UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2006, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. Large accelerated
filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
As of August 2, 2006 there were 30,816,904 shares of Common Stock
outstanding.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
-------------------- ------------
2006 2005 2005
-------- -------- --------
(unaudited)
(in thousands, except share data)
ASSETS
Cash and cash equivalents................ $ 28,770 $ 19,092 $ 42,741
Service fees receivable.................. 4,499 4,776 4,176
Pawn receivables......................... 30,713 26,924 27,314
Short-term advance receivables,
net of allowance of $198, $505
and $242, respectively................. 5,352 14,068 6,488
Inventories.............................. 21,439 18,451 21,987
Prepaid expenses and other current assets 6,651 3,964 5,430
-------- -------- --------
Total current assets .................. 97,424 87,275 108,136
Property and equipment, net.............. 27,004 21,367 23,565
Goodwill................................. 53,237 53,237 53,237
Other.................................... 1,132 905 1,016
-------- -------- --------
Total assets .......................... $ 178,797 $ 162,784 $ 185,954
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable......................... $ 902 $ 1,346 $ 908
Accrued liabilities...................... 10,725 6,969 13,722
-------- -------- --------
Total current liabilities ............. 11,627 8,315 14,630
Deferred income taxes payable............ 9,035 8,913 8,616
-------- -------- --------
Total liabilities ..................... 20,662 17,228 23,246
-------- -------- --------
Stockholders' equity:
Preferred stock; $.01 par value;
10,000,000 shares authorized ........ - - -
Common stock; $.01 par value;
90,000,000 shares authorized ........ 345 334 340
Additional paid-in capital ............ 89,123 80,010 83,065
Retained earnings ..................... 116,940 88,732 102,823
Common stock held in treasury ......... (48,273) (23,520) (23,520)
-------- -------- --------
Total stockholders' equity ............ 158,135 145,556 162,708
-------- -------- --------
Total liabilities and stockholders'
equity .............................. $ 178,797 $ 162,784 $ 185,954
======== ======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2006 2005 2006 2005
------- ------- ------- -------
(unaudited, in thousands, except per share amounts)
Revenues:
Merchandise sales ........... $ 29,353 $ 22,544 $ 58,862 $ 46,781
Pawn service fees ........... 11,334 9,569 22,400 18,523
Short-term advance and
credit services fees....... 14,766 13,262 28,806 25,931
Check cashing fees .......... 748 691 1,634 1,517
Other ....................... 174 262 373 575
------- ------- ------- -------
56,375 46,328 112,075 93,327
------- ------- ------- -------
Cost of revenues:
Cost of goods sold........... 17,017 13,380 34,533 27,970
Short-term advance and credit
services loss provision ... 3,755 3,018 4,539 4,599
Check cashing returned items
expense.................... 96 48 190 134
------- ------- ------- -------
20,868 16,446 39,262 32,703
------- ------- ------- -------
Gross profit................... 35,507 29,882 72,813 60,624
------- ------- ------- -------
Expenses and other income:
Store operating expenses..... 18,648 16,164 36,767 31,925
Administrative expenses...... 5,064 4,209 10,770 8,425
Depreciation................. 1,895 1,370 3,600 2,662
Interest income ............. (329) (87) (550) (171)
------- ------- ------- -------
25,278 21,656 50,587 42,841
------- ------- ------- -------
Income before income taxes..... 10,229 8,226 22,226 17,783
Provision for income taxes..... 3,734 3,003 8,109 6,491
------- ------- ------- -------
Net income..................... $ 6,495 $ 5,223 $ 14,117 $ 11,292
======= ======= ======= =======
Net income per share:
Basic..................... $ 0.20 $ 0.17 $ 0.44 $ 0.36
======= ======= ======= =======
Diluted................... $ 0.20 $ 0.16 $ 0.43 $ 0.34
======= ======= ======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------
2006 2005
-------- --------
(unaudited, in thousands)
Cash flows from operating activities:
Net income .................................... $ 14,117 $ 11,292
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation ............................... 3,600 2,662
Share-based compensation ................... 522 -
Short-term advance loss provision ........... 494 4,599
Stock option and warrant income tax benefit.. - 666
Changes in operating assets and liabilities:
Service fees receivable ..................... (323) (264)
Inventories ................................. 192 (315)
Prepaid expenses and other assets ........... (459) (459)
Accounts payable and accrued liabilities .... (2,533) (1,227)
Current and deferred income taxes .......... (929) 196
-------- --------
Net cash flows from operating activities .. 14,681 17,150
-------- --------
Cash flows from investing activities:
Pawn receivables, net ......................... (3,043) (3,987)
Short-term advance receivables, net ........... 642 (3,202)
Purchases of property and equipment ........... (7,039) (6,653)
-------- --------
Net cash flows from investing activities .. (9,440) (13,842)
-------- --------
Cash flows from financing activities:
Purchase of treasury stock .................... (24,753) (11,404)
Proceeds from exercise of stock options
and warrants ................................ 3,284 956
Stock option and warrant income tax benefit ... 2,257 -
-------- --------
Net cash flows from financing activities .. (19,212) (10,448)
-------- --------
Change in cash and cash equivalents............. (13,971) (7,140)
Cash and cash equivalents at beginning
of the period................................. 42,741 26,232
-------- --------
Cash and cash equivalents at end of the period.. $ 28,770 $ 19,092
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes ................................ $ 8,418 $ 6,086
======== ========
Supplemental disclosure of non-cash investing activity:
Non-cash transactions in connection with pawn
receivables settled through forfeitures of
collateral transferred to inventories ....... $ 22,090 $ 17,554
======== ========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements,
including the notes thereto, include the accounts of First Cash Financial
Services, Inc. (the "Company"), and its wholly-owned subsidiaries. In
addition, the accompanying consolidated financial statements include the
accounts of Cash & Go, Ltd., a Texas limited partnership that operates
financial services kiosks inside convenience stores, in which the Company
has a 50% ownership interest. All significant intercompany accounts and
transactions have been eliminated.
Such unaudited consolidated financial statements are condensed and do
not include all disclosures and footnotes required by generally accepted
accounting principles in the United States of America for complete financial
statements. Such interim period financial statements should be read in
conjunction with the Company's consolidated financial statements, which are
included in the Company's December 31, 2005 Annual Report on Form 10-K. The
condensed consolidated financial statements as of June 30, 2006 and for the
three and six-month periods ended June 30, 2006 and 2005, are unaudited, but
in management's opinion, include all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows for such interim periods.
Operating results for the periods ended June 30, 2006 are not necessarily
indicative of the results that may be expected for the full fiscal year.
Certain amounts in prior year comparative presentations have been
reclassified in order to conform to the 2006 presentation.
Note 2 - Stock Split
In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006. Common stock and all share and per share amounts (except authorized
shares and par value) have been retroactively adjusted to reflect the split.
