UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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.
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(Exact name of registrant as specified in its charter)
Delaware 75-2237318
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(state or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
690 East Lamar Blvd., Suite 400
Arlington, Texas 76011
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 460-3947
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ X ]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. Large accelerated
filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the last reported sales price on the Nasdaq
National Market on June 30, 2006, the last trading date of registrant's most
recently completed second fiscal quarter is $530,815,000.
As of March 14, 2007, there were 32,187,504, shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement in connection with its Annual Meeting of
Stockholders to be held on June 12, 2007, is incorporated by reference in
Part III, Items 10, 11, 12 and 13.
FIRST CASH FINANCIAL SERVICES, INC.
FORM 10-K
For the Year Ended December 31, 2006
TABLE OF CONTENTS
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PART I
Item 1. Business
Item 1a. Risk Factors
Item 1b. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9a. Controls and Procedures
Item 9b. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
SIGNATURES
FORWARD-LOOKING INFORMATION
---------------------------
This annual report may contain forward-looking statements about the
business, financial condition and prospects of First Cash Financial
Services, Inc. ("First Cash" or the "Company"). Forward-looking statements,
as that term is defined in the Private Securities Litigation Reform Act of
1995, can be identified by the use of forward-looking terminology such as
"believes," "projects," "expects," "may," "estimates," "should," "plans,"
"intends," "could," or "anticipates," or the negative thereof, or other
variations thereon, or comparable terminology, or by discussions of
strategy. Forward-looking statements can also be identified by the fact
that these statements do not relate strictly to historical or current
matters. Rather, forward-looking statements relate to anticipated or
expected events, activities, trends or results. Because forward-looking
statements relate to matters that have not yet occurred, these statements
are inherently subject to risks and uncertainties. Forward-looking
statements in this annual report include, without limitation, the Company's
expectations of earnings per share, earnings growth, expansion strategies,
earnings accretion from acquisitions, store and dealership openings, future
liquidity, cash flows, debt levels, assessment of risk factors and other
performance results. 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 annual report speak only as of the date
of this statement, and the Company expressly disclaims any obligation or
undertaking to report any updates or revisions to any such statement to
reflect any change in the Company's expectations or any change in events,
conditions or circumstances on which any such statement is based. Certain
factors may cause results to differ materially from those anticipated by
some of the statements made in this annual report. Such factors are
difficult to predict and many are beyond the control of the Company and may
include changes in regional, national or international economic conditions,
changes in consumer borrowing and repayment behaviors, changes in credit
markets, credit losses, changes or increases in competition, the ability to
locate, open and staff new stores and dealerships, the availability or
access to sources of inventory, inclement weather, the ability to
successfully integrate acquisitions, the ability to retain key management
personnel, the ability to operate with limited regulation as a credit
services organization in Texas, new legislative initiatives or governmental
regulations (or changes to existing laws and regulations) affecting cash
advance businesses, credit services organizations, pawn businesses and buy-
here/pay-here automotive 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 energy prices, changes in used-vehicle
prices, cost of funds, changes in foreign currency exchange rates, future
business decisions, and other uncertainties. These and other risks and
uncertainties are further and more completely described in "Item 1a. Risk
Factors."
STOCK SPLIT
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In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006. Common stock and all share and per share amounts (except authorized
shares and par value) have been retroactively adjusted to reflect the split.
PART I
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Item 1. Business
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General
First Cash is a leading provider of consumer financial services and
related specialty retail products. The Company has over 420 locations in
thirteen U.S. states and nine states in Mexico as of March 14, 2007.
The Company's pawn stores engage in both consumer finance and retail
sales activities. They are a convenient source for small consumer loans,
advancing money against pledged tangible personal property such as jewelry,
electronic equipment, tools, sporting goods and musical equipment. The pawn
stores also retail previously-owned merchandise acquired through collateral
forfeitures and over-the-counter purchases from customers. In addition,
many of the Company's pawn stores offer cash advances or a credit services
product.
In addition, the Company operates stand-alone cash advance stores in
six U.S. states. These stores provide consumer financial services products
including cash advances, credit services, check cashing, money orders, money
transfers and prepaid card products. The exact product mix varies by
location. In addition, the Company is a 50% partner in Cash & Go, Ltd., a
Texas limited partnership, which currently owns and operates kiosks located
inside convenience stores that offer the credit services program and check
cashing.
Through an acquisition completed in August 2006, the Company also
operates automobile dealerships focused on the buy-here/pay-here segment of
the used-vehicle sales and financing industry. These automotive dealerships
sell used vehicles and earn finance charges from the related vehicle
financing contracts.
The Company was formed as a Texas corporation in July 1988 and in April
1991 the Company reincorporated as a Delaware corporation. Except as
otherwise indicated, the term "Company" includes its wholly-owned
subsidiaries, which are detailed in Exhibit 21.1.
The Company's principal executive offices are located at 690 East Lamar
Blvd., Suite 400, Arlington, Texas 76011, and its telephone number is (817)
460-3947.
Industry
Specialty consumer finance continues to represent a growing segment of
the overall financial services industry. This segment focuses on providing
a quick and convenient source of short-term credit to unbanked, underbanked
and credit-challenged customers. These consumers are typically not
effectively or efficiently served by traditional lenders such as banks,
credit unions or credit card providers. First Cash competes directly in the
specialty consumer finance industry with its pawn, cash advance and buy-
here/pay-here automotive products and services.
The pawnshop industry in the United States is an established industry,
with the highest concentration of pawnshops being in the Southeast and
Southwest regions of the country. The operation of pawnshops is governed
primarily by state laws, and accordingly, states that maintain pawn laws
most conducive to profitable operations have historically seen the greatest
concentration of pawnshops. Management believes the U.S. pawnshop industry
is fragmented, with approximately 15,000 stores in the country. The three
major publicly traded pawnshop companies, which include First Cash,
currently operate approximately 1,000 of the pawnshops in the United States.
The Company believes that individuals operating one to three locations own
the majority of pawnshops. Management further believes that the highly
fragmented nature of the industry is due in part to the lack of qualified
management personnel, the difficulty of developing adequate financial
controls and reporting systems, and the lack of financial resources.
The pawnshop industry in Mexico is substantially less developed, as
compared to the U.S., with fewer than 5,000 stores in the entire country.
Management believes the Mexican pawnshop industry is also fragmented. The
Company currently operates over 165 pawnshops in Mexico and is the only
major publicly traded U.S. company with significant pawnshop operations in
Mexico. A large percentage of the population in Mexico are unbanked or
underbanked and have limited access to consumer credit. The Company sees
significant opportunity for future expansion in Mexico due to the large
potential consumer base and limited competition in that country.
The cash advance industry has experienced significant growth over the
past decade in the U.S. A leading industry analyst estimates that there are
over 24,000 cash advance locations throughout the United States and expects
the number of locations to reach approximately 40,000 over the next decade.
There are several privately held chains that operate from 100 to
approximately 1,400 stores each. The six largest publicly held operators of
cash advance stores, which include First Cash Financial Services, Inc.,
operate a combined total of over 4,000 stores.
The market for used car sales and related financing in the United
States is significant as well. Used car retail sales typically occur
through franchised new car dealerships that sell used cars or independent
used car dealerships. The Company operates in the buy-here/pay-here segment
of the independent used car sales and finance market. Buy-here/pay-here
dealers sell and finance used cars to individuals who are unbanked, have
limited credit histories or past credit problems. Buy-here/pay-here dealers
typically offer their customers certain advantages over more traditional
financing sources, such as broader and more flexible underwriting
guidelines, flexible payment terms (including scheduling payments on a
weekly or bi-weekly basis to coincide with a customer's payday), and the
ability to make payments in person, an important feature to individuals who
may not have a checking account.
The used automobile financing industry is served by traditional lending
sources such as banks, savings and loans, and captive finance subsidiaries
of automobile manufacturers, as well as by independent finance companies and
buy-here/pay-here dealers. Despite significant opportunities, many of the
traditional lending sources do not consistently provide financing to
individuals with limited credit histories or past credit problems.
Management believes traditional lenders avoid this market because of the
credit risk and the associated collection efforts.
Business Strategy
The Company's primary business plan is to significantly expand its
operations by opening new pawnshops, cash advance stores, and buy-here/pay-
here automotive dealerships. In addition, it will continue to remain
focused on increasing the revenues and operating profits in its existing
stores and dealerships.
New Store Openings
The Company has opened or acquired 162 new pawn stores, 113 new cash
advance stores and 10 buy-here/pay-here automotive dealerships in the last
six years and currently intends to open additional pawn stores, cash advance
stores and buy-here/pay-here automotive dealerships in locations where
management believes appropriate demand and other favorable conditions exist.
The following chart details store openings over the past six years:
2006 2005 2004 2003 2002 2001
---- ---- ---- ---- ---- ----
Pawn stores 27 35 40 31 25 4
Cash advance stores 43 15 12 16 13 14
Buy-here/pay-here
dealerships 10 - - - - -
---- ---- ---- ---- ---- ----
Total 80 50 52 47 38 18
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The Company plans to continue opening new pawn stores, primarily in
Mexico, and new cash advance stores and buy-here/pay-here automotive
dealerships in the U.S. The Company continues to evaluate new markets in
both Mexico and the U.S. with favorable demographics and regulatory
environment for expansion opportunities and it believes that its
organizational structure is capable of supporting a larger, multi-country
and multi-state store base.
Management seeks to locate new stores and dealerships where
demographics are favorable and competition is limited. It is the Company's
experience that after a suitable location has been identified and a lease
and licenses are obtained, a new store or dealership can be open for
business within six to twelve weeks. The investment required to open a new
pawn store includes store operating cash, inventory, funds available for
pawn loans, leasehold improvements, store fixtures, security systems,
computer equipment and start-up losses. Although the total investment
varies and is difficult to predict for each location, it has been the
Company's experience that approximately $295,000 is required to fund a new
pawn store located in Mexico for the first six months of operation. The
Company estimates that approximately $180,000 is required to fund a new cash
advance store for the first six months of operation, which includes
investments for leasehold improvements, security and computer equipment,
funds available for cash advances, store operating cash, and start-up
losses. The Company also estimates that approximately $3 to $4 million is
required to fund a new buy-here/pay-here dealership for the first six months
of operation, which includes investments for leasehold improvements,
security and computer equipment, funds available for inventory, store
operating cash, and start-up losses.
Enhance Productivity of Existing and Newly Opened Stores
The primary factors affecting the profitability of the Company's
existing store base are the volume and gross profit of merchandise sales,
the volume and yield on customer receivables outstanding, the volume and
fees on credit services transactions, check cashing transactions and other
consumer financial services transactions, and the control of store expenses,
including the loss provision expense related to cash advances, credit
services, and buy-here/pay-here receivables. To increase customer traffic,
which management believes is a key determinant to increasing its stores'
profitability, the Company has taken several steps to distinguish its
stores from traditional pawn and check cashing/cash advance stores and to
make customers feel more comfortable. In addition to well-lit parking
facilities, the stores' exteriors typically display attractive and
distinctive signage similar to those used by contemporary specialty
retailers.
The Company has an employee-training program for both store and
corporate-level personnel that stresses customer service, productivity and
professionalism. The Company utilizes a proprietary computer information
system that provides fully integrated functionality to support point-of-sale
retail operations, inventory management and loan processing. Each store is
connected on a real-time basis to a secured off-site data center that houses
the centralized databases and operating systems. The information systems
provide management the ability to continuously monitor store transactions
and operating results. The Company maintains a well-trained internal audit
staff that conducts regular store visits to test compliance with financial
and operational controls. Management believes that the current operating
and financial controls and systems are adequate for the Company's existing
store base and can accommodate reasonably foreseeable growth in the near
term.
Acquisitions
Because of the highly fragmented nature of the pawn, cash advance and
buy-here/pay-here automotive industries, as well as the availability of
certain regional chains, the Company believes that certain acquisition
opportunities may arise from time to time. The timing of any future
acquisitions is based on identifying suitable stores and purchasing them on
terms that are viewed as favorable to the Company. Before making an
acquisition, management typically studies a demographic analysis of the
surrounding area, considers the number and size of competing stores,
and researches state and local regulatory issues. Specific pawn store
acquisition criteria include an evaluation of the volume of annual pawn
transactions, outstanding receivable balances, historical redemption rates,
the quality and quantity of inventory on hand, and location and condition of
the facility, including lease terms. Factors involved in evaluating the
acquisition of cash advance stores include the annual volume of
transactions, locations and conditions of facilities, and a demographic
evaluation of the surrounding area to determine the potential for the
Company's cash advance and credit services products. Factors involved in
evaluating the acquisition of buy-here/pay-here automotive dealerships
include the annual volume of transactions, outstanding receivables balance,
the quality and quantity of inventory on hand, locations and conditions of
facilities, and a demographic evaluation of the surrounding area to
determine the potential for the Company's retail vehicle and related
financing products.
Pawn Lending Activities
The Company's pawn stores advance money to their customers against the
security of pledged goods provided by their customers. The pledged goods
are tangible personal property such as jewelry, electronic equipment, tools,
sporting goods and musical equipment. The pledged goods provide the only
security to the Company for the repayment of the pawn, as pawns cannot
result in personal liability to the borrower. Accordingly, the Company does
not investigate the creditworthiness of the borrower, relying instead on the
marketability and sales value of pledged goods as a basis for its credit
decision.
At the time a pawn transaction is entered into, an agreement, commonly
referred to as a pawn ticket, is delivered to the borrower for signature
that sets forth, among other items, the name and address of the pawnshop;
borrower's name; borrower's identification number from his/her driver's
license or other identification; date; identification and description of the
pledged goods, including applicable serial numbers; amount financed; pawn
service fee; maturity date; total amount that must be paid to redeem the
pledged goods on the maturity date; and the annual percentage rate.
Pledged property is held through the term of the pawn, which is 30 days
in Texas, South Carolina, Missouri, Virginia, and Oklahoma, with an
automatic extension period of 15 to 60 days depending on state laws, unless
the pawn is paid earlier or renewed. In Maryland, Washington, D.C., and
Mexico, pledged property is held for 30 days. In the event the borrower
does not pay or renew a pawn within 90 days in South Carolina and Missouri,
60 days in Texas and Oklahoma, 45 days in Virginia, and 30 days in Maryland,
Washington, D.C. and Mexico, the unredeemed collateral is forfeited to the
Company and becomes inventory available for general liquidation or sale in
one of the Company's stores. If a pawn is not repaid prior to the
expiration of the automatic extension period, if applicable, the property is
forfeited to the Company and transferred to inventory at a value equal to
the principal amount of the loan, exclusive of accrued interest.
The amount the Company is willing to finance typically is based on a
percentage of the estimated sale value of the collateral. There are no
minimum or maximum pawn to fair market value restrictions in connection with
the Company's lending activities. The basis for the Company's determination
of the sale value includes such sources as catalogs, blue books, on-line
auction sites and newspapers. The Company also utilizes its integrated
computer information system to recall recent selling prices of similar
merchandise in its own stores. These sources, together with the employees'
experience in selling similar items of merchandise in particular stores,
influence the determination of the estimated sale value of such items. The
Company does not utilize a standard or mandated percentage of estimated sale
value in determining the amount to be financed. Rather, the employee has
the authority to set the percentage for a particular item and to determine
the ratio of pawn amount to estimated sale value with the expectation that,
if the item is forfeited to the pawnshop, its subsequent sale should yield a
gross profit margin consistent with the Company's historical experience. It
is the Company's policy to value merchandise on a conservative basis to
avoid the risks associated with over-valuation. The recovery of the
principal and realization of gross profit on sales of inventory is dependent
on the Company's initial assessment of the property's estimated sale value.
Improper assessment of the sale value of the collateral in the lending
function can result in reduced marketability of the property and sale of the
property for an amount less than the principal amount pawned.
The Company contracts for a pawn service charge in lieu of interest to
compensate it for the pawn loan. The statutory service fees on pawns at its
Texas stores range from 12% to 240% on an annualized basis depending on the
size of the pawn, and from 39% to 240% on an annualized basis at the
Company's Oklahoma stores. Pawns made in the Maryland stores bear service
fees of 144% to 240% on an annualized basis with a $6 minimum charge per
month, while pawns in Virginia earn 120% to 144% annually with a $5 minimum
charge per month. In Washington, D.C., a flat $2 charge per month applies
to all pawns up to $40, and an 18% to 60% annualized service charge applies
to pawns greater than $40. In Missouri, pawns bear a total service and
storage charge of 180% to 240% on an annualized basis with a $2.50 minimum
charge per month, and South Carolina rates range from 100% to 300%. In
Mexico, pawns bear an annualized rate of 240%. As of December 31, 2006, the
Company's average pawn per pawn ticket was approximately $99.
Cash Advance and Credit Services Activities
The Company's cash advance stores and many of its pawn stores generally
make cash advances, also known as payday advances, for a term typically
thirty-one days or less. The typical cash advance is for amounts ranging
from $100 to $1,000 with an average advance being $413. To qualify for a
cash advance, a customer generally must have proof of steady income, a
checking account with a minimum of returned items within a specified period,
and valid identification. Upon completing an application and subsequent
approval, the customer writes a check on his or her personal checking
account for the amount of the advance, plus applicable fees. At maturity,
the customer typically returns to the store to pay off the advance and
related fee with cash, in which case the check is returned to the customer.
If the customer fails to repay the loan, the store then deposits the
customer's check. Cash advance transactions are subject to federal truth-
in-lending regulations and fair debt collection practice regulations. In
addition, state and local regulations exist in certain markets, which, among
other things, limit the number of consecutive cash advances a customer can
obtain, limit the total transactions over a specified time period, or limit
the number of outstanding advances a consumer may have with any combination
of lenders.
The term of the cash advances generally range from 7 to 31 days. In
California, Washington, Illinois, Oregon, South Carolina, Oklahoma,
Washington, D.C. and Michigan, the maximum loan term is 31, 45, 45, 60, 31,
45, 31 and 31 days, respectively. Only Illinois, Oklahoma and Michigan have
a minimum term which is 13, 12 and 7 days, respectively. Fees charged for
cash advances are generally regulated by state law. In California, the
service fee is 15% of the check's face value. Cash advances made in
Washington and Oregon bear service fees of 15% on loan amounts up to $500
and 10% on loan amounts exceeding $500; the maximum loan amount being $700.
Cash advances made in Oklahoma bear service fees of 15% on loan amounts up
to $300 and 10% on loan amounts exceeding $300; the maximum loan amount
being $500. In South Carolina, the service fee is 15% on loan amounts up to
$300. In Washington, D.C., the service fee is 10% plus a flat fee of $5 to
$20 on loans up to $1,000. Cash advances made in Michigan bear service
fees ranging from 13% to 15% on loan amounts up to $600. Cash advances made
in Illinois are limited to 15.5% per $100 advanced. In Illinois, the
Company also offers an installment loan product with terms of 14 to 180 days
at fees which range from $16 to $35 per $100 advanced.
The bank returns a significant number of customer cash advance checks
deposited by the Company due to insufficient funds in the customers'
accounts. However, the Company subsequently collects a large percentage of
these bad debts by redepositing the customers' checks or subsequent cash
repayments by the customers. The profitability of the Company's cash
advance operations is dependent upon adequate collection of these returned
items.
In the Company's Texas locations, First Cash Credit, Ltd. ("FCC"), a
wholly-owned subsidiary of the Company, offers a fee-based credit services
organization ("CSO") program to assist consumers in obtaining credit. Under
the CSO program, FCC assists customers in applying for a cash advance 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 $50 to $1,000, have
terms of 7 to 35 days and bear interest at a rate of 9.9% on an annualized
basis. FCC typically charges a credit services fee of $20 per $100
advanced. If the loan is not repaid prior to the expiration of the term,
the customer's personal check is deposited into the Independent Lender's
bank account. The bank returns a significant number of customer checks
deposited into the Independent Lender's account due to insufficient funds
in the customers' accounts. If the loan is unpaid after 16 days from its
due date, FCC reimburses the Independent Lender, under the terms of its
letter of credit, for the outstanding principal amount, accrued interest,
applicable late fees and returned check fees. FCC subsequently collects a
large percentage of these bad debts by redepositing the customers' checks or
subsequent cash repayments by the customers. The profitability of the
Company's credit services operations is dependent upon adequate collection
of these returned items.
