UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _______________ Commission File Number 1-9733 CASH AMERICA INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2018239 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification No.) organization) 1600 WEST 7TH STREET FORT WORTH, TEXAS 76102 (Address of principal executive offices) (Zip Code) (817) 335-1100 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: 24,300,784 common shares, $.10 par value, were outstanding as of June 30, 2003 CASH AMERICA INTERNATIONAL, INC. INDEX TO FORM 10-Q PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2003 and 2002 and December 31, 2002............................................... 1 Consolidated Statements of Operations - Three and Six Months Ended June 30, 2003 and 2002.......................................... 2 Consolidated Statements of Stockholders' Equity - June 30, 2003 and 2002..................................................................... 3 Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2003 and 2002.......................................... 3 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2003 and 2002.................................................... 4 Notes to Consolidated Financial Statements................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 31 Item 4. Controls and Procedures................................................................ 31 PART II. OTHER INFORMATION......................................................................... 32 SIGNATURES.......................................................................................... 34 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) June 30, ------------------------- December 31, 2003 2002 2002 --------- --------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents ....................................... $ 7,697 $ 6,691 $ 3,951 Pawn loans ...................................................... 136,897 120,575 127,388 Cash advances, net .............................................. 8,463 1,430 2,210 Merchandise held for disposition, net ........................... 50,947 49,958 54,444 Finance and service charges receivable .......................... 21,316 18,864 21,096 Other receivables and prepaid expenses .......................... 9,030 6,479 8,671 Income taxes recoverable ........................................ -- 2,270 -- Deferred tax assets ............................................. 6,169 5,031 5,392 --------- --------- --------- Total current assets .......................................... 240,519 211,298 223,152 Property and equipment, net ....................................... 67,896 67,816 67,254 Goodwill .......................................................... 81,432 78,127 79,833 Other assets ...................................................... 2,814 5,079 6,239 --------- --------- --------- Total assets .................................................. $ 392,661 $ 362,320 $ 376,478 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ........................... $ 25,401 $ 19,663 $ 24,920 Customer deposits ............................................... 4,381 4,336 4,050 Income taxes currently payable .................................. 1,683 943 2,086 Current portion of long-term debt ............................... 8,286 8,671 12,571 --------- --------- --------- Total current liabilities ..................................... 39,751 33,613 43,627 Deferred tax liabilities .......................................... 5,390 2,337 4,385 Long-term debt .................................................... 140,591 146,683 136,131 Stockholders' equity: Common stock, $.10 par value per share, 80,000,000 shares authorized .................................................... 3,024 3,024 3,024 Additional paid-in capital ...................................... 127,977 127,820 127,819 Retained earnings ............................................... 124,971 103,263 113,278 Accumulated other comprehensive income (loss) ................... 660 (6,288) (2,718) Notes receivable secured by common stock ........................ (5,774) (6,047) (5,864) Treasury shares at cost ......................................... (43,929) (42,085) (43,204) --------- --------- --------- Total stockholders' equity .................................... 206,929 179,687 192,335 --------- --------- --------- Total liabilities and stockholders' equity .................... $ 392,661 $ 362,320 $ 376,478 ========= ========= ========= See notes to consolidated financial statements. 1 CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (Unaudited) REVENUE Finance and service charges ............................. $ 30,601 $ 27,456 $ 62,056 $ 56,276 Proceeds from disposition of merchandise ................ 56,176 58,279 122,295 125,313 Cash advance fees ....................................... 6,394 4,184 12,860 7,746 Check cashing royalties and fees ........................ 1,246 1,068 2,711 2,372 --------- --------- --------- --------- TOTAL REVENUE .............................................. 94,417 90,987 199,922 191,707 COST OF REVENUE Disposed merchandise .................................... 35,387 39,185 76,941 83,066 --------- --------- --------- --------- NET REVENUE ................................................ 59,030 51,802 122,981 108,641 --------- --------- --------- --------- EXPENSES Operations .............................................. 36,241 33,312 73,211 67,757 Cash advance loss provision ............................. 1,692 1,568 3,024 2,469 Administration .......................................... 8,413 6,962 17,408 14,459 Depreciation and amortization ........................... 3,607 3,684 7,296 7,270 --------- --------- --------- --------- TOTAL EXPENSES ............................................. 49,953 45,526 100,939 91,955 --------- --------- --------- --------- INCOME FROM OPERATIONS ..................................... 9,077 6,276 22,042 16,686 Interest expense, net ................................... 2,126 2,070 4,302 4,313 Loss from derivative valuation fluctuations ............. -- 36 -- 72 Gain from disposal of asset ............................. (1,013) -- (1,013) -- --------- --------- --------- --------- Income from continuing operations before income taxes ...... 7,964 4,170 18,753 12,301 Provision for income taxes .............................. 2,313 1,488 6,333 4,416 --------- --------- --------- --------- INCOME FROM CONTINUING OPERATIONS .......................... 5,651 2,682 12,420 7,885 Gain from discontinued operations ....................... -- 800 -- 800 --------- --------- --------- --------- NET INCOME ................................................. $ 5,651 $ 3,482 $ 12,420 $ 8,685 ========= ========= ========= ========= Net income per share: Basic - Income from continuing operations ..................... $ 0.23 $ 0.11 $ 0.51 $ 0.32 Gain from discontinued operations ..................... $ -- $ 0.03 $ -- $ 0.03 Net income ............................................ $ 0.23 $ 0.14 $ 0.51 $ 0.35 Diluted - Income from continuing operations ..................... $ 0.22 $ 0.11 $ 0.50 $ 0.32 Gain from discontinued operations ..................... $ -- $ 0.03 $ -- $ 0.03 Net income ............................................ $ 0.22 $ 0.14 $ 0.50 $ 0.35 Weighted average common shares outstanding: Basic ................................................... 24,189 24,447 24,215 24,483 Diluted ................................................. 25,128 24,916 24,940 24,888 See notes to consolidated financial statements. 2 CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share data) June 30, 2003 June 30, 2002 -------------------------- ------------------------- Shares Amounts Shares Amounts ---------- ---------- ---------- --------- (Unaudited) COMMON STOCK .................................................... 30,235,164 $ 3,024 30,235,164 $ 3,024 ========== ---------- ========== --------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year ................................. 127,819 127,821 Exercise of stock options .................................... 7 (8) Tax benefit from exercise of stock options ................... 151 7 ---------- --------- Balance at June 30 ......................................... 127,977 127,820 ---------- --------- RETAINED EARNINGS Balance at beginning of year ................................. 113,278 95,192 Net income ................................................... 12,420 8,685 Dividends declared ........................................... (727) (614) ---------- --------- Balance at June 30 ......................................... 124,971 103,263 ---------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year ................................. (2,718) (10,820) Foreign currency translation adjustments ..................... 3,378 4,532 ---------- --------- Balance at June 30 ......................................... 660 (6,288) ---------- --------- NOTES RECEIVABLE SECURED BY COMMON STOCK Balance at beginning of year ................................. (5,864) (5,890) Payments (advances) on notes receivable during period ........ 90 (157) ---------- --------- Balance at June 30 ......................................... (5,774) (6,047) ---------- --------- TREASURY SHARES AT COST Balance at beginning of year ................................. (5,939,794) (43,204) (5,643,318) (40,896) Purchases of treasury shares ................................. (146,381) (1,391) (167,247) (1,225) Exercise of stock options .................................... 91,475 666 5,000 36 ---------- ---------- ---------- --------- Balance at June 30 ......................................... (5,994,700) (43,929) (5,805,565) (42,085) ========== ---------- ========== --------- TOTAL STOCKHOLDERS' EQUITY ...................................... $ 206,929 $ 179,687 ========== ========= CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2003 2002 2003 2002 ------- ------- ------- ------- (Unaudited) COMPREHENSIVE INCOME Net income .................................... $ 5,651 $ 3,482 $12,420 $ 8,685 Other comprehensive income, net of tax - Foreign currency translation adjustments .... 3,868 5,342 3,378 4,532 ------- ------- ------- ------- TOTAL COMPREHENSIVE INCOME ....................... $ 9,519 $ 8,824 $15,798 $13,217 ======= ======= ======= ======= See notes to consolidated financial statements. 3 CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Six Months Ended June 30, ------------------------- 2003 2002 --------- --------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income .................................................................. $ 12,420 $ 8,685 Less: Gain from discontinued operations .................................... -- 800 --------- --------- Income from continuing operations ........................................... 12,420 7,885 Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations: Depreciation and amortization ............................................. 7,296 7,270 Cash advance loss provision ............................................... 3,024 2,469 Gain from disposal of asset ............................................... (1,013) -- Loss from derivative valuation fluctuations ............................... -- 72 Changes in operating assets and liabilities - Merchandise held for disposition ........................................ 