UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number:
June 30, 2003 0-19133
FIRST CASH FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2237318
(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act). Yes X No ___
As of August 7, 2003, there were 9,578,137 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,
-------------------- -------------
2003 2002 2002
------- ------- -------
(unaudited)
(in thousands, except share data)
ASSETS
Cash .................................... $ 12,511 $ 12,177 $ 12,735
Service charges receivable............... 3,351 2,636 3,174
Receivables.............................. 28,781 22,620 27,314
Inventories.............................. 13,248 11,301 13,648
Prepaid expenses and other current assets 523 1,600 1,161
Income taxes receivable.................. 457 780 109
------- ------- -------
Total current assets ................. 58,871 51,114 58,141
Property and equipment, net.............. 12,454 10,330 11,750
Goodwill, net ........................... 53,194 53,194 53,194
Receivable from Cash & Go, Ltd........... 5,155 5,889 7,351
Other.................................... 537 555 563
------- ------- -------
$130,211 $121,082 $130,999
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt........ $ - $ 1,606 $ 900
Accounts payable and accrued expenses.... 9,974 10,190 10,054
------- ------- -------
Total current liabilities ............ 9,974 11,796 10,954
Revolving credit facility................ 17,000 24,500 28,000
Long-term debt, net of current portion... - 653 602
Deferred income taxes.................... 5,524 4,389 4,923
------- ------- -------
32,498 41,338 44,479
------- ------- -------
Stockholders' equity:
Preferred stock; $.01 par value;
10,000,000 shares authorized; no
shares issued or outstanding ......... - - -
Common stock; $.01 par value; 20,000,000
shares authorized; 8,966,187,
8,871,187 and 8,871,187 shares
outstanding, respectively ............ 97 96 96
Additional paid-in capital ............. 52,373 51,908 51,908
Retained earnings ...................... 48,258 35,872 41,759
Notes receivable from officers ......... - (5,117) (4,228)
Common stock held in treasury, at cost,
654,181 shares ....................... (3,015) (3,015) (3,015)
------- ------- -------
97,713 79,744 86,520
------- ------- -------
$130,211 $121,082 $130,999
======= ======= =======
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, June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
(unaudited, in thousands, except per share amounts)
Revenues:
Merchandise sales....... $ 15,550 $ 12,578 $ 32,703 $ 27,333
Service charges......... 16,923 13,368 32,936 26,113
Check cashing fees...... 667 653 1,439 1,384
Other................... 278 268 584 488
------- ------- ------- -------
33,418 26,867 67,662 55,318
------- ------- ------- -------
Cost of goods sold and expenses:
Cost of goods sold...... 8,978 7,082 19,325 15,992
Operating expenses...... 14,914 12,733 28,825 24,768
Interest expense........ 122 220 304 476
Interest income......... (151) (132) (334) (282)
Depreciation ........... 686 586 1,348 1,141
Administrative expenses. 3,962 2,848 7,696 5,328
------- ------- ------- -------
28,511 23,337 57,164 47,423
------- ------- ------- -------
Income before income taxes 4,907 3,530 10,498 7,895
Provision for income taxes 1,906 1,271 3,999 2,842
------- ------- ------- -------
Net income................ $ 3,001 $ 2,259 $ 6,499 $ 5,053
======= ======= ======= =======
Net income per share:
Basic .................. $ 0.34 $ 0.26 $ 0.73 $ 0.57
======= ======= ======= =======
Diluted ................ $ 0.30 $ 0.23 $ 0.65 $ 0.53
======= ======= ======= =======
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, June 30,
2003 2002
-------- --------
(unaudited) (unaudited)
(in thousands)
Cash flows from operating activities:
Net income ................................... $ 6,499 $ 5,053
Adjustment to reconcile net income to net cash
flows from operating activities:
Depreciation ............................ 1,348 1,141
Changes in operating assets and liabilities:
Service charges receivable ................. (177) 181
Inventories ................................ 400 1,380
Prepaid expenses and other assets .......... 316 (390)
Accounts payable and accrued expenses ...... (80) 149
Current and deferred income taxes ......... 601 374
-------- --------
Net cash flows from operating activities . 8,907 7,888
-------- --------
Cash flows from investing activities:
Net (increase) decrease in receivables ....... (1,467) 936
Purchases of property and equipment .......... (2,052) (1,437)
Decrease in receivable from Cash & Go, Ltd ... 2,196 1,184
-------- --------
Net cash flows from investing activities . (1,323) 683
-------- --------
Cash flows from financing activities:
Proceeds from debt ........................... - 2,500
Repayments of debt ........................... (12,501) (10,734)
Decrease (increase) in notes receivable
from officers............................... 4,228 (66)
Proceeds from exercise of options and warrants 465 654
-------- --------
Net cash flows from financing activities (7,808) (7,646)
-------- --------
Change in cash and cash equivalents............ (224) 925
Cash and cash equivalents at beginning
of the period................................ 12,735 11,252
-------- --------
Cash and cash equivalents at end of the period. $ 12,511 $ 12,177
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................... $ 328 $ 484
======== ========
Income taxes ............................... $ 2,931 $ 2,355
======== ========
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. 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, 2002 Annual Report on Form 10-K. All
significant inter-company accounts and transactions have been eliminated in
consolidation. The consolidated financial statements as of June 30, 2003
and for the periods ended June 30, 2003 and 2002 are unaudited, but in
management's opinion, include all adjustments (consisting of only normal
recurring adjustments) considered necessary to present fairly the financial
position, results of operations and cash flows for such interim periods.
