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, 2005, 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
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(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 if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. Large accelerated
filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the 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 30, 2005, the last trading date of registrant's most
recently completed second fiscal quarter is $269,500,000.
As of March 13, 2006, there were 32,007,672 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 June 7, 2006, 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, 2005
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 1a Risk Factors
Item 1b. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9a. Controls and Procedures
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
FORWARD-LOOKING INFORMATION
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This annual report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. ("First Cash" or the "Company"). Forward-looking statements,
as that term is defined in the Private Securities Litigation Reform Act of
1995, 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 can also be identified by the fact
that these statements do not relate strictly to historical or current
matters. Rather, forward-looking statements relate to anticipated or
expected events, activities, trends or results. Because forward-looking
statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties. Forward-looking
statements in this annual report include, without limitation, the Company's
expectations of earnings per share, expansion strategy, store openings, loss
provisions, future liquidity, equity compensation expense and cash flows.
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
annual report speak only as of the date of this statement, and the Company
expressly disclaims any obligation or undertaking to report any updates or
revisions to any such statement to reflect any change in the Company's
expectations or any change in events, conditions or circumstances 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
annual report. Such factors are difficult to predict and many are beyond
the control of the Company and may include changes in regional, national or
international economic conditions, changes in consumer borrowing and
repayment behaviors, changes or increases in competition, the ability to
locate, open and integrate new stores, the ability to operate as a credit
services organization in Texas, the ability to successfully refer credit
services customers to an independent lender who can provide credit to these
customers, new legislative initiatives or governmental regulations, or
changes to existing regulations, affecting payday advance businesses, credit
services organizations and pawn businesses in both the U.S. and Mexico,
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. These risks and
uncertainties are further and more completely described in "Item 1a. - Risk
Factors."
STOCK SPLIT
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In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006. All share and per share amounts (except authorized shares and par
value) have been retroactively adjusted to reflect the split.
PART I
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Item 1. Business
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General
The Company is a leading provider of specialty consumer finance
products. The Company has over 330 locations in eleven U.S. states and
seven states in Mexico as of March 13, 2006. For the year ended December
31, 2005, the Company's revenues were derived as follows: 49% from pawn-
related merchandise sales, 20% from pawn service fees, 29% from short-term
advance and credit services fees, and 2% from other sources, primarily check
cashing fees.
The Company's pawn stores engage in both consumer finance and retail
sales activities, and are a convenient source for small consumer loans,
advancing money against 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. In addition,
many of the Company's pawn stores offer short-term payday advances or a
credit services product.
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 payday advances, credit services, check
cashing, money orders, money transfers and prepaid card products in selected
markets. 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, that offer the credit services program
and check cashing.
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.; Capital Pawnbrokers, Inc.;
Silver Hill Pawn, Inc.; Elegant Floors, Inc.; One Iron Ventures, 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; First Cash, Inc.;
First Cash Credit, Ltd.; First Cash Credit Management, LLC; FCFS MO, Inc.;
FCFS OK, Inc.; FCFS SC, Inc.; and FCFS MI, 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
Specialty consumer finance represents a rapidly growing segment of the
overall financial services industry. This segment focuses on providing a
quick and convenient source of short-term credit to unbanked, underbanked
and credit-challenged customers. These consumers are typically not
effectively or efficiently served by traditional lenders such as banks,
credit unions or credit-card providers. First Cash competes directly in the
specialty consumer finance industry with its pawn, payday advance and credit
services products.
The pawnshop industry in the United States is an established industry,
with the highest concentration of pawnshops being in the Southeast and
Southwest regions of the country. 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
concentration of pawnshops. Management believes the U.S. pawnshop industry
is fragmented, with approximately 15,000 stores in the country. The three
major publicly traded pawnshop companies, which includes First Cash,
currently operate approximately 1,000 of the pawnshops in the United States.
The Company believes that individuals operating one to three locations own
the majority of pawnshops. 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 pawnshop industry in Mexico is substantially less developed as
compared to the U.S., with fewer than 5,000 stores in the entire country.
Management believes the Mexican pawnshop industry is fragmented, as in the
U.S. The Company currently operates over 130 pawnshops in Mexico and is the
only major publicly traded U.S. company doing business there. The Company
sees significant opportunity due to the large potential consumer base and
limited competition in Mexico.
The payday advance industry is also a less developed industry and
continues to experience rapid growth in the U.S. A leading industry analyst
estimates that there are over 23,000 payday advance locations throughout the
United States and expects the number of locations to double over the next
decade. There are several privately held chains that operate from 100 up to
approximately 1,500 stores each. The eight largest publicly held operators
of payday advance stores, which include First Cash Financial Services, Inc.,
operate a combined total of over 6,400 stores. There is currently not a
similar short-term or payday advance industry in Mexico due to relatively
few Mexican consumers that utilize checking accounts in a manner that is
conducive to payday advance lending.
Business Strategy
The Company's primary business plan is to significantly expand its
operations by opening new pawnshops and payday advance stores. In addition,
it will continue to remain focused on increasing the revenues and operating
profits in its existing stores.
New Store Openings
The Company has opened 153 new pawn stores and 81 new payday advance
stores since its inception and currently intends to open both additional
pawn stores and payday advance stores in locations where management believes
appropriate demand and other favorable conditions exist. During the years
ended December 31, 2005, 2004 and 2003, the Company opened 35, 40 and 31 new
pawn stores, respectively, and over the same three years, the Company opened
15, 12 and 16 new payday advance stores, respectively.
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 open for business within six to twelve weeks. The
investment required to open a new pawn store includes store operating cash,
inventory, funds available for pawn loans, 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
$360,000 is required to fund a new pawn store for the first six months of
operation. The Company also estimates that between $200,000 and $360,000 is
required to fund a new payday advance store for the first six months of
operation, which includes investments for leasehold improvements, security
and computer equipment, funds available for short-term advances, store
operating cash, and start-up losses.
The Company currently plans to continue expansion of both pawn
stores, primarily in Mexico, and payday advance stores in the U.S. The
Company continues to evaluate new markets in both Mexico and the U.S. with
favorable demographics and regulatory environments. The Company has an
organizational structure that it believes is capable of supporting a larger,
multi-country and multi-state store base.
Enhance Productivity of Existing and Newly Opened 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 credit services transactions, check
cashing transactions and other consumer financial services transactions, and
the control of store expenses, including the loss provision expense related
to short-term advances and credit services. 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, the stores' exteriors typically display attractive and
distinctive signage similar to those used by contemporary specialty
retailers.
The Company has 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 Allen, Texas,
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.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and
the payday advance industry, as well as the availability of certain regional
chains and "mom & pop" sole proprietors willing to sell their stores, the
Company believes that certain acquisition opportunities may arise 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 state and local 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 payday advance stores include the
annual volume of transactions, locations and conditions of facilities, and a
demographic evaluation of the surrounding area to determine the potential
for the Company's short-term advance and credit services products.
Pawn Lending Activities
The Company's pawn stores advance money to their customers against the
security of pledged goods provided by their customers. The pledged goods
are tangible personal property such as 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
result in personal liability to the borrower. Accordingly, 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.
At the time a pawn transaction is entered into, an agreement, commonly
referred to as a pawn ticket, is delivered to the borrower for signature
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 fee; maturity date; total amount that must be paid to redeem the
pledged goods on the maturity date; and the annual percentage rate.
Pledged property is held through the term of the pawn, which is 30 days
in Texas, South Carolina, Missouri, Virginia, and Oklahoma, with an
automatic extension period of 15 to 60 days depending on state laws, unless
the pawn is earlier paid or renewed. In Maryland, 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 Virginia and Mexico, and 30 days
in Maryland and Washington, D.C., the unredeemed collateral is forfeited to
the Company and becomes inventory available for general liquidation or sale
in one of the Company's stores. 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.
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, on-line
auction sites 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. 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.
The Company contracts for a pawn service charge in lieu of interest to
compensate it for the pawn loan. The statutory service fees 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 240% on an annualized basis at the
Company's Oklahoma stores. Pawns made in the Maryland stores bear service
fees of 144% to 240% on an annualized basis with a $6 minimum charge per
month, while pawns in Virginia earn 120% to 144% annually with a $5 minimum
charge per month. In Washington, D.C., a flat $2 charge per month applies
to all pawns up to $40, and an 18% 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 with a $2.50 minimum
charge per month, and South Carolina rates range from 100% to 300%. In
Mexico, pawns bear an annualized rate of 240%. As of December 31, 2005, the
Company's average pawn per pawn ticket was approximately $95. For the
fiscal years ended December 31, 2005, 2004 and 2003, the Company's
annualized yields on average pawn balances were 158%, 156% and 158%,
respectively.
Short-term Advance and Credit Services Activities
The Company's short-term (or payday) advance stores and selected pawn
stores, make short-term advances for a term of thirty-one days or less. To
qualify for a short-term advance, a customer 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 his or her personal
checking account for the amount of the advance, plus applicable fees. At
maturity, either the customer may 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 customer's check into its checking account.
Short-term advance transactions are subject to federal truth-in-lending
regulations and fair debt collection practice regulations. In addition,
state and local regulations exist in certain markets, which, among other
things, limit the number of consecutive short-term advances a customer can
obtain, limit the total transactions over a specified time period, or limit
the number of outstanding advances a consumer may have.
The customer's check is held through the term of the short-term
advance, which ranges from 7 to 31 days. In California, Washington,
Illinois, Oregon, South Carolina, Oklahoma and Washington, D.C., the maximum
loan term is 31, 45, 45, 60, 31, 45 and 31 days, respectively. Only
Illinois and Oklahoma have a minimum term which is 13 days. If the loan is
not repaid prior to the expiration of the term, the customer's personal
check is forfeited to the Company. Fees charged for short-term advances are
generally regulated by state law. In California and South Carolina, the
service fee is 15% of the check's face value. Short-term advances made in
Washington and Oregon bear service fees of 15% on loan amounts up to $500
and 10% on loan amounts exceeding $500; the maximum loan amount being $700.
Short-term advances made in Oklahoma bear service fees of 15% on loan
amounts up to $300 and 10% on loan amounts exceeding $300; the maximum loan
amount being $500. In Washington, D.C., the service fee is 10% plus a flat
fee of $5 to $20 on loans up to $1,000. The service fee in Illinois is
limited to 15.5% on loans up to $1,000.
The bank returns a significant number of customer short-term advance
checks deposited by the Company because there are insufficient funds in the
customers' accounts. However, the Company subsequently collects a large
percentage of these bad debts by redepositing the customers' checks or
subsequent cash repayments by the customers. The profitability of the
Company's short-term advance operations is dependent upon adequate
collection of these returned items.
Effective July 1, 2005, First Cash Credit, Ltd. ("FCC"), a wholly-owned
subsidiary of the Company, began offering a fee-based credit services
organization ("CSO") program to assist consumers in its Texas markets in
obtaining credit. Under the CSO program, FCC assists customers in applying
for a short-term loan from an independent, non-bank, consumer lending
company (the "Independent Lender") and issues the Independent Lender a
letter of credit to guarantee the repayment of the loan. The loans made by
the Independent Lender to credit services customers of FCC range in amount
from $100 to $1,000, have terms of 7 to 31 days and bear interest at a rate
of less than 10% on an annualized basis. FCC charges a credit services fee
of $20 per $100 advanced. If the loan is not repaid prior to the expiration
of the term, the customer's personal check is deposited into the Independent
Lender's bank account. The bank returns a significant number of customer
checks deposited into the Independent Lender's account because there are
insufficient funds in the customers' accounts. If the loan is unpaid after
16 days from its due date, FCC reimburses the Independent Lender, under the
terms of its letter of credit, for the outstanding principal amount, accrued
interest, applicable late fees and returned check fees. FCC subsequently
collects a large percentage of these bad debts by redepositing the
customers' checks or subsequent cash repayments by the customers. The
profitability of the Company's credit services operations is dependent upon
adequate collection of these returned items.
Merchandise Sales
The Company's merchandise sales are primarily retail sales to the
general public in its pawn stores. The items retailed are primarily used
jewelry, consumer electronics, tools, musical instruments, and sporting
goods. The Company also melts down certain quantities of scrap gold jewelry
and sells the gold at market commodity prices. Total merchandise sales
during the years ended December 31, 2005, 2004 and 2003, accounted for
approximately 49%, 48%, and 48%, respectively, of the Company's total
revenues in each of these periods.
The Company acquires merchandise inventory primarily through forfeited
pawns and purchases of used goods directly from the general public.
Merchandise acquired by the Company through defaulted pawns is carried in
inventory at the amount of the related pawn loan, exclusive of any accrued
service fees.
The Company does not provide financing to purchasers of its
merchandise, but does permit its customers to purchase merchandise 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.
Locations and Operations
The Company operates stores in eleven U.S. states and seven states in
Mexico. It seeks to establish clusters of several stores in specific
geographic areas in order to achieve certain economies of scale relative
to supervision, purchasing and marketing. Financial information about
geographic areas is provided in Results of Operations and Note 13 of the
Notes to the Consolidated Financial Statements. As of December 31, 2005,
the Company's stores were located in the following states:
Pawn Payday Advance Total
Stores Stores Stores
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United States:
Texas (1)................... 58 60 118
Maryland.................... 21 - 21
California.................. - 15 15
Illinois.................... - 10 10
District of Columbia (2).... 2 7 9
South Carolina (2).......... 7 - 7
Oregon...................... - 7 7
Washington.................. - 3 3
Missouri.................... 3 - 3
Oklahoma (2)................ 3 - 3
Virginia.................... 2 - 2
Mexico:
Tamaulipas.................. 31 - 31
Chihuahua................... 27 - 27
Coahuila.................... 26 - 26
Nuevo Leon.................. 26 - 26
Baja California............. 16 - 16
Durango..................... 3 - 3
Sonora...................... 1 - 1
---- ---- ----
Total .................... 226 102 328
==== ==== ====
(1) All stores in this market offer the credit services product.