3,700 13,708 Finance and service charges receivable .................................. 134 970 Other receivables and prepaid expenses .................................. 1,632 1,635 Accounts payable and accrued expenses ................................... 371 (10,409) Customer deposits, net .................................................. 331 375 Current income taxes .................................................... (249) (2,467) Deferred taxes, net ..................................................... 76 3,347 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS ...... 27,722 24,855 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Pawn loans forfeited and transferred to merchandise held for disposition .... 62,112 60,792 Pawn loans repaid or renewed ................................................ 148,402 134,632 Pawn loans made, including loans renewed .................................... (216,819) (195,558) --------- --------- Net increase in pawn loans .............................................. (6,305) (134) --------- --------- Cash advances repaid or renewed ............................................. 27,644 15,230 Cash advances made, assigned or purchased ................................... (35,964) (16,981) --------- --------- Net increase in cash advances ........................................... (8,320) (1,751) --------- --------- Acquisitions, net of cash acquired .......................................... (1,937) (1,044) Purchases of property and equipment ......................................... (7,270) (5,787) Proceeds from sale of asset ................................................. 1,639 -- --------- --------- NET CASH USED BY INVESTING ACTIVITIES OF CONTINUING OPERATIONS .......... (22,193) (8,716) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under bank lines of credit ...................... 8,081 (8,816) Payments on notes payable and capital lease obligations ..................... (8,571) (8,920) Change in notes receivable secured by common stock .......................... 90 48 Net proceeds from reissuance of treasury shares ............................. 673 28 Treasury shares purchased ................................................... (1,391) (1,225) Dividends paid .............................................................. (727) (614) --------- --------- NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS .......... (1,845) (19,499) --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ........................................ 62 516 --------- --------- CASH PROVIDED (USED) BY CONTINUING OPERATIONS .................................. 3,746 (2,844) CASH PROVIDED BY DISCONTINUED OPERATIONS ....................................... -- 3,141 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 3,951 6,394 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 7,697 $ 6,691 ========= ========= See notes to consolidated financial statements. 4 CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Cash America International, Inc. (the "Company") and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. In September 2001, the Company announced plans to exit the rent-to-own business in order to focus on its core business of lending activities. In June 2002, the Company sold the remaining assets of its rent-to-own business. See Note 3. The financial statements as of June 30, 2003 and 2002, and for the three and six month periods then ended are unaudited but, in management's opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for such interim periods. Operating results for the three and six month periods are not necessarily indicative of the results that may be expected for the full fiscal year. Certain amounts in the consolidated financial statements for the three and six month periods ended June 30, 2002, have been reclassified to conform to the presentation format adopted in 2003. These reclassifications have no effect on the net income previously reported. These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report to Stockholders. 2. REVENUE RECOGNITION Lending Operations -- Pawn loans ("loans") are made on the pledge of tangible personal property. The Company accrues finance and service charges revenue on all loans that the Company deems collectible, based on historical loan redemption statistics. For loans not repaid, the carrying value of the forfeited collateral ("merchandise held for disposition") is stated at the lower of cost (cash amount loaned) or market. Revenue is recognized at the time that merchandise is sold. Interim customer payments for layaway sales are recorded as customer deposits and subsequently recognized as revenue during the period in which final payment is received. Small consumer cash advances ("cash advances") provide customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's personal check for the aggregate amount of the cash advanced plus a service fee. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check to be presented for collection. The Company accrues fees and interest on cash advances on a constant yield basis ratably over their terms. For those locations that offer cash advances from a third-party financial institution, the Company receives administrative service fees for services provided on the institutions' behalf. These fees are recorded in revenue when earned. 5 Check Cashing Operations -- The Company records fees derived from its owned check cashing locations in the period in which the service is provided. Royalties derived from franchise locations are recorded on the accrual basis. 3. DISCONTINUED OPERATIONS In September 2001, the Company adopted a formal plan (the "Plan") to exit the rent-to-own business conducted by the Company's subsidiary, Rent-A-Tire, Inc. ("Rent-A-Tire"), in order to focus on its core business of lending activities. The Company closed 21 Rent-A-Tire operating locations and held the remaining 22 locations for sale. In conjunction with the Plan, a pre-tax charge of $10,961,000 ($7,553,000 after income tax benefit) was recorded in the quarter ended September 30, 2001, to establish a reserve for the estimated loss on disposal of the rent-to-own business segment. On June 14, 2002, the Company sold the assets of 22 Rent-A-Tire stores for proceeds of approximately $3,000,000 in cash. During the quarter ended June 30, 2002, the Company recorded a $1,214,000 ($800,000 after income tax) reduction in the original charge to the reserve, due to both a decrease in the Company's expected future operating lease obligations (net of expected sublease income) for closed stores and proceeds from the sale of assets in excess of the original estimate. The remaining balance of the reserve of $439,000 at June 30, 2003, consists primarily of expected future operating lease obligations (net of expected sublease income) for closed stores. The reserve is included in "Accounts payable and accrued expenses" in the accompanying consolidated balance sheets. The Company guarantees obligations under certain operating leases for the premises related to the 22 Rent-A-Tire stores included in the asset sale agreement. In the event the buyer is unable to perform under the operating leases, the Company's maximum aggregate contingent obligation under these guarantees was approximately $1,189,000 at June 30, 2003. This amount will be reduced dollar-for-dollar by future amounts paid on these operating leases by the buyer. In the event that the buyer fails to perform and the Company is required to make payments under these leases, the Company will seek to mitigate its losses by subleasing the properties or buying out of the leases. 4. SMALL CONSUMER CASH ADVANCES AND ALLOWANCE FOR LOSSES Cash advances are generally offered for a term of 7 to 45 days, depending on the customer's next payday. The Company originates cash advances in some of its locations and markets and services cash advances made by a third-party bank in other Company locations. During the first quarter of 2003, the Company terminated its relationship with a national bank that had offered this product in many of its stores. The Company entered into an agreement with a state chartered bank to offer the product in those stores. Under the current bank program, the Company purchases a participation interest in the bank originated cash advances, and receives an administrative fee for its services. In order to benefit from the use of the Company's collection resources and proficiency, all cash advances unpaid after maturity are assigned to the Company at a discount from the amount owed by the borrower. Losses on cash advances assigned to the Company that prove uncollectible are the responsibility of the Company. To the extent that the Company collects an amount owed by the customer in excess of the amount assigned by the bank, the Company is entitled to the excess 6 and recognizes it in income when collected. Since the Company may not be successful in the collection of the assigned accounts, the Company's provision for loan losses includes amounts estimated to be adequate to absorb credit losses from cash advances in the aggregate portfolio including those expected to be assigned from the third-party bank's outstanding portfolio. Cash advances outstanding at June 30, 2003 and 2002, were as follows (in thousands): 2003 2002 ------- ------- Originated by the Company Active cash advances and fees receivable ...................... $ 1,329 $ 881 Cash advances and fees in collection .......................... 367 296 ------- ------- TOTAL ORIGINATED BY THE COMPANY ........................... 1,696 1,177 ------- ------- Originated by bank Active cash advances and fees receivable ...................... 7,532 4,463 Cash advances and fees in collection .......................... 2,476 1,849 ------- ------- TOTAL ORIGINATED BY BANK .................................. 10,008 6,312 ------- ------- COMBINED GROSS PORTFOLIO ........................................ 11,704 7,489 Less: Elimination of cash advances owned by banks ........... 908 4,463 Less: Discount on cash advances assigned by banks ........... 396 272 ------- ------- Company cash advances and fees receivable, gross ................ 10,400 2,754 Less: Allowance for losses ................................... 1,937 1,324 ------- ------- CASH ADVANCES AND FEES RECEIVABLE, NET .......................... $ 8,463 $ 1,430 ======= ======= BALANCE OF ALLOWANCE FOR LOSSES AS A % OF GROSS PORTFOLIO ....... 16.5% 17.7% ======= ======= Changes in the allowance for losses on cash advances for the three and six month periods ended June 30, 2003 and 2002, were as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Balance at beginning of period .............. $ 1,363 $ 495 $ 1,748 $ 711 Cash advance loss provision .............. 1,692 1,568 3,024 2,469 Charge-offs .............................. (1,941) (1,213) (4,404) (2,910) Recoveries ............................... 823 474 1,569 1,054 ------- ------- ------- ------- Balance at end of period .................... $ 1,937 $ 1,324 $ 1,937 $ 1,324 ======= ======= ======= ======= Cash advance loss provision as a % of combined advances written ................ 3.9% 6.0% 3.7% 5.1% ======= ======= ======= ======= Charge-offs (net of recoveries) as a % of combined advances written ................ 2.6% 2.8% 3.5% 3.9% ======= ======= ======= ======= Cash advances assigned by the bank to the Company for collection were $13,448,000 and $9,804,000, for the six months ended June 30, 2003 and 2002, respectively. The Company's participation interest in bank originated cash advances at June 30, 2003, was $6,551,000. 