Note 3 - Revolving Credit Facility
The Company maintains a long-term line of credit with two commercial
lenders (the "Credit Facility"). The Credit Facility provides a $25,000,000
long-term line of credit that matures on April 15, 2007, and bears interest
at the prevailing LIBOR rate (which was approximately 5.3% at June 30, 2006)
plus a fixed interest rate margin of 1.375%. Amounts available under the
Credit Facility are limited to 300% of the Company's earnings before income
taxes, interest, and depreciation for the trailing twelve months. At June
30, 2006, no amounts were outstanding under the Credit Facility and the
Company had $25,000,000 available for borrowings. Under the terms of the
Credit Facility, the Company is required to maintain certain financial
ratios and comply with certain technical covenants. The Company was in
compliance with the requirements and covenants of the Credit Facility as of
June 30, 2006, and August 2, 2006. The Company is required to pay an annual
commitment fee of 1/8 of 1% on the average daily unused portion of
the Credit Facility commitment. The Company's Credit Facility contains
provisions that allow the Company to repurchase stock and/or pay cash
dividends within certain parameters. Substantially all of the unencumbered
assets of the Company have been pledged as collateral against indebtedness
under the Credit Facility.
Note 4 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2006 2005 2006 2005
------ ------ ------ ------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 6,495 $ 5,223 $14,117 $11,292
====== ====== ====== ======
Denominator:
Weighted-average common shares for
calculating basic earnings per share 31,758 31,358 31,802 31,742
Effect of dilutive securities:
Stock options and warrants 1,451 1,476 1,356 1,688
------ ------ ------ ------
Weighted-average common shares
for calculating diluted earnings
per share 33,209 32,834 33,158 33,430
====== ====== ====== ======
Basic earnings per share $ 0.20 $ 0.17 $ 0.44 $ 0.36
====== ====== ====== ======
Diluted earnings per share $ 0.20 $ 0.16 $ 0.43 $ 0.34
====== ====== ====== ======
Note 5 - Share-Based Compensation Expense
Under the Company's equity compensation plans, including the board-
approved 1990 Stock Option Plan, the shareholder-approved 1999 Stock
Option Plan and the shareholder-approved 2004 Long-Term Incentive Plan
(collectively described as the "Plans"), it has granted qualified and non-
qualified stock options to officers, directors and other key employees. At
June 30, 2006, 214,000 shares of unissued common stock of the Company were
available for granting under the Plans. In addition, the Company has issued
warrants to purchase shares of common stock to certain key members of
management, directors and other third parties.
Prior to January 1, 2006, the Company applied the recognition and
measurement principles of APB 25, Accounting for Stock Issued to Employees,
and related interpretations in accounting for awards of stock options and
warrants, whereby at the date of grant, no compensation expense was
reflected in income, as all stock options and warrants granted had an
exercise price equal to or greater than the market value of the underlying
common stock on the date of grant. Pro forma information regarding net
income and earnings per share was provided in accordance with Statement of
Financial Accounting Standards ("SFAS") 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, as if the fair value method
defined by SFAS 123, Accounting for Stock-Based Compensation had been
applied to stock-based compensation. For purposes of the pro forma
disclosures, the estimated fair value of stock options was amortized to
expense over the options' vesting period.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-
Based Payments, which replaces SFAS 123 and supersedes APB 25. SFAS 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their
fair values. The Company adopted SFAS 123(R) using the modified-prospective
transition method, which requires the Company, beginning January 1, 2006 and
thereafter, to expense the grant-date fair value of all share-based awards
over their remaining vesting periods to the extent the awards were not fully
vested as of the date of adoption and to expense the fair value of all
share-based awards granted subsequent to December 31, 2005 over their
requisite service periods. Stock-based compensation expense for all share-
based payment awards granted after January 1, 2006 is based on the grant-
date fair value estimated in accordance with the provisions of SFAS 123(R).
The Company recognizes compensation cost net of a forfeiture rate and
recognizes the compensation cost for only those awards expected to vest on a
straight-line basis over the requisite service period of the award, which is
generally the vesting term. The Company estimated the forfeiture rate based
on its historical experience and its expectations of future forfeitures. As
required under the modified-prospective transition method, prior periods
have not been restated. In March 2005, the Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin ("SAB") 107 regarding
the SEC's interpretation of SFAS 123(R) and the valuation of share-based
payments for public companies. The Company has applied the provisions of
SAB 107 in its adoption of SFAS 123(R). The Company records share-based
compensation cost as an administrative expense.
Historically, stock options and warrants have been granted to purchase
the Company's common stock at an exercise price equal to or greater than the
fair market value at the date of grant and generally have a maximum duration
of ten years. Stock options and warrants granted prior to January 1, 2005
were either fully vested and exercisable on the date grant, or vested and
become exercisable ratably over a five year period beginning five years from
the date of grant. In addition, certain of the options with vesting
provisions granted prior to January 1, 2005 included accelerated vesting
provisions tied to increases in the market value of the Company's stock.
All stock options granted during fiscal 2005 were fully vested on the date
of grant, of which 594,000 options were granted with an exercise price equal
to the market price of the stock on the date of grant and 5,264,000 options
were granted with an exercise price that exceeded the market price on the
date of grant ("premium-priced options"). The options granted in fiscal
2005 at market price had a weighted-average exercise price of $12.50 and a
weighted-average fair value of $3.46. The premium-priced options granted in
fiscal 2005 had a weighted-average exercise price of $19.89 and a weighted-
average fair value price of $3.75. No options or warrants were granted
during the six-month period ended June 30, 2006.
As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
income before income taxes and net income for the three months ended June
30, 2006 were $16,000 and $10,000, respectively, less than if it had
continued to account for share-based compensation under the recognition and
measurement provisions of APB 25, and related interpretations, as permitted
by SFAS 123. Basic and diluted net income per share for the three months
ended June 30, 2006 would not have been affected if the Company had not
adopted SFAS 123(R). The Company's income before income taxes and net
income for the six months ended June 30, 2006 were $522,000 and $340,000,
respectively, less than if it had continued to account for share-based
compensation under the recognition and measurement provisions of APB 25.
Basic and diluted net income per share for the six months ended June 30,
2006 would have each increased by $0.01, to $0.45 and $0.44, respectively,
if the Company had not adopted SFAS 123(R). SFAS 123(R) requires that cash
flows from tax benefits resulting from tax deductions in excess of the
compensation cost recognized for stock-based awards (excess tax benefits)
be classified as financing cash flows prospectively from January 1, 2006.
Prior to the adoption of SFAS 123(R), such excess tax benefits were
presented as operating cash flows. Accordingly, $2,257,000 of excess tax
benefits has been classified as a financing cash inflow in the 2006
year-to-date Consolidated Statement of Cash Flows. For the six months
ended June 30, 2005, such excess tax benefits amounted to $666,000 and was
classified as a operating activity cash inflow.
Of the total share-based compensation expense (before tax benefit) of
$522,000 for the six months ended June 30, 2006, approximately $490,000
related to accelerated vesting of previously issued options as a result of
an increase in the market value of the Company's common stock during the
first quarter of 2006. As of June 30, 2006, there are no outstanding,
unvested options with accelerated vesting features. The Company anticipates
that it will record an additional $16,000 of share-based compensation
expense in each remaining quarter of fiscal 2006. Total share-based
compensation expense, before tax benefit, for fiscal 2006 is anticipated to
be $556,000. As of June 30, 2006, total future unrecognized share-based
compensation cost related to stock options and warrants of $176,000, before
tax benefit, is expected to be recognized over a weighted-average period of
1.7 years.