Operating results for the period ended June 30, 2003 are not necessarily
indicative of the results that may be expected for the full fiscal year.
Note 2 - Revolving Credit Facility
The Company maintains a long-term line of credit with a group of
commercial lenders (the "Credit Facility"). The Credit Facility provides a
$30,000,000 long-term line of credit that matures on August 9, 2005 and
bears interest at the prevailing LIBOR rate (which was approximately 1.1% at
June 30, 2003) plus an applicable margin based on a defined leverage ratio
for the Company. Based on the Company's existing leverage ratio, the margin
is currently 1.375%, the most favorable rate provided under the terms of the
agreement. 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, 2003, the Company
had $13,000,000 available for additional borrowings. Under the terms of the
Credit Facility, the Company is required to maintain certain financial
ratios and comply with certain technical covenants. The Company was in
compliance with the requirements and covenants of the Credit Facility as of
June 30, 2003 and August 7, 2003. The Company is required to pay an annual
commitment fee of 1/5 of 1% on the average daily-unused portion of
the Credit Facility commitment. The Company's Credit Facility contains
provisions, which will allow the Company to repurchase stock and/or pay cash
dividends within certain parameters. Substantially all of the unencumbered
assets of the Company have been pledged as collateral against indebtedness
under the Credit Facility.
Note 3 - Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 3,001 $ 2,259 $ 6,499 $ 5,053
====== ====== ====== ======
Denominator:
Weighted-average common shares
for calculating basic earnings
per share 8,905 8,825 8,892 8,794
Effect of dilutive securities:
Stock options and warrants 1,201 917 1,055 805
------ ------ ------ ------
Weighted-average common
shares for calculating diluted
earnings per share 10,106 9,742 9,947 9,599
====== ====== ====== ======
Basic earnings per share $ 0.34 $ 0.26 $ 0.73 $ 0.57
====== ====== ====== ======
Diluted earnings per share $ 0.30 $ 0.23 $ 0.65 $ 0.53
====== ====== ====== ======
Note 4 - Employee Stock Incentive Plans
The Company accounts for its employee stock incentive plans under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees and the related interpretations under Financial
Accounting Standards Board (FASB) Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation. Accordingly, no stock-
based employee compensation cost is reflected in net income as all options
granted had an exercise price equal to the market value of the underlying
common stock on the date of grant. In accordance with SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, the
following table illustrates the effect on net income and earnings per share
as if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Net income, as reported $ 3,001 $ 2,259 $ 6,499 $ 5,053
Less: Stock based employee
compensation determined under the
fair value requirements of SFAS
123, net of income tax benefits 823 1,181 911 1,189
------ ------ ------ ------
Adjusted net income $ 2,178 $1,078 $ 5,588 $ 3,864
====== ====== ====== ======
Earnings per share:
Basic, as reported $ 0.34 $ 0.26 $ 0.73 $ 0.57
Basic, adjusted 0.24 0.12 0.63 0.44
Diluted, as reported 0.30 0.23 0.65 0.53
Diluted, adjusted 0.22 0.11 0.56 0.40
The fair values were determined using a Black-Scholes option-pricing model
using the following assumptions:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
------ ------ ------ ------
Dividend yield - - - -
Volatility 58.1% 58.0% 58.1% 58.0%
Risk-free interest rate 3.5% 3.5% 3.5% 3.5%
Expected life 7 years 7 years 7 years 7 years
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
First Cash Financial Services, Inc. (the "Company") is the nation's
third largest publicly traded pawnshop operator and currently owns pawn
stores in Texas, Oklahoma, Washington, D.C., Maryland, Missouri, South
Carolina, Virginia and Mexico. The Company's pawn stores engage in both
consumer finance and retail sales activities. The Company's pawn stores
provide a convenient source for consumer advances, advancing money against
pledged tangible personal property such as jewelry, electronic equipment,
tools, sporting goods and musical equipment. These pawn stores also
function as retailers of previously owned merchandise acquired in forfeited
pawn transactions and over-the-counter purchases from customers. Certain of
the Company's pawn stores also offer short-term, unsecured advances ("short-
term advances").