7 5. WEIGHTED AVERAGE SHARES The reconciliation of basic and diluted weighted average common shares outstanding for the three and six month periods ended June 30, 2003 and 2002, was as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2003 2002 2003 2002 ------ ------ ------ ------ Weighted average shares - Basic ............................ 24,189 24,447 24,215 24,483 Effect of shares applicable to stock option plans .......... 880 403 662 335 Effect of shares applicable to nonqualified savings plan ... 59 66 63 70 ------ ------ ------ ------ Weighted average shares - Diluted .......................... 25,128 24,916 24,940 24,888 ====== ====== ====== ====== 6. ACQUISITIONS During the six months ended June 30, 2003, the Company acquired three pawnshops, one check cashing franchise and other earning assets in purchase transactions for an aggregate cash consideration of $1,937,000. The excess of the aggregate purchase price over the aggregate fair market value of net assets acquired was approximately $945,000. On June 30, 2003, the Company entered into a definitive agreement to purchase substantially all of the assets of Cashland, Inc. ("Cashland"), a private consumer finance company based in Dayton, Ohio. The Company estimated the initial purchase price as of that date to be approximately $53,000,000 in cash and stock. Cashland operates 118 consumer finance centers that offer short-term cash advances, check cashing and money transfer services. The purchase is expected to close within 60 days. 7. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets having an indefinite useful life are tested for impairment annually at June 30, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Based on the results of the test, management determined there was no impairment as of June 30, 2003 as the respective fair value of the Company's reporting units exceeds their respective carrying amounts. 8 Goodwill -- The changes in the carrying value of goodwill for the six month periods ended June 30, 2003 and 2002, were as follows (in thousands): Lending --------------------------------- United Check States Foreign Total Cashing Consolidated ------- ------- ------- ------- ------------ Balance as of January 1, 2003, net of amortization of $23,365 ...................... $59,591 $15,059 $74,650 $ 5,183 $79,833 Acquired goodwill ..................................... 145 673 818 127 945 Effect of foreign translation ......................... -- 654 654 -- 654 ------- ------- ------- ------- ------- Balance as of June 30, 2003 ........................... $59,736 $16,386 $76,122 $ 5,310 $81,432 ======= ======= ======= ======= ======= Balance as of January 1, 2002, net of amortization of $24,224 ...................... $59,050 $12,453 $71,503 $ 5,183 $76,686 Acquired goodwill ..................................... 555 -- 555 -- 555 Effect of foreign translation ......................... -- 886 886 -- 886 ------- ------- ------- ------- ------- Balance as of June 30, 2002 ........................... $59,605 $13,339 $72,944 $ 5,183 $78,127 ======= ======= ======= ======= ======= Acquired Intangible Assets -- Acquired intangible assets subject to amortization as of June 30, 2003 and 2002, were as follows (in thousands): 2003 2002 ---------------------------------- ---------------------------------- Gross Accumulated Gross Accumulated Amount Amortization Net Amount Amortization Net ------- ------------ ------- ------- ------------ ------- Noncompete agreements ....... $ 1,197 $ (806) $ 391 $ 3,051 $(2,372) $ 679 Other ....................... 130 (77) 53 131 (64) 67 ------- ------- ------- ------- ------- ------- Total ....................... $ 1,327 $ (883) $ 444 $ 3,182 $(2,436) $ 746 ======= ======= ======= ======= ======= ======= Noncompetition agreements are amortized over the terms of the contracts. Net acquired intangible assets are included in "Other assets" in the accompanying consolidated balance sheets. 9 8. LONG-TERM DEBT The Company's long-term debt instruments and balances outstanding at June 30, 2003 and 2002, were as follows (in thousands): 2003 2002 -------- -------- U.S. Line of Credit up to $90,000 due August 14, 2005 ................................ $ 49,437 $ -- U.S. Line of Credit up to $150,000 due June 30, 2003 (terminated in 2002) ............. -- 95,000 Multi-currency Line of Credit up to(pound)20,000 due April 30, 2006 ................................. 15,511 -- Multi-currency Line of Credit up to(pound)20,000 due April 30, 2003 (terminated in 2002) ............ -- 10,054 8.33% senior unsecured notes due 2003 ................. -- 4,286 8.14% senior unsecured notes due 2007 ................. 20,000 20,000 7.10% senior unsecured notes due 2008 ................. 21,429 25,714 7.20% senior unsecured notes due 2009 ................. 42,500 -- Other ................................................. -- 300 -------- -------- 148,877 155,354 Less current portion .................................. 8,286 8,671 -------- -------- Total long-term debt ............................... $140,591 $146,683 ======== ======== The Company also has an SEK 15,000,000 line of credit (approximately $1,880,000 at June 30, 2003) that matures on May 30, 2004. There were no amounts outstanding on this line of credit as of June 30, 2003 and 2002, respectively. 9. STOCK OPTIONS Under various plans (the "Plans") it sponsors, the Company is authorized to issue 8,300,000 shares of common stock pursuant to "Awards" granted as incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and nonqualified stock options. Stock options granted under the Plans have contractual terms of 5 to 15 years and have an exercise price equal to or greater than the fair market value of the stock at grant date. Stock options granted vest equally over periods ranging from 1 to 7 years and certain option awards issued since 1997 have a provision to accelerate the vesting if specified share price appreciation criteria are met. During the six months ended June 30, 2003, 100,475 shares vested due to the acceleration provision. No such accelerated vesting of stock options occurred during the six months ended June 30, 2002. The Company applies the intrinsic value based method of accounting for the Plans and, accordingly, no compensation costs have been recognized. Had compensation costs for the Company's stock options been determined using the fair value accounting provisions of Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation", the Company's net income and related amounts per share, basic and diluted, for each of the three and six month periods ended June 30, 2003 and 2002 would have been reported as follows (in thousands, except per share amounts): 10 Three Months Ended Six Months Ended June 30, June 30, -------------------------- ------------------------- 2003 2002 2003 2002 ----------- ------------ ----------- ----------- Net income - as reported.................................. $ 5,651 $ 3,482 $ 12,420 $ 8,685 Deduct: Total stock-based employee compensation expense(a)............................................. 646 366 1,021 674 ----------- ------------ ----------- ------------ Net income - pro forma.................................... $ 5,005 $ 3,116 $ 11,399 $ 8,011 =========== ============ =========== ============ Net income per share Basic: As reported.......................................... $ 0.23 $ 0.14 $ 0.51 $ 0.35 Pro forma............................................ $ 0.21 $ 0.13 $ 0.47 $ 0.33 Diluted: As reported.......................................... $ 0.22 $ 0.14 $ 0.50 $ 0.35 Pro forma............................................ $ 0.20 $ 0.13 $ 0.45 $ 0.32 ---------- (a) Determined under fair value based method for all awards, net of related tax effects. "All awards" refers to awards granted, modified, or settled in fiscal periods beginning after December 15, 1994, that is, awards for which the fair value was required to be measured under SFAS 123. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model. For options granted during the three and six month periods ended June 30, 2003 and 2002, the following weighted average assumptions were used: Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 ------- ------- ------- ------- Expected term (years) ...... 8.3 8.0 8.4 8.2 Risk-free interest rate .... 4.05% 5.17% 4.13% 5.23% Expected dividend yield .... 0.61% 0.57% 0.53% 0.63% Expected volatility ........ 49.6% 55.9% 50.0% 56.7% 10. OPERATING SEGMENT INFORMATION The Company has two reportable operating segments in the lending industry and one in the check cashing industry. While the United States and foreign lending segments offer the same services, each is managed separately due to the different operational strategies required. The check cashing operation offers different services and products, requiring its own technical, marketing and operational strategy. The segment data included below excludes amounts related to discontinued operations. See Note 3. 11 Information concerning the segments is set forth below (in thousands): Lending ------------------------------------ United Check States Foreign Total Cashing Consolidated -------- -------- -------- -------- ------------ THREE MONTHS ENDED JUNE 30, 2003: REVENUE Finance and service charges .................... $ 23,439 $ 7,162 $ 30,601 $ -- $ 30,601 Proceeds from disposition of merchandise ....... 51,644 4,532 56,176 -- 56,176 Cash advance fees .............................. 6,394 -- 6,394 -- 6,394 Check cashing royalties and fees ............... -- 418 418 828 1,246 -------- -------- -------- -------- -------- TOTAL REVENUE .................................... 81,477 12,112 93,589 828 94,417 Cost of revenue - disposed merchandise ........... 31,984 3,403 35,387 -- 35,387 -------- -------- -------- -------- -------- NET REVENUE ...................................... 49,493 8,709 58,202 828 59,030 -------- -------- -------- -------- -------- EXPENSES Operations ..................................... 31,916 3,948 35,864 377 36,241 Cash advance loss provision .................... 1,692 -- 1,692 -- 1,692 Administration ................................. 7,082 1,148 8,230 183 8,413 Depreciation and amortization .................. 2,837 648 3,485 122 3,607 -------- -------- -------- -------- -------- TOTAL EXPENSES ................................... 43,527 5,744 49,271 682 49,953 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS ........................... $ 5,966 $ 2,965 $ 8,931 $ 146 $ 9,077 ======== ======== ======== ======== ======== AS OF JUNE 30, 2003: Total assets ..................................... $283,433 $101,175 $384,608 $ 8,053 $392,661 ======== ======== ======== ======== ======== THREE MONTHS ENDED JUNE 30, 2002: REVENUE Finance and service charges .................... $ 21,688 $ 5,768 $ 27,456 $ -- $ 27,456 Proceeds from disposition of merchandise ....... 55,093 3,186 58,279 -- 58,279 Cash advance fees .............................. 4,184 -- 4,184 -- 4,184 Check cashing royalties and fees ............... -- 242 242 826 1,068 -------- -------- -------- -------- -------- TOTAL REVENUE .................................... 80,965 9,196 90,161 826 90,987 Cost of revenue - disposed merchandise ........... 36,728 2,457 39,185 -- 39,185 -------- -------- -------- -------- -------- NET REVENUE ...................................... 