2
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO
FEE REQUIRED]
For the transition period from ______________ to
_____________
Commission File Number 0-19424
_______________________________
EZCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2540145
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1901 Capital Parkway
Austin, Texas 78746
(Address of principal executive offices)
(Zip Code)
(512) 314-3400
(Registrant's telephone number, including area code)
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__
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant
issued and outstanding is the Class B Voting Common Stock,
par value $.01 per share, 100% of which is owned by one
record holder who is an affiliate of the registrant. There
is no trading market for the Class B Voting Common Stock.
As of March 31, 1999, 10,811,553 shares of the
registrant's Class A Non-Voting Common Stock, par value $.01
per share and 1,190,057 shares of the registrant's Class B
Voting Common Stock, par value $.01 per share were
outstanding.
<PAGE>
EZCORP, INC.
INDEX TO FORM 10-Q
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1999, March 31, 1998 and September 30, 1998 1
Condensed Consolidated Statements of Operations -
Three and Six Months Ended March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows -
Six Months Ended March 31, 1999 and 1998 3
Notes to Interim Condensed Consolidated Financial
Statements 4
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 6
PART II. OTHER INFORMATION 12
SIGNATURE 13
<PAGE>
PART I
Item 1. Financial Statements
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, March 31, September 30,
<TABLE> 1999 1998 1998
---------- ---------- -------------
<CAPTION> (unaudited)(unaudited)
(In thousands)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,717 $ 974 $ 1,328
Pawn loans 42,786 34,475 49,632
Service charge receivable 12,807 10,161 14,843
Inventory, net 47,750 36,638 44,011
Deferred tax asset 1,882 1,364 1,882
Income tax recoverable - - 840
Prepaids and other assets 3,868 2,946 3,170
------- ------- -------
Total current assets 111,810 86,558 115,706
Investment in unconsolidated
affiliate 13,065 10,362 10,909
Property and equipment, net 52,749 34,333 43,666
Other assets:
Goodwill, net 13,957 13,804 13,605
Deferred tax asset - 1,730 -
Notes receivable, related parties 3,000 3,000 3,000
Other assets, net 4,591 1,537 3,025
------- ------- -------
Total assets $199,172 $151,324 $189,911
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of
long-term debt $ 10 $ 9 $ 10
Accounts payable and other
accrued expenses 9,148 5,939 8,874
Customer layaway deposits 2,617 2,259 2,174
Income taxes payable 1,391 - -
------- ------ ------
Total current liabilities 13,166 8,207 11,058
Long-term debt, less current
maturities 51,118 17,128 48,123
Deferred tax liability 24 - 24
Other long-term liabilities 127 172 152
------ ------ ------
Total long-term liabilities 51,269 17,300 48,299
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01
a share - Authorized 5,000,000
shares; none issued and outstanding - - -
Class A Non-voting Common stock,
par value $.01 a share - 108 108 108
Authorized 40,000,000 shares;
10,820,586 shares issued and
10,811,553 shares outstanding at
March 31, 1999; 10,820,574 shares
issued and 10,811,541 shares
outstanding at March 31, 1998 and
September 30, 1998
Class B Voting Common stock, par value
$.01 a share - 12 12 12
Authorized 1,198,990 shares in 1999;
1,190,057 shares issued and
outstanding at March 31, 1999,
September 30, 1998 and
March 31, 1998
Additional paid-in capital 114,398 114,398 114,398
Retained earnings 21,060 12,063 16,830
------- ------- -------
135,578 126,581 131,348
Treasury stock (9,033 shares in
1999 and 1998) (35) (35) (35)
Receivables from stockholders (729) (729) (729)
Accumulated foreign currency
translation adjustment (77) - (30)
------- ------- -------
Total stockholders' equity 134,737 125,817 130,554
Total liabilities and ------- ------- -------
stockholders' equity $199,172 $151,324 $189,911
</TABLE> ======= ======= =======
See Notes to Interim Condensed Consolidated Financial Statements
(unaudited).