The Company also owns and operates check cashing and short-term advance
stores in Texas, California, Washington, Oregon, Illinois, South Carolina
and Washington, D.C. These stores provide a broad range of consumer
financial services, including check cashing, short-term advances, money
order sales, wire transfers and bill payment services. In addition, the
Company is a 50% partner in Cash & Go, Ltd., a Texas limited partnership,
which owns and operates financial services kiosks located inside convenience
stores.
The Company opened a total of eleven stores during the quarter ended
June 30, 2003, bringing total year-to-date store openings to 22 and the
total store count to 212 units. For the quarter ended June 30, 2003, the
Company's revenues were derived 46% from merchandise sales, 51% from service
charges on pawn loans and short-term advances, and 3% from other sources,
primarily check-cashing fees. The Company's business plan is to continue to
expand its operations by opening both new check cashing/short-term advance
stores and new pawn stores in selected geographic markets.
Although the Company has had significant increases in revenues due to
new store openings, the Company has also incurred increases in operating
expenses attributable to the additional stores and increases in
administrative expenses attributable to building a management team and the
support personnel required by the Company's growth. Operating expenses
consist of all items directly related to the operation of the Company's
stores, including salaries and related payroll costs, rent, utilities,
equipment depreciation, advertising, property taxes, licenses, supplies,
security and bad debt and collection expenses for both check cashing and
short-term advances. Administrative expenses consist of items relating to
the operation of the corporate office, including the compensation and
benefit costs of corporate officers, area supervisors and other management,
accounting and administrative costs, liability and casualty insurance,
outside legal and accounting fees and stockholder-related expenses.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principals generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and related revenues and expenses and
disclosure of gain and loss contingencies at the date of the financial
statements. Such estimates and assumptions are subject to a number of risks
and uncertainties, which may cause actual results to differ materially from
the Company's estimates. Both the significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating the reported financial results and the effects of recent
accounting pronouncements have been reported in the Company's 2002 Annual
Report on Form 10-K.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities - an interpretation of ARB No.
51. FIN 46 addresses consolidation by business enterprises of variable
interest entities (formerly special purpose entities). In general, a
variable interest entity is a corporation, partnership, trust or any other
legal structure used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its
activities. FIN 46 requires a variable interest entity to be consolidated
by a company if that company is subject to a majority of the risk of loss
from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The consolidation
requirements of FIN 46 apply to variable interest entities created after
January 31, 2003. The consolidation requirements apply to older entities in
the first fiscal year or interim period beginning after June 15, 2003. The
Company has evaluated the applicability of FIN 46 to its existing 50%
investment in Cash & Go, Ltd., a Texas limited partnership, which owns and
operates approximately 40 check-cashing/short term advance kiosks inside
convenience stores in the Texas market. As a result, the Company expects
that beginning in July 2003, it will consolidate into its financial
statements the assets, liabilities and operating results of Cash & Go, Ltd.
As part of the initial consolidation, the Company projects that it will
incur a change in accounting charge of approximately $430,000, net of income
taxes. The expected third quarter charge results from the Company
recognizing the other partner's share of the previously accumulated losses
of the joint venture as a result of the consolidation. There have been no
subsequent changes in the Company's accounting policies nor have there been
any other subsequently issued accounting pronouncements which materially
affect the preparation of the Company's financial statements.