(2) Pawn stores in these markets also offer the payday/short-term
advance product.
In addition, at December 31, 2005, the Company's 50% owned joint
venture, Cash & Go, Ltd., operated a total of 40 staffed kiosks located
inside convenience stores in the state of Texas. These kiosks offer credit
services and check cashing.
Pawn Store Operations
The typical Company pawn store is a freestanding 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 distinctive signage and a layout similar to a
contemporary specialty retailer. 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
rapidly recall 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 merchandise sales, service charge revenues, 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
competitive percentage of the estimated sale value of items presented for
pledge and by providing quick financing, renewal and redemption services in
an appealing atmosphere.
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.
Area supervisors typically report to a regional market manager, who in turn
reports to one of the Company's two Vice-Presidents of Operations.
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 on sales, gross profit and special
promotional contests.
Payday Advance and Credit Services Operations
The Company's payday 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 lighted 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 payday advance stores allow
a store manager or clerk to rapidly recall customer check cashing histories,
short-term advance histories, and other vital information. The Company
attempts to attract customers primarily through television and yellow page
advertisements.
Each payday advance store employs a manager, and between one 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 supervisor
who typically oversees two to five store managers. Area supervisors
typically report to a regional market manager, who in turn reports to one of
the Company's two Vice-Presidents of Operations.
The kiosks operated by the Cash & Go, Ltd., joint venture are located
inside convenience stores. Each kiosk is a physically secured area with its
own counter space within the convenience store. Each kiosk is typically
staffed by one or two employees at any point in time.
The Company believes that profitability of its payday advance locations
is dependent upon its employees' ability to make loans and extend credit
services that achieve optimum loan performance, to manage bad debt expense
and to provide excellent customer service. Company employees are trained
through direct instruction and on-the-job lending, collections and customer
service experience. The new employee is introduced to the business through
a training program that includes on-the-job training in lending practices,
collections efforts and general administration of store operations. Certain
experienced employees receive training and an introduction to the
fundamentals of management, such as income maximization, recruitment and
cost efficiency, to acquire the skills necessary to advance into management
positions throughout the Company. The Company maintains a performance-based
compensation plan for all payday advance and credit services store employees
based on gross profit, net income and other seasonal contests.
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
payday advance operators. There are three publicly held pawnshop operators
and five publicly held payday advance/check cashing operators, all of which
have more locations than the Company. There are several privately held
operators of payday advance stores, some of which are significantly larger
than the Company. In addition, both the pawnshop and payday 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 banks
and consumer finance companies, which generally lend on an unsecured as well
as 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, on-line retailers, on-line auction
sites 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.
Governmental Regulation
General
The Company is subject to extensive regulation of its pawnshop, short-
term advance/payday lending, credit services and check-cashing operations in
most jurisdictions in which it operates. These regulations are provided
through numerous laws, ordinances and regulatory pronouncements from various
federal, state and local governmental entities in the United States and
Mexico. In many jurisdictions, the Company must obtain and maintain
regulatory operating licenses. In addition, many statutes and regulations
prescribe, among other things, the general terms of the Company's loan
and credit services agreements and the maximum service fees and/or
interest rates that may be charged. These regulatory agencies have broad
discretionary authority. The Company is also subject to U.S. federal and
state regulations relating to the reporting and recording of certain
currency transactions. The Company's pawnshop operations in Mexico are also
subject to, and must comply with pawnshop and other general business, tax,
employment and consumer protection regulations from various federal, state
and local governmental agencies in Mexico.
Governmental action to further prohibit or restrict, in particular,
payday or 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
payday advances, which is higher than the interest generally charged by
credit-card issuers to a more creditworthy consumer. The consumer groups
and media stories often characterize short-term advance activities as
abusive toward consumers. During the last few years legislation has been
introduced and/or enacted in the United States Congress, in certain state
legislatures and in various local jurisdictions to prohibit or restrict
payday advances. In addition, regulatory authorities in various levels of
government have proposed or publicly addressed, from time to time, the
possibility of proposing new or expanded regulations that would prohibit or
further restrict payday advances.
There can be no assurance that additional local, state or federal
statutes or regulations in either the United States or Mexico will not be
enacted or that existing laws and regulations will not be amended at some
future date that could inhibit the ability of the Company to offer pawn
loans, short-term advances and credit services, significantly decrease the
service fees 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 results. If legislative or regulatory
actions that had negative effects on the pawn, payday advance or credit
services industries were taken at a federal level in the United States or
Mexico, or in U.S. or Mexican states or municipalities where the Company has
a significant number of stores, those actions could have a materially
adverse effect on the Company's lending, credit services and retail
activities and revenues. There can be no assurance that additional federal,
state or local legislation in the U.S. or Mexico 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.
U.S. State and Local Regulations
The Company operates pawn stores in seven U.S. states, all of which
have licensing and/or fee regulations on pawnshop operations, which includes
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.
Under some county and municipal ordinances, pawn stores must provide
local law enforcement agencies with copies of all daily transactions
involving pawns and over-the-counter purchases. These daily transaction
reports are designed to provide the local law enforcement officials 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. Goods held to secure pawns or goods purchased that are
determined to belong to an owner other than the borrower or seller are
subject to recovery by the 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 currently provides payday/short-term advances in seven U.S.
states that have licensing and/or fee and operating regulations related to
its payday (or short-term) advance and check-cashing operations, which
includes California, Washington, Oklahoma, 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
payday advance provider. The Company's fee structures are at or below the
applicable rate ceilings adopted by each of these states. Regulations in
certain states limit the maximum number of consecutive payday advances that
may be provided to a customer and/or limit the total advances a customer may
have outstanding at any point in time. As an example of such restrictive
regulation, states such as Illinois and Michigan have recently enacted cash
advance laws that require payday advance lenders to report their customers'
cash advance activities to a state-wide database. Payday advance lenders
operating in conjunction with a state-wide database are generally restricted
from making cash advance loans to customers who may have a certain amount of
cash advances outstanding with other lenders. These database restrictions
can have the effect of preventing customers from obtaining the cash advances
they need and want. The Company currently operates ten payday advance
locations in the state of Illinois and expects that these restrictions will
negatively impact the revenues and profitability of these locations during
2006. However, at this time the Company cannot reasonably quantify the
potential impact on its projected revenues and operating profits in 2006.
It is possible that legislators and regulators could pursue database or
other restrictive legislation in other states, despite the increasing
consumer demand for cash advance products. Additional restrictive
legislative and regulatory activity surrounding cash advance products, if
passed, could also adversely affect the Company's cash advance business. 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.
The laws in the state of Texas permit licensed payday lending
operations; however, restrictions on the maximum fees that can be charged do
not permit the Company to operate profitably as a payday lender.
Accordingly, in the state of Texas, the Company provides a credit services
program to customers seeking short-term advances as described below.
In July 2005, First Cash Credit, Ltd., a wholly-owned subsidiary of the
Company, became a registered credit services organization in the state of
Texas as provided under Section 393 of the Texas Finance Code. As a credit
services organization, First Cash Credit, Ltd. assists customers, for a fee,
in obtaining a short-term loan from an independent lender. A credit
services organization must provide the consumer with a disclosure statement
and a credit services agreement that describe in detail, among other things,
the services the credit services organization will provide to the consumer,
the fees the consumer will be charged by the credit services organization
for these services, the details of the surety bond and the availability of
the surety bond if the consumer believes the credit services organization
has violated the law, the consumer's right to review his or her file, the
procedures a consumer may follow to dispute information contained in his or
her file, and the availability of non-profit credit counseling services.
The credit services organization must also give a consumer the right to
cancel the credit services agreement without penalty within three days after
the agreement is signed. In addition, under the provisions of the credit
services statute, each First Cash Credit, Ltd.'s credit services location
must be registered as a credit services organization and pay a registration
fee.
U.S. Federal Regulations
There is currently no direct federal regulation of either the pawn or
short-term/payday advance industries. The federal government does, however,
regulate the ability of state and nationally chartered banks to participate
in the short-term/payday advance industry. The U.S. Office of Comptroller of
the Currency has significantly restricted the ability of nationally
chartered banks to establish or maintain relationships with loan servicers
in order to make out-of-state payday advance loans. In 2003 and 2005, the
Federal Deposit Insurance Corporation ("FDIC"), which regulates the ability
of state chartered banks to enter into relationships with out-of-state
payday loan servicers, issued stringent guidelines under which such
arrangements are permitted. Subsequently, in February 2006, the FDIC
indicated through direct communications with certain of these banks, that it
will no longer permit state-chartered banks to establish or maintain
relationships with loan servicers in order to make out-of-state payday
advance loans.
The Company previously had a payday advance loan servicing relationship
with County Bank of Rehoboth Beach, Delaware, a state chartered bank,
through which the Company offered payday advances to customers in its Texas
locations. Effective September 30, 2005, the Company terminated its
relationship with County Bank and as of December 31, 2005 had no customers
with active payday advances through County Bank or any other state or
nationally chartered bank. The Company does not believe that under current
federal banking regulations that it will be able to establish future loan-
servicing relationships with state or nationally chartered banks.
In connection with payday/short-term advance transactions, the Company
must comply with the various disclosure requirements under the Federal Truth
in Lending Act (and Federal Reserve Regulation Z under that Act). These
disclosures include among other things, the total amount of the finance
charges and annualized percentage rate of the finance charges associated
with each payday/short-term advance transaction.
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 one 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, adopted by the Financial Crimes Enforcement Network of the Treasury
Department ("FinCEN"), 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). The agent list must be updated annually.
In March 2000, FinCEN adopted additional regulations, implementing the
Bank Secrecy Act that is also addressed to money services businesses. These
regulations require money services businesses, such as 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.
Under the USA PATRIOT Act passed by Congress in 2001 and revised in
2006, the Company is required to maintain an anti-money laundering
compliance program. The program must include (1) the development of
internal policies, procedures and controls; (2) the designation of a
compliance officer; (3) an ongoing employee-training program; and (4) an
independent audit function to test the program. The United States
Department of Treasury is expected to issue regulations specifying the
appropriate features and elements of the anti-money laundering compliance
programs for the pawn brokering and short-term advance industries.
The Gramm-Leach-Bliley Act requires 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.
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 that it receives or sells. The
Company does not currently take firearms as pawn collateral nor does it sell
firearms to the public.
Mexico Regulations
The pawnshop industry in Mexico is currently subject to various general
business regulations in the areas of tax compliance, customs, consumer
protections and employment matters, among others, by various federal, state
and local governmental agencies in Mexico. In addition, there are currently
two states in which the Company operates that have certain laws and
regulations specific to the pawn industry. In general, these regulations
provide for the registration of pawnshops operating in the state and impose
certain consumer protection standards upon pawnshop operators. Legislation
to specifically regulate the pawn industry at a federal level and/or in
other states has been, and continues to be, proposed from time to time.
There is currently proposed federal legislation in Mexico which would
provide for administrative regulation of the pawnshop industry through
PROFECO, the federal consumer protection agency. The Company monitors the
status of any such proposed legislation on a regular basis. If regulatory
actions that had negative effects on the pawn industry, such as limits on
pawn service charges, were taken at a federal level in Mexico, or in Mexican
states or municipalities where the Company has a significant number of
stores, those actions could have a materially adverse effect on the
Company's lending and retail activities and revenues. There can be no
assurance that additional federal, state or local statutes or regulations in
Mexico will not be enacted, or that existing laws and regulations will not
be amended, which could have a materially adverse impact on the Company's
operations and financial condition.
Employees
The Company had approximately 2,158 employees as of March 13, 2006,
including approximately 156 persons employed in executive, administrative
and accounting functions. In addition, Cash & Go, Ltd., had approximately
84 employees as of March 13, 2006. None of the Company's employees are
covered by collective bargaining agreements. The Company considers its
employee relations to be satisfactory.
First Cash Website
The Company's primary website is at http://www.firstcash.com. The
Company makes available, free of charge, at its corporate website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as soon as reasonably practicable after they are
electronically filed with the SEC.
Insurance
The Company maintains fire, casualty, theft and public liability
insurance for each of its pawn stores and payday 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 1a. Risk Factors
----------------------
Important risk factors that could cause results or events to differ
from current expectations are described below. These factors are not
intended to be an all-encompassing list of risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business.
A decreased demand for the Company's products and specialty financial
services and failure of the Company to adapt to such decrease could
adversely affect results. Although the Company's products and services
are a staple of its customer base, the demand for a particular product or
service may decrease due to a variety of factors, such as the availability
of competing products, changes in customers' financial conditions, or
regulatory restrictions that reduce customer access to particular products.
Should the Company fail to adapt to a significant change in its customers'
demand for, or access to, its products, the Company's revenues could
decrease significantly. Even if the Company does make adaptations, customers
may resist or may reject products whose adaptations make them less
attractive or less available. In any event, the effect of any product change
on the results of the Company's business may not be fully ascertainable
until the change has been in effect for some time. In particular, the
Company has changed, and will continue to change, some of the short-term
advance products and services it offers due to the revised guidelines issued
by the FDIC effective July 1, 2005 and supplemented in February 2006. The
long-term impact these changes will have on the Company's business is not
yet certain.