A summary of stock option and warrant activity during the six months
ended June 30, 2006 is presented below:
Weighted-
Weighted- Average Aggregate
Underlying Average Remaining Intrinsic
Shares Exercise Contractual Value
(thousands) Price Term (years) (thousands)
----------- -------- ------------ -----------
Outstanding at
December 31, 2005 6,631 $12.04 8.5 $ 26,099
Granted - - - -
Exercised (577) 5.70 7.4 6,550
Canceled or forfeited - - - -
-----
Outstanding at
June 30, 2006 6,054 12.65 8.1 43,130
=====
Vested and expected to
vest at June 30, 2006 6,054 12.65 8.1 43,130
=====
Exercisable at
June 30, 2006 5,877 12.57 8.2 40,146
=====
The aggregate intrinsic value in the above table reflects the total
pretax intrinsic value (the difference between the Company's closing stock
price on the last trading day of the period and the exercise price of the
options and warrants, multiplied by the number of in-the-money options and
warrants) that would have been received by the option and warrants holders
had all option and warrant holders exercised their options and warrants on
June 30, 2006. The intrinsic value of the stock options and warrants
exercised are based on the closing price of the Company's stock on the date
of exercise. The total intrinsic value of options and warrants exercised
for the six months ended June 30, 2005 was $1,980,000. The Company
typically issues shares of common stock to satisfy option and warrant
exercises.
Prior to the adoption of SFAS 123(R), the Company accounted for share-
based compensation plans under the provisions of APB 25, Accounting for
Stock Issued to Employees, and related interpretations. If compensation
cost for stock-based compensation plans had been determined based on the
fair value method (estimated using the Black-Scholes option pricing model)
recognized over the vesting period in accordance with SFAS 123, pro forma
net income and earnings per share for the three and six-month periods ended
June 30, 2005, would have been as follows:
Three Months Ended Six Months Ended
June 30, 2005 June 30, 2005
------------------ ----------------
Net income, as reported $ 5,223 $11,292
Less: Pro forma stock-based employee
compensation determined under the
fair value requirements of SFAS 123,
net of income tax benefits 46 7,438
------ ------
Adjusted net income (loss) $ 5,177 $ 3,854
====== ======
Earnings (loss) per share:
Basic, as reported $ 0.17 $ 0.36
====== ======
Basic, adjusted $ 0.17 $ 0.12
====== ======
Diluted, as reported $ 0.16 $ 0.34
====== ======
Diluted, adjusted $ 0.16 $ 0.12
====== ======
The estimated per share weighted-average grant-date fair value of stock
options granted during the three and six-month periods ended 2005, was
$15.13, as determined using the Black-Scholes option pricing model based on
the following assumptions:
Dividend yield -
Volatility 45.0%
Risk-free interest rate 3.5%
Expected life 5.0 years
On November 10, 2005, the Financial Accounting Standards Board ("FASB")
issued FASB Staff Position No. SFAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards ("FSP 123(R)-3").
The alternative transition method includes simplified methods to establish
the beginning balance of the additional paid-in capital pool ("APIC pool")
related to the tax effects of employee stock-based compensation, and to
determine the subsequent impact on the APIC pool and Consolidated Statements
of Cash Flows of the tax effects of employee stock-based compensation awards
that are outstanding upon adoption of SFAS 123(R). The Company has
until January 1, 2007 to make a one-time election to adopt the transition
method described in FSP 123(R)-3. The Company is currently evaluating FSP
123(R)-3; however, if the Company were to make the one-time election, it
is not expected to affect operating income or net income.
Note 6 - Guarantees
Effective July 1, 2005, First Cash Credit, Ltd. ("FCC"), a wholly-owned
subsidiary of the Company, began offering a fee-based credit services
program ("CSO program") to assist consumers in its Texas markets in
obtaining credit. Under the CSO program, FCC assists customers in applying
for a short-term loan from an independent, non-bank, consumer lending
company (the "Independent Lender") and issues the Independent Lender a
letter of credit to guarantee the repayment of the loan. The loans made by
the Independent Lender to credit services customers of FCC range in amount
from $100 to $1,000, have terms of 7 to 31 days and bear interest at a rate
of less than 10% on an annualized basis.
These letters of credit constitute a guarantee for which the Company is
required to recognize, at the inception of the guarantee, a liability for
the fair value of the obligation undertaken by issuing the letters of
credit. The Independent Lender may present the letter of credit to FCC for
payment if the customer fails to repay the full amount of the loan and
accrued interest after the due date of the loan. Each letter of credit
expires within 60 days from the inception of the associated lending
transaction. FCC's maximum loss exposure under all of the outstanding
letters of credit issued on behalf of its customers to the Independent
Lender as of June 30, 2006 was $11,529,000. There were no outstanding
letters of credit at June 30, 2005. According to the letter of credit, if
the borrower defaults on the loan, the Company will pay the Independent
Lender the principal, accrued interest, insufficient funds fee, and late
fees, all of which the Company records as bad debt in the short-term advance
and credit services loss provision. FCC is entitled to seek recovery
directly from its customers for amounts it pays the Independent Lender in
performing under the letters of credit. The Company records the estimated
fair value of the liability under the letters of credit in accrued
liabilities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's pawn store revenues are derived primarily from service
fees on pawns, service fees from short-term advances, also known as payday
loans, credit services fees and the sale of unredeemed goods (merchandise
sales). The Company accrues pawn service charge revenue on a constant-yield
basis over the life of the pawn for all pawns that the Company deems
collection to be probable based on historical pawn redemption statistics.
If a pawn is not repaid prior to the expiration of the automatic extension
period, if applicable, the property is forfeited to the Company and
transferred to inventory at a value equal to the principal amount of the
loan, exclusive of accrued interest.
The Company's payday advance store revenues are derived primarily from
fees on short-term/payday advances, credit services fees, check cashing fees
and fees from the sale of money orders, money transfers and prepaid card
products. The Company recognizes service fee income on short-term advances
on a constant-yield basis over the life of the advance, which is generally
thirty-one days or less. The net defaults on short-term advances and
changes in the short-term advance valuation reserve are charged to the
short-term advance loss provision.
Effective July 1, 2005, First Cash Credit, Ltd., a wholly-owned
subsidiary of the Company, began offering a fee-based credit services
organization program to assist consumers in its Texas markets in obtaining
credit. Under the CSO program, FCC assists customers in applying for a
short-term loan from an independent, non-bank, consumer lending company and
issues the Independent Lender a letter of credit to guarantee the repayment
of the loan. The Company recognizes credit services fees, which are
collected from the customer at the inception of the loan, ratably over the
life of the loan made by the Independent Lender. The loans made by the
Independent Lender to credit services customers of FCC have terms of seven
to thirty-one days. The Company records a liability for collected, but
unearned, credit services fees received from its customers.
