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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2006 Commission File No. 000-19424
EZCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2540145
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
(Address of principal executive offices)
Registrant's telephone number: (512) 314-3400
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
CLASS A NON-VOTING COMMON STOCK, THE NASDAQ STOCK MARKET
$.01 PAR VALUE PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosures of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The only class of voting securities of the registrant issued and outstanding is
the Class B Voting Common Stock, par value $.01 per share, all of which is owned
by one record holder who is an affiliate of the registrant. There is no trading
market for the Class B Voting Common Stock. The aggregate market value of the
Class A Non-Voting Common Stock held by non-affiliates of the registrant was
$347 million, based on the closing price on the NASDAQ Stock Market on March 31,
2006.
As of October 31, 2006, 37,554,180 shares of the registrant's Class A Non-voting
Common Stock, par value $.01 per share and 2,970,171 shares of the registrant's
Class B Voting Common Stock, par value $.01 per share were outstanding. These
amounts have been adjusted to reflect the three-for-one common stock split for
shareholders of record as of November 27, 2006.
Documents incorporated by reference: None
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EZCORP, INC.
YEAR ENDED SEPTEMBER 30, 2006
INDEX TO FORM 10-K
Item Page
No. No.
---- ----
INTRODUCTION
PART I
1. Business 3
1A. Risk Factors 17
2. Properties 19
3. Legal Proceedings 22
4. Submission of Matters to a Vote of Security Holders 22
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 26
7A. Qualitative and Quantitative Disclosures About Market Risk 39
8. Financial Statements and Supplementary Data 40
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 64
9A. Controls and Procedures 65
PART III
10. Directors and Executive Officers of the Registrant 67
11. Executive Compensation 70
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 75
13. Certain Relationships and Related Party Transactions 77
14. Principal Accounting Fees and Services 77
PART IV
15. Exhibits and Financial Statement Schedules 79
Signatures 82
Exhibit Index 83
PART I
ITEM 1. BUSINESS
The discussion in this section of the report contains forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this report.
GENERAL
EZCORP, Inc. (the "Company") is a Delaware corporation with its principal
executive offices located at 1901 Capital Parkway, Austin, Texas 78746. Its
telephone number is (512) 314-3400. Interested parties may access the Company's
filings with the Securities and Exchange Commission through a link in the
Investor Relations section of the Company's website at www.ezcorp.com. Also
available on the Company's website is its Code of Conduct and Ethics. References
to the Company include its subsidiaries listed in Exhibit 21.1.
The Company is primarily a lender or provider of credit services to individuals
who do not have cash resources or access to credit to meet their short-term cash
needs. In 280 EZPAWN locations open September 30, 2006, the Company offers
non-recourse loans collateralized by tangible personal property, commonly known
as pawn loans. At these locations, the Company also sells merchandise, primarily
collateral forfeited from its pawn lending operations, to consumers looking for
good value. In 334 EZMONEY stores and 82 EZPAWN stores open September 30, 2006,
the Company offers short-term non-collateralized loans, often called payday
loans, or fee-based credit services to customers seeking loans (collectively,
"signature loans").
The income earned on pawn lending is pawn service charge revenue. While
allowable service charges vary by state and loan size, a majority of the
Company's loans are in amounts that permit pawn service charges of 20% per
month, or 240% annually. The Company's average pawn loan amount typically ranges
between $80 and $85 but varies depending on the valuation of each item pawned.
The total loan term, consisting of the primary term and grace period, ranges
between 60 and 120 days. In the years ended September 30, 2004, 2005 and 2006
("Fiscal 2004", "Fiscal 2005" and "Fiscal 2006"), approximately 76%, 77% and 76%
of the pawn loans made by the Company were redeemed in full or were renewed or
extended through the payment of accrued pawn service charges.
In its pawnshops, the Company acquires inventory for its retail sales through
pawn loan forfeitures and, to a lesser extent, through purchases of customers'
merchandise. The realization of gross profit on sales of inventory depends
primarily on the Company's assessment of the resale value at the time the
property is either accepted as loan collateral or purchased. Improper assessment
of the resale value in the lending or purchasing process can result in the
realization of a lower margin or reduced marketability of the property. The
Company realized gross margins on sales of 39% in Fiscal 2004 and 2005, and 40%
in Fiscal 2006.
On July 15, 2005, the EZMONEY stores located in Texas ceased marketing payday
loans and began providing fee-based credit services to consumers in obtaining
loans from unaffiliated lenders. At September 30, 2006, 245 of the Company's 334
EZMONEY stores and 51 of the Company's 280 pawn stores offered credit services.
The Company does not participate in the loans made by the lenders, but typically
earns a fee of 20% of the loan amount for assisting the customer in obtaining
credit and by enhancing the borrower's creditworthiness through the issuance of
a letter of credit. The Company also offers an optional service at no charge to
improve or establish customers' credit histories by reporting their payments to
an external credit-reporting agency. The average loan obtained by the Company's
credit service customers is approximately $470 and the term is generally less
than 30 days, averaging about 17 days. If the borrower defaults on the loan, the
Company pays the lender the principal and accrued interest due under the loan
plus an insufficient funds fee. The Company then attempts to collect the unpaid
principal, interest, and insufficient funds fee from the borrower. The Company
considers as its bad debt the amount it pays the lender under letters of credit,
less any amounts it collects from the borrowers. The profitability of the
Company's credit services is highly dependent on the level of bad debt.
3
When measured as a percentage of credit service fee revenue, the Company
experienced bad debt on credit services of 24% during Fiscal 2006.
The Company earns payday loan service charge revenue on its payday loans. In 120
of its locations, the Company makes payday loans subject to state law. The
average payday loan amount is approximately $385 and the term is generally less
than 30 days, averaging about 21 days. The Company typically charges a fee of
$15 to $22 per $100 loaned for a 7 to 27-day period. The profitability of payday
loans is highly dependent on the level of bad debt. When measured as a
percentage of payday loan revenues, the Company experienced bad debt on payday
loans of 34%, 23% and 41% during Fiscal 2004, 2005 and 2006.
During Fiscal 2006, the Company opened 101 EZMONEY stores and closed one. Of the
334 total EZMONEY stores, 165 adjoin existing EZPAWN locations but have a
different entrance, signage, decor, and staffing. Even though they adjoin an
EZPAWN, the EZMONEY store is a separate business from the customers' point of
view. The Company refers to these as "adjoined stores."
The Company has experienced rapid signature loan growth in the past several
years, and expects this growth to continue in the near term. Customers find
signature loans a more attractive alternative than borrowing from friends and
family or incurring insufficient fund fees, overdraft protection fees, utility
reconnect fees and other charges imposed when they have insufficient cash.
Signature loan customers exercise greater control of their personal finances
without damaging the relationship they have with their merchants and service
providers. Customers also value the excellent service and confidentiality
provided to them.
The following components comprised the Company's net revenues (total revenues
less cost of goods sold):
Fiscal Year Ended September 30,
-------------------------------
2004 2005 2006
---- ---- ----
Pawn service charges 42% 38% 31%
Gross profit from merchandise sales 35% 31% 27%
Gross profit from jewelry scrapping 5% 4% 7%
Signature loan (payday loan and credit service) fees 17% 26% 34%
Other fee revenue 1% 1% 1%
--- --- ---
Net revenues 100% 100% 100%
PAWN LENDING ACTIVITIES
The Company's pawnshops make pawn loans, which typically are small, non-recourse
loans collateralized by tangible personal property. At September 30, 2006, the
Company had approximately 585,000 loans outstanding, representing an aggregate
principal balance of $50.3 million. A majority of the Company's pawn loans are
in amounts that permit pawn service charges of 20% per month, or 240% annually.
For Fiscal 2006, pawn service charges accounted for approximately 21% of the
Company's total revenues and 31% of its net revenues.
Collateral for the Company's pawn loans consists of tangible personal property,
generally jewelry, consumer electronics, tools, sporting goods, and musical
instruments. The Company does not evaluate the creditworthiness of a pawn
customer, but relies on the estimated resale value of the collateral and the
perceived probability of the loan's redemption. The Company generally lends from
25% to 65% of the pledged property's estimated resale value depending on an
evaluation of these factors. The sources for the Company's determination of the
resale value of collateral include the Company's computerized valuation
software, recent and projected gold values, internet auction sites, catalogues,
newspaper advertisements, and previous sales of similar merchandise.
The collateral is held through the duration of the loan, which in most locations
is a maximum of 60 days. The customer has the option of renewing or extending
the loan. Through its lending guidelines, the
4
Company maintains a redemption rate (the percent of loans made that are
redeemed, renewed, or extended) between 70% and 80%. In each of the Company's
last three fiscal years, the redemption rate was within this range. If a
borrower does not repay, extend, or renew a loan, the collateral is forfeited to
the Company and becomes inventory available for sale. The Company does not
record loan losses or charge-offs of pawn loans because the principal amount of
an unpaid loan becomes the inventory carrying cost of the forfeited collateral.
The Company provides an inventory valuation allowance to ensure that this
forfeited collateral is valued at the lower of cost or market.
The table below shows the dollar amount of pawn loan activity by the Company for
Fiscal 2004, 2005 and 2006:
Fiscal Year Ended September 30,
-------------------------------
2004 2005 2006
------ ------ ------
(Dollars in millions)
Loans made $170.0 $173.0 $191.8
Loans repaid (92.5) (93.3) (101.6)
Loans forfeited (76.4) (75.9) (93.2)
Loans acquired in business acquisitions -- -- 0.4
------ ------ ------
Net increase (decrease) in pawn loans outstanding
at the end of the year $ 1.1 $ 3.8 $ (2.6)
====== ====== ======
Loans renewed $ 23.9 $ 23.2 $ 30.2
Loans extended $141.2 $144.2 $183.3
The redemption rate of pawn loans and the gross profit realized on the sale of
forfeited collateral are dependent on the appraisal of customer merchandise.
Jewelry, which makes up approximately 60% of the value of collateral, can be
appraised based on weight, gold content, style, and value of gemstones, if any.
The other items pawned typically consist of consumer electronics, tools,
sporting goods, and musical instruments. These are evaluated based on recent
sales experience and the selling price of similar new merchandise, adjusted for
age, wear, and obsolescence. During Fiscal 2004, 2005 and 2006, the Company
realized gross margins on sales of 39%, 39% and 40%.
At the time a pawn transaction is made, a pawn loan agreement is given to the
borrower. It sets forth, among other things, the name and address of the
pawnshop and the borrower, the borrower's identification information, the date
of the loan, and a detailed description of the pledged goods (including
applicable serial numbers), the amount financed, the pawn service charge, the
maturity date of the loan, the total amount that must be paid to redeem the
loan, and the annual percentage rate.
Since a majority of the Company's pawn stores are located in Texas, Texas
pawnshop laws and regulations govern most of the Company's pawn operations. The
maximum allowable pawn service charges in Texas are set in accordance with the
Texas Pawnshop Act and are based on the dollar amount of the loan. Historically,
the maximum allowable pawn service charges under Texas law have not changed, but
loan amounts have been increased annually in relation to the Consumer Price
Index.
5
APPLICABLE PAWN LOAN SERVICE CHARGES FOR TEXAS
Amount Financed per Pawn Loan
------------------------------------- Maximum
July 1, 2005 to July 1, 2006 to Allowable Annual
June 30, 2006 June 30, 2007 Pawn Service Charge
----------------- ----------------- -------------------
$1 to $162 $1 to $168 240%
$163 to $1,080 $169 to $1,120 180%
$1,081 to $1,620 $1,121 to $1,680 30%
$1,621 to $13,500 $1,681 to $14,000 12%
Under Texas law, there is a ceiling on the maximum allowable pawn loan. For the
year ended June 30, 2006, the loan ceiling was $13,500. From July 1, 2006 to
June 30, 2007, the loan ceiling is $14,000.
SIGNATURE LOANS
In 334 EZMONEY and 82 EZPAWN locations, the Company offers signature loans,
consisting of payday loans or fee-based credit services to customers seeking
loans from independent lenders. The table below shows the dollar amount of
signature loan activity by the Company for Fiscal 2004, 2005 and 2006. For
purposes of this table, signature loan balances include the principal portion of
payday loans (net of valuation allowance) recorded on the Company's balance
sheet and the principal portion of active brokered loans outstanding from
independent lenders, which is not included on the Company's balance sheet.
Fiscal Year
Ended September 30,
------------------------
2004 2005 2006
------ ------ ------
(Dollars in millions)
Loans made $ 52.5 $ 87.9 $115.5
Loans repaid (41.1) (67.3) (93.7)
Loans forfeited, net of collections on bad debt (7.7) (12.0) (17.0)
------ ------ ------
Net increase in signature loans outstanding at
the end of the year $ 3.7 $ 8.6 $ 4.8
====== ====== ======
Loans renewed $ 81.5 $144.0 $247.3
Signature loans are unsecured, and their profitability is highly dependent upon
the Company's ability to manage the default rate and collect defaulted loan
principal, interest and insufficient fund fees. In determining whether to lend
or provide credit services, the Company performs a limited review of customer
information, such as making a credit reporting agency inquiry, reviewing
previous check writing experience, evaluating income levels, and verifying a
telephone number where customers may be contacted.
At the time a signature loan is made, a loan agreement is given to the borrower.
It sets forth, among other things, the name and address of the lender, the
borrower, and the credit services company when applicable, the borrower's
identification information, the date of the loan, the amount financed, the
interest or service charges due on maturity, the maturity date of the loan, the
total amount that must be paid, and the annual percentage rate.
CREDIT SERVICES
The Company began offering credit services in its EZMONEY stores in Texas during
the Fiscal 2005 fourth quarter, and now offers credit services in its Florida
EZMONEY stores. These services consist of advice and assistance to consumers in
obtaining loans from unaffiliated lenders. The Company does not make, fund or
participate in the loans made by the lenders, but earns a fee of 20% of the loan
amount for
6
assisting the customer in obtaining credit and by enhancing the borrowers'
creditworthiness through the issuance of a letter of credit. If a borrower
defaults on the loan, the Company pays the lender the principal and accrued
interest due under the loan and an insufficient funds fee. The Company then
attempts to collect the unpaid principal, interest, and insufficient funds fee
from the borrower. The Company considers as its bad debt the amount it pays the
lenders under letters of credit, less any amounts it collects from borrowers.
Although amounts paid under letters of credit may be collected later, the
Company charges those amounts to bad debt expense upon default. Subsequent
recoveries under the letters of credit are recorded as a reduction of bad debt
at the time of collection. The Company also records as bad debt expense an
accrual of expected losses for principal, interest, and insufficient fund fees
it expects to pay the lender on default of the lender's current loans under the
terms of the letters of credit. This estimate is based on recent default and
collection experience and the amount of loans the lender has outstanding.
PAYDAY LENDING ACTIVITIES
Payday loans made by the Company are governed by state law. The average payday
loan amount is approximately $385 and the term is generally less than 30 days,
averaging about 21 days. The Company typically charges a fee of $15 to $22 per
$100 loaned for a 7 to 27-day period.
The Company considers a loan defaulted if the loan has not been repaid or
renewed by the maturity date. Although defaulted loans may be collected later,
the Company charges the loan principal to bad debt upon default, leaving only
active loans in the reported balance. Subsequent collections of principal are
recorded as a reduction of bad debt at the time of collection. Accrued service
charges related to defaulted loans are deducted from service charge revenue upon
loan default, and increase service charge revenue upon subsequent collection.
The Company provides for a valuation allowance on both the principal and service
charges receivable based on recent default and collection experience. The
Company's payday loan balance represents the principal amount of all active
(non-defaulted) loans, net of this valuation allowance.
RETAIL ACTIVITIES
In its pawnshops, the Company acquires inventory for retail sales through pawn
loan forfeitures and, to a lesser extent, through purchases of customers'
merchandise. The realization of gross profit on sales of inventory depends
primarily on the Company's assessment of the resale value at the time the
property is either accepted as loan collateral or purchased. Improper assessment
of the resale value in the lending or purchasing process can result in the
realization of a lower margin or reduced marketability of the property. Jewelry
sales represent approximately half of the Company's total sales with the
remaining sales consisting primarily of consumer electronics, tools, sporting
goods, and musical instruments. The Company believes its ability to offer
quality used merchandise at prices significantly lower than original retail
prices attracts value-conscious customers. During the three most recent fiscal
years, sources of inventory additions were:
Fiscal Year Ended
September 30,
------------------
2004 2005 2006
---- ---- ----
Forfeited pawn loan collateral 86% 84% 83%
Purchases from customers 14% 16% 16%
Acquired in business acquisitions -- -- 1%
For Fiscal 2004, 2005 and 2006, retail activities and jewelry scrapping (sales
of precious metals and gemstones to refiners and gemstone wholesalers) accounted
for approximately 63%, 58% and 56% of the Company's total revenues, or 40%, 35%
and 34% of the Company's net revenues, after deducting the cost of goods sold.
As a significant portion of the Company's inventory and sales involve gold
jewelry, its results can be heavily influenced by the market price of gold. This
is particularly true for gold scrapping, which comprised 19% of total sales in
Fiscal 2004, 20% in Fiscal 2005 and 24% in Fiscal 2006.
Analysis of the sales and inventory data provided by the Company's management
information systems facilitates the design and development of marketing and
merchandising programs and merchandise
7
pricing decisions. A director of merchandise planning and the Company's regional
and area managers oversee these marketing and merchandising programs, review
merchandise pricing decisions, and balance inventory levels within markets.
The Company allows customers to return or exchange merchandise sold through its
retail operations within seven days of purchase, but has experienced a very low
rate of returns and exchanges as a percentage of sales. Customers may purchase
an item on layaway, whereby a customer will typically pay a minimum layaway
deposit of 20% of an item's sale price. The Company will hold the item for a 60
to 90-day period, during which the customer is required to pay for the item. The
initial deposit and subsequent payments are recorded as customer layaway
deposits. Layaways are recorded as sales when paid in full. As of September 30,
2006, the Company held $1.9 million in customer layaway deposits.
The Company's overall inventory is stated at the lower of cost or market. The
Company provides an inventory valuation allowance for shrinkage and cost in
excess of market value. The Company estimates this valuation allowance through
study and analysis of sales trends, inventory turnover, inventory aging, margins
achieved on recent sales, and shrinkage. The valuation allowance amounted to
$1.5 million, $1.9 million and $2.8 million as of September 30, 2004, 2005 and
2006. At September 30, 2006, total inventory on hand was $35.6 million after
deducting the inventory valuation allowance.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow is greatest in its second fiscal quarter
primarily due to a high level of loan redemptions and sales in the income tax
refund season.
OPERATIONS
A typical Company pawn store employs approximately six full-time equivalent
employees ("FTEs") consisting of a manager, an assistant manager, and four sales
and lending representatives. Each store manager is responsible for ensuring that
the store is run in accordance with the Company's policies, procedures, and
operating guidelines, and reports to an area manager. Area managers are
responsible for the performance of all stores within their area and report to
one of the Company's regional directors, who in turn report to the Vice
President of EZPAWN Operations. Area managers, store managers, and assistant
managers receive incentive compensation based on their area or store's
performance in comparison to an operating budget. This incentive compensation
typically ranges between 5% and 30% of their total compensation. Regional
directors' compensation is also variable depending upon the performance of their
region.
Signature loan stores typically employ two to three FTEs per location,
consisting of a manager and one to two customer service representatives. Each
store manager is responsible for ensuring that the store is run in accordance
with the Company's policies, procedures, and operating guidelines, and reports
to an area manager, who is responsible for the stores within a specific
operating area. Area managers report to one of the EZMONEY regional directors,
who report to the Vice President of EZMONEY Operations. In some areas, area
managers are also assisted by market managers, who manage a single store and
supervise up to four other store managers. Managers receive incentive
compensation based on their performance in comparison to an operating budget.
In its stand-alone EZMONEY stores, store employees attempt to collect defaulted
signature loans in the first 30 days after default. After the initial 30 days,
the Company's centralized collection center assumes collection responsibility.
The collection center also collects defaulted signature loans for all other
8
locations from the date of default. After attempting to collect for
approximately 80 days, the Company then sells remaining defaulted signature
loans to an outside collection agency.
The Company has an internally developed store level point of sale ("POS") system
that automates the recording of store-level pawn transactions. For its signature
loan operations, the Company uses a separate POS specifically designed to handle
signature loans. Financial data from all stores is processed at the corporate
office each day and the preceding day's data are available for management review
via the Company's internal network. The Company's communications network
provides information access between the stores and the corporate office.
The Company's internal audit staff monitors the Company's perpetual inventory
system, lending practices, and regulatory compliance. In addition, they ensure
consistent compliance with the Company's policies and procedures.
As of September 30, 2006, the Company employed approximately 3,100 people. The
Company believes that its success is dependent upon its employees' ability to
provide prompt and courteous customer service and to execute the Company's
operating procedures and standards. The Company seeks to hire people who will
become long-term, career employees. To achieve the Company's long-range
personnel goals, it strives to develop its employees through a combination of
learner-controlled instruction, web-based classes, classroom training, and
supervised on-the-job training for new employees. All store associates complete
competency checks and all new employees complete a learner-controlled
instruction program. Managers attend on-going management skills and operations
performance training. The Company anticipates that store manager candidates will
be promoted from the ranks of existing store employees and hired from outside
the Company. The Company's career development plan develops and advances
employees within the Company and provides training for the efficient integration
of experienced managers and associates from outside the Company.
At October 31, 2006, the Company operated its pawnshops under the name "EZPAWN",
its payday loan stores under the name "EZMONEY Payday Loans" and its credit
service stores under the name "EZMONEY Loan Services". The Company has
registered with the United States Patent and Trademark Office the names EZPAWN,
EZMONEY, EZMONEY Center, and EZCORP, among others. Additionally, the Company
operates under the trade names EZMONEY Payroll Advance, Payroll Advance Express,
and EZCORP Collection Center.
FUTURE EXPANSION
The Company plans to expand the number of locations it operates through the
development of new locations and through acquisitions. The Company believes that
in the near term the largest growth opportunity is with the EZMONEY stores. The
Company plans to open approximately 100 new EZMONEY stores in Fiscal 2007.
The 101 new EZMONEY stores opened in Fiscal 2006 required an average property
and equipment investment of approximately $58,000 each. Although it acquired
three pawnshops in Fiscal 2006, it has not opened a new pawnshop location in the
United States since Fiscal 2000. In November 2006, the Company opened its first
pawnshop in Mexico, and plans to open several more locations in Fiscal 2007.
The Company's ability to add new stores is dependent on several variables, such
as the availability of acceptable sites or acquisition candidates, the
regulatory environment, local zoning ordinances and the availability of
qualified personnel.
COMPETITION
The Company encounters significant competition in connection with its lending
operations. These competitive conditions may adversely affect the Company's
revenues, profitability, and its ability to expand. In its lending business, the
Company competes with other pawnshops, payday lenders, credit service
organizations, and financial institutions, such as consumer finance companies.
Other lenders may lend money on an unsecured basis, at interest rates that may
be lower than the service charges of the Company, and on other terms that may be
more favorable than those offered by the Company. The
9
Company believes that the primary elements of competition are the quality of
customer service and relationship management, store location, and the ability to
loan competitive amounts at competitive rates. In addition, the Company believes
that the ability to compete effectively will be based increasingly on strong
general management, regional market focus, automated management information
systems, and access to capital.
The Company's competitors for merchandise sales include numerous retail and
wholesale stores, including jewelry stores, discount retail stores, consumer
electronics stores, other pawnshops, other retailers of previously owned
merchandise, electronic commerce retailers, and auction sites. Competitive
factors in the Company's retail operations include the ability to provide the
customer with a variety of merchandise at an exceptional value.
The pawnshop industry in the United States is large and highly fragmented. The
industry consists of approximately 12,000 pawnshops owned primarily by
independent operators who own one to three locations, and the Company considers
the industry mature. The Company, with 280 pawn locations, is the second largest
operator of pawnshops in the United States. The three largest pawnshop
operators, including the Company, account for less than ten percent of the total
estimated pawnshops in the United States.
The signature loan industry in the United States is larger and more concentrated
than the pawn industry. The industry consists of approximately 23,000 locations
that are generally mono-line stores that offer only signature loans, and other
businesses offering signature loans in addition to other products and services,
such as check cashing stores and pawnshops. The ten largest signature loan
companies, which include the Company, comprise approximately 40% of the total
number of locations. The signature loan industry remains in a growth stage.
STRATEGIC INVESTMENT
At June 30, 2006, the Company held approximately 28.5% of the outstanding shares
of Albemarle & Bond Holdings plc ("A&B"). At June 30, 2006, A&B operated 75
locations in the United Kingdom that offer pawn loans, payday loans, installment
loans, check cashing, and retail jewelry. For A&B's fiscal year ended June 30,
2006, A&B's turnover (gross revenues) increased 23% to L29.5 million ($52.5
million), and its profit after tax (net income) increased 18% over the prior
year to approximately L4.8 million ($8.5 million). A&B is based in Bristol,
England and publicly trades on the Alternative Investment Market of the London
Stock Exchange. As its largest single shareholder, the Company and its
affiliates hold three seats on A&B's board of directors.
The Company accounts for its investment in A&B under the equity method. In
Fiscal 2006, the Company's interest in A&B's income was $2,433,000 and the
Company received dividends on its investment totaling $969,000. Based on the
closing price and exchange rates on October 31, 2006, the market value of the
Company's investment in A&B was approximately $58.6 million, compared to its
book value of $19.3 million.
10
REGULATION
PAWNSHOP OPERATIONS
The Company's pawnshop operations are subject to extensive regulation,
examination and licensing under various federal, state, and local statutes,
ordinances, and regulations. The laws of Texas, Colorado, Oklahoma, Indiana,
Florida, Alabama, and Nevada govern the majority of the Company's pawnshop
operations. A summary of these states' applicable pawnshop statutes and
regulations are discussed below.
TEXAS REGULATIONS
In Texas, pawnshops are regulated by the Office of the Consumer Credit
Commissioner ("OCCC") in accordance with Chapter 371 of the Texas Finance Code,
commonly known as the Texas Pawnshop Act (the "Pawnshop Act") and Rules of
Operation for Pawnshops (the "Rules"). Pawnshops and pawnshop employees are
licensed by the OCCC.
To be eligible for a license to operate a pawnshop in Texas, an applicant must:
(i) be of good moral character, which in the case of a business entity applies
to each officer, director, and holder of five percent or more of the entity's
outstanding shares; (ii) have net unencumbered assets (as defined in the Texas
Pawnshop Act) of at least $150,000 readily available for use in conducting the
business of each licensed pawnshop; (iii) demonstrate that the applicant has the
financial responsibility, experience, character, and general fitness to command
the confidence of the public in its operation; and (iv) demonstrate that the
pawnshop will be operated lawfully and fairly. Additionally, each pawnshop
employee must qualify for and maintain a separate pawnshop employee license.