Short-term consumer loan services have come under increased regulation
and scrutiny. If changes in regulations affecting the Company's short-term
advance and credit services businesses create increased restrictions, or
have the effect of prohibiting loans in the countries and states where the
Company offers short-term consumer loans, such regulations could materially
reduce the Company's pawn, short-term advance and credit services businesses
and limit its expansion into new markets. The Company's products and
services are subject to extensive regulation and supervision under various
federal, state and local laws, ordinances and regulations in both the
United States and Mexico. The Company faces the risk that restrictions
or limitations on loan amounts, loan yields and customer acceptance of loan
products resulting from the enactment, change, or interpretation of laws and
regulations in the United States or Mexico could have a negative effect on
the Company's business activities. In particular, short-term consumer
loans have come under increased scrutiny and increasingly restrictive
regulation in recent years. Some regulatory activity may limit the number
of short-term loans that customers may receive or have outstanding, such as
the limits prescribed by the FDIC in March 2005 and supplemented in February
2006 and regulations adopted by some states requiring that all borrowers
of certain short-term loan products be listed on a database, limiting
the yield on short term-loans and limiting the number of such loans they
may have outstanding. Certain consumer advocacy groups and federal and
state legislators have also asserted that laws and regulations should be
tightened so as to severely limit, if not eliminate, the availability of the
short-term advance and credit services products to consumers, despite the
significant demand for it. In Mexico, similar restrictions and regulations
affecting the pawn industry, including limits on loan yields, have been
proposed from time to time. Adoption of such federal, state or local
regulation or legislation in the United States and Mexico could restrict,
or even eliminate, the availability of specialty consumer finance products
at some or all of the Company's locations. See the discussion of Regulation
in "Item 1 - Business" for more information about regulations affecting the
Company.
The failure of third-parties who provide products, services or support
to the Company to maintain their products, services or support could disrupt
Company operations or result in a loss of revenue. The Company's credit
services revenues depend in part on the willingness and ability of an
unaffiliated third-party lender to make loans to its customers. The loss of
the relationship with this lender, and an inability to replace it with a new
lender or lenders, or the failure of the lender to maintain quality and
consistency in its loan programs, could cause the Company to lose customers
and substantially decrease the revenues and earnings of the Company's credit
services business. The Company also uses third parties to support and
maintain certain of its communication systems and computerized point-of-sale
and information systems. The failure of such a third party to fulfill its
support and maintenance obligations could disrupt the Company's operations.
The Company's growth is subject to external factors and other
circumstances over which the Company has limited control or that are beyond
the Company's control. These factors and circumstances could adversely
affect the Company's ability to grow through the opening of new store
locations. The success of this strategy is subject to numerous external
factors, such as the availability of sites with favorable customer
demographics, limited competition, acceptable regulatory restrictions and
suitable lease terms, the Company's ability to attract, train and retain
qualified unit management personnel and the ability to obtain required
government permits and licenses. Some of these factors are beyond the
Company's control. The failure to execute this expansion strategy would
adversely affect the Company's ability to expand its business and could
materially adversely affect its business, prospects, results of operations
and financial condition.
Increased competition from banks, savings and loans, other short-term
consumer lenders, and other entities offering similar financial services, as
well as retail businesses that offer products and services offered by the
Company, could adversely affect the Company's results of operations. The
Company has many competitors to its core lending and merchandise sales
operations. Its principal competitors are other pawnshops, cash advance
companies, consumer finance companies and other financial institutions that
serve the Company's primary customer base. Many other financial institutions
or other businesses that do not now offer products or services directed
toward the Company's traditional customer base, many of whom may be much
larger than the Company, could begin doing so. Significant increases in the
number and size of competitors for the Company's business could result in a
decrease in the number of short-term advances or pawn loans that the Company
writes, resulting in lower levels of revenues and earnings in these
categories. Furthermore, the Company has many competitors to its retail
operations, such as retailers of new merchandise, retailers of pre-owned
merchandise, other pawnshops, thrift shops, online retailers and online
auction sites. Increased competition or aggressive marketing and pricing
practices by these competitors could result in decreased revenues, margins
and turnover rates in the Company's retail operations. In Mexico, the
Company competes directly with certain pawn stores owned by a governmental
entity. The government could take actions that would harm the Company's
ability to compete in the Mexico market.
A sustained deterioration of economic conditions could reduce demand
for the Company's products and services and result in reduced earnings.
While the credit risk for most of the Company's consumer lending is
mitigated by the collateralized nature of pawn lending, a sustained
deterioration in the economy could adversely affect the Company's operations
through deterioration in performance of its pawn loan or short-term advance
portfolios, or by reducing consumer demand for the purchase of pre-owned
merchandise.
Adverse gold market fluctuations could affect the Company's profits.
The Company holds significant gold inventories and a significant portion of
its pawn receivables are secured by gold jewelry collateral. A significant
decline in gold prices could result in decreased merchandise sales margins,
decreased inventory valuations and sub-standard collateralization of
outstanding pawn loans. 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.
Adverse real estate market fluctuations could affect the Company's
profits. The Company leases most of its locations. A significant rise
in real estate prices could result in an increase in store lease costs as
the Company opens new locations and renews leases for existing locations.
Risks and uncertainties related to the Company's foreign operations
could negatively impact the Company's operating results. The Company has
a significant number of pawnshop locations in Mexico, a country in which
there are potential risks related to geo-political events, enforcement of
property rights, public safety and security among others. Actions or events
could occur in Mexico, that are beyond the Company's control, which could
restrict or eliminate the Company's ability to operate its locations in
Mexico or significantly reduce the profitability of such operations. In
addition, the Company conducts a significant number of transactions in
pesos, the national currency in Mexico, and holds significant financial
assets that are denominated in pesos. Significant fluctuations in the
value of the peso compared to the U.S. dollar could negatively impact the
Company's operating results.
Media reports and public perception of short-term consumer loans as
being predatory or abusive could materially adversely affect the Company's
short-term advance and credit services businesses. In recent years, consumer
advocacy groups and some media reports, in both the United States and
Mexico, have advocated governmental action to prohibit or place severe
restrictions on short-term consumer loans. The consumer advocacy groups
and media reports generally focus on the cost to a consumer for this type of
loan, which is higher than the interest typically charged by banks to
consumers with better credit histories. Though the consumer advocacy groups
and media reports do not discuss the lack of viable alternatives for our
customers' borrowing needs, they do typically characterize these short-term
consumer loans as predatory or abusive despite the large customer demand for
these loans. If the negative characterization of these types of loans
becomes increasingly accepted by consumers, demand for the cash advance
products could significantly decrease, which could materially affect the
Company's results of operations and financial condition. Additionally, if
the negative characterization of these types of loans becomes increasingly
accepted by legislators and regulators, the Company could become subject to
more restrictive laws and regulations that could materially adversely affect
the Company's financial condition and results of operations.
Other risk factors are discussed under Quantitative and Qualitative
Disclosures about Market Risk.
Other risks that are indicated in the Company's filings with the
Securities and Exchange Commission may apply as well.
Item 1b. Unresolved Staff Comments
-----------------------------------
As of December 31, 2005, the Company had no unresolved SEC staff
comments.
Item 2. Properties
-------------------
The Company owns the real estate and buildings for three of its pawn
stores and leases 355 pawn and payday advance locations that are currently
open or are in the process of opening. Leased facilities are generally
leased for a term of three to five years with one or more options to renew.
The Company's existing leases expire on dates ranging between 2006 and 2017.
All current store leases provide for specified periodic rental payments
ranging from approximately $700 to $9,900 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 materially adverse effect on the
Company's operations. The Company's strategy is generally to lease, rather
than purchase, space for its pawnshop and payday advance 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 payday advance locations are suitable for such
purposes. The Company considers its equipment, furniture and fixtures to be
in good condition.
The Company currently leases approximately 18,000 square feet in
Arlington, Texas for its corporate offices. The lease, which expires April
30, 2010, currently provides for monthly rental payments of approximately
$25,000. The Company also leases approximately 7,500 square feet in
Monterrey, Mexico for its Mexico administrative offices. The lease, which
expires July 30, 2009, currently provides for monthly rental payments of
approximately $3,500. The Company's 50% owned joint venture, Cash & Go,
Ltd., leases its kiosk locations under operating leases generally with terms
ranging from one to five years, with renewal options for certain locations.
The joint venture's existing leases expire on dates ranging between 2006 and
2009. All current Cash & Go, Ltd., leases provide for specified periodic
rental payments ranging from approximately $1,100 to $1,700 per month.
Item 3. Legal Proceedings
--------------------------
The Company is from time to time a defendant (actual or threatened) in
certain 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 materially 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 2005.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------
In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006 and stock began trading at the split-adjusted price on February 22,
2006. All share and per share amounts (except authorized shares and par
value) have been retroactively adjusted to reflect the split.
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:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2005
High ............... $13.32 $11.36 $13.16 $14.89
Low ................ 10.08 8.45 10.53 12.01
2004
High ............... $12.15 $12.36 $10.71 $13.68
Low ................ 8.47 9.80 8.43 10.17
On March 13, 2006, the closing sales price for the common stock as
reported by the Nasdaq National Market was $18.61 per share. On March 13,
2006, there were approximately 63 stockholders of record of the common
stock.
No cash dividends have been paid by the Company on its common stock.
The dividend and earnings retention policies are reviewed by the Board of
Directors of the Company from time to time in light of, among other things,
the Company's earnings, cash flows, and financial position. The Company's
revolving credit facility contains provisions that allow the Company to pay
cash dividends within certain parameters.
During the period from January 1, 2005, through December 31, 2005, the
Company issued 157,000 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $1,327,000
(including income tax benefit). During the period from January 1, 2005,
through December 31, 2005, the Company issued 520,000 shares of common stock
relating to the exercise of outstanding stock warrants for an aggregate
price of $3,356,000 (including income tax effect). While the issuance of
the derivative securities to officers and employees was exempt under Section
4(2) of the Act, the resale was registered under the Act.
Issuer Purchases of Equity Securities
In July 2004, the Company's Board of Directors authorized an open-
ended stock repurchase plan, with no dollar limitation, to permit future
repurchases of up to 3,200,000 shares of the Company's outstanding common
stock. During 2004, the Company repurchased a total of 1,245,000 common
shares under the stock repurchase plan for an aggregate purchase price
of $12,116,000 or $9.73 per share. The following table provides the
information with respect to purchases made by the Company of shares of its
common stock during each month of 2005 that the program was in effect:
Number of Number
Total Average Shares Purchased Of Shares
Number Price as Part that May Yet
Of Shares Paid of Publicly Be Purchased
Purchased Per Share Announced Plan Under the Plan
--------- --------- -------------- --------------
January 1 through
January 31, 2005 - - - 1,954,570
February 1 through
February 28, 2005 - - - 1,954,570
March 1 through
March 31, 2005 - - - 1,954,570
April 1 through
April 30, 2005 1,152,958 $9.89 1,152,958 801,612
May 1 through
May 31, 2005 - - - 801,612
June 1 through
June 30, 2005 - - - 801,612
July 1 through
July 31, 2005 - - - 801,612
August 1 through
August 31, 2005 - - - 801,612
September 1 through
September 30, 2005 - - - 801,612
October 1 through
October 31, 2005 - - - 801,612
November 1 through
November 30, 2005 - - - 801,612
December 1 through
December 31, 2005 - - - 801,612
--------- ---------
Total 1,152,958 $9.89 1,152,958
========= =========
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.
Year Ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
(in thousands, except per share amounts and certain operating data)
Income Statement Data:
Total revenues $ 207,775 $ 179,813 $ 145,468 $ 118,793 $ 110,427
Cost of revenues 75,768 63,867 51,222 41,817 43,498
Gross profit 132,007 115,946 94,246 76,976 66,929
Total expenses and
other income 92,329 83,079 69,517 59,585 54,410
Income from continuing
operations before
income taxes 39,678 32,867 24,729 17,391 12,519
Provision for income taxes 14,295 12,161 9,397 6,451 4,507
Income from continuing
operations 25,383 20,706 15,332 10,940 8,012
Discontinued operations:
Income (loss) from
discontinued operations,
net of taxes - - - - 33
Loss on sale of subsidiary,
net of taxes - - - - (175)
Cumulative effect of change
in accounting principle,
net of taxes - - (357) - -
Net income 25,383 20,706 14,975 10,940 7,870
Net Income per share:
Basic:
Income from continuing
operations $ 0.81 $ 0.66 $ 0.55 $ 0.42 $ 0.31
======== ======== ======== ======== ========
Net income $ 0.81 $ 0.66 $ 0.54 $ 0.42 $ 0.30
======== ======== ======== ======== ========
Diluted:
Income from continuing
operations $ 0.76 $ 0.61 $ 0.49 $ 0.38 $ 0.29
======== ======== ======== ======== ========
Net income $ 0.76 $ 0.61 $ 0.48 $ 0.38 $ 0.29
======== ======== ======== ======== ========
Unaudited pro forma amounts
assuming retroactive
application of change in
accounting principle:
Revenues from continuing
operations $ 207,775 $ 179,813 $ 152,162 $ 125,886 $ 117,260
Income from continuing
operations 25,383 20,706 15,362 10,790 7,951
Basic earnings per share
from continuing operations 0.81 0.66 0.55 0.42 0.31
Diluted earnings per share
from continuing operations 0.76 0.61 0.49 0.38 0.29
Balance Sheet Data:
Working capital $ 93,506 $ 81,389 $ 60,840 $ 47,187 $ 8,540
Total assets 185,954 162,343 140,064 130,999 122,806
Long-term liabilities 8,616 8,755 11,955 33,525 5,277
Total liabilities 23,246 18,297 22,841 44,479 48,703
Stockholders' equity 162,708 144,046 117,223 86,520 74,103
End of Year Location Counts:
Pawn-only stores 157 127 89 57 35
Pawn stores offering
payday advances (1) 69 70 71 74 77
Payday advance stores (1) 102 87 75 59 46
-------- -------- -------- -------- --------
End of the year 328 284 235 190 158
======== ======== ======== ======== ========
(1) Includes locations where advances are provided through the CSO program.