<PAGE>
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
<TABLE> 1999 1998 1999 1998
------------------- ------------------
<CAPTION> (In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues:
Sales $ 36,325 $ 30,624 $ 70,759 $ 61,550
Pawn service charges 23,542 19,007 49,373 39,994
Other 216 49 366 80
------- ------- ------- -------
Total revenues 60,083 49,680 120,498 101,624
Cost of goods sold 31,101 25,369 60,122 51,449
------- ------- ------- -------
Net revenues 28,982 24,311 60,376 50,175
Operating expenses:
Operations 20,064 15,818 40,252 32,507
Administrative 2,597 3,143 6,945 6,497
Depreciation and amortization 2,196 1,824 4,481 3,622
------- ------- ------- -------
Total operating expenses 24,857 20,785 51,678 42,626
------- ------- ------- -------
Operating income 4,125 3,526 8,698 7,549
Interest expense 819 241 1,665 621
Equity in net income of
unconsolidated affiliate (163) - (273) -
------- ------- ------- -------
Income before income taxes 3,469 3,285 7,306 6,928
Income tax expense 1,318 1,248 2,776 2,632
------- ------- ------- -------
Net income $ 2,151 $ 2,037 $ 4,530 $ 4,296
======= ======= ======= =======
Basic and diluted
earnings per share $ 0.18 $ 0.17 $ 0.38 $ 0.36
======= ======= ======= =======
Cash dividends per common share $ 0.0125 $ - $ 0.0250 $ -
Weighted average shares outstanding
Basic 12,001,598 11,997,817 12,001,598 11,996,813
========== ========== ========== ==========
Diluted 12,007,408 12,011,217 12,008,378 12,011,446
========== ========== ========== ==========
</TABLE>See Notes to Interim Condensed Consolidated Financial
Statements (unaudited).
<PAGE>
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
Six Months Ended
<CAPTION> March 31,
1999 1998
------------------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,530 $ 4,296
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,481 3,622
Deferred income taxes - 525
Loss/(gain) on sale of assets 88 (106)
Income from investment in
unconsolidated affiliate (273) -
Changes in operating assets and liabilities:
Service charge receivable 2,036 3,092
Inventories (3,597) 2,787
Prepaid expenses and other assets (1,927) (1,025)
Accounts payable and accrued expenses 274 (1,719)
Customer layaway deposits 439 336
Other long term liabilities (25) 172
Income taxes recoverable 840 -
Income taxes payable 1,391 (819)
-------- --------
Net cash provided by
operating activities 8,257 11,161
INVESTING ACTIVITIES:
Pawn loans forfeited and transferred
to inventories 38,881 30,395
Pawn loans made (97,761) (80,400)
Pawn loans repaid 65,953 58,787
-------- --------
Net decrease in loans 7,073 8,782
Additions to property, plant, and equipment (13,205) (5,082)
Acquisitions, net of cash acquired (1,501) (2,552)
Investment in unconsolidated affiliate (1,930) (10,362)
Sale of assets - 203
-------- --------
Net cash used in investing activities (9,563) (9,011)
FINANCING ACTIVITIES:
Payment of dividends (300) -
Proceeds from bank borrowings 18,000 17,000
Payments on borrowings (15,005) (19,005)
-------- -------
Net cash used by financing activities 2,695 (2,005)
-------- -------
Increase in cash and cash equivalents 1,389 145
Cash and cash equivalents at beginning of period 1,328 829
-------- -------
Cash and cash equivalents at end of period $ 2,717 $ 974
======== =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Foreign currency translation adjustment $ (47) $ -
Issuance of common stock to 401(k) Plan $ - $ 60
======== =======
</TABLE>
See Notes to Interim Condensed Consolidated Financial Statements
(unaudited).