44,237 6,739 50,976 826 51,802 -------- -------- -------- -------- -------- EXPENSES Operations ..................................... 30,154 2,830 32,984 328 33,312 Cash advance loss provision .................... 1,568 -- 1,568 -- 1,568 Administration ................................. 5,810 1,008 6,818 144 6,962 Depreciation and amortization .................. 2,923 605 3,528 156 3,684 -------- -------- -------- -------- -------- TOTAL EXPENSES ................................... 40,455 4,443 44,898 628 45,526 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS ........................... $ 3,782 $ 2,296 $ 6,078 $ 198 $ 6,276 ======== ======== ======== ======== ======== AS OF JUNE 30, 2002: Total assets ..................................... $274,157 $ 80,302 $354,459 $ 7,861 $362,320 ======== ======== ======== ======== ======== 12 Lending ------------------------------------ United Check States Foreign Total Cashing Consolidated -------- -------- -------- -------- ------------ SIX MONTHS ENDED JUNE 30, 2003: REVENUE Finance and service charges .................... $ 48,148 $ 13,908 $ 62,056 $ -- $ 62,056 Proceeds from disposition of merchandise ....... 114,706 7,589 122,295 -- 122,295 Cash advance fees .............................. 12,860 -- 12,860 -- 12,860 Check cashing royalties and fees ............... -- 800 800 1,911 2,711 -------- -------- -------- -------- -------- TOTAL REVENUE .................................... 175,714 22,297 198,011 1,911 199,922 Cost of revenue - disposed merchandise ........... 71,487 5,454 76,941 -- 76,941 -------- -------- -------- -------- -------- NET REVENUE ...................................... 104,227 16,843 121,070 1,911 122,981 -------- -------- -------- -------- -------- EXPENSES Operations ..................................... 64,821 7,583 72,404 807 73,211 Cash advance loss provision .................... 3,024 -- 3,024 -- 3,024 Administration ................................. 14,818 2,232 17,050 358 17,408 Depreciation and amortization .................. 5,719 1,333 7,052 244 7,296 -------- -------- -------- -------- -------- TOTAL EXPENSES ................................... 88,382 11,148 99,530 1,409 100,939 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS ........................... $ 15,845 $ 5,695 $ 21,540 $ 502 $ 22,042 ======== ======== ======== ======== ======== SIX MONTHS ENDED JUNE 30, 2002: REVENUE Finance and service charges .................... $ 45,003 $ 11,273 $ 56,276 $ -- $ 56,276 Proceeds from disposition of merchandise ....... 119,650 5,663 125,313 -- 125,313 Cash advance fees .............................. 7,746 -- 7,746 -- 7,746 Check cashing royalties and fees ............... -- 426 426 1,946 2,372 -------- -------- -------- -------- -------- TOTAL REVENUE .................................... 172,399 17,362 189,761 1,946 191,707 Cost of revenue - disposed merchandise ........... 78,804 4,262 83,066 -- 83,066 -------- -------- -------- -------- -------- NET REVENUE ...................................... 93,595 13,100 106,695 1,946 108,641 -------- -------- -------- -------- -------- EXPENSES Operations ..................................... 61,424 5,566 66,990 767 67,757 Cash advance loss provision .................... 2,469 -- 2,469 -- 2,469 Administration ................................. 12,158 1,970 14,128 331 14,459 Depreciation and amortization .................. 5,793 1,169 6,962 308 7,270 -------- -------- -------- -------- -------- TOTAL EXPENSES ................................... 81,844 8,705 90,549 1,406 91,955 -------- -------- -------- -------- -------- INCOME FROM OPERATIONS ........................... $ 11,751 $ 4,395 $ 16,146 $ 540 $ 16,686 ======== ======== ======== ======== ======== 11. LITIGATION The Company is party to a number of lawsuits arising in the normal course of business. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company is a provider of specialty financial services to individuals in the United States, United Kingdom and Sweden. The Company offers secured non-recourse loans, commonly referred to as pawn loans, to individuals through its lending operations. The pawn loan portfolio generates finance and service charges revenue. As an alternative to a pawn loan, the Company offers unsecured small consumer cash advances in selected lending locations and on behalf of a third-party financial institution in other locations. A related activity of the lending operations is the disposition of merchandise, primarily collateral from unredeemed pawn loans. The Company also provides check cashing services through its franchised and company owned Mr. Payroll(R) check cashing centers. As of June 30, 2003, the Company's lending operations consisted of 462 pawnshops, including 390 owned units and 9 franchised units in 17 states in the United States, 51 units in the United Kingdom, and 12 units in Sweden. The foreign operations consist primarily of jewelry-only lending units. The number of owned pawnshops declined by 7 during the 18 months ended June 30, 2003, as the Company acquired 7 operating units, established 3 locations, and combined or closed 17 locations. In addition, 4 franchise units were either closed or terminated. As of June 30, 2003, the Company also owned and operated 11 locations in the United States that offer only the cash advance product. As of June 30, 2003, Mr. Payroll operated 132 franchised and 7 company-owned manned check cashing centers in 20 states. In September 2001, the Company announced plans to exit the rent-to-own business in order to focus on its core business of lending activities. In June 2002, the Company sold the remaining assets of its rent-to-own business. See Note 3 of Notes to Consolidated Financial Statements. 14 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the components of consolidated statements of operations as a percentage of total revenue. Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2003 2002 2003 2002 ------ ------ ------ ------ REVENUE Finance and service charges .................... 32.4% 30.2% 31.0% 29.4% Proceeds from disposition of merchandise ....... 59.5 64.0 61.2 65.4 Cash advance fees .............................. 6.8 4.6 6.4 4.0 Check cashing royalties and fees ............... 1.3 1.2 1.4 1.2 ------ ------ ------ ------ TOTAL REVENUE .................................... 100.0 100.0 100.0 100.0 COST OF REVENUE Disposed merchandise ........................... 37.5 43.1 38.5 43.3 ------ ------ ------ ------ NET REVENUE ...................................... 62.5 56.9 61.5 56.7 ------ ------ ------ ------ EXPENSES Operations ..................................... 38.4 36.6 36.6 35.3 Cash advance loss provision .................... 1.8 1.7 1.5 1.3 Administration ................................. 8.9 7.6 8.7 7.6 Depreciation and amortization .................. 3.8 4.1 3.7 3.8 ------ ------ ------ ------ TOTAL EXPENSES ................................... 52.9 50.0 50.5 48.0 ------ ------ ------ ------ INCOME FROM OPERATIONS ........................... 9.6 6.9 11.0 8.7 Interest expense, net .......................... 2.3 2.3 2.2 2.2 Loss from derivative valuation fluctuations .... -- -- -- -- Gain from disposal of asset .................... (1.1) -- (0.5) -- ------ ------ ------ ------ Income from continuing operations before provision for income taxes ............................ 8.4 4.6 9.3 6.5 Provision for income taxes ..................... 2.4 1.6 3.1 2.3 ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS ................ 6.0% 3.0% 6.2% 4.2% ====== ====== ====== ====== 15 The following table sets forth certain selected consolidated financial and non-financial data as of June 30, 2003 and 2002, and for the three and six months then ended (dollars in thousands). Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- LENDING OPERATIONS: PAWN LOANS Annualized yield on pawn loans .................................. 94.4% 97.4% 98.1% 100.7% Total pawn loans written ........................................ $ 113,548 $ 103,046 $ 216,819 $ 195,558 Average pawn loan balance outstanding ........................... $ 129,991 $ 113,097 $ 127,579 $ 112,664 Average pawn loan balance per average pawnshop location in operation ..................................................... $ 288 $ 248 $ 282 $ 246 Average pawn loan amount at end of period (not in thousands)..... $ 107 $ 100 $ 107 $ 100 Profit margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise ................... 37.0% 32.8% $ 37.1% 33.7% Average annualized merchandise turnover ......................... 2.9x 3.0x 3.1x 3.0x Average merchandise held for disposition per average pawnshop location ............................................. $ 110 $ 115 $ 112 $ 123 Pawnshop locations in operation - Beginning of period, owned .................................... 453 459 455 460 Acquired .................................................... -- -- 3 2 Start-ups ................................................... 1 -- 2 -- Combined or closed .......................................... (1) (5) (7) (8) End of period, owned .......................................... 453 454 453 454 Franchise locations at end of period .......................... 9 13 9 13 Total pawnshop locations at end of period ..................... 462 467 462 467 Average number of owned pawnshop locations in operation ....... 452 456 453 458 SMALL CONSUMER CASH ADVANCES Total amount of cash advances written (a) ....................... $ 43,552 $ 26,347 $ 81,762 $ 48,035 Number of cash advances written (not in thousands) (a) .......... 148,507 94,037 278,244 170,509 Average cash advance amount (not in thousands)(a) ............... $ 293 $ 280 $ 294 $ 282 Combined cash advances outstanding (a) .......................... $ 11,704 $ 7,489 $ 11,704 $ 7,489 Cash advances outstanding per location at end of period (a) ..... $ 30 $ 19 $ 30 $ 19 Cash advances outstanding before allowance for losses (b) ....... $ 10,400 $ 2,754 $ 10,400 $ 2,754 Locations offering cash advances at end of period: Pawnshops ..................................................... 383 390 383 390 Cash advance units ............................................ 11 -- 11 -- Total ....................................................... 394 390 394 390 Average number of locations offering cash advances .............. 391 391 391 391 CHECK CASHING OPERATIONS (c): Check cashing royalties and fees ................................... $ 828 $ 826 $ 1,911 $ 1,946 Franchised and owned check cashing centers - Face amount of checks cashed .................................... $ 257,066 $ 249,778 $ 565,594 $ 545,723 Gross fees collected ............................................ $ 3,527 $ 3,470 $ 8,138 $ 7,918 Fees as a percentage of checks cashed ........................... 1.4% 1.4% 1.4% 1.5% Average check cashed (not in thousands) ......................... $ 340 $ 333 $ 374 $ 366 Centers in operation at end of period ........................... 139 135 139 135 Average centers in operation for the period ..................... 