For a new license application in any Texas county, the OCCC provides notice of
the application and the opportunity for a public hearing to the other licensed
pawnshops in the county in which the applicant proposes to operate. In counties
with 250,000 or more people, applications for new licenses are approved only at
locations that are not less than two miles from another licensed pawnshop and
applications to relocate a license are approved only for locations that are not
less than one mile from another licensed pawnshop. Any existing store may
relocate within one mile of its present location, regardless of the existence of
other pawnshops. The Company's ability to open new stores or relocate existing
stores may be adversely affected by these licensing provisions.
The Texas Pawnshop Act also contains provisions related to the operation of
pawnshops and authorizes the Rules. The Rules regulate the day-to-day operation
of the Company's pawnshops including the maximum pawn service charge and
principal loan amount.
Pawn service charges vary based on loan amounts. Historically, the maximum
allowable pawn service charge rates have not changed; however, the loan amounts
are adjusted annually based on fluctuations in the Consumer Price Index. A table
of the maximum allowable pawn service charges under the Texas Pawnshop Act for
the various loan amounts is presented in "Lending Activities". Under Texas law,
there is a ceiling on the maximum allowable pawn loan. For July 1, 2005 through
June 30, 2006, the loan ceiling was $13,500. For July 1, 2006 through June 30,
2007, the loan ceiling is $14,000. Texas requires pawn transactions to be
reported to local law enforcement.
Under the Texas Pawnshop Act and the Rules, a pawnbroker may not do any of the
following: (i) accept a pledge from a person under the age of 18 years; (ii)
make any agreement requiring the personal liability of the borrower; (iii)
accept any waiver of any right or protection accorded to a pawn customer; (iv)
fail to exercise reasonable care to protect pledged goods from loss or damage;
(v) fail to return pledged goods to a pawn customer upon payment of the full
amount due; (vi) make any charge for insurance in connection with a pawn
transaction; (vii) enter into any pawn transaction that has a maturity date of
more than one month; (viii) display pistols, swords, canes, blackjacks or
similar weapons for sale in storefront windows or sidewalk display cases; (ix)
purchase used or second hand personal property unless a record is established
containing the name, address, and identification of the seller, a complete
description of the property, including serial number and a signed statement that
the seller has the right to sell the property; or, (x) accept into pawn or
purchase stolen goods.
11
The OCCC may, after notice and hearing, suspend or revoke any license for a
Texas pawnshop or employee upon finding that: (i) any fees or charges have not
been paid; (ii) the licensee has violated (knowingly or unknowingly without due
care) any provisions of the Texas Pawnshop Act or any regulation or order; or
(iii) any fact or condition exists which, if it had existed at the time the
original license application was filed would have justified the OCCC in refusing
the license. The OCCC may also take other administrative action against a
licensee including the assessment of fines and penalties.
COLORADO REGULATIONS
The Colorado Pawnbroker Act is limited in scope and primarily sets forth the
terms and prohibitions of a pawn loan. In Colorado, local municipalities subject
pawnshops to extensive and varied regulation, including licensing and bonding.
Pawn transactions must be reported to local authorities and pawnbrokers must
maintain certain bookkeeping records. Colorado law allows a maximum pawn service
charge of 240% annually for all pawn loans regardless of the amount financed.
OKLAHOMA REGULATIONS
The Oklahoma Pawnshop Act follows a statutory scheme similar to the Texas
Pawnshop Act, requires pawnbrokers to be licensed and bonded, and regulates the
day-to-day operation of Oklahoma pawnshops. The Oklahoma Administrator of
Consumer Credit administers the Oklahoma Pawnshop Act and has broad rule-making
authority. Additionally, the Oklahoma Administrator of Consumer Credit is
responsible for investigating the general fitness of pawnshop applicants. Each
applicant is required to (i) be of good moral character; (ii) have net assets of
at least $25,000; (iii) show that the pawnshop will be operated lawfully and
fairly; and (iv) not have been convicted of any felony that directly relates to
the duties and responsibilities of pawnbrokering. Unlike Texas, Oklahoma
pawnshop employees are not individually licensed.
In general, the Oklahoma Pawnshop Act prescribes loan amounts and maximum rates
of service charges that pawnbrokers may charge. The regulations provide for a
graduated rate structure, similar to the structure used for federal income tax
purposes. Under this rate structure, a $500 loan, for example, earns interest as
follows: (i) the first $150 at 240% annually, (ii) the next $100 at 180%
annually, and (iii) the remaining $250 at 120% annually.
The maximum allowable pawn service charges for the various loan amounts in
Oklahoma are as follows:
Maximum Allowable Annual
Amount Financed Percentage
Per Pawn Loan Rate
----------------- ----------
$1 to $150 240%
$151 to $250 180%
$251 to $500 120%
$501 to $1,000 60%
$1,001 to $25,000 35%
The principal amount of an Oklahoma pawn loan may not exceed $25,000 per
transaction.
FLORIDA REGULATIONS
Florida pawnshops are governed by the Florida Pawnbroking Act and accompanying
regulations. The Division of Consumer Services of the Department of Agriculture
and Consumer Services licenses and regulates pawnshops.
The Florida Pawnbroking Act and regulations require that the pawnshop complete a
Pawnbroker Transaction Form showing the customer name, type of item pawned, the
amount of the pawn loan, and the applicable finance charges. A copy of each form
must be delivered to local law enforcement officials at the end of each business
day.
12
Pawn loans in Florida have a 30-day minimum term. The pawnbroker is entitled to
charge two percent (2%) of the amount financed for each 30-day period as
interest, and an additional amount as pawn service charges, provided the total
amount of such charge, inclusive of interest, does not exceed 25% of the amount
financed for each 30-day period. The pawnbroker may charge a minimum pawn
service charge of $5.00 for each 30-day period. Pawn loans may be extended by
agreement, with the charge being one-thirtieth of the original total pawn
service charge for each day by which the loan is extended. For loans redeemed
greater than 60 days after the date made, pawn service charges continue to
accrue at the daily rate of one-thirtieth of the original total pawn service
charge.
The Pawnbroking Act prohibits pawnbrokers from: (i) falsifying or failing to
make entries in pawn transaction forms; (ii) refusing to allow appropriate law
enforcement officials to inspect their records; (iii) failing to retain records
of pawn transactions for at least two years; (iv) making any agreement requiring
the personal liability of a pawn customer; (v) failing to return pledged goods
upon payment in full of the amount due (unless the pledged goods have been taken
into custody by a court or law enforcement officer or otherwise lost or
damaged); or (vi) engaging in title loan transactions. Pawnbrokers are also
prohibited from entering into pawn transactions with a person who is under the
influence of alcohol or controlled substances, a person who is under the age of
eighteen, or a person using a name other than his own name or the registered
name of his business.
INDIANA REGULATIONS
In Indiana, the Pawnbroking Law governs pawnshops. The Department of Financial
Institutions (the "Department") regulates the Company's Indiana operations. The
Department requires the licensing of all pawnshops and investigates the general
fitness of pawn license applicants to determine whether the convenience and
needs of the public will be served by granting a pawn license. The Department
has broad investigatory and enforcement authority. It may grant, revoke, and
suspend licenses. Pawnshops are required to keep books, accounts, and records to
enable the Department to determine if the pawnshop is complying with the
statute. Each pawnshop is required to give authorized agents of the Department
free access to its books and accounts for these purposes.
The Indiana Pawnbroking Law prescribes loan amounts and maximum interest rates
that pawnbrokers in Indiana may charge for lending money. The regulations
provide for a graduated rate structure similar to the structure used for federal
income tax purposes. Under this rate structure, for July 1, 2006 through June
30, 2008, a $3,500 loan, for example, may earn interest as follows: (i) the
first $1020 at 36% annually, (ii) the next $2,380 at 21% annually, and (iii) the
remaining $100 at 15% annually. In addition to interest, the Company may also
charge a service charge of 240% annually. The maximum combined allowable
interest and service charges for the various loan amounts under the Indiana
statute are as follows:
Maximum Allowable Annual
Amount Financed Percentage
Per Pawn Loan Rate
----------------- ----------
$1 to $1020 276%
$1021 to $3,400 261%
$3,401 and up 255%
The Indiana Pawnbroking Law provides for a grace period of 60 days after the
initial 30-day term of the loan. During the grace period, interest and service
fees continue to accrue and are prorated to the date of loan redemption.
ALABAMA REGULATIONS
The Alabama Pawnshop Act regulates the licensing and operation of Alabama
pawnshops. The Supervisor of the Bureau of Loans of the State Department of
Banking is responsible for licensing and investigating the general fitness of
pawnshop applicants. The Alabama Pawnshop Act requires that certain bookkeeping
records be maintained and made available to the Supervisor and to local law
13
enforcement authorities. The Alabama Pawnshop Act establishes a maximum
allowable pawn service charge of 300% annually.
NEVADA REGULATIONS
In Nevada, all pawn loans must be held for redemption for at least 120 days
after the date the loan is made. A pawnbroker may charge interest at the rate of
10% per month for money loaned on personal property received. In addition, the
pawnbroker may collect an initial set up fee of $5.00. Property received in
pledge may not be removed from the pawnshop until after the receipt of the
property is reported to the sheriff or chief of police, unless redeemed by the
owner.
LOCAL REGULATIONS
At the local level, most of the pawnshops voluntarily or pursuant to state law
or municipal ordinance, provide reports of pawn transactions and purchases from
customers to local law enforcement on a regular basis. These reports are
designed to provide local law enforcement with a detailed description of the
goods involved, including serial numbers, if any, and the names and addresses of
the customers.
A record of each transaction is provided to local law enforcement agencies to
aid in the investigation of property crimes. Goods held to secure pawn loans or
goods purchased which are determined to belong to an individual other than the
pawnshop customer are subject to recovery by the rightful owner. While a risk
exists that pledged or purchased merchandise may be subject to claims of
rightful owners, the Company's claims experience is historically less than 0.5%
of pawn loans made.
There can be no assurance that additional local, state, or federal legislation
will not be enacted or that existing laws and regulations will not be amended
which would materially, adversely impact the Company's operations, financial
condition, and the ability to expand its operations.
FIREARMS REGULATIONS
With respect to firearm sales, each pawnshop must comply with the regulations
issued by the Bureau of Alcohol, Tobacco, and Firearms (the "ATF"). ATF
regulations require each pawnshop dealing in firearms to maintain a federal
firearms license and a permanent written record of all transactions involving
the receipt or disposition of firearms.
The Brady Handgun Violence Prevention Act (the "Brady Act") and the related ATF
rules require all federal firearm licensees, in either selling firearms or
releasing pawned firearms, to have the customer complete appropriate forms and
pass a background check through the National Instant Criminal Background Check
System before the Company may transfer a firearm to any customer.
The Company complies with the Brady Act and the ATF regulations. The Company
does not believe that compliance with the Brady Act and the ATF regulations
materially affects the Company's operations. There can be no assurance, however,
that compliance with the Brady Act and the ATF regulations, or any future
changes or amendments to such regulations will not adversely affect the
Company's operations.
CREDIT SERVICE ORGANIZATION REGULATIONS
In July 2005, the Company registered as a Credit Service Organization ("CSO") in
Texas and began doing business as EZMONEY Loan Services, providing customers fee
based advice, assistance, and services in obtaining loans from unaffiliated
lenders. CSOs in Texas are required to register with the Texas Office of the
Secretary of State pursuant to Chapter 393 of the Texas Finance Code. In order
to provide credit services in Texas, the Company registered each location where
it offers credit services and posted a surety bond in the amount of $10,000 per
location. The Company must renew its CSO registration annually.
As a CSO, Texas law requires each location to provide customers a disclosure
statement describing the services to be provided by the Company, the fees,
explanation of the customer's rights, identification of the surety bond company,
and other specified information. This disclosure must be delivered to the
customer prior to the Company entering into any contract with the customer for
credit services. The Company is also required to enter into a written contract
with each customer fully describing the services,
14
the payment terms, the Company's principal place of business, and agent
authorized to receive service. Customers have three days to cancel a CSO
contract. The CSO statute also prohibits the Company from making false or
misleading representations or statements, receiving compensation solely for
referring a customer to a lender who will or may make the loan on substantially
the same terms, and engaging in fraudulent or deceptive conduct. Violations of
the CSO statute could subject the Company to criminal and civil liability.
In Texas, the Company does business with two unaffiliated lenders. The maximum
loan currently offered by the unaffiliated lenders is $1,500. The lenders are
not required to be licensed and are not regulated by a state agency, provided
the interest rate charged on their loans does not exceed 10% annually. The
lenders are authorized to charge a late fee for loans past due more than 10 days
and an insufficient funds fee; however, the lenders that the Company does
business with do not assess late fees. The insufficient funds fee is $30. If a
customer defaults on a loan, the letter of credit issued by the Company
authorizes the unaffiliated lender to make demand on the Company for payment of
the principal, interest, and insufficient funds fee, if any. The Company is
obligated to pay the lender on any demand made on the letter of credit pursuant
to the terms and conditions set forth in the letter of credit, then may recover
those amounts from the borrower.
The Company also offers credit services in ten EZMONEY stores in Florida under a
credit services statute similar to Texas. The Florida CSO statute, however, does
not require registration or bonds. The Company does business with one lender in
Florida. Like Texas, the Florida lender is not required to be licensed or
regulated provided the interest rate charged on its loans does not exceed
eighteen percent (18%) annually. Currently, the Florida Office of Financial
Regulation is reviewing the Company's and other CSO providers' credit service
operations.
PAYDAY LOAN REGULATIONS
In Colorado, the Company makes payday loans to customers pursuant to state law
and its own underwriting guidelines. Payday loans made by the Company in
Colorado are regulated by the Department of Law, Office of the Attorney General,
Uniform Consumer Credit Code Division (the "UCCC Division"). The Company's
Colorado stores have and are required to maintain a supervised lender's license
issued by the UCCC Division. The UCCC Division maintains regulatory and
supervisory authority over the Company's payday loan activities. The Company is
required to maintain certain records related to its payday loans and include
specific information and disclosures in the loan agreement.
The Colorado maximum payday loan amount is $500, exclusive of the service fee.
Colorado law provides for a graduated service fee of 20% of the first $300 and
7.5% of the amount over $300. The loan term may not exceed 40 days, and
customers have the right to rescind the loan within one business day after the
date the loan was made. By law, the loan cannot be renewed more than once and if
it is renewed prior to the maturity date, the Company must refund a prorated
portion of the service fee.
Payday loans made by the Company in Oklahoma are regulated by the Oklahoma
Department of Consumer Credit (the "ODCC"). The Company's Oklahoma stores making
payday loans are required to maintain a deferred deposit lender license issued
by the ODCC. The ODCC maintains regulatory and supervisory authority over the
Company's payday loan activities. The Company is required to maintain certain
records related to its payday loans and include specific information and
disclosures in the loan agreement.
The Oklahoma maximum loan amount is $500, exclusive of the service fee. Oklahoma
law provides for a service fee of 15% of the first $300 and 10% of the amount
over $300. The loan term may not exceed 45 days, and customers have the right to
rescind the loan within one business day after the date the loan was made. The
loan cannot be renewed. The Company must deliver specific disclosures to the
customer related to the customer's rights and responsibilities in the payday
loan, as well as submit the customer's application and loan status to a state
operated database in order to make certain determinations about outstanding or
prior payday loans.
15
The Company is licensed as a Loan Company by the Wisconsin Department of
Financial Institutions. The Company must provide the state with an annual report
containing certain business information, and must maintain certain records
related to its payday loans. Wisconsin does not specify the maximum loan amount,
rate or duration. The Company typically makes loans up to $1,000 for a period of
7 to 23 days, and charges a 22% service fee in Wisconsin. State law requires
specific notice to a customer's spouse for every loan made and explicit
disclosure of loan terms. The Company does not allow a customer to renew a loan
more than four times.
In Utah, the Company's payday loan activities are regulated and supervised by
the Department of Financial Institutions. The Company must have and maintain a
Check Casher Doing Deferred Presentment Loan license. The Company is required to
maintain certain records related to its payday loans and include specific
information and disclosures in the loan agreement. Utah does not specify the
maximum loan amount, rate or duration. The Company typically makes loans up to
$1,000 for a period of 7 to 23 days, and charges a 20% service fee in Utah.
Customers have the right to rescind a loan within one business day after the
date the loan is made. No loans may be renewed beyond twelve weeks from the
original date the loan was made. Prior to maturity, a customer may make partial
payments of at least $5.00 without incurring additional charges.
MISCELLANEOUS STATE AND FEDERAL LENDING STATUTES
The Company's pawn, CSO and payday loan operations are subject to extensive
state and federal statutes and regulations such as the federal Equal Credit
Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the
Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act and similar state
laws. The Company complies with the requirements of these federal and state
statutes and their regulations with respect to its business operations.
16
ITEM 1A. RISK FACTORS
Important risk factors that could cause results or events to differ from current
expectations are described below. These factors are not intended to be an
all-encompassing list of risks and uncertainties that may affect the operations,
performance, development and results of the Company's business. Readers are
cautioned not to place undue reliance on this discussion, which speaks only as
of the date hereof. The Company undertakes no obligation to release publicly the
results of any revisions to these risk factors which may be made to reflect
events or circumstances after the date hereon, including without limitation,
changes in the Company's business strategy or planned capital expenditures,
store growth plans, or to reflect the occurrence of unanticipated events.
- THE COMPANY'S EARNINGS AND FINANCIAL POSITION ARE AFFECTED BY CHANGES IN
GOLD VALUES AND THE RESULTING IMPACT ON PAWN LENDING AND JEWELRY SALES; A
SIGNIFICANT OR SUDDEN CHANGE IN GOLD VALUES MAY HAVE A MATERIAL IMPACT ON
THE COMPANY'S EARNINGS. Pawn service charge, sales proceeds and the
Company's ability to liquidate excess jewelry inventory at an acceptable
margin are dependent upon gold values. The Company periodically changes its
lending guidelines on jewelry in response to gold values and other market
factors, such as competitor loan values. Gold scrapping revenues were $43.1
million and gross profit from gold scrapping was $14.7 million in Fiscal
2006. The impact on the Company's financial position and results of
operations of a hypothetical change in gold values cannot be reasonably
estimated because the market and competitive response to changes in gold
values is not known; however, changes in gold values would lead to changes
in sales, sales margins, and pawn service charge revenues.
- CHANGES IN LAWS, GOVERNMENTAL RULES OR REGULATIONS APPLICABLE TO THE
SPECIALTY FINANCIAL SERVICES INDUSTRY COULD HAVE A NEGATIVE IMPACT ON THE
COMPANY'S LENDING ACTIVITIES. The Company's lending is subject to extensive
regulation and licensing requirements under various federal, state and
local laws, ordinances and regulations. Recent legislative action has
concentrated on attempts to limit payday loans, including applicable rates,
the ability for customers to renew their loans, and the ability to lend to
military personnel. The passage of new laws and regulations or changes in
existing laws and regulations could have a negative impact on the Company's
lending activities, including its ability to provide credit services in
Texas, where a majority of the Company's signature loans are made.
THE COMPANY'S CSO REVENUES ARE DEPENDENT UPON UNAFFILIATED LENDERS' ABILITY AND
WILLINGNESS TO MAKE LOANS TO THE COMPANY'S CUSTOMERS. The loss of the
relationships with its unaffiliated lenders or a decrease in those lenders'
ability to lend money could significantly decrease the Company's revenues and
earnings.
- ACHIEVEMENT OF THE COMPANY'S GROWTH OBJECTIVES IS DEPENDENT UPON ITS
ABILITY TO OPEN AND ACQUIRE NEW STORES. The Company's expansion program is
subject to numerous factors that cannot be predicted or controlled, such as
identifying acceptable locations or attractive acquisition targets and the
Company's ability to attract, train and retain qualified associates.
- FLUCTUATIONS IN THE COMPANY'S SALES, PAWN LOAN BALANCES, SALES MARGINS,
PAWN REDEMPTION RATES, AND SIGNATURE LOAN DEFAULT AND COLLECTION RATES
COULD HAVE A MATERIAL ADVERSE IMPACT ON THE COMPANY'S OPERATING RESULTS.
The Company regularly experiences fluctuations in these operating metrics.
Changes in any of these factors, as might be caused by changes in the
economic environment or a significant decrease in gold prices, could
materially and adversely affect the Company's profitability and ability to
achieve its planned results.
- CHANGES IN THE COMPANY'S LIQUIDITY AND CAPITAL REQUIREMENTS COULD LIMIT ITS
ABILITY TO ACHIEVE ITS PLANS. The Company requires continued access to
capital; a significant reduction in cash flows from operations or the
availability of credit could materially and adversely affect the Company's
ability to achieve its planned growth and operating results. Similarly, if
actual costs to build new stores significantly exceed planned costs, this
could materially restrict the Company's ability to build new stores or to
operate new stores profitably.
17
- CHANGES IN COMPETITION FROM VARIOUS SOURCES COULD HAVE A MATERIAL ADVERSE
IMPACT ON THE COMPANY'S ABILITY TO ACHIEVE ITS PLANS. The Company
encounters significant competition in connection with its lending and
retail operations from other pawnshops, cash advance companies and other
forms of financial institutions and other retailers, many of which have
significantly greater financial resources than the Company. Significant
increases in these competitive influences could adversely affect the
Company's operations through a decrease in the number or quality of
signature and pawn loans or the Company's ability to liquidate forfeited
collateral at acceptable margins.
- ONE PERSON HOLDS VOTING CONTROL OF THE COMPANY AND CONTROLS THE OUTCOME OF
ALL MATTERS REQUIRING A VOTE OF STOCKHOLDERS, WHICH MAY INFLUENCE THE VALUE
OF OUR PUBLICLY TRADED STOCK. Mr. Phillip E. Cohen controls all of the
Company's Class B Voting Common Stock. He controls the outcome of all
issues requiring a vote of stockholders, including the election of the
Company's directors.
- THE COMPANY FACES OTHER RISKS DISCUSSED UNDER QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK IN ITEM 7A OF THIS FORM 10-K.
18
ITEM 2. PROPERTIES
The typical Company pawnshop is a freestanding building or part of a retail
strip center with contiguous parking. Store interiors are designed to resemble
small retail operations and attractively display merchandise by category.
Distinctive exterior design and attractive in-store signage provide an appealing
atmosphere to customers. The typical pawn store has approximately 1,800 square
feet of retail space and approximately 3,200 square feet dedicated to collateral
storage. An EZMONEY signature loan store is designed to resemble a bank interior
and offers payday loans or credit services to help a customer obtain short-term
signature loans. The typical EZMONEY store is approximately 1,000 to 1,500
square feet and is located in a retail strip center. In some of its pawnshop
locations, the Company operates EZMONEY adjoined stores of approximately 300 to
500 square feet, which have a different entrance, signage, decor, and staffing.
From the customers' perspective, these are viewed as a separate business. The
Company maintains property and general liability insurance for each of its
stores. The Company's stores are open six or seven days a week.
As of October 31, 2006, the Company owned the real estate and building for one
location containing an EZPAWN and an adjoining EZMONEY, leased 279 locations
containing EZPAWNs and 165 adjoining EZMONEYs, and leased 169 EZMONEY locations.
In one additional EZMONEY location, the Company leases the land, but owns the
portable modular building housing the EZMONEY storefront. The Company also owns
the real estate and building for one non-operating location. The Company
generally leases facilities for a term of three to fifteen years with one or
more options to renew. The Company's existing leases expire on dates ranging
between December 14, 2006 and April 30, 2023, with a small number of leases on
month-to-month terms. All leases provide for specified periodic rental payments
at market rates. Most leases require the Company to maintain the property and
pay the cost of insurance and taxes. The Company believes that the termination
of any one of its leases would not have a material adverse effect on the
Company's operations. The Company's strategy generally is to lease rather than
acquire space for its stores unless the Company finds what it believes is a
superior location at an attractive price.
Below is a summary of changes in the number of store locations during Fiscal
2004, 2005 and 2006.
Fiscal Year Ended September 30,
-------------------------------
2004 2005 2006
---- ---- ----
Store count at beginning of fiscal year 284 405 514
New stores opened 121 110 101
Acquired stores -- -- 3
Stores closed or consolidated -- (1) (4)
--- --- ---
Store count at end of fiscal year 405 514 614
=== === ===
Included in the new stores opened in 2004, 2005 and 2006 are 93, 63 and 7
EZMONEY stores adjoining existing pawnshop locations. All other new stores are
separate EZMONEY locations. The Company also acquired three pawn stores during
Fiscal 2006.
On an ongoing basis, the Company may close or consolidate under-performing store
locations. In Fiscal 2005, the Company closed one EZMONEY store. In Fiscal 2006,
the Company closed one EZMONEY store and one EZPAWN store, and consolidated two
existing EZPAWN stores into two newly acquired stores.
19
The following table presents the number of locations serving each metropolitan
area or region (as defined by the Company) as of October 31, 2006:
EZPAWN EZMONEY
Stores in Stores in
Region/Area Each Area Each Area
----------- --------- ---------
Texas:
Houston 60 84
Dallas / Ft. Worth 17 60
San Antonio 21 26
West and Southwest 19 16
Valley 20 8
Austin Area 7 21
Central 10 7
Panhandle 9 6
Corpus Christi 8 6
Laredo Area 11 2
--- ---
Total Texas 182 236
Colorado:
Denver Area 17 33
Colorado Springs Area 7 10
Other Areas -- 2
--- ---
Total Colorado 24 45
Oklahoma:
Tulsa Area 10 3
Oklahoma City Area 9 3
Other Areas 1 --
--- ---
Total Oklahoma 20 6
Florida:
Tampa 9 6
Orlando 8 2
Other Areas 1 2
--- ---
Total Florida 18 10
Wisconsin:
Madison -- 5
Milwaukee -- 5
Central -- 5
Other Areas -- 6
--- ---
Total Wisconsin -- 21
Utah:
Salt Lake City -- 11
Provo -- 5
Other Areas -- 1
--- ---
Total Utah -- 17
20
EZPAWN EZMONEY
Stores in Stores in
Region/Area Each Area Each Area
----------- --------- ---------
Indiana:
Indianapolis 15 --
--- ---
Total Indiana 15 --
Alabama:
Birmingham Area 5 --
Other Areas 2 1
--- ---
Total Alabama 7 1
Nevada:
Las Vegas 4 --
--- ---
Total Nevada 4 --
Tennessee:
Memphis 3 --
--- ---
Total Tennessee 3 --
Louisiana:
New Orleans Area 2 --
Other Areas 1 --
--- ---
Total Louisiana 3 --
Mississippi:
Jackson 2 --
Other Areas 1 --
--- ---
Total Mississippi 3 --
Arkansas:
West Helena 1 --
--- ---
Total Arkansas 1 --
--- ---
Total Company 280 336
=== ===
In addition to its store locations, the Company leases its 27,400 square foot
corporate office and 8,100 square foot facility for its jewelry processing
center and payday loan collections center located in Austin, Texas.