Pawn Merchandise Sales
The Company's pawn merchandise sales are primarily retail sales to the
general public in its pawn stores. The items retailed are primarily used
jewelry, consumer electronics, tools, musical instruments, and sporting
goods. The Company also melts down certain quantities of scrap gold jewelry
and sells the gold at market commodity prices.
The Company acquires pawn merchandise inventory primarily through
forfeited pawns and, to a lesser extent, through purchases of used goods
directly from the general public. Merchandise acquired by the Company
through defaulted pawns is carried in inventory at the amount of the related
pawn loan, exclusive of any accrued service fees.
The Company does not provide financing to purchasers of its
merchandise, but does permit its customers to purchase merchandise on an
interest-free "layaway" plan. Should the customer fail to make a required
payment, the item is returned to inventory and previous payments are
forfeited to the Company.
Buy-Here/Pay-Here Automotive Sales and Financing Activities
The Company's buy-here/pay-here merchandise sales are retail sales of
used vehicles to the general public at its automotive dealerships. The
Company purchases vehicles primarily through wholesalers, new car dealers
and from auctions. The majority of vehicle purchasing is performed by the
Company's buyers. Senior management monitors the quantity and quality of
vehicles purchased and compares the cost of similar vehicles purchased among
different buyers. Vehicles acquired by the Company are carried in
inventory at the amount of the purchase price plus vehicle reconditioning
costs.
The Company provides financing to substantially all of its customers
who purchase a vehicle at one of its dealerships. The Company only provides
financing to its customers for the purchase of its vehicles, and the Company
does not provide any type of financing to non-customers. The Company's
finance contracts typically include down payments and/or trade-in allowances
ranging from 5% to 10% of the purchase price, and an average term of 30
months. Missouri, Oklahoma and Arkansas state regulations limit interest
rates to 22.99%, 21.99% and the Federal Reserve Discount Window Primary Rate
(approx 6%) plus 5%, respectively. In Missouri and Oklahoma, the Company
charges rates that are lower than those allowed by law and those charged by
many of its competitors. Currently, the Company charges 10.9% interest on
all new sales in Arkansas and 16.99% on all sales in Oklahoma and Missouri.
The Company requires payments be made on a weekly, bi-weekly, semi-
monthly or monthly basis to coincide with the day the customer is paid by
his or her employer. Upon the customer and the Company reaching a
preliminary agreement as to financing terms, the Company obtains a credit
application from the customer which includes information regarding
employment, residency and credit history, personal references and a detailed
budget itemizing the customer's monthly income and expenses, which is then
verified by the Company's underwriting personnel. After the verification
process, the store manager makes the decision to accept, reject or modify
(perhaps obtain a greater down payment or require an acceptable co-buyer)
the proposed transaction. In general, the store manager and underwriters
attempt to assess the stability and character of the applicant.
Financial Information about Segments
Additional financial information regarding the Company's revenues and
assets by each of its two operating segments is provided in Note 14 of
"Notes to Consolidated Financial Statements."
Financial Information about Geographic Areas
Additional financial information regarding the Company's revenues and
long-lived assets by geographic areas is provided in Note 15 of "Notes to
Consolidated Financial Statements."
Locations and Operations
The Company seeks to establish clusters of several stores in specific
geographic areas in order to achieve certain economies of scale relative
to supervision, purchasing and marketing. Financial information about
geographic areas is provided in Results of Operations and Note 15 of the
"Notes to Consolidated Financial Statements." Of the Company's 252 pawn
stores, 69 pawn stores also offer the cash advance or credit services
product. As of December 31, 2006, the Company's stores were located in the
following states:
Buy-Here/
Cash Pay-Here
Pawn Advance Automotive Total
Stores Stores Dealerships Locations
------ ------ ----------- ---------
United States:
Texas 58 95 - 153
Maryland 21 - - 21
California - 15 - 15
Illinois - 10 - 10
District of Columbia 2 7 - 9
Michigan - 8 - 8
Oregon - 7 - 7
Arkansas - - 6 6
South Carolina 6 - - 6
Missouri 3 - 2 5
Oklahoma 3 - 2 5
Washington - 3 - 3
Virginia 2 - - 2
Mexico:
Tamaulipas 39 - - 39
Chihuahua 30 - - 30
Coahuila 28 - - 28
Nuevo Leon 27 - - 27
Baja California 26 - - 26
Jalisco 3 - - 3
Durango 3 - - 3
Sonora 1 - - 1
----- ----- ------ -------
Total 252 145 10 407
===== ===== ====== =======
In addition, at December 31, 2006, the Company's 50% owned joint
venture, Cash & Go, Ltd., operated a total of 40 staffed kiosks located
inside convenience stores in the state of Texas. These kiosks offer credit
services and check cashing. No kiosks were opened or closed during the year
ended December 31, 2006, although subsequent to December 31, 2006, one Cash
& Go, Ltd. kiosk was closed.
Pawn Store Operations
The typical Company pawn store is a freestanding building or part of a
small retail strip shopping center with adequate, well-lit parking.
Management has established a standard store design intended to distinguish
the Company's stores from the competition. The design consists of a well-
illuminated exterior with distinctive signage and a layout similar to a
contemporary specialty retailer. The Company's stores are typically open
six to seven days a week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.
The Company's computer system permits a store manager or clerk to
rapidly recall the cost of an item in inventory, the date it was purchased
as well as the prior transaction history of a particular customer. It also
facilitates the timely valuation of goods by showing values assigned to
similar goods in the past. The Company has networked its stores to permit
the Company's headquarters to more efficiently monitor each store's
operations, including merchandise sales, service charge revenues, pawns
written and redeemed, and changes in inventory.
The Company attempts to attract retail shoppers seeking value prices
through the use of seasonal promotions, special discounts for regular
customers, prominent display of impulse purchase items such as jewelry,
electronics and tools, tent and sidewalk sales, and a layaway purchasing
plan. The Company attempts to attract and retain pawn customers by lending
a competitive percentage of the estimated sale value of items presented for
pledge and by providing quick financing, renewal and redemption services in
an appealing atmosphere.
Each pawnshop employs a manager, one or two assistant managers, and
between one and eight sales personnel, depending upon the size, sales volume
and location of the store. The store manager is responsible for supervising
personnel and assuring that the store is managed in accordance with Company
guidelines and established policies and procedures. Each manager reports to
an area supervisor who typically oversees four to seven store managers.
Area supervisors typically report to a regional market manager, who in turn
reports to one of the Company's two Vice-Presidents of Operations.
The Company believes that profitability of its pawnshops is dependent,
among other factors, upon its employees' ability to make pawns that achieve
optimum redemption rates, to be effective sales people and to provide prompt
and courteous service. Therefore, the Company trains its employees through
direct instruction and on-the-job pawn and sales experience. The new
employee is introduced to the business through an orientation and training
program that includes on-the-job training in lending practices, layaways,
merchandise valuation, and general administration of store operations.
Certain experienced employees receive training and an introduction to the
fundamentals of management to acquire the skills necessary to advance into
management positions within the organization. Management training typically
involves exposure to income maximization, recruitment, inventory control and
cost efficiency. The Company maintains a performance-based compensation
plan for all store employees based on sales, gross profit and special
promotional contests.
Cash Advance and Credit Services Operations
The Company's cash advance locations are typically part of a retail
strip shopping center with good visibility from a major street and easy
access to parking. Management has established a standard store design
intended to distinguish the Company's stores from the competition. The
design consists of a well-illuminated exterior with lighted signage. The
interiors typically feature an ample lobby, separated from employee work
areas by glass teller windows. The Company's stores are typically open six
to seven days a week from 9:00 a.m. to between 6:00 p.m. and 9:00 p.m.
Computer operating systems in the Company's cash advance stores allow a
store manager or clerk to rapidly recall customer check cashing histories,
cash advance histories, and other vital information. The Company attempts
to attract customers primarily through the stores' visibility and television
and yellow page advertisements in certain markets.
Each cash advance store employs a manager, and between one and eight
tellers, depending upon the size, sales volume and location of the store.
The store manager is responsible for supervising personnel and assuring that
the store is managed in accordance with Company guidelines and established
policies and procedures. Each store manager reports to an area supervisor
who typically oversees two to five store managers. Area supervisors
typically report to a regional market manager, who in turn reports to one of
the Company's two Vice-Presidents of Operations.
The kiosks operated by the Cash & Go, Ltd., joint venture are located
inside convenience stores. Each kiosk is a physically secured area with its
own counter space within the convenience store. Each kiosk is typically
staffed by one or two employees at any point in time.
The Company believes that profitability of its cash advance locations
is dependent upon its employees' ability to make loans and extend credit
services that achieve optimum loan performance, to manage bad debt expense
and to provide excellent customer service. Company employees are trained
through direct instruction and on-the-job lending, collections and customer
service experience. The new employee is introduced to the business through
a training program that includes on-the-job training in lending practices,
collections efforts and general administration of store operations. Certain
experienced employees receive training and an introduction to the
fundamentals of management, such as income maximization, recruitment and
cost efficiency, to acquire the skills necessary to advance into management
positions throughout the Company. The Company maintains a performance-based
compensation plan for all cash advance and credit services store employees
based on gross profit, net income and other seasonal contests.
Buy-Here/Pay-Here Automotive Operations
The typical Company buy-here/pay-here automotive dealership is a
freestanding building with adequate, well-lit parking. Management has
established a standard store design intended to distinguish the Company's
stores from the competition. The design consists of a well-illuminated
exterior with distinctive signage and a layout similar to other automobile
retailers. The Company's dealerships are typically open six days a week
from 9:00 a.m. to between 6:00 p.m. and 8:00 p.m. All stores are located on
leased property between one and three acres in size.
Computer operating systems in the Company's buy-here/pay-here
dealerships allow a store manager or clerk to rapidly recall the cost of a
vehicle in inventory, the date it was purchased as well as the prior
transaction history of a particular customer and other vital information.
The Company attempts to attract customers primarily through its stores'
visibility, television, radio and Internet advertisements. Another
significant source of customers is repeat customers and referrals. As a
result, the Company offers special promotions to customers nearing the end
of their current contract or to previous customers that have paid out
contracts. The Company also actively manages a website, network of
billboards, and a toll-free hotline, all of which drive traffic to
individual stores.
Each dealership employs a manager, a team captain, and between three
and eight sales personnel, depending upon the size, sales volume and
location of the dealership. The store manager is responsible for
supervising personnel and assuring that the store is managed in accordance
with Company guidelines and established policies and procedures. Each
manager reports to a regional sales manager who typically oversees three to
five store managers. Regional sales managers report to Auto Master's Vice-
President of Operations.
The Company believes that profitability of its buy-here/pay-here
dealerships is dependent upon its employees' ability to sell vehicles and
extend credit that achieves optimum loan performance, to manage bad debt
expense and to provide excellent customer service. Company employees are
trained through direct instruction and on-the-job sales, collections
and customer service experience. New employees are introduced to the
business through a training program that includes on-the-job sales training
in selling and financing practices and general administration of store
operations. The Company maintains a performance-based compensation plan for
a substantial portion of all buy-here/pay-here employees based on gross
profit, net income and other types of programs related to the advancement of
functional and organizational goals and objectives.
The Company utilizes a highly centralized operating model. Key
functions such as inventory purchasing, inventory management,
reconditioning, pricing, underwriting, marketing and collections are managed
and executed at a corporate and/or regional level. The Company believes it
gains certain economies of scale and greater consistency in operations by
centralizing its operations.
The Company employs a full-time staff of buyers who purchase used cars
from vehicle auctions, wholesalers, and new vehicle dealers in a ten state
area. The ability to purchase vehicles from multiple regions of the country
protects the Company from local and regional supply shortages while allowing
it to showcase a much greater selection of quality vehicles.
Vehicle quality is important as it impacts front end sales, customer
satisfaction and referrals, repeat business and loan quality; a customer is
more likely to make payments on a vehicle that is operational. Each vehicle
purchased by the Company is sent to a centralized reconditioning facility
for inspection, necessary repairs, and detailing. This is in contrast to
many competitors, whose vehicles go directly from the auction or wholesaler
to the retail location. Adjacent to the Auto Master headquarters, a 12,000
square foot facility is equipped with skilled technicians, 20 double bays,
and a parts shop stocked with most commonly needed items. Upon arrival,
each vehicle is thoroughly inspected to determine the level of
reconditioning necessary for the unit to meet the Company's retail
standards. Approximately 10% of vehicles purchased do not pass this
inspection, and are therefore wholesaled. Each remaining vehicle is
assigned to a technician who completes the work mandated by the inspection.
The most common modifications are tune-ups and the replacement of parts
which routinely wear down such as brakes and tires; however, the Company's
technicians are equipped to handle most major repairs as well. Upon
completion of all necessary repairs, each vehicle is then sent to the
Company's adjacent 10,000 square foot detail facility, where it is cleaned,
inside and out, by the detail staff.
Corporate management monitors and controls inventory by working
directly with the Company's buyers as well as its retail location managers
to ensure that each retail location has the appropriate mix of vehicle
models and price ranges. Based on each location's needs, management assigns
the newly reconditioned vehicles to an individual retail location.
The Company's loan approval process begins as soon as the customer
arrives at the retail location. Applications which meet initial
qualifications are sent to underwriting. The Company has a staff of
full-time underwriters, all of which are based in the Auto Master corporate
office. Upon receipt of a credit application, an underwriter verifies that
it is within the Company's loan underwriting guidelines, checks the
customer's credit and contacts the customer's references. The Company
has developed standardized loan underwriting guidelines which make the
approval process objective rather than subjective. Following approval from
underwriting, sales management closes the transaction, and the customer
takes delivery of the vehicle.
Following a sale, each customer is assigned an account manager who
works with the customer to ensure payments are made on time, typically on a
weekly or bi-weekly basis when the customer gets paid. The Company has over
20 account managers who are spread across its four regional collection
centers.
Competition
The Company encounters significant competition in connection with all
aspects of its business operations. These competitive conditions may
adversely affect the Company's revenues, profitability, and ability to
expand.
The Company competes primarily with other pawn store operators, cash
advance operators and buy-here/pay-here dealership operators. There are
three publicly-held pawnshop operators, six publicly-held cash advance/check
cashing operators and two publicly-held buy-here/pay-here operators, all of
which have more locations than the Company. There are many privately held
operators of cash advance stores and buy-here/pay-here dealerships, some of
which are significantly larger than the Company. In addition, the pawnshop,
cash advance and buy-here/pay-here industries are characterized by a large
number of independent owner-operators, some of whom own and operate multiple
locations. The Company believes that the primary elements of competition in
these businesses are store location, the ability to lend competitive amounts
on pawns and cash advances, customer service, and management of store
employees. In addition, the Company competes with financial institutions,
such as banks and consumer finance companies, which generally lend on an
unsecured as well as a secured basis. Other lenders may and do lend money
on terms more favorable than those offered by the Company. Many of these
competitors have greater financial resources than the Company.
In its retail operations, the Company's competitors include numerous
retail and wholesale stores, including jewelry stores, discount retail
stores, consumer electronics stores, on-line retailers, on-line auction
sites and other pawnshops. Competitive factors in the Company's retail
operations include the ability to provide the customer with a variety of
merchandise items at attractive prices. Many retailers have significantly
greater financial resources than the Company.
In the used automotive retail industry, the Company competes
principally with other independent buy-here/pay-here dealers, and to a
lesser degree with used vehicle retail operations of franchised automobile
dealerships, national or regional, independent used vehicle dealers, and
individuals who sell used vehicles in private transactions. The Company
competes for both the purchase and resale of used vehicles.
Governmental Regulation
General
The Company is subject to extensive regulation of its pawnshop, cash
advance, credit services, check cashing and buy-here/pay-here automotive
retailing 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 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 pawn operations in Mexico are also
subject to, and must comply with pawnshop and other general business, tax,
employment and consumer protection regulations from various federal, state
and local governmental agencies in Mexico.
Governmental action to further prohibit or restrict, in particular,
cash or payday advances and credit services products 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 cash advances, which is higher than the interest generally
charged by credit card issuers to a more creditworthy consumer. The
consumer groups and media stories often characterize cash advance activities
as abusive toward consumers. During the last few years, legislation has
been introduced and/or enacted in the United States Congress, in certain
state legislatures and in various local jurisdictions to prohibit or
restrict cash advances and the related service charges. In addition,
regulatory authorities in various levels of government have proposed or
publicly addressed, from time to time, the possibility of proposing new or
expanded regulations that would prohibit or further restrict cash advances.
There can be no assurance that additional local, state or federal
statutes or regulations in either the United States or Mexico will not be
enacted or that existing laws and regulations will not be amended at some
future date that could inhibit the ability of the Company to offer pawn
loans, cash advances, credit services and buy-here/pay-here automotive
retailing/financing, 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, cash advance, credit services or buy-here/pay-here
automotive industries were taken at a federal level in the United States or
Mexico, or in U.S. or Mexican states or municipalities where the Company has
a significant number of stores, those actions could have a materially
adverse effect on the Company's lending, credit services and retail
activities and revenues. There can be no assurance that additional federal,
state or local legislation in the U.S. or Mexico will not be enacted, or
that existing laws and regulations will not be amended, which would have a
materially adverse impact on the Company's operations and financial
condition.
U.S. State and Local Regulations
The Company operates pawn stores in seven U.S. states, all of which
have licensing and/or fee regulations on pawnshop operations, which includes
Texas, Oklahoma, Maryland, Virginia, South Carolina, Washington, D.C., and
Missouri. The Company is licensed in each of the states in which a license
is currently required for it to operate as a pawnbroker. The Company's fee
structures are at or below the applicable rate ceilings adopted by each of
these states. In addition, the Company is in compliance with the net asset
requirements in states where it is required to maintain certain levels of
liquid assets for each pawn store it operates in the applicable state.
Under some county and municipal ordinances, pawn stores must provide
local law enforcement agencies with copies of all daily transactions
involving pawns and over-the-counter purchases. These daily transaction
reports are designed to provide the local law enforcement officials with a
detailed description of the goods involved, including serial numbers, if
any, and the name and address of the owner obtained from a valid
identification card. Goods held to secure pawns or goods purchased that are
determined to belong to an owner other than the borrower or seller are
subject to recovery by the rightful owners. Historically, the Company has
not found these claims to have a material, adverse effect upon results of
operations. The Company does not maintain insurance to cover the costs of
returning merchandise to its rightful owners.
The Company currently provides cash advances, also known as payday
advances, in eight U.S. states that have licensing and/or fee and operating
regulations related to its payday advance operations, which includes
California, Washington, Oklahoma, South Carolina, Oregon, Illinois and
Washington, D.C and Michigan. The Company is licensed in each of the states
in which a license is currently required for it to operate as a payday
advance provider. The Company's fee structures are at or below the
applicable rate ceilings adopted by each of these states. Regulations in
certain states limit the maximum number of consecutive payday advances that
may be provided to a customer and/or limit the total advances a customer may
have outstanding at any point in time. As an example of such restrictive
regulation, states such as Illinois and Michigan have enacted payday advance
laws that require payday advance lenders to report their customers' payday
advance activities to a state-wide database. Cash advance lenders operating
in conjunction with a state-wide database are generally restricted from
making payday advance loans to customers who may have a certain number of
payday advances outstanding with other lenders. These database restrictions
can have the effect of preventing customers from obtaining the cash advances
they need and want. It is possible that legislators and regulators could
pursue database or other restrictive legislation in other states, despite
the increasing consumer demand for cash, or payday advance products. In
2006, the state of Oregon 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, where the Company currently
has seven cash advance locations. Additional restrictive legislative and
regulatory activity in other states surrounding cash advance products, if
passed, could also adversely affect the Company's cash advance business. In
addition, in some jurisdictions, check cashing companies or money
transmission agents are required to meet minimum bonding or capital
requirements and are subject to record-keeping requirements.