140 135 137 135 ---------- (a) Includes cash advances made by the Company and cash advances made by third-party financial institutions. (b) Amounts recorded in the Company's consolidated financial statements. (c) Information presented in this section relates to Mr. Payroll. "Check cashing royalties and fees" in the consolidated statements of operations also includes United Kingdom check cashing fees. 16 SECOND QUARTER ENDED JUNE 30, 2003, COMPARED TO THE SECOND QUARTER ENDED JUNE 30, 2002 CONSOLIDATED NET REVENUE. Consolidated net revenue increased $7.2 million, or 13.9%, to $59.0 million during the second quarter ended June 30, 2003 (the "current quarter") from $51.8 million during the second quarter ended June 30, 2002 (the "prior year quarter"). The following table sets forth net revenue results by operating segment for the three month periods ended June 30 (in millions): 2003 2002 Increase ----- ----- ------------- Domestic lending .................... $49.5 $44.3 $ 5.2 11.7% Foreign lending ..................... 8.7 6.7 2.0 29.9 ----- ----- ----- ----- Total lending .................. 58.2 51.0 7.2 14.1 Check cashing ....................... 0.8 0.8 -- -- ----- ----- ----- ----- Consolidated net revenue ............ $59.0 $51.8 $ 7.2 13.9% ===== ===== ===== ===== The Company's domestic lending operations generated the majority of the increase in consolidated net revenue. Higher revenue from the Company's small consumer cash advance product, higher finance and service charges on pawn loans, and higher gross profit from disposition of merchandise accounted for the increase in net revenue. The components of net revenue are finance and service charges from pawn loans, which increased $3.1 million; gross profit from disposition of merchandise, which increased $1.7 million; cash advance fees, which increased $2.2 million; and check cashing royalties and fees, which increased $0.2 million. Management believes that the trend of higher cash advance fees and higher finance and service charges on pawn loans will continue during the remainder of 2003 as a result of the expected continuation of increased demand for these products and due to the higher balances of cash advances and pawn loans at the end of the second quarter of 2003 compared to the prior year. FINANCE AND SERVICE CHARGES. The following is a summary of finance and service charges related to pawn loans by operating segment for the three months ended June 30, 2003 and 2002 (in millions): 2003 2002 Increase ----- ----- ------------- Domestic lending ..................... $23.4 $21.7 $ 1.7 7.8% Foreign lending ...................... 7.2 5.8 1.4 24.1 ----- ----- ----- ----- Total finance and service charges... $30.6 $27.5 $ 3.1 11.3% ===== ===== ===== ===== Variations in finance and service charges on pawn loans are caused by changes in the average balance of pawn loans outstanding, the annualized yield of the pawn loan portfolio, and the effects of translation of foreign currency amounts into United States dollars. The following table demonstrates how each of these factors affected the total change in finance and service charges for the current quarter as compared to the prior year quarter (in millions): 17 Total Average Before Balance Loan Foreign Foreign Outstanding Yield Translation Translation Total ------------- -------- ------------- ------------ --------- Domestic lending....... $ 1.5 $ 0.2 $ 1.7 $ -- $ 1.7 Foreign lending........ 0.7 (0.2) 0.5 0.9 1.4 ------------- -------- ------------- ------------ --------- Total............. $ 2.2 $ -- $ 2.2 $ 0.9 $ 3.1 ============= ======== ============= ============ ========= Excluding the favorable impact of foreign currency translation, the company-wide average balance of pawn loans outstanding was 8.8% higher during the current quarter than the prior year quarter. On a segment basis, the average balances of pawn loans were 7.1% and 11.7% higher for the domestic and foreign lending operations, respectively. The increase in the average balance of domestic pawn loans outstanding was driven by a 6.0% increase in the average number of pawn loans outstanding during the current quarter coupled with a 1.1% increase in the average amount per loan. Management believes the higher average domestic loan balance outstanding is partially attributable to adverse trends in the U.S. economy, which were conducive to an increase in loan demand. Domestic pawn loan balances at June 30, 2003, were $5.7 million, or 7.6%, higher than at June 30, 2002. Management expects this trend of higher demand for pawn loans to continue throughout the remainder of 2003. However, the year-over-year increase may decline slightly during the third quarter due to the advance child tax credit payments to be issued by the Internal Revenue Service to some pawn loan customers in the period. The average balances of pawn loans outstanding denominated in their local currencies increased 13.3% and 9.0% in the United Kingdom and Sweden, respectively. The average number of pawn loans outstanding in the United Kingdom and Sweden increased 7.5% and 1.5%, respectively. Average amounts per loan were higher for both the United Kingdom and Sweden by 5.4% and 7.3%, respectively. Excluding the favorable impact of foreign currency translation, the consolidated annualized loan yield, which represents the blended result derived from the distinctive loan yields realized from operations in the three countries, was 96.7% in the current year quarter, compared to 97.4% in the prior year quarter. There was an increase in the domestic annualized loan yield to 123.9% for the current year quarter, compared to 122.8% for the prior year quarter. Improved performance of the pawn loan portfolio, including higher redemption rates and a slightly higher concentration of extended loans in the portfolio, contributed to the higher domestic yield. The blended yield on average foreign pawn loans outstanding decreased to 53.0% in the current year quarter compared to 54.7% in the prior year quarter. The decrease in the blended foreign yield was caused by a decrease in loan redemption rates and lower yield on the disposition of unredeemed collateral at auction. Favorable currency translation adjustments contributed $0.9 million to the increase in foreign source finance and service charges in the current quarter as compared to the prior year quarter, as the British pound and Swedish kronor were stronger relative to the United States dollar. The weighted average exchange rates used to translate local currency earnings into dollars for the pound and kronor were 10.9% and 23.9% higher, respectively, during the current quarter compared to the prior year quarter. PROFIT FROM DISPOSITION OF MERCHANDISE. Profit from disposition of merchandise represents the proceeds received from disposition of merchandise in excess of the cost of disposed 18 merchandise. The following table summarizes, by operating segment, the proceeds from disposition of merchandise and the related profit for the current quarter compared to the prior year quarter (in millions): Three Months Ended June 30, ------------------------------------------------------------------ 2003 2002 ----------------------------- ------------------------------- Merch- Refined Merch- Refined andise* Gold Total andise* Gold Total ------- ------- ----- ------- ------- ----- Proceeds from disposition: Domestic ....................... $43.8 $ 7.9 $51.7 $46.8 $ 8.3 $55.1 Foreign ........................ 2.8 1.7 4.5 2.2 1.0 3.2 ----- ----- ----- ----- ----- ----- Total proceeds ............... $46.6 $ 9.6 $56.2 $49.0 $ 9.3 $58.3 ===== ===== ===== ===== ===== ===== Profit on disposition ............. $18.5 $ 2.3 $20.8 $18.0 $ 1.1 $19.1 ===== ===== ===== ===== ===== ===== Profit margin ..................... 39.7% 23.9% 37.0% 36.7% 11.8% 32.8% Profit margin - Domestic .......... 39.8% 28.3% 38.1% 36.8% 13.6% 33.3% Profit margin - Foreign ........... 37.9% 3.8% 24.9% 33.2% (1.7)% 22.9% ---------- *Excluding refined gold. Total proceeds from disposition of merchandise in the current quarter were $2.1 million, or 3.6%, lower than in the prior year quarter. The decrease was predominately the result of the Company entering the quarter with lower levels of merchandise available for sale. Proceeds from disposition of merchandise, excluding refined gold, decreased $2.4 million, or 5.0%. Proceeds from disposition of refined gold increased $0.3 million, or 3.6% due to higher market prices for gold. The consolidated merchandise turnover rate decreased to 2.9 times during the current quarter as compared to 3.0 times during the prior year quarter, and the gross profit on disposition of merchandise increased to 37.0% in the current quarter as compared to 32.8% in the prior year quarter. Excluding the effect of disposition of refined gold, the gross profit on disposition of merchandise increased to 39.7% in the current quarter from 36.7% in the prior year quarter due predominately to lower average cost of merchandise sold. The gross profit on disposition of refined gold was 23.9% in the current quarter compared to 11.8% in the prior year quarter due to the prevailing higher market price of gold. CASH ADVANCE FEES. Cash advance fees increased $2.2 million, or 52.3%, to $6.4 million in the current quarter as compared to $4.2 million in the prior year quarter. The increase resulted from significantly higher cash advance balances at the beginning of the period related to the continued increase in demand for the small consumer cash advance product. While management expects demand for the cash advance product to remain strong throughout the remainder of 2003, the advance child tax credit payments to be issued by the Internal Revenue Service during the third quarter to some cash advance customers may moderate demand for the product in the quarter. While this could slow the growth in cash advance balances, management still anticipates positive year-over-year comparisons to the 2002 balances. The product was available in 394 domestic lending units at June 30, 2003, including 303 units that offer the product on behalf of a third-party bank, for which the Company performs administrative services. Cash advance fees include revenue from the cash advance portfolio owned by the Company and fees for administrative services performed for the bank. (Although small consumer cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as "cash advances" for convenience.) The amount of cash advances written increased $17.2 million, or 65.4%, to $43.5 million in the current quarter from $26.3 million in the prior year quarter. The $43.5 million in cash advances written in the current quarter includes $37.9 million extended to customers by the bank. The average amount per cash advance increased to $293 from $280. The combined Company 19 and bank portfolio of cash advances generated $7.5 million in revenue during the current quarter compared to $4.6 million in the prior year quarter. The outstanding combined portfolio of small consumer cash advances increased $4.2 million to $11.7 million at June 30, 2003, from $7.5 million at June 30, 2002. Included in these amounts are $10.4 million and $2.7 million for 2003 and 2002, respectively, that are included in the Company's consolidated balance sheets. An allowance for losses of $1.9 million and $1.3 million has been provided in the consolidated financial statements as of June 30, 2003 and 2002, respectively, which offsets the outstanding cash advance amounts. During the first quarter of 2003, the Company terminated its relationship with the national bank that had offered this product in many of its stores. The Company entered into an agreement with a state chartered bank to offer the product in those stores. See further discussion in Note 4 of Notes to Consolidated Financial Statements. CHECK CASHING ROYALTIES AND FEES. Check cashing fees for