OPERATIONS AND LOCATIONS
As of June 30, 2006, the Company had 370 locations in twelve U.S.
states and eight states in Mexico. Included in this total, the Company has
244 pawn shops of which 95 are located in the U.S. and 149 are located in
Mexico. In addition, the Company has 126 payday advance stores, all of
which are located in the U.S. Approximately 68 of the U.S. pawn stores also
offer the payday advance or credit services products in addition to pawn
loans and retail sales. The following table details store counts for the
three and six-month periods ended June 30, 2006:
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
---------------------- ----------------------
Payday Payday
Pawn Advance Total Pawn Advance Total
Stores Stores Stores Stores Stores Stores
------ ------ ------ ------ ------ ------
Beginning of period count 235 113 348 226 102 328
New stores opened 10 13 23 19 24 43
Stores closed or consolidated (1) - (1) (1) - (1)
------ ------ ------ ------ ------ ------
End of period count 244 126 370 244 126 370
====== ====== ====== ====== ====== ======
For the six months ended June 30, 2006, all of the new pawn stores
opened were located in Mexico, while all of the new payday stores opened
were located in the U.S. During the three months ended June 30, 2006, the
Company opened its first payday advance locations in the state of Michigan
and its first pawn store locations in the state of Jalisco, Mexico. The
Company's 50% owned joint venture, Cash & Go, Ltd., operates a total of 40
kiosks located inside convenience stores in the state of Texas, which are
not included in the above table. No kiosks were opened or closed during the
three months ended June 30, 2006.
While the Company has had significant increases in revenues due to new
store openings in 2005 and 2006, the Company has also incurred increases
in operating expenses attributable to the additional stores. Operating
expenses consist of all items directly related to the operation of the
Company's stores, including salaries and related payroll costs, rent,
utilities, equipment, advertising, property taxes, licenses, supplies and
security. Administrative expenses consist of items relating to the
operation of the corporate office, including the compensation and benefit
costs of corporate management, area supervisors and other operations
management personnel, accounting and administrative costs, information
technology costs, liability and casualty insurance, outside legal and
accounting fees and stockholder-related expenses.
Stores included in the same-store revenue calculations are those stores
that were opened prior to the beginning of the prior year comparative fiscal
period and are still open. Also included are stores that were relocated
during the year within a specified distance serving the same market, where
there is not a significant change in store size and where there is not a
significant overlap or gap in timing between the opening of the new store
and the closing of the existing store. During the periods reported, the
Company has not had store expansions that involved a significant change in
the size of retail showrooms, and accordingly, no expanded stores have been
excluded from the same-store calculations. Non-retail sales of scrap
jewelry are included in same-store revenue calculations.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, related revenues and expenses, and
disclosure of gain and loss contingencies at the date of the financial
statements. Such estimates and assumptions are subject to a number of risks
and uncertainties, which may cause actual results to differ materially from
the Company's estimates. Both the significant accounting policies that
management believes are the most critical to aid in fully understanding and
evaluating the reported financial results and the effects of recent
accounting pronouncements have been reported in the Company's 2005 Annual
Report on Form 10-K.
Effective January 1, 2006, the Company adopted Financial Accounting
Standards Board Statement No. 123(R), Share-Based Payments ("SFAS 123(R)").
SFAS 123(R) establishes the accounting required for share-based
compensation, and requires companies to measure and recognize compensation
expense for all share-based payments at the grant date based on the fair
value of the award, as defined in SFAS 123(R), and include such costs as an
expense in their statements of operations over the requisite service
(vesting) period. The Company elected to adopt SFAS 123(R) using a
modified-prospective application, whereby the provisions of the statement
will apply going forward only from the date of adoption to new stock option
awards (issued subsequent to December 31, 2005) and for the portion of any
previously issued and outstanding stock option awards for which the
requisite service is rendered after the date of adoption. Thus, the Company
recognizes as expense the fair value of stock options issued prior to
January 1, 2006, but vesting after January 1, 2006, over the remaining
vesting period. In addition, compensation expense must be recognized for
any awards modified, repurchased, or canceled after the date of adoption.
Under the modified-prospective application, no restatement of previously
issued results is required. The Black-Scholes option pricing model is used
to measure fair value, which is the same method used in prior years for
disclosure purposes.
Effective July 1, 2005, First Cash Credit, Ltd. ("FCC"), a wholly-owned
subsidiary of the Company, began offering a fee-based credit services
program ("CSO program") to assist consumers in its Texas markets in
obtaining credit. Under the CSO program, FCC assists customers in applying
for a short-term loan from an independent, non-bank, consumer lending
company (the "Independent Lender") and issues the Independent Lender a
letter of credit to guarantee the repayment of the loan. The loans made by
the Independent Lender to credit services customers of FCC range in amount
from $100 to $1,000, have terms of 7 to 31 days and bear interest at a rate
of less than 10% on an annualized basis.
In accordance with the provisions of FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, the Company has determined
that the letters of credit issued by FCC to the Independent Lender as part
of the CSO program constitute a guarantee for which the Company is required
to recognize, at the inception of the guarantee, a liability for the fair
value of the obligation undertaken by issuing the letters of credit. Each
letter of credit is issued at the time that a FCC credit services customer
enters into a loan agreement with the Independent Lender. The Independent
Lender may present the letter of credit to FCC for payment if the customer
fails to repay the full amount of the loan and accrued interest after the
due date of the loan. Each letter of credit expires within 60 days from the
inception of the associated lending transaction. FCC is entitled to seek
recovery directly from its customers for amounts it pays the Independent
Lender in performing under the letters of credit. The Company records the
estimated fair value of the liabilities under the letters of credit in
accrued liabilities.
RESULTS OF OPERATIONS
Three months ended June 30, 2006, compared to the three months ended June
30, 2005
The following table (amounts shown in thousands) details the components
of revenues for the three months ended June 30, 2006 (the "Second Quarter of
2006"), as compared to the three months ended June 30, 2005 (the "Second
Quarter of 2005"):
Three Months Ended June 30,
---------------------------
2006 2005 Increase/Decrease
------ ------ -----------------
Domestic revenues:
Retail merchandise sales $13,562 $13,183 $ 379 3%
Scrap jewelry sales 2,678 1,335 1,343 101%
Pawn service fees 6,381 5,995 386 6%
Short-term advance and credit
services fees 14,766 13,262 1,504 11%
Check cashing fees 748 691 57 8%
Other 174 262 (88) (34%)
------ ------ ----- ----
38,309 34,728 3,581 10%
------ ------ ----- ----
Foreign revenues:
Retail merchandise sales 7,607 5,394 2,213 41%
Scrap jewelry sales 5,506 2,632 2,874 109%
Pawn service fees 4,953 3,574 1,379 39%
------ ------ ----- ----
18,066 11,600 6,466 56%
------ ------ ----- ----
Total revenues:
Retail merchandise sales 21,169 18,577 2,592 14%
Scrap jewelry sales 8,184 3,967 4,217 106%
Pawn service fees 11,334 9,569 1,765 18%
Short-term advance and credit
services fees 14,766 13,262 1,504 11%
Check cashing fees 748 691 57 8%
Other 174 262 (88) (34%)
------ ------ ------ ----
$56,375 $46,328 $10,047 22%
====== ====== ====== ====
Year-over-year revenue increases for retail merchandise sales, pawn
service fees and short-term advance/credit service fees were due to a
combination of same-store revenue growth and the addition of new stores.
Same-store revenues (stores that were in operation during all of the Second
Quarter of both 2005 and 2006) increased 15% or $6,854,000 for the Second
Quarter of 2006 as compared to the same quarter last year. Revenues
generated by the 44 new pawn stores and the 34 new payday advance stores
opened since April 1, 2005 increased by $3,394,000, compared to the same
quarter last year.