RESULTS OF OPERATIONS
Three months ended June 30, 2003 compared to the three months ended June 30,
2002
Total revenues increased 24% to $33,418,000 for the three months ended
June 30, 2003 ("the Second Quarter of 2003") as compared to $26,867,000 for
the three months ended June 30, 2002 ("the Second Quarter of 2002"). The
change resulted from an increase in revenues of $2,881,000 generated by the
52 pawn and check cashing/short-term advance stores which were opened since
April 1, 2002, an increase of $4,126,000 at the 160 stores which were in
operation during all of the Second Quarter of 2002 and the Second Quarter of
2003, net of a decrease in revenues of $456,000 from the five stores
consolidated since April 1, 2002. Of the $6,551,000 increase in total
revenues, 45%, or $2,972,000, was attributable to increased merchandise
sales, 54%, or $3,555,000 was attributable to a net increase in service
charges on pawn and short-term advances, and 1% or $24,000 was attributable
to other income, comprised primarily of check cashing fees. A significant
component of the increase in merchandise sales was non-retail bulk sales of
scrap jewelry merchandise, which increased from $624,000 in the Second
Quarter of 2002 to $2,171,000 in the Second Quarter of 2003. Service charges
from short-term advances increased from $8,387,000 in the Second Quarter of
2002 to $10,255,000 in the Second Quarter of 2003, while service charges
from pawns increased from $4,981,000 in the Second Quarter of 2002 to
$6,668,000 in the Second Quarter of 2003. As a percentage of total
revenues, merchandise sales decreased from 47% to 46% during the Second
Quarter of 2003 as compared to the Second Quarter of 2002, service charges
increased from 50% to 51%, and check-cashing fees and other income as a
percentage of total revenues were at 3% during both the Second Quarter of
2003 and the Second Quarter of 2002.
The receivables balance increased 27% from $25,256,000 at June 30, 2002
to $32,132,000 at June 30, 2003. Of the $6,876,000 increase, an increase of
$4,157,000 was attributable to the 166 pawn stores and check cashing/short-
term advance stores which were in operation as of June 30, 2003 and 2002 and
an increase of $2,719,000 was attributable to growth at the 46 pawn and
check cashing/short-term advance stores opened or acquired since June 30,
2002, net of closed stores. The aggregate receivables balance at June 30,
2003 was comprised of $20,859,000 of pawn loan receivables and $11,273,000
of short-term advance receivables, compared to $16,010,000 of pawn loan
receivables and $9,246,000 of short-term advance receivables at June 30,
2002.
Gross profit margins as a percentage of total merchandise sales were
42% during the Second Quarter of 2003 compared to 44% during the Second
Quarter of 2002. Retail merchandise margins, which do not include bulk scrap
jewelry sales, increased from 45% to 46% over the same periods.
Operating expenses increased 17% to $14,914,000 during the Second
Quarter of 2003 compared to $12,733,000 during the Second Quarter of 2002,
primarily as a result of the net addition of 47 pawn stores and check
cashing/short-term advance stores since April 1, 2002, which is a 28%
increase in store count. The Company's net bad debt expense relating to
short-term advances increased from $2,034,000 in the Second Quarter of 2002
to $2,690,000 in the Second Quarter of 2003 as a result of an increase in
volume of short-term advances. Administrative expenses increased 39% to
$3,962,000 during the Second Quarter of 2003 compared to $2,848,000 during
the Second Quarter of 2002 due primarily to increased costs including
administrative/supervisory compensation and benefits, insurance, accounting
and legal fees and other expenses necessary to support the Company's growth
strategy and increase in store counts. Interest expense decreased to
$122,000 in the Second Quarter of 2003 compared to interest expense of
$220,000 in the Second Quarter of 2002 as a result of lower average
outstanding debt balances and lower average interest rates during the Second
Quarter of 2003. Interest income increased to $151,000 in the Second
Quarter of 2003 compared to $132,000 in the Second Quarter of 2002, due
primarily to an increase in the contractual rate of interest on the note
receivable from Cash & Go, Ltd.
For the Second Quarter of 2003 and 2002, the Company's effective
federal income tax rates of 38.8% and 36.0%, respectively, differed from the
statutory tax rate of approximately 34% primarily as a result of state and
foreign income taxes.