21
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation and regulatory actions.
Currently, the Company is a defendant in several actions. While the ultimate
outcome of these actions cannot be determined, after consultation with counsel,
the Company believes the resolution of these actions will not have a material
adverse effect on the Company's financial condition, results of operations, or
liquidity. There can be no assurance, however, as to the ultimate outcome of
these actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 2006, the sole owner of the Company's Class B Voting Common Stock
signed a unanimous written consent approving the Board of Directors' proposed
three-for-one common stock split and the related amendment to the Company's
Certificate of Incorporation increasing the Company's authorized common shares.
The amendment increased the authorized Class A Non-voting Common Stock to fifty
million shares, and the authorized Class B Voting Common Stock to three million
shares.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 27, 1991, the Company's Class A Non-voting Common Stock ("Class A
Common Stock") has traded on The NASDAQ Stock Market under the symbol EZPW. As
of October 31, 2006, there were 111 stockholders of record of the Company's
Class A Common Stock. There is no trading market for the Company's Class B
Voting Common Stock ("Class B Common Stock"), which was held by one stockholder
as of October 31, 2006.
On November 3, 2006, the Board of Directors declared a three-for-one stock split
of the Company's two classes of common stock to shareholders of record as of
November 27, 2006, to be distributed on December 11, 2006. All share and price
per share amounts have been adjusted retroactively to reflect the effect of this
stock split throughout this annual report on Form 10-K.
The high and low per share closing price for the Company's Class A Common Stock
for the past two fiscal years, as reported by The NASDAQ Stock Market, were as
follows:
High Low
------ ------
Fiscal 2005:
First quarter ended December 31, 2004 $ 5.14 $ 2.49
Second quarter ended March 31, 2005 7.23 4.22
Third quarter ended June 30, 2005 5.38 3.12
Fourth quarter ended September 30, 2005 6.38 3.62
Fiscal 2006:
First quarter ended December 31, 2005 $ 5.63 $ 4.62
Second quarter ended March 31, 2006 9.84 5.24
Third quarter ended June 30, 2006 13.11 9.29
Fourth quarter ended September 30, 2006 14.52 11.66
On October 31, 2006, the Company's Class A Common Stock closed at $15.06 per
share.
During the past three fiscal years, no dividends have been declared or paid.
Under the terms of the Company's amended and restated credit agreement, which
matures October 1, 2009, payment of dividends is allowed but restricted. Should
dividends be paid in the future, the Company's certificate of incorporation
provides that cash dividends on common stock, when declared, must be declared
and paid at the same per share amounts on the Class A Common Stock and the Class
B Common Stock.
Any interested party may request a copy of this Annual Report on Form 10-K or of
the Company's Code of Conduct and Ethics free of charge by submitting a written
request to EZCORP, Inc., Investor Relations, 1901 Capital Parkway, Austin, Texas
78746. The Code of Conduct and Ethics also may be obtained from the Company's
website at www.ezcorp.com.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction with,
and is qualified in its entirety by reference to, the financial statements of
the Company and accompanying notes included elsewhere in this Form 10-K:
SELECTED FINANCIAL DATA
Fiscal Years Ended September 30,
----------------------------------------------------
2002 2003 2004 2005 2006
-------- -------- -------- -------- --------
(Amounts in thousands, except per share
and store figures)
(a)
Operating Data:
Sales $131,046 $134,591 $143,472 $148,410 $177,424
Pawn service charges 56,676 58,175 59,090 62,274 65,325
Payday loan service charges 8,251 12,538 23,874 28,954 5,389
Credit service fees -- -- -- 13,246 66,451
Other 925 1,045 1,361 1,275 1,263
-------- -------- -------- -------- --------
Total revenues 196,898 206,349 227,797 254,159 315,852
Cost of goods sold 84,936 86,100 88,202 90,678 106,873
-------- -------- -------- -------- --------
Net revenues 111,962 120,249 139,595 163,481 208,979
Store operating expenses 74,325 80,688 86,862 95,876 111,110
Payday loan bad debt and other direct transaction expenses 3,940 4,685 9,103 7,808 2,525
Credit service bad debt and other direct transaction expenses -- -- -- 6,395 16,000
Corporate administrative expenses 15,619 17,008 21,845 23,067 27,749
Depreciation and amortization 10,087 8,775 7,512 8,104 8,610
Interest expense (income), net 4,770 2,006 1,528 1,275 (79)
Equity in net income of unconsolidated affiliate (604) (1,412) (1,739) (2,173) (2,433)
(Gain) loss on sale of assets 327 170 3 79 (7)
Impairment of investment -- 1,100 -- -- --
-------- -------- -------- -------- --------
Income before income taxes and cumulative effect of adopting a new
accounting principle 3,498 7,229 14,481 23,050 45,504
Income tax expense (benefit) 1,294 (1,170) 5,358 8,298 16,245
-------- -------- -------- -------- --------
Income before cumulative effect of adopting a new accounting principle 2,204 8,399 9,123 14,752 29,259
Cumulative effect of adopting a new accounting principle, net of tax -- (8,037) -- -- --
-------- -------- -------- -------- --------
Net income $ 2,204 $ 362 $ 9,123 $ 14,752 $ 29,259
======== ======== ======== ======== ========
Earnings per common share, diluted (b) $ 0.06 $ 0.01 $ 0.23 $ 0.36 $ 0.69
Cash dividends per common share $ -- $ -- $ -- $ -- $ --
Weighted average common shares and share equivalents, diluted (b) 36,876 37,656 39,366 40,722 42,264
Stores operated at end of period 280 284 405 514 614
(a) Beginning in Fiscal 2003, the Company adopted Statement of Financial
Accounting Standards No. 142, which ceased amortization of certain
indefinite lived intangible assets. Amortization expense and equity in net
income of affiliate before Fiscal 2003 are stated on the historical
accounting method, and are not directly comparable to Fiscal 2003 through
Fiscal 2006 amounts.
(b) On November 3, 2006, the Board of Directors declared a three-for-one stock
split of the Company's two classes of common stock to shareholders of
record as of November 27, 2006, to be distributed on December 11, 2006. All
share and price per share amounts have been adjusted retroactively to
reflect the effect of this stock split.
24
SELECTED FINANCIAL DATA (CONTINUED)
September 30,
----------------------------------------------------
2002 2003 2004 2005 2006
-------- -------- -------- -------- --------
(in thousands)
BALANCE SHEET DATA:
Pawn loans $ 49,248 $ 47,955 $ 49,078 $ 52,864 $ 50,304
Payday loans 2,326 3,630 7,292 1,634 2,443
Inventory 32,097 29,755 30,636 30,293 35,616
Working capital 86,425 90,885 93,062 92,954 117,539
Total assets 165,970 153,690 164,322 165,448 197,858
Long-term debt 42,245 31,000 25,000 7,000 --
Stockholders' equity 104,544 105,478 116,729 133,543 170,140
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis compares the results of operations for the 12-month
periods ended September 30, 2004, 2005 and 2006 ("Fiscal 2004", "Fiscal 2005"
and "Fiscal 2006"). The discussion should be read in conjunction with, and is
qualified in its entirety by the accompanying consolidated financial statements
and related notes.
On November 3, 2006, the Board of Directors declared a three-for-one stock split
of the Company's two classes of common stock to shareholders of record as of
November 27, 2006, to be distributed on December 11, 2006. All share and price
per share amounts have been adjusted retroactively to reflect the effect of this
stock split throughout this annual report on Form 10-K.
SUMMARY FINANCIAL DATA
Fiscal Years Ended September 30,
--------------------------------
2004 2005 2006
-------- -------- ---------
(Dollars in thousands, except
as indicated)
NET REVENUES:
Sales $143,472 $148,410 $177,424
Pawn service charges 59,090 62,274 65,325
Payday loan service charges 23,874 28,954 5,389
Credit service fees -- 13,246 66,451
Other 1,361 1,275 1,263
-------- -------- --------
Total revenues 227,797 254,159 315,852
Cost of goods sold 88,202 90,678 106,873
-------- -------- --------
Net revenues $139,595 $163,481 $208,979
======== ======== ========
NET INCOME $ 9,123 $ 14,752 $ 29,259
======== ======== ========
OTHER DATA:
Gross margin on sales 38.5% 38.9% 39.8%
Average annual inventory turnover 2.8x 3.0x 3.2x
Average inventory per pawn location at year end $ 109 $ 108 $ 127
Average pawn loan balance per pawn location at year end $ 175 $ 189 $ 180
Average pawn loan at year end (whole dollars) $ 70 $ 76 $ 86
Average yield on pawn loan portfolio 126% 133% 139%
Pawn loan redemption rate 76% 77% 76%
Signature loan bad debt as a percent of signature loan
revenues (a) 34% 31% 25%
(a) Signature loans include payday loans (included in the Company's balance
sheet) and loans coordinated through the Company's credit services
(excluded from the Company's balance sheet).
26
SUMMARY FINANCIAL DATA (CONTINUED)
Fiscal Years Ended September 30,
--------------------------------
2004 2005 2006
---- ---- ----
EXPENSES AND INCOME AS A PERCENTAGE OF NET REVENUE (%):
Store operating 62.2 58.6 53.2
Payday loan bad debt & other direct expenses 6.5 4.8 1.2
Credit service bad debt & other direct expenses -- 3.9 7.7
Administrative 15.6 14.1 13.3
Depreciation and amortization 5.4 5.0 4.1
Interest, net 1.1 0.8 0.0
Income before income taxes 10.4 14.1 21.8
Net income 6.5 9.0 14.0
STORES IN OPERATION:
Beginning of year 284 405 514
New openings 121 110 101
Acquired -- -- 3
Sold, combined, or closed -- (1) (4)
---- ---- ----
End of year 405 514 614
==== ==== ====
Average number of locations during the year 337 462 545
COMPOSITION OF ENDING STORES:
EZPAWN locations 280 280 280
EZMONEY signature loan locations adjoining EZPAWNs 95 158 165
EZMONEY signature loan locations - free standing 30 76 169
---- ---- ----
Total stores in operation 405 514 614
==== ==== ====
EZPAWN locations offering signature loans 162 98 82
Total locations offering signature loans 287 332 416
27
EFFECT OF ADOPTING A NEW ACCOUNTING PRINCIPLE FOR SHARE-BASED COMPENSATION
Prior to October 1, 2005, the Company accounted for its share-based employee
compensation plans under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations ("APB 25"), as permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-based
Compensation." For periods prior to October 1, 2005, share-based employee
compensation cost was recognized in the Statement of Operations for only
restricted stock grants and options granted at prices below market price on the
date of grant. Effective October 1, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), "Share-based Payment," using the
modified prospective transition method, as more fully described in Note I of the
financial statements included in this report. In accordance with the modified
prospective transition provisions, results for prior periods have not been
restated. The Company's net income includes the following compensation costs
related to our share-based compensation arrangements:
Years Ended September 30,
-------------------------
2004 2005 2006
----- ----- ------
(in thousands)
Gross compensation costs
Stock options $ -- $ -- $1,321
Restricted stock 538 588 76
----- ----- ------
Total gross compensation costs 538 588 1,397
Income tax benefits
Stock options -- -- (154)
Restricted stock (188) (206) (26)
----- ----- ------
Total income tax benefits (188) (206) (180)
----- ----- ------
Net compensation expense $ 350 $ 382 $1,217
===== ===== ======
At September 30, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $2.3 million.
The weighted average period over which these costs will be amortized is 2 years.
GENERAL
The Company is primarily a lender or provider of credit services to individuals
who do not have cash resources or access to credit to meet their short-term cash
needs. In 280 EZPAWN locations open September 30, 2006, the Company offers
non-recourse loans collateralized by tangible personal property, commonly known
as pawn loans. At these locations, the Company also sells merchandise, primarily
collateral forfeited from its pawn lending operations, to consumers looking for
good value. In 334 EZMONEY stores and 82 EZPAWN locations open September 30,
2006, the Company offers short-term non-collateralized loans, often called
payday loans, or fee based credit services to customers seeking loans
(collectively, "signature loans").
The income earned on pawn lending is pawn service charge revenue. While
allowable service charges vary by state and loan size, a majority of the
Company's loans are in amounts that permit pawn service charges of 20% per
month, or 240% annually. The Company's average pawn loan amount typically ranges
between $80 and $85 but varies depending on the valuation of each item pawned.
The total loan term, consisting of the primary term and grace period, ranges
between 60 and 120 days.
The Company began reducing the total loan term on pawn loans from 90 days to 60
days in 67 of its pawn locations in August 2005 and another 148 in November
2005. Forty-three locations had previously made the change. The Company believes
this change reduced its pawn portfolio approximately 15% for
28
the loans in these stores that were between 60 and 90 days old, with very little
or no impact on earned pawn service charge revenues. This change also created a
one-time doubling of forfeitures as loans made 90 and 60 days earlier
simultaneously forfeited for a 30-day period, resulting in a higher level of
inventory available for sale (beginning inventory plus forfeitures and
purchases). In the 67 stores converted in August 2005, the Company experienced
this doubling of forfeitures as loans matured in the first quarter of Fiscal
2006. In the 148 stores converted in November 2005, the Company experienced this
doubling of forfeitures as loans matured during the second quarter of Fiscal
2006. As a result, inventory available for sale increased over the prior year
period 11% and 16% for the December and March quarters.
In its pawnshops, the Company acquires inventory for its retail sales through
pawn loan forfeitures and, to a lesser extent, through purchases of customers'
merchandise. The realization of gross profit on sales of inventory depends
primarily on the Company's assessment of the resale value at the time the
property is either accepted as loan collateral or purchased. Improper assessment
of the resale value in the lending or purchasing process can result in the
realization of a lower margin or reduced marketability of the property.
On July 15, 2005, the EZMONEY stores located in Texas ceased marketing payday
loans and began providing fee-based credit services to consumers in obtaining
loans from unaffiliated lenders. At September 30, 2006, 245 of the Company's 334
EZMONEY stores and 51 of its 280 pawn stores offered credit services. The
Company does not participate in the loans made by the lenders, but typically
earns a fee of 20% of the loan amount for assisting the customer in obtaining
credit and by enhancing the borrower's creditworthiness through the issuance of
a letter of credit. The average loan obtained by the Company's credit service
customers is approximately $470 and the term is generally less than 30 days,
averaging about 17 days.
The Company earns payday loan service charge revenue on its payday loans. In 120
of its locations, the Company makes payday loans subject to state law. The
average payday loan amount is approximately $385 and the term is generally less
than 30 days, averaging about 21 days. The Company typically charges a fee of
$15 to $22 per $100 loaned for a 7 to 27-day period. Through December 2005, the
Company also marketed and serviced payday loans made by County Bank of Rehoboth
Beach ("County Bank"), a federally insured Delaware bank in some of its
locations. After origination of the loans, the Company could purchase a 90%
participation in the loans made by County Bank and marketed by the Company. As
of December 31, 2005, County Bank discontinued its payday loan program. Most of
the locations previously marketing County Bank loans now provide credit services
to consumers in obtaining loans from unaffiliated lenders.
In Fiscal 2006, the Company's net income improved to $29.3 million compared to
$14.8 million in Fiscal 2005. Contributing to the earnings growth was an
improvement in the gross profit on sales, the significant growth in the
Company's signature loan business, and the improvement in its pawn loan yield.
Partially offsetting these factors was the incremental operating costs at the
101 new EZMONEY stores, a full year of expenses at the 110 EZMONEY stores opened
in Fiscal 2005, and an increase in administrative expenses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, inventory,
allowance for losses on signature loans, long-lived and intangible assets,
income taxes, contingencies and litigation. Management bases its estimates on
historical experience, observable trends and various other assumptions that are
believed to be reasonable under the circumstances. Management uses this
information to make judgments about the carrying values of
29
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from the estimates under different assumptions or conditions.
Management believes the following critical accounting policies and estimates
could have a significant impact on its results of operations. Readers should
refer to Note A of the Company's consolidated financial statements for a more
complete review of the Company's other accounting policies and estimates used in
the preparation of its consolidated financial statements.
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of uncollectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans in its ending portfolio. Unexpected variations in any of these factors
could change the Company's estimate of collectible loans, affecting the
Company's earnings and financial condition. In Fiscal 2006, 101.9% ($66.6
million) of recorded pawn service charge revenue was collected in cash, offset
by 1.9% ($1.3 million) from a decrease in accrued pawn service charges
receivable. The decrease in ending accrued pawn service charges receivable was
due primarily to the shorter loan term offered in 215 pawn stores, as discussed
above.
PAYDAY LOAN REVENUE RECOGNITION: Payday loans and related service charges
reported in the Company's consolidated financial statements reflect only the
Company's participation interest in these loans. The Company accrues service
charges on the percentage of loans the Company deems to be collectible using the
interest method. Accrued service charges related to defaulted loans are deducted
from service charge revenue upon loan default and increase service charge
revenue upon subsequent collection. In Fiscal 2006, 97.1% ($5.2 million) of
recorded payday loan service charge revenue was collected in cash, and 2.9%
($0.2 million) resulted from an increase in accrued payday loan service charges
receivable.
PAYDAY LOAN BAD DEBT: The Company considers a loan defaulted if the loan has not
been repaid or renewed by the maturity date. Although defaulted loans may be
collected later, the Company charges the loan principal to bad debt upon
default, leaving only active loans in the reported balance. Subsequent
collections of principal are recorded as a reduction of bad debt at the time of
collection. The Company's payday loan bad debt, included in payday loan bad debt
and direct transaction expenses, was $6.6 million and $2.2 million in Fiscal
2005 and Fiscal 2006, representing 23% and 41% of payday loan service charges.
Excluding the benefit of a $0.9 million sale of older bad debt in December 2004,
bad debt for Fiscal 2005 was $7.5 million, or 26.0% of service charges in Fiscal
2005.
PAYDAY LOAN ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses on active payday loans and related service charges receivable, based on
recent loan default experience and expected seasonal variations. The accuracy of
the Company's allowance estimate is dependent upon several factors, including
its ability to predict future default rates based on historical trends and
expected future events. Actual loan losses could vary from those estimated due
to variance in any of these factors. Changes in the principal valuation
allowance are charged to bad debt expense in the Company's statement of
operations. Changes in the service charge receivable valuation allowance are
charged to payday loan service charge revenue. Increased defaults and credit
losses may occur during a national or regional economic downturn, or could occur
for other reasons, resulting in the need to increase the allowance. The Company
believes it effectively manages these risks through its underwriting criteria
and closely monitoring the performance of the portfolio. At September 30, 2006,
the allowance for losses on payday loans was $0.2 million, representing 42% of
payday loan fees receivable.
CREDIT SERVICE REVENUE RECOGNITION: The Company earns credit service fees when
it assists customers in obtaining a loan from unaffiliated lenders. The Company
accrues credit service fees on the percentage of fees the Company expects to
collect. Accrued fees related to defaulted loans are deducted from credit
service fee revenue upon loan default and increase credit service fee revenue
upon subsequent collection. In Fiscal 2006, 98.6% ($65.5 million) of recorded
credit service fee revenue was collected in cash, and 1.4% ($0.9 million)
resulted from an increase in accrued credit service fees receivable.
30
CREDIT SERVICE BAD DEBT: As part of its credit services, the Company issues a
letter of credit to enhance the creditworthiness of the Company's customers
seeking loans from unaffiliated lenders. The letter of credit assures the
lenders that if the borrower defaults on the loan, the Company will pay the
lender the principal and accrued interest owed it by the borrower, plus any
insufficient funds fee, all of which the Company records as bad debt and then
attempts to collect from the borrower. Upon demand, the Company pays all amounts
due under the related letter of credit if the loan has not been repaid or
renewed by the maturity date. Although amounts paid under letters of credit may
be collected later, the Company charges those amounts to bad debt upon default.
Subsequent recoveries under the letters of credit are recorded as a reduction of
bad debt at the time of collection. The Company's credit service bad debt,
included in credit service bad debt and direct transaction expenses, was $6.4
million and $15.7 million in Fiscal 2005 and Fiscal 2006, representing 48% and
24% of credit service fee revenues.
CREDIT SERVICE ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses it expects to incur under letters of credit for loans that are active at
period-end but have not yet matured. Its allowance is based on recent loan
default experience and expected seasonal variations, and includes all amounts it
expects to pay to the unaffiliated lenders upon loan default, including loan
principal, accrued interest, and insufficient funds fees, net of the amounts it
expects to subsequently collect from borrowers ("Expected LOC Losses"). Changes
in the valuation allowance are charged to credit service bad debt expense in the
Company's statement of operations. At September 30, 2006, the allowance for
Expected LOC Losses was $0.9 million, or 22% of gross credit service fees
receivable.
Based on the same expected loss and collection percentages, the Company also
provides an allowance for its credit service fees it expects not to collect and
charges changes in the credit service fee receivable valuation allowance to
credit service fee revenue. At September 30, 2006, this reserve amounted to $0.2
million, or 5% of gross credit service fees receivable.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete, or slow-moving inventory. The allowance is based on the type and age
of merchandise as well as recent sales trends and margins. At September 30,
2006, the valuation allowance deducted from the carrying value of inventory was
$2.8 million, or 7.3% of gross inventory. Changes in the inventory valuation
allowance are recorded as cost of goods sold. The accuracy of the Company's
inventory allowance is dependent on its ability to predict future events based
on historical trends. Unexpected variations in sales margins, inventory
turnover, or other factors, including fluctuations in gold values could increase
or decrease the Company's inventory allowance.
INCOME TAXES: As part of the process of preparing the consolidated financial
statements, the Company estimates income taxes in each jurisdiction in which it
operates. This process involves estimating the actual current tax liability
together with assessing temporary differences in recognition of income for tax
and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included in the Company's consolidated balance sheet.
Management must then assess the likelihood the deferred tax assets will be
recovered from future taxable income. At September 30, 2006, the Company
determined it was unlikely to utilize a capital loss carry-forward scheduled to
expire in 2009, and recorded a $0.4 million full valuation allowance against the
related deferred tax asset. This was charged to the income tax provision in
Fiscal 2006. In the event the Company were to determine that it would not be
able to realize all or part of its remaining net deferred tax assets in the
future, an increase to the valuation allowance would be charged to the income
tax provision in the period such determination was made. Likewise, should the
Company determine that it will be able to realize its deferred tax assets in the
future in excess of its net recorded amount, a decrease to the valuation
allowance would increase income in the period such determination was made. The
Company evaluates the realizability of its deferred tax assets quarterly by
assessing the need for a valuation allowance, if any. At September 30, 2006, the
Company's valuation allowance was $0.4 million. The Company had no deferred tax
asset valuation allowance at September 30, 2005.
31
SHARE-BASED COMPENSATION: Prior to October 1, 2005, the Company accounted for
its share-based employee compensation plans under the recognition and
measurement provisions of APB 25, as permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation." For periods prior to October 1, 2005, share-based
employee compensation cost was recognized in the Statement of Operations only
for restricted stock grants and options granted at prices below market price on
the date of grant. Effective October 1, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), as described in Note I, "Common
Stock, Warrants, Options, and Share-based Compensation."
Certain prior year balances have been reclassified to conform to the Fiscal 2006
presentation.
RESULTS OF OPERATIONS
FISCAL 2006 COMPARED TO FISCAL 2005
The Company's Fiscal 2006 pawn service charge revenue increased 4.9%, or $3.1
million from Fiscal 2005 to $65.3 million. The growth was due to an improvement
in loan yields to 139% from 133% in Fiscal 2005, and a 0.4% higher average
outstanding pawn loan balance in Fiscal 2006. During the last eighteen months,
the Company raised its loan values on gold jewelry in response to an increase in
gold market values and similar changes by its competitors. This contributed
approximately $2.2 million to the increase in pawn service charges in Fiscal
2006. Although the average pawn loan balance was higher, the ending pawn loan
balance was 4.8% lower than at September 30, 2005. The lower ending pawn
portfolio and accrued pawn service charges receivable resulted largely from the
Fiscal 2006 conversion of 215 pawn stores from offering 90-day loan terms to
offering 60-day loan terms, as discussed above.
Fiscal 2006 sales increased $29.0 million from Fiscal 2005 to $177.4 million.
The increase was due to a $14.7 million increase in same store merchandise sales
and a $13.6 million increase in jewelry scrapping, driven by an increase in gold
prices and in the amount of gold scrapped. The increase in merchandise sales is
largely due to 18% higher levels of inventory available for sale (beginning
inventory plus loan forfeitures and purchases) during Fiscal 2006 compared to
Fiscal 2005. As described above, 215 stores shortened their pawn loan term from
90 days to 60 days in Fiscal 2006. This created a one-time doubling of pawn loan
forfeitures for a thirty-day period in the affected stores. This doubling of
loan forfeitures and a higher average pawn loan balance produced the higher
levels of inventory available for sale. Below is a summary of Fiscal 2005 and
2006 sales and margins:
Fiscal Year Ended September 30,
-------------------------------
2005 2006
------ ------
(Dollars in millions)
Merchandise sales $119.0 $134.3
Jewelry scrapping sales 29.4 43.1
------ ------
Total sales 148.4 177.4
Gross profit on merchandise sales $ 50.3 $ 55.9
Gross profit on jewelry scrapping sales 7.5 14.7
Gross margin on merchandise sales 42.3% 41.6%
Gross margin on jewelry scrapping sales 25.3% 34.1%
Overall gross margin 38.9% 39.8%
Fiscal 2006 overall gross margins on sales improved 0.9 of a percentage point
from Fiscal 2005 to 39.8%. This resulted primarily from an 8.8 percentage point
improvement in margins on jewelry scrapping sales, offset by a 0.7 percentage
point decrease in margins on merchandise sales. Included in the Fiscal 2006 cost
of goods sold is a $1.0 million increase in the inventory valuation allowance,
compared to a $0.3 million increase in Fiscal 2005. Absent this change, gross
margins on merchandise sales decreased 0.2 of a percentage point from Fiscal
2005 to 42.1%. Inventory shrinkage, included in
32
cost of goods sold, improved to 1.3% of merchandise sales in Fiscal 2006
compared to 1.5% in Fiscal 2005.
In Fiscal 2006, the Company raised its retail prices on gold jewelry in response
to higher gold values. The Company also increased the amount paid to purchase
jewelry from customers and loaned on jewelry, increasing the cost of these
items. The net effect increased gross profit on merchandise sales approximately
$0.9 million and jewelry scrapping sales approximately $8.0 million. The
increase in gross profit from jewelry scrapping sales was further improved by
scrapping 9% more volume in Fiscal 2006 compared to Fiscal 2005, partially
offset by other increases in the cost of scrapped gold. Future fluctuations in
gold prices would have an immediate and direct impact on the proceeds of
scrapped jewelry. In response to these fluctuations, the Company may adjust the
amount it lends on jewelry, as it did in Fiscal 2006, which would ultimately
impact the cost of inventory sold and sales margins.