<PAGE>
EZCORP, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
March 31, 1999
Note A - Basis of Presentation The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring entries) considered necessary for
a fair presentation have been included. The accompanying
financial statements should be read with the Notes to
Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the year ended September 30, 1998.
The Company's business is subject to seasonal variations,
and operating results for the three- and six-month periods ended
March 31, 1999 are not necessarily indicative of the results of
operations for the full fiscal year.
Note B - Accounting Principles and Practices
The provision for federal income taxes has been calculated
based on the Company's estimate of its effective tax rate for the
full fiscal year.
The Company provides inventory reserves for shrinkage and
cost in excess of market value. The Company estimates these
reserves using analysis of sales trends, inventory aging, sales
margins and shrinkage on inventory. The inventory reserves were
$6.9 million, $6.8 million, and $7.0 million at March 31, 1999,
September 30, 1998 and March 31, 1998, respectively.
Property and equipment is shown net of accumulated
depreciation of $33.4 million, $29.5 million and $26.0 million at
March 31, 1999 and September 30, 1998, and March 31, 1998,
respectively.
Note C - Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE> Three Months Ended Six Months Ended
<CAPTION> March 31, March 31,
1999 1998 1999 1998
------------------ ----------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Numerator
Numerator for basic and diluted
earnings per share - net income $ 2,151 $ 2,037 $ 4,530 $ 4,296
Denominator ====== ====== ====== ======
Denominator for basic earnings
per share - weighted average
shares 12,002 11,998 12,002 11,997
Effect of dilutive securities:
Employee stock options - 2 - 3
Warrants 5 11 6 11
------ ------ ------ ------
Dilutive potential common shares 5 13 6 14
Denominator for diluted earnings ------ ------ ------ ------
per share - adjusted weighted
average shares and assumed
conversions 12,007 12,011 12,008 12,011
Basic earnings per share $ 0.18 $ 0.17 $ 0.38 $ 0.36
===== ===== ===== =====
Diluted earnings per share $ 0.18 $ 0.17 $ 0.38 $ 0.36
</TABLE> ===== ===== ===== =====
<PAGE>
EZCORP, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
March 31, 1999
For the three months ended March 31, 1999, options to
purchase 1,655,992 weighted average shares of common stock at an
average price of $11.23 per share were outstanding. For the six
months ended March 31, 1999, options to purchase 1,459,771
weighted average shares of common stock at an average price of
$11.40 per share were outstanding. These options were not
included in the computation of diluted earnings per share because
the options' exercise price was greater than the average market
price of the common shares and, therefore, the effect would be
anti-dilutive.
For the three months ended March 31, 1998, options to
purchase 629,519 weighted average shares of common stock at an
average price of $13.35 per share were outstanding. For the six
months ended March 31, 1998, options to purchase 592,088 weighted
average shares of common stock at an average price of $13.46 per
share were outstanding. These options were not included in the
computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the
common shares and, therefore, the effect would be anti-dilutive.
Note D - Investment in Unconsolidated Affiliate
On October 16, 1998, the Company acquired an additional
1,896,666 newly issued common shares of Albemarle & Bond
Holdings, plc ("A&B"), for approximately $2 million. Following
this purchase the Company owns 13,276,666 common shares of A&B,
or approximately of 29.9% of the total outstanding shares.
The Company accounts for its investment in A&B using the
equity method. A&B reports its results to the public every six
months and the most recently reported period ended December 31,
1998. The six months ended March 31, 1999 include the Company's
percentage of A&B's earnings for July through December 1998.
Note E - Litigation
From time to time, the Company is involved in litigation
relating to claims arising from its normal business operations.
Currently, the Company is a defendant in several lawsuits. Some
of these lawsuits involve claims for substantial amounts. While
the ultimate outcome of these lawsuits cannot be ascertained,
after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect
on the Company's financial condition. There can be no assurance,
however, that this will be the case.