Six months ended June 30, 2003 compared to the six months ended June 30,
2002
Total revenues increased 22% to $67,662,000 for the six months ended
June 30, 2003 ("the Six-Month 2003 Period") as compared to $55,318,000 for
the six months ended June 30, 2002 ("the Six-Month 2002 Period"). The
change resulted from an increase in revenues of $5,874,000 generated by the
60 pawn and check cashing/short-term advance stores which were opened since
January 1, 2002, an increase of $7,482,000 at the 158 stores which were in
operation during all of the Six-Month 2002 Period and the Six-Month 2003
Period, net of a decrease in revenues of $1,012,000 from the six stores
consolidated since January 1, 2002. Of the $12,344,000 increase in total
revenues, 44%, or $5,370,000, was attributable to increased merchandise
sales, 55%, or $6,823,000 was attributable to a net increase in service
charges on pawn and short-term advances, and 1% or $151,000 was attributable
to an increase in other income, primarily check cashing fees. A significant
component of the increase in merchandise sales was non-retail bulk sales of
scrap jewelry merchandise, which increased from $1,301,000 in the Six-Month
2002 Period to $4,559,000 in the Six-Month 2003 Period. Service charges
from short-term advances increased from $16,352,000 in the Six-Month 2002
Period to $19,774,000 in the Six-Month 2003 Period, while service charges
from pawns increased from $9,761,000 in the Six-Month 2002 Period to
$13,162,000 in the Six-Month 2003 Period. As a percentage of total
revenues, merchandise sales decreased from 49% to 48% during the Six-Month
2003 Period as compared to the Six-Month 2002 Period, service charges
increased from 47% to 49%, check-cashing fees and other income as a
percentage of total revenues decreased from 4% to 3% during the Six-Month
2003 Period as compared to the Six-Month 2002 Period.
The receivables balance increased 27% from $25,256,000 at June 30, 2002
to $32,132,000 at June 30, 2003. Of the $6,876,000 increase, an increase of
$4,157,000 was attributable to the 166 pawn stores and check cashing/short-
term advance stores which were in operation as of June 30, 2003 and 2002 and
an increase of $2,719,000 was attributable to growth at the 46 pawn and
check cashing/short-term advance stores opened or acquired since June 30,
2002, net of closed stores. The aggregate receivables balance at June 30,
2003 was comprised of $20,859,000 of pawn loan receivables and $11,273,000
of short-term advance receivables, compared to $16,010,000 of pawn loan
receivables and $9,246,000 of short-term advance receivables at June 30,
2002.
Gross profit margins as a percentage of total merchandise sales were
41% during the Six-Month 2003 Period, which was consistent with overall
margins during the Six-Month 2002 Period. Retail merchandise margins, which
do not include bulk scrap jewelry sales, increased from 43% to 45% over the
same periods.
Operating expenses increased 16% to $28,825,000 during the Six-Month
2003 Period compared to $24,768,000 during the Six-Month 2002 Period,
primarily as a result of the net addition of 54 pawn stores and check
cashing/short-term advance stores since January 1, 2002, which is a 34%
increase in store count. The Company's net bad debt expense relating to
short-term advances increased from $3,287,000 in the Six-Month 2002 Period
to $4,128,000 in the Six-Month 2003 Period as a result of an increase in
volume of short-term advances. Administrative expenses increased 44% to
$7,696,000 during the Six-Month 2003 Period compared to $5,328,000 during
the Six-Month 2002 Period due primarily to increased costs including
administrative/supervisory compensation and benefits, insurance, accounting
and legal fees and other expenses necessary to support the Company's growth
strategy and increase in store counts. Interest expense decreased to
$304,000 in the Six-Month 2003 Period compared to interest expense of
$476,000 in the Six-Month 2002 Period as a result of lower average
outstanding debt balances and lower average interest rates during the Six-
Month 2003 Period. Interest income increased to $334,000 in the Six-Month
2003 Period compared to $282,000 in the Six-Month 2002 Period, due primarily
to an increase in the contractual rate of interest on the note receivable
from Cash & Go, Ltd.
For the Six-Month Period of 2003 and 2002, the Company's effective
federal income tax rates of 38% and 36%, respectively, differed from the
statutory tax rate of approximately 34% primarily as a result of state and
foreign income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations, acquisitions and store openings have been
financed with funds generated from operations, bank and other borrowings,
and the issuance of the Company's securities.