Signature loan data (combined payday loan and credit service activities) are as
follows:
Fiscal Year Ended September 30,
-------------------------------
2005 2006
-------- --------
(Dollars in millions)
Service charge revenue $ 42.2 $ 71.8
Bad debt:
Net defaults, including interest on brokered loans (12.6) (17.1)
Change in valuation allowance (1.1) 0.5
Sale of older bad debt (c) 1.0 --
Other related costs, net of insufficient funds fees collected (0.3) (1.3)
------- --------
Net bad debt (13.0) (17.9)
Direct transaction expenses (1.2) (0.6)
Operating expenses at EZMONEY stores (15.6) (27.0)
Depreciation and amortization at EZMONEY stores (0.6) (1.3)
Collection and call center costs (included in administrative expense) (1.5) (1.5)
------- --------
Contribution to operating income $ 10.3 $ 23.5
======= ========
Average signature loan balance outstanding during year (a) $ 10.1 $ $16.4
Signature loan balance at end of year (a) $ 15.9 20.7
Participating locations at end of year, including call center (whole
numbers) 333 416
Signature loan bad debt, as a percent of service charge revenue 31% 25%
Signature loan bad debt, excluding sale of older bad debt, as a
percent of service charge revenue (c) 33% 25%
Direct transaction expenses, as a percent of service charge revenue 3% 1%
Net default rate (a) (b) 5.0% 4.7%
Net default rate, excluding sale of older bad debt (a) (b) (c) 5.4% 4.7%
(a) Signature loan balances include payday loans (net of valuation allowance)
recorded on the Company's balance sheet and the principal portion of active
brokered loans outstanding from independent lenders, the balance of which
is not included on the Company's balance sheet.
(b) Principal defaults net of collections, as a percentage of signature loans
made and renewed.
(c) Older bad debts were originated between fiscal 2001 and fiscal 2004.
Signature loan service charge revenue increased 70% from Fiscal 2005 primarily
due to higher average loan balances at existing stores and the addition of new
EZMONEY stores. Signature loan bad debt has improved eight percentage points to
25% of related service charges, compared to Fiscal 2005 excluding the sale of
older bad debt. In December 2004, the Company sold its older bad debt
(originated between fiscal 2001 and fiscal 2004) to an outside agency for net
proceeds of approximately $0.9 million. Including the benefit of this sale,
signature loan bad debt was 31% of related revenues in Fiscal 2005. Generally on
a weekly basis, the Company now sells bad debt as it ages beyond 80 days, except
33
defaulted loans on current payment plans. The Company believes that, in today's
market, selling this debt is more efficient than other alternatives.
As a percent of related service charges, the Company's bad debt on CSO
activities improved to 24% of related service charges in Fiscal 2006 compared to
48% in Fiscal 2005. To transition customers from County Bank loans to credit
services in the last quarter of Fiscal 2005, the Company relaxed its
underwriting criteria during the transitional period. In doing so, the Company
enjoyed a significant increase in credit services volume, but did experience an
increase in the losses on its letters of credit obligations as compared to its
bad debt on payday loans. The Fiscal 2006 improvement was a result of subsequent
modifications the Company made to its underwriting for the credit services.
Payday loan bad debt increased from 23% of related fees in Fiscal 2005 to 41% in
Fiscal 2006. Excluding the benefit of the $0.9 million sale of older bad debt in
December 2004, bad debt for Fiscal 2005 was 26% of services charges in Fiscal
2005. Many of the stores that converted to offering credit services in July 2005
had lower bad debt in relation to their fees than those that did not convert,
increasing the bad debt ratio for the remaining stores offering payday loans.
The Company's Fiscal 2006 payday loan growth was also primarily in states with
lower fees than the average store offering payday loans in Fiscal 2005, which
increased bad debt measured as a percent of fees.
Signature loan direct transaction expenses improved to 1% of related revenues,
from 3% in Fiscal 2005. The higher transaction expenses in Fiscal 2005 related
primarily to loans offered by County Bank, which the Company no longer markets.
The Company provides a valuation allowance for expected losses on signature
loans and the related fees receivable. Due to the short-term nature of these
loans, the Company uses recent net default rates and anticipated seasonal
changes in the default rate as the basis for its valuation allowance. At
September 30, 2006, the valuation allowance was 28% of signature loan gross fees
receivable, (5.0% of signature loan principal and fees receivable), compared to
51% of signature loan fees receivable (9.4% of the outstanding signature loan
principal and fees receivable) at September 30, 2005.
Operations expense improved to 53.2% of net revenues ($111.1 million) in Fiscal
2006 from 58.6% of net revenue ($95.9 million) in Fiscal 2005. Of the total
dollar increase of $15.2 million, $11.4 million related to the growth in EZMONEY
stores. These increases were comprised mostly of additional labor, rent, and
other increases from new stores. Included in the Fiscal 2005 amount is a
one-time cost of $0.6 million related directly to the conversion of stores from
offering payday loans to offering credit services. Pawn operating expenses also
increased approximately $3.8 million, primarily from labor.
Administrative expenses in Fiscal 2006 were $27.7 million compared to $23.1
million in Fiscal 2005, a decrease of 0.8 of a percentage point to 13.3% when
measured as a percent of net revenue. The dollar increase was due primarily to a
$2.0 million increase in administrative labor and benefits and a $1.4 million
increase in stock compensation recognized as a result of adopting SFAS No.
123(R), as described above. Effective October 2, 2006, the Company granted a
total of 1,757,250 restricted shares, vesting over the next ten years, to its
Chairman, Chief Executive Officer, and other employees. Related to this grant,
the Company expects to recognize administrative expense of $1.9 million in the
year ending September 30, 2007.
Depreciation and amortization expense was $8.6 million in Fiscal 2006, compared
to $8.1 million in Fiscal 2005. Depreciation on assets placed in service,
primarily related to new EZMONEY stores, exceeded the reduction from assets that
became fully depreciated or were retired in the period.
The Company had net interest income of $0.1 million in Fiscal 2006, compared to
net interest expense of $1.3 million in Fiscal 2005. The Company had an average
outstanding debt balance of $1.6 million and an average cash balance of $17.5
million in Fiscal 2006, compared to an average debt balance of $17.0 million and
an average cash balance of $2.9 million in the prior year period. The Company's
earnings on its invested cash balance in Fiscal 2006 more than offset the
interest and line of credit commitment fees
34
paid in the period. The liquidity changes were funded primarily by cash flow
from operations after funding all investment activity.
The Fiscal 2006 income tax expense was $16.2 million, or 35.7% of pre-tax
income, compared to $8.3 million, or 36% of pre-tax income in Fiscal 2005. The
decrease in the Fiscal 2006 effective tax rate is primarily due to a $0.7
million reduction in accrued state income taxes following a legislative change.
Partially offsetting this was a $0.3 million tax increase related to
non-deductible stock compensation and a $0.4 million valuation allowance placed
on a capital loss carry-forward.
Operating income for Fiscal 2006 improved $20.8 million over Fiscal 2005 to
$43.0 million. The $12.8 million improvement in gross profit on sales, $13.2
million increased contribution from signature loans, and $3.1 million increase
in pawn service charges account for most of the improvement. These improvements
were partially offset by the $4.7 million increase in administrative expenses
and $3.8 million increase in pawn operating expenses.
After a $1.4 million improvement in net interest and other smaller items, income
before income taxes grew to $45.5 million from $23.1 million in Fiscal 2005.
After income taxes, net income improved from $14.8 million in Fiscal 2005 to
$29.3 million in Fiscal 2006.
FISCAL 2005 COMPARED TO FISCAL 2004
The Company's Fiscal 2005 pawn service charge revenue increased 5.4%, or $3.2
million from Fiscal 2004 to $62.3 million. The growth was due to an improvement
in loan yields to 133% from 126% in Fiscal 2004. Slightly offsetting this was a
0.3% lower average outstanding pawn loan balance in Fiscal 2005.
Fiscal 2005 sales increased $4.9 million from Fiscal 2004 to $148.4 million. The
increase was due to a $2.8 million increase in jewelry scrapping and a $2.1
million increase in same store merchandise sales. Below is a summary of Fiscal
2004 and 2005 sales and margins:
Fiscal Year Ended September 30,
-------------------------------
2004 2005
------ ------
(Dollars in millions)
Merchandise sales $116.8 $119.0
Jewelry scrapping sales 26.7 29.4
------ ------
Total sales 143.5 148.4
Gross profit on merchandise sales $ 49.1 $ 50.3
Gross profit on jewelry scrapping sales 6.1 7.5
Gross margin on merchandise sales 42.1% 42.3%
Gross margin on jewelry scrapping sales 23.0% 25.3%
Overall gross margin 38.5% 38.9%
Fiscal 2005 overall gross margins on sales increased 0.4 of a percentage point
from Fiscal 2004 to 38.9%. Margins on merchandise sales increased 0.2 of a
percentage point as a result of less discounting and lower loan values on
forfeited collateral. Jewelry scrapping margins improved 2.3 percentage points
due largely to gold prices rising at a faster rate than the Company's increases
in gold loan and purchase values. Inventory shrinkage, included in cost of goods
sold, was 1.5% of merchandise sales in Fiscal 2005 compared to 1.7% in Fiscal
2004.
At September 30, 2005, the Company offered signature loans in 332 locations and
a call center, an increase from September 30, 2004, when the Company offered
signature loans in 287 locations and a call center. Prior to July 15, 2005, the
Company's signature loans consisted of only payday loans. Beginning July 15,
2005, most of its locations offering payday loans ceased marketing payday loans
and began providing fee-based credit services to consumers in obtaining loans
from an unaffiliated lender.
35
The Company opened 121 EZMONEY signature loan stores in Fiscal 2004, and another
110 in Fiscal 2005. One EZMONEY location was closed in Fiscal 2005. Signature
loan data (combined payday loan and credit service activities) are as follows
for Fiscal 2004 and 2005:
Fiscal Year Ended September 30,
-------------------------------
2004 2005
------- --------
(Dollars in millions)
Service charge revenue $ 23.9 $ 42.2
Bad debt:
Net defaults, including interest on brokered loans (8.0) (12.6)
Change in valuation allowance (0.3) (1.1)
Sale of older bad debt (c) -- 1.0
Other related costs, net of insufficient funds fees collected 0.2 (0.3)
------- --------
Net bad debt (8.1) (13.0)
Direct transaction expenses (1.0) (1.2)
Operating expenses at EZMONEY stores (4.3) (15.6)
Depreciation and amortization at EZMONEY stores (0.2) (0.6)
Collection and call center costs (included in administrative expense) (0.8) (1.5)
------- --------
Contribution to operating income $ 9.5 $ 10.3
======= ========
Average signature loan balance outstanding during year (a) $ 5.6 $ 10.1
Signature loan balance at end of year (a) $ 7.3 $ 15.9
Participating locations at end of year, including call center (whole numbers) 288 333
Signature loan bad debt, as a percent of service charge revenue 34% 31%
Signature loan bad debt, excluding sale of older bad debt, as a percent of
service charge revenue (c) 34% 33%
Direct transaction expenses, as a percent of service charge revenue 4% 3%
Net default rate (a) (b) 5.9% 5.0%
Net default rate, excluding sale of older bad debt (a) (b) (c) 5.9% 5.4%
(a) Signature loan balances include payday loans (net of valuation allowance)
recorded on the Company's balance sheet and the principal portion of active
brokered loans outstanding from independent lenders, the balance of which
is not included on the Company's balance sheet.
(b) Principal defaults net of collections, as a percentage of signature loans
made and renewed.
(c) Older bad debts were originated between fiscal 2001 and fiscal 2004.
Signature loan service charge revenue increased from Fiscal 2004 primarily due
to higher average loan balances at existing stores and the addition of new
EZMONEY stores. Although signature loan bad debt improved three percentage
points as a percent of related service charges, it increased $4.9 million in
Fiscal 2005 due to the increased volume of signature loans. As a percent of
related service charges, the Company's bad debt on payday loans decreased from
34% in Fiscal 2004 to 23% in Fiscal 2005, but bad debt on CSO activities was 48%
of related service charges. To transition customers from County Bank loans to
credit services, the Company relaxed its underwriting criteria during the
transitional period. In doing so, the Company enjoyed a significant increase in
credit services volume, but did experience an increase in the losses on its
letter of credit obligations as compared to its bad debt on payday loans.
The Company provides a valuation allowance on payday loan principal and fees
receivable. Due to the short-term nature of these loans, the Company used recent
net default rates and anticipated seasonal changes in the default rate as the
basis for its valuation allowance. At September 30, 2005, the valuation
allowance was 55% of gross payday loan fees receivable, or 7.8% of gross payday
loan principal and fees receivable.
36
Store operating expenses increased to $95.9 million in Fiscal 2005 from $86.9
million in Fiscal 2004. The increase was due to $11.3 million additional
operating expenses at new EZMONEY stores opened in Fiscal 2005 or stores opened
during Fiscal 2004 with a full year of expenses in Fiscal 2005. Included in this
amount is a one-time cost of $0.6 million related directly to the conversion of
stores from offering payday loans to offering credit services. Offsetting this
was a $2.3 million reduction in same store pawn operating expenses. Although
operating expenses increased in dollars, it represents a 3.6 percentage point
decrease when measured as a percent of net revenue.
Administrative expenses were $23.1 million (14.1% of net revenue) in Fiscal 2005
compared to $21.8 million (15.6% of net revenue) in Fiscal 2004. The $1.3
million increase is due primarily to a $1.9 million increase in labor and
benefits, a $0.8 million increase in legal and professional fees, and a $0.3
million increase in travel expenses, offset by a $1.1 million reduction in
restricted stock grants and related taxes. Also offsetting the increase was the
absence of a $0.7 million impairment of a note receivable from a former Chief
Executive Officer of the Company, as was seen in Fiscal 2004.
Depreciation and amortization expense increased $0.6 million in Fiscal 2005 to
$8.1 million, primarily due to the net effect of assets placed in service versus
assets that became fully depreciated during the year. Of the total, $0.4 million
related to new stores and $0.2 million related to same stores.
In Fiscal 2005, interest expense decreased to $1.3 million from $1.5 million in
Fiscal 2004. The improvement resulted primarily from lower average debt balances
outstanding during the year. At September 30, 2005, the Company's total debt was
$7.0 million compared to $25.0 million at September 30, 2004. Decreases in the
debt balance were funded by cash flow from operations after funding all
investment activity.
The Fiscal 2005 income tax expense was $8.3 million, or 36% of pre-tax income,
compared to $5.4 million, or 37% of pre-tax income in Fiscal 2004. The decrease
in the Fiscal 2005 effective tax rate is primarily due to non-deductible
executive compensation in Fiscal 2004 that did not recur in Fiscal 2005.
Operating income for Fiscal 2005 improved $8.0 million over Fiscal 2004 to $22.2
million. The $3.2 million increase in same store pawn service charges, $2.5
million improvement in gross profit on sales, $2.3 million reduction in same
store pawn operating expenses, and $0.8 million increased contribution from
signature loans account for most of the improvement. These improvements were
partially offset by the $1.3 million increase in administrative expenses.
After a $0.3 million improvement in interest expense, the $0.4 million increased
equity in Albemarle & Bond's earnings, and other smaller items, income before
income taxes grew to $23.1 million from $14.5 million in Fiscal 2004. After
income taxes, net income improved from $9.1 million in Fiscal 2004 to $14.8
million in Fiscal 2005.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 2006, the Company's $43.2 million cash flow from operations consisted
of (i) net income plus several non-cash items, aggregating to $42.7 million, and
(ii) $0.5 million of changes in operating assets and liabilities, primarily
accounts payable and accrued expenses. In Fiscal 2005, the Company's $31.7
million cash flow from operations consisted of (i) net income plus several
non-cash items, aggregating to $28.1 million, and (ii) $3.6 million of changes
in operating assets and liabilities, primarily accounts payable and accrued
expenses. The primary differences between cash flow from operations for Fiscal
2005 and Fiscal 2006 are an increase in signature loan fees collected, gross
profit on sales of inventory, and pawn service charges collected.
In Fiscal 2006, the Company invested $11.1 million in property and equipment,
$3.0 million in funding payday loans net of repayments, $2.2 million to acquire
three stores, and $0.7 million in funding pawn loans, net of repayments and
recoveries through the sale of forfeited collateral. These changes, a $7.0
million reduction in debt, and a $25.8 million increase in cash on hand were
funded by the cash flow from
37
operations discussed above, the $5.4 million proceeds from the exercise of
employee stock options and related excess tax benefit, and $1.0 million of
dividends from Albemarle & Bond Holding, plc.
Below is a summary of the Company's cash needs to meet its future aggregate
contractual obligations in the full fiscal years ending September 30 (in
thousands):
Payments due by Period
--------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
----------------------- -------- --------- --------- --------- ---------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Interest on long-term debt obligations 337 137 200 -- --
Capital lease obligations -- -- -- -- --
Operating lease obligations 113,552 16,784 29,102 22,839 44,827
Purchase obligations -- -- -- -- --
Other long-term liabilities -- -- -- -- --
-------- ------- ------- ------- -------
Total $113,889 $16,921 $29,302 $22,839 $44,827
======== ======= ======= ======= =======
In addition to the contractual obligations in the table above, the Company is
obligated by letters of credit issued to unaffiliated lenders as part of its
credit service operations. At September 30, 2006, the Company's maximum exposure
for losses on letters of credit, if all brokered loans defaulted and none was
collected, was $19.4 million. This amount includes principal, interest, and
insufficient funds fees.
During the fiscal year ending September 30, 2007, the Company plans to open
approximately 100 new EZMONEY stores for an expected capital expenditure of
approximately $6 million, plus the funding of working capital and start-up
losses at these stores. The Company believes that these new stores will create a
drag on earnings in their first six to nine months of operations before turning
profitable.
The Company had no debt outstanding at September 30, 2006. Effective October 13,
2006, the Company amended and restated its credit agreement. The amendment
extended the maturity date to October 1, 2009, reduced applicable interest rates
and commitment fees, and provided for a $40.0 million revolving credit facility
secured by the Company's assets. Under the terms of the amended agreement, the
Company had the ability to borrow $40 million at September 30, 2006. Terms of
the agreement require, among other things, that the Company meet certain
financial covenants. Payment of dividends and additional debt are allowed but
restricted. The interest amount shown in the table above reflects the commitment
fee the Company anticipates paying through maturity of the credit agreement,
assuming it remains debt-free.
The Company anticipates that cash flow from operations, cash on hand, and
availability under its revolving credit facility will be adequate to fund its
contractual obligations, planned store growth, capital expenditures, and working
capital requirements during the coming year.
SEASONALITY
Historically, service charge revenues are highest in the Company's first fiscal
quarter (October through December) due to improving loan redemption rates
coupled with a higher average loan balance following the summer lending season.
Sales generally are highest in the Company's first and second fiscal quarters
(October through March) due to the holiday season and the impact of tax refunds.
Sales volume can be heavily influenced by the timing of decisions to scrap
excess jewelry inventory, which generally occurs during low jewelry sales
periods (May through October). The net effect of these factors is that net
revenues and net income typically are highest in the first and second fiscal
quarters. The Company's cash flow is greatest in its second fiscal quarter
primarily due to a high level of loan redemptions and sales in the income tax
refund season.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE
RESULTS
38
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K, including Management's Discussion and Analysis
of Financial Condition and Results of Operations, includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
Company intends that all forward-looking statements be subject to the safe
harbors created by these laws. All statements other than statements of
historical information provided herein are forward-looking and may contain
information about financial results, economic conditions, trends, and known
uncertainties. All forward-looking statements are based on current expectations
regarding important risk factors. Many of 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. Actual results could differ materially from those expressed in the
forward-looking statements, and readers should not regard those statements 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 in Item 1A, "Risk
Factors," of this Annual Report on Form 10-K. These factors are not intended to
be an all-encompassing list of risks and uncertainties that may affect the
operations, performance, development and result of the Company's business.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to release publicly the results of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereon, including without limitation, changes in the Company's
business strategy or planned capital expenditures, store growth plans, or to
reflect the occurrence of unanticipated events.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
The following discussion about the Company's market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. The Company is exposed to market
risk related to changes in foreign currency exchange rates and gold values. The
Company also is exposed to regulatory risk in relation to its credit services
and payday loans. The Company does not use derivative financial instruments.
The Company's earnings and financial position may be affected by changes in gold
values and the resulting impact on pawn lending and jewelry sales. The proceeds
of scrap sales and the Company's ability to liquidate excess jewelry inventory
at an acceptable margin are dependent upon gold values. The impact on the
Company's financial position and results of operations of a hypothetical change
in gold values cannot be reasonably estimated. For further discussion, readers
should see "Risk Factors" in Part I, Item 1A of this annual report on Form 10-K.
The Company's earnings and financial position are affected by foreign exchange
rate fluctuations related to its equity investment in A&B. A&B's functional
currency is the U.K. pound. The U.K. pound exchange rate can directly and
indirectly impact the Company's results of operations and financial position in
several ways. For example, a devalued pound could result in an economic
recession in the U.K., which in turn could impact A&B's and the Company's
results of operations and financial position. The impact on the Company's
results of operations and financial position of a hypothetical change in the
exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably
estimated due to the interrelationship of operating results and exchange rates.
The translation adjustment representing the strengthening in the U.K. pound
during the year ended June 30, 2006 (included in the Company's September 30,
2006 results on a three-month lag as described above) was approximately a
$463,000 increase, net of tax effect, to shareholders' equity. On September 30,
2006, the U.K. pound strengthened to 1.00 to 1.8726 U.S. dollars from 1.8163 at
June 30, 2006. No assurance can be given as to the future valuation of the U.K.
pound and how further movements in the pound could affect future earnings or the
financial position of the Company.
39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 41
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 2005 and 2006 42
Consolidated Statements of Operations for each of the Three Fiscal
Years Ended September 30, 2006 43
Consolidated Statements of Cash Flows for each of the Three Fiscal
Years Ended September 30, 2006 44
Consolidated Statements of Stockholders' Equity for each of the Three
Fiscal Years Ended September 30, 2006 45
Notes to Consolidated Financial Statements 46
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
EZCORP, Inc.
Austin, Texas
We have audited the accompanying consolidated balance sheets of EZCORP, Inc. and
subsidiaries as of September 30, 2006 and 2005 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2006. Our audits also include the
financial statement schedule listed in the index at Item 15(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EZCORP, Inc. at
September 30, 2006 and 2005, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
As more fully described in Note I to the consolidated financial statements,
effective October 1, 2005, the Company adopted the provisions of SFAS No.
123(R), "Share-Based Payment."
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of EZCORP, Inc.'s
internal control over financial reporting as of September 30, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated November 3, 2006 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Dallas, Texas
November 3, 2006 (except for Note R,
which is as of December 11, 2006)
41
EZCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
-------------------
2005 2006
-------- --------
(In thousands)
Assets:
Current assets:
Cash and cash equivalents $ 4,168 $ 29,939
Pawn loans 52,864 50,304
Payday loans, net 1,634 2,443
Pawn service charges receivable, net 9,492 8,234
Payday loan service charges receivable, net 272 426
Credit service fees receivable, net 3,007 3,954
Inventory, net 30,293 35,616
Deferred tax asset 10,534 7,150
Federal income tax receivable -- 35
Prepaid expenses and other assets 1,998 3,907
-------- --------
Total current assets 114,262 142,008
Investment in unconsolidated affiliate 17,348 19,275
Property and equipment, net 26,964 29,447
Deferred tax asset, non-current 4,012 3,749
Other assets, net 2,862 3,379
-------- --------
Total assets $165,448 $197,858
======== ========
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable and other accrued expenses $ 18,988 $ 22,579
Customer layaway deposits 1,672 1,890
Federal income taxes payable 648 --
-------- --------
Total current liabilities 21,308 24,469
Long-term debt 7,000 --
Deferred gains and other long-term liabilities 3,597 3,249
-------- --------
Total long-term liabilities 10,597 3,249
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $.01 per share; Authorized
5,000,000 shares; none issued and outstanding -- --
Class A Non-voting Common Stock, par value $.01 per share;
Authorized 50,000,000 shares; 35,635,374 issued and
35,608,275 outstanding in 2005; 37,542,240 issued and
37,515,141 outstanding in 2006 351 375
Class B Voting Common Stock, convertible, par value $.01 per
share; Authorized 3,000,000 shares; Issued and
Outstanding 2,970,171 30 30
Additional paid-in capital 117,965 124,572
Retained earnings 14,714 43,973
Deferred compensation expense (244) --
-------- --------
132,816 168,950
Treasury stock, at cost (27,099 shares) (35) (35)
Accumulated other comprehensive income 762 1,225
-------- --------
Total stockholders' equity 133,543 170,140
-------- --------
Total liabilities and stockholders' equity $165,448 $197,858
======== ========
See accompanying notes to consolidated financial statements.
42
EZCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30,
------------------------------
2004 2005 2006
-------- -------- --------
(In thousands, except per
share amounts)
Revenues:
Sales $143,472 $148,410 $177,424
Pawn service charges 59,090 62,274 65,325
Payday loan service charges 23,874 28,954 5,389
Credit service fees -- 13,246 66,451
Other 1,361 1,275 1,263
-------- -------- --------
Total revenues 227,797 254,159 315,852
Cost of goods sold 88,202 90,678 106,873
-------- -------- --------
Net revenues 139,595 163,481 208,979
Operating expenses:
Operations 86,862 95,876 111,110
Payday loan bad debt and direct transaction expenses 9,103 7,808 2,525
Credit service bad debt and direct transaction expenses -- 6,395 16,000
Administrative 21,845 23,067 27,749
Depreciation 7,435 8,036 8,543
Amortization 77 68 67
-------- -------- --------
Total operating expenses 125,322 141,250 165,994
-------- -------- --------
Operating income 14,273 22,231 42,985
Interest expense 1,567 1,520 441
Interest income (39) (245) (520)
Equity in net income of unconsolidated affiliate (1,739) (2,173) (2,433)
(Gain) loss on sale / disposal of assets 3 79 (7)
-------- -------- --------
Income before income taxes 14,481 23,050 45,504
Income tax expense 5,358 8,298 16,245
-------- -------- --------
Net income $ 9,123 $ 14,752 $ 29,259
======== ======== ========
Net income per common share:
Basic $ 0.25 $ 0.40 $ 0.74
======== ======== ========
Diluted $ 0.23 $ 0.36 $ 0.69
======== ======== ========
Weighted average shares outstanding:
Basic 36,768 37,302 39,432
Diluted 39,366 40,722 42,264
See accompanying notes to consolidated financial statements.
