13
<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 June 30, 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 June 30, 1999, 10,822,010 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 -
June 30, 1999, June 30, 1998 and September 30, 1998 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended June 30, 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
June 30, June 30, September 30,
1999 1998 1998
-----------------------------------
(unaudited)(unaudited)
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 1,889 $ 1,624 $ 1,328
Pawn loans 51,891 43,057 49,632
Service charges receivable 15,446 12,523 14,843
Inventory, net 50,212 37,457 44,011
Deferred tax asset 1,882 1,364 1,882
Income tax recoverable 230 - 840
Prepaids and other assets 3,622 2,851 3,170
------- ------- -------
Total current assets 125,172 98,876 115,706
Investment in unconsolidated
affiliate 12,998 10,583 10,909
Property and equipment, net 56,483 37,752 43,666
Other assets:
Goodwill, net 14,013 13,797 13,605
Deferred tax asset - 1,730 -
Notes receivable, related
parties 3,000 3,000 3,000
Other assets, net 4,590 1,568 3,025
------- ------- -------
Total assets $216,256 $167,306 $189,911
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current maturities of
long-term debt $ 10 $ 9 $ 10
Accounts payable and other
accrued expenses 8,599 6,055 8,874
Customer layaway deposits 2,256 1,982 2,174
------- ------- -------
Total current liabilities 10,865 8,046 11,058
Long-term debt, less current
maturities 70,115 31,126 48,123
Deferred tax liability 24 - 24
Other long-term liabilities 114 165 152
------- ------- -------
Total long-term liabilities 70,253 31,291 48,299
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value
$.01 per share - Authorized
5,000,000 shares; none issued
and outstanding - - -
Class A Non-voting Common
stock, par value $.01 per share -
Authorized 40,000,000 shares;
10,831,043 shares issued and
10,822,010 shares outstanding
at June 30, 1999; 10,820,574
shares issued and 10,811,541
shares outstanding at June 30,
1998 and September 30, 1998 108 108 108
Class B Voting Common stock,
par value $.01 per share -
Authorized 1,198,990 shares
in 1999; 1,190,057 shares
issued and outstanding at
June 30, 1999, September 30,
1998 and June 30, 1998 12 12 12
Additional paid-in capital 114,470 114,398 114,398
Retained earnings 21,379 14,215 16,830
------- ------- -------
135,969 128,733 131,348
Treasury stock (9,033 shares) (35) (35) (35)
Receivables from stockholders (729) (729) (729)
Accumulated foreign currency
translation adjustment (67) - (30)
------- ------- -------
Total stockholders' equity 135,138 127,969 130,554
Total liabilities and ------- ------- -------
stockholders' equity $216,256 $167,306 $189,911
</TABLE> ======= ======= =======
See accompanying notes.
<PAGE>
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------ -----------------
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Revenues:
Sales $ 29,124 $ 24,883 $ 99,883 $ 86,433
Pawn service charges 24,563 20,268 73,936 60,263
Other 215 59 581 139
------- ------- ------- -------
Total revenues 53,902 45,210 174,400 146,835
Cost of goods sold 25,382 20,231 85,504 71,680
------- ------- ------- -------
Net revenues 28,520 24,979 88,896 75,155
Operating expenses:
Operations 21,059 16,314 61,311 48,822
Administrative 3,600 2,903 10,545 9,400
Depreciation and
amortization 2,458 1,930 6,939 5,553
------- ------- ------- -------
Total operating
expenses 27,117 21,147 78,795 63,775
------- ------- ------- -------
Operating income 1,403 3,832 10,101 11,380
Interest expense 849 358 2,514 979
Equity in net income of
unconsolidated affiliate (75) - (348) -
------- ------- ------- -------
Income before income taxes 629 3,474 7,935 10,401
Income tax expense 160 1,320 2,936 3,952
------- ------- ------- -------
Net income $ 469 $ 2,154 $ 4,999 $ 6,449
======= ======= ======= =======
Basic and diluted earnings
per share $ 0.04 $ 0.18 $ 0.42 $ 0.54
======= ======= ======= =======
Cash dividends per common
share $ 0.0125 $ - $ 0.0375 $ -
======= ======= ======= =======
Weighted average shares
outstanding
Basic 12,011,263 12,001,598 12,004,821 11,998,408
========== ========== ========== ==========
Diluted 12,015,106 12,017,688 12,010,808 12,014,366
========== ========== ========== ==========
</TABLE>See accompanying notes.
