005
through April 28, 2005, the Company issued 87,000 shares of common stock
relating to the exercise of outstanding stock warrants for an aggregate
exercise price of $1,062,000 (including income tax effect).
The transactions set forth in the above paragraphs were completed
pursuant to either Section 4(2) of the Securities Act or Rule 506 of
Regulation D of the Securities Act. With respect to issuances made pursuant
to Section 4(2) of the Securities Act, the transactions did not involve any
public offering and were sold to a limited group of persons. Each recipient
either received adequate information about the Company or had access,
through employment or other relationships, to such information, and the
Company determined that each recipient had such knowledge and experience in
financial and business matters that they were able to evaluate the merits
and risks of an investment in the Company. With respect to issuances made
pursuant to Rule 506 of Regulation D of the Securities Act, the Company
determined that each purchaser was an "accredited investor" as defined in
Rule 501(a) under the Securities Act. All sales of the Company's securities
were made by officers of the Company who received no commission or
other remuneration for the solicitation of any person in connection with
the respective sales of securities described above. The recipients of
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
On July 15, 2004 the Board of Directors authorized the repurchase of up
to 1,600,000 shares of common stock. During the period from January 1, 2005
through April 28, 2005, the Company repurchased 576,479 shares of common
stock at an average price of $19.74 per share under the stock repurchase
program approved by the Board of Directors.
The following table provides the information with respect to purchases
made by the Company of shares of its common stock during each month that the
program was in effect during 2005.
Total Number Maximum
Total Average of Shares Number Of
Number Price Purchased as Part Shares that May
Of Shares Paid of Publicly Yet Be Purchased
Purchased Per Share Announced Plan Under the Plan
--------- --------- -------------- --------------
January 1 through
January 31, 2005 - $ - - 977,285
February 1 through
February 28, 2005 - - - 977,285
March 1 through
March 31, 2005 - - - 977,285
April 1 through
April 28, 2005 576,479 19.74 576,479 400,806
------- -------
Total 576,479 $19.74 576,479
======= =======
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by J. Alan Barron, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
provided by J. Alan Barron, Chief Executive Officer and
R. Douglas Orr, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: April 28, 2005 FIRST CASH FINANCIAL SERVICES, INC.
----------------------------------
(Registrant)
/s/ J. ALAN BARRON
-----------------------
J. Alan Barron
Chief Executive Officer
/s/ R. DOUGLAS ORR
-----------------------
R. Douglas Orr
Chief Financial Officer
(Principal Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by J. Alan Barron, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided
by J. Alan Barron, Chief Executive Officer and R. Douglas Orr,
Chief Financial Officer
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, J. Alan Barron, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Cash
Financial Services, Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13(a)-15(f) and 15(d)-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation;
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: April 28, 2005
/s/ J. Alan Barron
-----------------------
J. Alan Barron
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, R. Douglas Orr, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of First Cash
Financial Services, Inc. (the "Registrant");
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13(a)-15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation;
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting; and
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of
the Registrant's board of directors (or persons performing the
equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: April 28, 2005
/s/ R. Douglas Orr
-----------------------
R. Douglas Orr
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Cash Financial Services,
Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31,
2005, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), we, J. Alan Barron and R. Douglas Orr each certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that to our knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange 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: April 28, 2005
/s/ J. Alan Barron
-----------------------
J. Alan Barron
Chief Executive Officer
/s/ R. Douglas Orr
-----------------------
R. Douglas Orr
Chief Financial Officer