43
EZCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30,
---------------------------------
2004 2005 2006
--------- --------- ---------
(In thousands)
Operating Activities:
Net income $ 9,123 $ 14,752 $ 29,259
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,512 8,104 8,610
Payday loan loss provision 8,225 6,627 2,221
Deferred taxes (2,103) 111 3,724
Net (gain) loss on sale or disposal of assets 3 79 (7)
Impairment of receivable from stockholder 729 -- --
Share-based compensation 538 588 1,397
Income from investment in unconsolidated affiliate (1,739) (2,173) (2,433)
Changes in operating assets and liabilities, net of business
acquisitions:
Service charges and fees receivable, net (428) (2,618) 213
Inventory, net 83 193 (772)
Note receivable from related party -- 1,500 --
Prepaid expenses, other current assets, and other assets, net (545) 1,625 (1,675)
Accounts payable and accrued expenses 3,964 4,107 3,524
Customer layaway deposits (147) 27 174
Deferred gains and other long-term liabilities (361) (361) (348)
Federal income taxes 2,371 (837) (649)
--------- --------- ---------
Net cash provided by operating activities 27,225 31,724 43,238
Investing Activities:
Pawn loans made (170,019) (172,991) (191,826)
Pawn loans repaid 92,457 93,315 101,610
Recovery of pawn loan principal through sale of forfeited collateral 75,475 76,040 89,556
Payday loans made (52,501) (59,466) (24,368)
Payday loans repaid 40,614 58,497 21,338
Additions to property and equipment (7,963) (9,227) (11,052)
Acquisitions, net of cash acquired -- -- (2,194)
Dividends from unconsolidated affiliate 680 861 969
Proceeds from sale of assets -- -- 66
--------- --------- ---------
Net cash used in investing activities (21,257) (12,971) (15,901)
Financing Activities:
Proceeds from exercise of stock options and warrants 450 909 4,350
Excess tax benefit from stock-based compensation -- -- 1,084
Debt issuance costs (408) -- --
Net payments on bank borrowings (6,000) (18,000) (7,000)
--------- --------- ---------
Net cash used in financing activities (5,958) (17,091) (1,566)
--------- --------- ---------
Change in cash and equivalents 10 1,662 25,771
Cash and equivalents at beginning of period 2,496 2,506 4,168
--------- --------- ---------
Cash and equivalents at end of period $ 2,506 $ 4,168 $ 29,939
========= ========= =========
Cash paid during the period for:
Interest $ 1,746 $ 943 $ 380
Income taxes $ 5,286 $ 9,244 $ 12,163
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory $ 76,439 $ 75,890 $ 93,184
Issuance of common stock to 401(k) plan $ 69 $ 72 $ 45
Foreign currency translation adjustment $ (342) $ 65 $ (463)
See accompanying notes to consolidated financial statements.
44
EZCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Retained Accumulated
------------- Additional Earnings Deferred Receivable Other
Par Paid In (Accumulated Compensation Treasury From Comprehensive
Shares Value Capital Deficit) Expense Stock Stockholder Income (Loss) Total
------ ----- ---------- ------------ ------------ -------- ----------- ------------- --------
(In thousands)
Balances at Sept. 30, 2003 36,591 $366 $115,336 $(9,161) $(784) $(35) $(729) $ 485 $105,478
Issuance of Common
Stock to 401(k) plan 27 -- 69 -- -- -- -- -- 69
Issuance of restricted
shares to employee -- -- 586 -- (48) -- -- -- 538
Stock options exercised 495 4 446 -- -- -- -- -- 450
Receivable from
stockholder written
off -- -- -- -- -- -- 729 -- 729
Foreign currency
translation adjustment -- -- -- -- -- -- -- 342 342
Net income -- -- -- 9,123 -- -- -- -- 9,123
--------
Total comprehensive
income -- -- -- -- -- -- -- -- 9,465
------ ---- -------- ------- ----- ---- ----- ------ --------
Balances at Sept. 30, 2004 37,113 370 116,437 (38) (832) (35) -- 827 116,729
Issuance of Common
Stock to 401(k) plan 12 -- 72 -- -- -- -- -- 72
Amortization of deferred
compensation -- -- -- -- 588 -- -- -- 588
Vesting of restricted
stock 375 -- -- -- -- -- -- -- --
Stock options exercised 1,104 11 898 -- -- -- -- -- 909
Tax benefit from exercise
of stock options -- -- 558 -- -- -- -- -- 558
Foreign currency
translation adjustment -- -- -- -- -- -- -- (65) (65)
Net income -- -- -- 14,752 -- -- -- -- 14,752
--------
Total comprehensive
income -- -- -- -- -- -- -- -- 14,687
------ ---- -------- ------- ----- ---- ----- ------ --------
Balances at Sept. 30, 2005 38,604 381 117,965 14,714 (244) (35) -- 762 133,543
Issuance of Common Stock
to 401(k) plan 3 -- 45 -- -- -- -- -- 45
Amortization of deferred
compensation -- -- -- -- 75 -- -- -- 75
Reclass upon adoption of
SFAS No. 123(R) -- -- (169) -- 169 -- -- -- --
Stock compensation 60 1 1,320 -- -- -- -- -- 1,321
Stock options exercised 1,845 23 4,327 -- -- -- -- -- 4,350
Excess tax benefit from
exercise of stock
options -- -- 1,084 -- -- -- -- -- 1,084
Foreign currency
translation adjustment -- -- -- -- -- -- -- 463 463
Net income -- -- -- 29,259 -- -- -- -- 29,259
--------
Total comprehensive
income -- -- -- -- -- -- -- -- 29,722
------ ---- -------- ------- ----- ---- ----- ------ --------
Balances at Sept. 30, 2006 40,512 $405 $124,572 $43,973 $ -- $(35) $ -- $1,225 $170,140
====== ==== ======== ======= ===== ==== ===== ====== ========
See accompanying notes to consolidated financial statements.
45
EZCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION: EZCORP, Inc. (the "Company") is a lender or provider of credit
services to individuals who do not have cash resources or access to credit to
meet their short-term cash needs. In 280 EZPAWN locations open on September 30,
2006, the Company offers non-recourse loans collateralized by tangible personal
property, commonly known as pawn loans. At these locations, the Company also
sells merchandise, primarily collateral forfeited from its pawn lending
operations, to consumers looking for good value. In 334 EZMONEY stores and 82
EZPAWN locations open on September 30, 2006, the Company offers short-term
non-collateralized loans, often called payday loans, or fee-based credit
services to customers seeking loans (collectively, "signature loans"). The
Company commenced its fee based credit services July 15, 2005.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated in consolidation. The Company
accounts for its 28.5% interest in Albemarle & Bond Holdings, plc ("A&B") using
the equity method.
STOCK SPLIT: On November 3, 2006, the Board of Directors declared a
three-for-one stock split of the Company's two classes of common stock to
shareholders of record as of November 27, 2006, to be distributed on December
11, 2006. Shares outstanding and amounts per share in this report have been
adjusted retroactively to reflect this split as it occurred prior to issuance of
these consolidated financial statements.
PAWN LOAN REVENUE RECOGNITION: Pawn service charges are recorded using the
interest method for all pawn loans the Company deems to be collectible. The
Company bases its estimate of collectible loans on several factors, including
recent redemption rates, historical trends in redemption rates, and the amount
of loans due in the following three months. Unexpected variations in any of
these factors could change the Company's estimate of collectible loans,
affecting the Company's earnings and financial condition. If the pawn loan is
not repaid, the forfeited collateral (inventory) is valued at the lower of cost
(pawn loan principal) or market (net realizable value) of the property. Sales
revenue and the related cost are recorded when this inventory is sold.
PAYDAY LOAN REVENUE RECOGNITION: The Company accrues service charges on the
percentage of loans it deems to be collectible using the interest method.
Accrued service charges related to defaulted loans are deducted from service
charge revenue upon loan default, and increase service charge revenue upon
subsequent collection.
PAYDAY LOAN BAD DEBT AND DIRECT TRANSACTION EXPENSES: The Company considers a
loan defaulted if the loan has not been repaid or renewed by the maturity date.
Although defaulted loans may be collected later, the Company charges the loan
principal to bad debt upon default, leaving only active loans in the reported
balance. Subsequent collections of principal are recorded as a reduction of bad
debt at the time of collection. The Company's payday loan bad debt, included in
payday loan bad debt and direct transaction expenses, was $8.0 million, $6.6
million and $2.2 million, representing 34%, 23% and 41% of payday loan service
charges for the years ended September 30, 2004, 2005 and 2006, ("Fiscal 2004,"
"Fiscal 2005" and "Fiscal 2006"). Excluding the benefit of a $0.9 million sale
of older bad debt in December 2004, bad debt for Fiscal 2005 was $7.5 million,
or 26.0% of service charges. The Company includes direct transaction expenses in
this financial statement line item. These include Tele-Track charges, electronic
debit fees, and other bank fees amounting to 4.3%, 4.1% and 5.6% of service
charges in Fiscal 2004, 2005 and 2006.
PAYDAY LOAN ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses on active payday loans and related service charges receivable, based on
recent loan default experience and expected seasonal variations. Changes in the
principal valuation allowance are charged to bad debt
46
expense in the Company's statement of operations. Changes in the service charge
receivable valuation allowance are charged to payday loan service charge
revenue. At September 30, 2004, 2005 and 2006, the allowance for losses on
payday loans was $0.6 million, $0.2 million and $0.2 million, representing 37%,
55% and 42% of gross payday loan fees receivable.
CREDIT SERVICE REVENUE RECOGNITION: The Company earns credit service fees when
it assists customers in obtaining a loan from unaffiliated lenders. The Company
accrues credit service fees on the percentage of fees the Company expects to
collect. Accrued fees related to defaulted loans are deducted from credit
service fee revenue upon loan default and increase credit service fee revenue
upon subsequent collection.
CREDIT SERVICE BAD DEBT AND DIRECT TRANSACTION EXPENSES: As part of its credit
services, the Company issues a letter of credit to enhance the creditworthiness
of the Company's customers seeking loans from an unaffiliated lender. The letter
of credit assures the lender that if the borrower defaults on the loan, the
Company will pay the lender the principal and accrued interest owed it by the
borrower, plus any insufficient funds fee, all of which the Company records as
bad debt and then attempts to collect from the borrower. Upon demand, the
Company pays all amounts due under the related letter of credit if the loan has
not been repaid or renewed by the maturity date. Although amounts paid under
letters of credit may be collected later, the Company charges those amounts to
bad debt upon default. Subsequent recoveries under the letters of credit are
recorded as a reduction of bad debt at the time of collection. The Company's
credit service bad debt, included in credit service bad debt and direct
transaction expenses, was $6.4 million and $15.7 million in Fiscal 2005 and
2006, representing 48% and 24% of credit service fee revenues. The Company did
not offer credit services in Fiscal 2004. The Company includes direct
transaction expenses in this financial statement line item. These include
Tele-Track charges, electronic debit fees, and other bank fees amounting to 0.1%
and 0.5% of credit service fee revenue for Fiscal 2005 and 2006.
CREDIT SERVICE ALLOWANCE FOR LOSSES: The Company also provides an allowance for
losses it expects to incur under letters of credit for loans that are active at
period-end but have not yet matured. Its allowance is based on recent loan
default experience and expected seasonal variations, and includes all amounts it
expects to pay to the unaffiliated lenders upon loan default, including loan
principal, accrued interest, and insufficient funds fees, net of the amounts it
expects to subsequently collect from borrowers ("Expected LOC Losses"). Changes
in the valuation allowance are charged to credit service bad debt expense in the
Company's statement of operations. At September 30, 2005 and 2006, the allowance
for Expected LOC Losses was $1.4 million and $0.9 million, representing 46% and
23% of credit service fees receivable. The Company's maximum exposure for losses
on letters of credit, if all loans defaulted and none was collected, was $19.4
million at September 30, 2006. This amount includes principal, interest, and
insufficient funds fees. Based on the expected loss and collection percentages,
the Company also provides an allowance for the credit service fees it expects
not to collect, and charges changes in the credit service fee receivable
valuation allowance to credit service fee revenue. At September 30, 2005 and
2006, this reserve amounted to $0.3 million and $0.2 million, representing 9.0%
and 4.6% of credit service fees receivable.
CASH AND CASH EQUIVALENTS: The Company considers investments with maturities of
90 days or less when purchased to be cash equivalents.
INVENTORY: If a pawn loan is not repaid, the forfeited collateral (inventory) is
recorded at cost (pawn loan principal). The Company does not record loan loss
allowances or charge-offs on the principal portion of pawn loans. In order to
state inventory at the lower of cost (specific identification) or market (net
realizable value), the Company provides an allowance for shrinkage and excess,
obsolete or slow-moving inventory. The allowance is based on the type and age of
merchandise as well as recent sales trends and margins. At September 30, 2005
and 2006, the valuation allowance deducted from the carrying value
47
of inventory amounted to $1,860,000 and $2,823,000 (5.8% and 7.3% of gross
inventory). Changes in the inventory valuation allowance are recorded as cost of
goods sold.
SOFTWARE DEVELOPMENT COSTS: The Company accounts for internal software
development costs in accordance with the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") No. 98-1, "Accounting for
the Costs of Computer Software Developed for or Obtained for Internal Use,"
which requires the capitalization of certain costs incurred in connection with
developing or obtaining software for internal use. During 2004, 2005 and 2006
approximately $134,000, $196,000 and $288,000 was capitalized in connection with
the development and acquisition of internal software systems. No interest was
capitalized in 2004, 2005 or 2006. Capitalized costs are amortized by the
straight-line method over the estimated useful lives of each system, ranging
from five to eight years.
CUSTOMER LAYAWAY DEPOSITS: Customer layaway deposits are recorded as deferred
revenue until the entire related sales price has been collected and the related
merchandise has been delivered to the customer.
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Provisions
for depreciation are computed on a straight-line basis using estimated useful
lives of 30 years for buildings and 2 to 8 years for furniture, equipment, and
software development costs. Leasehold improvements are depreciated over the
shorter of their estimated useful life - typically 10 years - or the reasonably
assured lease term at the inception of the lease. Property and equipment is
shown net of accumulated depreciation of $67.2 million and $75.5 million at
September 30, 2005 and 2006.
INTANGIBLE ASSETS: The Company accounts for intangible assets in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets." Under the provisions of
SFAS No. 142, goodwill and other intangible assets having an indefinite useful
life are not subject to amortization but are tested for impairment at least
annually on July 1, or more frequently if events or changes in circumstances
indicate that the assets might be impaired. The Company recognized no impairment
of its intangible assets in Fiscal 2004, 2005 or 2006. Intangible assets with
definite lives are amortized over their estimated useful lives.
VALUATION OF TANGIBLE LONG-LIVED ASSETS: The Company assesses the impairment of
tangible long-lived assets whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. Factors which could trigger an
impairment review include the following: significant underperformance relative
to historical or projected future cash flows; significant changes in the manner
of use of the assets or the strategy for the overall business; and significant
negative industry trends. When management determines that the carrying value of
tangible long-lived assets may not be recoverable, impairment is measured based
on the excess of the assets' carrying value over the estimated fair value. No
impairment of tangible long-lived assets has been recognized in Fiscal 2004,
2005 or 2006.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of financial instruments is
determined by reference to various market data and other valuation techniques,
as appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values, due primarily to their short-term
nature. The Company considers investments with maturities of 90 days or less
when purchased to be cash equivalents.
FOREIGN CURRENCY TRANSLATION: The Company's equity investment in A&B is
translated into U.S. dollars at the exchange rate as of A&B's balance sheet date
of June 30. The related interest in A&B's net income is translated at the
average exchange rate for each six-month period reported by A&B. Resulting
translation adjustments are reflected as a separate component of stockholders'
equity.
COST OF GOODS SOLD: Included in cost of goods sold is the historical cost of
inventory sold, inventory shrinkage and any change in the Company's allowance
for inventory shrinkage and valuation. Also included is the cost of operating
the Company's central jewelry processing unit, as it relates directly to sales
of precious metals to refiners.
48
OPERATIONS EXPENSE: Included in operations expense are costs related to
operating the Company's stores. These costs include labor, other direct expenses
such as utilities, supplies and banking fees, and indirect expenses such as
store rent, building repairs and maintenance, advertising and store property
taxes and insurance.
ADMINISTRATIVE EXPENSE: Included in administrative expense are costs related to
the Company's executive and administrative offices. This includes executive,
administrative and regional salaries, wages and incentive compensation,
professional fees, license fees and costs related to the operation of the
Company's administrative offices such as rent, property taxes, insurance, and
information technology. Also included in administrative expense are costs of the
Company's payday loan call center and bad debt collection center.
ADVERTISING: Advertising costs are expensed as incurred. Advertising expense was
approximately $1,202,000, $1,440,000 and $1,041,000 for Fiscal 2004, 2005 and
2006.
INCOME TAXES: The provision for federal income taxes has been calculated based
on the Company's estimate of its effective tax rate for the full fiscal year. As
part of the process of preparing the consolidated financial statements, the
Company estimates income taxes in each jurisdiction in which it operates. This
process involves estimating the actual current tax liability together with
assessing temporary differences in recognition of income for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in the Company's consolidated balance sheet. Management must then
assess the likelihood the deferred tax assets will be recovered from future
taxable income. At September 30, 2006, the Company decreased its estimate of the
effective tax rate for its fiscal year then ending from 36.4% to 35.7% primarily
due to a $0.7 million decrease in accrued state income taxes, as more fully
discussed in Note J, "Income Taxes." At September 30, 2006, the Company also
determined it was unlikely to utilize a capital loss carry-forward scheduled to
expire in 2009, and recorded a $0.4 million full valuation allowance against the
related deferred tax asset. This was charged to the income tax provision in
Fiscal 2006. In the event the Company were to determine that it would not be
able to realize all or part of its remaining net deferred tax assets in the
future, an increase to the valuation allowance would be charged to the income
tax provision in the period such determination was made. Likewise, should the
Company determine that it will be able to realize its deferred tax assets in the
future in excess of its net recorded amount, a decrease to the valuation
allowance would decrease the tax provision in the period such determination was
made. The Company evaluates its deferred tax assets quarterly by assessing the
need for a valuation allowance, if any. At September 30, 2006, the Company's
valuation allowance was $0.4 million. The Company had no deferred tax asset
valuation allowance at September 30, 2005.
SHARE-BASED COMPENSATION: Prior to October 1, 2005, the Company accounted for
its share-based employee compensation plans under the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations ("APB
25"), as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation."
For periods prior to October 1, 2005, share-based employee compensation cost was
recognized in the Statement of Operations only for restricted stock grants and
options granted at prices below market price on the date of grant. Effective
October 1, 2005, the Company adopted the fair value recognition provisions of
SFAS No. 123(R), as described in Note I, "Common Stock, Warrants, Options, and
Share-based Compensation."
SEGMENTS: The Company accounts for its operations in accordance with SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." No
segment disclosures have been made as the Company considers its business
activities as a single segment.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
difference may be material.
49
RECLASSIFICATIONS: Certain prior year financial statement balances have been
reclassified to conform to the current year presentation.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In May 2005, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3."
SFAS No. 154 changes the requirements for the accounting for and reporting of a
change in accounting principle. This statement applies to all voluntary changes
in accounting principle and changes required by an accounting pronouncement in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 31,
2005. The Company does not believe the adoption of SFAS No. 154 will have a
material effect on its consolidated financial position, results of operations or
cash flows.
In June 2006, the Financial Accounting Standards Board issued Interpretation No.
48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). To be recognized in
the financial statements, FIN 48 requires that a tax position is
more-likely-than-not to be sustained upon examination, based on the technical
merits of the position. In making the determination of sustainability, companies
must presume tax positions will be examined by the appropriate taxing authority
with full knowledge of all relevant information. FIN 48 also prescribes how such
benefit should be measured, including the consideration of any penalties and
interest. It requires that the new standard be applied to the balances of tax
assets and liabilities as of the beginning of the period of adoption and that a
corresponding adjustment be made to the opening balance of retained earnings.
FIN 48 will be effective for the Company in the fiscal year ending September 30,
2008. The Company is evaluating the potential effect of FIN 48, but does not
expect it to have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
Among other requirements, SFAS No. 157 defines fair value and establishes a
framework for measuring fair value and also expands disclosure about the use of
fair value to measure assets and liabilities. SFAS No. 157 will be effective for
the Company's fiscal year ending September 30, 2009. The Company is currently
evaluating the impact of SFAS No. 157 on its financial position and results of
operations.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial
Statements," which provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in
quantifying a current year misstatement. The guidance will be applicable for the
Company's fiscal year ending September 30, 2007. The Company does not believe
SAB 108 will have a material impact on its consolidated financial position,
results of operations or cash flows.
NOTE B: ACQUISITIONS
In Fiscal 2006, the Company acquired three pawnshops for total consideration of
$2.2 million. Of the total purchase price, $0.9 million was allocated to
inventory, $0.4 million was allocated to pawn loans, $0.1 million was allocated
to other identified assets and liabilities, and the remaining $0.8 million was
allocated to goodwill. The results of the acquired stores have been consolidated
with that of the Company since their acquisition dates. Pro forma results of
operations have not been presented because the effects of the acquisitions were
not material to the Company.
NOTE C: EARNINGS PER SHARE
The Company has two classes of common stock and computes earnings per share
using the two-class method in accordance with SFAS No. 128, "Earnings Per
Share." As discussed in Note I, the holders of the Company's Class A and Class B
common stock have similar rights with the exception of voting rights.
Accordingly, earnings per common share for the two classes of common stock are
the same.
50
Basic earnings per share are computed on the basis of the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share are computed on the basis of the weighted average number of shares of
common stock plus the effect of dilutive potential common shares outstanding
during the period using the treasury stock method. Dilutive potential common
shares include outstanding stock options, warrants and restricted stock awards.
Components of basic and diluted earnings per share are as follows (in thousands,
except per share amounts):
Years Ended September 30,
---------------------------
2004 2005 2006
------- ------- -------
Net income (A) $ 9,123 $14,752 $29,259
======= ======= =======
Weighted average outstanding shares of common stock (B) 36,768 37,302 39,432
Dilutive effect of stock options, warrants, and restricted stock 2,598 3,420 2,832
------- ------- -------
Weighted average common stock and common stock equivalents (C) 39,366 40,722 42,264
======= ======= =======
Basic earnings per share (A/B) $ 0.25 $ 0.40 $ 0.74
======= ======= =======
Diluted earnings per share (A/C) $ 0.23 $ 0.36 $ 0.69
======= ======= =======
Anti-dilutive options, warrants and restricted stock grants have been excluded
from the computation of diluted earnings per share because the exercise price
was greater than the average market price of the common shares so the effect
would be anti-dilutive. During Fiscal 2004, there were 128,361 of weighted
average shares of restricted stock outstanding that were anti-dilutive. None
were anti-dilutive in Fiscal 2005 or Fiscal 2006.
NOTE D: INVESTMENT
The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc
("A&B"), or approximately 28.5% of A&B's total outstanding shares. The shares
were acquired in 1998 at a total cost of $12.8 million. A&B is primarily engaged
in pawnbroking, retail jewelry sales, check cashing and lending in the United
Kingdom. The investment is accounted for using the equity method. Since A&B's
fiscal year end is June 30, the income reported by the Company for its
investment in A&B is on a three-month lag. In accordance with United Kingdom
securities regulations, A&B files only semi-annual financial reports, for its
fiscal periods ending December 31 and June 30. The income reported for the
Company's fiscal year end of September 30 represents its percentage interest in
the results of A&B's operations from July 1 to June 30. In Fiscal 2004, 2005 and
2006, the Company received dividends from A&B of $680,000, $861,000 and
$969,000. The undistributed earnings included in the Company's consolidated
retained earnings were $5.3 million at September 30, 2006. A&B's shares are
listed on the Alternative Investment Market of the London Stock Exchange and at
October 31, 2006, the market value of this investment was approximately $58.6
million, based on the closing market price and currency exchange rate on that
date.
Conversion of A&B's financial statements into US Generally Accepted Accounting
Principles ("GAAP") resulted in no material differences from those reported by
A&B following United Kingdom GAAP.
51
Below is summarized financial information for A&B's most recently reported
results (using the exchange rate as of June 30 of each year for balance sheet
items and average exchange rates for income statement items for the periods
indicated):
As of June 30,
--------------------
2005 2006
---------- -------
(restated)
(In thousands)
Current assets $51,451 $62,564
Non-current assets 9,475 14,058
------- -------
Total assets $60,926 $76,622
======= =======
Current liabilities $ 5,416 $ 5,094
Non-current liabilities 18,836 28,843
Equity shareholders' funds 36,674 42,685
------- -------
Total liabilities and equity shareholders' funds $60,926 $76,622
======= =======
The restatement of A&B's fiscal 2005 results affected only its balance sheet
presentation, and had no effect on its current or prior year earnings.
Years ended June 30,
---------------------------
2004 2005 2006
------- ------- -------
(In thousands)
Turnover (gross revenues) $38,891 $44,620 $52,461
Gross profit 27,613 32,555 38,574
Profit after tax (net income) 6,024 7,539 8,484
At September 30, 2006, the recorded balance of the Company's investment in A&B,
accounted for on the equity method, was $19.3 million. The Company's equity in
net assets of A&B was $12.2 million. The difference between the recorded balance
and the Company's equity in A&B's net assets represents the $7.1 million of
unamortized goodwill which resulted from the initial purchase, plus the
cumulative difference resulting from A&B's earnings, dividend payments and
translation gain since the date of investment.
NOTE E: PROPERTY AND EQUIPMENT
Major classifications of property and equipment were as follows:
September 30,
-------------------
2005 2006
-------- --------
(In thousands)
Land $ 44 $ 44
Buildings and improvements 38,527 43,143
Furniture and equipment 33,296 38,839
Software 21,407 21,696
Construction in progress 934 1,185
-------- --------
Total 94,208 104,907
Less accumulated depreciation (67,244) (75,460)
-------- --------
$ 26,964 $ 29,447
======== ========
52
NOTE F: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the balance of each major class of indefinite-lived
intangible asset at the specified dates:
September 30,
---------------
2005 2006
------ ------
(In thousands)
Pawn licenses $1,549 $1,549
Goodwill -- 768
------ ------
Total $1,549 $2,317
====== ======
The following table presents the gross carrying amount and accumulated
amortization for each major class of definite-lived intangible asset at the
specified dates:
September 30, 2005 September 30, 2006
----------------------- -----------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------- ------------ -------- ------------
(In thousands)
License application fees $ 345 $(226) $ 345 $(257)
Real estate finders' fees 554 (294) 556 (311)
Non-compete agreements 388 (258) 398 (277)
------ ----- ------ -----
Total $1,287 $(778) $1,299 $(845)
====== ===== ====== =====
Total amortization expense from definite-lived intangible assets was
approximately $77,000, $68,000 and $67,000 for Fiscal 2004, 2005 and 2006. The
following table presents the Company's estimate of amortization expense for
definite-lived intangible assets for each of the five succeeding fiscal years as
of September 30, 2006 (in thousands):
Fiscal Year Amortization Expense
----------- --------------------
2007 $69
2008 $68
2009 $59
2010 $44
2011 $38
As acquisitions and dispositions occur in the future, amortization expense may
vary from these estimates.