<PAGE>
EZCORP, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
June 30,
1999 1998
-------------------
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,999 $ 6,449
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 6,939 5,553
Deferred income taxes - 525
Loss/(gain) on sale of assets 149 (106)
Income from investment in
unconsolidated affiliate (348) -
Changes in operating assets and
liabilities:
Service charges receivable (603) 730
Inventory (6,052) 1,967
Prepaids and other assets (1,788) (1,253)
Accounts payable and other
accrued expenses (201) (1,604)
Customer layaway deposits 78 59
Other long-term liabilities (38) 165
Income taxes recoverable 610 -
Income taxes payable - (821)
------- -------
Net cash provided by operating
activities 3,745 11,664
INVESTING ACTIVITIES:
Pawn loans forfeited and transferred to
inventory 55,589 42,653
Pawn loans made (152,493) (127,722)
Pawn loans repaid 94,971 85,268
-------- --------
Net (increase)/decrease in loans (1,933) 199
Additions to property, plant, and equipment (19,213) (10,254)
Acquisitions, net of cash acquired (1,803) (2,427)
Investment in unconsolidated affiliate (1,777) (10,583)
Sale of assets - 203
------- -------
Net cash used in investing activities (24,726) (22,862)
FINANCING ACTIVITIES:
Payment of dividends (450) -
Proceeds from bank borrowings 38,000 31,000
Payments on borrowings (16,008) (19,007)
------- -------
Net cash provided by
financing activities 21,542 11,993
------- -------
Increase in cash and cash equivalents 561 795
Cash and cash equivalents at beginning of period 1,328 829
------- -------
Cash and cash equivalents at end of period $ 1,889 $ 1,624
======= =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Foreign currency translation adjustment $ (37) $ -
Issuance of common stock to 401(k) Plan $ 72 $ 60
</TABLE>
See accompanying notes.
<PAGE>
EZCORP, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
June 30, 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 nine-month periods ended
June 30, 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
$7.1 million, $6.6 million, and $6.8 million at June 30, 1999,
June 30, 1998 and September 30, 1998, respectively.
Property and equipment is shown net of accumulated
depreciation of $34.5 million, $27.7 million and $29.5 million at
June 30, 1999 and June 30, 1998, and September 30, 1998,
respectively.
Note C - Earnings Per Share
The following table sets forth the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------ -----------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Numerator
Numerator for basic and diluted
earnings per share - net income $ 469 $ 2,154 $ 4,999 $ 6,449
Denominator ====== ======= ======= =======
Denominator for basic earnings
per share - weighted
average shares 12,011 12,002 12,005 11,998
Effect of dilutive securities:
Employee stock options - 4 - 4
Warrants 4 12 6 12
------ ------ ------ ------
Dilutive potential common
shares 4 16 6 16
Denominator for diluted earnings ------ ------ ------ ------
per share - adjusted weighted
average shares and assumed
conversions 12,015 12,018 12,011 12,014
====== ====== ====== ======
Basic earnings per share $ 0.04 $ 0.18 $ 0.42 $ 0.54
====== ====== ====== ======
Diluted earnings per share $ 0.04 $ 0.18 $ 0.42 $ 0.54
</TABLE> ====== ====== ====== ======
<PAGE>
EZCORP, Inc. and Subsidiaries
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
For the three months ended June 30, 1999, options to
purchase 1,615,855 weighted average shares of common stock at an
average price of $11.22 per share were outstanding. For the nine
months ended June 30, 1999, options to purchase 1,509,082
weighted average shares of common stock at an average price of
$11.33 per share were outstanding. These options were not
included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market
price of the common shares and, therefore, the effect would be
anti-dilutive.