The Company's Credit Facility provides a $30,000,000 long-term line of
credit that matures on August 9, 2005 and bears interest at the prevailing
LIBOR rate (which was approximately 1.1% at June 30, 2003) plus an
applicable margin based on a defined leverage ratio for the Company. Based
on the Company's current leverage ratio, the margin is 1.375%, the most
favorable rate provided under the terms of the agreement. 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. 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, 2003 and August 7, 2003.
The Company is required to pay an annual commitment fee of 1/5 of 1% on the
average daily-unused portion of the Credit Facility commitment. The
Company's Credit Facility contains provisions, which will allow the Company
to repurchase stock and/or pay cash dividends within certain parameters.
Substantially all of the unencumbered assets of the Company have been
pledged as collateral against indebtedness under the Credit Facility.
As of June 30, 2003, the Company's primary sources of liquidity were
$12,511,000 in cash and cash equivalents, $32,132,000 in receivables,
$13,248,000 in inventories and $13,000,000 of available and unused funds
under the Company's Credit Facility. The Company had working capital of
$48,897,000 as of June 30, 2003, and a total liabilities to equity ratio of
0.33 to 1.
The Company utilized positive cash flows from operations in the Six-
Month 2003 Period to fund investing and financing activities primarily
related to opening new stores and reduction of debt. Net cash provided by
operating activities of the Company during the six months ended June 30,
2003 was $8,907,000, consisting primarily of net income before non-cash
depreciation of $7,847,000, net of an increase in accrued service charges
receivable and a decrease in accounts payable and accrued expenses of
$177,000 and $80,000, respectively, in addition to a decrease in inventory
and prepaid expenses of $400,000 and $316,000, respectively, and an increase
in current and deferred taxes of $601,000. Net cash used by investing
activities during the six months ended June 30, 2003 was $1,323,000, which
was primarily comprised of an increase in receivables of $1,467,000, cash
paid for fixed asset additions of $2,052,000, net of a decrease in the
receivable from the Cash & Go, Ltd. joint venture of $2,196,000. The year-
to-date opening of 22 new stores in 2003 contributed significantly to the
volume of fixed asset additions. Net cash used by financing activities was
$7,808,000 during the six months ended June 30, 2003, which primarily
consisted of a decrease in the Company's debt of $12,501,000, net of
repayments on notes receivable from officers of $4,228,000 and proceeds,
including tax benefit, from exercises of stock options and warrants of
$465,000.
The Company funds substantially all of the working capital needs of
Cash & Go, Ltd. The Company's net receivable from the joint venture was
$5,155,000 at June 30, 2003.
The profitability and liquidity of the Company is affected by the amount
of pawn loans outstanding, which is controlled in part by the Company's
lending decisions. The Company is able to influence the frequency of pawn
redemption by increasing or decreasing the amount loaned in relation to the
resale value of the pawned property. Tighter credit decisions generally
result in smaller pawn loans in relation to the estimated resale value of
the pledged property and can thereby decrease the Company's aggregate pawn
loan balance and, consequently, decrease pawn service charges.
Additionally, small advances in relation to the pledged property's estimated
resale value tend to increase pawn redemptions and improve the Company's
liquidity. Conversely, providing larger pawn loans 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 loan
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 related potential bad
debt expense also affect the profitability and liquidity of the Company. An
allowance for losses is provided on active short-term advances and service
charges receivable, based upon expected default rates, net of estimated
future recoveries of previously defaulted short-term advances and service
charges receivable. The Company considers short-term advances to be in
default if they are not repaid on the due date, and writes off the principal
amount and service charges receivable as of the default date, leaving only
active receivables in the reported balances. Net defaults and changes in
the short-term advance allowance are charged to bad debt expense, which is
included in operating expenses.
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 2003. 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.