Note F - Comprehensive Income
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. Comprehensive income
includes net income and other revenues, expenses, gains and
losses that are excluded from net income but are included as a
component of total shareholders' equity. Comprehensive income
for the three and six months ended March 31, 1999 was
approximately $2,038,000 and 4,483,000, respectively. The
difference between comprehensive income and net income is
comprised of the effect of currency translation adjustments and
hedging activity in accordance with Financial Accounting
Standards Board Statement No. 52, "Foreign Currency Translation."
The accumulated balance of foreign currency and hedging activity,
excluded from net income, is presented in the Condensed
Consolidated Balance Sheets as "Accumulated Foreign Currency
Translation Adjustment."
<PAGE>
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations
The discussion in this section of this report contains
forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not
limited to, those discussed in this section and those
discussed elsewhere in this report.
Second Quarter Ended March 31, 1999 vs. Second Quarter Ended
March 31, 1998
The following table sets forth selected, unaudited,
consolidated financial data with respect to the Company for
the Three-months ended March 31, 1999 and 1998.
<TABLE> Three Months Ended % or
<CAPTION> March 31,(a) Point
1999 1998 Change(b)
------------------- ---------
<S> <C> <C> <C>
Net Revenues:
Sales $36,325 $30,624 18.6%
Pawn service charges 23,542 19,007 23.9%
Other 216 49 340.8%
------ ------
Total revenues 60,083 49,680 20.9%
Cost goods sold 31,101 25,369 22.6%
------ ------
Net revenues $28,982 $24,311 19.2%
====== ======
Other Data:
Gross profit as a percent
of sales 14.4% 17.2% (2.8) pts.
Average annual inventory
turnover 2.5x 2.6x (0.1) x
Average inventory balance
per location as of the
end of the quarter $150 $140 7.1%
Average loan balance per
location as of the end
of the quarter $135 $132 2.3%
Average yield on loan
portfolio 210% 211% (1.0) pt.
Average redemption rate 77% 80% (3.0) pts.
Expenses as a Percent of Total Revenues:
Operating 33.4% 31.8% 1.6 pts.
Administrative 4.3% 6.3% (2.0) pts.
Depreciation and
amortization 3.7% 3.7% - pt.
Interest, net 1.4% 0.5% 0.9 pt.
Locations in Operation:
Beginning of period 304 250
Acquired 2 -
Established 12 12
Sold, combined or closed - -
--- ---
End of period 318 262
=== ===
Average locations in operation
during the period(c) 311.0 256.0
</TABLE> ===== =====
- ------------------------------
a In thousands, except percentages, inventory turnover
and store count.
b In comparing the period differences between dollar
amounts or store counts, a percentage change is used.
In comparing the period differences between two
percentages, a percentage point (pt.) change is used.
c Average locations in operation during the period is
calculated based on the average of the stores operating
at the beginning and end of such period.
<PAGE>
Six Months Ended March 31, 1999 vs. Six Months Ended March
31, 1998
The following table sets forth selected, unaudited,
consolidated financial data with respect to the Company for
the Six-months ended March 31, 1999 and 1998.
<TABLE> Six Months Ended % or
<CAPTION> March 31,(a) Point
1999 1998 Change(b)
----------------- --------
<S> <C> <C> <C>
Net Revenues:
Sales $ 70,759 $ 61,550 15.0%
Pawn service charges 49,373 39,994 23.5%
Other 366 80 357.5%
------- -------
Total revenues 120,498 101,624 18.6%
Cost of goods sold 60,122 51,449 16.9%
------- -------
Net revenues $ 60,376 $ 50,175 20.3%
======= =======
Other Data:
Gross profit as a
percent of sales 15.0% 16.4% (1.4) pts.
Average annual inventory
turnover 2.5x 2.6x (0.1) pts.
Average inventory balance
per location as of the
end of the quarter $150 $140 7.1%
Average loan balance per
location as of the end
of the quarter $135 $132 2.3%
Average yield on loan
portfolio 210% 208% 2.0 pts.