53
NOTE G: ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES
Accounts payable and other accrued expenses consisted of the following:
September 30,
-----------------
2005 2006
------- -------
(In thousands)
Trade accounts payable $ 3,760 $ 6,014
Accrued payroll and related expenses 6,398 8,123
Accrued interest 145 37
Accrued rent and property taxes 3,099 3,993
Accrual for expected losses on CSO letters of credit 1,391 898
Collected funds payable to independent lenders under CSO program 566 1,026
Other accrued expenses 3,629 2,488
------- -------
$18,988 $22,579
======= =======
NOTE H: LONG-TERM DEBT
At September 30, 2006, the Company had no debt. At September 30, 2005, the
Company had $7.0 million payable to a bank syndicate under a revolving credit
facility, none of which was a current liability at that date.
Effective October 13, 2006, the Company amended and restated its credit
agreement. The amendment extended the maturity date to October 1, 2009 and
provided for a $40.0 million revolving credit facility secured by the Company's
assets. For any borrowed funds, the Company may choose a Eurodollar rate plus
100 to 200 basis points (depending on the leverage ratio) or the agent bank's
base rate. On the unused amount of its revolving facility, the Company also pays
a commitment fee of 25 to 30 basis points depending on the leverage ratio
calculated as of the end of each quarter. Terms of the agreement require, among
other things, that the Company meet certain financial covenants. Payment of
dividends and additional debt are allowed but restricted.
NOTE I: COMMON STOCK, WARRANTS, OPTIONS, AND SHARE-BASED COMPENSATION
The capital stock of the Company consists of two classes of common stock
designated as Class A Non-voting Common Stock ("Class A Common Stock") and Class
B Voting Common Stock ("Class B Common Stock"). The rights, preferences and
privileges of the Class A and Class B Common Stock are similar except that each
share of Class B Common Stock has one vote and each share of Class A Common
Stock has no voting privileges. All Class A Common Stock is publicly held.
Holders of Class B Common Stock may, individually or as a class, convert some or
all of their shares into Class A Common Stock. Class A Common Stock becomes
voting common stock upon the conversion of all Class B Common Stock to Class A
Common Stock. The Company is required to reserve such number of authorized but
unissued shares of Class A Common Stock as would be issuable upon conversion of
all outstanding shares of Class B Common Stock.
Prior to October 1, 2005, the Company accounted for its share-based employee
compensation plans under the recognition and measurement provisions of APB 25,
as permitted by SFAS No. 123. For periods prior to October 1, 2005, share-based
employee compensation cost was recognized in the Statement of Operations for
only restricted stock grants and options granted at prices below market price on
the date of grant. Effective October 1, 2005, the Company adopted the fair value
recognition provisions of SFAS No. 123(R), "Share-based Payment," using the
modified prospective transition method. Under that transition method,
compensation cost recognized in all periods subsequent to September 30, 2005
includes (a) compensation cost for all share-based payments granted prior to,
but not yet vested as of October 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all share-based payments granted on or after October 1,
2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). The fair value of grants is amortized to
compensation expense on a straight-line
54
basis over the vesting period for both cliff vesting and graded vesting grants.
The grant-date fair value of options is estimated using the Black-Scholes-Merton
option-pricing model ("Black-Scholes") and is amortized to expense over the
options' vesting periods. In accordance with the modified prospective transition
provisions, results for prior periods have not been restated, and pro forma
results are disclosed below for the pre-adoption period.
The Company's net income includes the following compensation costs related to
our share-based compensation arrangements:
Years Ended September 30,
---------------------------
2004 2005 2006
----- ----- ------
(In thousands)
Gross compensation costs
Stock options $ -- $ -- $1,321
Restricted stock 538 588 76
----- ----- ------
Total gross compensation costs 538 588 1,397
Income tax benefits
Stock options -- -- (154)
Restricted stock (188) (206) (26)
----- ----- ------
Total income tax benefits (188) (206) (180)
----- ----- ------
Net compensation expense $ 350 $ 382 $1,217
===== ===== ======
All options and restricted stock relate to the Company's Class A Non-voting
Common Stock.
Our independent directors have been granted non-qualified stock options that
vest one year from grant and expire in ten years. Non-qualified, incentive stock
options and restricted stock awards have been granted to our officers and
employees under our 1991, 1998, 2003 and 2006 Incentive Plans. Most options have
a contractual life of ten years and provide for graded vesting over five years,
but some provide for cliff vesting. Certain of the options granted to officers
also provide for accelerated vesting upon a change in control or upon the
achievement of certain performance targets. Outstanding options have been
granted with strike prices ranging from $0.67 per share to $12.60 per share.
These were granted at or above the market price at the time of grant, and had no
intrinsic value on the grant date.
On September 21, 2006, the Board of Directors approved the adoption of the
EZCORP, Inc. 2006 Incentive Plan (the "2006 Plan"). The 2006 Plan permits grants
of up to 2,250,000 options, restricted stock awards ("RSAs") and stock
appreciation rights ("SARs") of the Company's Class A Common Stock. In approving
this plan, the Board of Directors resolved that no further options, RSAs or SARs
would be granted under any previous plan. Awards that expire or are canceled
without delivery of shares under the 2006 Incentive Plan generally become
available for issuance in new grants. The Company issues new shares to satisfy
stock option exercises. At September 30, 2006, 2,205,000 shares were available
for grant under the 2006 Plan. Following a subsequent grant of 1,757,250 shares
effective October 2, 2006, as discussed below, 447,750 shares of the 2006 Plan
remained available for grant.
On September 21, 2006, the Board of Directors approved a 15,000 share
non-qualified stock option grant to each of the Company's three independent
directors. The total grant of 45,000 shares vests in one year and has a strike
price of $12.60 per share.
On January 15, 2004, the Compensation Committee of the Board of Directors
approved an award of 180,000 shares of restricted stock to the Company's Chief
Executive Officer. The shares will vest on January 1, 2009, provided he remains
continuously employed by the Company through the vesting date. The shares were
subject to earlier vesting based on the occurrence of certain objectives. The
market value of the restricted stock on the award date was $0.6 million, which
was being amortized over a three-
55
year period based on the Company's initial expectation that earlier vesting
objectives would be met. One-third of the shares vested January 15, 2005 based
on the attainment of the goals for accelerated vesting. Effective October 1,
2005, the Company determined it no longer believed the requirements would be met
for accelerated vesting of the remaining unvested shares. Accordingly, the
remaining unamortized deferred compensation of $0.2 million is being amortized
ratably over the vesting period ending January 1, 2009. During Fiscal 2005 and
2006, $195,000 and $75,000 was amortized to expense for this grant.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved an award of 375,000 shares of restricted stock to the Chairman of the
Board. The market value of the restricted stock on the award date was $0.8
million, which was amortized over the two-year restriction period that expired
September 17, 2005. During Fiscal 2005, $0.4 million of this cost was amortized
to expense, and no expense was recognized for this grant in Fiscal 2006.
We measure the fair value of RSAs based upon the market price of the underlying
common stock as of the grant date. Throughout Fiscal 2006, the Company had
120,000 shares of non-vested RSAs outstanding, with a weighted average
grant-date fair value of $3.26 per share. No restricted shares have been
granted, vested or forfeited during the year. At September 30, 2006, there was
$0.2 million of unrecognized compensation cost related to RSAs. The Company
expects to recognize this cost over a weighted average period of 2.3 years.
The following table summarizes the impact of adopting SFAS No. 123(R) on the
noted items:
Year Ended
September 30, 2006
-------------------
Intrinsic Fair
Value Value
Method Method
--------- -------
(In thousands)
Income before income taxes $46,826 $45,504
Net income $30,427 $29,259
Earnings per share:
Basic $ 0.77 $ 0.74
Diluted $ 0.72 $ 0.69
Cash flow provided by operating activities $44,322 $43,238
Cash flow used in financing activities $(2,650) $(1,566)
Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits
of deductions resulting from the exercise of stock options as operating cash
flows in the Statement of Cash Flows. SFAS No. 123(R) requires the cash flows
resulting from excess tax benefits (the tax benefits resulting from tax
deductions in excess of the compensation cost recognized for those options) to
be classified as financing cash flows.
56
A summary of the option plans' activity for the most recently reported period
follows:
Weighted
Weighted Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Shares Price Term (years) (thousands)
---------- -------- ------------ -----------
Outstanding at September 30, 2005 5,399,700 $ 2.60
Granted 45,000 12.60
Forfeited (231,900) 3.10
Expired (2,580) 2.79
Exercised (1,835,550) 2.36
---------- ------
Outstanding at September 30, 2006 3,374,670 $ 2.83 4.9 $33,975
Vested and Expected to Vest 3,098,619 $ 2.80 4.8 $31,263
Vested at September 30, 2006 1,020,270 $ 1.78 6.4 $11,339
The Black-Scholes-Merton option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, this option valuation model requires
the input of highly subjective assumptions including the expected stock price
volatility. In applying Black-Scholes, the Company used the following weighted
average assumptions for Fiscal 2004, 2005 and 2006:
Year Ended September 30,
------------------------
2004 2005 2006
------ ------ ------
Risk-free interest rate 3.22% 3.24% 4.71%
Dividend yield 0% 0% 0%
Volatility factor of the expected market price of
the Company's common stock 38.00% 41.00% 61.96%
Expected life of the options (years) 10 10 2
Weighted average grant date fair value of
options granted $ 1.73 $ 2.04 $ 4.66
The Company considered the contractual life of the options and the past behavior
of employees in estimating the expected life of options granted. The estimated
expected life cannot exceed the contractual term, and cannot be less than the
vesting term. The volatility factor was estimated using the actual volatility of
the Company's stock over the most recently completed time period equal to the
estimated life of each option grant. Although no adjustment was made in the
period presented above, the Company considers excluding from its volatility
factor discrete events which have had a significant effect on its historical
volatility but have a remote chance of recurring.
As of September 30, 2006, the unamortized fair value of share-based awards to be
amortized over their remaining vesting periods was approximately $2.3 million.
The weighted average period over which these costs will be amortized is 2 years.
Stock option and warrant exercises resulted in the issuance of 1,104,219 shares
of Class A Common Stock in Fiscal 2005 for total proceeds of $909,000. Stock
option and warrant exercises resulted in the issuance of 1,842,669 shares of
Class A Common Stock in Fiscal 2006 for total proceeds of $4.4 million. The
total intrinsic value of stock options exercised was $5.7 million in Fiscal
2005, and $14.2 million in Fiscal 2006.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123
to options granted under the Company's
57
stock option plans in periods prior to adoption of SFAS No. 123(R). For purposes
of this pro forma disclosure, the value of the options is estimated using
Black-Scholes and is amortized to expense over the options' vesting periods.
Year ended September 30,
------------------------
2004 2005
------ -------
(In thousands, except
per share amounts)
Net income, as reported $9,123 $14,752
Add: stock-based employee compensation expense
included in reported net income, net of
related tax effects 350 376
Deduct: total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (879) (1,048)
------ -------
Pro forma net income $8,594 $14,080
Earnings per share, basic:
As reported $ 0.25 $ 0.40
Pro forma $ 0.23 $ 0.38
Earnings per share, diluted:
As reported $ 0.23 $ 0.36
Pro forma $ 0.22 $ 0.35
At September 30, 2006, warrants to purchase 60,069 shares of Class A Common
Stock and 12,222 shares of Class B Common Stock at $2.06 per share were
outstanding. The warrants are not mandatorily redeemable, and are exercisable at
the option of the holder through July 25, 2009.
Effective October 2, 2006, the Compensation Committee of the Board of Directors
approved an award of 675,000 shares of restricted stock to the Chairman of the
Board, and 945,000 shares of restricted stock to the Company's Chief Executive
Officer. The cumulative market value of the two grants on the award date was $21
million, and 20% of the shares will vest every two years for a ten-year period
if certain company performance requirements are achieved. If the bi-annual
performance requirements are not met, the unvested shares will be added to
subsequent vesting dates. In the event that the performance requirements for
vesting are not achieved for any applicable vesting date by the end of the
Company's fiscal year ending September 30, 2016, all unvested shares will be
forfeited and cancelled. As these shares were granted subsequent to the end of
Fiscal 2006, Fiscal 2006 results include no expense related to these grants. The
Company expects to recognize $1.6 million of expense related to these grants in
Fiscal 2007, partially offset by a related tax benefit of $0.6 million.
Effective October 2, 2006, the Compensation Committee of the Board of Directors
approved an award of 137,250 shares of restricted stock to key individuals. The
shares will vest October 2, 2010, and the market value of the restricted stock
on the award date was $1.8 million. As these shares were granted subsequent to
the end of Fiscal 2006, Fiscal 2006 results include no expense related to this
grant. The Company expects to recognize $0.3 million of expense related to this
grant in Fiscal 2007, partially offset by a related tax benefit of $0.1 million.
58
NOTE J: INCOME TAXES
The income tax provision is attributable only to continuing operations, and is
as follows:
Years Ended September 30,
--------------------------
2004 2005 2006
------- ------ -------
(In thousands)
Current
Federal $ 7,400 $8,121 $13,040
State 61 67 (519)
------- ------ -------
7,461 8,188 12,521
Deferred
Federal (2,103) 110 3,647
State -- -- 77
------- ------ -------
(2,103) 110 3,724
------- ------ -------
$ 5,358 $8,298 $16,245
======= ====== =======
A reconciliation of income taxes calculated at the statutory rate and the
provision for income taxes attributable to continuing operations is as follows:
Years Ended September 30,
-------------------------
2004 2005 2006
------ ------ -------
(In thousands)
Income taxes at the federal statutory rate $5,068 $8,068 $15,926
Non-deductible expense related to incentive stock options -- -- 297
State income tax, net of federal benefit 61 93 280
Removal of state tax exposure, net of federal benefit -- -- (722)
Change in valuation allowance -- -- 392
Other 229 137 72
------ ------ -------
$5,358 $8,298 $16,245
====== ====== =======
The Company's effective tax rate was 35.7% in Fiscal 2006. The Company's Fiscal
2006 adoption of SFAS No. 123R caused it to begin recognizing expense related to
incentive stock options, creating the non-deductible expense shown above.
For tax purposes, most of the Company's earnings are subject to the Texas
Franchise Tax. Due to its limited partnership structure in Texas, 99% of those
earnings were exempt from the Texas Franchise Tax. Over the past several
legislative sessions, the Texas Legislature has proposed numerous bills to amend
the Texas Franchise Tax to remove the preferable treatment of limited
partnerships, including possible same-year application. As a result, the Company
had accrued an additional $722,000 in previous periods for its exposure to a
possible change in this state tax. In the fourth quarter of Fiscal 2006, the
Texas Legislature abandoned its attempts to amend the franchise tax, and instead
passed legislation replacing the franchise tax with a margin tax that will
function similarly to an income tax, but with no preferable treatment for
limited partnerships. The Texas margin tax will apply to the Company beginning
in Fiscal 2007. As a result, the Company no longer believes it is exposed to
challenges to its preferable limited partnership treatment for Fiscal 2006 or
earlier years, and has removed its accrued exposure of $722,000 in the current
period.
59
Significant components of the Company's deferred tax liabilities and assets as
of September 30 are as follows:
2005 2006
------- -------
(In thousands)
Deferred tax liabilities:
Tax over book amortization $ 3,764 $ 3,634
Foreign income and dividends 1,309 1,837
Prepaid expenses 321 1,077
------- -------
Total deferred tax liabilities 5,394 6,548
Deferred tax assets:
Book over tax depreciation 8,347 8,865
Tax over book inventory 6,266 4,880
Accrued liabilities 1,901 2,038
Pawn service charges receivable 2,694 1,664
Tax carry-forwards 389 392
Impairment of receivable from stockholder 343 --
------- -------
Total deferred tax assets 19,940 17,839
------- -------
Net deferred tax asset 14,546 11,291
Valuation allowance -- (392)
------- -------
Net deferred tax asset $14,546 $10,899
======= =======
In Fiscal 2004, the Company incurred a $1.1 million capital loss on an equity
investment in a Company that discontinued operations. The tax benefit related to
the loss will expire in Fiscal 2009 unless an offsetting capital gain is
generated before its expiration. Until September 30, 2006, the Company believed
it would generate sufficient capital gains to utilize the capital loss
carry-forward. Based on recent events, the Company determined at September 30,
2006 it is unlikely to generate the necessary capital gain prior to the
expiration of its capital loss carry-forward, and has placed a full valuation
allowance of $392,000 on the tax benefit. The valuation allowance will be
adjusted or removed in future periods if the Company believes it is more likely
than not to be able to generate other capital gains to offset the capital loss
prior to its expiration.
Substantially all of the Company's operating income was generated from domestic
operations during 2005 and 2006. At September 30, 2005 and 2006, the Company has
provided deferred income taxes on all undistributed earnings from A&B. Such
earnings have been reinvested in foreign operations except for dividends at
September 30, 2005 and 2006 of approximately $861,000 and $969,000. Any taxes
paid to foreign governments on those earnings may be used in whole or in part as
credits against the U.S. tax on any dividends distributed from such earnings.
The Company has no net operating loss carry-forward or alternative minimum tax
credit carry-forward at September 30, 2006.
NOTE K: RELATED PARTY TRANSACTIONS
As of October 1, 2004, the Company entered into a financial advisory services
agreement with Madison Park, L.L.C. ("Madison Park"), an affiliate of the
controlling stockholder. The agreement requires Madison Park to provide ongoing
advice and consultation with respect to mergers, acquisitions, divestitures,
strategic planning, corporate development, investor relations, treasury and
other advisory services for a monthly fee of $100,000, inclusive of most
expenses. The Madison Park agreement has a three-year term and the Company has
the right to terminate the agreement at any time. Madison Park can terminate
only at the end of any one of the Company's fiscal years. In Fiscal 2005 and
2006, total payments to Madison Park amounted to $1,200,000 annually.
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff
& Co., Inc. ("Morgan Schiff"), an affiliate of the general partner of the
controlling stockholder, provided financial advisory services similar to those
now provided by Madison Park through October 1, 2004. In Fiscal 2004, the
Company paid $802,000 to Morgan Schiff. As a result of entering the agreement
with Madison Park, the Company elected
60
not to renew its financial advisory services agreement with Morgan Schiff at
October 1, 2004. Philip E. Cohen is a principal in Morgan Schiff, Madison Park
and the general partner of the controlling stockholder.
In 1994, the Company loaned a former chief executive ("CEO") $729,113 to
purchase 150,000 shares of Class A Common Stock. In connection with his
separation from the Company in 2000, the maturity date of the loan was extended
to the earlier of (a) ten business days following the first day that the closing
price for the Company's stock equals or exceeds $3.33 per share, or (b) August
1, 2005. On January 16, 2004 the Company's stock closed at $3.45 thereby
accelerating the due date of the note. The former CEO defaulted in the payment
of the note after it became due. On September 22, 2004, the Company obtained a
judgment confirming an arbitration award on the note in the amount of $969,399
(principal of $729,113 and accrued interest of $240,286) plus post-judgment
interest. On October 19, 2004, the former CEO filed a Chapter 7 bankruptcy
seeking to discharge all of his debts including the debt represented by the
judgment. A full valuation allowance has been recorded for the note, as its
collection is doubtful.
In October 1994, the Board of Directors approved an agreement that provided
incentive compensation to the Chairman, Sterling Brinkley, based on growth in
the share price of the Company's Class A Common Stock. Mr. Brinkley was advanced
$1.5 million evidenced by a recourse promissory note, due in 2005 and bearing
interest at the minimum rate allowable for federal income tax purposes (2.33%
for Fiscal 2005). Accrued interest was forgiven based upon continued employment,
and the Company was required to reimburse Mr. Brinkley for the income tax
consequences of the interest forgiveness. Charges to operations consist of
forgiveness of interest and related income tax costs and totaled approximately
$41,000 and $60,000 for the years ended September 30, 2004 and 2005. Mr.
Brinkley repaid his note in full in September 2005.
NOTE L: LEASES
The Company leases various facilities and certain equipment under operating
leases. Future minimum rentals due under non-cancelable leases are as follows
for each of the years ending September 30:
(In thousands)
--------------
2007 $ 16,784
2008 15,420
2009 13,682
2010 12,024
2011 10,815
Thereafter 44,827
--------
$113,552
========
The Company subleases some of the above facilities. Future minimum rentals
expected under these subleases amount to $9,600 in each of the fiscal years
ending between 2007 and 2011, and $27,200 thereafter.
After an initial lease term of generally 3 to 10 years, the Company's lease
agreements typically allow renewals in three to five-year increments. The
Company's lease agreements generally include rent escalations throughout the
initial lease term. Such rent escalations are included in the above numbers. For
financial reporting purposes, the aggregate rentals over the lease term,
including lease renewal options that are reasonably assured, are expensed on a
straight-line basis.
Net rent expense for the years ending September 30, 2004, 2005 and 2006 was
$15.5 million, $16.7 million and $17.4 million. Net rent expense includes the
collection of sublease rent revenue of approximately $55,000, $47,000 and
$60,000 for years ending September 30, 2004, 2005 and 2006.
Prior to Fiscal 2004, the Company completed several sale-leaseback transactions
of previously owned facilities. Losses on sales were recognized immediately, and
gains were deferred and are being amortized
61
as a reduction of lease expense over the terms of the related leases. The
remaining unamortized long-term portion of these deferred gains, amounting to
$3.2 million at September 30, 2006, is included in "Deferred gains and other
long-term liabilities" in the Company's consolidated balance sheet. The
short-term portion, included in "Accounts payable and other accrued expenses"
was $0.4 million at September 30, 2006. Future rentals on these sale-leasebacks
are included in the above schedule of future minimum rentals. Terms of these
leases are consistent with the terms on the Company's other lease agreements.
NOTE M: EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options and a portion of his restricted stock. If Mr. Rotunda's
employment is terminated, other than for cause, he is entitled to receive a
severance payment equal to his annual compensation.
NOTE N: 401(K) PLAN
The Company sponsors a 401(k) Plan under which eligible employees of the Company
may contribute up to a maximum percentage allowable not to exceed the limits of
Code Sections 401(k), 402(g), 404 and 415. The Company, in its sole discretion,
may match in the form of the Company's Class A Common Stock. Contribution
expense related to the plan for 2004, 2005 and 2006 was approximately $61,000,
$72,000 and $54,000.
NOTE O: CONTINGENCIES
From time to time, the Company is involved in litigation and regulatory actions.
Currently, the Company is a defendant in several actions. While the ultimate
outcome of these actions cannot be ascertained, after consultation with counsel,
the Company believes the resolution of these actions will not have a material
adverse effect on the Company's financial condition, results of operations or
liquidity. There can be no assurance, however, as to the ultimate outcome of
these actions.
NOTE P: QUARTERLY INFORMATION (UNAUDITED)
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
(In thousands, except per share amounts)
YEAR ENDED SEPTEMBER 30, 2006
Total revenues $75,770 $78,941 $73,786 $87,355
Net revenues 50,109 50,604 50,088 58,178
Net income 6,756 7,727 5,608 9,168
Earnings per common share:
Basic $ 0.17 $ 0.20 $ 0.14 $ 0.23
Diluted $ 0.17 $ 0.19 $ 0.13 $ 0.21
YEAR ENDED SEPTEMBER 30, 2005
Total revenues $61,628 $63,098 $56,250 $73,183
Net revenues 39,715 39,197 37,829 46,740
Net income 4,949 3,969 2,129 3,705
Earnings per common share:
Basic $ 0.13 $ 0.11 $ 0.06 $ 0.10
Diluted $ 0.12 $ 0.10 $ 0.05 $ 0.09
As described in Note I, the Company adopted SFAS No. 123(R) effective October 1,
2005 using the modified prospective method. This method required fair value
expense recognition of share-based
62
payments in Fiscal 2006, but share-based payments in Fiscal 2005 were accounted
for under the intrinsic value method of APB No. 25.
In the quarter ended September 30, 2006, the Company decreased its estimate of
the effective tax rate for its fiscal year ending September 30, 2006 from 36.4%
to 35.7%. The decrease was primarily due to the reduction of expected state
income taxes following legislative changes in Texas, partially offset by a
valuation allowance placed on a capital loss carry-forward the Company believes
is unlikely of realization. The decrease in the effective income tax rate
increased net income in the quarter ended September 30, 2006 by $319,000, or
$0.01 per share (basic and diluted).
NOTE Q: COMPREHENSIVE INCOME
Comprehensive income includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a component of
total stockholders' equity. Comprehensive income for Fiscal 2004, 2005 and 2006
was $9.5 million, $14.7 million and $29.7 million. The difference between
comprehensive income and net income results primarily from the effect of foreign
currency translation adjustments determined in accordance with SFAS No. 52,
"Foreign Currency Translation." The accumulated balance of foreign currency
activity excluded from net income of $1.9 million is presented, net of tax of
$0.7 million, in the consolidated balance sheets as "Accumulated other
comprehensive income."
NOTE R: SUBSEQUENT EVENTS
Effective October 2, 2006, the Compensation Committee of the Company's Board of
Directors awarded 1,757,250 shares of restricted stock to several executive and
management level employees. Of the total, 1,620,000 vest over a ten-year period,
and 137,250 vest on October 2, 2010. These are described more fully in Note I,
"Common Stock, Warrants, Options, and Share-based Compensation."
Effective October 13, 2006, the Company amended and restated its credit
agreement. As more fully described in Note H, "Long-Term Debt," the amendment
extended the maturity date to October 1, 2009, reduced applicable interest rates
and commitment fees, and provided for a $40.0 million revolving credit facility
secured by the Company's assets.
On November 3, 2006, the Board of Directors declared a three-for-one stock split
of the Company's two classes of common stock to shareholders of record as of
November 27, 2006, to be distributed on December 11, 2006. Shares outstanding
and amounts per share in this report have been adjusted retroactively to reflect
this split as it occurred prior to issuance of these consolidated financial
statements.
63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company had no change in its independent certified public accountants, and
no disagreements on accounting or financial disclosure matters with its
independent certified public accountants to report under this Item 9.
64
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company carried out an evaluation as of the end of the period covered by
this report, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
the Company's disclosure controls and procedures, which are defined under SEC
rules as controls and other procedures of a company that are designed to ensure
that information required to be disclosed by a company in the reports that it
files under the Exchange Act is recorded, processed, summarized and reported
within required time periods. Based upon that evaluation, the Company's CEO and
CFO concluded that the Company's disclosure controls and procedures were
effective.
There were no changes in the Company's internal control over financial reporting
during the fourth quarter of Fiscal 2006 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
Notwithstanding the foregoing, because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of a simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Moreover, the design of any system of controls is also
based in part upon certain assumptions about the likelihood of future events.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal
control over financial reporting and for the assessment of the effectiveness of
the Company's internal control over financial reporting. This internal control
system has been designed to provide reasonable assurance to the Company's
management and board of directors regarding the preparation and fair
presentation of the Company's published consolidated financial statements.