The increase in scrap jewelry sales during the Second Quarter of 2006,
as compared to the Second Quarter of 2005, was due to both higher selling
prices of gold and a 49% increase in the volume-weight of scrap jewelry sold
in the Second Quarter of 2006, compared to the prior-year quarter. The
increase in scrap volume was primarily related to the Company's foreign
operations. Aggregate short-term advance and credit services fees increased
11% over the same period, although revenues in the Company's ten Illinois
locations decreased due to new payday advance regulations in that state.
Excluding the Illinois locations, revenues from short-term advances and
credit services increased by 22% compared to the prior year quarter. The
implementation of new payday regulations in Illinois caused second quarter
revenues and gross profit to decrease compared to the prior year by
$1,035,000 and $883,000, respectively, in the Company's ten locations in
that state. Effective July 2006, the Company introduced an installment loan
product in Illinois through which it plans to recapture a portion of the
affected customer base. The Company introduced its credit services program
in its Texas locations in July 2005. Credit services fees, which are
included in reported short-term advance and credit services fees, totaled
$9,829,000 for the Second Quarter of 2006.
The following table (amounts shown in thousands) details pawn
receivables, short-term advance receivables and active CSO loans outstanding
from an independent third-party lender as of June 30, 2006, as compared to
June 30, 2005:
Balance at June 30,
-------------------
2006 2005 Increase/Decrease
------ ------ -----------------
Domestic receivables & CSO loans
outstanding:
Pawn receivables $19,870 $17,852 $2,018 11%
Short-term advance receivables 5,352 14,068 (8,716) (62%)
CSO loans held by independent
third-party lender (1) 10,305 - 10,305 -
------ ------ ------ ----
35,527 31,920 3,607 11%
------ ------ ----- ----
Foreign receivables:
Pawn receivables 10,843 9,072 1,771 20%
------ ------ ----- ----
Total receivables & CSO loans
outstanding:
Pawn receivables 30,713 26,924 3,789 14%
Short-term advance receivables 5,352 14,068 (8,716) (62%)
CSO loans held by independent
third-party lender (1) 10,305 - 10,305 -
------ ------ ------ ----
$46,370 $40,992 $ 5,378 13%
====== ====== ====== ====
(1) CSO loans outstanding are comprised of the principal portion of active
CSO loans outstanding from an independent third-party lender, which
are not included on the Company's balance sheet.
Of the $3,789,000 total increase in pawn receivables, $2,671,000 was
attributable to growth at stores that were in operation as of June 30, 2006
and 2005, and $1,118,000 was attributable to the 35 new pawn stores opened
since June 30, 2005. The decrease in short-term advance receivables was
due primarily to the introduction of the credit services program in the
Company's Texas locations in July 2005. As a result, the Company had no
short-term advance receivables in its Texas locations, including the Cash &
Go, Ltd, joint venture kiosks, at June 30, 2006, compared to $7,773,000 at
June 30, 2005. Short-term advance receivables in the Company's non-Texas
locations decreased from $6,295,000 at June 30, 2005, to $5,352,000 at June
30, 2006, primarily due to the introduction of more restrictive payday
advance regulations in Illinois, which negatively affected short-term
advance receivables in the Company's ten Illinois locations. The Company's
loss reserve on short-term advance receivables decreased from $505,000 at
June 30, 2005, to $198,000 at June 30, 2006 as a result of the decrease in
outstanding short-term advance receivables. The estimated fair value of the
liabilities under the letters of credit, net of anticipated recoveries from
customers, was $394,000 at June 30, 2006, which is included as a component
of the Company's accrued liabilities. There were no outstanding letters of
credit or related liabilities at June 30, 2005.
The gross profit margin on total merchandise sales was 42.0% during the
Second Quarter of 2006, compared to 40.6% during the Second Quarter of 2005,
due to increased margins on both retail sales and scrap jewelry sales. The
retail merchandise margin, which excludes scrap jewelry sales, was 45.5%
during the Second Quarter of 2006, compared to 44.6% in the Second Quarter
of 2005. Gross margin on sales of scrap jewelry increased from 22.3% in the
Second Quarter of 2005 to 33.1% in the Second Quarter of 2006 due to
increased selling prices of gold.
The Company's payday advance and credit services loss provision
increased from 22.8% of short-term advance and credit services fee revenues
during the Second Quarter of 2005 to 25.4% during the Second Quarter of
2006. The increase in the provision was primarily related to an increased
proportion of new stores, which typically have greater early credit losses
and higher charge-offs associated with new customers and employees, and to
increased credit losses in the Illinois locations related to the transition
to the new payday advance regulations effective in 2006. During the Second
Quarter of 2006, the Company sold certain bad debt portfolios generated from
short-term advances and credit services agreements for an aggregate price of
$349,000, compared to $445,000 in the prior year quarter. The sales were
recorded as a credit to the short-term advance and credit services loss
provision.
Store operating expenses increased 15% to $18,648,000 during the Second
Quarter of 2006, compared to $16,164,000 during the Second Quarter of 2005,
primarily as a result of the net addition of 73 pawn and check
cashing/short-term advance stores since April 1, 2005, which is a 25%
increase in the store count. Administrative expenses increased 20% to
$5,064,000 during the Second Quarter of 2006 compared to $4,209,000 during
the Second Quarter of 2005, which is primarily attributable to increased
management and supervisory compensation expense and to additional
administrative expenses related to new store openings. Interest income
increased from $87,000 in the Second Quarter of 2005 to $329,000 in the
Second Quarter of 2006, due primarily to greater levels of invested cash and
to higher interest rates.
For both the Second Quarter of 2006 and 2005, the Company's effective
federal income tax rate of 36.5% differed from the federal statutory tax
rate of 35%, primarily as a result of state income taxes.
Six months ended June 30, 2006, compared to the six months ended June 30,
2005
The following table (amounts shown in thousands) details the components
of revenues for the six months ended June 30, 2006 (the "Six-Month 2006
Period"), as compared to the six months ended June 30, 2005 (the "Six-Month
2005 Period"):
Six Months Ended June 30,
-------------------------
2006 2005 Increase/Decrease
------ ------ -----------------
Domestic revenues:
Retail merchandise sales $29,378 $27,742 $1,636 6%
Scrap jewelry sales 4,998 3,192 1,806 57%
Pawn service fees 13,127 12,048 1,079 9%
Short-term advance and credit
services fees 28,806 25,931 2,875 11%
Check cashing fees 1,634 1,517 117 8%
Other 373 575 (202) (35%)
------ ------ ----- ----
78,316 71,005 7,311 10%
------ ------ ----- ----
Foreign revenues:
Retail merchandise sales 14,393 9,803 4,590 47%
Scrap jewelry sales 10,093 6,044 4,049 67%
Pawn service fees 9,273 6,475 2,798 43%
------ ------ ----- ----
33,759 22,322 11,437 51%
------ ------ ----- ----
Total revenues:
Retail merchandise sales 43,771 37,545 6,226 17%
Scrap jewelry sales 15,091 9,236 5,855 63%
Pawn service fees 22,400 18,523 3,877 21%
Short-term advance and credit
services fees 28,806 25,931 2,875 11%
Check cashing fees 1,634 1,517 117 8%
Other 373 575 (202) (35%)
------- ------ ------ ----
$112,075 $93,327 $18,748 20%
======= ====== ====== ====
Year-over-year revenue increases for retail merchandise sales, pawn
service fees and short-term advance/credit service fees were due to a
combination of same-store revenue growth and the addition of new stores.