Average redemption rate 76% 78% (2.0) pts.
Expenses as a Percent of Total Revenues:
Operating 33.4% 32.0% 1.4 pts.
Administrative 5.8% 6.4% (0.6) pts.
Depreciation and
amortization 3.7% 3.6% 0.1 pt.
Interest, net 1.4% 0.6% 0.8 pt.
Locations in Operation:
Beginning of period 286 249
Acquired 29 2
Established 3 12
Sold, combined or closed - (1)
--- ---
End of period 318 262
=== ===
Average locations in operation
during the period(c) 302.0 255.5
</TABLE> ===== =====
- ------------------------------
a In thousands, except percentages, inventory turnover
and store count.
b In comparing the period differences between dollar
amounts or store counts, a percentage change is used.
In comparing the period differences between two
percentages, a percentage point (pt.) change is used.
c Average locations in operation during the period is
calculated based on the average of the stores operating
at the beginning and end of such period.
<PAGE>
Results of Operations
The following discussion compares results for the Three- and
Six-month periods ended March 31, 1999("Fiscal 1999 Periods")
to the Three- and Six-month periods ended March 31, 1998 ("Fiscal
1998 Periods"). The discussion should be read in conjunction
with the accompanying financial statements and related notes.
Early in the Company's 1998 fiscal year, the Company began
to expand rapidly primarily through newly established stores.
The Company expects these newly established stores to be
unprofitable for the first three to four quarters that they are
open as they develop their loan and sales customer base. Despite
this unprofitable startup period, the Company believes that newly
established stores will provide a better return on invested
capital when compared to most acquisitions. During the Three-
month Fiscal 1999 Period, the Company opened 12 newly established
stores and acquired two stores. During the 12 months ended March
31, 1999, the Company opened 51 newly established stores and
acquired five stores.
The Company's primary activity is the making of small, non-
recourse loans secured by tangible personal property. The income
earned on this activity is pawn service charge revenue. For the
Three-month Fiscal 1999 Period, pawn service charge revenue
increased $4.5 million from the Three-month Fiscal 1998 Period to
$23.5 million. This resulted from an increase in same store pawn
service charge revenue ($3.0 million) and the pawn service charge
revenue from new stores not open the full three-month period
($1.5 million). Average same store pawn loan balances were 17
percent above the prior year. The annualized yield on the
average pawn loan balance decreased one percentage point from the
Three-month Fiscal 1998 Period to 210 percent.
For the Six-month Fiscal 1999 Period, pawn service charge
revenue increased $9.4 million from the Six-month Fiscal 1998
Period to $49.4 million. This resulted from an increase in same
store pawn service charge revenue ($6.5 million) and the pawn
service charge revenue from new stores not open the full six-
month period ($2.9 million). At March 31, 1999, average same
store pawn loan balances were 15 percent above the prior year.
The annualized yield on the average pawn loan balance increased
two percentage points from the Six-month Fiscal 1998 Period to
210 percent. Variations in the annualized loan yield, as we saw
between these periods, are due generally to a mix shift in the
loan portfolio between loans with different loan yields.
A secondary, but related, activity of the Company is the
sale of merchandise, primarily collateral forfeited from its
lending activity. For the Three-month Fiscal 1999 Period, sales
increased approximately $5.7 million from the Three-month Fiscal
1998 Period to approximately $36.3 million. This resulted from
an increase in same store merchandise sales ($2.0 million), new
store sales ($2.9 million), and an increase in jewelry scrapping
and wholesale activity ($0.8 million). Same store sales for the
Three-month Fiscal 1999 Period increased six percent from the
Three-month Fiscal 1998 Period. Inventory turnover, at 2.5
times, was slightly lower in the Three-month Fiscal 1999 Period
compared to the Three-month Fiscal 1998 Period largely due to new
stores which typically have slower inventory turnover.