The laws in the state of Texas permit licensed payday advance
operations; however, restrictions on the maximum fees that can be charged do
not permit the Company to operate profitably as a payday advance lender.
Accordingly, in the state of Texas, the Company provides a credit services
program to customers seeking cash advances. First Cash Credit, Ltd., a
wholly-owned subsidiary of the Company, operates a registered credit
services organization in the state of Texas as provided under Section 393 of
the Texas Finance Code. As a credit services organization, First Cash
Credit, Ltd. assists customers, for a fee, in obtaining a cash advance from
an independent lender. A credit services organization must provide the
consumer with a disclosure statement and a credit services agreement that
describe in detail, among other things, the services the credit services
organization will provide to the consumer, the fees the consumer will be
charged by the credit services organization for these services, the details
of the surety bond and the availability of the surety bond if the consumer
believes the credit services organization has violated the law, the
consumer's right to review his or her file, the procedures a consumer may
follow to dispute information contained in his or her file, and the
availability of non-profit credit counseling services. The credit services
organization must also give a consumer the right to cancel the credit
services agreement without penalty within three days after the agreement is
signed. In addition, under the provisions of the credit services statute,
each First Cash Credit, Ltd.'s credit services location must be registered
as a credit services organization and pay a registration fee. There can be
no assurance that new legislative or regulatory initiatives will not be
enacted which would eliminate or restrict the Company's ability to operate
as a credit services organization in the state of Texas.
The Company's buy-here/pay-here operations are subject to various state
and local laws, ordinances and regulations pertaining to the sale and
financing of vehicles. Under these state laws, the Company's dealerships
must obtain a license in order to operate or relocate. These laws
also regulate advertising and sales practices. The Company's financing
activities are subject to state and local motor vehicle finance laws,
installment finance laws, usury laws and other installment sales laws. Among
other things, these laws require that the Company limit or prescribe terms
of the contracts it originates, require specified disclosures to customers,
restrict collection practices, limit the Company's right to repossess and
sell collateral, and prohibit discrimination against customers on the basis
of certain characteristics including age, race, gender and marital status.
The states in which the Company operates impose limits on interest
rates the Company can charge on its loans. These limits are generally based
on either (i) a specified margin above the federal primary credit rate, (ii)
the age of the vehicle, or (iii) a fixed rate. Management believes the
Company is in compliance in all material respects with all applicable
federal, state and local laws, ordinances and regulations. However, the
adoption of additional laws, changes in the interpretation of existing laws,
or the Company's entrance into jurisdictions with more stringent regulatory
requirements could have a material adverse effect on the Company's used
vehicle sales and finance business.
U.S. Federal Regulations
Direct federal regulation of the pawn, cash advance and buy-here/pay-
here automotive retailing/financing industries is generally limited. The
federal government regulates, and generally prohibits, the ability of state
and nationally chartered banks to participate in the cash advance industry
through regulations established by both the U.S. Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation.
During 2006, the United States Congress enacted legislation that caps
the annual percentage rate charged on loans made to active military
personnel at 36%; this legislation becomes effective in October 2007. As of
the date of this report, the 36% annual percentage rate cap applies to most
loan products, including cash advances and pawn loans. The Company does not
have any cash advance or pawn loan products bearing an interest rate of 36%
per annum or less, nor does the Company intend to develop any such product,
as the Company believes the losses and servicing costs associated with
lending to the Company's traditional customer base would exceed the revenue
produced at that rate. The Company does not expect this new legislation to
have a material adverse effect on the Company's financial condition or
results of operations.
In connection with cash advance and automobile finance transactions,
the Company must comply with the various disclosure requirements under the
Federal Truth in Lending Act (and Federal Reserve Regulation Z under that
Act). These disclosures include among other things, the total amount of the
finance charges and annualized percentage rate of the finance charges
associated with each cash advance and vehicle financing transaction.
Under the Bank Secrecy Act regulations of the U.S. Department of the
Treasury (the "Treasury Department"), transactions involving currency in an
amount greater than $10,000 or the purchase of monetary instruments for cash
in amounts from $3,000 to $10,000 must be recorded. In general, every
financial institution, including the Company, must report each deposit,
withdrawal, exchange of currency or other payment or transfer, whether by,
through or to the financial institution, that involves currency in an amount
greater than $10,000. In addition, multiple currency transactions must be
treated as single transactions if the financial institution has knowledge
that the transactions are by, or on behalf of, any one person and result in
either cash in or cash out totaling more than $10,000 during any one
business day.
The Money Laundering Suppression Act of 1994 added a section to the
Bank Secrecy Act requiring the registration of "money services businesses,"
like the Company, that engage in check cashing, currency exchange, money
transmission, or the issuance or redemption of money orders, traveler's
checks, and similar instruments. The purpose of the registration is to
enable governmental authorities to better enforce laws prohibiting money
laundering and other illegal activities. The regulations require money
services businesses to register with the Treasury Department by filing a
form, adopted by the Financial Crimes Enforcement Network of the Treasury
Department ("FinCEN"), and to re-register at least every two years
thereafter. The regulations also require that a money services business
maintain a list of names and addresses of, and other information about, its
agents and that the list be made available to any requesting law enforcement
agency (through FinCEN). The agent list must be updated annually.
In March 2000, FinCEN adopted additional regulations, implementing the
Bank Secrecy Act that is also addressed to money services businesses. These
regulations require money services businesses, such as the Company, to
report suspicious transactions involving at least $2,000 to FinCEN. The
regulations generally describe three classes of reportable suspicious
transactions - one or more related transactions that the money services
business knows, suspects, or has reason to suspect (1) involve funds derived
from illegal activity or are intended to hide or disguise such funds; (2)
are designed to evade the requirements of the Bank Secrecy Act; or (3)
appear to serve no business or lawful purpose.
Under the USA PATRIOT Act passed by Congress in 2001 and revised in
2006, the Company is required to maintain an anti-money laundering
compliance program. The program must include (1) the development of
internal policies, procedures and controls; (2) the designation of a
compliance officer; (3) an ongoing employee-training program; and (4) an
independent audit function to test the program. The Treasury Department
is expected to issue regulations specifying the appropriate features and
elements of the anti-money laundering compliance programs for the pawn
brokering and cash advance industries.
The Gramm-Leach-Bliley Act requires the Company to generally protect
the confidentiality of its customers' nonpublic personal information and to
disclose to its customers its privacy policy and practices, including those
regarding sharing the customers' nonpublic personal information with third
parties. Such disclosure must be made to customers at the time the customer
relationship is established, at least annually thereafter, and if there is a
change in the Company's privacy policy.
Mexico Regulations
The pawnshop industry in Mexico is subject to various general business
regulations in the areas of tax compliance, customs, consumer protections
and employment matters, among others, by various federal, state and local
governmental agencies in Mexico. In addition, federal legislation in Mexico
was recently enacted which provides for administrative regulation of the
pawnshop industry by PROFECO, the federal consumer protection agency. Under
these regulations, PROFECO regulates the form of pawn loan contracts and
certain operating procedures of pawnshops. PROFECO does not currently have
regulatory authority over the interest rates and fees charged to pawn
customers. There can be no assurance that additional federal, state or
local statutes or regulations in Mexico will not be enacted, or that
existing laws and regulations will not be amended, which could have a
materially adverse impact on the Company's operations and financial
condition.
Employees
The Company had approximately 2,900 employees as of March 14, 2007,
including approximately 200 persons employed in executive, administrative
and accounting functions. In addition, Cash & Go, Ltd., had approximately
80 employees as of March 14, 2007. None of the Company's employees are
covered by collective bargaining agreements. The Company considers its
employee relations to be satisfactory.
First Cash Website
The Company's primary website is at http://www.firstcash.com. The
Company makes available, free of charge, at its corporate website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), as soon as reasonably practicable after they are
electronically filed with the SEC.
Insurance
The Company maintains property risk coverage and liability insurance
for each of its locations in amounts management believes to be adequate.
The Company maintains workers' compensation insurance in Maryland, Missouri,
California, Virginia, Washington, Oregon, South Carolina, Illinois,
Washington, D.C., Oklahoma, Michigan, Arkansas, as well as excess employer's
indemnification insurance in Texas and equivalent coverage in Mexico. The
Company is a non-subscriber under the Texas Workers' Compensation Act.
Item 1a. Risk Factors
----------------------
Important risk factors that could cause results or events to differ
from current expectations are described below. These factors are not
intended to be an all-encompassing list of risks and uncertainties that may
affect the operations, performance, development and results of the Company's
business.
Short-term consumer loan products have come under increased regulation
and scrutiny. If changes in regulations affecting the Company's pawn, cash
advance, automotive finance and credit services businesses create increased
restrictions, or have the effect of prohibiting loans in the countries and
states where the Company offers short-term consumer loans, such regulations
could materially reduce the Company's pawn, cash advance, automotive finance
and credit services businesses and limit its expansion into new markets.
The Company's products and services are subject to extensive regulation and
supervision under various federal, state and local laws, ordinances and
regulations in both the United States and Mexico. The Company faces the risk
that restrictions or limitations on loan amounts, loan yields and customer
acceptance of loan products resulting from the enactment, change, or
interpretation of laws and regulations in the United States or Mexico could
have a negative effect on the Company's business activities. In particular,
short-term consumer loans, including cash and payday advances, have come
under increased scrutiny and increasingly restrictive regulation in recent
years. Some regulatory activity may limit the number of cash advances that
customers may receive or have outstanding and regulations adopted by some
states requiring that all borrowers of certain cash advance loan products be
listed on a database, limiting the yield on cash advances and limiting the
number of such loans they may have outstanding. Certain consumer advocacy
groups and federal and state legislators have also asserted that laws and
regulations should be tightened so as to severely limit, if not eliminate,
the availability of the cash advance and credit services products to
consumers, despite the significant demand for it. In Mexico, similar
restrictions and regulations affecting the pawn industry, including limits
on loan service fees, have been proposed from time to time. Adoption of
such federal, state or local regulation or legislation in the United States
and Mexico could restrict, or even eliminate, the availability of specialty
consumer finance products at some or all of the Company's locations, which
would adversely affect the Company's operations and financial condition.
The failure of third-parties who provide products, services or support
to the Company to maintain their products, services or support could disrupt
Company operations or result in a loss of revenue. The Company's credit
services revenues depend in part on the willingness and ability of an
unaffiliated third-party lender to make loans to its customers. The loss of
the relationship with this lender, and an inability to replace it with a new
lender or lenders, or the failure of the lender to fund new loans and to
maintain quality and consistency in its loan programs, could cause the
Company to lose customers and substantially decrease the revenues and
earnings of the Company's credit services business.
Media reports and public perception of short-term consumer loans, such
as cash or payday advances, as being predatory or abusive could materially
adversely affect the Company's cash advance and credit services businesses.
In recent years, consumer advocacy groups and some media reports, in both
the United States and Mexico, have advocated governmental action to prohibit
or place severe restrictions on short-term consumer loans. The consumer
advocacy groups and media reports generally focus on the cost to a consumer
for this type of loan, which is higher than the interest typically charged
by banks to consumers with better credit histories. Though the consumer
advocacy groups and media reports do not discuss the lack of viable
alternatives for our customers' borrowing needs, they do typically
characterize these short-term consumer loans as predatory or abusive despite
the large customer demand for these loans. If the negative characterization
of these types of loans becomes increasingly accepted by consumers, demand
for the cash advance products could significantly decrease, which could
materially affect the Company's results of operations and financial
condition. Additionally, if the negative characterization of these types of
loans becomes increasingly accepted by legislators and regulators, the
Company could become subject to more restrictive laws and regulations that
could materially adversely affect the Company's financial condition and
results of operations.
The Company's growth is subject to external factors and other
circumstances over which the Company has limited control or that are beyond
the Company's control. These factors and circumstances could adversely
affect the Company's ability to grow through the opening of new store
locations. The success of this strategy is subject to numerous external
factors, such as the availability of sites with favorable customer
demographics, limited competition, acceptable regulatory restrictions and
suitable lease terms, the Company's ability to attract, train and retain
qualified unit management personnel and the ability to obtain required
government permits and licenses. Some of these factors are beyond the
Company's control. The failure to execute this expansion strategy would
adversely affect the Company's ability to expand its business and could
materially adversely affect its business, prospects, results of operations
and financial condition.
Increased competition from banks, savings and loans, other short-term
consumer lenders, and other entities offering similar financial services, as
well as retail businesses that offer products and services offered by the
Company, could adversely affect the Company's results of operations. The
Company has many competitors to its core lending and merchandise sales
operations. The Company's principal competitors are other pawnshops, cash
advance companies, automotive retailers, consumer finance companies and
other financial institutions that serve the Company's primary customer base.
Many other financial institutions or other businesses that do not now offer
products or services directed toward the Company's traditional customer
base, many of whom may be much larger than the Company, could begin doing
so. Significant increases in the number and size of competitors for the
Company's business could result in a decrease in the number of cash advances
or pawn loans that the Company writes, resulting in lower levels of revenues
and earnings in these categories. Furthermore, the Company has many
competitors to its retail operations, such as retailers of new merchandise
and automobiles, retailers of pre-owned merchandise and automobiles, other
pawnshops, thrift shops, online retailers and online auction sites.
Increased competition or aggressive marketing and pricing practices by these
competitors could result in decreased revenues, margins and turnover rates
in the Company's retail operations. In Mexico, the Company competes
directly with certain pawn stores owned by a governmental entity. The
government could take actions that would harm the Company's ability to
compete in the Mexico market.
A sustained deterioration of economic conditions could reduce demand
for the Company's products and services and result in reduced earnings.
While the credit risk for some of the Company's consumer lending is
mitigated by the collateralized nature of pawn lending, a sustained
deterioration in the economy could adversely affect the Company's operations
through deterioration in performance of its pawn loan or cash advance
portfolios, or by reducing consumer demand for the purchase of pre-owned
merchandise.
Adverse gold market fluctuations could affect the Company's profits.
The Company holds significant gold inventories and a significant portion
of its pawn receivables are secured by gold jewelry collateral. A
significant decline in gold prices could result in decreased merchandise
sales margins, decreased inventory valuations and sub-standard
collateralization of outstanding pawn loans. In addition, a decline in gold
prices could result in a lower balance of pawn loans outstanding for the
Company, as customers would receive lower loan amounts for individual pieces
of jewelry.
Risks and uncertainties related to the Company's foreign operations
could negatively impact the Company's operating results. The Company has
a significant number of locations in Mexico, a country in which there are
potential risks related to geo-political events, enforcement of property
rights, public safety and security among others. Actions or events could
occur in Mexico that are beyond the Company's control, which could restrict
or eliminate the Company's ability to operate its locations in Mexico or
significantly reduce the profitability of such operations. In addition, the
Company conducts a significant number of transactions in pesos, the national
currency in Mexico, and holds significant financial assets that are
denominated in pesos. Significant fluctuations in the value of the peso
compared to the U.S. dollar could negatively impact the Company's operating
results.
The inability to successfully integrate acquisitions could adversely
affect results. The success of the Auto Master acquisition is subject to
numerous internal and external factors, such as the ability to consolidate
data processing and accounting functions, the management of additional
sales, administrative, operations and management personnel, overall
management of a larger organization, the ability to manage a longer-maturing
portfolio of customer receivables, competitive market forces, and general
economic factors.
The Company's success depends upon the continued contributions of the
Auto Master management team and key employees of Auto Master. The Company
is dependent upon the continued contributions of key Auto Master employees.
The loss of the services of key employees could have a material adverse
effect on the Company's results of operations. In addition, as Auto Master
opens new dealerships, the Company will need to hire additional personnel.
The market for qualified employees in the industry and in the regions Auto
Master operates is highly competitive and may subject the Company to
increased labor costs during periods of low unemployment.
The Company's allowance for credit losses may not be sufficient to
cover actual credit losses which could adversely affect its financial
condition and operating results. From time to time, the Company has to
recognize losses resulting from the inability of certain borrowers to repay
loans and the insufficient realizable value of the collateral securing the
loans. The Company maintains an allowance for credit losses in an attempt to
cover credit losses inherent in its loan portfolio. Additional credit losses
will likely occur in the future and may occur at a rate greater than the
Company has experienced to date. The allowance for credit losses is based
primarily upon historical credit loss experience, with consideration given
to delinquency levels, collateral values, economic conditions and
underwriting and collection practices. This evaluation is inherently
subjective as it requires estimates of material factors that may be
susceptible to significant change. If the Company's assumptions and
judgments prove to be incorrect, its current allowance may not be sufficient
and adjustments may be necessary to allow for different economic conditions
or adverse developments in its loan portfolio.
The Company is dependent on the availability of used vehicle inventory
and access to such inventory. Auto Master acquires vehicles primarily
through auction wholesalers and new car dealers. There can be no assurance
that sufficient inventory will continue to be available to the Company or
will be available at comparable costs. Any reduction in the availability of
inventory or increases in the cost of vehicles would adversely affect gross
profit percentages as the Company focuses on keeping payments affordable to
its customer base. The Company could have to absorb cost increases.
A decreased demand for the Company's products and services and failure
of the Company to adapt to such decrease could adversely affect results.
Although the Company's products and services are a staple of its
customer base, the demand for a particular product or service may decrease
due to a variety of factors, such as the availability of competing products,
changes in customers' financial conditions, or regulatory restrictions that
reduce customer access to particular products. Should the Company fail to
adapt to a significant change in its customers' demand for, or access to,
its products, the Company's revenues could decrease significantly. Even if
the Company does make adaptations, customers may resist or may reject
products whose adaptations make them less attractive or less available. In
any event, the effect of any product change on the results of the Company's
business may not be fully ascertainable until the change has been in effect
for some time. In particular, the Company has changed, and will continue to
change, some of the cash advance products and services it offers due to
regulatory developments.
Inclement weather can adversely impact the Company's operating results.
The occurrence of weather events, such as rain, cold weather, snow, wind,
storms, hurricanes, or other natural disasters, adversely affecting consumer
traffic and collection activities at the Company's stores and dealerships,
could negatively impact the Company's operating results.
Other risk factors are discussed under Quantitative and Qualitative
Disclosures about Market Risk.
Other risks that are indicated in the Company's filings with the
Securities and Exchange Commission may apply as well.
Item 1b. Unresolved Staff Comments
-----------------------------------
As of December 31, 2006, the Company had no unresolved SEC staff
comments.
Item 2. Properties
-------------------
The Company owns the real estate and buildings for three of its pawn
stores and leases 443 pawn, cash advance and buy-here/pay-here automotive
dealership locations that are currently open or are in the process of
opening. Leased facilities are generally leased for a term of three to five
years with one or more options to renew. The Company's existing leases
expire on dates ranging between 2007 and 2017. All current store and
dealership leases provide for specified periodic rental payments ranging
from approximately $740 to $10,600 per month.
The Company currently leases approximately 19,500 square feet of office
space in Arlington, Texas for its corporate offices. The lease, which
expires April 30, 2010, currently provides for monthly rental payments of
approximately $29,000. The Company also leases approximately 7,500 square
feet of office space in Monterrey, Mexico for its Mexico administrative
offices. The lease, which expires July 30, 2009, currently provides for
monthly rental payments of approximately $3,500. The Company also leases
approximately 13.5 acres and buildings in Tontitown, Arkansas for the Auto
Master corporate offices, reconditioning facility and detail center of
approximately 5,500, 11,800 and 9,600 square feet, respectively. The lease,
which expires December 31, 2010, currently provides for monthly rental
payments of approximately $22,800.
The Company's 50% owned joint venture, Cash & Go, Ltd., leases its
kiosk locations under operating leases generally with terms ranging from one
to five years, with renewal options for certain locations. The joint
venture's existing leases expire on dates ranging between 2007 and 2009.
All current Cash & Go, Ltd., leases provide for specified periodic rental
payments ranging from approximately $1,100 to $1,700 per month.
Most leases require the Company to maintain the property and pay the
cost of insurance and property taxes. The Company believes that termination
of any particular lease would not have a materially adverse effect on the
Company's operations. The Company's strategy is generally to lease, rather
than purchase, space for its pawnshop, cash advance and buy-here/pay-here
automotive locations, unless the Company finds what it believes is a
superior location at an attractive price. The Company believes that the
facilities currently owned and leased by it as pawn stores, cash advance
stores and buy-here/pay-here automotive dealerships are suitable for such
purposes. The Company considers its equipment, furniture and fixtures to be
in good condition.