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
fees on pawns, service fees from short-term advances, also known as payday
loans, credit services fees and the sale of unredeemed goods, or
"merchandise sales." 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.
The Company's payday advance store revenues are derived primarily from
fees on short-term/payday advances, credit services fees, check cashing fees
and fees from the sale of money orders, money transfers and prepaid card
products. The Company recognizes service fee income on short-term advances
on a constant-yield basis over the life of the advance, which is generally
thirty-one days or less. The net defaults on short-term advances and
changes in the short-term advance valuation reserve are charged to the
short-term advance loss provision.
Effective July 1, 2005, First Cash Credit, Ltd., a wholly-owned
subsidiary of the Company, began offering a fee-based credit services
organization program to assist consumers in its Texas markets in obtaining
credit. Under the CSO program, FCC assists customers in applying for
a short-term loan from an independent, non-bank, consumer lending company
and issues the Independent Lender a letter of credit to guarantee the
repayment of the loan. The Company recognizes credit services fees, which
are collected from the customer at the inception, ratably over the life of
the loan made by the Independent Lender. The loans made by the Independent
Lender to credit services customers of FCC have terms of seven to
thirty-one days. The Company records a liability for collected, but
unearned, credit services fees received from its customers.
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Total receivable balances at end
of period, in thousands:
Pawn receivables $ 27,314 $ 23,429 $ 20,037
Short-term advance receivables 6,488 15,465 13,759
CSO loans held by independent
third-party lender (1) 10,724 - -
Short-term advance receivables balance
and CSO loans at end of period,
in thousands (1):
Pawn stores $ 3,313 $ 2,974 $ 3,414
Payday advance stores
(excluding Cash & Go, Ltd.) 12,031 10,967 8,609
Cash & Go, Ltd. joint venture kiosks 1,868 1,524 1,736
Average inventory per pawn store $ 97 $ 90 $ 97
Annualized inventory turnover 3.2x 3.1x 2.8x
Annualized yield (2):
Pawn receivables 158% 156% 158%
Short-term advance receivables,
net of loss provision 324% 326% 319%
Net loss provision on short-term advance
receivables and CSO loans as a percentage
of service fees (1) 23% 21% 23%
Locations in operation (excluding
joint venture kiosks):
Beginning of the year 284 235 190
Opened 50 52 47
Consolidated/Closed (6) (3) (2)
End of the year 328 284 235
Number of locations at end of period:
Pawn-only stores 157 127 89
Pawn stores also offering payday
advances (3) 69 70 71
Payday advance stores (3) 102 87 75
Cash & Go, Ltd. joint venture
kiosks (3) 40 40 40
Average receivables and CSO loan
balances per location at end of
period, in thousands:
Pawn receivables in pawn stores $ 121 $ 119 $ 125
Short-term advances in pawn stores (1) 48 43 47
Short-term advances in payday advance
stores (excluding Cash & Go, Ltd.) (1) 118 126 115
Short-term advances in Cash & Go, Ltd.
joint venture kiosks (1) 47 38 43
Average outstanding loan transactions:
Pawn receivables $ 95 $ 85 $ 85
Short-term advance receivables 364 391 381
CSO loans held by independent
third-party lender (1) 454 - -
(1) Short-term advance amount includes payday loans recorded on the
Company's balance sheet and the principal portion of active CSO loans
outstanding from the independent third-party lender, the balance of
which is not included on the Company's balance sheet.
(2) The annualized yield on pawn receivables is calculated by dividing
total pawn service fees by the average quarterly pawn receivable
balance for the year. The annualized yield, net of loss provision, for
short-term advances is calculated by dividing total short-term advance
service fees, net of the short-term advance loss provision, by the
average quarterly short-term advance receivable balance for the year.
The annualized yield calculation for short-term advances does not
include credit services fees or the related credit services loss
provision.
(3) Includes locations where payday advances are provided through the CSO
program.
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 2005 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
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. Store 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 and security. 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, professional
services fees and stockholder-related expenses.
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Income statement items as a percent
of total revenues:
Revenues:
Merchandise sales 49.2% 48.2% 48.0%
Pawn service fees 19.6 19.3 19.8
Short-term advance and credit services fees 29.3 30.1 29.5
Check cashing fees 1.4 1.7 1.9
Other 0.5 0.7 0.8
Cost of Revenues:
Cost of goods sold 29.7% 29.0% 28.3%
Short-term advance and credit services
loss provision 6.6 6.4 6.8
Check cashing returned items expense 0.1 0.1 0.2
Expenses:
Store operating expenses 32.5% 34.0% 35.6%
Administrative expenses 9.3 9.9 10.2
Depreciation 2.8 2.3 2.1
Interest expense - - 0.3
Interest income (0.2) - (0.4)
Merchandise sales gross profit 39.6% 40.0% 41.1%
Short-term advance and credit services loss
provision as a percentage of short-term
advance and credit services fees 22.7% 21.4% 23.0%
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, 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 that we
believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated. In addition, effective December 31, 2003, the accompanying
consolidated financial statements also include the accounts of Cash & Go,
Ltd., a Texas limited partnership, which owns financial services kiosks
inside convenience stores. The Company has a 50% ownership interest in the
partnership, which it has historically accounted for by the equity method of
accounting as neither partner has control. Through December 31, 2003, the
Company recorded its 50% share of the partnership's earnings or losses in
its consolidated financial statements. Effective December 31, 2003, when the
Company adopted FASB Interpretation No. 46(R) - Consolidation of Variable
Interest Entities, the Company included the balance sheet accounts of Cash &
Go, Ltd., in its consolidated financial statements. The Company recorded a
non-recurring change in accounting principle charge of $357,000 net of
income tax benefit on December 31, 2003, in order to reflect the other
partner's share of accumulated losses in the partnership. The consolidated
operating results for the fiscal periods beginning on or after January 1,
2004 include the operating results of Cash & Go, Ltd.
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. The typical pawn loan has a term of thirty days. If the pawn is
not repaid, the principal amount pawned becomes the carrying value of the
forfeited collateral (inventory), which is held for sale. The Company
accrues short-term advance service fees on a constant-yield basis over the
term of the short-term advance. Short-term advances have terms that range
from seven to thirty-one days. The Company recognizes credit services fees,
which are collected from the customer at the inception of the credit
services agreement, ratably over the life of the loan made by the
Independent Lender. The loans made by the Independent Lender to credit
services customers of FCC have terms of seven to thirty-one days. The
Company records a liability for collected, but unearned, credit services
fees received from its customers.
Short-term advance and credit services loss provision - An allowance is
provided for losses on active short-term advances and service fees
receivable based upon expected default rates, net of estimated future
recoveries of previously defaulted short-term advances and service fees
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 fees 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 the short-term advance loss provision. Under the
CSO program, letters of credit issued by FCC to the Independent Lender
constitute a guarantee for which the Company is required to recognize, at
the inception of the guarantee, a liability for the fair value of the
obligation undertaken by issuing the letters of credit. The Independent
Lender may present the letter of credit to FCC for payment if the customer
fails to repay the full amount of the loan and accrued interest after the
due date of the loan. Each letter of credit expires within 60 days from the
inception of the associated lending transaction. FCC's maximum loss
exposure under all of the outstanding letters of credit issued on behalf of
its customers to the Independent Lender as of December 31, 2005 was
$11,969,000. According to the letter of credit, if the borrower defaults on
the loan, the Company will pay the Independent Lender the principal, accrued
interest, insufficient funds fee, and late fees, all of which the Company
records in the short-term advance and credit services loss provision. FCC
is entitled to seek recovery directly from its customers for amounts it pays
the Independent Lender in performing under the letters of credit. The
Company records the estimated fair value of the liability under the letters
of credit in accrued liabilities. This fair value estimate is based in part
upon the Company's historical credit losses for the short-term advance
product, which the Company considers to be a similar credit risk.
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 - Property, plant and equipment and non-current
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 asset and the estimated fair value of the related asset.
Management does not believe any of these assets have been impaired at
December 31, 2005. Goodwill is reviewed annually for impairment based upon
its fair value, or more frequently if certain indicators arise. Management
has determined that goodwill has not been impaired at December 31, 2005.
Stock-based compensation - In December 2004, the FASB issued Statement
No. 123(R), Share Based Payments ("FAS 123(R)"). This statement, which
becomes effective for the Company beginning January 2006, requires that
companies recognize compensation expense equal to the fair value of stock
options or other share-based payments. In January 2005, the Company issued
options to purchase 4,152,000 shares of common stock to certain employees
and directors 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 $12.50, $15.00, $17.50, $20.00, $22.50, $25.00 and $27.50. In
December 2005, the Company issued options to purchase 1,706,000 shares of
common stock to certain employees and directors under its existing stock
option plans. These options were issued in three equal layers to each
recipient with exercise prices for the layers set at $15.00, $17.00 and
$19.00. All of the options granted in 2005 were fully-vested as of the date
of grant, and accordingly, the Company will 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).
In June 2005, 1,716,000 of the options issued in January 2005, and still
outstanding, were canceled. These options had exercise prices ranging from
$22.50 to $27.50. The Company anticipates that it will record share-based
compensation expense in 2006 of approximately $690,000 related to the
vesting of other previously issued options. Approximately $625,000 of the
estimated 2006 equity compensation expense will be recorded in the quarter
ended March 31, 2006, which relates primarily to options with accelerated
vesting features that are expected to be triggered due to an increase in
the Company's stock price. The remaining $65,000 of expected 2006 equity
compensation expense will be recorded ratably in the second, third, and
fourth quarters of 2006.
Results of Operations
Twelve Months Ended December 31, 2005 Compared to Twelve Months Ended
December 31, 2004
The following table (amounts shown in thousands) details the components
of revenues for the fiscal year ended December 31, 2005 ("Fiscal 2005"), as
compared to the fiscal year ended December 31, 2004 ("Fiscal 2004"):
Fiscal Year Ended December 31,
------------------------------
2005 2004 Increase/Decrease
-------- -------- -----------------
Domestic revenues:
Merchandise sales $ 57,174 $ 55,307 $ 1,867 3%
Scrap jewelry sales 7,230 7,787 (557) (7%)
Pawn service fees 25,429 23,887 1,542 6%
Short-term advance and
credit services fees 60,881 54,123 6,758 12%
Check cashing fees 2,900 3,030 (130) (4%)
Other 1,035 1,252 (217) (17%)
-------- -------- -------
$ 154,649 $ 145,386 $ 9,263 6%
======== ======== =======
Foreign revenues:
Merchandise sales 24,165 14,774 9,391 64%
Scrap jewelry sales 13,570 8,877 4,693 53%
Pawn service fees 15,391 10,776 4,615 43%
-------- -------- -------
$ 53,126 $ 34,427 $ 18,699 54%
======== ======== =======
Total revenues:
Merchandise sales 81,339 70,081 11,258 16%
Scrap jewelry sales 20,800 16,664 4,136 25%
Pawn service fees 40,820 34,663 6,157 18%
Short-term advance and
credit services fees 60,881 54,123 6,758 12%
Check cashing fees 2,900 3,030 (130) (4%)
Other 1,035 1,252 (217) (17%)
-------- -------- -------
$ 207,775 $ 179,813 $ 27,962 16%
======== ======== =======
The Company introduced its credit services program in its Texas
locations in July 2005. Credit services fees, which are included in
reported short-term advance and credit services fees, totaled $18,657,000
for Fiscal 2005. Same-store revenues (stores that were in operation during
all of the year of both Fiscal 2004 and Fiscal 2005) increased 6% or
$10,885,000 for Fiscal 2005 as compared to Fiscal 2004. Revenues generated
by the 102 new pawn and payday advance stores that have opened since January
1, 2004 increased by $18,175,000, compared to Fiscal 2004.
The following table (amounts shown in thousands) details the pawn and
short-term advance receivable balances as of December 31, 2005, as compared
to December 31, 2004:
Balance at December 31,
-----------------------
2005 2004 Increase/Decrease
-------- -------- -----------------
Domestic receivables:
Pawn receivables $ 18,603 $ 16,707 $ 1,896 11%
Short-term advance receivables 6,488 15,465 (8,977) (58%)
CSO loans held by independent
third-party lender (1) 10,724 - 10,724 -
-------- -------- -------
$ 35,815 $ 32,172 $ 3,643 11%
======== ======== =======
Foreign receivables:
Pawn receivables $ 8,711 $ 6,722 $ 1,989 30%
======== ======== =======
Total receivables:
Pawn receivables 27,314 23,429 3,885 17%
Short-term advance receivables 6,488 15,465 (8,977) (58%)
CSO loans held by independent
third-party lender (1) 10,724 - 10,724 -
-------- -------- -------
$ 44,526 $ 38,894 $ 5,632 14%
======== ======== =======
(1) CSO loans include the principal portion of active CSO loans
outstanding from an independent third-party lender, the balance
of which is not included on the Company's balance sheet.