For the Six-month Fiscal 1999 Period, sales increased
approximately $9.2 million from the Six-month Fiscal 1998 Period
to approximately $70.8 million. This resulted from an increase
in same store merchandise sales ($3.2 million), new store sales
($5.6 million), and an increase in jewelry scrapping and
wholesale activity ($0.4 million). Same store sales for the Six-
month Fiscal 1999 Period increased five percent from the Six-
month Fiscal 1998 Period. Inventory turnover, at 2.5 times, was
slightly lower in the Six-month Fiscal 1999 Period compared to
the Six-month Fiscal 1998 Period largely due to new stores.
The Company's gross margin level (gross profit as a
percentage of merchandise sales) results from, among other
factors, the composition, quality and age of its inventory. At
March 31, 1999, and 1998, respectively, the Company's inventories
consisted of approximately 59 and 66 percent jewelry (e.g.
ladies' and men's rings, chains, bracelets, etc.) and 41 and 35
percent general merchandise (e.g., televisions, VCRs, tools,
sporting goods, musical instruments, firearms, etc.). At March
31, 1999 and 1998, respectively, 86 percent and 87 percent of the
jewelry was less than twelve months old based on the Company's
date of acquisition (date of forfeiture for collateral or date of
purchase) as was approximately 95 percent of the general
merchandise inventory for each period.
<PAGE>
For the Three-month Fiscal 1999 Period, gross profits as a
percentage of sales decreased 2.8 percentage points from the
Three-month Fiscal 1998 Period to 14.4 percent. This decrease
results from lower gross margins on merchandise sales (1.7
percentage points), an increase in inventory shrinkage when
measured as a percentage of merchandise sales (up 1.0 percentage
point to approximately 2.2 percent) and lower gross margins on
wholesale and scrap jewelry sales (0.1 percentage point).
For the Six-month Fiscal 1999 Period, gross profits as a
percentage of sales decreased 1.4 percentage points from the Six-
month Fiscal 1998 Period to 15.0 percent. This decrease results
from lower margins on merchandise sales (1.5 percentage points),
and increase in inventory shrinkage when measured as a percentage
of merchandise sales (up 0.5 percentage point to approximately
1.7 percent) offset by higher margins on wholesale and scrap
jewelry sales (0.6 percentage point).
In the Three-month Fiscal 1999 Period, operating expenses as
a percentage of total revenues increased 1.6 percentage points
from the Three-month Fiscal 1998 Period to 33.4 percent. This
increase results primarily from new stores which typically
experience higher levels of operating expense relative to
revenues. Administrative expenses decreased 2.0 percentage points
in the Three-month Fiscal 1999 Period to 4.3 percent. This
decrease results from the higher levels of revenues and lower
levels of expenses in the Three-month Fiscal 1999 Period.
In the Six-month Fiscal 1999 Period, operating expenses as a
percentage of total revenues increased 1.4 percentage points from
the Six-month Fiscal 1998 Period to 33.4 percent. This increase
results primarily from new stores which typically experience
higher levels of operating expense relative to revenues.
Administrative expenses decreased 0.6 of a percentage point in
the Six-month Fiscal 1999 Period to 5.8 percent. This decrease
results from the higher levels of revenues relative to these
expenses in the Six-month Fiscal 1999 Period.
Depreciation and amortization expense as a percent of total
revenues remained unchanged in the Three-month Fiscal 1999 Period
and increased by 0.1 of a percentage point from the Six-month
Fiscal 1998 Period to 3.7 percent. Interest expense increased
by 0.9 and 0.8 of a percentage point, respectively, from the
Fiscal 1998 Periods largely due to increased average debt
balances.
Liquidity and Capital Resources
Net cash provided by operating activities for the Fiscal
1999 Period was $8.3 million as compared to $11.2 million
provided in the Fiscal 1998 Period. Increases in inventories,
primarily related to new stores, were partially offset by
improved operating results and other working capital changes.