Item 3. Legal Proceedings
--------------------------
The Company is from time to time a defendant (actual or threatened) in
certain lawsuits and arbitration claims encountered in the ordinary course
of its business, the resolution of which, in the opinion of management,
should not have a materially adverse effect on the Company's financial
position, results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of fiscal 2006.
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
-----------------------------------------------------------------------------
General Market Information
The Company's common stock is quoted on the Nasdaq Global Select Market
under the symbol "FCFS." The following table sets forth the quarterly high
and low closing sales prices per share for the common stock, as reported by
the Nasdaq National Market:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
2006
High $21.00 $22.37 $21.70 $26.12
Low 14.39 18.60 16.85 19.66
2005
High $13.32 $11.36 $13.16 $14.89
Low 10.08 8.45 10.53 12.01
On March 14, 2007, the closing sales price for the common stock as
reported by the Nasdaq National Market was $20.78 share. On March 14, 2007,
there were approximately 59 stockholders of record of the common stock.
No cash dividends have been paid by the Company on its common stock.
The dividend and earnings retention policies are reviewed by the Board of
Directors of the Company from time to time in light of, among other things,
the Company's earnings, cash flows, and financial position. The Company's
revolving credit facility contains provisions that allow the Company to pay
cash dividends within certain parameters.
Recent Issuances of Common Stock
During the period from January 1, 2006, through December 31, 2006, the
Company issued 1,020,000 shares of common stock relating to the exercise of
outstanding stock options for an aggregate exercise price of $14,899,000
(including income tax benefit). During the period from January 1, 2006,
through December 31, 2006, the Company issued 418,000 shares of common stock
relating to the exercise of outstanding stock warrants for an aggregate
price of $3,415,000 (including income tax effect). The issuance of the
derivative securities to officers and employees was exempt under Section
4(2) of the Act, and all holders had access to and/or reviewed copies of
Exchange Act filings. No sales commissions were paid with respect to these
issuances.
Issuer Purchases of Equity Securities
In July 2004, the Company's Board of Directors authorized an open-ended
stock repurchase plan, with no dollar limitation, to permit future
repurchases of up to 3,200,000 shares of the Company's outstanding common
stock. During the second quarter of 2006, First Cash repurchased
approximately 802,000 shares to close out the 2004-authorized program. The
repurchase price of the 3,200,000 shares repurchased under this plan was
$39,425,000 or a weighted-average of $12.32 per share.
In June 2006, the Company's Board of Directors authorized a repurchase
program for up to 2,000,000 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. There were no shares
repurchased during the third and fourth quarters of 2006. There are
1,539,000 total remaining shares available for repurchase under the 2006-
authorized plan.
Item 6. Selected Financial Data
--------------------------------
The information below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 and the Company's Consolidated Financial Statements and
related notes thereto required by Item 8.
Year Ended December 31,
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
(in thousands, except per share amounts and certain operating data)
Income Statement Data:
Total revenues $ 269,722 $ 207,775 $ 179,813 $ 145,468 $ 118,793
Cost of revenues 106,132 75,768 63,867 51,222 41,817
Net revenues 163,590 132,007 115,946 94,246 76,976
Total expenses and
other income 113,990 92,329 83,079 69,517 59,585
Income before income taxes 49,600 39,678 32,867 24,729 17,391
Provision for income taxes 17,856 14,295 12,161 9,397 6,451
Income before change in
accounting principle 31,744 25,383 20,706 15,332 10,940
Cumulative effect of change
in accounting principle,
net of taxes - - - (357) -
Net income 31,744 25,383 20,706 14,975 10,940
Net income per share:
Basic:
Income before change in
accounting principle $ 1.01 $ 0.81 $ 0.66 $ 0.55 $ 0.42
Net income 1.01 0.81 0.66 0.54 0.42
Diluted:
Income before change in
accounting principle 0.97 0.76 0.61 0.49 0.38
Net income 0.97 0.76 0.61 0.48 0.38
Unaudited pro forma amounts
assuming retroactive
application of change in
accounting principle:
Revenues $ 269,722 $ 207,775 $ 179,813 $ 152,162 $ 125,886
Net income 31,744 25,383 20,706 15,362 10,790
Basic earnings per share 1.01 0.81 0.66 0.55 0.42
Diluted earnings per share 0.97 0.76 0.61 0.49 0.38
Balance Sheet Data:
Working capital $ 93,653 $ 93,506 $ 81,389 $ 60,840 $ 47,187
Total assets 233,842 185,954 162,343 140,064 130,999
Long-term liabilities 23,485 8,616 8,755 11,955 33,525
Total liabilities 45,246 23,246 18,297 22,841 44,479
Stockholders' equity 188,596 162,708 144,046 117,223 86,520
End of Year Location Counts:
Pawn-only stores 183 157 127 89 57
Pawn stores offering cash
advances (1) 69 69 70 71 74
Cash advance stores (1) 145 102 87 75 59
Buy-here/pay-here dealerships 10 - - - -
-------- -------- -------- -------- --------
407 328 284 235 190
======== ======== ======== ======== ========
(1) Includes locations where cash advances are provided through the CSO program.
Item 7. Management's Discussion and Analysis of Financial Condition and
------------------------------------------------------------------------
Results of Operations
---------------------
General
The Company's pawn revenues are derived primarily from service fees on
pawns, and merchandise sales of forfeited pawn collateral. 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 cash advance revenues are derived primarily from fees on
cash advances and credit services fees. The Company recognizes service fee
income on cash advances on a constant-yield basis over the life of the
advance, which is generally thirty-one days or less. The net defaults on
cash advances and changes in the cash advance valuation reserve are charged
to the cash advance loss provision. The credit loss provision is based
primarily upon historical credit loss experience, with consideration given
to recent credit loss trends, delinquency, economic conditions and
management's expectations of future credit losses.
First Cash Credit, Ltd., a wholly-owned subsidiary of the Company,
offers a fee-based credit services organization program to assist customers
in all of the Company's Texas locations 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 and the estimated fair value of the
liability under the letters of credit.
The Company's buy-here/pay-here automotive revenues are derived
primarily from the sale of used vehicles and the finance charges from
related vehicle financing contracts. Revenues from the sale of used
vehicles are recognized when the sales contract and related finance
agreement is signed and the customer has taken possession of the vehicle.
Interest income is recognized on all active finance receivable accounts on a
constant-yield basis. Late payment fees are recognized when collected and
are included in revenue. The Company maintains an allowance for credit
losses, on an aggregate basis, at a level it considers sufficient to cover
estimated losses in the collection of its finance receivables. The credit
loss provision is based primarily upon historical credit loss experience,
with consideration given to recent credit loss trends, delinquency, economic
conditions and management's expectations of future credit losses.
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Total receivable balances at end
of period, in thousands:
Pawn receivables $ 32,459 $ 27,314 $ 23,429
Cash advance receivables, net of allowance 7,510 6,488 15,465
CSO loans held by independent third-party
lender (1) 12,732 10,724 -
Buy-here/pay-here automotive receivables,
net of allowance 34,295 - -
Source of cash advance receivables balances,
net of allowance, and CSO loans at end of
period, in thousands (1):
Pawn stores $ 3,063 $ 3,313 $ 2,974
Cash advance stores 15,339 12,031 10,967
Cash & Go, Ltd., joint venture kiosks 1,840 1,868 1,524
Source of inventories, in thousands:
Pawn stores $ 25,034 $ 21,987 $ 17,644
Buy-here/pay-here dealerships 3,727 - -
Annualized inventory turnover:
Pawn stores 3.2x 3.2x 3.1x
Buy-here/pay-here dealerships 8.8x - -
Annualized service/finance fee yield (2):
Pawn receivables 160% 158% 156%
Cash advance receivables, net of credit
loss provision 332% 324% 326%
Buy-here/pay-here receivables 12% - -
Net cash advance and credit services loss
provision as a percentage of service fees (1) 23% 23% 21%
Net buy-here/pay-here loss provision as a
percentage of retail sales 27% - -
Locations in operation (excluding joint
venture kiosks):
Beginning of the year 328 284 235
Opened 72 50 52
Acquired 8 - -
Consolidated/closed (1) (6) (3)
------- ------- -------
End of the year 407 328 284
======= ======= =======
Number of locations at end of period:
Pawn-only stores 183 157 127
Pawn stores also offering cash advances (3) 69 69 70
Cash advance stores (3) 145 102 87
Cash & Go, Ltd., joint venture kiosks (3) 40 40 40
Buy-here/pay-here automotive dealerships 10 - -
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Average receivables and CSO loan balances per
location at end of period, in thousands:
Pawn receivables in pawn stores $ 129 $ 121 $ 119
Cash advances in pawn stores (1) 44 48 43
Cash advances in cash advance stores
(excluding Cash & Go, Ltd.) (1) 106 118 126
Cash advances in Cash & Go, Ltd., joint
venture kiosks (1) 46 47 38
Buy-here/pay-here finance receivables
in dealerships 3,430 - -
Average inventories per location,
in thousands:
Pawn stores $ 99 $ 97 $ 90
Buy-here/pay-here dealerships 373 - -
Average outstanding loan at December 31, 2006:
Pawn receivables $ 99 $ 95 $ 85
Cash advance receivables 381 364 391
CSO loans held by independent
third-party lender (1) 439 454 -
Buy-here/pay-here receivables 6,335 - -
(1) Cash advance amount includes cash advances recorded on the Company's
balance sheet and the principal portion of active CSO loans
outstanding from the independent third-party lender, the balance of
which is not included on the Company's balance sheet.
(2) The annualized yield on pawn receivables is calculated by dividing
total pawn service fees by the average quarterly pawn receivable
balance for the year. The annualized yield, net of loss provision,
for cash advances is calculated by dividing total cash advance service
fees, net of the cash advance loss provision, by the average quarterly
cash advance receivable balance for the year. The annualized yield
calculation for cash advances does not include credit services fees
or the related credit services loss provision. The annualized yield
on buy-here/pay-here receivables is calculated by dividing total
buy-here/pay-here finance fees (annual amount estimated) by the
average quarterly buy-here/pay-here receivable balance for the period
August 25, 2006 through December 31, 2006.
(3) Includes locations where cash advances are provided through the CSO
program.
Stores included in the same-store revenue calculations are those stores
that were opened prior to the beginning of the prior year comparative
fiscal period and are still open. Also included are stores that were
relocated during the year within a specified distance serving the same
market, where there is not a significant change in store size and where
there is not a significant overlap or gap in timing between the opening of
the new store and the closing of the existing store. During the third
quarter of 2006, the Company relocated one pawn store that involved a
significant change in the size of its retail showroom, and accordingly, the
expanded store has been excluded from the same-store calculations. Non-
retail sales of scrap jewelry are included in same-store revenue
calculations. The Auto Master buy-here/pay-here automotive dealerships,
acquired in August 2006, were not included in the same-store revenue
calculations.
While the Company has had significant increases in revenues due to new
store openings and acquisitions, the Company has also incurred increases in
operating expenses attributable to the additional locations. Operating
expenses consist of all items directly related to the operation of the
Company's stores and dealerships, 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 offices, including the compensation and
benefit costs of corporate management, area supervisors and other operations
management personnel, collections operations and personnel, accounting and
administrative costs, information technology costs, liability and casualty
insurance, outside legal and accounting fees and stockholder-related
expenses.
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Income statement items as a percent
of total revenues:
Revenues:
Merchandise sales 55.4% 49.2% 48.2%
Finance and service charges 43.1 48.9 49.4
Other 1.5 1.9 2.4
Cost of revenues:
Cost of goods sold 31.2% 29.7% 29.0%
Credit loss provision 8.0 6.6 6.4
Other 0.2 0.1 0.1
Net revenues 60.7% 63.5% 64.5%
Expenses and other income:
Store operating expenses 30.1% 32.5% 34.0%
Administrative expenses 9.1 9.3 9.9
Depreciation 2.9 2.8 2.3
Amortization - - -
Interest expense 0.3 - -
Interest income (0.3) (0.2) -
Merchandise sales gross profit 43.6% 39.6% 40.0%
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, related revenues and expenses, and
disclosure of gain and loss contingencies at the date of the financial
statements. Such estimates and assumptions are subject to a number of risks
and uncertainties, which may cause actual results to differ materially from
the Company's estimates. The significant accounting policies that we
believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned
subsidiaries. The Company is a 50% partner in Cash & Go, Ltd., a Texas
limited partnership, and in accordance with FASB Interpretation No. 46(R) -
Consolidation of Variable Interest Entities, the consolidated operating
results include those of Cash & Go, Ltd. On August 25, 2006, the Company
acquired Guaranteed Auto Finance, Inc. and SHAC, Inc. (collectively doing
business as "Auto Master"). Accordingly, the operating results of Auto
Master are included in consolidated operating results for the period August
26, 2006 through December 31, 2006. See Note 4. All significant
intercompany accounts and transactions have been eliminated.
Receivables and income recognition - Receivables on the balance sheet
consist of pawn, cash advances and buy-here/pay-here automotive customer
receivables. Pawns are made on the pledge of tangible personal property.
The Company accrues pawn service charge revenue on a constant-yield basis
over the life of the pawn for all pawns that the Company deems collection to
be probable based on historical pawn redemption statistics. The typical pawn
loan has a term of thirty days. If the pawn is not repaid, the principal
amount pawned becomes the carrying value of the forfeited collateral
(inventory), which is held for sale. The Company accrues cash advance
service fees on a constant-yield basis over the term of the cash advance.
Cash advances have terms that range from seven to thirty-one days. The
Company recognizes credit services fees, which are collected from the
customer at the inception of the credit services agreement, ratably over the
life of the loan made by the Independent Lender. The loans made by the
Independent Lender to credit services customers have terms of seven to
thirty-five days. The Company records a liability for collected, but
unearned, credit services fees received from its customers. The Company's
buy-here/pay-here revenues are primarily from retail sales of used vehicles
to the general public in its automotive dealerships. The Company provides
financing to substantially all of its customers who purchase a vehicle at
one of its dealerships. The Company's vehicle sales and finance contracts
typically include down payments ranging from 5% to 10%, an average term of
30 months, and typical annual finance charges ranging from 8% to 16%.
Cash advance and credit services loss provision - An allowance is
provided for losses on active cash advances and service fees receivable
based upon expected default rates, net of estimated future recoveries of
previously defaulted cash advances and service fees receivable. The Company
considers cash advances to be in default if they are not repaid on the due
date, and writes off the principal amount and service fees receivable as of
the default date, leaving only active advances in the reported balance. Net
defaults and changes in the cash advance allowance are charged to the cash
advance loss provision. Under the CSO program, letters of credit issued by
FCC to the Independent Lender constitute a guarantee for which the Company
is required to recognize, at the inception of the guarantee, a liability for
the fair value of the obligation undertaken by issuing the letters of
credit. The Independent Lender may present the letter of credit to FCC for
payment if the customer fails to repay the full amount of the loan and
accrued interest after the due date of the loan. Each letter of credit
expires within 60 days from the inception of the associated lending
transaction. FCC's maximum loss exposure under all of the outstanding
letters of credit issued on behalf of its customers to the Independent
Lender as of December 31, 2006 was $14,239,000. According to the letter of
credit, if the borrower defaults on the loan, the Company will pay the
Independent Lender the principal, accrued interest, insufficient funds fees,
and late fees, all of which the Company records in the cash advance and
credit services loss provision. FCC is entitled to seek recovery directly
from its customers for amounts it pays the Independent Lender in performing
under the letters of credit. The Company records the estimated fair value
of the liability under the letters of credit in accrued liabilities. This
fair value estimate is based in part upon the Company's historical credit
losses for the cash advance product, which the Company considers to be a
similar credit risk.
Buy-here/pay-here credit loss provision - The Company maintains an
allowance for credit losses on an aggregate basis at a level it considers
sufficient to cover estimated losses in the collection of its finance
receivables. The allowance for credit losses is based primarily upon
historical credit loss experience, with consideration given to recent credit
loss trends and changes in loan characteristics (i.e., average amount
financed and term), delinquency levels, collateral values, economic
conditions, age of dealership and underwriting and collection practices. The
allowance for credit losses is regularly reviewed by management with any
changes reflected in current operations. Although it is at least reasonably
possible that events or circumstances could occur in the future that are not
presently foreseen which could cause actual credit losses to be materially
different from the recorded allowance for credit losses, the Company
believes that it has given appropriate consideration to all relevant factors
and has made reasonable assumptions in determining the allowance for credit
losses.
Inventories - Pawn inventories represent merchandise purchased
directly from the public and merchandise acquired from forfeited pawns.
Inventories purchased directly from customers are recorded at cost.
Inventories from forfeited pawns are recorded at the amount of the pawn
principal on the unredeemed goods. Vehicle inventories consist of used
vehicles acquired from auctions, new car dealerships and trade-ins. Vehicle
transportation and reconditioning costs are capitalized as a component of
inventory. Repossessed vehicles are recorded at fair value, which
approximates wholesale value. The cost of pawn and vehicle inventories
is determined on the specific identification method. Pawn and vehicle
inventories are stated at the lower of cost or market; accordingly,
inventory valuation allowances are established when inventory carrying
values are in excess of estimated selling prices, net of direct costs of
disposal. Management has evaluated inventories and determined that a
valuation allowance is not necessary.
Long-lived assets - Property, plant and equipment and non-current
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss is recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the
asset is less than the net book value of the asset. Generally, the amount
of the impairment loss is measured as the difference between the net book
value of the asset and the estimated fair value of the related asset.
Management does not believe any of these assets have been impaired at
December 31, 2006. Goodwill is reviewed annually for impairment based upon
its fair value, or more frequently if certain indicators arise. Management
has determined that goodwill has not been impaired at December 31, 2006.
Stock-based compensation - Prior to January 1, 2006, the Company
accounted for its share-based employee compensation plans under the
recognition and measurement provisions of APB 25, as permitted by SFAS No.
123, "Accounting for Stock-Based Compensation." Effective January 1, 2006,
the Company adopted the fair value recognition provisions of SFAS No.
123(R), as described in Note 12, "Equity Compensation Plans and Share-Based
Compensation."
Results of Operations
Twelve Months Ended December 31, 2006 Compared to Twelve Months Ended
December 31, 2005
The following table (amounts shown in thousands) details the components
of revenues for the fiscal year ended December 31, 2006 ("Fiscal 2006"), as
compared to the fiscal year ended December 31, 2005 ("Fiscal 2005"):
Fiscal Year Ended
December 31,
--------------------
2006 2005 Increase/Decrease
-------- -------- -----------------
Domestic revenues:
Pawn retail merchandise sales $ 60,097 $ 57,174 $ 2,923 5%
Pawn scrap jewelry sales 11,337 7,230 4,107 57%
Pawn service charges 27,847 25,429 2,418 10%
Cash advance and credit
services fees 66,167 60,881 5,286 9%
Buy-here/pay-here retail
automobile sales 22,507 - 22,507 -
Buy-here/pay-here wholesale
automobile sales 530 - 530 -
Buy-here/pay-here finance charges 1,348 - 1,348 -
Other 4,062 3,935 127 3%
-------- -------- -------
$ 193,895 $ 154,649 $ 39,246 25%
======== ======== =======
Foreign revenues:
Pawn retail merchandise sales $ 34,667 $ 24,165 $ 10,502 43%
Pawn scrap jewelry sales 20,335 13,570 6,765 50%
Pawn service charges 20,825 15,391 5,434 35%
-------- -------- -------
$ 75,827 $ 53,126 $ 22,701 43%
======== ======== =======
Total revenues:
Pawn retail merchandise sales $ 94,764 $ 81,339 $ 13,425 17%
Pawn scrap jewelry sales 31,672 20,800 10,872 52%
Pawn service charges 48,672 40,820 7,852 19%
Cash advance and credit
services fees 66,167 60,881 5,286 9%
Buy-here/pay-here retail
automobile sales 22,507 - 22,507 -
Buy-here/pay-here wholesale
automobile sales 530 - 530 -
Buy-here/pay-here finance charges 1,348 - 1,348 -
Other 4,062 3,935 127 3%
-------- -------- -------
$ 269,722 $ 207,775 $ 61,947 30%
======== ======== =======
The Company introduced its credit services program in its Texas
locations in July 2005. Credit services fees, which are included in
reported cash advance and credit services fees, totaled $43,344,000 and
$18,657,000 for Fiscal 2006 and Fiscal 2005, respectively.