the United Kingdom operations increased 72.7% to $0.4 million, in the current quarter. Check cashing revenue for the Mr. Payroll operations was unchanged at $0.8 million. OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and administration expenses, as a percentage of total revenue, was 47.3% in the current quarter compared to 44.2% in the prior year quarter. These expenses increased $4.4 million, or 10.9%, in the current quarter compared to the prior year quarter. Domestic lending expenses increased $3.0 million, as a result of higher expenses related to the cash advance product including advertising and new locations. In addition there were increased incentive expenses associated with the improvement in operating results and higher personnel costs. The current quarter operating expenses also included a write-off of $0.3 million in uncollectable receivables from a third party collector of past due cash advances. Foreign lending operations expenses increased $1.3 million primarily due to an increase in the number of locations in the United Kingdom. Mr. Payroll's expenses increased slightly from $0.5 million for the prior year quarter to $0.6 million for the current quarter. CASH ADVANCE LOSS PROVISION. The Company maintains an allowance for losses on cash advances at a level projected to be adequate to absorb credit losses inherent in the outstanding cash advance portfolio. The cash advance loss provision is utilized to increase the allowance carried against the outstanding portfolio. The cash advance loss provision increased $0.1 million to $1.7 million in the current quarter as compared to $1.6 million in the prior year quarter due to the increase in the size of the portfolio. Loss provision as a percentage of cash advance fees was 26.5% in the current quarter as compared to 37.5% in the prior year quarter. The decrease in the loss provision as a percentage of cash advance fees is due to lower loss rates experienced by the Company in the current quarter compared to the prior year quarter. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of total revenue was 3.8% in the current quarter compared to 4.1% in the prior year quarter. INTEREST EXPENSE. Net interest expense as a percentage of total revenue remained at 2.3%. Interest expense for both current and prior year quarters was $2.1 million. The effective blended borrowing cost increased to 6.0% in the current quarter as compared to 5.2% in the prior year quarter due primarily to the Company's decision to issue $42.5 million of long-term fixed rate notes in July 2002 that replaced lower floating interest rate debt and the elimination of interest 20 income from a note receivable repaid in the first quarter of 2003. The average amount of debt outstanding decreased during the current quarter to $142.3 million from $159.4 million during the prior year quarter. LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. There were no adjustments to fair values of interest rate cap agreements during the current quarter compared to a loss of $36,000 in the prior year quarter. GAIN FROM DISPOSAL OF ASSET. During the current quarter, the Company sold real estate that was being held for investment purposes following the reconstruction of the corporate headquarters. The Company received cash proceeds of $1.6 million and realized a gain of $1.0 million. INCOME TAXES. The Company's effective tax rate for the current quarter was 29.0% as compared to 35.7% for the prior year quarter. The decrease in the current quarter is primarily attributable to a reduction in the deferred tax valuation allowance for capital losses. The valuation allowance was reduced as a result of the recognition of capital gain from the sale of real estate held for investment. The effective tax rate for the current quarter would have been 35.2% excluding the gain and the related tax effect. 21 OTHER DATA. The following table sets forth certain selected financial and non-financial data for the Company's domestic and foreign lending operations, presented in U.S. dollars, as of June 30, 2003 and 2002, and for the three months then ended (dollars in thousands). Domestic Foreign ------------------------ ----------------------- 2003 2002 2003 2002 -------- -------- -------- -------- Annualized yield on pawn loans - domestic ............................ 123.9% 122.8% -- -- Annualized yield on pawn loans - foreign operations: In U.S. dollars .................................................... -- -- 53.1% 54.7% In local currency - United Kingdom .................................................. -- -- 57.7% 58.9% Sweden .......................................................... -- -- 45.8% 49.0% Total pawn loans written ............................................. $ 82,014 $ 77,702 $ 31,534 $ 25,344 Average pawn loan balance outstanding ................................ $ 75,904 $ 70,832 $ 54,087 $ 42,265 Average pawn loan balance per average pawnshop location in operation .......................................................... $ 195 $ 177 $ 872 $ 755 Average pawn loan amount at end of period (not in thousands) ........ $ 81 $ 80 $ 201 $ 175 Profit margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise ........................... 38.1% 33.3% 24.9% 22.9% Average annualized merchandise turnover .............................. 2.9x 3.0x 2.4x 2.7x Average merchandise held for disposition per average pawnshop location ........................................................... $ 112 $ 122 93 $ 64 Pawnshop locations in operations - Beginning of period, owned ......................................... 391 403 62 56 Acquired ........................................................ -- -- -- -- Start-ups ....................................................... -- -- 1 -- Combined or closed .............................................. (1) (5) -- -- End of period, owned ............................................... 390 398 63 56 Franchise locations at end of period ............................... 9 13 -- -- Total pawnshop locations at end of period .......................... 399 411 63 56 Average number of owned pawnshop locations in operation ............ 390 400 62 56 CURRENCY EXCHANGE RATES: Harvey & Thompson, Ltd. (British pound per U.S. dollar) - Balance sheet data - end of period rate............................. -- -- 0.6039 0.6527 Statements of operations data - average rate for the period......... -- -- 0.6169 0.6842 Svensk Pantbelaning (Swedish kronor per U.S. dollar) - Balance sheet data - end of period rate............................. -- -- 7.9808 9.1593 Statements of operations data - average rate for the period......... -- -- 8.0416 9.9669 22 SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002 CONSOLIDATED NET REVENUE. Consolidated net revenue increased $14.4 million, or 13.3%, to $123.0 million during the six months ended June 30, 2003, (the "current period") from $108.6 million during the second quarter ended June 30, 2002 (the "prior year period"). The following table sets forth net revenue results by operating segment for the three month periods ended June 30, 2003 and 2002 (in millions): 2003 2002 Increase ------ ------ ------------------ Domestic lending ....... $104.3 $ 93.6 $ 10.7 11.4% Foreign lending ........ 16.8 13.1 3.7 28.2 ------ ------ ------ ------ Total lending ..... 121.1 106.7 14.4 13.5 Check cashing .......... 1.9 1.9 -- -- ------ ------ ------ ------ Consolidated net revenue $123.0 $108.6 $ 14.4 13.3% ====== ====== ====== ====== The Company's domestic lending operations generated the majority of the increase in consolidated net revenue. Higher revenue from the Company's small consumer cash advance product, higher finance and service charges on pawn loans, and higher gross profit from disposition of merchandise accounted for the increase in net revenue. Finance and service charges from pawn loans increased $5.8 million; gross profit from disposition of merchandise increased $3.2 million; cash advance fees increased $5.1 million; and check cashing royalties and fees increased $0.3 million. FINANCE AND SERVICE CHARGES. The following is a summary of finance and service charges related to pawn loans by operating segment for the six months ended June 30, 2003 and 2002 (in millions): 2003 2002 Increase ----- ----- ---------------- Domestic lending .................. $48.2 $45.0 $ 3.2 7.1% Foreign lending ................... 13.9 11.3 2.6 23.0 ----- ----- ----- ----- Total finance and service charges ...................... $62.1 $56.3 $ 5.8 10.3% ===== ===== ===== ===== The following table demonstrates how the key factors affected the total change in finance and service charges for the current period as compared to the prior year period (in millions): Total Average Before Balance Loan Foreign Foreign Outstanding Yield Translation Translation Total ----------- ---- ----------- ----------- ---- Domestic lending ........ $2.3 $0.9 $3.2 $ -- $3.2 Foreign lending ......... 1.2 (0.4) 0.8 1.8 2.6 ---- ---- ---- ---- ---- Total .............. $3.5 $0.5 $4.0 $1.8 $5.8 ==== ==== ==== ==== ==== Excluding the favorable impact of foreign currency translation, the company-wide average balance of pawn loans outstanding was 7.1% higher during the current period than the 23 prior year period. On a segment basis, the average balances of pawn loans were 5.2% and 10.3% higher for the domestic and foreign lending operations, respectively. The increase in the average balance of domestic pawn loans outstanding was driven by a 3.3% increase in the average number of pawn loans outstanding during the current period coupled with a 1.8% increase in the average amount per loan. The average balances of foreign pawn loans outstanding denominated in their local currencies increased 12.5% and 6.8% in the United Kingdom and Sweden, respectively. Foreign loan demand was mixed as the average number of pawn loans outstanding in the United Kingdom and Sweden increased 6.6% and decreased 0.8%, respectively. Average amounts per loan were higher for both the United Kingdom and Sweden by 5.5% and 7.7%, respectively. Excluding the favorable impact of foreign currency translation, the consolidated annualized loan yield was 100.7% for both current and prior year periods. There was an increase in the domestic annualized loan yield to 129.4% for the current year period, compared to 127.2% for the prior year period. Improved performance of the pawn loan portfolio, demonstrated by higher redemption rates and a slightly higher concentration of extended loans in the portfolio, contributed to the higher domestic yield. The blended yield on average foreign pawn loans outstanding decreased to 53.4% in the current year period compared to 55.0% in the prior year period. The decrease in the blended foreign yield was caused by a decrease in loan redemption rates and lower yield on the disposition of unredeemed collateral at auction. Favorable currency translation adjustments contributed $1.8 million to the increase in foreign source finance and service charges in the current period as compared to the prior year period, as the British pound and Swedish kronor were stronger relative to the United States dollar. The weighted average exchange rates used for translating earnings into dollars for the pound and kronor were 10.8% and 22.8% higher, respectively, during the current period compared to the prior year period. PROFIT FROM DISPOSITION OF MERCHANDISE. The following table summarizes, by operating segment, the proceeds from disposition of merchandise and the related profit for the current period compared to the prior year period (in millions): Six Months Ended June 30, ---------------------------------------------------------------------------------------- 2003 2002 ---------------------------------------- ---------------------------------------- Refined Refined Merchandise* Gold Total Merchandise* Gold Total ------------- ------- ------ ------------ ------- ------ Proceeds from disposition: Domestic ................... $ 99.4 $ 15.3 $114.7 $106.1 $ 13.5 $119.6 Foreign .................... 