While the Company continually looks for, and is presented with
potential acquisition candidates, the Company has no definitive plans
or commitments for further acquisitions. If the Company encounters an
attractive opportunity to acquire or open additional new stores in the near
future, the Company may seek additional financing, the terms of which will
be negotiated on a case-by-case basis.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT
FUTURE RESULTS
Forward-Looking Statements
This quarterly report may contain forward-looking statements about the
business, financial condition and prospects of the Company. Forward-looking
statements can be identified by the use of forward-looking terminology such
as "believes," "projects," "expects," "may," "estimates," "will," "should,"
"plans," "intends," or "anticipates" or the negative thereof, or other
variations thereon, or comparable terminology, or by discussions of
strategy. Forward-looking statements include, without limitation, the
earnings per share discussion, the expectation of increased pawn growth, the
expectation for additional store openings, and the expectation of growth in
the Company's short-term advance products. These statements are made to
provide the public with management's assessment of the Company's business.
Although the Company believes that the expectations reflected in forward-
looking statements are reasonable, there can be no assurances that such
expectations will prove to be accurate. Security holders are cautioned that
such forward-looking statements involve risks and uncertainties. The
forward-looking statements contained in this report speak only as of the
date of this report, and the Company expressly disclaims any obligation or
undertaking to release any updates or revisions to any such statement to
reflect any change in the Company's expectations or any change in events,
conditions or circumstance on which any such statement is based. Certain
factors may cause results to differ materially from those anticipated by
some of the statements made in this report. Such factors are difficult to
predict and many are beyond the control of the Company, but may include
changes in regional or national economic conditions, the ability to
integrate new stores, the ability to maintain favorable banking
relationships as it relates to short-term lending products, changes in
governmental regulations, access to credit, unforeseen litigation, changes
in interest rates or tax rates, changes in foreign currency exchange rates,
changes in gold prices, future business decisions, other uncertainties, and
other risks indicated in the Company's 2002 Annual Report to Stockholders.
Regulatory Changes
Governmental action to prohibit or restrict short-term advances has
been advocated over the past few years by consumer-advocacy groups and by
media reports and stories. The consumer groups and media stories typically
focus on the cost to a consumer for that type of short-term advance, which
is higher than the interest typically charged by credit-card issuers to a
more creditworthy consumer. The consumer groups and media stories typically
characterize short-term advance activities as abusive toward consumers.
During the last few years, legislation has been introduced in the United
States Congress and in certain state legislatures, and regulatory
authorities have proposed or publicly addressed the possibility of proposing
regulations, that would prohibit or restrict short-term advances.
The U.S. Office of Comptroller of the Currency has recently initiated
enforcement actions to restrict the ability of nationally chartered banks to
establish or maintain relationships with loan servicers in order to make
out-of-state short-term advance loans. The Company does not currently
maintain nor intend in the future to establish loan-servicing relationships
with nationally chartered banks. The Federal Deposit Insurance Corporation,
("FDIC"), which regulates the ability of state chartered banks to enter into
relationships with loan servicers, has recently enacted new examiner
guidelines under which such arrangements are permitted. Texas is the only
state in which the Company functions as loan servicer through a relationship
with a state chartered bank, County Bank of Rehoboth Beach, Delaware, that
is subject to the new FDIC examiner guidelines. If the implementation of
the FDIC's new guidelines were to ultimately restrict the ability of all or
certain state banks to maintain relationships with loan servicers, it could
have a materially adverse impact on the Company's operations and financial
results.
Legislation and regulatory action at the state level that affects
consumer lending has recently become effective in a few states and may be
taken in other states. The Company intends to continue, with others in the
short-term advance industry, to oppose legislative or regulatory action that
would prohibit or restrict short-term advances. But if legislative or
regulatory action with that effect were taken on the federal level or in
states such as Texas, in which the Company has a significant number of
stores, that action could have a material adverse effect on the Company's
short-term advance-related activities and revenues. There can be no
assurance that additional local, state, or federal legislation will not be
enacted or that existing laws and regulations will not be amended, which
would materially, adversely impact the Company's operations and financial
condition.
Other
Certain factors may cause results to differ materially from those
anticipated by some of the statements made in this report. Such factors are
difficult to predict and many are beyond the control of the Company, but may
include changes in regional or national economic conditions, changes in
competition from various sources including both financial services entities
and retail businesses, the ability to integrate new stores, changes in
governmental regulations, unforeseen litigation, changes in capital markets,
changes in interest rates or tax rates, the ability to maintain a loan
servicing relationship with an out-of-state bank necessary to generate
service charges from short-term advances in the Texas market, future
business decisions, other risks indicated in the Company's 2002 Annual
Report to Stockholders and other uncertainties.