For the three months ended June 30, 1998, options to
purchase 626,451 weighted average shares of common stock at an
average price of $13.35 per share were outstanding. For the nine
months ended June 30, 1998, options to purchase 603,542 weighted
average shares of common stock at an average price of $13.42 per
share were outstanding. These options were not included in the
computation of diluted earnings per share because the options'
exercise prices were 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 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 nine months ended June 30, 1999 include the Company's
percentage of A&B's earnings for July 1998 through December 1998
and an estimate of earnings for January 1999 through March 1999.
The Company plans to reconcile this amount during its fiscal year
ending September 30, 1999 after the results have been reported to
the public. The Company does not expect the actual results to
differ materially from this estimate.
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 nine-months ended June 30, 1999 was
approximately $479,000 and $4,962,000, respectively. The
difference between comprehensive income and net income is
comprised of the effect of currency translation adjustments 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.
Three Months Ended June 30, 1999 vs. Three Months Ended June
30, 1998
- ------------------------------------------------------------
The following table sets forth selected, unaudited,
consolidated financial data with respect to the Company for
the three-months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Three Months Ended % or
June 30,(a) Point
1999 1998 Change(b)
------------------ --------
<S> <C> <C> <C>
Net Revenues:
Sales $ 29,124 $ 24,883 17.0%
Pawn service charges 24,563 20,268 21.2%
Other 215 59 264.4%
-------- --------
Total revenues 53,902 45,210 19.2%
Cost goods sold 25,382 20,231 25.5%
-------- --------
Net revenues $ 28,520 $ 24,979 14.2%
======== ========
Other Data:
Gross profit as a percent
of sales 12.8% 18.7% (5.9) pts.
Average annual inventory turnover 2.1x 2.2x (0.1)x
Average inventory balance per
location as of the end of the
quarter $154 $136 13.2%
Average loan balance per location
as of the end of the quarter $159 $157 1.3%
Average yield on loan portfolio 210% 211% (1.0) pts.
Average redemption rate 78% 81% (3.0) pts.
Expenses as a Percent of Total Revenues:
Operating 39.1% 36.1% 3.0 pts.
Administrative 6.7% 6.4% 0.3 pt.
Depreciation and amortization 4.6% 4.3% 0.3 pt.
Interest 1.6% 0.8% 0.8 pt.
Locations in Operation:
Beginning of period 318 262
Acquired 1 -
Established 7 13
Sold, combined or closed - -
----- -----
End of period 326 275
Average locations in operation during ===== =====
the period(c) 322.0 268.5
</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>
Nine Months Ended June 30, 1999 vs. Nine Months Ended June
30, 1998
- ------------------------------------------------------------
The following table sets forth selected, unaudited,
consolidated financial data with respect to the Company for
the nine-months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Nine Months Ended % or
June 30,(a) Point
1999 1998 Change(b)
----------------- ---------
<S> <C> <C> <C>
Net Revenues:
Sales $ 99,883 $ 86,433 15.6%
Pawn service charges 73,936 60,263 22.7%
Other 581 139 318.0%
-------- --------
Total revenues 174,400 146,835 18.8%
Cost of goods sold 85,504 71,680 19.3%
-------- --------
Net revenues $ 88,896 $ 75,155 18.3%
======== ========
Other Data:
Gross profit as a percent of sales 14.4% 17.1% (2.7) pts.
Average annual inventory turnover 2.3x 2.4x (0.1)x
Average inventory balance per
location as of the end of the
quarter $154 $136 13.2%
Average loan balance per location
as of the end of the quarter $159 $157 1.3%
Average yield on loan portfolio 208% 207% 1.0 pt.
Average redemption rate 77% 78% (1.0) pts.
Expenses as a Percent of Total Revenues:
Operating 35.2% 33.2% 2.0 pts.
Administrative 6.0% 6.4% (0.4) pt.
Depreciation and amortization 4.0% 3.8% 0.2 pt.