Net cash used by investing activities was $9.6 million for the
Fiscal 1999 Period compared to $9.0 million used in the Fiscal
1998 Period. The change is due to smaller decreases in pawn loan
balances in the Fiscal 1999 Period compared to the Fiscal 1998
Period, higher levels of capital expenditures and acquisitions in
the Fiscal 1999 Period compared to the Fiscal 1998 Period and the
investment in the unconsolidated affiliate, Albemarle & Bond
Holdings, plc in the Fiscal 1998 Period.
In the Fiscal 1999 Period, the Company invested
approximately $13.2 million to open twenty-nine newly established
stores, to acquire three stores, to upgrade or replace existing
equipment and computer systems, and for improvements at existing
stores. The Company funded these expenditures largely from cash
flow provided by operating activities. The Company plans to open
approximately 60 stores during fiscal 1999, including the 32
stores already opened. The Company anticipates that cash flow
from operations and funds available under its existing bank line
of credit should be adequate to fund these capital expenditures
and expected pawn loan growth during the coming year. There can
be no assurance, however, that the Company's cash flow and line
of credit will provide adequate funds for these capital
expenditures.
On December 10, 1998, the Company completed a new
$110,000,000 syndicated credit facility. The new credit
facility is unsecured and matures December 3, 2001. Terms of the
credit agreement require, among other things, that the Company
meet certain financial covenants. The outstanding balance under
the facility
<PAGE>
bears interest, payable monthly, at the agent bank's Prime Rate
or Eurodollar rate plus 87.5 to 137.5 basis points, depending on
certain performance criteria. In addition, annually the Company
pays an unused commitment fee equal to a fixed rate of 25 basis
points of the unused amount of the total commitment. At March
31, 1999, the Company had $51 million outstanding on the line of
credit.
Seasonality
Historically, pawn service charge revenues are highest in
the fourth fiscal quarter (July, August and September) due to
higher loan demand during the summer months and merchandise sales
are highest in the first and second fiscal quarters (October
through March) due to the holiday season and tax refunds.
The Year 2000 Issue
The Company, like many companies, faces the Year 2000 Issue.
This is a result of computer programs being written using two
digits rather than four (for example, "99" for 1999) to define
the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things a temporary inability
to process transactions or engage in similar normal business
activities.
The Company's plan to resolve the Year 2000 Issue involves
the following four phases: assessment, remediation, testing, and
implementation. To date, the Company has fully completed its
assessment of all systems that could be affected by the Year
2000. The completed assessment indicated that the information
technology system which would be affected is the Company's store
level point of sale system. For this exposure, the Company is
100 percent complete on the assessment, remediation and testing
phases and 70 percent complete with regard to the implementation
phase. It was 100 percent complete with respect to software
reprogramming, replacement and testing by April 1999. It expects
to be 100 percent complete with implementation by June 1999. In
addition, the Company has gathered information about the Year
2000 compliance status regarding relationships it has with
various third parties and continues to monitor their compliance.
To date, the Company is not aware of any third party with a Year
2000 Issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the
Company has no means of ensuring that all third parties will be
Year 2000 ready.
The Company will utilize internal resources to reprogram,
test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is
estimated to be less than $100,000 and is being funded through
operating cash flows. These costs are being expensed as
incurred.
The Company's management believes it has an effective
program in place to resolve the Year 2000 Issue. As noted above,
the Company has not completed all necessary phases of this
program. In the event the Company does not complete all phases,
the Company may not be able to process customer transactions
which could have a material impact on the operations of the
Company. In addition, disruptions in the economy generally
resulting from Year 2000 Issues could also materially adversely
affect the Company. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plans in place in
the event it does not complete all phases of the Year 2000
program. The Company plans to evaluate the status of completion
in May 1999, and determine at that time whether such a plan is
necessary.