Of the $3,885,000 total increase in pawn receivables, $2,639,000 was
attributable to the growth at the stores that were in operation as of
December 31, 2005 and 2004, and $1,246,000 was attributable to the 35 new
pawn stores opened since December 31, 2004, all of which were located in
Mexico. The decrease in short-term advance receivables was due primarily to
the introduction of the credit services program in the Company's Texas
locations, and the resulting discontinuation of the short-term advance
product in Texas during the second half of Fiscal 2005. As a result, short-
term advance receivables in the Company's Texas locations, including the
Cash & Go, Ltd., joint venture kiosks, decreased from $8,826,000 at December
31, 2004, to zero at December 31, 2005. As of December 31, 2005, the
Company's credit services customers had current loans outstanding with the
Independent Lender in the amount of $10,724,000. Short-term advance
receivables in the Company's non-Texas locations decreased from $6,638,000
at December 31, 2004, to $6,488,000 at December 31, 2005. The Company's
loss reserve on short-term advance receivables decreased from $552,000 at
December 31, 2004, to $242,000 at December 31, 2005 as a result of the
decrease in outstanding short-term advance receivables. Under the CSO
program, letters of credit issued by FCC to the Independent Lender
constitute a guarantee for which the Company is required to recognize, at
the inception of the guarantee, a liability for the fair value of the
obligation undertaken by issuing the letters of credit. The estimated loss
reserve under the letters of credit, net of anticipated recoveries from
customers, is $456,000, which is included as a component of the Company's
accrued expenses on its consolidated balance sheets.
Gross profit margins on total merchandise sales were 40% during Fiscal
2005 and Fiscal 2004. Retail merchandise margins, which exclude scrap
jewelry sales, were 44% during Fiscal 2005 and Fiscal 2004. Profit margins
on scrap jewelry sales were 22% during Fiscal 2005 and Fiscal 2004. The
Company's payday advance and credit services loss provision increased from
21% of short-term advance and credit services fee revenues during Fiscal
2004 to 23% during Fiscal 2005. During the Second Quarter of 2005, the
Company initiated a program to sell selected payday advance receivables
which have been previously written-off. The Company realized approximately
$1,569,000 from sales of receivables written-off in 2004 and prior during
Fiscal 2005. This amount was recorded as a reduction to the short-term
advance and credit services loss provision. It is anticipated that such
sales of selected charged-off receivables, along with the implementation of
other collection improvement initiatives, will continue into future periods
for the purpose of ongoing reduction of the payday advance and credit
services loss provision.
Store operating expenses increased 10% to $67,430,000 during Fiscal
2005 compared to $61,063,000 during Fiscal 2004, primarily as a result of
the net addition of 93 pawn and check cashing/short-term advance stores
since January 1, 2004, which is a 40% increase in the store count.
Administrative expenses increased 9% to $19,412,000 during Fiscal 2005
compared to $17,837,000 during Fiscal 2004, which is primarily attributable
to increased costs related to variable management and supervisory
compensation expense and increased professional services fees. The Company
had no interest expense during Fiscal 2005 as it had no interest-bearing
debt outstanding during the year. Interest income increased from $67,000 in
Fiscal 2004 to $317,000 in Fiscal 2005, due primarily to interest income
earned on increased levels of invested cash and cash equivalents.
For Fiscal 2005 and 2004, the Company's effective federal income tax
rates of 36% and 37%, respectively, differed from the statutory tax rate of
approximately 35% and 34%, respectively, primarily as a result of state
income taxes.
Twelve Months Ended December 31, 2004 Compared to Twelve Months Ended
December 31, 2003
The following table (amounts shown in thousands) details the components
of revenues for the fiscal year ended December 31, 2004 ("Fiscal 2004"), as
compared to the fiscal year ended December 31, 2003 ("Fiscal 2003"):
Fiscal Year Ended December 31,
------------------------------
2004 2003 Increase/Decrease
-------- -------- -----------------
Domestic revenues:
Merchandise sales $ 55,307 $ 52,477 $ 2,830 5%
Scrap jewelry sales 7,787 5,834 1,953 33%
Pawn service fees 23,887 21,542 2,345 11%
Short-term advance fees (1) 54,123 42,939 11,184 26%
Check cashing fees (1) 3,030 2,749 281 10%
Other (1) 1,252 1,168 84 7%
-------- -------- -------
$ 145,386 $ 126,709 $ 18,677 15%
======== ======== =======
Foreign revenues:
Merchandise sales 14,774 7,390 7,384 100%
Scrap jewelry sales 8,877 4,107 4,770 116%
Pawn service fees 10,776 7,262 3,514 48%
-------- -------- -------
$ 34,427 $ 18,759 $ 15,668 84%
======== ======== =======
Total revenues:
Merchandise sales 70,081 59,867 10,214 17%
Scrap jewelry sales 16,664 9,941 6,723 68%
Pawn service fees 34,663 28,804 5,859 20%
Short-term advance fees (1) 54,123 42,939 11,184 26%
Check cashing fees (1) 3,030 2,749 281 10%
Other (1) 1,252 1,168 84 7%
-------- -------- -------
$ 179,813 $ 145,468 $ 34,345 24%
======== ======== =======
(1) Effective December 31, 2003, when the Company adopted FASB
Interpretation No. 46(R) - Consolidation of Variable Interest Entities, the
Company included the balance sheet accounts of Cash & Go, Ltd., in its
consolidated financial statements. The consolidated operating results for
Fiscal 2004 include the operating results of Cash & Go, Ltd.; which
include short-term advance fees, check cashing fees and other revenues of
$5,059,000, $545,000 and $75,000, respectively.
Same-store revenues (stores that were in operation during all of the
year of both Fiscal 2003 and Fiscal 2004) increased 10% or $14,056,000 for
Fiscal 2004 as compared to Fiscal 2003. Revenues generated by the 99
new pawn and payday advance stores that have opened since January 1, 2003
increased by $15,934,000, compared to Fiscal 2003. An increase in revenues
of $5,679,000 was related to the consolidation of the 40 Cash & Go, Ltd.
kiosks.
The following table (amounts shown in thousands) details the pawn and
short-term advance receivable balances as of December 31, 2004, as compared
to December 31, 2003:
Balance at December 31,
-----------------------
2004 2003 Increase/Decrease
-------- -------- -----------------
Domestic receivables:
Pawn receivables $ 16,707 $ 15,695 $ 1,012 6%
Short-term advance receivables 15,465 13,759 1,706 12%
-------- -------- -------
$ 32,172 $ 29,454 $ 2,718 9%
======== ======== =======
Foreign receivables:
Pawn receivables $ 6,722 $ 4,342 $ 2,380 55%
======== ======== =======
Total receivables:
Pawn receivables 23,429 20,037 3,392 17%
Short-term advance receivables 15,465 13,759 1,706 12%
-------- -------- -------
$ 38,894 $ 33,796 $ 5,098 15%
======== ======== =======
Of the $3,392,000 total increase in pawn receivables, $2,082,000 was
attributable to the growth at the stores that were in operation as of
December 31, 2004 and 2003, and $1,310,000 was attributable to the 40 new
pawn stores opened since December 31, 2003, all of which were located in
Mexico. Of the $1,706,000 total increase in short-term advance receivables,
a same-store increase of $1,146,000 was attributable to the growth in short-
term advance receivable balances at the stores that were in operation as of
December 31, 2004 and 2003 and an increase of $560,000 was attributable to
the 12 new payday advance stores opened since December 31, 2003. The
Company's loss reserve on short-term advance receivables increased from
$497,000 at December 31, 2003, to $552,000 at December 31, 2004.
Gross profit margins on total merchandise sales were 40% during Fiscal
2004 compared to 41% during Fiscal 2003. This decrease was primarily the
result of the increased mix of non-retail bulk sales of scrap jewelry, which
is typically sold at lower profit margins. Retail merchandise margins,
which exclude bulk scrap jewelry sales, decreased from 45% during Fiscal
2003 compared to 44% during Fiscal 2004. Scrap jewelry sales increased 68%
to $16,664,000 for Fiscal 2004 compared to $9,941,000 for Fiscal 2003.
Profit margins on scrap jewelry sales were 22% during Fiscal 2004 compared
to 18% during Fiscal 2003. The Company's loss provision relating to short-
term advances increased from $9,879,000 in Fiscal 2003 to $11,559,000 in
Fiscal 2004. As a percentage of short-term advance and credit services fee
revenue, the loss provision decreased from 23% during Fiscal 2003 to 21%
during Fiscal 2004. This decrease was due in part to the consolidation of
the Cash & Go, Ltd., joint venture, which is a more mature group of stores
with a lower than average loss provision expense.
Store operating expenses increased 18% to $61,063,000 during Fiscal
2004 compared to $51,814,000 during Fiscal 2003, primarily as a result of
the consolidation of Cash & Go, Ltd.'s operating results and the net
addition of 49 pawn and payday advance stores in Fiscal 2004, which is a
21% increase in store count. Administrative expenses increased 20% to
$17,837,000 during Fiscal 2004 compared to $14,807,000 during Fiscal 2003
primarily as a result of the consolidation of Cash & Go, Ltd.'s operating
results and increased costs related to additional administrative personnel,
professional services fees, and other expenses necessary to support the
Company's growth strategy and increase in store counts. Interest expense
decreased to $73,000 in Fiscal 2004 compared to interest expense of $472,000
in Fiscal 2003 as a result of lower average outstanding debt balances during
Fiscal 2004. Interest income decreased from $595,000 in Fiscal 2003 to
$67,000 in Fiscal 2004, due primarily to the elimination of interest income
associated with the consolidation of Cash & Go, Ltd.
For Fiscal 2004 and 2003, the Company's effective federal income tax
rates of 37% and 38%, respectively, differed from the statutory tax rate of
approximately 34% primarily as a result of state and foreign income taxes.
Liquidity and Capital Resources
As of December 31, 2005, the Company's primary sources of liquidity
were $42,741,000 in cash and cash equivalents, $37,978,000 in receivables,
$21,987,000 in inventories and $25,000,000 of available and unused funds
under the Company's line of credit. The Company had working capital of
$93,506,000 as of December 31, 2005, and total equity exceeded total
liabilities by a ratio of 7 to 1. The Company's operations and store
openings have been financed with funds generated primarily 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, 2007 and bears interest
at the prevailing LIBOR rate (which was approximately 4.4% at December 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, depreciation and amortization for the trailing
twelve months. At December 31, 2005, no amounts were outstanding under the
Credit Facility and the Company had $25,000,000 available for 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, 2005, and March 13, 2006. 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.
Net cash provided by operating activities of the Company during the
year ended December 31, 2005, was $42,095,000, consisting primarily of net
income of $25,383,000 plus non-cash adjustments for depreciation, the short-
term advance loss provision, and the tax benefit from the exercise
of employee stock options of $5,804,000, $7,118,000, and $2,066,000,
respectively. Net changes in operating assets and liabilities increased
cash provided by operating activities in the amount of $1,724,000. Net cash
used by investing activities during the year ended December 31, 2005, was
$16,799,000, which was primarily comprised of net cash outflows from pawn
receivables activity of $6,665,000, net cash inflows from short-term advance
receivables activity of $1,859,000, and cash paid for fixed asset additions
of $11,993,000. Net inflows from short-term advance activity were due to
the reduction in outstanding short-term advances in the Company's Texas
locations resulting from the introduction of the credit services program.
The opening of 50 new stores and the purchases of corporate fixed assets
during Fiscal 2005 contributed significantly to the volume of fixed asset
additions. Net cash used by financing activities was $8,787,000 during the
year ended December 31, 2005, which consisted of purchases of treasury stock
in the amount of $11,404,000, net of proceeds from exercises of stock
options and warrants of $2,617,000.
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, although in the
Statements of Cash Flows these are classified as investing cash flows. For
Fiscal 2005, total cash flows from operations were $42,095,000 while net
cash outflows related to pawn receivables activity was $6,665,000 and the
net cash inflows related to short-term advance receivables activity was
$1,859,000. The combined net cash flows from operations and pawn and short-
term advance receivables totaled $37,289,000 for Fiscal 2005. For Fiscal
2004, total cash flows from operations were $44,128,000 while net cash
outflows related to pawn receivables and short-term advance receivables were
$4,728,000 and $13,265,000, respectively. The combined net cash flows from
operations and pawn and short-term advance receivables totaled $26,135,000
for Fiscal 2004. For Fiscal 2003, cash flows from operations were
$32,606,000, and net cash outflows related to pawn receivables and short-
term advance receivables were $4,635,000 and $11,211,000, respectively. The
combined net cash flows from operations and pawn and short-term advance
receivables totaled $16,760,000 for Fiscal 2003.
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 redemptions 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 fees.
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 service fees on such pawns,
effectively creating a new pawn transaction.
The amount of short-term advances outstanding and related potential
loss provision expense also affect the profitability and liquidity of the
Company. An allowance for losses is provided on active short-term advances
and service fees receivable, based upon expected default rates, net of
estimated future recoveries of previously defaulted short-term advances and
service fees 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 fees 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 the
Credit Facility and cash generated from operations will be sufficient to
accommodate the Company's current operations for fiscal 2006. 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 2006, the
Company currently plans to open approximately 60 to 70 new stores, comprised
of both payday advance locations, primarily located in Texas and Michigan,
and pawnshops, primarily in Mexico. This expansion is expected to be funded
entirely through operating cash flows. 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 new stores in the near
future, the Company will seek additional financing, the terms of which will
be negotiated on a case-by-case basis.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") for Fiscal 2005 totaled $45,165,000, an increase of 22% compared
to $37,046,000 for Fiscal 2004. The EBITDA margin, which is EBITDA as a
percentage of revenues, for Fiscal 2005 was 21.7%, compared to 20.6% for the
comparable prior year period.
EBITDA is commonly used by investors to assess a company's leverage
capacity, liquidity and financial performance. EBITDA is not considered a
measure of financial performance under U.S. generally accepted accounting
principles ("GAAP"), and the items excluded from EBITDA are significant
components in understanding and assessing the Company's financial
performance. Since EBITDA is not a measure determined in accordance with
GAAP and is thus susceptible to varying calculations, EBITDA, as presented,
may not be comparable to other similarly titled measures of other companies.