Management has assessed the effectiveness of the Company's internal control over
financial reporting as of September 30, 2006. To make this assessment,
management utilized the criteria for effective internal control over financial
reporting described in "Internal Control - Integrated Framework" issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of September 30, 2006, the Company's
internal control over financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2006 has been audited by BDO Seidman,
LLP, an independent registered public accounting firm, and their report follows
immediately in this Form 10-K.
/s/ Joseph L. Rotunda /s/ Dan N. Tonissen
------------------------------------- ----------------------------------------
Joseph L. Rotunda Dan N. Tonissen
President, Chief Executive Officer Senior Vice President,
& Director Chief Financial Officer &
October 31, 2006 Director
October 31, 2006
65
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
EZCorp, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting and Scope of
Management's Report, that EZCORP, Inc. maintained effective internal control
over financial reporting as of September 30, 2006, based on criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management of EZCORP, Inc. is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that EZCORP, Inc. maintained effective
internal control over financial reporting as of September 30, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, EZCORP, Inc. maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2006, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets as
of September 30, 2006 and 2005 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended September 30, 2006 of EZCORP, Inc. and our report dated
November 3, 2006 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Dallas, Texas
November 3, 2006
66
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company as of October 31, 2006 were
as follows:
Name Age Title
---- --- -----
Sterling B. Brinkley (1) 54 Chairman of the Board of Directors
Joseph L. Rotunda (1) (3) 59 President, Chief Executive Officer, and Director
Dan N. Tonissen (1) (3) 56 Senior Vice President, Chief Financial
Officer, Assistant Secretary, and Director
Gary C. Matzner (4) 58 Director
Thomas C. Roberts (2) (4) 64 Director
Richard D. Sage (2) (4) 66 Director
Robert A. Kasenter 60 Senior Vice President of Administration
Eric Fosse 43 Vice President of EZMONEY Operations
Robert Jackson 51 Vice President and Chief Information Officer
John R. Kissick 64 Vice President of Strategic Development
Connie L. Kondik 42 Vice President, Secretary, and General Counsel
Michael Volpe 42 Vice President of EZPAWN Operations
Daniel M. Chism 38 Controller and Assistant Secretary
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Section 401(k) Plan Committee
(4) Member of Audit Committee
Mr. Brinkley has served as either Chairman of the Board or Chairman of the
Executive Committee of the Board of Directors of the Company since 1989. Mr.
Brinkley serves as a Director of Albemarle & Bond Holdings plc, which the
Company owns approximately 29%. In addition, Mr. Brinkley was President and
Chairman of the Board of MS Pawn Corporation, the general partner of MS Pawn
Limited Partnership until 2004. Mr. Brinkley also served as Chairman of the
Board, Chairman of the Executive Committee, or Chief Executive Officer of
Crescent Jewelers, Inc., an affiliate of the Company from 1988 to March 2006.
Crescent Jewelers, Inc., a private company, filed for Chapter 11 bankruptcy
protection in August 2004. From 1990 to December 2003, he served as Chairman of
the Board or Chairman of the Executive Committee of Friedman's, Inc., a publicly
traded affiliate of the Company. In January 2005, Friedman's, Inc. filed for
Chapter 11 bankruptcy. From 1986 to 1990, Mr. Brinkley served as a Managing
Director of Morgan Schiff & Co., Inc., an affiliate of the Company. See
"Security Ownership of Certain Beneficial Owners and Management."
Mr. Rotunda joined the Company as director, President and Chief Operating
Officer in February 2000 and assumed the role of Chief Executive Officer of the
Company in August 2000. From 1998 to 2000, he was Chief Operating Officer of G&K
Services, Inc., a $500 million provider of uniform and textile products. From
1991 to 1998 he progressed through several officer positions to Executive Vice
President and Chief Operating Officer of Thorn Americas, Inc. Mr. Rotunda also
currently serves as a Director of Easyhome, Ltd., Toronto, Canada.
Mr. Tonissen has served as Senior Vice President and Chief Financial Officer of
the Company since August 1994. Mr. Tonissen has also been a member of the
Company's Board of Directors since August 1994.
Mr. Matzner has served as director of the Company since July 2002. He has been
Senior Counsel with the law firm of McDermott, Will & Emery since August 2002,
and has been the Mayor of the Village of Pinecrest, Florida since November 2004.
From 1997 to July 2002, Mr. Matzner was President of Nobel
67
Health Services, Inc., a provider of health care consulting services. From 1999
to May 2001, Mr. Matzner was also President of Oakridge Outpatient Center, Inc.
Mr. Roberts has served as a director and as Chairman of the Audit Committee of
the Company's Board of Directors since January 2005. From 1970 to 1985, Mr.
Roberts was with Schlumberger, Ltd., where he was an Executive Vice President
and Chief Financial Officer from 1977 to 1979 and President of Schlumberger's
worldwide electronics operations from 1979 until 1985. From 1985 until 1989, he
was President of Control Data Computer Systems and Services and a member of the
Control Data Board of Directors. Since 1990, Mr. Roberts has been a private
investor and is currently Chairman of the Board of Directors and Chairman of the
Trust Committee of Pensco, Inc., a financial services company.
Mr. Sage has served as director of the Company since July 1995. He was a
co-founder of AmeriHealth, Inc., which owned and managed hospitals. He served as
Treasurer of AmeriHealth, Inc. from April 1983 to October 1995 and was a member
of the board of directors of AmeriHealth, Inc. from April 1983 to December 1994.
Mr. Sage was a Director of Champion Healthcare Corporation from January 1995 to
August 1996. Since June 1993, he has been associated with Sage Law Offices in
Miami, Florida.
Mr. Kasenter joined the Company in August 2003 as Vice President of Human
Resources and in October 2004 was promoted to Senior Vice President of
Administration. He was a director of the Donnkenny Apparel Board from 2001 until
April 2005, at which time Donnkenny filed for Chapter 11 bankruptcy protection
and was sold. Mr. Kasenter was the President & Chief Executive Officer of
Strategic Executive Actions, a Chicago-based management consulting firm
specializing in human resource crisis issues from 1999 to 2003. From 1968 to
1999, Mr. Kasenter was employed in various operating and administrative
positions and ultimately served as the Executive Vice President of Human
Resources and Corporate Communications for Montgomery Ward.
Mr. Fosse joined the Company in September 2004 as Vice President of EZMONEY
Operations. From 1991 to 2004, Mr. Fosse was employed in various operating
positions and ultimately served as a Regional Vice President of G&K Services, a
$500 million provider of uniform and textile products.
Mr. Jackson joined the Company in May 2004 as Vice President & Chief Information
Officer. He was Chief Information Officer at DuPont Photomasks, Inc. from 1997
to 2004 where he also served as Controller from 1995 to 1996.
Mr. Kissick has served as Vice President of Strategic Development since August
2001. From 1998 to 2001, Mr. Kissick was Managing Director of Strategic
Development Partners, a strategy and business development consulting firm
located in Wichita, Kansas. From 1991 to 1998 he served as Vice President of
Strategic Planning for Thorn Americas, Inc.
Ms. Kondik has served as General Counsel since June 2000, Secretary since
January 2001 and Vice President since January 2003. From June 1995 to June 2000,
Ms. Kondik served as Sr. Associate General Counsel, Vice-President and Assistant
Secretary of Empire Funding Corp. and TMI Financial, Inc., a national sub-prime
mortgage lender and servicer.
Mr. Volpe joined the Company in October 2003 as Vice President of EZPAWN
Operations. From 2001 to 2003, he was a multi-unit manager for Toys "R" Us in
the Chicago Area. Prior to 2001, Mr. Volpe spent ten years in several positions
with Montgomery Ward, including the National Director of Hardlines.
Mr. Chism has served as Controller and Assistant Secretary of the Company since
August 1999. From 1996 to 1999, Mr. Chism served as Audit Manager for Ernst &
Young LLP, where he also served as an audit senior and audit staff member from
1991 to 1995.
68
COMMITTEES OF THE BOARD
The Board of Directors held five meetings during the year ended September 30,
2006. The Board of Directors has appointed four committees: an Executive
Committee, an Audit Committee, a Compensation Committee and a Section 401(k)
Plan Committee. The members of the Executive Committee for Fiscal 2006 were Mr.
Brinkley, Mr. Rotunda and Mr. Tonissen. The Executive Committee held several
informal meetings during Fiscal 2006, and all members attended. The Audit
Committee, comprised of Messrs. Roberts, Sage and Matzner, held five meetings in
Fiscal 2006. Messrs. Roberts and Sage attended all Audit Committee meetings, and
Mr. Matzner attended four of the five meetings. All audit committee members are
independent directors and are financially literate. Mr. Roberts is the
committee's chairman and is an "audit committee financial expert" as defined in
the applicable rules and regulations of the Securities and Exchange Act of 1934.
The Compensation Committee, comprised of Mr. Sage and Mr. Roberts, held two
formal meetings and several informal meetings during Fiscal 2006. All actions
taken by the committee during the year were by Written Unanimous Consent. The
committee that administers the Section 401(k) Plan consists of Mr. Rotunda and
Mr. Tonissen. Both members attended the one informal meeting held by the 401(k)
Committee during Fiscal 2006. All Fiscal 2006 actions of this committee were by
Written Unanimous Consents or by board resolutions. All directors attended at
least 75% of the total number of meetings of the Board and of the committees on
which they serve.
The NASDAQ stock market, on which the Company's stock is traded, typically
requires registrants' boards to utilize a nominating committee to nominate
prospective members of the board. EZCORP is a controlled company, with all its
voting stock controlled by one individual. Accordingly, the Company is exempt
from the requirement to have a nominating committee, and its directors are
elected by its voting shareholder.
CODE OF CONDUCT AND ETHICS
The Company has in place a Code of Conduct and Ethics applicable to all
employees, as well as the Board of Directors and executive officers. Copies of
the Company's Code of Conduct and Ethics are available, free of charge by
submitting a written request to EZCORP, Inc., Investor Relations, 1901 Capital
Parkway, Austin, Texas 78746 or may be obtained from the Company's website at
www.ezcorp.com.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based primarily on statements received from officers and directors and a review
of the relevant Forms 3, 4 and 5, all officers, directors and beneficial owners
of more than ten percent of any class of equity securities were timely
throughout the fiscal year in filing all reports required by Section 16(a) of
the Exchange Act.
69
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table presents compensation earned for services during Fiscal
2004, 2005 and 2006 by the Company's Chief Executive Officer and each of the
Company's four most highly compensated executive officers whose total annual
compensation exceeded $100,000 (collectively, the "Named Executive Officers").
Long Term
Compensation
Annual Compensation Restricted
---------------------------------- Stock All other
Salary Bonus Other Awards Compensation
Name and Principal Position Year ($) ($) ($) ($) ($)(1)
--------------------------- ---- ------- ------- ------- ------------ ------------
Sterling B. Brinkley 2004 473,077 22,650 759,847 -- 3,238
Chairman of the Board (5) 2005 497,650 -- -- -- 1,625
2006 581,915 -- -- -- 3,720
Joseph L. Rotunda 2004 522,885 787,500 414,298 586,200 3,378
President, Chief Executive Officer and 2005 575,481 721,875 -- -- 1,912
Director (2) (3) 2006 630,590 952,500 -- -- 3,720
Dan N. Tonissen 2004 272,500 170,898 -- -- 2,327
Senior Vice President, Chief Financial 2005 289,346 165,300 -- -- 1,086
Officer, Assistant Secretary and Director 2006 304,423 198,250 -- -- 3,404
Robert A. Kasenter 2004 160,000 78,000 -- -- 1,364
Senior Vice President of 2005 188,846 100,244 -- -- 722
Administration 2006 223,654 146,250 -- -- 2,511
Eric Fosse 2004 -- -- -- -- --
Vice President of EZMONEY 2005 168,269 78,313 150,437 -- 665
Operations (4) 2006 194,231 92,869 -- -- 2,176
Michael Volpe 2004 152,615 77,040 97,858 -- 1,353
Vice President of EZPAWN Operations (4) 2005 166,250 57,276 41,458 -- 633
2006 169,865 79,688 -- -- 1,897
(1) This category includes the value of any life insurance and disability
premiums paid on behalf of the named executive.
(2) On January 15, 2004, Mr. Rotunda was awarded 180,000 shares of restricted
Class A Common Stock with a fair value of $0.6 million on that date. The
Company also agreed to reimburse Mr. Rotunda for the income tax
consequences of the award. The restriction requires Mr. Rotunda to remain
employed by the Company until January 1, 2009 at which time any unvested
shares will vest. The shares are subject to earlier vesting based on the
occurrence of certain objectives. 60,000 shares vested on January 15, 2005
based on the achievement of certain of those objectives. As of September
30, 2006, the market value of the 180,000 shares was $2.3 million.
(3) Mr. Rotunda's Other Annual Compensation in 2004 includes $336,223 for
payment of taxes related to the restricted stock award, $51,272 expenses
related to a country club membership plus taxes, and $26,803 for auto
allowance plus taxes.
(4) Mr. Fosse's and Mr. Volpe's Other Annual Compensation is for relocation to
Austin, Texas.
(5) Mr. Brinkley's 2004 Other Annual Compensation includes $746,163 for payment
of taxes related to the restricted stock award on September 17, 2003 and
the 2004 forgiveness of interest pursuant to a note receivable from Mr.
Brinkley.
EMPLOYMENT AGREEMENTS
As President and Chief Executive Officer, Joseph L. Rotunda's annual
compensation includes an annual bonus ranging from 50% to 150% of his base
salary dependent upon the attainment of Board approved operating goals. In the
event of a change of control, Mr. Rotunda is entitled to receive a bonus payment
equivalent to 200% of his annual compensation, as well as immediate vesting of
all stock options. If Mr.
70
Rotunda's employment is terminated, other than for cause, he is entitled to
receive a severance payment equal to his annual compensation.
INSIDER NOTES
In 1994, the Company loaned a former chief executive ("CEO") $729,113 to
purchase 150,000 shares of Class A Common Stock. The loan was shown as a
reduction of stockholders' equity. In connection with his separation from the
Company in 2000, the maturity date of the loan was extended to the earlier of
(a) ten business days following the first day that the closing price for the
Company's stock equals or exceeds $3.33 per share, or (b) August 1, 2005. On
January 16, 2004 the Company's stock closed at $3.45 thereby accelerating the
due date of the note. The former CEO defaulted in the payment of the note after
it became due. On September 22, 2004, the Company obtained a judgment confirming
an arbitration award on the note in the amount of $969,399 (principal of
$729,113 and accrued interest of $240,286) plus post-judgment interest. On
October 19, 2004, the former CEO filed a Chapter 7 bankruptcy seeking to
discharge all of his debts including the debt represented by the judgment. A
full valuation allowance has been recorded for the note, as its collection is
doubtful.
In October 1994, the Board of Directors approved an agreement that provided
incentive compensation to the Chairman, Sterling Brinkley, based on growth in
the share price of the Company's Class A Common Stock. Mr. Brinkley was advanced
$1.5 million evidenced by a recourse promissory note, due in 2005 and bearing
interest at the minimum rate allowable for federal income tax purposes (2.33%
for Fiscal 2005).
Under the terms of Mr. Brinkley's $1.5 million loan, as amended, the loan
principal would have been forgiven if, prior to its October 1, 2005 maturity
date, a stock price target of $9.42 had been attained. Mr. Brinkley repaid his
note in full in September 2005. Accrued interest was forgiven based upon
continued employment, and the Company was required to reimburse Mr. Brinkley for
the income tax consequences of the interest forgiveness. Charges to operations
consist of forgiveness of interest and related income tax costs and totaled
approximately $41,000 and $60,000 in Fiscal 2004 and 2005.
DIRECTOR COMPENSATION
The table below summarizes payments made to outside directors during Fiscal
2006:
Compensation Audit
Committee Committee
Name Board Service Chair Chair Total
---- ------------- ------------ --------- --------
Gary C. Matzner $ 56,000 $ -- $ -- $ 56,000
Thomas C. Roberts (a) 56,000 -- 8,000 64,000
Richard D. Sage 56,000 5,000 -- 61,000
-------- ------ ------ --------
$168,000 $5,000 $8,000 $181,000
======== ====== ====== ========
(a) Excludes a $4,500 reimbursement from Mr. Roberts for an over payment in
Fiscal 2005.
The Company had no other outside directors during Fiscal 2006.
STOCK OPTIONS
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the grant of 1,050,000 options to Mr. Brinkley and 300,000 options to
Mr. Tonissen that remain outstanding. The options are exercisable at $3.33 per
share, vest on October 6, 2008 and have a contractual life of ten years. If any
of these options fail to qualify as incentive options under the Internal Revenue
Code, the Company has agreed to pay a bonus to each optionee at the time and in
the amount of any resulting tax savings realized by the Company.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 1,710,000 options to executive officers, exercisable at
$0.86 per share, and, except as discussed below, vesting on October 20, 2008. As
of September 30, 2006, 405,000 of these options remained outstanding, 405,000
options have been canceled due to employee termination and 900,000 options have
been
71
exercised. The terms of this grant provide for accelerated vesting upon
achievement of certain income levels for years ending September 30, 2003, 2004
and 2005. As of September 30, 2006, 405,000 options are exercisable.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved a grant of 300,000 options to Mr. Brinkley, exercisable at $2.09 per
share. Forty percent of these options vested on September 15, 2004, and the
remaining 60% vested on September 15, 2005.
On January 15, 2004, the Compensation Committee of the Board of Directors
approved a grant of 972,000 options to key individuals exercisable at $3.26 per
share, and except as discussed below, vesting on January 1, 2009. An additional
grant under the same conditions was granted on April 19, 2004 at an exercise
price of $3.53 per share. As of September 30, 2006, 591,000 of these options
remained outstanding, 172,500 options have been canceled due to employee
termination and 261,000 options have been exercised. As of September 30, 2006,
63,000 options are exercisable. The terms of the grant provide for accelerated
vesting upon achievement of certain objectives.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The Named Executive Officers received no option or SAR grants in the fiscal year
ended September 30, 2006.
72
AGGREGATE OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise of
stock options (or tandem SARs) and freestanding SARs in Fiscal 2006 and the
value of unexercised options and SARs held by each of the Named Executive
Officers at the end of the Company's last fiscal year.
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money
On Value Options/SARs at Options/SARs at
Exercise Realized FY-End (#) FY-End ($)(1)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- ---------- ------------------------- -------------------------
Sterling B. Brinkley
Chairman of the Board -- $ -- 300,000 / 1,050,000 $3,241,000 / $10,038,000
Joseph L. Rotunda
President, Chief Executive
Officer and Director 870,000 $6,546,875 0 / 0 $0 / $0
Dan N. Tonissen
Senior Vice President, Chief
Financial Officer, Assistant
Secretary and Director 183,000 $1,933,335 255,000 / 432,000 $3,069,350 / $4,171,120
Robert A. Kasenter
Senior Vice President of
Administration 105,000 $ 534,533 0 / 150,000 $0 / $1,500,800
Eric Fosse
Vice President of EZMONEY
Operations 24,000 $ 167,152 0 / 36,000 $0 / $360,000
Michael Volpe
Vice President of EZPAWN
Operations 84,000 $ 839,400 0 / 156,000 $0 / $1,549,520
(1) Values stated are based upon the closing price of $12.89 per share of the
Company's Class A Common Stock on The NASDAQ Stock Market on September 29,
2006, the last trading day of the fiscal year.
COMPENSATION PURSUANT TO PLANS
STOCK INCENTIVE PLAN
On November 5, 1998, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 1998 Incentive Plan (the "1998 Plan").
The 1998 Plan provided for (i) the granting of incentive stock options to
purchase Class A Common Stock, (ii) the granting of nonqualified stock options
to purchase Class A Common Stock, (iii) the granting of stock appreciation
rights ("SARs"), and (iv) the granting of limited stock appreciation rights
("LSARs"). Currently, no more options, SARs or LSARs may be granted under the
1998 Plan.
The 1998 Plan provided for the issuance of shares for stock option awards of up
to 3,825,000 of the Company's Class A Common Stock. As of September 30, 2006,
the Company had 1,905,000 active options outstanding to executive officers under
the 1998 Plan at prices ranging from $0.67 to $3.33. Of these options, 484,200
are vested. As of Fiscal 2006, 1,953,000 options have been exercised.
On October 30, 2002, the Compensation Committee of the Board of Directors
approved a grant of 1,710,000 options to executive officers, exercisable at
$0.86 per share and, except as discussed below,
73
vesting on October 20, 2008. As of September 30, 2006, 405,000 of these options
remained outstanding, 405,000 options have been canceled due to employee
termination and 900,000 options have been exercised. The terms of this grant
provides for accelerated vesting upon achievement of certain income levels for
years ending September 30, 2003, 2004 and 2005. As of September 30, 2006,
405,000 options are exercisable.
On September 17, 2003, the Compensation Committee of the Board of Directors
approved the adoption of the EZCORP, Inc. 2003 Incentive Plan (the "2003 Plan").
The 2003 Plan permitted grants of the same types of options, SARs and LSARs as
the 1998 Plan and provided for stock option awards of up to 2,700,000 of the
Company's Class A Common Stock. Currently, no more options, SARs or LSARs may be
granted under the 2003 Plan. As of September 30, 2006, the Company had 903,000
active options outstanding to executive officers under the 2003 Plan at prices
ranging from $1.97 to $4.05. Of these options, 324,600 are vested. As of Fiscal
2006, 279,000 options have been exercised.
Also, on September 17, 2003, the Board of Directors approved an award of 375,000
shares of restricted stock to the Chairman of the Board. The closing price of
the Company's stock on September 17, 2003 was $2.09. The restriction required
that Mr. Brinkley remain employed with the Company through September 17, 2005.
The Company also agreed to reimburse Mr. Brinkley for the income tax
consequences that resulted from the award.
On January 15, 2004, the Board of Directors approved an award of 180,000 shares
of restricted stock to the Company's Chief Executive Officer valued at $0.6
million. The shares will vest on January 1, 2009, provided he remains
continuously employed by the Company through the vesting date. The shares are
subject to earlier vesting based on the occurrence of certain objectives. The
Company also agreed to reimburse him for the income tax consequences resulting
from the award.
The options, SARs, and LSARs from all plans are not transferable except by will
and by the laws of descent and distribution, and under other limited
circumstances. The plans intended to be qualified under Securities and Exchange
Commission Rule 16b-3 which generally exempts certain option grants and certain
stock or cash awards from the provisions of Section 16(b) under the Securities
Exchange Act of 1934.
401(K) PLAN
On June 6, 1991, the Company adopted the EZCORP, Inc. 401(k) Plan (the "401(k)
Plan"), a savings and profit sharing plan intended to qualify under Section
401(k) of the Code. Under the 401(k) Plan, employees of the Company may
contribute to the plan up to a maximum percentage allowable not to exceed the
limits of Code Sections 401(k), 402(g), 404 and 415. The Company may match 25%
of an employee's contributions up to 6% of his compensation. Employer
contributions may be made in the form of Class A Common Stock. Contribution
expense related to the 401(k) Plan for 2006 was approximately $54,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors has appointed a Compensation Committee currently
comprised of Mr. Sage and Mr. Roberts. Mr. Sage serves as a director and is also
a member of the Audit Committee of the Board of Directors. Mr. Roberts serves as
a director and is the Chairman of the Audit Committee of the Board of Directors.
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Phillip Ean Cohen indirectly controls the Company through his ownership of all
of the issued and outstanding stock of MS Pawn Corporation, the sole general
partner of MS Pawn Limited Partnership ("MS Pawn"), which owns 100% of the Class
B Voting Common Stock of the Company. The table below sets forth information
regarding the beneficial ownership of the Company's Common Stock as of October
31, 2006 for (i) each of the Company's current directors, (ii) each of the Named
Executive Officers, (iii) beneficial owners known to the registrant to own more
than five percent of any class of the Company's voting securities, and (iv) all
current officers and directors as a group.
Class A Non-Voting Class B Voting
Common Stock Common Stock
Name and Address of the --------------------- ------------------- Voting
Beneficial Owners(a) Number Percent Number Percent Percent
----------------------- --------- ------- --------- ------- -------
MS Pawn Limited Partnership (b) (g) 2,998,548(h) 7.39%(h) 2,982,393 100% 100%
MS Pawn Corporation
Phillip Ean Cohen
1901 Capital Parkway
Austin, Texas 78746
Sterling B. Brinkley (c) 671,520 1.77% -- -- --
9 Morgan Lane
Locust Valley, New York 11560
Joseph L. Rotunda (d) 615,552 1.64% -- -- --
1901 Capital Parkway
Austin, TX 78746
Dan N. Tonissen (e) 387,000 1.02% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Gary C. Matzner (l) 22,200 0.06% -- -- --
2601 S. Bayshore Dr.
Miami, Florida 33133
Thomas C. Roberts (n) 30,000 0.08% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Richard D. Sage (m) 18,693 0.05% -- -- --
13636 Deering Bay Drive
Coral Gables, Florida 33158
Robert A. Kasenter (i) 15,159 0.04% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Eric Fosse (j) 96 0.00% -- -- --
1901 Capital Parkway
Austin, Texas 78746
Michael Volpe (k) 12,000 0.03% -- -- --
1901 Capital Parkway
Austin, Texas 78746
All officers and directors as a
group (b) (f) 2,110,494 5.48% -- -- --
75
(a) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Class B Common Stock shown as beneficially owned by them, subject to
community property laws where applicable.
(b) MS Pawn Corporation is the general partner of MS Pawn and has the sole
right to vote its shares of Class B Common Stock and to direct their
disposition. Mr. Cohen is the sole stockholder of MS Pawn Corporation. See
"Certain Relationships and Related Transactions."
(c) Includes options to acquire 300,000 shares of Class A Common Stock at $2.09
per share and warrants to acquire 3,573 shares of Class A Common Stock at
$2.06 per share. Does not include options to acquire 1,050,000 shares of
Class A Common Stock at $3.33 per share, none of which are currently
exercisable. Does not include 675,000 shares of restricted stock.
(d) Does not include 1,065,000 shares of restricted stock.
(e) Includes options to acquire 12,000 shares of Class A Common Stock at $0.67
per share and 255,000 shares of Class A Common Stock at $0.86 per share.
Does not include options to acquire 300,000 shares of Class A Common Stock
at $3.33 per share and 120,000 shares of Class A Common Stock at $3.26 per
share, none of which are currently exercisable. Does not include 30,000
shares of restricted stock.
(f) Includes 13 persons' options to acquire 928,800 shares of Class A Common
Stock at prices ranging from $0.67 to $5.35 per share and warrants to
acquire 3,666 shares of Class A Common Stock at $2.06 per share.
(g) Includes warrants for 12,279 shares of Class A Common Stock, warrants for
12,222 shares of Class B Common Stock held by MS Pawn, and warrants for
3,876 shares of Class A Common Stock held by Mr. Cohen.