5.4 2.2 7.6 4.3 1.4 5.7 ------ ------ ------ ------ ------ ------ Total proceeds ........... $104.8 $ 17.5 $122.3 $110.4 $ 14.9 $125.3 ====== ====== ====== ====== ====== ====== Profit on disposition ......... $ 41.1 $ 4.3 $ 45.4 $ 40.1 $ 2.1 $ 42.2 ====== ====== ====== ====== ====== ====== Profit margin ................. 39.2% 24.6% 37.1% 36.3% 14.1% 33.7% Profit margin - Domestic ...... 39.3% 26.9% 37.7% 36.5% 15.4% 34.1% Profit margin - Foreign ....... 37.1% 6.1% 28.1% 32.0% 1.8% 24.7% ---------- *Excluding refined gold. 24 Total proceeds from disposition of merchandise in the current period were $3.0 million, or 2.4%, lower than in the prior year period. The decrease was predominately the result of the Company entering the current period with lower levels of merchandise available for sale. Proceeds from disposition of merchandise, excluding refined gold, decreased $5.6 million, or 5.1%. Proceeds from disposition of refined gold increased $2.6 million, or 17.4% due to higher market prices for gold. The consolidated merchandise turnover rate increased to 3.1 times during the current period as compared to 3.0 times during the prior year period, and the gross profit on disposition of merchandise increased to 37.1% in the current period as compared to 33.7% in the prior year period. Excluding the effect of the disposition of refined gold, the gross profit on disposition of merchandise increased to 39.2% in the current period from 36.3% in the prior year period due predominately to lower average cost of merchandise sold. The gross profit on disposition of refined gold was 24.6% in the current period compared to 14.1% in the prior year period due to the prevailing higher market price of gold. CASH ADVANCE FEES. Cash advance fees increased $5.1 million, or 66.2%, to $12.8 million in the current period as compared to $7.7 million in the prior year period. The increase resulted from significantly higher cash advance balances at the beginning of the period related to the continued increase in demand for the small consumer cash advance product. The amount of cash advances written increased $33.7 million, or 70.2%, to $81.8 million in the current period from $48.0 million in the prior year period. The $81.8 million in cash advances written in the current period includes $71.2 million extended to customers by the banks. The average amount per cash advance increased to $294 from $282. The combined Company and bank portfolio of cash advances generated $14.6 million in revenue during the current period compared to $8.5 million in the prior year period. CHECK CASHING ROYALTIES AND FEES. Check cashing fees for the United Kingdom operations increased 87.8% to $0.8 million, in the current period. Check cashing revenue for the Mr. Payroll operations remained unchanged at $1.9 million. OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and administration expenses, as a percentage of total revenue, was 45.3% in the current period compared to 42.9% in the prior year period. These expenses increased $8.4 million, or 10.2%, in the current period compared to the prior year period. Domestic lending expenses increased $6.0 million, as a result of higher expenses related to the cash advance product including advertising and new locations. In addition, there were increased incentive expenses associated with the improvement in operating results and higher personnel costs. The current period operating expenses included a write-off of $0.3 million in uncollectable receivables from a third party collector of past due cash advances. Foreign lending operations expenses increased $2.3 million primarily due to an increase in the number of locations in the United Kingdom. Mr. Payroll's expenses increased slightly from $1.1 million for the prior year period to $1.2 million for the current period. CASH ADVANCE LOSS PROVISION. The cash advance loss provision for domestic lending operations increased $0.5 million to $3.0 million in the current period as compared to $2.5 million in the prior year period due to the significant increase in the size of the portfolio. Loss provision as a percentage of cash advance fees was 23.5% in the current period as compared to 31.9% in the prior year period. The decrease in the loss provision as a percentage of cash advance fees is due to lower loss rates experienced by the Company in the current period compared to the prior year. 25 DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of total revenue was 3.7% in the current period compared to 3.8% in the prior year period. Total depreciation and amortization expense was $7.3 million for both periods. INTEREST EXPENSE. Net interest expense as a percentage of total revenue was 2.2% for both periods at $4.3 million. The Company's average debt balance decreased 13.4% during the current period compared to the prior year period. The aggregate blended borrowing cost increased to 6.1% in current period as compared to 5.3% in the prior year period due primarily to the Company's decision to issue $42.5 million of long-term fixed rate notes in July 2002 that replaced lower floating rate debt and the elimination of interest income from a note receivable repaid early in the current period. The average amount of debt outstanding decreased during the current period to $142.3 million from $164.4 million during the prior year period. LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. There were no adjustments to fair values of interest rate cap agreements during the current period compared to a loss of $72,000 in the prior year period. GAIN FROM DISPOSAL OF ASSET. During the current period, the Company sold real estate that was being held for investment purposes following the reconstruction of the corporate headquarters. The Company received cash proceeds of $1.6 million and realized a gain of $1.0 million. INCOME TAXES. The Company's effective tax rate for the current period ended June 30, 2003, was 33.8% as compared to 35.9% for the prior year period ended June 30, 2002. The decrease in the current period is primarily attributable to a reduction in the deferred tax valuation allowance for capital losses. The valuation allowance was reduced as a result of the recognition of capital gain from the sale of real estate held for investment. The effective tax rate for the current quarter would have been 36.4% excluding the gain and the related tax effect. 26 OTHER DATA. The following table sets forth certain selected financial and non-financial data for the Company's domestic and foreign lending operations, presented in U.S. dollars, for the six months ended June 30, 2003 and 2002 (dollars in thousands). Domestic Foreign ------------------------- ------------------------- 2003 2002 2003 2002 --------- --------- --------- --------- Annualized yield on pawn loans - domestic ............................ 129.4% 127.2% -- -- Annualized yield on pawn loans - foreign operations: In U.S. dollars .................................................... -- -- 53.4% 55.0% In local currency - United Kingdom .................................................. -- -- 57.7% 59.5% Sweden .......................................................... -- -- 46.8% 48.5% Total pawn loans written ............................................. $ 154,087 $ 145,604 $ 62,732 $ 49,954 Average pawn loan balance outstanding ................................ $ 75,032 $ 71,356 $ 52,547 $ 41,308 Average pawn loan balance per average pawnshop location in operation .......................................................... $ 191 $ 178 $ 861 $ 738 Profit margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise............................ 37.7% 34.1% 28.1% 24.7% Average annualized merchandise turnover .............................. 3.2x 3.0x 2.0x 2.5x Average merchandise held for disposition per average pawnshop location ........................................................... $ 116 $ 132 $ 90 $ 61 Pawnshop locations in operations - Beginning of period, owned ......................................... 396 404 59 56 Acquired ........................................................ -- 2 3 -- Start-ups ....................................................... -- -- 2 -- Combined or closed .............................................. (6) (8) (1) -- End of period, owned ............................................... 390 398 63 56 Franchise locations at end of period ............................... 9 13 -- -- Total pawnshop locations at end of period .......................... 399 411 63 56 Average number of owned pawnshop locations in operation ............ 392 402 61 56 CURRENCY EXCHANGE RATES: Harvey & Thompson, Ltd. (British pound per U.S. dollar) - Statements of operations data - average rate for the period ........ -- -- 0.6205 0.6920 Svensk Pantbelaning (Swedish kronor per U.S. dollar) - Statements of operations data - average rate for the period ........ -- -- 8.3036 10.1984 27 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows and other key indicators of liquidity are summarized as follows ($ in millions): Six Months Ended June 30, -------------------- 2003 2002 ------- ------- Operating activities cash flows ........ $ 27.7 $ 24.9 Investing activities cash flows: Pawn loans ......................... (6.3) (0.1) Cash advances ...................... (8.3) (1.8) Other investing activities ......... (7.6) (6.8) Financing activities cash flows ........ (1.8) (19.5) Working capital ........................ $ 200.8 $ 177.7 Current ratio .......................... 6.1x 6.3x Merchandise turnover ................... 