EBITDA should not be considered as an alternative to net income, cash flows
provided by or used in operating, investing or financing activities or other
financial statement data presented in the Company's consolidated financial
statements as an indicator of financial performance or liquidity. Non-GAAP
measures should be evaluated in conjunction with, and are not a substitute
for, GAAP financial measures. The following table provides a reconciliation
of net income from continuing operations to EBITDA (amounts in thousands):
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Net income before change
in accounting principle $ 25,383 $ 20,706 $ 15,332
Adjustments:
Interest income, net of
interest expense (317) 6 (123)
Depreciation 5,804 4,173 3,019
Income taxes 14,295 12,161 9,397
------- ------- -------
Earnings before interest, income
taxes, depreciation and amortization $ 45,165 $ 37,046 $ 27,625
======= ======= =======
Contractual Commitments
A tabular disclosure of contractual obligations at December 31, 2005,
including Cash & Go, Ltd., is as follows:
Payments due by period
-----------------------------------------------
(in thousands)
Less More
than 1 1 - 3 3 - 5 than 5
Total year years years years
------ ------ ------ ------ ------
Operating leases $52,440 $13,909 $22,642 $10,833 $ 5,056
Employment and
consulting contracts
for officers and
directors 8,700 1,550 3,100 2,050 2,000
------ ------ ------ ------ ------
Total $61,140 $15,459 $25,742 $12,883 $ 7,056
====== ====== ====== ====== ======
Off-Balance Sheet Arrangements
As of December 31, 2005, the Company had no off-balance sheet arrangements.
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 merchandise sales 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
See discussion in Note 2 of Notes to Consolidated Financial Statements.
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 potentially exposed to market risk in the form of
interest rate risk in regards to its long-term line of credit. As of March
13, 2006, the line of credit did not have an outstanding balance; therefore,
the Company's interest rate risk for 2006 is immaterial.
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 materially adverse effect on the Company's operating results,
financial condition, or cash flows.
Foreign Currency Risk
The Company bears certain exchange rate risks from its operations in
Mexico as approximately $3,304,000 of the Company's pawn loans in Mexico at
December 31, 2005 were contracted and expected to be settled in Mexican
pesos. The Company also maintained certain peso-denominated bank balances
at December 31, 2005, which converted to a U.S. dollar equivalent of
$2,570,000. A 10% increase in the peso to U.S. dollar exchange rate would
increase the Company's foreign currency translation exposure on its pawn
loan balance and cash by approximately $300,000 and $234,000, respectively.
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 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 15(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 Hein &
Associates LLP requiring disclosure hereunder.
Item 9a. Controls and Procedures
---------------------------------
Evaluation of Disclosure Controls and Procedures
The Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO")
participated in an evaluation by our management of the effectiveness of the
Company's disclosure controls and procedures as of the end of the fiscal
year that ended on December 31, 2005. Based on their participation in that
evaluation, the CEO and CFO concluded that the disclosure controls and
procedures were effective as of December 31, 2005 to ensure that required
information is disclosed on a timely basis in our reports filed or furnished
under the Exchange Act.
The CEO and CFO also participated in an evaluation by the management of
any changes in the internal control over financial reporting that occurred
during the year ended December 31, 2005. That evaluation did not identify
any changes that have materially affected, or are likely to materially
affect, the internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. This internal control system has
been designed to provide reasonable assurance to the Company's management
and board of directors regarding the preparation and fair presentation of
the Company's published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management has assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2005. To make this
assessment, management used the criteria for effective internal control over
financial reporting described in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of
December 31, 2005, the Company's internal control over financial reporting
is effective based on those criteria.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2005 has been audited by Hein &
Associates LLP, an independent registered public accounting firm, as stated
in their report which appears herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of First Cash Financial Services, Inc.
We have audited management's assessment, included in the accompanying
management's report on internal controls, that First Cash Financial
Services, Inc., maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Company management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding
of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed 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. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2005,
is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Also in our
opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").
We also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of First Cash Financial Services, Inc., as of December 31, 2005 and 2004,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the years ended December 31, 2005 and 2004 and our report
dated March 13, 2006 expressed an unqualified opinion thereon.
Hein & Associates LLP
Dallas, Texas
March 13, 2006
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 shareholder-approved
plans, including its 1990 Stock Option Plan, its 1999 Stock Option Plan, and
its 2004 Long-Term Incentive Plan as of December 31, 2005. 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 SFAS No. 123.
Number of Number of securities
securities to Weighted remaining available
be issued upon average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column A)
Plan Category (A) (B) (C)
------------- --- --- ---
Equity Compensation
Plans Approved by
Security Holders 5,373,850 $ 14.17 213,710
Equity Compensation
Plans Not Approved
by Security Holders 1,257,200 2.94 -
--------- ---------
Total 6,631,050 $ 12.04 213,710
========= =========
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.
Item 14. Principal Accounting Fees and Services
------------------------------------------------
The information required by this item is incorporated by reference from
the information provided in the Company's Proxy Statement under the
discussion of the Company Audit Committee and under the item regarding
shareholder ratification of the Company's independent accountants.
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
----------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the
notes thereto.
(3) Exhibits:
3.1(7) Amended Certificate of Incorporation
3.2(5) Amended Bylaws
4.1(2) Common Stock Specimen
10.1(1) First Cash, Inc. 1990 Stock Option Plan
10.2(8) Consulting Agreement - Phillip E. Powell
10.3(8) Employment Agreement - Rick L. Wessel
10.4(8) Employment Agreement - Alan Barron
10.5(3) Acquisition Agreement - Miraglia, Inc.
10.6(4) Acquisition Agreement for Twelve Pawnshops
in South Carolina
10.7(4) Acquisition Agreement for One Iron Ventures, Inc.
10.8(4) First Cash Financial Services, Inc. 1999 Stock
Option Plan
10.9(6) Executive Incentive Compensation Plan
10.10(7) 2004 Long-Term Incentive Plan
14.1(8) Code of Ethics
21.1(9) Subsidiaries
23.1(9) Consent of Independent Registered Public Accounting
Firm, Deloitte & Touche LLP
23.2(9) Consent of Independent Registered Public Accounting
Firm, Hein & Associates LLP
31.1(9) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(9) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(9) Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(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 the Annual Report on Form 10-K for the fiscal
year ended July 31, 1998 (File No. 0 - 19133) and incorporated herein
by reference.
(4) 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.
(5) 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.
(6) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 30, 2003.
(7) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 29, 2004.
(8) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 0 - 19133) and incorporated herein
by reference.
(9) 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.
Dated: March 13, 2006 /s/ J. ALAN BARRON
--------------------------------------------
J. Alan Barron
Chief Executive Officer
(Principal Executive Officer)
Dated: March 13, 2006 /s/ R. DOUGLAS ORR
--------------------------------------------
R. Douglas Orr
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ PHILLIP E. POWELL Chairman of the Board March 13, 2006
----------------------
Phillip E. Powell
/s/ RICK L. WESSEL Vice Chairman of the Board, March 13, 2006
---------------------- President, Secretary and
Rick L. Wessel Treasurer
/s/ JOE R. LOVE Director March 13, 2006
----------------------
Joe R. Love
/s/ RICHARD T. BURKE Director March 13, 2006
----------------------
Richard T. Burke
/s/ TARA MACMAHON Director March 13, 2006
----------------------
Tara MacMahon
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005 and
2004, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years ended December 31, 2005 and 2004.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, 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, 2005 and
December 31, 2004, and the consolidated results of their operations and
cash flows for the years ended December 31, 2005 and 2004, in conformity
with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
the Company's internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 13, 2006, expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over
financial reporting.
Hein & Associates LLP
Dallas, Texas
March 13, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of First Cash Financial Services, Inc.,
and subsidiaries for the year ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated results of operations and cash flows
of First Cash Financial Services, Inc., and subsidiaries for the year ended
December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 3, effective December 31, 2003, in connection with the
adoption of Financial Accounting Standards Board Interpretation No. 46(R),
Consolidation of Variable Interest Entities, the Company consolidated into
its financial statements its 50% owned joint venture, Cash & Go, Ltd.
As described in Note 2, the consolidated statement of cash flows for the
period ended December 31, 2003, has been restated.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 8, 2004 (October 8, 2004 as to the effects of the restatement
described in the last paragraph of Note 2)
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2005 2004
------- -------
(in thousands, except share data)
ASSETS
Cash and cash equivalents...................... $ 42,741 $ 26,232
Service fees receivable........................ 4,176 4,512
Pawn receivables............................... 27,314 23,429
Short-term advance receivables, net of
allowance of $242 and $552, respectively..... 6,488 15,465
Inventories.................................... 21,987 17,644
Prepaid expenses and other current assets...... 5,430 3,649
------- -------
Total current assets ......................... 108,136 90,931
Property and equipment, net.................... 23,565 17,376
Goodwill....................................... 53,237 53,237
Other.......................................... 1,016 799
------- -------
Total assets .............................. $185,954 $162,343
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable .............................. $ 908 $ 856
Accrued liabilities............................ 13,722 8,686
------- -------
Total current liabilities .................... 14,630 9,542
Deferred income taxes payable.................. 8,616 8,755
------- -------
Total liabilities ......................... 23,246 18,297
------- -------
Commitments and contingencies (Notes 2 and 10)
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding................................. - -
Common stock; $.01 par value; 90,000,000
shares authorized; 33,900,860 and 33,223,910
shares issued, respectively; 31,502,472 and
31,978,480 shares outstanding, respectively 170 166
Additional paid-in capital ................... 83,235 78,556
Retained earnings ............................ 102,823 77,440
Common stock in treasury, 2,398,388 and
1,245,430 shares at cost, respectively (23,520) (12,116)
------- -------
Total stockholders' equity................ 162,708 144,046
------- -------
Total liabilities and stockholders' equity $185,954 $162,343
======= =======
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,
-----------------------------
2005 2004 2003
------- ------- -------
(in thousands, except per share amounts)
Revenues:
Merchandise sales ....................... $102,139 $ 86,745 $ 69,808
Pawn service fees ....................... 40,820 34,663 28,804
Short-term advance and credit
services fees ......................... 60,881 54,123 42,939
Check cashing fees ...................... 2,900 3,030 2,749
Other ................................... 1,035 1,252 1,168
------- ------- -------
207,775 179,813 145,468
------- ------- -------
Cost of revenues:
Cost of goods sold ...................... 61,659 52,056 41,110
Short-term advance and credit services
loss provision ........................ 13,808 11,559 9,879
Check cashing returned items expense .... 301 252 233
------- ------- -------
75,768 63,867 51,222
------- ------- -------
Gross profit........................... 132,007 115,946 94,246
------- ------- -------
Expenses and other income:
Store operating expenses ................ 67,430 61,063 51,814
Administrative expenses ................. 19,412 17,837 14,807
Depreciation ............................ 5,804 4,173 3,019
Interest expense ........................ - 73 472
Interest income ......................... (317) (67) (595)
------- ------- -------
92,329 83,079 69,517
------- ------- -------
Income before income taxes ................. 39,678 32,867 24,729
Provision for income taxes .............. 14,295 12,161 9,397
------- ------- -------
Income before change in accounting principle 25,383 20,706 15,332
Cumulative effect of change in accounting
principle, net of taxes (Note 3)....... - - (357)
------- ------- -------
Net income............................. $ 25,383 $ 20,706 $ 14,975
======= ======= =======
Net income per share (Notes 2 and 4):
Basic:
Income before change in accounting
principle.......................... $ 0.81 $ 0.66 $ 0.55
Cumulative effect of change in
accounting principle, net of taxes. - - (0.01)
------- ------- -------
Net income........................... $ 0.81 $ 0.66 $ 0.54
======= ======= =======
Diluted:
Income before change in accounting
principle.......................... $ 0.76 $ 0.61 $ 0.49
Cumulative effect of change in
accounting principle, net of taxes. - - (0.01)
------- ------- -------
Net income........................... $ 0.76 $ 0.61 $ 0.48
======= ======= =======
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,
-----------------------------
2005 2004 2003
------- ------- -------
(in thousands)
Cash flows from operating activities:
Income before change in accounting
principle .............................. $ 25,383 $ 20,706 $ 15,332
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation .......................... 5,804 4,173 3,019
Short-term advance loss provision ..... 7,118 11,559 9,878
Stock option and warrant income tax
benefit ............................. 2,066 8,736 5,408
Changes in operating assets and
liabilities, net of effect of Cash & Go,
Ltd. consolidation:
Service fees receivable ............... 336 (594) (553)
Inventories ........................... (1,563) (720) (718)
Prepaid expenses and other assets ..... (2,832) (530) 167
Accounts payable and accrued
liabilities ......................... 5,088 (1,344) 545
Current and deferred income taxes ..... 695 2,142 (472)
------- ------- -------
Net cash flows from operating activities 42,095 44,128 32,606
------- ------- -------
Cash flows from investing activities:
Pawn receivables, net .................... (6,665) (4,728) (4,635)
Short-term advance receivables, net ...... 1,859 (13,265) (11,211)
Purchases of property and equipment ...... (11,993) (7,131) (5,202)
Cash from consolidation of Cash & Go, Ltd. - - 2,103
Net decrease in receivable from
Cash & Go, Ltd ......................... - - 2,633
------- ------- -------
Net cash flows from investing activities (16,799) (25,124) (16,312)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt ....................... - 10,000 -
Repayments of debt ....................... - (16,000) (23,502)
Decrease in notes receivable from officers - - 4,228
Purchases of treasury stock .............. (11,404) (13,463) -
Proceeds from exercise of stock options
and warrants ........................... 2,617 10,844 6,092
------- ------- -------
Net cash flows from financing activities (8,787) (8,619) (13,182)
------- ------- -------
Change in cash and cash equivalents ........ 16,509 10,385 3,112
Cash and cash equivalents at beginning
of the year............................... 26,232 15,847 12,735
------- ------- -------
Cash and cash equivalents at end of the year $ 42,741 $26,232 $ 15,847
======= ======= =======
Supplemental disclosure of
cash flow information:
Cash paid during the year for:
Interest ................................ $ - $ 70 $ 498
======= ======= =======
Income taxes ............................ $ 11,380 $ 1,356 $ 4,256
======= ======= =======
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
(in thousands)
Supplemental disclosure of non-cash
operating, investing and financing
activities:
Non-cash transactions in connection with
consolidation of Cash & Go, Ltd.:
Fair market value of assets
consolidated ........................ $ - $ - $ 4,648
Less assumption of liabilities
from consolidation .................. - - (5,791)
------- ------- -------
Net liabilities resulting from consolidation $ - $ - $ (1,143)
======= ======= =======
Non-cash transactions in connection with
pawn receivables collateral forfeited
and transferred to inventories ......... $ 42,241 $ 35,173 $ 27,112
======= ======= =======
The accompanying notes are an integral
part of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
(in thousands)
Preferred stock........................... - - -
------- ------- -------
Common stock:
Balance at beginning of year ........... $ 166 $ 109 $ 96
Exercise of stock options and warrants.. 4 15 13
Cancellation of treasury stock ......... - (8) -
Effect of stock split .................. - 50 -
------- ------- -------
Balance at end of year ............ 170 166 109
------- ------- -------
Additional paid-in capital:
Balance at beginning of year ........... 78,556 63,395 51,908
Exercise of stock options and warrants,
including income tax benefit of $2,066,
$8,736, and $5,408, respectively....... 4,679 19,572 11,487
Cancellation of treasury stock ......... - (4,354) -
Effect of stock split .................. - (57) -
------- ------- -------
Balance at end of year ............ 83,235 78,556 63,395
------- ------- -------
Retained earnings:
Balance at beginning of year ........... 77,440 56,734 41,759
Net income ............................. 25,383 20,706 14,975
------- ------- -------
Balance at end of year ............ 102,823 77,440 56,734
------- ------- -------
Treasury stock:
Balance at beginning of year ........... (12,116) (3,015) (3,015)
Repurchases of treasury stock .......... (11,404) (13,463) -
Cancellation of treasury stock ......... - 4,362 -
------- ------- -------
Balance at end of year ............ (23,520) (12,116) (3,015)
------- ------- -------
Notes receivable from officers:
Balance at beginning of year ........... - - (4,228)
Repayment of notes receivable .......... - - 4,228
------- ------- -------
Balance at end of year ............ - - -
------- ------- -------
Total stockholders' equity................ $162,708 $144,046 $117,223
======= ======= =======
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 retail previously owned
merchandise acquired through pawn forfeitures and purchases directly from
the general public. In addition to making short-term secured pawns, many of
the Company's pawn stores offer short-term advances and credit services.