(h) The number of shares and percentage reflect Class A Common Stock and
warrants, together with Class B Common Stock and warrants, which are
convertible to Class A Common Stock.
(i) Does not include options to acquire 30,000 shares of Class A Common Stock
at $1.41 per share or 120,000 shares of Class A Common Stock at $3.26 per
share, none of which are currently exercisable. Does not include 30,000
shares of restricted stock.
(j) Does not include options to acquire 36,000 shares of Class A Common Stock
at $2.89 per share that are not currently exercisable. Does not include
12,000 shares of restricted stock.
(k) Includes options to acquire 12,000 shares of Class A Common Stock at $1.97
per share. Does not include options to acquire 24,000 shares of Class A
Common Stock at $1.97 per share, or 120,000 shares of Class A Common Stock
at $3.26 per share, none of which are currently exercisable.
(l) Includes options to acquire 1,800 shares of Class A Common Stock at $0.86
per share and 15,000 shares of Class A Common Stock at $5.35 per share.
Does not include options to acquire 1,800 shares of Class A Common Stock at
$0.86 per share or 15,000 shares of Class A Common Stock at $12.60 per
share, none of which are currently exercisable.
(m) Includes options to acquire 1,800 shares of Class A Common Stock at $0.67
per share, 1,800 shares of Class A Common Stock at $0.86 per share, 15,000
shares of Class A Common Stock at $5.35 per share and warrants to acquire
93 shares of Class A Common Stock at $2.06 per share. Does not include
options to acquire 1,800 shares of Class A Common Stock at $0.86 per share
or 15,000 shares of Class A Common Stock at $12.60 per share, none of which
are currently exercisable.
(n) Includes options to acquire 15,000 shares of Class A Common Stock at $4.76
per share and 15,000 shares of Class A Common Stock at $5.35 per share.
Does not include options to acquire 15,000 shares of Class A Common Stock
at $12.60 per share, which are currently not exercisable.
76
Securities authorized under equity compensation plans as of September 30, 2006,
were as follows:
Number of Securities Remaining
Number of Securities Weighted Average Available for Future Issuance
to be Issued Exercise Price of Under Equity Compensation Plans
Upon Exercise of Outstanding (Excluding Securities Reflected
Outstanding Options Option in Column (a))
Plan Category (a) (b) (c)
------------- -------------------- ----------------- -------------------------------
Equity compensation plans
approved by security
holders 3,374,670 $2.83 2,205,000
Equity compensation plans
not approved by
security holders -- -- --
--------- ----- ---------
Total 3,374,670 $2.83 2,205,000
========= ===== =========
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of October 1, 2004, the Company entered into a financial advisory services
agreement with Madison Park, L.L.C. ("Madison Park"), an affiliate of the
controlling stockholder. The agreement requires Madison Park to provide ongoing
advice and consultation with respect to mergers, acquisitions, divestitures,
strategic planning, corporate development, investor relations, treasury and
other advisory services for a monthly fee of $100,000, inclusive of most
expenses. The Madison Park agreement has a three-year term and the Company has
the right to terminate the agreement at any time. Madison Park can terminate
only at the end of any one of the Company's fiscal years. In Fiscal 2005 and
2006, total payments to Madison Park amounted to $1,200,000 annually.
Pursuant to the terms of a financial advisory services agreement, Morgan Schiff
& Co., Inc. ("Morgan Schiff"), an affiliate of the general partner of the
controlling stockholder, provided financial advisory services similar to those
now provided by Madison Park through October 1, 2004. In Fiscal 2004, the
Company paid $802,000 to Morgan Schiff. As a result of entering the agreement
with Madison Park, the Company elected not to renew its financial advisory
services agreement with Morgan Schiff at October 1, 2004. Philip E. Cohen is a
principal in Morgan Schiff, Madison Park and the general partner of the
controlling stockholder.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by BDO Seidman, LLP during the years
ended September 30, 2005 and 2006 are:
Years Ended September 30,
-------------------------
2005 2006
-------- --------
Audit fees:
Audit of financial statements $246,145 $207,356
Audit pursuant to section 404 of the
Sarbanes-Oxley Act 200,000 259,831
Quarterly reviews and other audit fees 69,453 68,522
-------- --------
Total audit fees 515,598 535,709
Audit related fees 16,033 15,862
Tax fees -- --
All other fees 6,440 --
-------- --------
Total fees for services $538,071 $551,571
======== ========
77
At September 30, 2005, the Company estimated the total costs it expected for its
financial statement audit and its section 404 audit for the above disclosure, as
total billings had not yet been received by the time it filed its 2005 annual
report. Included in the 2006 figures above is $12,956 related to the 2005 audit
of financial statements and $70,831 related to the 2005 section 404 audit. Also
included in the 2006 figures is the Company's estimated total cost for the 2006
audits, as final billings have not yet been received for those audits.
The Audit Committee of the Company's Board of Directors has adopted a policy of
pre-approving all fees to be paid to the Company's independent audit firm,
regardless of the type of service. All non-audit services were reviewed with the
Audit Committee, which concluded that the provision of such services by BDO
Seidman, LLP, as appropriate, was compatible with the maintenance of that firm's
independence in the conduct of its auditing functions.
78
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of EZCORP, Inc. and
subsidiaries are included in Item 8:
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2005 and 2006
Consolidated Statements of Operations for each of the three years in the
period ended September 30, 2006
Consolidated Statements of Cash Flows for each of the three years in the
period ended September 30, 2006
Consolidated Statements of Stockholders' Equity for each of the three years
in the period ended September 30, 2006
Notes to Consolidated Financial Statements.
(2) The following Financial Statement Schedule is included herein:
Schedule II-Valuation Accounts
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission ("SEC") are
not required under the related instructions or are inapplicable, and
therefore, have been omitted.
(3) Listing of Exhibits (included herein)
(b) Through the fourth quarter ended September 30, 2006, the Company filed
the following Current Reports on Form 8-K: Four dated November 10, 2005,
January 24, 2006, April 25, 2006, and July 25, 2006 reporting the issuance
of a press release regarding its results of operations for the fiscal
quarters ended September 30, 2005, December 31, 2005, March 31, 2006, and
June 30, 2006; One dated October 1, 2005 describing the Senior Management
Incentive Compensation Program; One dated December 1, 2005 announcing the
formation of a supplemental executive retirement plan; Once dated March 6,
2006 announcing the termination of relationship with an independent lender
related to the Company's credit services; One dated April 11, 2006
announcing the execution of credit service agreements with independent
lenders; One dated April 17, 2006 to report the issuance of a press release
increasing expected quarterly earnings; And one dated September 21, 2006
(amended September 29, 2006) announcing the adoption of a new stock
compensation plan and a grant of restricted shares under that plan.
79
EZCORP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION ACCOUNTS
(In millions)
ADDITIONS
Balance at ------------------------ Balance
Beginning Charged to Charged to at End
Description of Period Expense Other Accts Deductions of Period
----------- ---------- ---------- ----------- ---------- ---------
Allowance for valuation of inventory:
Year ended September 30, 2004 ............ $1.8 $(0.3) $-- $ -- $1.5
---- ----- --- ---- ----
Year ended September 30, 2005 ............ $1.5 $ 0.4 $-- $ -- $1.9
---- ----- --- ---- ----
Year ended September 30, 2006 ............ $1.9 $ 0.9 $-- $ -- $2.8
---- ----- --- ---- ----
Allowance for uncollectible pawn service
charges receivable:
Year ended September 30, 2004 ............ $6.3 $ 0.7 $-- $ -- $7.0
---- ----- --- ---- ----
Year ended September 30, 2005 ............ $7.0 $ 0.6 $-- $ -- $7.6
---- ----- --- ---- ----
Year ended September 30, 2006 ............ $7.6 $ -- $-- $2.9 $4.7
---- ----- --- ---- ----
Allowance for losses on payday loans:
Year ended September 30, 2004 ............ $0.2 $ 8.1 $-- $7.8 $0.5
---- ----- --- ---- ----
Year ended September 30, 2005 ............ $0.5 $ 6.6 $-- $7.0 $0.1
---- ----- --- ---- ----
Year ended September 30, 2006 ............ $0.1 $ 2.3 $-- $2.2 $0.2
---- ----- --- ---- ----
Allowance for valuation of deferred
tax assets:
Year ended September 30, 2004 ............ $ -- $ -- $-- $ -- $ --
---- ----- --- ---- ----
Year ended September 30, 2005 ............ $ -- $ -- $-- $ -- $ --
---- ----- --- ---- ----
Year ended September 30, 2006 ............ $ -- $ 0.4 $-- $ -- $0.4
---- ----- --- ---- ----
80
LISTING OF EXHIBITS
See Exhibit Index immediately following signature page.
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EZCORP, Inc.
December 13, 2006
By: /s/ Joseph L. Rotunda
---------------------------------
(Joseph L. Rotunda)
(President, Chief Executive
Officer & Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Sterling B. Brinkley Chairman of the Board December 13, 2006
-------------------------------------
Sterling B. Brinkley
/s/ Joseph L. Rotunda President, Chief Executive December 13, 2006
------------------------------------- Officer & Director
Joseph L. Rotunda (Principal Executive Officer)
/s/ Dan N. Tonissen Senior Vice President, Chief December 13, 2006
------------------------------------- Financial Officer, Assistant Secretary
Dan N. Tonissen & Director (Principal Financial and
Accounting Officer)
/s/ Gary C. Matzner Director December 13, 2006
-------------------------------------
Gary C. Matzner
/s/ Richard D. Sage Director December 13, 2006
-------------------------------------
Richard D. Sage
/s/ Thomas C. Roberts Director December 13, 2006
-------------------------------------
Thomas Roberts
82
EXHIBIT INDEX
Page Number if
Number Description Filed herein Incorporated by Reference to
------ ----------- -------------- ----------------------------
3.1 Amended and Restated Certificate of Exhibit 3.1 to the Registration Statement
Incorporation of the Company on Form S-1 effective August 23, 1991
(File No. 33-41317)
3.1A Certificate of Amendment to Certificate of Exhibit 3.1A to the Registration Statement
Incorporation of the Company on Form S-1 effective July 15, 1996
(File No. 33-41317)
3.1B Amended Certificate of Incorporation of the N/A
Company *
3.2 Bylaws of the Company. Exhibit 3.2 to the Registration Statement
on Form S-1 effective August 23, 1991
(File No. 33-41317)
3.3 Amendment to the Bylaws. Exhibit 3.3 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1994
(File No. 0-19424)
3.4 Amendment to the Certificate of Incorporation of Exhibit 3.4 to Registrant's Annual Report
the Company. on Form 10-K for the year ended September
30, 1994
(File No. 0-19424)
3.5 Amendment to the Certificate of Incorporation of Exhibit 3.5 to Registrant's Annual Report
the Company on Form 10-K for the year ended September
30, 1997
3.6 Amendment to the Certificate of Incorporation of Exhibit 3.6 to Registrant's Quarterly
the Company Report on Form 10-Q for the quarter ended
March 31, 1998
4.1 Specimen of Class A Non-voting Common Stock Exhibit 4.1 to the Registration Statement
certificate of the Company. on Form S-1 effective August 23, 1991
(File No. 33-41317)
10.2 Omitted N/A
10.3 Omitted N/A
10.4 Omitted N/A
83
10.5 Security Agreement executed by EZPAWN Texas, Exhibit 10.5 to Registrant's Annual Report
Inc. (substantially the same agreement also was on Form 10-K for the year ended September
executed by EZPAWN Oklahoma, Inc.; EZPAWN 30, 1992
Mississippi, Inc.; EZPAWN Arkansas, Inc.; EZPAWN (File No. 0-19424)
Colorado, Inc.; EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston Financial
Corporation).
10.6 Guaranty Agreement executed by EZPAWN Texas, Exhibit 10.6 to Registrant's Annual Report
Inc. (substantially the same agreement also was on Form 10-K for the year ended September
executed by EZPAWN Oklahoma, Inc.; EZPAWN 30, 1992
Mississippi, Inc.; EZPAWN Arkansas, Inc.; EZPAWN (File No. 0-19424)
Colorado, Inc.; EZPAWN Alabama, Inc.; EZPAWN
Tennessee, Inc.; and Houston Financial
Corporation).
10.7 Omitted N/A
10.8 Omitted N/A
10.9 Omitted N/A
10.10 Letter agreement executed December 20, 1990 Exhibit 10.10 to the Registration Statement
between Morgan Schiff & Co., Inc. ("Morgan on Form S-1 effective August 23, 1991
Schiff") and the Company. (File No. 33-41317)
10.11 Stock Purchase Agreement between the Company, Exhibit 10.11 to the Registration Statement
Courtland L. Logue, Jr., Courtland L. Logue, on Form S-1 effective August 23, 1991
Sr., James D. McGee, M. Frances Spears, Porter (File No. 33-41317)
A. Stratton and Steve A. Stratton dated as of
May 18, 1989.
10.12 Capitalization and Subscription Agreement Exhibit 10.12 to the Registration Statement
between MS Pawn Limited Partnership ("MS Pawn") on Form S-1 effective August 23, 1991
and the Company, dated as of July 25, 1989. (File No. 33-41317)
10.13 Omitted N/A
10.14 Omitted N/A
84
10.15 Omitted N/A
10.16 Omitted N/A
10.17 Omitted N/A
10.18 Warrant Certificate issued by the Company to MS Exhibit 10.18 to the Registration Statement
Pawn on July 25, 1989. on Form S-1 effective August 23, 1991
(File No. 33-41317)
10.19 Amendment to the Stock Purchase Agreement dated Exhibit 10.19 to the Registration Statement
as of June 19, 1989 Between the Company and the on Form S-1 effective August 23, 1991
Stockholders of the Predecessor Company. (File No. 33-41317)
10.20 Second Amendment to Stock Pur- chase Agreement Exhibit 10.20 to the Registration Statement
dated as of April 20, 1990 between the Company on Form S-1 effective August 23, 1991
and the Stockholders of the Predecessor Company. (File No. 33-41317)
10.21 Omitted N/A
10.22 Omitted N/A
10.23 Omitted N/A
10.24 Omitted N/A
10.25 Omitted N/A
10.27 Omitted N/A
10.28 Omitted N/A
10.29 Omitted N/A
10.30 Omitted N/A
10.31 Omitted N/A
10.32 Omitted N/A
10.33 Omitted N/A
10.34 Omitted N/A
10.35 Stockholders' Agreement dated as of July 25, Exhibit 10.35 to the Registration Statement
1989 between the Com- pany, MS Pawn and on Form S-1 effective August 23, 1991
Courtland L. Logue, Jr. (File No. 33-41317)
85
10.36 Joinder Agreement to the Stock- Holders' Exhibit 10.36 to the Registration Statement
Agreement dated as of May 1, 1991 between the on Form S-1 effective August 23, 1991
Company MS Pawn, Mr. Kofnovec, Mr. Gary, Mr. (File No. 33-41317)
Ross and Ms. Berger.
10.37 Incentive Stock Option Plan. Exhibit 10.37 to the Registration Statement
on Form S-1 effective August 23, 1991
(File No. 33-41317)
10.38 401(k) Plan. Exhibit 10.38 to the Registration Statement
on Form S-1 effective August 23, 1991
(File No. 33-41317)
10.39 Section 125 Cafeteria Plan. Exhibit 10.39 to the Registration Statement
on Form S-1 effective August 23, 1991
(File No. 33-41317)
10.40 Omitted N/A
10.41 Omitted N/A
10.42 Omitted N/A
10.43 Omitted N/A
10.44 Omitted N/A
10.45 Lease between Logue, Inc. and E-Z Corporation Exhibit 10.45 to the Registration Statement
for real estate located at 1166 Airport on Form S-1 effective August 23, 1991
Boulevard, Austin, Texas, dated July 25, 1989. (File No. 33-41317)
10.46 Lease between Logue, Inc. and E-Z Corporation Exhibit 10.46 to the Registration Statement
for real estate located at 5415 North Lamar on Form S-1 effective August 23, 1991
Boulevard, Austin, Texas, dated July 25, 1989 (File No. 33-41317)
10.47 Agreement of Lease between LDL Partnership and Exhibit 10.47 to the Registration Statement
Logue-Drouin Industries, Inc. for real property on Form S-1 effective August 23, 1991
at 8540 Broadway Blvd., Houston, Texas, dated (File No. 33-41317)
May 3, 1988 and related Assignment of Lease.
10.48 Lease Agreement between C Minus Corporation and Exhibit 10.48 to the Registration Statement
Logue-Drouin Industries, Inc. DBA E-Z Pawn #5 on Form S-1 effective August 23, 1991
for real property located at 5209 Cameron Road, (File No. 33-41317)
Austin, Texas, dated December 28, 1987.
86
10.49 Lease Agreement between Logue, Inc. and E-Z Exhibit 10.49 to the Registration Statement
Corporation for real Property located at 901 E. on Form S-1 effective August 23, 1991
1st St., Austin, Texas, dated July 25, 1989. (File No. 33-41317)
10.50 Agreements between the Company and MS Pawn dated Exhibit 10.50 to the Registration Statement
February 18, 1992 for the payment of $1.377 on Form S-1 effective March 16, 1992
million of Series A Increasing Rate Senior (File No. 33-45807)
Subordinated Notes held by MS Pawn.
10.51 Agreement Regarding Reservation of Shares. Exhibit 10.51 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1993
(File No. 0-19424)
10.52 Omitted N/A
10.53 Omitted N/A
10.54 Omitted N/A
10.55 Omitted N/A
10.56 Omitted N/A
10.57 Omitted N/A
10.58 Omitted N/A
10.59 Omitted N/A
10.60 Loan Agreement between Sterling B. Brinkley and Exhibit 10.60 to Registrant's Annual
the Company dated October 7, 1994 (an identical Report on Form 10-K for the year ended
document exists with respect to Vincent A. September 30, 1995
Lambiase). (File No. 0-19424)
10.61 Promissory Note between Sterling B. Brinkley and Exhibit 10.61 to Registrant's Annual
the Company in the original principal amount of Report on Form 10-K for the year ended
$1,500,000 attached thereto (an identical September 30, 1995
document exists with respect to Vincent A. (File No. 0-19424)
Lambiase).
10.62 July 1, 1994 Employment Agreement between the Exhibit 10.62 to Registrant's Annual Report
Company and Vincent A. Lambiase and Promissory on Form 10-K for the year ended September
Note in the amount of $729,112.50 in connection 30, 1995
therewith. (File No. 0-19424)
10.63 EZCORP, Inc. Incentive Stock Option Award Exhibit 10.63 to Registrant's Annual Report
Agreement, Employee Form on Form 10-K For the year ended September
30,1998
(File No.0-19424)
87
10.64 EZCORP, Inc. Incentive Stock Option Award Exhibit 10.64 to Registrant's Annual Report
Agreement, Executive Form on Form 10-K for the year ended September
30, 1998
(File No. 0-19424)
10.71 Omitted N/A
10.72 Omitted N/A
10.73 Omitted N/A
10.74 Omitted N/A
10.75 Omitted N/A
10.76 Omitted N/A
10.77 Credit Agreement between the Company and Wells Exhibit 10.77 to Registrant's Annual Report
Fargo Bank (Texas), N.A., as Agent and Issuing on Form 10-K for the year ended September
Bank, re: $110 million Revolving Credit Loan 30, 1998
(File No. 0-19424)
10.78 First Amendment to Credit Agreement Between the Exhibit 10.78 to Registrant's Annual Report
Company and Wells Fargo Bank (Texas), N.A., as on Form 10-K for the year Ended September
Agent and Issuing Bank, re: $110 million 30, 1999
Revolving Credit Loan. (File No. 0-19424)
10.79 Second Amendment to Credit Agreement and Waiver Exhibit 10.79 to Registrant's Quarterly
between the Company and Wells Fargo Bank Report on Form 10-Q for the quarter ended
(Texas), N.A., as Agent and Issuing Bank, re: March 31, 2000
$85 million Revolving Credit Loan. (File No. 0-19424)
10.80 Limited Waiver between the Company and Wells Exhibit 10.80 to Registrant's Quarterly
Fargo Bank Texas, N.A., as Agent and Issuing Report on Form 10-Q for the quarter ended
Bank, re: $85 million Revolving Credit Loan. June 30, 2000
(File No. 0-19424)
10.81 Amended and Restated Credit Agreement between Exhibit 10.81 to Registrant's Annual Report
the Company and Wells Fargo Bank Texas, N.A., as on Form 10-K for the year ended September
Agent and Issuing Bank, re: $85 million Credit 30, 2000
Facility. (File No. 0-19424)
10.82 Waivers of Selected Sections of Credit Agreement Exhibit 10.82 to Registrant's Quarterly
between the Company and Wells Fargo Bank, N.A., Report on Form 10-Q for the quarter ended
as Agent and Issuing Bank, re: $85 million June 30, 2001
Credit Facility. (File No. 0-19424)
88
10.83 First Amendment to Amended and Restated Credit Exhibit 10.83 to Registrant's Quarterly
Agreement between the Company and Wells Fargo Report on Form 10-Q for the quarter ended
Bank, N.A., as Agent and Issuing Bank, re: $85 June 30, 2001
million Credit Facility. (File No. 0-19424)
10.84 Second Amendment to Amended and Restated Credit Exhibit 10.84 to Registrant's Annual Report
Agreement between the Company and Wells Fargo on Form 10-K for the year ended September
Bank, N.A., as Agent and Issuing Bank, re: $85 30, 2001
million Credit Facility. (File No. 0-19424)
10.85 Third Amendment to Amended and Restated Credit Exhibit 10.85 to Registrant's Annual Report
Agreement between the Company and Wells Fargo on Form 10-K for the year ended September
Bank, N.A., as Agent and Issuing Bank, re: $85 30, 2001
million Credit Facility. (File No. 0-19424)
10.86 Fourth Amendment to Amended and Restated Credit Exhibit 10.86 to Registrant's Current
Agreement between the Company and Wells Fargo Report on Form 8-K dated September 30, 2002
Bank, N.A., as Agent and Issuing Bank, re: $85 (File No. 0-19424)
million Credit Facility.
10.87 Second Amended and Restated Credit Agreement Exhibit 10.87 to Registrant's Current
between the Company and Wells Fargo Bank Texas, Report on Form 8-K dated October 30, 2002
N.A., as Agent and Issuing Bank, re: (File No. 0-19424)
re-syndication of Credit Facility, with a
maturity date of March 31, 2005.
10.88 EZCORP, Inc. 2003 Incentive Plan. Exhibit 10.88 to Registrant's Annual Report
on Form 10-K for the year ended September
30, 2003
(File No. 0-19424)
10.89 Third Amended and Restated Credit Agreement Exhibit 10.89 to Registrant's Quarterly
between the Company and Wells Fargo Bank Texas, Report on Form 10-Q for the quarter ended
N.A., as Agent and Issuing Bank, re: $40 million March 30, 2004
Credit Facility (File No. 0-19424)
10.90 Amended Charter of the Audit Committee of the Exhibit 10.90 to Registrant's Annual Report
Board of Directors of EZCORP, Inc. dated October on Form 10-K for the year ended September
26, 2004 30, 2004
(File No. 0-19424)
10.91 Advisory Services Agreement between EZCORP, Inc. Exhibit 10.91 to Registrant's Annual Report
and Madison Park LLC effective October 1, 2004 on Form 10-K for the year ended September
30, 2004
(File No. 0-19424)
89
10.92 First Amendment to Third Amended and Restated Exhibit 10.92 to Registrant's Quarterly
Credit Agreement between the Company and Wells Report on Form 10-Q for the quarter ended
Fargo Bank, N.A., as Agent and Issuing Bank, re: June 30, 2005
$40 million Credit Facility (File No. 0-19424)
10.93 Second Amendment to Third Amended and Restated Exhibit 10.93 to Registrant's Annual Report
Credit Agreement between the Company and Wells on Form 10-K for the year ended September
Fargo Bank, N.A., as Agent and Issuing Bank, re: 30, 2005
$40 million Credit Facility (File No. 0-19424)
10.94 EZCORP Supplemental Executive Retirement Plan Exhibit 10.94 to Registrant's Current
effective December 1, 2005 Report on Form 8-K dated November 28, 2005
(File No. 0-19424)
10.95 Charter of the Audit Committee of the Board of Exhibit 10.95 to Registrant's Annual Report
Directors of EZCORP, Inc. dated November 8, 2005 on Form 10-K for the year ended September
30, 2005
(File No. 0-19424)
10.96 EZCORP Fiscal Year 2006 Incentive Compensation Exhibit 10.96 to Registrant's Annual Report
Plan on Form 10-K for the year ended September
30, 2005
(File No. 0-19424)
10.97 Credit Services and Loan Administration Exhibit 10.97 to Registrant's Quarterly
Agreement dated April 11, 2006 between Texas Report on Form 10-Q for the quarter ended
EZPAWN, L.P. and NCP Finance Limited Partnership March 31, 2006
(File No. 0-19424)
10.98 Guaranty dated April 11, 2006 from EZCORP, Inc Exhibit 10.98 to Registrant's Quarterly
to NCP Finance Limited Partnership Report on Form 10-Q for the quarter ended
March 31, 2006
(File No. 0-19424)
10.99 Credit Services Organization and Lender Exhibit 10.99 to Registrant's Quarterly
Agreement dated April 12, 2006 between Texas Report on Form 10-Q for the quarter ended
EZMONEY, L.P. and Integrity Texas Funding, L.P. March 31, 2006
(File No. 0-19424)
10.100 Credit Services Organization and Lender Exhibit 10.100 to Registrant's Quarterly
Agreement dated November 9, 2005 between Texas Report on Form 10-Q for the quarter ended
EZPAWN, L.P. and Integrity Texas Funding, L.P. March 31, 2006
(File No. 0-19424)
10.101 Credit Services Organization and Lender Exhibit 10.101 to Registrant's Quarterly
Agreement dated November 30, 2005 between Texas Report on Form 10-Q for the quarter ended
EZPAWN Florida, L.P. and Integrity Florida March 31, 2006
Funding, L.P. (File No. 0-19424)
10.102 Fourth Amended and Restated Credit Agreement Exhibit 10.102 to Registrant's Current
between the Company and Wells Fargo Bank Texas, Report on Form 8-K dated October 13, 2006
N.A., as the Agent and Issuing Bank, re: $40 (File No. 0-19424)
million credit facility
90
10.103 EZCORP Fiscal Year 2007 Incentive Compensation N/A
Plan * +
10.104 EZCORP, Inc. 2006 Incentive Plan. * N/A
16.1 Omitted N/A
20.1 Omitted N/A
21.1 Subsidiaries of Registrant.* N/A
23.1 Consent of Independent Registered Public N/A
Accounting Firm.*
31.1 Certification of Chief Executive Officer N/A
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. *
31.2 Certification of Chief Financial Officer N/A
Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. *
32.1 Certification of Chief Executive Officer N/A
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
32.2 Certification of Chief Financial Officer N/A
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
----------
* Filed herewith.
+ Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.
91