Same-store revenues (stores that were in operation during all of the
year of both Fiscal 2005 and Fiscal 2006) increased 9% or $18,890,000 for
Fiscal 2006 as compared to Fiscal 2005. Revenues generated by the 62 new
pawn stores and the 58 new cash advance stores which have opened since
January 1, 2005 increased by $19,534,000, compared to Fiscal 2005. Revenues
from the eight buy-here/pay-here automobile dealerships acquired in August
2006 and the two dealerships opened in November 2006 totaled $24,466,000.
The following table (amounts shown in thousands) details pawn
receivables, cash advance receivables, active CSO loans outstanding from an
independent third-party lender and buy/here-pay/here automotive receivables
as of December 31, 2006, as compared to December 31, 2005:
Balance at December 31,
-----------------------
2006 2005 Increase/Decrease
-------- -------- -----------------
Domestic customer receivables &
CSO loans outstanding:
Pawn receivables $ 21,350 $ 18,603 $ 2,747 15%
Cash advance receivables,
net of allowance 7,510 6,488 1,022 16%
CSO loans held by independent
third-party lender (1) 12,732 10,724 2,008 19%
Buy-here/pay-here receivables,
net of allowance 34,295 - 34,295 -
-------- -------- -------
$ 75,887 $ 35,815 $ 40,072 112%
======== ======== =======
Foreign customer receivables:
Pawn receivables $ 11,109 $ 8,711 $ 2,398 28%
-------- -------- -------
Total customer receivables and
CSO loans outstanding:
Pawn receivables $ 32,459 $ 27,314 $ 5,145 19%
Cash advance receivables,
net of allowance 7,510 6,488 1,022 16%
CSO loans held by independent
third-party lender (1) 12,732 10,724 2,008 19%
Buy-here/pay-here receivables,
net of allowance 34,295 - 34,295 -
-------- -------- -------
$ 86,996 $ 44,526 $ 42,470 95%
======== ======== =======
(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 $5,145,000 total increase in pawn receivables, $3,799,000 was
attributable to the growth at the stores that were in operation as of
December 31, 2006 and 2005, and $1,346,000 was attributable to the 27 new
pawn stores opened since December 31, 2005, all of which were located in
Mexico. Of the $3,030,000 total increase in cash advance and CSO loan
receivables, $1,413,000 was attributable to the growth at the stores that
were in operation as of December 31, 2006 and 2005, and $1,617,000 was
attributable to the 43 new cash advance stores opened since December 31,
2005. The Company's credit services customers had current loans outstanding
with the Independent Lender in the amount of $12,732,000 at December 31,
2006, compared to $10,724,000 at December 31, 2005. The Company's loss
reserve on cash advance receivables decreased from $242,000 at December 31,
2005, to $230,000 at December 31, 2006. Under the CSO program, letters of
credit issued by FCC to the Independent Lender constitute a guarantee for
which the Company is required to recognize, at the inception of the
guarantee, a liability for the fair value of the obligation undertaken by
issuing the letters of credit. The estimated loss reserve under the letters
of credit, net of anticipated recoveries from customers, was $569,000 at
December 31, 2006 compared to $508,000 at December 31, 2005. This reserve
is included as a component of the Company's accrued expenses on its
consolidated balance sheets.
The gross profit margin on total pawn merchandise sales was 42% during
Fiscal 2006, compared to 40% during Fiscal 2005, primarily as a result
of improved margins on wholesale scrap jewelry revenues. Retail pawn
merchandise margins, which exclude scrap jewelry sales, were 44% during
Fiscal 2006 and Fiscal 2005. The gross margin on wholesale scrap jewelry
sales was 34% during Fiscal 2006, compared to 22% during Fiscal 2005. This
difference was primarily the result of increased selling prices for gold
during the applicable periods. The volume-weight of scrap jewelry sold
during Fiscal 2006 increased approximately 13% compared to Fiscal 2005. The
gross profit margin, before the credit loss provision, on buy-here/pay-here
retail automobile sales was 57% for the period August 26, 2006 through
December 31, 2006.
The Company's cash advance and credit services loss provision for
Fiscal 2006 was unchanged from Fiscal 2005 at 23% of cash advance and credit
services fee revenues. The Company realized approximately $1,883,000 and
$1,569,000 from sales of charged off cash advance and credit services
receivables during Fiscal 2006 and 2005, respectively. These amounts were
recorded as a reduction to the cash advance and credit services loss
provision. The buy-here/pay-here automotive credit loss provision was
$6,137,000 for the period August 26, 2006 through December 31, 2006, which
represented 27% of retail automobile sales.
Store operating expenses increased 20% to $81,089,000 during Fiscal
2006 compared to $67,430,000 during Fiscal 2005, primarily as a result of
the net addition of 113 pawn and cash advance stores since January 1, 2005,
which is a 40% increase in the store count. Administrative expenses
increased 27% to $24,671,000 during Fiscal 2006 compared to $19,412,000
during Fiscal 2005, which is primarily attributable to increased management
and supervisory compensation expense, additional administrative expenses
related to new store openings, the Auto Master acquisition and a non-cash
charge of approximately $583,000 for share-based compensation expense as a
result of the adoption of SFAS 123(R), effective January 1, 2006. The
Company incurred interest expense on acquisition-related debt in the third
and fourth quarters of 2006 of $916,000. There was no debt outstanding
during Fiscal 2005. Interest income increased from $317,000 in Fiscal 2005
to $727,000 in Fiscal 2006, due primarily to interest income earned on
increased levels of invested cash and cash equivalents.
For both Fiscal 2006 and 2005, the Company's effective federal income
tax rate of 36% differed from the statutory tax rate of approximately 35%,
primarily as a result of state income taxes.
Net income increased 25% to $31,744,000 during Fiscal 2006 compared to
$25,383,000 during Fiscal 2005.
Twelve Months Ended December 31, 2005 Compared to Twelve Months Ended
December 31, 2004
The following table (amounts shown in thousands) details the components
of revenues for the fiscal year ended December 31, 2005, as compared to the
fiscal year ended December 31, 2004 ("Fiscal 2004"):
Fiscal Year Ended
December 31,
--------------------
2005 2004 Increase/Decrease
-------- -------- -----------------
Domestic revenues:
Pawn retail merchandise sales $ 57,174 $ 55,307 $ 1,867 3%
Pawn scrap jewelry sales 7,230 7,787 (557) (7%)
Pawn service charges 25,429 23,887 1,542 6%
Cash advance and credit
services fees 60,881 54,123 6,758 12%
Other 3,935 4,282 (347) (8%)
-------- -------- -------
$ 154,649 $ 145,386 $ 9,263 6%
======== ======== =======
Foreign revenues:
Pawn retail merchandise sales $ 24,165 $ 14,774 $ 9,391 64%
Pawn scrap jewelry sales 13,570 8,877 4,693 53%
Pawn service charges 15,391 10,776 4,615 43%
-------- -------- -------
$ 53,126 $ 34,427 $ 18,699 54%
======== ======== =======
Total revenues:
Pawn retail merchandise sales $ 81,339 70,081 11,258 16%
Pawn scrap jewelry sales 20,800 16,664 4,136 25%
Pawn service charges 40,820 34,663 6,157 18%
Cash advance and credit
services fees 60,881 54,123 6,758 12%
Other 3,935 4,282 (347) (8%)
-------- -------- -------
$ 207,775 $ 179,813 $ 27,962 16%
======== ======== =======
The Company introduced its credit services program in its Texas
locations in July 2005. Credit services fees, which are included in
reported cash advance and credit services fees, totaled $18,657,000 for
Fiscal 2005.
Same-store revenues (stores that were in operation during all of the
year of both Fiscal 2004 and Fiscal 2005) increased 6% or $10,885,000 for
Fiscal 2005 as compared to Fiscal 2004. Revenues generated by the 102 new
pawn and cash advance stores that have opened since January 1, 2004
increased by $18,175,000, compared to Fiscal 2004.
The following table (amounts shown in thousands) details pawn
receivables, cash advance receivables and active CSO loans outstanding from
an independent third-party lender as of December 31, 2005, as compared to
December 31, 2004:
Balance at December 31,
-----------------------
2005 2004 Increase/Decrease
-------- -------- -----------------
Domestic customer receivables &
CSO loans outstanding:
Pawn receivables $ 18,603 $ 16,707 $ 1,896 11%
Cash advance receivables,
net of allowance 6,488 15,465 (8,977) (58%)
CSO loans held by independent
third-party lender (1) 10,724 - 10,724 -
-------- -------- -------
$ 35,815 $ 32,172 $ 3,643 11%
======== ======== =======
Foreign customer receivables:
Pawn receivables $ 8,711 $ 6,722 $ 1,989 30%
-------- -------- -------
Total customer receivables and
CSO loans outstanding:
Pawn receivables $ 27,314 $ 23,429 $ 3,885 17%
Cash advance receivables,
net of allowance 6,488 15,465 (8,977) (58%)
CSO loans held by independent
third-party lender (1) 10,724 - 10,724 -
-------- -------- -------
$ 44,526 $ 38,894 $ 5,632 14%
======== ======== =======
(1) CSO loans 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 $3,885,000 total increase in pawn receivables, $2,639,000 was
attributable to the growth at the stores that were in operation as of
December 31, 2005 and 2004, and $1,246,000 was attributable to the 35 new
pawn stores opened since December 31, 2004, all of which were located in
Mexico. The decrease in short-term advance receivables was due primarily to
the introduction of the credit services program in the Company's Texas
locations, and the resulting discontinuation of the short-term advance
product in Texas during the second half of Fiscal 2005. As a result, short-
term advance receivables in the Company's Texas locations, including the
Cash & Go, Ltd., joint venture kiosks, decreased from $8,826,000 at December
31, 2004, to zero at December 31, 2005. As of December 31, 2005, the
Company's credit services customers had current loans outstanding with the
Independent Lender in the amount of $10,724,000. Short-term advance
receivables in the Company's non-Texas locations decreased from $6,638,000
at December 31, 2004, to $6,488,000 at December 31, 2005. The Company's
loss reserve on short-term advance receivables decreased from $552,000 at
December 31, 2004, to $242,000 at December 31, 2005 as a result of the
decrease in outstanding short-term advance receivables. Under the CSO
program, letters of credit issued by FCC to the Independent Lender
constitute a guarantee for which the Company is required to recognize, at
the inception of the guarantee, a liability for the fair value of the
obligation undertaken by issuing the letters of credit. The estimated loss
reserve under the letters of credit, net of anticipated recoveries from
customers, was $508,000 at December 31, 2005, which is included as a
component of the Company's accrued expenses on its consolidated balance
sheets.
Gross profit margins on total merchandise sales were 40% during Fiscal
2005 and Fiscal 2004. Retail merchandise margins, which exclude scrap
jewelry sales, were 44% during Fiscal 2005 and Fiscal 2004. Profit margins
on scrap jewelry sales were 22% during Fiscal 2005 and Fiscal 2004. The
Company's payday advance and credit services loss provision increased from
21% of cash advance and credit services fee revenues during Fiscal 2004 to
23% during Fiscal 2005. During the second quarter of 2005, the Company
initiated a program to sell selected payday advance receivables which had
been previously written-off. The Company realized approximately $1,569,000
from sales of receivables written-off in 2004 and prior during Fiscal 2005.
This amount was recorded as a reduction to the short-term advance and credit
services loss provision.
Store operating expenses increased 10% to $67,430,000 during Fiscal
2005 compared to $61,063,000 during Fiscal 2004, primarily as a result of
the net addition of 93 pawn and cash advance stores since January 1, 2004,
which is a 40% increase in the store count. Administrative expenses
increased 9% to $19,412,000 during Fiscal 2005 compared to $17,837,000
during Fiscal 2004, which is primarily attributable to increased costs
related to variable management and supervisory compensation expense and
increased professional services fees. The Company had no interest expense
during Fiscal 2005 as it had no interest-bearing debt outstanding during the
year. Interest income increased from $67,000 in Fiscal 2004 to $317,000 in
Fiscal 2005, due primarily to interest income earned on increased levels
of invested cash and cash equivalents.
For Fiscal 2005 and 2004, the Company's effective federal income tax
rates of 36% and 37%, respectively, differed from the statutory tax rate of
approximately 35% and 34%, respectively, primarily as a result of state
income taxes.
Net income increased 23% to $25,383,000 during Fiscal 2005 compared to
$20,706,000 during Fiscal 2004.
Liquidity and Capital Resources
As of December 31, 2006, the Company's primary sources of liquidity
were $15,535,000 in cash and cash equivalents, $79,230,000 in receivables,
$28,761,000 in inventories and $42,000,000 of available and unused funds
under the Company's line of credit. The Company had working capital of
$93,653,000 as of December 31, 2006, and total equity exceeded total
liabilities by a ratio of 4 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") which was amended during the third quarter
of 2006 to increase the amount available under the line of credit from
$25,000,000 to $50,000,000 and to extend the term of the facility until
April 2009. The Credit Facility bears interest at the prevailing LIBOR rate
(which was approximately 5.3% at December 31, 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 December
31, 2006, the Company had $8,000,000 outstanding under the Credit Facility
and the Company had $42,000,000 available for borrowings. Under the terms
of the Credit Facility, the Company is required to maintain certain
financial ratios and comply with certain technical covenants. The Company
was in compliance with the requirements and covenants of the Credit Facility
as of December 31, 2006, and March 14, 2007. 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.
At December 31, 2006, the Company had notes payable to individuals
arising from the Auto Master acquisition which total $9,438,000 in aggregate
and bear interest at 7%, with quarterly payments of principal and interest
scheduled over the next four years. Of the $9,438,000 in notes payable,
$2,250,000 is classified as a current liability and $7,188,000 is classified
as long-term debt. One of the notes payable, in the principal amount of
$1,000,000, is convertible after one year into 55,555 shares of the
Company's common stock at a conversion price of $18.00 per share.
The following table sets forth certain historical information with
respect to the Company's statements of cash flows:
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
(in thousands)
Cash flows from operating activities:
Net income $ 31,744 $ 25,383 $ 20,706
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 8,041 5,804 4,173
Share-based compensation 583 - -
Non-cash portion of credit loss provision 9,920 7,118 11,559
Stock option and warrant income tax benefit - 2,066 8,736
Changes in operating assets and liabilities:
Buy-here/pay-here automative customer
receivables (11,939) - -
Finance and service fees receivable (790) 336 (594)
Inventories (1,936) (1,563) (720)
Prepaid expenses and other assets 438 (2,832) (530)
Accounts payable and accrued liabilities 2,360 5,088 (1,344)
Current and deferred income taxes (1,868) 695 2,142
------- ------- -------
Net cash flows from operating activities 36,553 42,095 44,128
------- ------- -------
Cash flows from investing activities:
Pawn customer receivables (7,095) (6,665) (4,728)
Cash advance customer receivables (4,805) 1,859 (13,265)
Purchases of property and equipment (14,716) (11,993) (7,131)
Acquisition of Auto Master buy-here/pay-here
automotive division (23,652) - -
------- ------- -------
Net cash flows from investing activities (50,268) (16,799) (25,124)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt 31,000 - 10,000
Payments of debt (38,052) - (16,000)
Purchase of treasury stock (24,753) (11,404) (13,463)
Proceeds from exercise of stock options
and warrants 13,570 2,617 10,844
Stock option and warrant income tax benefit 4,744 - -
------- ------- -------
Net cash flows from financing activities (13,491) (8,787) (8,619)
------- ------- -------
Change in cash and cash equivalents (27,206) 16,509 10,385
Cash and cash equivalents at beginning
of the period 42,741 26,232 15,847
------- ------- -------
Cash and cash equivalents at end
of the period $ 15,535 $ 42,741 $ 26,232
======= ======= =======
During the second quarter of 2006, the Company completed its 3,200,000
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 2,000,000 share repurchase. During Fiscal 2006, the Company
utilized excess cash flows to repurchase $24,753,000 of common stock for a
total of 1,262,000 shares under the two authorizations.
For purposes of its internal liquidity assessments, the Company
considers net cash changes in pawn and cash advance customer receivables to
be closely related to operating cash flows. For Fiscal 2006, net cash flows
from operations were $36,553,000, while net cash outflows related to pawn
receivables activity was $7,095,000 and the net cash outflows related to
cash advance receivables activity was $4,805,000. The combined net cash
flows from operations and pawn and cash advance receivables totaled
$24,653,000 during Fiscal 2006. For the comparable prior year period, net
cash flows from operations were $42,095,000 and net cash outflows related to
pawn receivables activity was $6,665,000 and the net cash inflows related to
cash advance receivables activity was $1,859,000. The combined net cash
flows from operations and pawn and cash advance receivables totaled
$37,289,000 during Fiscal 2005, which included a non-recurring operating
cash flow benefit of approximately $7,454,000 related to the replacement of
the short-term advance product with the credit services product in Texas
during the third quarter of 2005. For Fiscal 2004, total cash flows
from operations were $44,128,000 while net cash outflows related to pawn
receivables activity was $4,728,000 and the net cash outflows related to
cash advance receivables activity was $13,265,000. The combined net cash
flows from operations and pawn and cash advance receivables totaled
$26,135,000 for Fiscal 2004.
The profitability and liquidity of the Company is affected by the
amount of customer receivables outstanding and related collections of such
receivables. In general, revenue growth is dependent upon the Company's
ability to fund the growth of customer receivable balances and inventories
and the ability to absorb related credit losses. At the current time, the
majority of this growth is funded from operating cash flows. In addition to
these factors, merchandise sales and the pace of store and dealership
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 and planned growth for Fiscal 2007.
The Company currently intends to continue to engage in a plan of
expansion primarily through new store and dealership openings. With 80
stores opened during Fiscal 2006 (including the eight acquired Auto Master
dealerships), the Company attained its target of 60 to 70 new store openings
for the year. The Company intends to continue its new store expansion
program in 2007, with a total of 75 to 80 new pawn and cash advance stores
anticipated for opening. In addition, the Company expects to open 3 to 5
new Auto Master buy-here/pay-here automotive dealerships during Fiscal 2007.
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 or additional
expansion opportunity in the near future, the Company may seek additional
financing, the terms of which will be negotiated on a case-by-case basis.
The Company has no significant capital commitments.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") for Fiscal 2006 totaled $57,830,000, an increase of 28% compared
to $45,165,000 for Fiscal 2005. The EBITDA margin, which is EBITDA as a
percentage of revenues, for Fiscal 2006 was 21.4%, compared to 21.7% 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):
Twelve Months Ended December 31,
--------------------------------
2006 2005
------- -------
Net income $ 31,744 $ 25,383
Adjustments:
Interest expense 916 -
Interest income (727) (317)
Income taxes 17,856 14,295
Depreciation and amortization 8,041 5,804
------- -------
Earnings before interest, income taxes,
depreciation and amortization $ 57,830 $ 45,165
======= =======
Contractual Commitments
A tabular disclosure of contractual obligations at December 31, 2006,
including Cash & Go, Ltd., is as follows:
Payments Due by Period
-----------------------------------------------
(in thousands)
Less More
than 1 1 -- 3 3 -- 5 than 5
Total year years years years
------ ------ ------ ------ ------
Operating leases $62,588 $17,582 $26,794 $13,401 $ 4,811
Employment and consulting
contracts for officers
and directors 6,900 1,300 2,600 1,200 1,800
Revolving credit facility (1) 8,000 - 8,000 - -
Notes payable 9,438 2,250 5,125 2,063 -
Interest on notes payable 1,384 602 710 72 -
------ ------ ------ ------ ------
Total $88,310 $21,734 $43,229 $16,736 $ 6,611
====== ====== ====== ====== ======
(1) Excludes interest obligations under the line of credit agreement. See
Note 8 of Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
In the Company's Texas locations, First Cash Credit, Ltd. ("FCC"), a
wholly-owned subsidiary of the Company, offers a fee-based credit services
organization ("CSO") program to assist consumers in obtaining credit. Under
the CSO program, FCC assists customers in applying for a cash advance 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. When a consumer executes a credit services
agreement with the Company, the Company agrees, for a fee payable to the
Company by the consumer, to provide a variety of credit services to the
consumer, one of which is to guarantee the consumer's obligation to repay
the loan received by the consumer from the Independent Lender if the
consumer fails to do so.