The Company also operates short-term or payday advance stores that provide
short-term advances, credit services, check cashing, and other related
financial services. As of December 31, 2005, the Company owned and operated
226 pawn stores and 102 payday advance stores. The Company is also a 50%
owner of Cash & Go, Ltd., a Texas limited partnership that owns and operates
40 financial services kiosks inside convenience 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. In addition, effective December 31, 2003, the accompanying
consolidated financial statements include the balance sheet accounts of Cash
& Go, Ltd., a 50%-owned Texas limited partnership, which owns financial
services kiosks inside convenience stores. The operating results of the
partnership are included in the consolidated financial statements effective
January 1, 2004. All significant intercompany accounts and transactions
have been eliminated (see Note 3).
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 - Pawn receivables are secured by
the pledge of tangible personal property. The Company accrues pawn service
charge revenue on a constant-yield basis over the life of the pawn loan 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 loaned becomes the carrying value of the forfeited
collateral ("inventory"), which is recovered through sale. The Company
accrues short-term advance service fees on a constant-yield basis over the
term of the short-term advance. Short-term advances have terms that range
from seven to thirty-one days. Effective July 1, 2005, First Cash Credit,
Ltd. ("FCC"), a wholly-owned subsidiary of the Company, began offering a
fee-based credit services organization ("CSO") program to assist consumers
in its Texas markets in obtaining credit. Under the CSO program, FCC
assists customers in applying for a short-term loan from an independent,
non-bank, consumer lending company (the "Independent Lender"). The Company
recognizes credit services fees, which are collected from the customer at
the inception of the credit services agreement, ratably over the life of the
loan made by the Independent Lender. The loans made by the Independent
Lender to credit services customers of FCC have terms of seven to thirty-
one days. The Company records a liability for collected, but unearned,
credit services fees received from its customers.
Short-term advance and credit services loss provision - An allowance is
provided on short-term advance receivables and service charge receivables,
based upon expected default rates, net of estimated future recoveries of
previously defaulted short-term advances and service charge receivables.
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
charge receivable as of the default date. Net defaults and changes in the
short-term advance allowance are charged to the short-term advance loss
provision. Under the CSO program, the Company issues the Independent Lender
a letter of credit to guarantee the repayment of the loan. These letters of
credit constitute a guarantee for which the Company is required to
recognize, at the inception of the guarantee, a liability for the fair value
of the obligation undertaken by issuing the letters of credit. The
Independent Lender may present the letter of credit to FCC for payment if
the customer fails to repay the full amount of the loan and accrued interest
after the due date of the loan. Each letter of credit expires within 60
days from the inception of the associated lending transaction. FCC's
maximum loss exposure under all of the outstanding letters of credit issued
on behalf of its customers to the Independent Lender as of December 31, 2005
was $11,969,000. According to the letter of credit, if the borrower
defaults on the loan, the Company will pay the Independent Lender the
principal, accrued interest, insufficient funds fee, and late fees, all of
which the Company records as bad debt in the short-term advance and credit
services loss provision. FCC is entitled to seek recovery directly from its
customers for amounts it pays the Independent Lender in performing under the
letters of credit. The Company records the estimated fair value of the
liability under the letters of credit in accrued liabilities.
Store operating expenses - Costs incurred in operating the pawn stores
and payday advance stores have been classified as store operating expenses.
Operating expenses include salary and benefit expense of store employees,
rent and other occupancy costs, bank charges, security, insurance,
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 inventories 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 the assets are sold or retired.
Long-lived assets - Property, plant and equipment and non-current
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.
Management does not believe any of these assets have been impaired at
December 31, 2005. Goodwill is reviewed annually for impairment based upon
its fair value, or more frequently if certain indicators arise. Management
has determined that goodwill has not been impaired at December 31, 2005.
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, 2005, 2004 and 2003, was $1,964,000, $2,302,000 and
$1,567,000, respectively.
Stock-based compensation - The Company's stock-based employee
compensation plans are described in Note 11. The expense recognition and
measurement principles of APB 25, Accounting for Stock Issued to Employees,
and related interpretations are followed in accounting for these plans. No
stock-based employee compensation has been charged to earnings because the
exercise prices of all stock options granted under these plans have been
equal to or greater than 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,
-----------------------------
2005 2004 2003
------- ------- -------
Net income, as reported $ 25,383 $ 20,706 $ 14,975
Less: Stock-based employee compensation
determined under the fair value
requirements of SFAS 123, net of
income tax benefits 11,178 2,716 2,261
------- ------- -------
Pro forma net income $ 14,205 $ 17,990 $ 12,714
======= ======= =======
Earnings per share:
Basic, as reported $ 0.81 $ 0.66 $ 0.54
Basic, pro forma $ 0.45 $ 0.57 $ 0.45
Diluted, as reported $ 0.76 $ 0.61 $ 0.48
Diluted, pro forma $ 0.43 $ 0.53 $ 0.40
Pursuant to the requirements of SFAS 123, the weighted-average fair
value of the individual employee stock options and warrants granted during
2005, 2004 and 2003 have been estimated as $3.72, $4.97 and $2.97,
respectively, on the date of the grant. In 2005, 594,000 options were
granted with an exercise price equal to the market price of the stock on the
date of grant and 5,264,000 options were granted with an exercise price that
exceeded the market price on the date of grant ("premium-priced options").
The options granted at market price had a weighted-average exercise price of
$12.50 and a weighted-average fair value of $3.46. The premium-priced
options had a weighted-average exercise price of $19.89 and a weighted-
average fair value price $3.75. All options granted in 2004 and 2003 had
an exercise price equal to the market price on the date of grant. The fair
values were determined using a Black-Scholes option-pricing model using the
following assumptions:
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Dividend yield - - -
Volatility 44.1% 52.7% 54.0%
Risk-free interest rate 3.5% 3.5% 3.5%
Expected life 4.4 years 5.5 years 7.0 years
In December 2004, the FASB issued Statement No. 123(R), Share Based
Payments. This statement, which becomes effective for the Company beginning
January 2006, requires that companies recognize compensation expense equal
to the fair value of stock options or other share-based payments.
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. All share amounts have been retroactively adjusted to give effect
to a two-for-one split and three-for-two split of the Company's common stock
in February 2006 and March 2004, respectively (see Note 4).
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Numerator:
Net income for calculating
basic and diluted earnings per share $ 25,383 $ 20,706 $ 14,975
Denominator:
Weighted-average common shares for
calculating basic earnings per share 31,506 31,507 27,971
Effect of dilutive stock options
and warrants 1,719 2,560 3,541
------- ------- -------
Weighted-average common shares for
calculating diluted earnings per share 33,225 34,067 31,512
======= ======= =======
Basic earnings per share $ 0.81 $ 0.66 $ 0.54
Diluted earnings per share $ 0.76 $ 0.61 $ 0.48
Pervasiveness of estimates - 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 the 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 for the years ended December 31,
2003 and 2004, have been reclassified in order to conform to the 2005
presentation.
In addition, the Statement of Cash Flows for the year ended December
31, 2003, was restated to correct the classification of certain transactions
between sections of the Statement of Cash Flows. The effect of these
reclassifications was to increase net cash flows from operating activities
by $16,508,000 from the amount previously reported for 2003 with offsetting
reductions to net cash flows from investing and financing activities. The
specific adjustment was provided in the Company's amended and restated
Annual Report on Form 10-K/A, dated October 8, 2004, for the year ended
December 31, 2003.
Recent accounting pronouncements - In December 2004, the Financial
Accounting Standards Board ("FASB") enacted Statement of Financial
Accounting Standards 123 - revised 2004 ("SFAS 123R"), Share-Based Payments,
which replaces Statement of Financial Accounting Standards No. 123
("SFAS 123"), Accounting for Stock-Based Compensation, and supersedes APB
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees.
SFAS 123R requires the measurement of all employee share-based payments to
employees, including grants of employee stock options, using a fair-value-
based method and the recording of such expense in the consolidated
statements of income.
The accounting provisions of SFAS 123R will be adopted by the Company
using the modified prospective method for reporting periods beginning
January 1, 2006. A "modified prospective" method assumes compensation cost
is recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of SFAS No. 123R
that remain unvested on the effective date. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. The pro forma net income and net income
per share amounts for Fiscal 2003 through Fiscal 2005 as if the Company had
used a fair-value-based method similar to the methods required under
SFAS 123R to measure compensation expense for employee stock incentive
awards is presented herein. The Company expects to adopt SFAS No. 123R
using the modified prospective method, and expects to continue to estimate
the fair value of stock options using the Black-Scholes option pricing model
so that fair value estimates will be computed on a basis comparable with
prior year pro forma compensation expense calculations. The Company
estimates that it will record share-based compensation expense in fiscal
2006 of approximately $690,000. Approximately $625,000 of the anticipated
2006 equity compensation expense will be recorded in the quarter ended March
31, 2006, which relates primarily to options with accelerated vesting
features that are expected to be triggered due to an increase in the
Company's stock price. The remaining $65,000 of expected 2006 equity
compensation expense will be recorded ratably in the second, third and
fourth quarters of 2006.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
In December 2003, the FASB issued Interpretation No. 46(R) ("FIN 46"),
Consolidation of Variable Interest Entities. 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. 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 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. The consolidation requirements became effective
beginning the first period that ended after March 15, 2004; however, the
Company elected to adopt the requirements effective December 31, 2003.
The Company has a 50% ownership interest in a joint venture, Cash & Go,
Ltd., a Texas limited partnership, which owns and operates 40 check cashing
and financial services kiosks inside convenience stores. The Company funds
substantially all of the working capital requirements of Cash & Go, Ltd., in
the form of a loan to the joint venture. 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.
The Company previously accounted for its share of the joint venture's
operating results using the equity method of accounting, as neither joint
venture partner had control. Accordingly, through December 31, 2003, the
Company recorded its 50% share of the partnership's earnings or losses in
its consolidated financial statements. As defined in FIN 46, Cash & Go,
Ltd., meets the requirements of a variable interest entity that must be
consolidated by the Company. The Company implemented FIN 46 on December 31,
2003, at which time it recorded a change in accounting principle charge of
$357,000, net of income tax benefit, which was necessary to recognize the
other joint venture partner's share of Cash & Go, Ltd.'s accumulated
operating losses as part of the initial consolidation accounting. As of
December 31, 2003, and periods thereafter, the Company's consolidated
balance sheet includes the assets and liabilities of Cash & Go, Ltd., net of
intercompany accounts, including the loan described below, which have been
eliminated. For Fiscal 2003, Cash & Go, Ltd. had total revenues of
$6,694,000 and total expenses of $6,596,000; resulting in income before
taxes of $98,000. The Company's share of income, as accounted for using
the equity method through December 31, 2003, was $49,000. The operating
results of Cash & Go, Ltd., are included in the Company's consolidated
operating results effective for accounting periods beginning January 1,
2004. Summarized financial information for Cash & Go, Ltd., as of December
31, 2003, is as follows:
December 31, 2003
-----------------
(in thousands)
Current assets $ 4,120
Non-current assets 528
Current note payable to First Cash Financial
Services, Inc. (5,504)
Other current liabilities (287)
-------
Net liabilities $ (1,143)
=======
Company's net receivable from Cash & Go, Ltd.:
Note receivable from Cash & Go, Ltd. $ 5,504
Company's share of net liabilities (572)
-------
$ 4,932
=======
Had the Company accounted for its investment in Cash & Go, Ltd., under
FIN 46 for the year ended December 31, 2003, the Company's net income would
have been as follows (in thousands, except per share data):
Year Ended December 31, 2003
----------------------------
Reported net income $ 14,975
Additional loss related to consolidation
of Cash & Go, Ltd., net of tax 387
-------
Adjusted net income $ 15,362
=======
Basic earnings per share:
Reported net income $ 0.54
Adjusted net income $ 0.55
Diluted earnings per share:
Reported net income $ 0.48
Adjusted net income $ 0.49
NOTE 4 - CAPITAL STOCK
In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006. All share and per share amounts (except authorized shares and par
value) have been retroactively adjusted to reflect the split.