Same-store revenues (stores that were in operation during all of the first
six months of both 2005 and 2006) increased 13% or $11,640,000 for the Six-
Month 2006 Period as compared to the same period last year. Revenues
generated by the 54 new pawn stores and the 39 new payday advance stores
which have opened since January 1, 2005 increased by $7,596,000, compared to
the same period last year.
The increase in scrap jewelry sales during the Six-Month 2006 Period,
as compared to the Six-Month 2005 Period, was due to both higher selling
prices of gold and a 21% increase in the volume-weight of scrap jewelry sold
in the Six-Month 2006 Period, compared to the prior-year period.
Aggregate short-term advance and credit services fees increased 11%
over the same period, although revenues in the Company's ten Illinois
locations decreased due to new payday advance regulations in that state.
Excluding the Illinois locations, revenues from short-term advances and
credit services increased by 20% compared to the prior year period. The
implementation of new payday regulations in Illinois caused year-to-date
revenues and gross profit to decrease compared to the prior year by
$1,752,000 and $1,600,000, respectively, in the Company's ten locations in
that state. Effective July 2006, the Company introduced an installment loan
product in Illinois through which it plans to recapture a portion of the
affected customer base. The Company introduced its credit services program
in its Texas locations in July 2005. Credit services fees, which are
included in reported short-term advance and credit services fees, totaled
$18,866,000 for the Six-Month 2006 Period.
The gross profit margin on total merchandise sales was 41.3% during the
Six-Month 2006 Period, compared to 40.2% during the Six-Month 2005 Period,
primarily due to increased margin on scrap jewelry sales. The retail
merchandise margin, which excludes scrap jewelry sales, was 44.4% during the
Six-Month 2006 Period, compared to 44.3% during the Six-Month 2005 Period.
Gross margin on sales of scrap jewelry increased from 23.8% in the Six-Month
2005 Period to 32.5% in the Six-Month 2006 Period due to increased selling
prices of gold.
The Company's payday advance and credit services loss provision
decreased from 17.7% of short-term advance and credit services fee revenues
during the Six-Month 2005 Period to 15.8% during the Six-Month 2006 Period.
During the Six-Month 2006 Period, the Company sold bad debt portfolios
generated from short-term advances and credit services agreements for an
aggregate price of $1,444,000, compared to $445,000 in the prior year
period. The sales were recorded as a credit to the short-term advance and
credit services loss provision.
Store operating expenses increased 15% to $36,767,000 during the Six-
Month 2006 Period, compared to $31,925,000 during the Six-Month 2005 Period,
primarily as a result of the net addition of 86 pawn and check
cashing/short-term advance stores since January 1, 2005, which is a 30%
increase in the store count. Administrative expenses increased 28% to
$10,770,000 during the Six-Month 2006 Period compared to $8,425,000 during
the Six-Month 2005 Period, which is primarily attributable to increased
management and supervisory compensation expense, additional administrative
expenses related to new store openings and a non-cash charge of
approximately $522,000 for share-based compensation expense as a result of
the adoption of SFAS 123(R), effective January 1, 2006. Interest income
increased from $171,000 in the Six-Month 2005 Period to $550,000 in the Six-
Month 2006 Period, due primarily to greater levels of invested cash and to
higher interest rates.
For both the Six-Month 2006 Period and Six-Month 2005 Period, the Company's
effective federal income tax rate of 36.5% differed from the federal
statutory tax rate of 35%, primarily as a result of state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006, the Company's primary sources of liquidity were
$28,770,000 in cash and cash equivalents, $40,564,000 in receivables,
$21,439,000 in inventories and $25,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital of
$85,797,000 as of June 30, 2006, and total equity exceeded total liabilities
by a ratio of 8 to 1. The Company's operations and store openings have been
financed with funds generated primarily from operations.
The Company maintains a long-term line of credit with two commercial
lenders (the "Credit Facility"). The Credit Facility provides a $25,000,000
long-term line of credit that matures on April 15, 2007, and bears interest
at the prevailing LIBOR rate (which was approximately 5.3% at June 30, 2006)
plus a fixed interest rate margin of 1.375%. Amounts available under the
Credit Facility are limited to 300% of the Company's earnings before income
taxes, interest, depreciation and amortization for the trailing twelve
months. At June 30, 2006, the Company had no amounts outstanding under the
Credit Facility and $25,000,000 available for borrowings. Under the terms
of the Credit Facility, the Company is required to maintain certain
financial ratios and comply with certain technical covenants. The Company
was in compliance with the requirements and covenants of the Credit Facility
as of June 30, 2006, and August 2, 2006. The Company is required to pay an
annual commitment fee of 1/8 of 1% on the average daily unused portion of
the Credit Facility commitment. The Company's Credit Facility contains
provisions that allow the Company to repurchase stock and/or pay cash
dividends within certain parameters. Substantially all of the unencumbered
assets of the Company have been pledged as collateral against indebtedness
under the Credit Facility.
Net cash provided by operating activities of the Company during the
Six-Month 2006 Period, was $14,681,000, consisting primarily of net income
of $14,117,000 plus non-cash adjustments for depreciation, share-based
compensation, and the short-term advance loss provision of $3,600,000,
$522,000, and $494,000 respectively. Net changes in operating assets and
liabilities reduced cash used by operating activities in the amount of
$4,052,000. Net cash used by investing activities during the six months
ended June 30, 2006, was $9,440,000, which was primarily comprised of net
cash outflows from pawn receivables activity of $3,043,000, net cash inflows
from short-term advance receivables activity of $642,000, net of cash paid
for fixed asset additions of $7,039,000. Net inflows from short-term
advance activity were due to the reduction in outstanding short-term
advances in the Company's Texas locations resulting from the introduction of
the credit services program in July 2005. The opening of 43 new stores
during the Six-Month 2006 Period contributed significantly to the volume
of fixed asset additions. Net cash used by financing activities was
$19,212,000 during the Six-Month 2006 Period, which consisted of purchases
of treasury stock in the amount of $24,753,000, net of proceeds from
exercises of stock options and warrants and the tax benefit from the
exercise of employee stock options of $3,284,000 and $2,257,000,
respectively.
During the second quarter of 2006, the Company completed its 3.2
million share repurchase plan authorized in July 2004 at an average
repurchase price of $12.32 per share. The Board of Directors subsequently
authorized an additional 2.0 million share repurchase. For the quarter
ended June 30, 2006, the Company utilized excess cash flows to repurchase
approximately $25 million of common stock for a total of 1.3 million shares
under the two authorizations.
For purposes of its internal liquidity assessments, the Company
considers net cash changes in pawn receivables and short-term advance
receivables to be closely related to operating cash flows. For the Six-
Month 2006 Period, net cash flows from operations were $14,681,000, while
net cash outflows related to pawn receivables activity was $3,043,000 and
net cash inflows from short-term advance receivables activity was $642,000.
The combined net cash flows from operations and pawn and short-term advance
receivables totaled $12,280,000 for the Six-Month 2006 Period. For the
comparable prior year period, net cash flows from operations were
$17,150,000, and net cash outflows related to pawn receivables and short-
term advance receivables were $3,987,000 and $3,202,000, respectively. The
combined net cash flows from operations and pawn and short-term advance
receivables totaled $9,961,000 for the Six-Month 2005 Period.