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 2002 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
(a) Under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, management of
the Company has evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Securities Exchange Act of 1934)
as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and
procedures are effective in timely alerting them to the material
information relating to the Company required to be included in its
periodic filings with the Securities and Exchange Commission.
(b) During the period covered by this report, there were no significant
changes in the Company's internal controls or, to management's
knowledge, in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in the litigation and
arbitration "previously reported" in the Company's 2002 Annual Report to
Stockholders filed on Form 10-K.
ITEM 2. CHANGES IN SECURITIES
During the period from January 1, 2003 through August 7, 2003, the
Company issued 373,200 shares of common stock relating to the exercise of
outstanding stock warrants for an aggregate exercise price of $3,894,000
(including income tax effect) and issued warrants to purchase 270,000 shares
of common stock at an average exercise price of $11.20, expiring in ten
years.
The transactions set forth in the above paragraph 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.
During the period from January 1, 2003 through August 7, 2003, the
Company issued 333,750 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $2,814,000
(including income tax effect) and issued options to purchase 50,000 shares
of common stock at an average exercise price of $10.00, expiring in ten
years.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 10, 2003, the Company held the annual meeting of its
stockholders. Of the 8,887,187 issued and outstanding common shares
entitled to vote at the meeting, 8,475,547 of the common shares voted in
person or by proxy. The shareholders voted affirmatively on the following
three proposals:
1. The stockholders ratified the re-election of three directors:
FOR % WITHHOLD %
--------- ---- -------- ---
Rick Wessel 8,012,183 94.9 431,841 5.1
Richard Burke 8,396,302 99.4 47,722 0.6
Joe Love 8,395,802 99.4 48,222 0.6
2. The stockholders ratified the selection of Deloitte & Touche LLP as
independent auditors of the Company for the year ended December 31, 2003.
FOR % AGAINST % ABSTAIN %
--------- ---- ------- --- ------- ---
8,396,607 99.4 36,167 0.4 11,250 0.1
3. The stockholders approved the adoption of the First Cash Financial
Services, Inc. Executive Performance Incentive Plan.
FOR % AGAINST % ABSTAIN % NON-VOTE %
--------- ---- ------- --- ------- --- --------- ----
3,939,884 46.7 484,801 5.7 84,858 1.0 3,934,481 46.6
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(1) Exhibits:
31.1 Chief Executive Officer Certification Pursuant to Section
13a-14 of the Securities Exchange Act
31.2 Chief Financial Officer Certification Pursuant to Section
13a-14 of the Securities Exchange Act
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(2) Reports on Form 8-K:
April 8, 2003 Item 5. Other Events
April 25, 2003 Item 9. Regulation FD Disclosure
Item 12. Results of Operations and
Financial Condition
May 14, 2003 Item 5. Other Events
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 7, 2003 FIRST CASH FINANCIAL SERVICES, INC.
----------------------------------
(Registrant)
/s/PHILLIP E. POWELL
-----------------------
Phillip E. Powell
Chief Executive Officer
/s/ R. DOUGLAS ORR
-----------------------
R. Douglas Orr
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
31.1 Chief Executive Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act
31.2 Chief Financial Officer Certification Pursuant to Section 13a-14
of the Securities Exchange Act
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
PURSUANT TO SECTION 13A-14 OF THE SECURITIES EXCHANGE ACT
I, Phillip E. Powell, Chief Executive Officer of First Cash
Financial Services, Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
Date: August 7, 2003
/s/ PHILLIP E. POWELL
--------------------------------------
Phillip E. Powell
Chief Executive Officer
EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
PURSUANT TO SECTION 13A-14 OF THE SECURITIES EXCHANGE ACT
I, R. Douglas Orr, Chief Financial Officer of First Cash Financial
Services, Inc. (the "registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
Date: August 7, 2003
/s/ R. DOUGLAS ORR
--------------------------------------
R. Douglas Orr
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of First Cash Financial Services,
Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30,
2003, as filed with the Securities and Exchange Commission on the date
hereof (the "Report"), I, Phillip E. Powell, Chief Executive Officer of
the Company, and R. Douglas Orr, Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: August 7, 2003
/s/ PHILLIP E. POWELL
--------------------------------------
Phillip E. Powell
Chief Executive Officer
/s/ R. DOUGLAS ORR
--------------------------------------
R. Douglas Orr
Chief Financial Officer