In July 2004, the Company's Board of Directors authorized a stock
repurchase program to permit future repurchases of up to 3,200,000 shares of
the Company's outstanding common stock. During 2005 and 2004, the Company
repurchased a total of 1,153,000 and 1,245,000 common shares, respectively,
under the stock repurchase program for an aggregate purchase price of
$11,404,000 and $12,116,000, respectively, or $9.89 and $9.73 per share,
respectively; leaving a balance of 802,000 shares remaining available for
repurchase under the plan.
In March 2004, the Company's Board of Directors approved a three-for-
two stock split in the form of a stock dividend to shareholders of record on
March 22, 2004. The additional shares were distributed on April 6, 2004.
All share and per share amounts (except authorized shares and par value)
have been retroactively adjusted to reflect the split.
NOTE 5 - RELATED PARTY TRANSACTIONS
As of December 31, 2002, the Company had notes receivable outstanding
from certain of its officers totaling $4,228,000. Repayment of these notes
was completed during Fiscal 2003. The notes bore interest at 3%.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31, December 31,
2005 2004
------- -------
Land $ 672 $ 672
Buildings 1,002 1,002
Furniture, fixtures, equipment and
leasehold improvements 46,870 35,210
------- -------
48,544 36,884
Less: accumulated depreciation (24,979) (19,508)
------- -------
$ 23,565 $ 17,376
======= =======
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
December 31, December 31,
2005 2004
------- -------
Accrued compensation $ 3,857 $ 3,492
Layaway deposits 2,495 2,057
Third-party lending settlements payable 1,914 781
Sales and property taxes payable 1,284 910
Unearned credit services fees 965 -
Money order and money transfer
settlements payable 673 523
Income taxes payable 470 -
Reserve for expected losses on outstanding
CSO letters of credit 456 -
Other 1,608 923
------- -------
$ 13,722 $ 8,686
======= =======
NOTE 8 - 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, 2007, and bears interest
at the prevailing LIBOR rate (which was approximately 4.4% at December 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, depreciation and amortization for the trailing
twelve months. At December 31, 2005, no amounts were outstanding under the
Credit Facility and the Company had $25,000,000 available for 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, 2005, and March 13, 2006. 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 9 - INCOME TAXES
Components of the provision for income taxes consist of the following
(in thousands):
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Current:
Federal $ 12,003 $ 9,874 $ 7,495
State and foreign 2,465 891 870
------- ------- -------
14,468 10,765 8,365
Deferred (173) 1,396 1,032
------- ------- -------
$ 14,295 $ 12,161 $ 9,397
======= ======= =======
The principal current and non-current deferred tax assets and
liabilities consist of the following at December 31, 2005 and 2004 (in
thousands):
December 31, December 31,
2005 2004
------- -------
Deferred tax assets:
Inventory tax-basis difference $ 1,291 $ 1,673
Foreign tax credits 1,146 -
Other 701 145
------- -------
Total deferred tax assets 3,138 1,818
------- -------
Deferred tax liabilities:
Intangible asset amortization 8,655 7,264
Depreciation 872 1,013
State income taxes, net 386 407
Other 404 485
------- -------
Total deferred tax liabilities 10,317 9,169
------- -------
Net deferred tax liabilities $ 7,179 $ 7,351
======= =======
Reported as:
Other current assets $ 1,437 $ 1,404
Non-current liabilities - deferred
income taxes (8,616) (8,755)
------- -------
Total deferred tax liabilities $ 7,179 $ 7,351
======= =======
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,
-----------------------------
2005 2004 2003
------- ------- -------
Tax at the federal statutory rate $ 13,887 $ 11,175 $ 8,408
State and foreign income taxes,
net of federal tax benefit for
state taxes of $312, $220 and
$43, respectively, and foreign tax
credits of $1,574, $83 and $453,
respectively 579 588 558
Other, net (171) 398 431
------- ------- -------
$ 14,295 $ 12,161 $ 9,397
======= ======= =======
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain of its facilities and equipment under
operating leases with terms generally ranging from three to five years.
Most facility leases contain renewal options. Remaining future minimum
rentals due under non-cancelable operating leases, including Cash & Go,
Ltd., are as follows (in thousands):
Fiscal
------
2006 $ 13,909
2007 12,729
2008 9,913
2009 6,775
2010 4,058
Thereafter 5,056
-------
$ 52,440
=======
Rent expense under such leases was $12,513,000, $10,923,000 and
$8,664,000 for the years ended December 31, 2005, 2004 and 2003,
respectively.
The Company is from time to time a defendant (actual or threatened) in
certain 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 materially adverse effect on the Company's financial
position, results of operations, or cash flows.
NOTE 11 - EMPLOYEE STOCK OPTION AND INCENTIVE PLANS 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
750,000 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, 2005, no options to purchase shares of
common stock were available for grant under the 1990 Plan. Options to
purchase 66,000 shares of common stock under the 1990 Plan were granted and
outstanding, of which 3,000 shares were vested at December 31, 2005.
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 7,500,000
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, 2005,
options to purchase 4,000 shares of common stock were available for grant
under the 1999 Plan. Options to purchase 3,718,000 shares of common stock
under the 1999 Plan were granted and outstanding, of which 3,490,000 options
were vested as of December 31, 2005.
On June 15, 2004, the Company's shareholders adopted the 2004 Long-Term
Incentive Plan (the "2004 Plan"). The 2004 Plan provides for the issuance
of incentive stock options, non-qualified stock options and other forms of
equity compensation such as stock appreciation rights and restricted stock
to key employees and directors of the Company. The total number of shares
of common stock authorized and reserved for issuance under the 2004 Plan is
1,800,000 shares. The exercise price for each stock option or stock
appreciation right granted under the 2004 Plan may not be less than the fair
market value of the common stock on the date of the grant. Unless otherwise
determined by the Board, options granted under the Plan have a maximum
duration of ten years. As of December 31, 2005, options to purchase 210,000
shares of common stock were available for grant under the 2004 Plan.
Options to purchase 1,590,000 shares of common stock under the 2004 Plan
were outstanding and are fully vested as of December 31, 2005.
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 SFAS 123, the
issuance of warrants to outside consultants and advisors is accounted for
using the fair value method prescribed by SFAS 123.
Stock option and warrant activity for Fiscal 2005, 2004 and 2003 is
summarized in the accompanying chart (in thousands, except exercise price):
2005 2004 2003
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Underlying Exercise Underlying Exercise Underlying Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding,
beginning
of period 3,367 $ 4.87 5,543 $ 3.33 7,501 $ 2.06
Granted 5,858 19.14 910 9.67 1,816 5.09
Exercised (677) 3.87 (3,086) 3.52 (3,720) 1.64
Canceled (1,917) 24.01 - - (54) 2.67
------ ------ ------
Outstanding,
end of
period 6,631 12.04 3,367 4.87 5,543 3.33
====== ====== ======
Exercisable,
end of
period 6,243 12.47 2,790 4.71 4,926 3.23
====== ====== ======
Options and warrants outstanding as of December 31, 2005, are as
follows (in thousands, except exercise price and life):
Ranges of Total Warrants Weighted-Average Currently
Exercise Prices and Options Remaining Life Exercisable
--------------- ----------- -------------- -----------
$ 0.01 - $ 5.00 1,686 6.4 1,452
$ 5.01 - $10.00 943 8.0 789
$10.01 - $15.00 1,684 9.4 1,684
$15.01 - $20.00 2,318 9.5 2,318
------ ------
6,631 6,243
====== ======
NOTE 12 - FIRST CASH 401(k) PLAN
The First Cash 401(k) Plan (the "Plan") is provided by the Company for
all full-time, U.S.-based, employees who have been employed with the Company
for one year or longer. 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 six years of service. The total
Company matching contributions to the Plan were $257,000, $250,000 and
$213,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
NOTE 13 - GEOGRAPHIC AREAS
The Company manages its business on the basis of one reportable
segment; see Note 1 for a brief description of the Company's business. The
following table shows revenues, selected current assets and long-lived
assets (all non-current assets except goodwill) by geographic area (in
thousands):
Year Ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Revenues:
United States $154,649 $145,386 $126,707
Mexico 53,126 34,427 18,761
------- ------- -------
$207,775 $179,813 $145,468
======= ======= =======
Pawn receivables:
United States $ 18,603 $ 16,707 $ 15,695
Mexico 8,711 6,722 4,342
------- ------- -------
$ 27,314 $ 23,429 $ 20,037
======= ======= =======
Short-term advance receivables:
United States $ 6,488 $ 15,465 $ 13,759
Mexico - - -
------- ------- -------
$ 6,488 $ 15,465 $ 13,759
======= ======= =======
Inventories:
United States $ 14,751 $ 13,393 $ 13,042
Mexico 7,236 4,251 2,546
------- ------- -------
$ 21,987 $ 17,644 $ 15,588
======= ======= =======
Long-lived assets:
United States $ 13,689 $ 11,183 $ 11,391
Mexico 10,892 6,992 3,710
------- ------- -------
$ 24,581 $ 18,175 $ 15,101
======= ======= =======
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands, except per share
data) for the fiscal years ended December 31, 2005 and 2004, are set forth
below. The Company's operations are subject to seasonal fluctuations.
Quarter Ended
------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2005
----
Total revenues $ 46,999 $ 46,328 $ 54,307 $ 60,141
Cost of revenues 16,257 16,446 19,964 23,101
Gross profit 30,742 29,882 34,343 37,040
Total expenses and
other income 21,185 21,656 24,312 25,176
Net income 6,069 5,223 6,370 7,721
Diluted net income
per share (1) 0.18 0.16 0.19 0.23
Diluted weighted
average shares (1) 34,025 32,834 32,866 33,174
2004
----
Total revenues $ 41,850 $ 40,318 $ 46,544 $ 51,101
Cost of revenues 13,532 13,730 17,660 18,945
Gross profit 28,318 26,588 28,884 32,156
Total expenses and
other income 20,139 19,813 20,641 22,486
Net income 5,178 4,246 5,190 6,092
Diluted net income
per share (1) 0.15 0.12 0.15 0.18
Diluted weighted
average shares (1) 34,159 34,587 33,660 33,863
(1) Amounts have been retroactively adjusted to reflect a two-for-one stock
split in the form of a stock dividend to each stockholder of record as of
February 6, 2006.
EXHIBIT 21.1
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%
First Cash Credit, Ltd. Texas 100%
First Cash Credit Management, LLC Texas 100%
FCFS MO, Inc. Missouri 100%
FCFS OK, Inc. Oklahoma 100%
FCFS SC, Inc. South Carolina 100%
FCFS MI, Inc. Michigan 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No.
333-71077 on Form S-3, Registration Statement No. 333-106878 on Form S-3,
Registration Statement No. 333-73391 on Form S-8, Registration Statement No.
333-106880 on Form S-8, and Registration Statement No. 333-106881 on Form S-
8 of First Cash Financial Services, Inc., of our report dated March 8, 2004,
(October 8, 2004, as to the effect of the restatement described in Note 2)
(which report expresses an unqualified opinion and includes explanatory
paragraphs relating to the Company's adoption of Financial Accounting
Standards Board Interpretation No. 46(R) Consolidation of Variable Interest
Entities, effective December 31, 2003, and the restatement of the statement
of cash flows for the year ended December 31, 2003, described in Note 2)
relating to the consolidated financial statements for the year ended
December 31, 2003 appearing in this Annual Report on Form 10-K of First Cash
Financial Services, Inc., for the year ended December 31, 2005.
DELOITTE & TOUCHE LLP
Fort Worth, Texas
March 13, 2006
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos.
333-71077 and 333-106878 on Form S-3, and Nos. 333-73391, 333-106880, and
333-106881 on Form S-8 of our reports, dated March 13, 2006, relating to the
financial statements of First Cash Financial Services, Inc., and to
management's report on the effectiveness of internal control over financial
reporting, appearing in this Annual Report on Form 10-K of First Cash
Financial Services, Inc., for the year ended December 31, 2005.
Hein & Associates LLP
Dallas, Texas
March 13, 2006
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, J. Alan Barron, certify that:
1. I have reviewed this Annual Report on Form 10-K 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(s) 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 13a-
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 fourth 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(s) 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: March 13, 2006
/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 Annual Report on Form 10-K 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(s) 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 13a-
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 fourth 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(s) 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: March 13, 2006
/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 Annual Report of First Cash Financial Services, Inc.
(the "Company") on Form 10-K for the year ended December 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 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 13, 2006
/s/ J. Alan Barron
------------------
J. Alan Barron
Chief Executive Officer
/s/ R. Douglas Orr
------------------
R. Douglas Orr
Chief Financial Officer