For cash advance products originated by the Independent Lender, the
Independent Lender is responsible for evaluating each of its customers'
applications, determining whether to approve a cash advance based on an
application and determining the amount of the cash advance. The Company is
not involved in the Independent Lender's cash advance approval processes
or in determining the lenders' approval procedures or criteria. At
December 31, 2006, the outstanding amount of active cash advances originated
by the Independent Lender was $12.7 million.
Since the Company may not be successful in collection of these
delinquent accounts, the Company's cash advance loss provision includes
amounts estimated to be adequate to absorb credit losses from cash advances
in the aggregate cash advance portfolio, including those expected to be
assigned to the Company or acquired by the Company as a result of its
guaranty obligations. Accrued losses of $569,000 on portfolios owned by the
Independent Lender are included in "accrued liabilities" in the consolidated
balance sheets. The Company believes that this amount is adequate to absorb
credit losses from cash advances expected to be assigned to the Company or
acquired by the Company as a result of its guaranty obligations.
Inflation
The Company does not believe that inflation has had a material effect
on the volume of customer receivables originated, merchandise sales, or
results of operation.
Seasonality
The Company's retail pawn business is seasonal in nature with its
highest volume of merchandise sales occurring during the first and fourth
calendar quarters of each year which coincides with Valentine's Day and
Christmas. The Company's pawn lending and cash advance activities are also
seasonal, with the highest volume of lending activity occurring during the
third and fourth calendar quarters of each year. The Company's buy-
here/pay-here automotive business is less seasonal, although the Company
expects that it will experience stronger sales and collection activities in
the first quarter as a result of customers receiving tax refunds.
Recent Accounting Pronouncements
See discussion in Note 2 of Notes to Consolidated Financial Statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
--------------------------------------------------------------------
Market risks relating to the Company's operations result primarily
from changes in interest rates, foreign exchange rates, and gold prices.
The Company does not engage in speculative or leveraged transactions, nor
does it hold or issue financial instruments for trading purposes.
Interest Rate Risk
The Company is potentially exposed to market risk in the form of
interest rate risk in regards to its long-term line of credit. At December
31, 2006, the Company had $8,000,000 outstanding under its revolving line of
credit. This revolving line is priced with a variable rate based on LIBOR or
a base rate, plus an applicable margin based on a defined leverage ratio for
the Company. See "Note 8 - Revolving Credit Facility and Notes Payable."
Based on the average outstanding indebtedness during the year ended
December 31, 2006, a 10% increase in interest rates would have increased the
Company's interest expense by approximately $62,000 for the year ended
December 31, 2006.
The Company's cash and cash equivalents are invested in money market
accounts. Accordingly, the Company is subject to changes in market interest
rates. However, the Company does not believe a change in these rates would
have a materially adverse effect on the Company's operating results,
financial condition, or cash flows.
Foreign Currency Risk
The Company bears certain exchange rate risks from its operations in
Mexico as approximately $4,337,000 of the Company's pawn loans in Mexico at
December 31, 2006 were contracted and expected to be settled in Mexican
pesos. The Company also maintained certain peso-denominated bank balances
at December 31, 2006, which converted to a U.S. dollar equivalent of
$600,000. A 10% increase in the peso to U.S. dollar exchange rate would
increase the Company's foreign currency translation exposure on its pawn
loan balance and cash by approximately $385,000 and $55,000, respectively.
Gold Price Risk
A significant and sustained decline in the price of gold would
negatively impact the value of jewelry inventories held by the Company and
the value of jewelry pledged as collateral by pawn customers. As a result,
the Company's profit margins on existing jewelry inventories would be
negatively impacted, as would be the potential profit margins on jewelry
currently pledged as collateral by pawn customers in the event it is
forfeited by the pawn customer. In addition, a decline in gold prices could
result in a lower balance of pawn loans outstanding for the Company, as
customers would receive lower loan amounts for individual pieces of jewelry.
The Company believes that many customers would be willing to add additional
items of value to their pledge in order to obtain the desired loan amount,
thus mitigating a portion of this risk.
Item 8. Financial Statements and Supplementary Data
----------------------------------------------------
The financial statements prepared in accordance with Regulation S-X
are included in a separate section of this report. See the index to
Financial Statements at Item 15(a)(1) and (2) of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
-------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
Item 9a. Controls and Procedures
---------------------------------
Evaluation of Disclosure Controls and Procedures
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 Rules 13a-15(e) and 15d-
15(e) under the Securities Exchange Act of 1934) as of December 31, 2006
("Evaluation Date"). Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures are effective (i) to ensure
that information required to be disclosed by us in reports that the Company
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the Securities and
Exchange Commission rules and forms; and (ii) to ensure that information
required to be disclosed in the reports that the Company files or submits
under the Exchange Act is accumulated and communicated to our management,
including the Company's Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosures.
The Report of Management on Internal Control Over Financial Reporting
is included in Item 9a of this annual report on Form 10-K. There was no
change in the Company's internal control over financial reporting during the
quarter ended December 31, 2006, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. Management's assessment of the Company's internal
control over financial reporting excluded the buy-here/pay-here operating
assets acquired from Guaranteed Auto Finance, Inc. and SHAC, Inc.,
collectively doing business as "Auto Master," because they were acquired by
the Company in a purchase transaction during 2006.
The Company's management, including its Chief Executive Officer and
Chief Financial Officer, does not expect that the Company's disclosure
controls and procedures or internal controls will prevent all possible error
and fraud. The Company's disclosure controls and procedures are, however,
designed to provide reasonable assurance of achieving their objectives, and
the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the Company's financial controls and procedures are effective
at that reasonable assurance level.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. This internal control system has
been designed to provide reasonable assurance to the Company's management
and board of directors regarding the preparation and fair presentation of
the Company's published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management has assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2006. To make this
assessment, management used the criteria for effective internal control over
financial reporting described in Internal Control-Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this assessment, management believes that, as of
December 31, 2006, the Company's internal control over financial reporting
is effective based on those criteria.
Management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2006 has been audited by Hein &
Associates LLP, an independent registered public accounting firm, as stated
in their report which appears herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of First Cash Financial Services, Inc.
We have audited management's assessment, included in the accompanying
management's report on internal controls, that First Cash Financial
Services, Inc., maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). Company management is
responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained
in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of
internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A
company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2006,
is fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO"). Also in our
opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission
("COSO").
We also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets
of First Cash Financial Services, Inc., as of December 31, 2006 and 2005,
and the related consolidated statements of operations, stockholders' equity,
and cash flows for the three years in the period ended December 31, 2006 and
our report dated March 14, 2007 expressed an unqualified opinion thereon.
Hein & Associates LLP
Dallas, Texas
March 14, 2007
Item 9b. Other Information
---------------------------
None.
PART III
--------
Item 10. Directors, Executive Officers and Corporate Governance
----------------------------------------------------------------
The information required by this item with respect to the directors,
executive officers and compliance with Section 16(a) of the Exchange Act is
incorporated by reference from the information provided under the headings
"Election of Directors," "Executive Officers" and "Section 16(a) Beneficial
Ownership Reporting Compliance," respectively, contained in the Company's
Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Company's Annual Meeting
of Stockholders.
The Company has adopted a Code of Ethics that applies to all of its
directors, officers, and employees. This Code is publicly available on the
Company's website at www.firstcash.com. Copies of the Company's Code of
Ethics are available, free of charge, by submitting a written request to
First Cash Financial Services, Inc., Investor Relations, 690 E. Lamar Blvd.,
Suite 400, Arlington, Texas 76011.
Item 11. Executive Compensation
--------------------------------
The information required by this item is incorporated by reference from
the information provided under the heading "Executive Compensation" of the
Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Equity Compensation Plan Information
The following table gives information about the Company's common stock
that may be issued upon the exercise of options under shareholder-approved
plans, including its 1990 Stock Option Plan, its 1999 Stock Option Plan, and
its 2004 Long-Term Incentive Plan as of December 31, 2006. Additionally,
the Company issues warrants to purchase shares of common stock to certain
key members of management, members of the Board of Directors that are not
employees or officers, and to other third parties. The issuance of warrants
is not approved by shareholders, and each issuance is generally negotiated
between the Company and such recipients.
Number of Number of securities
securities to Weighted remaining available
be issued upon average for future issuance
exercise of exercise price under equity
outstanding of outstanding compensation
options, options, plans (excluding
warrants and warrants and securities reflected
rights rights in column A)
Plan Category (A) (B) (C)
------------- --- --- ---
Equity Compensation
Plans Approved by
Security Holders 4,193,500 $ 14.50 374,288
Equity Compensation
Plans Not Approved
by Security Holders 839,000 3.00 -
--------- ---------
Total 5,032,500 $ 12.58 374,288
========= =========
Other information required by this item is incorporated herein by
reference from the information provided under the heading "Security
Ownership of Certain Beneficial Owners and Management" of the Company's
Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director
----------------------------------------------------------------------
Independence
------------
The information required by this item is incorporated herein by
reference from the information provided in the Company's Proxy Statement.
Item 14. Principal Accounting Fees and Services
------------------------------------------------
The information required by this item is incorporated by reference from
the information provided in the Company's Proxy Statement under the
discussion of the Company Audit Committee and under the item regarding
shareholder ratification of the Company's independent accountants.
PART IV
-------
Item 15. Exhibits and Financial Statement Schedules
----------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
(2) All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or the
notes thereto.
(3) Exhibits:
3.1(7) Amended Certificate of Incorporation
3.2(5) Amended Bylaws
4.1(2) Common Stock Specimen
10.1(1) First Cash, Inc. 1990 Stock Option Plan
10.2(8) Consulting Agreement - Phillip E. Powell
10.3(8) Employment Agreement - Rick L. Wessel
10.4(3) Acquisition Agreement - Miraglia, Inc.
10.5(4) Acquisition Agreement for Twelve Pawnshops
in South Carolina
10.6(4) Acquisition Agreement for One Iron Ventures, Inc.
10.7(4) First Cash Financial Services, Inc. 1999 Stock
Option Plan
10.8(6) Executive Incentive Compensation Plan
10.9(7) 2004 Long-Term Incentive Plan
10.10(9) Stock Purchase Agreement - Auto Master
10.11(9) Third Amendment to the Credit Agreement
10.12(10) Amendment to Consulting Agreement - Phillip E. Powell
10.13(10) Amendment to Employment Agreement - Rick L. Wessel
14.1(8) Code of Ethics
21.1(10) Subsidiaries
23.1(10) Consent of Independent Registered Public Accounting
Firm, Hein & Associates LLP
31.1(10) Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2(10) Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1(10) Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350 as
adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(1) Filed as an exhibit to the Company's Registration Statement on
Form S-18 (No. 33-37760-FW) and incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 33-48436) and incorporated herein by reference.
(3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal
year ended July 31, 1998 (File No. 0 - 19133) and incorporated herein
by reference.
(4) Filed as an exhibit to the Company's Registration Statement on Form S-3
dated January 22, 1999 (File No. 333-71077) and incorporated herein by
reference.
(5) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0 - 19133) and incorporated herein
by reference.
(6) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 30, 2003.
(7) Filed as Exhibit A to the Company's Definitive Proxy Statement filed
on April 29, 2004.
(8) Filed as an exhibit to the Annual Report on Form 10-K for the year
ended December 31, 2004 (File No. 0 - 19133) and incorporated herein
by reference.
(9) Filed as an exhibit to the Current Report on Form 8-K dated August 22,
2006 (File No. 0 - 19133) and incorporated herein by reference.
(10) Filed herewith.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 2007 FIRST CASH FINANCIAL SERVICES, INC.
(Registrant)
/s/ RICK L. WESSEL
--------------------------------------------
Rick L. Wessel
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)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ PHILLIP E. POWELL Chairman of the Board March 14, 2007
----------------------
Phillip E. Powell
/s/ RICK L. WESSEL Vice Chairman of the Board, March 14, 2007
---------------------- President, Chief Executive
Rick L. Wessel Officer
/s/ JOE R. LOVE Director March 14, 2007
----------------------
Joe R. Love
/s/ RICHARD T. BURKE Director March 14, 2007
----------------------
Richard T. Burke
/s/ TARA MACMAHON Director March 14, 2007
----------------------
Tara MacMahon
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
First Cash Financial Services, Inc.
We have audited the accompanying consolidated balance sheets of First Cash
Financial Services, Inc., and subsidiaries as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders'
equity, and cash flows for the three years in the period ended December
31, 2006. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of First Cash
Financial Services, Inc., and subsidiaries at December 31, 2006 and 2005,
and the consolidated results of their operations and cash flows for the
three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
the Company's internal control over financial reporting as of December 31,
2006, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated March 14, 2007, expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an unqualified
opinion on the effectiveness of the Company's internal control over
financial reporting.
Hein & Associates LLP
Dallas, Texas
March 14, 2007
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2006 2005
-------- --------
(in thousands, except per share data)
ASSETS
Cash and cash equivalents $ 15,535 $ 42,741
Finance and service charges receivable 4,966 4,176
Customer receivables, net of allowances of
$5,867 and $242, respectively 60,251 33,802
Inventories 28,761 21,987
Prepaid expenses and other current assets 5,901 5,430
-------- --------
Total current assets 115,414 108,136
Customer receivables with long-term maturities,
net of allowance of $3,895 and $0, respectively 14,013 -
Property and equipment, net 30,643 23,565
Goodwill and other intangible assets, net 72,544 53,237
Other 1,228 1,016
-------- --------
Total assets $ 233,842 185,954
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable $ 2,250 -
Accounts payable 1,535 908
Accrued liabilities 17,976 13,722
-------- --------
Total current liabilities 21,761 14,630
Revolving credit facility 8,000 -
Notes payable, net of current portion 7,188 -
Deferred income taxes payable 8,297 8,616
-------- --------
Total liabilities 45,246 23,246
-------- --------
Commitments and contingencies (Notes 2 and 10)
Stockholders' equity:
Preferred stock; $.01 par value; 10,000,000
shares authorized; no shares issued or
outstanding - -
Common stock; $.01 par value; 90,000,000 shares
authorized; 35,756,960 and 33,900,860 shares
issued, respectively; 32,096,304 and
31,502,472 shares outstanding, respectively 353 340
Additional paid-in capital 101,949 83,065
Retained earnings 134,567 102,823
Common stock held in treasury, 3,660,656 and
2,398,388 shares at cost, respectively (48,273) (23,520)
-------- --------
Total stockholders' equity 188,596 162,708
-------- --------
Total liabilities and stockholders' equity $ 233,842 $ 185,954
======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
(in thousands, except per share amounts)
Revenues:
Merchandise sales $149,473 $102,139 $ 86,745
Finance and service charges 116,187 101,701 88,786
Other 4,062 3,935 4,282
------- ------- -------
269,722 207,775 179,813
------- ------- -------
Cost of revenues:
Cost of goods sold 84,229 61,659 52,056
Credit loss provision 21,463 13,808 11,559
Other 440 301 252
------- ------- -------
106,132 75,768 63,867
------- ------- -------
Net revenues 163,590 132,007 115,946
------- ------- -------
Expenses and other income:
Store operating expenses 81,089 67,430 61,063
Administrative expenses 24,671 19,412 17,837
Depreciation 7,929 5,804 4,173
Amortization 112 - -
Interest expense 916 - 73
Interest income (727) (317) (67)
------- ------- -------
113,990 92,329 83,079
------- ------- -------
Income before income taxes 49,600 39,678 32,867
Provision for income taxes 17,856 14,295 12,161
------- ------- -------
Net income $ 31,744 $ 25,383 $ 20,706
======= ======= =======
Net income per share (Note 3):
Basic $ 1.01 $ 0.81 $ 0.66
======= ======= =======
Diluted $ 0.97 $ 0.76 $ 0.61
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
(in thousands)
Cash flows from operating activities:
Net income $ 31,744 $ 25,383 $ 20,706
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization 8,041 5,804 4,173
Share-based compensation 583 - -
Non-cash portion of credit loss provision 9,920 7,118 11,559
Stock option and warrant income
tax benefit - 2,066 8,736
Changes in operating assets and liabilities:
Buy-here/pay-here automotive customer
receivables (11,939) - -
Finance and service fees receivable (790) 336 (594)
Inventories (1,936) (1,563) (720)
Prepaid expenses and other assets 438 (2,832) (530)
Accounts payable and accrued liabilities 2,360 5,088 (1,344)
Current and deferred income taxes (1,868) 695 2,142
------- ------- -------
Net cash flows from operating activities 36,553 42,095 44,128
------- ------- -------
Cash flows from investing activities:
Pawn customer receivables (7,095) (6,665) (4,728)
Cash advance customer receivables (4,805) 1,859 (13,265)
Purchases of property and equipment (14,716) (11,993) (7,131)
Acquisition of Auto Master
buy-here/pay-here automotive division (23,652) - -
------- ------- -------
Net cash flows from investing activities (50,268) (16,799) (25,124)
------- ------- -------
Cash flows from financing activities:
Proceeds from debt 31,000 - 10,000
Payments of debt (38,052) - (16,000)
Purchase of treasury stock (24,753) (11,404) (13,463)
Proceeds from exercise of stock
options and warrants 13,570 2,617 10,844
Stock option and warrant income tax benefit 4,744 - -
------- ------- -------
Net cash flows from financing activities (13,491) (8,787) (8,619)
------- ------- -------
Change in cash and cash equivalents (27,206) 16,509 10,385
Cash and cash equivalents at beginning
of the period 42,741 26,232 15,847
------- ------- -------
Cash and cash equivalents at end
of the period $ 15,535 $ 42,741 $ 26,232
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
(in thousands)
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 738 $ - $ 70
======= ======= =======
Income taxes $ 14,576 $ 11,380 $ 1,356
======= ======= =======
Supplemental disclosure of non-cash
operating activity:
Inventory acquired in repossession $ 310 $ - $ -
======= ======= =======
Supplemental disclosure of non-cash
investing activity:
Non-cash transactions in connection
with pawn receivables settled through
forfeitures of collateral transferred
to inventories $ 49,138 $ 42,241 $ 35,173
======= ======= =======
Supplemental disclosure of non-cash
financing activity:
Notes payable issued in connection
with the acquisition of Auto Master $ 10,000 $ - $ -
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
(in thousands)
Preferred Stock - - -
------- ------- -------
Common stock:
Balance at beginning of year $ 340 $ 332 $ 318
Exercise of stock options and warrants 13 8 30
Cancellation of treasury stock - - (16)
------- ------- -------
Balance at end of year 353 340 332
------- ------- -------
Additional paid-in capital:
Balance at beginning of year 83,065 78,390 63,179
Exercise of stock options and warrants,
including income tax benefit of $4,744,
$2,066, $8,736, respectively 18,301 4,675 19,557
Cancellation of treasury stock - - (4,346)
Stock option expense 583 - -
------- ------- -------
Balance at end of year 101,949 83,065 78,390
------- ------- -------
Retained earnings:
Balance at beginning of year 102,823 77,440 56,734
Net income 31,744 25,383 20,706
------- ------- -------
Balance at end of year 134,567 102,823 77,440
------- ------- -------
Treasury stock:
Balance at beginning of year (23,520) (12,116) (3,015)
Repurchases of treasury stock (24,753) (11,404) (13,463)
Cancellation of treasury stock - - 4,362
------- ------- -------
Balance at end of year (48,273) (23,520) (12,116)
------- ------- -------
Total stockholders' equity $188,596 $162,708 $144,046
======= ======= =======
The accompanying notes are an integral part
of these consolidated financial statements.