3.1x 3.0x CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating activities of continuing operations was $27.7 million for the six months ended June 30, 2003 ("current period"). CASH FLOWS FROM INVESTING ACTIVITIES. An increase in the Company's investment in pawn loans during the current period required $6.3 million of cash. The Company's transition from a national bank to a state chartered bank program in early 2003 and increases in balances for its cash advance product required an investment of $8.3 million in cash during the current period. The Company invested $7.3 million in purchases of property and equipment during the current period for property improvements, the remodeling of selected operating units and additions to computer systems for lending operations. During the current period, the Company acquired three lending locations, one check cashing franchise and other earning assets for $1.9 million. During the current period, the Company sold real estate that was being held for investment purposes following the reconstruction of the corporate headquarters for cash proceeds of $1.6 million. Management anticipates that capital expenditures for the remainder of 2003 will be approximately $5 to $10 million. These expenditures will primarily relate to the establishment of new lending locations, the remodeling of selected operating units and enhancements to information systems. The Company may add up to 15 new lending locations, including cash advance only locations. The new locations will be added primarily through the acquisition of existing pawnshop locations and the establishment of both new pawnshop and new cash advance locations. On June 30, 2003, the Company entered into a definitive agreement to purchase substantially all of the assets of Cashland, Inc. ("Cashland"), a private consumer finance company based in Dayton, Ohio. The Company estimated the initial purchase price as of that date to be approximately $53.0 million in cash and stock. Cashland operates 118 consumer finance centers that offer short-term cash advances, check cashing and money transfer services. The purchase is 28 expected to close within 60 days. The Company expects to increase its U.S. line of credit from $90.0 million to $135.0 million to facilitate payment of the cash portion of the purchase price and to continue to provide for working capital needs. CASH FLOWS FROM FINANCING ACTIVITIES. The Company had net borrowings of $8.1 million on bank lines of credit and used cash for payments of $8.6 million on other debt obligations; $0.7 million for dividends; and $1.4 million for the purchase of treasury shares. On July 24, 2002, the Company's Board of Directors authorized management to purchase up to one million shares of its common stock in the open market and terminated the open market purchase authorization established in 2000. During the current period, the Company purchased 152,900 shares for an aggregate amount of $1.4 million under this authorization. Additional purchases may be made from time to time in the open market, and it is expected that funding will come from operating cash flow. At June 30, 2003, $49.4 million was outstanding on the Company's $90 million U.S. line of credit. The Company extended its multi-currency line of credit to April 30, 2006 and increased the maximum amount to (pound)20 million (approximately $33.1 million at June 30, 2003) from (pound)15 million (approximately $24.8 million at June 30, 2003). The Company's foreign subsidiaries are co-borrowers on this multi-currency line of credit. Funds may be drawn in British pounds, bearing interest at the Bank's cost of funds plus a margin of 75 basis points. Funds up to the equivalent of (pound)10 million may be drawn in Swedish kronor, bearing interest at the Bank's cost of funds plus a margin of 75 basis points. In the aggregate, the British pound and Swedish kronor drawings may not exceed the equivalent of (pound)20 million. The Company pays a fee of 0.25% per annum on the unused portion of this line of credit. As of June 30, 2003, amounts outstanding under this line of credit were (pound)6.0 million (approximately $9.9 million) and SEK 44.5 million (approximately $5.6 million). The Company also extended its SEK 15 million line of credit (approximately $1.9 million as of June 30, 2003) with a commercial bank to mature on May 30, 2004. Interest on this line of credit is charged at the Bank's base funding rate plus 1%. There were no amounts outstanding on this line of credit as of June 30, 2003. Management believes that borrowings available under these credit facilities, cash generated from operations and current working capital of $200.8 million should be sufficient to meet the Company's anticipated future capital requirements. CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS This quarterly report, including management's discussion and analysis, contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules. The Company intends that all forward-looking statements be subject to the safe harbors created by these laws and rules. When used in this quarterly report, the words "believes", "estimates", "plans", "expects", "anticipates", and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those expressed in the forward-looking statements. Accordingly, actual results may differ materially from those 29 expressed in the forward-looking statements, and such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. 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. RISK FACTORS o CHANGES IN CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SPECIALTY FINANCIAL SERVICES. Although the Company's products and services are a staple of its customer base, a significant change in the needs or wants of customers and the Company's failure to adapt to those needs or wants could result in a significant decrease in the revenues of the Company. o THE ACTIONS OF THIRD PARTIES WHO OFFER PRODUCTS AND SERVICES AT THE COMPANY'S LOCATIONS. The Company offers products and services to its customers made available by various third parties. A failure of a third party provider to provide its product or service or to maintain the quality and consistency of its product or service could result in a loss of customers and a related loss in revenue from those products or services. o THE ABILITY OF THE COMPANY TO OPEN AND ACQUIRE NEW OPERATING UNITS IN ACCORDANCE WITH ITS PLANS. The Company's expansion program is subject to numerous factors which cannot be predicted or controlled, such as the availability of attractive acquisition candidates or sites with suitable terms and general economic conditions. o CHANGES IN COMPETITION FROM VARIOUS SOURCES SUCH AS BANKS, SAVINGS AND LOANS, SHORT-TERM CONSUMER LENDERS, AND OTHER SIMILAR FINANCIAL SERVICES ENTITIES, AS WELL AS RETAIL BUSINESSES THAT OFFER PRODUCTS AND SERVICES OFFERED BY THE COMPANY. The Company encounters significant competition in connection with its lending and merchandise disposition operations from other pawnshops and other forms of financial institutions such as consumer finance companies. Significant increases in these competitive influences could adversely affect the Company's operations through a decrease in the number of cash advances and pawn loans originated, resulting in lower levels of earning assets in these categories. o CHANGES IN ECONOMIC CONDITIONS. While the credit risk for most of the Company's consumer lending is mitigated by the collateralized nature of pawn lending, a protracted deterioration in the economic environment could adversely affect the Company's operations through a deterioration in performance of its pawn loan or cash advance portfolios, or by reducing consumer demand for the purchase of pre-owned merchandise. o REAL ESTATE MARKET FLUCTUATIONS. A significant rise in real estate prices could result in an increase in the cost of store leases as the Company opens new locations and renews leases for existing locations. o INTEREST RATE FLUCTUATIONS. Although the weakness in the U.S. economy over the past several quarters has resulted in relatively low interest rates offered by lending institutions, an eventual economic recovery could result in a rise in interest rates which would, in turn, increase the cost of borrowing to the Company. o CHANGES IN THE CAPITAL MARKETS. The Company regularly accesses the debt capital markets to refinance existing debt obligations, and to obtain capital to finance growth. Efficient access to these markets is critical to the Company's ongoing financial success; however, the Company's future access to the debt capital markets could become 30 restricted should the Company experience deterioration of its cash flows, balance sheet quality, or overall business or industry prospects. o CHANGES IN TAX AND OTHER LAWS AND GOVERNMENTAL RULES AND REGULATIONS APPLICABLE TO THE SPECIALTY FINANCIAL SERVICES INDUSTRY. The Company's lending activities are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations. The Company faces the risk that new laws and regulations could be enacted that could have a negative impact on the Company's domestic or international lending activities. o OTHER FACTORS DISCUSSED UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK IN ITEM 3 OF THIS FORM 10-Q AND IN THE COMPANY'S 2002 ANNUAL REPORT TO STOCKHOLDERS. o OTHER RISKS INDICATED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. ITEM 3. 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. There have been no material changes to the Company's exposure to market risks since December 31, 2002. ITEM 4. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of the last day of the period covered by this report (the "Evaluation Date"). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. (b) During the period covered by this report, there was no change in the Company's internal control over financial reporting that was identified in connection with management's evaluation described in Item 4(a) above and has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 31 PART II Item 1. LEGAL PROCEEDINGS See Note 11 of Notes to Consolidated Financial Statements Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not Applicable Item 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 23, 2003, the Company's Annual Meeting of Shareholders was held. All of the nominees for director identified in the Company's Proxy Statement, filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, were elected at the meeting to hold office until the next Annual Meeting or until their successors are duly elected and qualified. The shareholders ratified the Company's selection of independent auditors. There was no other business brought before the meeting that required shareholder approval. Votes were cast in the matters described below as follows (there were no broker non-votes or abstentions other than those listed below): (a) Election of directors For Withheld ---------- -------- Jack R. Daugherty 20,359,892 425,461 A. R. Dike 20,461,392 323,961 Daniel R. Feehan 20,461,392 323,961 James H. Graves 20,398,672 386,681 B. D. Hunter 20,360,592 424,761 Timothy J. McKibben 20,397,872 387,481 Alfred J. Micallef 20,460,792 324,561 Clifton H. Morris, Jr. 20,298,472 486,881 (b) Ratification of Independent Auditors For - 20,350,982 Against - 429,347 Abstain - 5,024 32 Item 5. OTHER INFORMATION Not Applicable Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Securities Exchange Act of 1934 99.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) promulgated under the Securities Exchange Act of 1934 99.3 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 99.4 Certification of Chief Financial Officer pursuant to 18 U.S. C. Section 1350 (b) Reports on Form 8-K On April 8, 2003, the Company filed a Report on Form 8-K that it had issued a press release announcing that it expected earnings for the first quarter of 2003 to exceed the Company's previously released guidance and be higher than security analysts' published estimates. In the release the Company also confirmed that it had completed the transition of providers for its short-term cash advance product in all planned locations. A copy of the press release was filed with the Report as an Exhibit. On April 24, 2003, the Company filed a Report on Form 8-K that it had issued a press release announcing its earnings for the first quarter of 2003. A copy of the press release was filed with the Report as an Exhibit. 33 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CASH AMERICA INTERNATIONAL, INC. -------------------------------------- (Registrant) By: /s/ Thomas A. Bessant, Jr. -------------------------- Thomas A. Bessant, Jr. Executive Vice President and Chief Financial Officer Date: July 25, 2003 34