The profitability and liquidity of the Company is affected by the
amount of pawn receivables outstanding, which is controlled in part by the
Company's pawn lending decisions. The Company is able to influence the
frequency of pawn redemptions by increasing or decreasing the amount
advanced in relation to the resale value of the pawned property. Tighter
credit decisions generally result in smaller pawn advances in relation to
the estimated resale value of the pledged property and can thereby decrease
the Company's aggregate pawn receivables balance and, consequently, decrease
pawn service fees. Additionally, small advances in relation to the pledged
property's estimated resale value tend to increase pawn redemptions and
improve the Company's liquidity. Conversely, providing larger pawns in
relation to the estimated resale value of the pledged property can result in
an increase in the Company's pawn service charge income. Also, larger
average pawn balances can result in an increase in pawn forfeitures, which
increases the quantity of goods on hand, and unless the Company increases
inventory turnover, reduces the Company's liquidity. The Company's renewal
policy allows customers to renew pawns by repaying all accrued interest on
such pawns, effectively creating a new pawn transaction.
The amount of short-term advances outstanding and credit services
activity and the related loss provisions also affect the profitability and
liquidity of the Company. An allowance for losses is provided on active
short-term advances and service fees receivable, based upon expected default
rates, net of estimated future recoveries of previously defaulted short-term
advances and service fees receivable. The Company considers short-term
advances to be in default if they are not repaid on the due date, and writes
off the principal amount and service fees receivable as of the default date,
leaving only active receivables in the reported balances. Net defaults and
changes in the short-term advance allowance are charged to the short-term
advance and credit services loss provision.
In addition to these factors, merchandise sales and the pace of store
expansions affect the Company's liquidity. Management believes that the
Credit Facility and cash generated from operations will be sufficient to
accommodate the Company's current operations for fiscal 2006. The Company
has no significant capital commitments. The Company currently has no
written commitments for additional borrowings or future acquisitions;
however, the Company intends to continue to grow and may seek additional
capital to facilitate expansion. The Company will evaluate acquisitions, if
any, based upon opportunities, acceptable financing, purchase price,
strategic fit and qualified management personnel.
The Company currently intends to continue to engage in a plan of
expansion primarily through new store openings. With 43 stores opened year-
to-date, the Company is on track to equal or exceed its target of 60 to 70
new store openings, comprised of both payday advance locations, located
primarily in Texas and Michigan, and pawn shops, located primarily in
Mexico. All capital expenditures, working capital requirements and start-up
losses related to this expansion are expected to be funded through operating
cash flows. While the Company continually looks for, and is presented with
potential acquisition opportunities, the Company currently has no definitive
plans or commitments for acquisitions. The Company will evaluate potential
acquisitions, if any, based upon growth potential, purchase price, strategic
fit and quality of management personnel, among other factors. If the
Company encounters an attractive acquisition opportunity in the near future,
the Company may seek additional financing, the terms of which will be
negotiated on a case-by-case basis.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") for the trailing twelve month period ended June 30, 2006 totaled
$50,167,000, an increase of 24% compared to $40,446,000 for the trailing
twelve month period ended June 30, 2005. The EBITDA margin, which is EBITDA
as a percentage of revenues, for the trailing twelve month period ended June
30, 2006 was 22%, compared to 21% for the comparable prior year period.
EBITDA is commonly used by investors to assess a company's leverage
capacity, liquidity and financial performance. EBITDA is not considered a
measure of financial performance under U.S. generally accepted accounting
principles ("GAAP"), and the items excluded from EBITDA are significant
components in understanding and assessing the Company's financial
performance. Since EBITDA is not a measure determined in accordance with
GAAP and is thus susceptible to varying calculations, EBITDA, as presented,
may not be comparable to other similarly titled measures of other companies.
EBITDA should not be considered as an alternative to net income, cash flows
provided by or used in operating, investing or financing activities or other
financial statement data presented in the Company's consolidated financial
statements as an indicator of financial performance or liquidity. Non-GAAP
measures should be evaluated in conjunction with, and are not a substitute
for, GAAP financial measures.
The following table provides a reconciliation of net income to EBITDA
(amounts in thousands):
Trailing Twelve Months
Ended June 30,
----------------------------
2006 2005
-------- --------
Net income $ 28,208 $ 22,574
Adjustments:
Interest income, net of interest expense (696) (176)
Depreciation 6,742 4,926
Income taxes 15,913 13,122
-------- --------
Earnings before interest, income taxes,
depreciation and amortization $ 50,167 $ 40,446
======== ========
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS
Forward-Looking Information
This quarterly report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. ("First Cash" or the "Company"). Forward-looking statements,
as that term is defined in the Private Securities Litigation Reform Act of
1995, can be identified by the use of forward-looking terminology such as
"believes," "projects," "expects," "may," "estimates," "should," "plans,"
"intends," "could," or "anticipates," or the negative thereof, or other
variations thereon, or comparable terminology, or by discussions of
strategy. Forward-looking statements can also be identified by the fact
that these statements do not relate strictly to historical or current
matters. Rather, forward-looking statements relate to anticipated or
expected events, activities, trends or results. Because forward-looking
statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties. Forward-looking
statements in this quarterly report include, without limitation, the
Company's expectations of earnings per share, expansion strategy, store
openings, loss provisions, future liquidity, option-based compensation
expense and cash flows. These statements are made to provide the public
with management's current assessment of the Company's business. Although
the Company believes that the expectations reflected in forward-looking
statements are reasonable, there can be no assurances that such expectations
will prove to be accurate. Security holders are cautioned that such
forward-looking statements involve risks and uncertainties. The forward-
looking statements contained in this quarterly report speak only as of the
date of this statement, and the Company expressly disclaims any obligation
or undertaking to report any updates or revisions to any such statement to
reflect any change in the Company's expectations or any change in events,
conditions or circumstances on which any such statement is based. Certain
factors may cause results to differ materially from those anticipated by
some of the statements made in this quarterly report. Such factors are
difficult to predict and many are beyond the control of the Company and may
include changes in regional, national or international economic conditions,
changes in consumer borrowing and repayment behaviors, changes or increases
in competition, the ability to locate, open and integrate new stores, the
ability to operate as a credit services organization in Texas, the ability
to successfully refer credit services customers to an independent lender who
can provide credit to these customers, new legislative initiatives or
governmental regulations, or changes to existing laws and regulations
affecting payday advance businesses, credit services organizations and pawn
businesses in both the U.S. and Mexico, unforeseen litigation, changes in
interest rates, changes in tax rates or policies, changes in gold prices,
changes in foreign currency exchange rates, future business decisions, and
other uncertainties. These and other risks and uncertainties are indicated
in the Company's 2005 Annual Report on Form 10-K (see "Item 1A. Risk
Factors").
Regulatory Developments
The Company is subject to extensive regulation of its pawnshop, short-
term advance/payday lending, credit services and check-cashing operations in
most jurisdictions in which it operates. These regulations are provided
through numerous laws, ordinances and regulatory pronouncements from various
federal, state and local governmental entities in the United States and
Mexico. In many jurisdictions, the Company must obtain and maintain
regulatory operating licenses. In addition, many statutes and regulations
prescribe, among other things, the general terms of the Company's loan and
credit services agreements and the maximum service fees and/or interest
rates that may be charged. These regulatory agencies have broad
discretionary authority. The Company is also subject to U.S. federal and
state regulations relating to the reporting and recording of certain
currency transactions. The Company's pawnshop operations in Mexico are also
subject to, and must comply with pawnshop and other general business, tax,
employment and consumer protection regulations from various federal, state
and local governmental agencies in Mexico.