FIRST CASH FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND NATURE OF THE COMPANY
First Cash Financial Services, Inc., (the "Company") was incorporated
in Texas on July 5, 1988, and was reincorporated in Delaware in April 1991.
The Company is engaged in the operation of pawn stores, which lend money on
the collateral of pledged personal property and retail previously owned
merchandise acquired through pawn forfeitures and purchases directly from
the general public. In addition to making short-term secured pawns, many of
the Company's pawn stores offer cash advances and credit services. The
Company also operates cash advance stores that provide cash advances, credit
services, check cashing, and other related financial services. On August
25, 2006, the Company acquired Guaranteed Auto Finance, Inc. and SHAC, Inc.
(collectively doing business as "Auto Master"), which operates automobile
dealerships in the buy-here/pay-here segment of the used-vehicle sales and
financing market. The automotive dealerships sell used vehicles and earn
finance charges from the related vehicle financing contracts. As of
December 31, 2006, the Company owned and operated 252 pawn stores, 145 cash
advance stores and 10 buy-here/pay-here automotive dealerships. The Company
is also a 50% owner of Cash & Go, Ltd., a Texas limited partnership that
owns and operates 40 financial services kiosks inside convenience stores.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed
in the preparation of these financial statements:
Principles of consolidation - The accompanying consolidated financial
statements of the Company include the accounts of its wholly-owned
subsidiaries. The Company is a 50% partner in Cash & Go, Ltd., a Texas
limited partnership, and in accordance with FASB Interpretation No. 46(R) -
Consolidation of Variable Interest Entities, the consolidated operating
results include those of Cash & Go, Ltd. The operating results of
Auto Master are included in consolidated operating results for the period
August 26, 2006 through December 31, 2006. See Note 4. All significant
intercompany accounts and transactions have been eliminated.
Cash and cash equivalents - The Company considers any highly liquid
investments with an original maturity of three months or less at date of
acquisition to be cash equivalents.
Customer receivables and revenue recognition - Pawn receivables are
short-term loans secured by the customer's pledge of tangible personal
property. The Company accrues pawn service charge revenue on a constant-
yield basis over the life of the pawn loan for all pawns that the Company
deems collection to be probable based on historical pawn redemption
statistics. If the pawn is not repaid, the principal amount loaned becomes
the carrying value of the forfeited collateral ("inventory"), which is
recovered through sale. Cash advances are short-term loans with terms that
range from seven to thirty-one days. The Company accrues cash advance
service fees on a constant-yield basis over the term of the cash advance.
In its Texas markets, the Company offers a credit services product ("CSO
Program") to assist customers in obtaining a short-term loan from an
independent, non-bank, consumer lending company (the "Independent Lender").
The Company recognizes credit services fees, which are collected from the
customer at the inception of the credit services agreement, ratably over the
life of the loan made by the Independent Lender. The loans made by the
Independent Lender to credit services customers of FCC have terms of seven
to thirty-one days. The Company records a liability for collected, but
unearned, credit services fees received from its customers. The Company
originates installment loan contracts from the sale of used vehicles at its
dealerships. Such automotive receivables are collateralized by vehicles
sold and consist of contractually scheduled payments from installment
contracts, net of unearned finance charges and an allowance for credit
losses. Unearned finance charges represent the balance of interest income
remaining from the total interest to be earned over the term of the related
installment contract.
Credit loss provisions - The Company maintains an allowance for credit
losses on an aggregate basis at a level it considers sufficient to cover
estimated losses in the collection of its cash advance and automobile
finance receivables. The allowance for credit losses is based primarily upon
historical credit loss experience, with consideration given to recent credit
loss trends and changes in loan characteristics (i.e., average amount
financed and term), delinquency levels, collateral values, economic
conditions and underwriting and collection practices. The allowances for
credit losses are periodically reviewed by management with any changes
reflected in current operations. Although it is at least reasonably possible
that events or circumstances could occur in the future that are not
presently foreseen which could cause actual credit losses to be materially
different from the recorded allowance for credit losses, the Company
believes that it has given appropriate consideration to all relevant factors
and has made reasonable assumptions in determining the allowance for credit
losses. The Company considers cash advances to be in default if they are
not repaid on the due date, and writes off the principal amount and service
charge receivable as of the default date. Net defaults and changes in the
cash advance allowance are charged to the cash advance loss provision.
Under the CSO program, the Company issues the Independent Lender a letter of
credit to guarantee the repayment of the loan. These letters of credit
constitute a guarantee for which the Company is required to recognize, at
the inception of the guarantee, a liability for the fair value of the
obligation undertaken by issuing the letters of credit. 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 cash
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. An automotive finance receivable account is considered
delinquent when a contractually scheduled payment has not been received
by the scheduled payment date. The Company considers automotive finance
receivables to be in default when a contractually scheduled payment is 90
days past due.
Store operating expenses - Costs incurred in operating the pawn stores,
cash advance stores and buy-here/pay-here dealerships have been classified
as store operating expenses. Operating expenses include salary and benefit
expense of store employees, rent and other occupancy costs, bank charges,
security, insurance, utilities, cash shortages and other costs incurred by
the stores.
Layaway and deferred revenue - Interim payments from customers on
layaway sales are credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Inventories - Pawn inventories represent merchandise purchased
directly from the public and merchandise acquired from forfeited pawns.
Certain pawn inventories are purchased directly from customers and are
recorded at cost. Inventories from forfeited pawns are recorded at the
amount of the pawn principal on the unredeemed goods. Vehicle inventories
consist of used vehicles acquired from auctions, new car dealerships and
trade-ins. Vehicle transportation and reconditioning costs are capitalized
as a component of inventory. Repossessed vehicles are recorded at fair
value, which approximates wholesale value. The cost of pawn and vehicle
inventories is determined on the specific identification method. Pawn and
vehicle inventories are stated at the lower of cost or market; accordingly,
inventory valuation allowances are established when inventory carrying
values are in excess of estimated selling prices, net of direct costs of
disposal. Management has evaluated inventories and determined that a
valuation allowance is not necessary.
Property and equipment - Property and equipment are recorded at cost.
Depreciation is determined on the straight-line method based on estimated
useful lives of fifteen years for buildings and three to five years for
equipment. The costs of improvements on leased stores are capitalized as
leasehold improvements and are amortized on the straight-line method over
the applicable lease period, or useful life, if shorter.
Maintenance and repairs are charged to expense as incurred; renewals
and betterments are charged to the appropriate property and equipment
accounts. Upon sale or retirement of depreciable assets, the cost and
related accumulated depreciation is removed from the accounts, and the
resulting gain or loss is included in the results of operations in the
period the assets are sold or retired.
Long-lived assets - Property, plant and equipment and non-current
assets are reviewed for impairment whenever events or changes in
circumstances indicate that the net book value of the asset may not be
recoverable. An impairment loss is recognized if the sum of the expected
future cash flows (undiscounted and before interest) from the use of the
asset is less than the net book value of the asset. Generally, the amount
of the impairment loss is measured as the difference between the net book
value of the assets and the estimated fair value of the related assets.
Management does not believe any of these assets have been impaired at
December 31, 2006. Goodwill is reviewed annually for impairment based upon
its fair value, or more frequently if certain indicators arise. Management
has determined that goodwill has not been impaired at December 31, 2006.
Fair value of financial instruments - The fair value of financial
instruments is determined by reference to various market data and other
valuation techniques, as appropriate. Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded values, due
primarily to their cash nature.
Income taxes - The Company uses the liability method of computing
deferred income taxes on all material temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases.
Advertising - The Company expenses the costs of advertising the first
time the advertising takes place. Advertising expense for the fiscal years
ended December 31, 2006, 2005 and 2004, was $2,489,000, $1,964,000 and
$2,302,000, respectively.
Share-based compensation - 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, as permitted by SFAS
123, Accounting for Stock-Based Compensation, 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. Effective January 1, 2006,
the Company adopted SFAS No. 123(R), Share-Based Payments, which replaces
SFAS 123 and supersedes APB 25 (see Note 12).
Earnings per share - Basic net income per share is computed by dividing
net income by the weighted average number of shares outstanding during the
year. Diluted net income per share is calculated by giving effect to the
potential dilution that could occur if securities or other contracts to
issue common shares were exercised and converted into common shares during
the year. All share amounts have been retroactively adjusted to give effect
to a two-for-one split and three-for-two split of the Company's common stock
in February 2006 and March 2004, respectively (see Note 3).
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Numerator:
Net income for calculating basic
and diluted earnings per share $ 31,744 $ 25,383 $ 20,706
======= ======= =======
Denominator:
Weighted-average common shares for
calculating basic earnings per share 31,448 31,506 31,507
Effect of dilutive securities:
Stock options and warrants 1,411 1,719 2,560
Weighted-average common shares for
calculating diluted earnings per share 32,859 33,225 34,067
======= ======= =======
Basic earnings per share $ 1.01 $ 0.81 $ 0.66
======= ======= =======
Diluted earnings per share $ 0.97 $ 0.76 $ 0.61
======= ======= =======
Pervasiveness of estimates - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and related revenues
and expenses, and the disclosure of gain and loss contingencies at the date
of the financial statements. Such estimates and assumptions are subject to
a number of risks and uncertainties, which may cause actual results to
differ materially from the Company's estimates.
Reclassification - Certain amounts for the years ended December 31,
2004 and 2005 have been reclassified in order to conform to the 2006
presentation.
Recent accounting pronouncements - In June 2006, the Financial
Accounting Standards Board issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 requires that a more-likely-
than-not threshold be met before the benefit of a tax position may be
recognized in the financial statements and prescribes how such benefit
should be measured. It requires that the new standard be applied to the
balances of assets and liabilities as of the beginning of the period of
adoption and that a corresponding adjustment be made to the opening balance
of retained earnings. FIN 48 will be effective for fiscal years beginning
after December 15, 2006. The Company is evaluating the potential effect of
FIN 48, but does not expect it to have a material effect on the Company's
consolidated financial position or results of operations.
In September 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value to be the price that
would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date and
emphasizes that fair value is a market-based measurement, not an entity-
specific measurement. It establishes a fair value hierarchy and expands
disclosures about fair value measurements in both interim and annual
periods. SFAS 157 will be effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company
does not expect SFAS 157 to have a material effect on the Company's
consolidated financial position or results of operations but anticipates
additional disclosures when it becomes effective.
NOTE 3 - CAPITAL STOCK
In January 2006, the Company's Board of Directors approved a two-for-
one stock split in the form of a stock dividend to shareholders of record on
February 6, 2006. The additional shares were distributed on February 20,
2006. Common stock and all share and per share amounts (except authorized
shares and par value) have been retroactively adjusted to reflect the split.
In March 2004, the Company's Board of Directors approved a three-for-
two stock split in the form of a stock dividend to shareholders of record on
March 22, 2004. The additional shares were distributed on April 6, 2004.
All share and per share amounts (except authorized shares and par value)
have been retroactively adjusted to reflect the split.
In June 2006, the Company's Board of Directors authorized the
repurchase of up to 2,000,000 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 2006-authorized stock repurchase plan for
an aggregate purchase price of $8,848,000 or $19.21 per share. There were
no shares repurchased during the second half of 2006. There are 1,539,000
total remaining shares available for repurchase under the 2006-authorized
plan.
In July 2004, the Company's Board of Directors authorized the
repurchase of up to 3,200,000 shares of the Company's outstanding common
stock. During 2005 and 2004, the Company repurchased a total of 1,153,000
and 1,245,000 common shares, respectively, under the stock repurchase
program for an aggregate purchase price of $11,404,000 and $12,116,000.
During 2006, First Cash repurchased approximately 802,000 shares for an
aggregate purchase price of $15,905,000 to close out the 2004-authorized
program. The weighted average repurchase price of the 3,200,000 shares
repurchased under this plan was $12.32 per share or a total of $39,425,000.
NOTE 4 - ACQUISITION
Pursuant to the Company's strategic initiative to grow and diversify
its product suite within the specialty consumer finance and retail
industries, the Company acquired two affiliated companies, collectively
doing business as Auto Master, an automotive retailer and related finance
company focused exclusively on the "buy-here/pay-here" segment of the retail
used vehicle market. Auto Master, based in Northwest Arkansas, owns and
operates buy-here/pay-here automobile dealerships located in Arkansas,
Missouri and Oklahoma, which specialize in the sale of clean, moderately-
priced used vehicles. The definitive stock purchase agreement for the
privately-held Auto Master group of companies was signed and closed on
August 25, 2006. The purchase price, in the amount of $33.7 million, was
funded through a combination of $23.7 million in cash and notes payable to
the sellers in the amount of $10 million. In addition, the Company retired
approximately $14 million of the outstanding interest-bearing debt of Auto
Master subsequent to closing the purchase transaction.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their estimated fair market values at the
date of acquisition. The excess purchase price over the estimated fair
market value of the net tangible assets acquired and identifiable intangible
assets has been recorded as goodwill. The total amount of goodwill and
identified intangible assets, of approximately $19.4 million, is expected to
be deductible for tax purposes. The results of operations of the acquired
company are included in the consolidated financial statements from its date
of acquisition.
The allocation of the purchase price is as follows (in thousands):
Cash $ 7
Fair market value of net tangible assets 28,723
Goodwill 13,637
Trade name 4,360
Customer relationships 1,423
Less: assumed debt (14,490)
--------
Purchase price $ 33,660
========
NOTE 5 - CUSTOMER RECEIVABLES AND VALUATION ACCOUNTS
Customer receivables, net of unearned finance charges, consist of the
following (in thousands):
Buy-Here/
Cash Pay-Here
Pawn Advance Automotive Total
-------- -------- ---------- --------
December 31, 2006
-----------------
Customer receivables with current maturities $ 32,459 $ 7,740 $ 25,919 $ 66,118
Less allowance for doubtful accounts - (230) (5,637) (5,867)
-------- -------- -------- --------
32,459 7,510 20,282 60,251
Customer receivables with long-term maturities - - 17,908 17,908
Less allowance for doubtful accounts - - (3,895) (3,895)
-------- -------- -------- --------
- - 14,013 14,013
Total customer receivables 32,459 7,740 43,827 84,026
Less allowance for doubtful accounts - (230) (9,532) (9,762)
-------- -------- -------- --------
$ 32,459 $ 7,510 $ 34,295 $ 74,264
======== ======== ======== ========
December 31, 2005
-----------------
Customer receivables with current maturities $ 27,314 $ 6,730 $ - $ 34,044
Less allowance for doubtful accounts - (242) - (242)
-------- -------- -------- --------
27,314 6,488 - 33,802
Customer receivables with long-term maturities - - - -
Less allowance for doubtful accounts - - - -
-------- -------- -------- --------
- - - -
Total customer receivables 27,314 6,730 - 34,044
Less allowance for doubtful accounts - (242) - (242)
-------- -------- -------- --------
$ 27,314 $ 6,488 $ - $ 33,802
======== ======== ======== ========
Changes in the customer receivables allowance for credit losses are as
follows (in thousands):
Buy-Here/
Cash Pay-Here
Advance Automotive Total
------- ---------- -------
December 31, 2006
-----------------
Balance, beginning of the year (1) $ 242 $ 9,299 $ 9,541
Provision for credit losses 2,658 6,137 8,795
Charge-offs, net of recoveries (2,670) (5,904) (8,574)
------- ------- -------
Balance at end of year $ 230 $ 9,532 $ 9,762
======= ======= =======
December 31, 2005
-----------------
Balance, beginning of the year $ 552 $ - 552
Provision for credit losses 7,118 - 7,118
Charge-offs, net of recoveries (7,428) - (7,428)
------- ------- -------
Balance at end of year $ 242 $ - $ 242
======= ======= =======
(1) Buy-here/pay-here beginning balance is as of August 25, 2006, the
date of acquistion.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Year Ended December 31,
-----------------------
2006 2005
-------- --------
Land $ 715 $ 672
Buildings 1,002 1,002
Furniture, fixtures, equipment and
leasehold improvements 62,611 46,870
-------- --------
64,328 48,544
-------- --------
Less: accumulated depreciation (33,685) (24,979)
-------- --------
$ 30,643 $ 23,565
======== ========
NOTE 7 - ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
Year Ended December 31,
-----------------------
2006 2005
-------- --------
Accrued compensation $ 5,476 $ 3,857
Deferred revenue 4,102 3,306
Third-party lending settlements payable 2,909 1,914
Sales and property taxes payable 1,289 1,284
Money order and money transfer settlements payable 743 673
Reserves for expected losses on outstanding CSO
letters of credit 569 508
Vehicle warranty reserve 523 -
Other 2,365 2,180
-------- --------
$ 17,976 $ 13,722
======== ========
NOTE 8 - REVOLVING CREDIT FACILITY AND NOTES PAYABLE
The Company maintains a long-term line of credit with two commercial
lenders ("the Credit Facility") which was amended during the third quarter
of 2006 to increase the amount available under the line of credit from
$25,000,000 to $50,000,000 and to extend the term of the facility until
April 2009. The Credit Facility bears interest at the prevailing LIBOR rate
(which was approximately 5.3% at December 31, 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 December
31, 2006, the Company had $8,000,000 outstanding under the Credit Facility
and the Company had $42,000,000 available for borrowings. Under the terms
of the Credit Facility, the Company is required to maintain certain
financial ratios and comply with certain technical covenants. The Company
was in compliance with the requirements and covenants of the Credit Facility
as of December 31, 2006, and March 14, 2007. 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.
At December 31, 2006, the Company has notes payable to individuals
arising from the Auto Master acquisition which total $9,438,000 in aggregate
and bear interest at 7%, with quarterly payments of principal and interest
scheduled over the next four years. Of the $9,438,000 in notes payable,
$2,250,000 is classified as a current liability and $7,188,000 is classified
as long-term debt. One of the notes payable, in the principal amount of
$1,000,000, is convertible after one year into 55,555 shares of the
Company's common stock at a conversion price of $18.00 per share.
NOTE 9 - INCOME TAXES
Components of the provision for income taxes consist of the following
(in thousands):
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Current:
Federal $ 16,012 $ 12,003 $ 9,874
State and foreign 2,992 2,465 891
------- ------- -------
19,004 14,468 10,765
Deferred (1,148) (173) 1,396
------- ------- -------
$ 17,856 $ 14,295 $ 12,161
======= ======= =======
The principal current and non-current deferred tax assets and
liabilities consist of the following (in thousands):
Year Ended December 31,
-----------------------
2006 2005
-------- --------
Deferred tax assets:
Inventory tax-basis difference $ 1,385 $ 1,291
Foreign tax credits 2,580 1,146
Other 1,566 701
-------- --------
Total deferred tax assets 5,531 3,138
-------- --------
Deferred tax liabilities:
Intangible asset amortization 9,984 8,655
Depreciation 745 872
State income taxes, net 324 386
Other 508 404
-------- --------
Total deferred tax liabilities 11,561 10,317
-------- --------
Net deferred tax liablities 6,030 7,179
======== ========
Reported as:
Other current assets 2,267 1,437
Non-current liabilities - deferred income taxes (8,297) (8,616)
-------- --------
Total deferred tax liabilities $ 6,030 $ 7,179
======== ========
The provision for income taxes differs from the amounts determined by
applying the expected federal statutory tax rate to income before income
taxes. The following is a reconciliation of such differences (in thousands):
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Tax at the federal statuatory rate $ 17,360 $ 13,887 $ 11,175
State and foreign income taxes, net of
federal tax benefit for state taxes of
$396, $312 and $220, respectively, and
foreign tax credits of $1,861, $1,574
and $83, respectively 735 579 588
Other, net (239) (171) 398
------- ------- -------
$ 17,856 $ 14,295 $ 12,161
======= ======= =======
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases - The Company leases certain of its facilities and equipment
under operating leases with terms generally ranging from three to five
years. Most facility leases contain renewal options. Remaining future
minimum rentals due under non-cancelable operating leases, including Cash &
Go, Ltd., are as follows (in thousands):
Fiscal
------
2007 $ 17,582
2008 15,014
2009 11,780
2010 8,808
2011 4,593
Thereafter 4,811
--------
$ 62,588
========
Rent expense under such leases was $15,268,000, $12,513,000 and
$10,923,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
The Company is from time to time a defendant (actual or threatened) in
certain lawsuits and arbitration claims encountered in the ordinary course
of its business, the resolution of which, in the opinion of management,
should not have a materially adverse effect on the Company's financial
position, results of operations, or cash flows.