<PAGE>
Qualitative and Quantitative Disclosures about Market Risk
The following discussion about the Company's market risk
disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the forward-
looking statements. The Company is exposed to market risk
related to changes in interest rates and foreign currency
exchange rates. The Company does not use derivative financial
instruments.
The Company's earnings are affected by changes in interest
rates due to the impact those changes have on its variable-rate
debt instruments. The majority of the Company's long-term debt
at March 31, 1999 is a variable-rate debt instrument. There have
been no material changes relating to interest rates since the
Company's most recent fiscal year, which ended on September 30,
1998.
The Company's earnings and financial position are affected
by foreign exchange rate fluctuations related to the equity
investment in Albemarle & Bond Holdings, plc ("A&B"). A&B's
operation's functional currency is the U.K. pound. The U.K.
pound exchange rate can directly and indirectly impact the
Company's results of operations and financial position in several
manners, including potential economic recession in the U.K.
resulting from a devalued pound. The impact on the Company's
financial position and results of operations of a hypothetical
change in the exchange rate between the U.S. dollar and the U.K.
pound cannot be reasonably estimated. During Fiscal 1998, the
U.K. pound weakened resulting in a cumulative translation
adjustment loss of $30,000. During the second fiscal quarter
ended March 31, 1999, the U.K. pound weakened resulting in a
cumulative translation adjustment loss of $77,000. On March 31,
1999, the U.S. dollar closed at 1.6120 to 1.00 U.K. pound, a
decrease from 1.6981 at September 30, 1998. No assurance can be
given as to the future valuation of the U.K. pound and how
further movements in the pound could effect future earnings or
the financial position of the Company.
Forward-Looking Information
This Quarterly Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than
statement of historical information provided herein are forward-
looking and may contain information about financial results,
economic conditions, trends and known uncertainties. The Company
cautions the reader that actual results could differ materially
from those expected by the Company depending on the outcome of
certain factors, including without limitation (i) fluctuations in
the Company's inventory and loan balances, inventory turnover,
average yield on loan portfolio, redemption rates, labor and
employment matters, competition, operating risk, acquisition and
expansion risk, liquidity and capital requirements and the effect
of government and environmental regulations and (ii) adverse
changes in the market for the Company's services. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company
undertakes no obligations to release publicly the results of any
revisions to these forward-looking statements which may be made
to reflect events or circumstances after the date hereon,
including without limitation, changes in the Company's business
strategy or planned capital expenditures, or to reflect the
occurrence of unanticipated events.
<PAGE>
PART II
Item 1. Legal Proceedings
From time to time, the Company is involved in litigation
relating to claims arising from its normal business operations.
Currently, the Company is a defendant in several lawsuits. Some
of these lawsuits involve claims for substantial amounts. While
the ultimate outcome of these lawsuits cannot be ascertained,
after consultation with counsel, the Company believes the
resolution of these suits will not have a material adverse effect
on the Company's financial condition. There can be no assurance,
however, that this will be the case.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
On March 1, 1999, the sole shareholder of the Class B Voting
Common Stock approved Ernst & Young LLP to serve as the Company's
auditors for the ensuing year and elected the following persons
as directors of the Company:
Sterling B. Brinkley Mark C. Pickup
Vincent A. Lambiase Richard D. Sage
Dan N. Tonissen John E. Cay, III
J. Jefferson Dean Steve Price
The Company's Class B Voting Common Stock was the only class
entitled to vote on these matters. The sole voting shareholder of
the Company holds all 1,190,057 shares of outstanding Class B
Voting Common Stock.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits Incorporated by
Number Description Reference to
---------- ------------------------ --------------
Exhibit 27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the
quarter ended March 31, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
EZCORP, INC.
----------------------------
(Registrant)
Date: May 14, 1999 By: /s/ DAN N. TONISSEN
----------------------------
(Signature)
Dan N. Tonissen
Senior Vice President and
Chief Financial Officer
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