Existing regulations and recent regulatory developments are described
in greater detail in the Company's Annual Report of Form 10-K for the year
ended December 31, 2005. Subsequent to the filing of the 2005 Form 10-K,
the State of Oregon has enacted legislation that provides for significantly
more restrictive regulation of the payday advance industry beginning in
July 2007. The implementation of these more restrictive regulations, as
currently enacted, is expected to have a significant negative effect on the
revenues and profitability of the Company's operations in Oregon, beginning
in July 2007. The Company currently has seven payday advance stores located
in Oregon. In Mexico, certain aspects of the Company's lending and retail
operations have historically been regulated by PROFECO, a federal government
consumer protection agency. Recent federal legislation has expanded
PROFECO's regulatory authority over the pawn industry, although resulting
regulatory changes, if any, have not been developed or implemented at the
current time. While the Company does not anticipate any significant effect
on its operations due to expanded regulation, such effect, if any, cannot be
determined at the current time.
There can be no assurance that additional local, state or federal
statutes or regulations in either the United States or Mexico will not be
enacted or that existing laws and regulations will not be amended at some
future date that could inhibit the ability of the Company to offer pawn
loans, short-term advances and credit services, significantly decrease the
service fees for lending money, or prohibit or more stringently regulate the
sale of certain goods, any of which could cause a significant, adverse
effect on the Company's future results. If legislative or regulatory actions
that had negative effects on the pawn, payday advance or credit services
industries were taken at a federal level in the United States or Mexico, or
in U.S. or Mexican states or municipalities where the Company has a
significant number of stores, those actions could have a materially adverse
effect on the Company's lending, credit services and retail activities and
revenues. There can be no assurance that additional federal, state or local
legislation in the U.S. or Mexico will not be enacted, or that existing laws
and regulations will not be amended, which would have a materially adverse
impact on the Company's operations and financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from
changes in interest rates, gold prices and foreign currency exchange rates
and are described in detail in the Company's 2005 Annual Report on Form 10-
K. The Company does not engage in speculative or leveraged transactions,
nor does it hold or issue financial instruments for trading purposes.
There have been no material changes to the Company's exposure to market
risks since December 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-
15(e) under the Exchange Act) as of the end of our second fiscal
quarter of 2006. Based on such evaluation, such officers have
concluded that the Company's disclosure controls and procedures are
effective.
(b) Changes in Internal Control Over Financial Reporting
There has been no significant change in the Company's internal
control over financial reporting that was identified in connection
with our evaluation that occurred during the quarter ended June 30,
2006, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation previously
reported in the Company's 2005 Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors previously
reported in the Company's 2005 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006 and stock began trading at the split-adjusted price on February 22,
2006. All share and per share amounts (except authorized shares and par
value) have been retroactively adjusted to reflect the split.
During the period from January 1, 2006, through June 30, 2006, the
Company issued 240,000 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $2,913,000
(including income tax benefit). During the period from January 1, 2006,
through June 30, 2006, the Company issued 337,000 shares of common stock
relating to the exercise of outstanding stock warrants for an aggregate
exercise price of $2,657,000 (including income tax benefit).
The transactions set forth in the above paragraphs were completed
pursuant to either Section 4(2) of the Securities Act or Rule 506 of
Regulation D of the Securities Act. With respect to issuances made pursuant
to Section 4(2) of the Securities Act, the transactions did not involve any
public offering and were sold to a limited group of persons. Each recipient
either received adequate information about the Company or had access,
through employment or other relationships, to such information, and the
Company determined that each recipient had such knowledge and experience in
financial and business matters that they were able to evaluate the merits
and risks of an investment in the Company. With respect to issuances made
pursuant to Rule 506 of Regulation D of the Securities Act, the Company
determined that each purchaser was an "accredited investor" as defined in
Rule 501(a) under the Securities Act. All sales of the Company's securities
were made by officers of the Company who received no commission or other
remuneration for the solicitation of any person in connection with
the respective sales of securities described above. The recipients of
securities represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions.
In July 2004, the Company's Board of Directors authorized an open-ended
stock repurchase plan, with no dollar limitation, to permit future
repurchases of up to 3,200,000 shares of the Company's outstanding common
stock. During the second quarter of 2006, First Cash repurchased
approximately 802,000 shares to close out the 2004-authorized program. The
weighted average repurchase price of 3,200,000 repurchased under this plan
was $39,425,000 or $12.32 per share.
In June 2006, the Company's Board of Directors authorized a new program
for the repurchase of up to 2,000,000 additional shares of First Cash's
outstanding common stock. During the Second Quarter of 2006, the Company
repurchased a total of 461,000 common shares under the new stock repurchase
plan for an aggregate purchase price of $8,848,000 or $19.21 per share.
The following table provides the information with respect to purchases
made by the Company of shares of its common stock during each month that the
programs were in effect during the Second Quarter of 2006:
Total Average Total Number of Maximum Number
Number Price Shares Purchased as Of Shares that May
Of Shares Paid Per Part of Publicly Yet Be Purchased
Purchased Share Announced Plans Under the Plans
--------- ----- --------------- ---------------
April 1 through
April 30, 2006 - - - 801,612
May 1 through
May 31, 2006 475,200 $19.89 475,200 326,412
June 1 through
June 30, 2006 787,068 $19.44 787,068 1,539,344
--------- ---------
Total 1,262,268 $19.61 1,262,268
========= =========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 7, 2006, the Company held the annual meeting of its
stockholders. Of the 32,052,172 issued and outstanding common shares
entitled to vote at the meeting, 26,005,182 of the common shares voted in
person or by proxy. The shareholders voted affirmatively on the following
two proposals:
1. The stockholders ratified the re-election of three directors:
FOR % WITHHELD %
---------- ---- --------- ---
Rick Wessel 24,718,455 95.1 1,286,727 4.9
Richard Burke 24,074,214 92.6 1,930,968 7.4
Joe Love 23,681,250 91.1 2,323,932 8.9
2. The stockholders ratified the selection of Hein & Associates LLP as
independent auditors of the Company for the year ended December 31, 2006:
FOR % AGAINST % ABSTAIN %
---------- ---- ------- --- ------- ---
25,894,596 99.6 55,939 0.2 54,647 0.2
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
Exhibits:
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by J. Alan Barron, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
provided by J. Alan Barron, Chief Executive Officer and R.
Douglas Orr, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 2, 2006 FIRST CASH FINANCIAL SERVICES, INC.
-----------------------------------
(Registrant)
/s/ J. ALAN BARRON
-----------------------
J. Alan Barron
Chief Executive Officer
(Principal Executive Officer)
/s/ R. DOUGLAS ORR
-----------------------
R. Douglas Orr
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by J. Alan Barron, Chief Executive Officer
31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
provided by R. Douglas Orr, Chief Financial Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 provided
by J. Alan Barron, Chief Executive Officer and R. Douglas Orr,
Chief Financial Officer