Guarantees - First Cash Credit, Ltd. ("FCC"), a wholly-owned subsidiary
of the Company, offers 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 $50 to $1,000, have terms of
7 to 35 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 December 31, 2006 was $14,239,000 compared to $11,969,000 at
December 31, 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.
NOTE 11 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets having an indefinite useful life
are tested for impairment annually or more frequently if events or changes
in circumstances indicate that the assets might be impaired. An impairment
loss is recognized if the sum of the expected future cash flows
(undiscounted and before interest) from the use of the asset is less than
the net book value of the asset. Management does not believe any of these
assets have been impaired at December 31, 2006. Goodwill is reviewed
annually for impairment based upon its fair value, or more frequently if
certain indicators arise. Management has determined that goodwill has not
been impaired at December 31, 2006.
Changes in the carrying value of goodwill and other intangible assets
were as follows (in thousands):
Pawn and Buy-Here/
Cash Pay-Here
Advance Automotive Total
------- ---------- -------
December 31, 2006
-----------------
Balance, beginning of year,
net of amortization of $8,461 $ 53,237 $ - $ 53,237
Acquisitions, net of amortization
of $112 - 19,307 19,307
Adjustments - - -
------- ------- -------
Balance, end of year $ 53,237 $ 19,307 $ 72,544
======= ======= =======
December 31, 2005
-----------------
Balance, beginning of year,
net of amortization of $8,461 $ 53,237 $ - $ 53,237
Acquisitions - - -
Adjustments - - -
------- ------- -------
Balance, end of year $ 53,237 $ - $ 53,237
======= ======= =======
Acquired intangible assets that are subject to amortization were as
follows (in thousands):
2006 2005
---------------------------- --------------------------
Accumulated Accumulated
Cost Depreciation Net Cost Depreciation Net
------ ------------ ------ ---- ------------ ------
Customer
relationships $ 1,423 $ (112) $ 1,311 $ - $ - $ -
Customer relationships are generally amortized over six years based on
the pattern of economic benefits provided. At December 31, 2006, the trade
name obtained in the acquisition of Auto Master, valued at $4,360,000, was
not subject to amortization.
Amortization expense for acquired intangible assets was $112,000 and $0
for Fiscal 2006 and 2005, respectively. Estimated future amortization
expense is approximately $200,000 annually over the next five years.
NOTE 12 - EQUITY COMPENSATION PLANS AND SHARE-BASED COMPENSATION
The Company has adopted equity compensation plans to attract and retain
executives, directors and key employees. Under these 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. In
addition, the Company has previously issued warrants to purchase shares of
common stock to certain key members of management, directors and other third
parties.
At December 31, 2006, 374,000 shares were reserved for future grants
under the Plans. 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. The Company typically issues shares of
common stock to satisfy option and warrant exercises.
Options and warrants outstanding as of December 31, 2006, are as
follows (in thousands, except exercise price and life):
Ranges of Total Warrants Weighted-Average Currently
Exercise Prices and Options Remaining Life Exercisable
--------------- ----------- -------------- -----------
$ 0.67 - $ 5.00 1,259 5.4 1,088
$ 5.01 - $10.00 448 7.0 448
$10.01 - $15.00 1,325 8.4 1,325
$15.01 - $20.00 1,997 8.6 1,912
$20.01 - $22.00 4 9.9 -
------ ------
5,033 4,773
====== ======
A summary of stock option and warrant activity for the years ended
December 31, 2006, 2005 and 2004 is as follows (in thousands, except
exercise price):
2006 2005 2004
--------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Underlying Exercise Underlying Exercise Underlying Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding
at beginning
of year 6,631 $12.04 3,367 $ 4.87 5,543 $ 3.33
Granted 89 20.09 5,858 19.14 910 9.67
Exercised (1,438) 9.43 (677) 3.87 (3,086) 3.52
Canceled or
forfeited (249) 19.11 (1,917) 24.01 - -
------ ------ ------
Outstanding
at end
of year 5,033 12.58 6,631 12.04 3,367 4.87
====== ====== ======
Exercisable
at end
of year 4,773 $12.13 6,243 $12.47 2,790 $ 4.71
====== ====== ======
The tax benefit realized from share options exercised during the year
ended December 31, 2006 was $4,744,000. At December 31, 2006, the aggregate
intrinsic value for the options outstanding was $66,863,000, of which
$62,421,000 million was exercisable at the end of the year.
The total intrinsic value of options and warrants exercised for
Fiscal 2006, 2005 and 2004 was $13,829,000 $5,870,000 and $24,640,000,
respectively. The aggregate intrinsic value 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 warrant holders had all
option and warrant holders exercised their options and warrants on December
31, 2006, 2005 and 2004, respectively. 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 Company typically issues
shares of common stock to satisfy option and warrant exercises.
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. The Company records share-based compensation cost
as an administrative expense. The Company applied the alternative
transition method in calculating its pool of excess tax benefits available
to absorb future tax deficiencies as provided by FSP FAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards.
The Company's income before income taxes and net income for Fiscal 2006
were approximately $583,000 and $379,000, 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 Fiscal 2006 would have each increased by $0.01, to $1.02 and $0.98,
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, $4,744,000 of
excess tax benefits has been classified as a financing cash inflow in the
Fiscal 2006 Consolidated Statement of Cash Flows. For Fiscal 2005 and 2004,
such excess tax benefits amounted to $2,066,000 and $8,736,000,
respectively, and were classified as an operating activity cash inflow. As
of December 31, 2006, the total compensation cost related to nonvested
awards not yet recognized was $556,000, and is expected to be recognized
over the weighted-average period of 2.2 years.
Stock options and warrants granted prior to January 1, 2006 were either
fully vested and exercisable on the grant date, or vested and become
exercisable ratably over a five year period beginning five years from the
date of grant. In addition, certain options granted prior to January 1,
2006 included accelerated vesting provisions. As of December 31, 2006,
there were no outstanding, unvested options with accelerated vesting
features. Of the total share-based compensation expense (before tax
benefit) of $583,000 for Fiscal 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.
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 would have been as follows (in thousands,
except per share amounts):
Year Ended December 31,
-----------------------
2005 2004
-------- --------
Net income, as reported $ 25,383 $ 20,706
Less: Pro forma stock-based employee
compensation determined under the fair
value requirements of SFAS 123, net of
income tax benefits 11,178 2,716
-------- --------
Adjusted net income $ 14,205 $ 17,990
======== ========
Earnings per share:
Basic, as reported $ 0.81 $ 0.66
======== ========
Basic, adjusted $ 0.45 $ 0.57
======== ========
Diluted, as reported $ 0.76 $ 0.61
======== ========
Diluted, adjusted $ 0.43 $ 0.53
======== ========
The fair value of each option grant was estimated at the date of the
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
Year Ended December 31,
-----------------------------------
2006 2005 2004
------- ------- -------
Dividend yield - - -
Volatility 32.5 % 44.1 % 52.7 %
Risk-free interest rate 4.0 % 3.5 % 3.5 %
Expected term of options 6.8 years 4.4 years 5.5 years
Weighted-average fair value
of options granted $ 6.79 $ 3.72 $ 3.69
NOTE 13 - FIRST CASH 401(k) PROFIT SHARING PLAN
The First Cash 401(k) Profit Sharing Plan (the "Plan") is provided by
the Company for all full-time, U.S.-based, employees who have been employed
with the Company for one year or longer. Under the Plan, a participant may
contribute up to 100% of earnings, with the Company matching the first 3% at
a rate of 50%. The employee and Company contributions are paid to a
corporate trustee and invested in various funds. Contributions made to
participants' accounts become fully vested upon completion of six years of
service. The total Company matching contributions to the Plan were
$279,000, $257,000 and $250,000 for the years ended December 31, 2006, 2005
and 2004, respectively.
NOTE 14 - OPERATING SEGEMENT INFORMATION
The Company manages its business on the basis of two reportable
segments: the pawn and cash advance segment and the buy-here/pay-here
automotive segment. There are no intersegmental sales and each segment is
supervised separately. The following tables detail revenues, cost of
revenues, net revenues, certain expenses, expenditures on property and
equipment and total assets by operating segment for Fiscal 2006, 2005 and
2004 (in thousands):
Pawn and Buy-Here/
Cash Pay-Here
Advance Automotive Total
------- ---------- -------
Year Ended December 31, 2006
----------------------------
Revenues:
Merchandise sales $126,436 $ 23,037 $149,473
Finance and service charges 114,839 1,348 116,187
Other 3,981 81 4,062
------- ------- -------
245,256 24,466 269,722
------- ------- -------
Cost of revenues:
Cost of goods sold 73,731 10,498 84,229
Credit loss provision 15,326 6,137 21,463
Other 440 - 440
------- ------- -------
89,497 16,635 106,132
------- ------- -------
Net revenues 155,759 7,831 163,590
------- ------- -------
Expenses and other income:
Store operating expenses 78,228 2,861 81,089
Store depreciation and amortization 7,163 17 7,180
------- ------- -------
85,391 2,878 88,269
------- ------- -------
Net store contribution $ 70,368 $ 4,953 $ 75,321
======= ======= =======
Expenditures on property and equipment $ 14,512 $ 204 $ 14,716
======= ======= =======
As of December 31, 2006
-----------------------
Total assets $195,478 $ 38,364 $233,842
======= ======= =======
Pawn and Buy-Here/
Cash Pay-Here
Advance Automotive Total
------- ---------- -------
Year Ended December 31, 2005
----------------------------
Revenues:
Merchandise sales $102,139 $ - $102,139
Finance and service charges 101,701 - 101,701
Other 3,935 - 3,935
------- ------- -------
207,775 - 207,775
------- ------- -------
Cost of revenues:
Cost of goods sold 61,659 - 61,659
Credit loss provision 13,808 - 13,808
Other 301 - 301
------- ------- -------
75,768 - 75,768
------- ------- -------
Net revenues 132,007 - 132,007
------- ------- -------
Expenses and other income:
Store operating expenses 67,430 - 67,430
Store depreciation and amortization 5,206 - 5,206
------- ------- -------
72,636 - 72,636
------- ------- -------
Net store contribution $ 59,371 $ - $ 59,371
======= ======= =======
Expenditures on property and equipment $ 11,993 $ - $ 11,993
======= ======= =======
As of December 31, 2005
-----------------------
Total assets $185,954 $ - $185,954
======= ======= =======
Pawn and Buy-Here/
Cash Pay-Here
Advance Automotive Total
------- ---------- -------
Year Ended December 31, 2004
----------------------------
Revenues:
Merchandise sales $ 86,745 $ - $ 86,745
Finance and service charges 88,786 - 88,786
Other 4,282 - 4,282
------- ------- -------
179,813 - 179,813
------- ------- -------
Cost of revenues:
Cost of goods sold 52,056 - 52,056
Credit loss provision 11,559 - 11,559
Other 252 - 252
------- ------- -------
63,867 - 63,867
------- ------- -------
Net revenues 115,946 - 115,946
------- ------- -------
Expenses and other income:
Store operating expenses 61,063 - 61,063
Store depreciation and amortization 3,849 - 3,849
------- ------- -------
64,912 - 64,912
------- ------- -------
Net store contribution $ 51,034 $ - $ 51,034
======= ======= =======
Expenditures on property and equipment $ 7,131 $ - $ 7,131
======= ======= =======
As of December 31, 2004
-----------------------
Total assets $162,343 $ - $162,343
======= ======= =======
The following table reconciles net store contribution, as presented
above, to net income for each period presented (in thousands):
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Total net store contibution for reportable
segments $ 75,321 $ 59,371 $ 51,034
Administrative depreciation and amortization (861) (598) (324)
Administrative expenses (24,671) (19,412) (17,837)
Interest expense (916) - (73)
Interest income 727 317 67
Provision for income taxes (17,856) (14,295) (12,161)
------- ------- -------
Net income $ 31,744 $ 25,383 $ 20,706
======= ======= =======
NOTE 15 - GEOGRAPHIC AREAS
The following table shows revenues, selected current assets and long-
lived assets (all non-current assets except goodwill) by geographic area (in
thousands):
Year Ended December 31,
-----------------------------
2006 2005 2004
------- ------- -------
Revenues:
United States $193,895 $154,649 $145,386
Mexico 75,827 53,126 34,427
------- ------- -------
$ 269,722 $207,775 $179,813
======= ======= =======
Customer receivables:
United States $ 63,155 $ 25,091 $ 32,172
Mexico 11,109 8,711 6,722
------- ------- -------
$ 74,264 $ 33,802 $ 38,894
======= ======= =======
Inventories:
United States $ 20,002 $ 14,751 $ 13,393
Mexico 8,759 7,236 4,251
------- ------- -------
$ 28,761 $ 21,987 $ 17,644
======= ======= =======
Long-lived assets:
United States $ 16,804 $ 13,689 $ 11,183
Mexico 15,067 10,892 6,992
------- ------- -------
$ 31,871 $ 24,581 $ 18,175
======= ======= =======
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data (in thousands, except per share
data) for the fiscal years ended December 31, 2006 and 2005, are set forth
below. The Company's operations are subject to seasonal fluctuations.
Quarter Ended
------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2006
----
Total revenues $ 55,700 $ 56,375 $ 69,472 $ 88,175
Cost of revenues 18,394 20,868 27,692 39,178
Net revenues 37,306 35,507 41,780 48,997
Total expenses and
other income 25,309 25,278 29,285 34,118
Net income 7,622 6,495 7,935 9,692
Diluted net income
per share 0.23 0.20 0.25 0.30
Diluted weighted
average shares 33,797 33,209 32,283 32,785
2005
----
Total revenues $ 46,999 $ 46,328 $ 54,307 $ 60,141
Cost of revenues 16,257 16,446 19,964 23,101
Net revenues 30,742 29,882 34,343 37,040
Total expenses and
other income 21,185 21,656 24,312 25,176
Net income 6,069 5,223 6,370 7,721
Diluted net income
per share 0.18 0.16 0.19 0.23
Diluted weighted
average shares 34,025 32,834 32,866 33,174
EXHIBIT 10.12
AMENDMENT NO. 1 TO CONSULTING AGREEMENT OF PHILLIP ERIC POWELL
This is the First Amendment ("First Amendment") to the Consulting
Agreement of Phillip Eric Powell entered into as of January 1, 2005 (the
"Agreement"), by and between First Cash Financial Services, Inc. (the
"Company"), a Delaware corporation, and Phillip Eric Powell (the
"Consultant"). This First Amendment shall apply prospectively and is
effective as of March 9, 2007.
WHEREAS, Consultant is presently serving the Company as an independent
contractor pursuant to the Agreement between the parties (said Agreement
including all previous amendments and/or addenda, if any), and the parties
desire to modify the Agreement as set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
1. In paragraph 7(a) of the Agreement, after the term "$500,000" insert
the phrase "until January 1, 2007, at which time the annual rate
shall be increased to $600,000."
2. Except as modified herein, the remainder of the Agreement shall
remain unchanged.
CONSULTANT ACKNOWLEDGES THAT HE HAS BEEN GIVEN THE OPPORTUNITY TO
DISCUSS THIS FIRST AMENDMENT WITH HIS PRIVATE LEGAL COUNSEL AND HAS AVAILED
HIMSELF OF THAT OPPORTUNITY.
FIRST CASH FINANCIAL SERVICES, INC. CONSULTANT
By:_____________________________ ______________________________
Richard T. Burke Phillip Eric Powell
Director
EXHIBIT 10.13
AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT OF RICK L. WESSEL
This is the First Amendment ("First Amendment") to the Employment
Agreement of Rick L. Wessel entered into as of December 31, 2004 (the
"Agreement"), by and between First Cash Financial Services, Inc. (the
"Company"), a Delaware corporation, and Rick L. Wessel (the "Executive").
This First Amendment shall apply prospectively and is effective as of March
9, 2007.
WHEREAS, Executive is presently employed by the Company pursuant to the
Agreement between the parties (said Agreement including all previous
amendments and/or addenda, if any), and the parties desire to modify the
Agreement as set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations hereinafter set forth, and other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
the parties agree as follows:
1. In paragraph 3(a) of the Agreement, after the term "President,"
insert the phrase "and Chief Executive Officer ("CEO")."
2. In the first sentence of paragraph 3(c), after the word
"President," insert the phrase "and CEO." In the last sentence of paragraph
3(c), after the word "President," insert the phrase "and CEO."
3. In paragraph 7 of the Agreement, after the term "$550,000," insert
the phrase "through December 31, 2005, $605,000 from January 1, 2006 to
December 31, 2006, and $700,000 beginning January 1, 2007."
4. Except as modified herein, the remainder of the Agreement shall
remain unchanged.
EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN GIVEN THE OPPORTUNITY TO
DISCUSS THIS FIRST AMENDMENT WITH HIS PRIVATE LEGAL COUNSEL AND HAS AVAILED
HIMSELF OF THAT OPPORTUNITY.
FIRST CASH FINANCIAL SERVICES, INC. EXECUTIVE
By:_____________________________ ______________________________
Phillip E. Powell Rick L. Wessel
Chairman of the Board
EXHIBIT 21.1
FIRST CASH FINANCIAL SERVICES, INC.
SUBSIDIARIES
Percentage
Country/State of Owned
Subsidiary Name Incorporation by Registrant
--------------- ------------- -------------
American Loan and Jewelry, Inc. Texas 100%
Famous Pawn, Inc. Maryland 100%
WR Financial, Inc. Texas 100%
Cash & Go, Inc. California 100%
One Iron Ventures, Inc. Illinois 100%
First Cash, S.A. de C.V. Mexico 100%
American Loan Employee Services,
S.A. de C.V. Mexico 100%
First Cash, Ltd. Texas 100%
First Cash Corp. Delaware 100%
First Cash Management, LLC Delaware 100%
First Cash, Inc. Nevada 100%
Cash & Go, Ltd. Texas 49.5%
Cash & Go Management, LLC Texas 50%
First Cash Credit, Ltd. Texas 100%
First Cash Credit Management, LLC Texas 100%
FCFS MO, Inc. Missouri 100%
FCFS OK, Inc. Oklahoma 100%
FCFS SC, Inc. South Carolina 100%
FCFS MI, Inc. Michigan 100%
Guaranteed Auto Finance, Inc. Arkansas 100%
SHAC, Inc. Arkansas 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements Nos.
333-71077 and 333-106878 on Form S-3, and Nos. 333-73391, 333-106880, 333-
106881 and 333-132665 on Form S-8 of our reports, dated March 14, 2007,
relating to the financial statements of First Cash Financial Services, Inc.,
and to management's report on the effectiveness of internal control over
financial reporting, appearing in this Annual Report on Form 10-K of First
Cash Financial Services, Inc., for the year ended December 31, 2006.
Hein & Associates LLP
Dallas, Texas
March 14, 2007
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, Rick L. Wessel, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Cash Financial
Services, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation;
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Registrant's
internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: March 14, 2007
/s/ Rick L. Wessel
------------------
Rick L. Wessel
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT
I, R. Douglas Orr, certify that:
1. I have reviewed this Annual Report on Form 10-K of First Cash Financial
Services, Inc. (the "Registrant");
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation;
d. Disclosed in this report any change in the Registrant's internal
control over financial reporting that occurred during the
Registrant's fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Registrant's
internal control over financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal control over financial reporting.
Date: March 14, 2007
/s/ R. Douglas Orr
------------------
R. Douglas Orr
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of First Cash Financial Services, Inc.
(the "Company") on Form 10-K for the year ended December 31, 2006, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), we, Rick L. Wessel and R. Douglas Orr each certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that to our knowledge:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 14, 2007
/s/ Rick L. Wessel
------------------
Rick L. Wessel
Chief Executive Officer
/s/ R. Douglas Orr
------------------
R. Douglas Orr
Chief Financial Officer