Interest 1.4% 0.7% 0.7 pt.
Locations in Operation:
Beginning of period 286 249
Acquired 4 1
Established 36 26
Sold, combined or closed - (1)
----- -----
End of period 326 275
Average locations in operation during the ===== =====
period(c) 306.0 262.0
</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>
Results of Operations
The following discussion compares results
for the three- and nine-month periods ended June 30, 1999
("Fiscal 1999 Periods") to the three- and nine-month periods
ended June 30, 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 five full 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 seven newly
established stores and acquired one store. During the 12 months
ended June 30, 1999, the Company opened 45 newly established
stores and acquired six 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 $4.3 million from the three-month Fiscal 1998 Period to
$24.6 million. This resulted from an increase in same store pawn
service charge revenue ($2.7 million) and the pawn service charge
revenue from new stores ($1.6 million). Same store pawn loan
balances were fifteen percent above the prior year. The
annualized yield on the pawn loan balance decreased one
percentage point from the three-month Fiscal 1998 Period to 210
percent.
For the nine-month Fiscal 1999 Period, pawn service charge
revenue increased $13.7 million from the nine-month Fiscal 1998
Period to $73.9 million. This resulted from an increase in same
store pawn service charge revenue ($9.4 million) and the pawn
service charge revenue from new stores ($4.3 million). At June
30, 1999, same store pawn loan balances were fifteen percent
above the prior year. The annualized yield on the pawn loan
balance increased one percentage point from the nine-month Fiscal
1998 Period to 208 percent.
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 $4.2 million from the three-month Fiscal
1998 Period to approximately $29.1 million. This resulted from
an increase in same store merchandise sales ($1.7 million), new
store sales ($2.3 million), and an increase in jewelry scrapping
and wholesale activity ($0.2 million). Same store sales for the
three-month Fiscal 1999 Period increased seven percent from the
three-month Fiscal 1998 Period. Inventory turnover, at 2.1
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 nine-month Fiscal 1999 Period, sales increased
approximately $13.4 million from the nine-month Fiscal 1998
Period to approximately $99.9 million. This resulted from an
increase in same store merchandise sales ($4.9 million), new
store sales ($7.9 million), and an increase in jewelry scrapping
and wholesale activity ($0.6 million). Same store sales for the
nine-month Fiscal 1999 Period increased six percent from the nine-
month Fiscal 1998 Period. Inventory turnover, at 2.3 times, was
slightly lower in the nine-month Fiscal 1999 Period compared to
the nine-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
June 30, 1999, and 1998, respectively, the Company's inventories
consisted of approximately 60 and 65 percent jewelry (e.g.
ladies' and men's rings, chains, bracelets, etc.) and 40 and 35
percent general merchandise (e.g., televisions, VCRs, tools,
sporting goods, musical instruments, firearms, etc.). For both
periods ending June 30, 1999 and 1998, 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 the three-month Fiscal 1999 Period, gross profits as a
percentage of sales decreased 5.9 percentage points from the
three-month Fiscal 1998 Period to 12.8 percent. This decrease
results from lower gross margins on merchandise sales (4.7
percentage points), an increase in inventory shrinkage when
measured as a percentage
<PAGE>
of merchandise sales (up 0.6 percentage point to approximately
1.9 percent) and lower gross margins on wholesale and scrap
jewelry sales (0.6 percentage point). The lower gross margins on
merchandise sales results from price reductions and discounting
to enhance demand for merchandise and the selling of higher cost
merchandise. The lower gross margins on the selling of scrap
jewelry can largely be attributed to year over year reductions in
gold prices.
For the nine-month Fiscal 1999 Period, gross profits as a
percentage of sales decreased 2.7 percentage points from the nine-
month Fiscal 1998 Period to 14.4 percent. This decrease results
from lower margins on merchandise sales (2.5 percentage points),
and increase in inventory shrinkage when measured as a percentage
of merchandise sales (up 0.5 percentage point to approximately
1.8 percent) offset by higher margins on wholesale and scrap
jewelry sales (0.3 percentage point).
In the three-month Fiscal 1999 Period, operating expenses as
a percentage of total revenues increased 3.0 percentage points
from the three-month Fiscal 1998 Period to 39.1 percent. This
increase results primarily from new stores which typically
experience higher levels of operating expense relative to
revenues. Additionally, the Company experienced higher labor
costs resulting from a competitive labor market in some of the
areas in which the Company operates. Administrative expenses
increased 0.3 of a percentage point in the three-month Fiscal
1999 Period to 6.7 percent.
In the nine-month Fiscal 1999 Period, operating expenses as
a percentage of total revenues increased 2.0 percentage points
from the nine-month Fiscal 1998 Period to 35.2 percent. This
increase results primarily from new stores which typically
experience higher levels of operating expense relative to
revenues. Administrative expenses decreased 0.4 of a percentage
point in the nine-month Fiscal 1999 Period to 6.0 percent.
Depreciation and amortization expense as a percent of total
revenues increased 0.3 of a percentage point in the three-month
Fiscal 1999 Period to 4.6 percent and increased by 0.2 of a
percentage point from the nine-month Fiscal 1998 Period to 4.0
percent. This increase results primarily from new stores.
Interest expense increased by 0.8 and 0.7 of a percentage point,
respectively, from the Fiscal 1998 Periods largely due to
increased average debt balances primarily to fund the new store
growth.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine-month
Fiscal 1999 Period was $3.7 million as compared to $11.7 million
provided in the nine-month Fiscal 1998 Period. Increases in
inventory, in our core stores and new stores, and lower operating
results were partially offset by other working capital changes.
Net cash used by investing activities was $24.7 million for the
nine-month Fiscal 1999 Period compared to $22.9 million used in
the nine-month Fiscal 1998 Period. The change is due to
increases in pawn loan balances in the nine-month Fiscal 1999
Period compared to the nine-month Fiscal 1998 Period, higher
levels of capital expenditures and acquisitions in the nine-month
Fiscal 1999 Period compared to the nine-month Fiscal 1998 Period
and a smaller incremental investment in the unconsolidated
affiliate, Albemarle & Bond Holdings, plc in the nine-month
Fiscal 1999 Period compared to the investment made in the nine-
month Fiscal 1998 Period.
In the nine-month Fiscal 1999 Period, the Company invested
approximately $19.2 million to open thirty-six newly established
stores, to acquire four 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 and borrowings on the
Company's credit facility. The Company plans to open 45 to 50
stores during fiscal 1999, including the 40 stores opened in the
first nine months of the fiscal year. 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
<PAGE>
other things, that the Company meet certain financial covenants.
The outstanding balance under the facility 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 June 30, 1999, the
Company had $70 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 only
information technology system expected to 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 is 98% complete with implementation and
expects to be 100 percent complete with implementation by August
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 August 1999, and determine at that time whether such a plan is
necessary.
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.
<PAGE>
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 June 30, 1999 is a variable-rate debt instrument. There have
been no material changes relating to the Company's 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
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. Through Fiscal 1998, the U.K. pound
weakened resulting in a cumulative translation adjustment loss of
$30,000. During the third fiscal quarter ended June 30, 1999,
the U.K. pound weakened resulting in a cumulative translation
adjustment loss of $67,000. On June 30, 1999, the U.S. dollar
closed at 1.5763 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 affect 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
Effective April 26, 1999, the sole shareholder of the Class
B Voting Common Stock approved, ratified and adopted (i)
amendments to the terms of loans previously made to two executive
officers; and (ii) the grant of stock options to four executive
officers. Both actions were consistent with a November 5, 1998
resolution of the Compensation Committee of the Company's Board
of Directors. The terms of such loan amendments and stock option
grants were more fully described in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998.
The Company's Class B Voting Common Stock was the only class
entitled to vote on these matters. The sole voting shareholder
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 June 30, 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: August 13, 1999 By: /s/ DAN N. TONISSEN
-------------------------------
(Signature)
Dan N. Tonissen
Senior Vice President and
Chief Financial Officer
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