Item 1. Business
General
First Cash Financial Services, Inc. (the "Company") is the nation's third largest publicly traded pawnshop operator and currently owns 116 pawn stores in Texas, Oklahoma, Washington, D.C., Maryland, Missouri, South Carolina, Virginia and Mexico. The Company's pawn stores engage in both consumer finance and retail sales activities. The Company's pawn stores provide a convenient source for consumer loans, lending money against pledged tangible personal property such as jewelry, electronic equipment, tools, sporting goods and musical equipment. These pawn stores also function as retailers of previously-owned merchandise acquired in forfeited pawn transactions and over-the-counter purchases from customers. The Company's pawn stores also offer short-term, secured advances ("payday advances"). The Company's primary business plan is to significantly expand its payday advance operations by opening new stores in Texas and other states, by accelerating the growth of its joint venture, Cash & Go, Ltd, which operates payday advance and check cashing kiosks inside convenience stores, and by expanding its payday advance operations in its existing pawn stores.
The Company also currently owns 33 check cashing and payday advance stores in California, Washington, Oregon, Illinois, and Washington, D.C. These stores provide a broad range of consumer financial services, including check cashing, money order sales, wire transfers, bill payment services and payday advances. The Company also owns Answers, etc., a company which provides computer hardware and software to third party check cashing and payday advance operators throughout the country, as well as ongoing technical support. In addition, the Company is a 50% partner in Cash & Go, Ltd., a joint venture, which currently owns and operates 36 financial services kiosks located inside convenience stores. For the year ended December 31, 2000, the Company's revenues were derived 52% from retail activities, 44% from lending activities, and 4% from other sources, including check-cashing fees.
Management believes the pawnshop industry is highly fragmented with approximately 15,000 stores in the United States. The four publicly traded pawnshop companies currently operate approximately 975, or less than 7%, of the pawnshops in the United States. Management believes significant economies of scale, increased operating efficiencies, and revenue growth are achievable by increasing the number of stores under operation and introducing modern merchandising techniques, point-of-sale systems, improved inventory management and store remodeling. In addition, management believes that revenues and operating income of its existing pawn stores can be enhanced by continuing to add consumer financial services, such as payday advances, which will attract new customers to its pawn stores, and provide a broader array of services to its existing customer base. During the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998 , the Company added 2, 10, 20 and 29 pawn stores to its network, respectively.
The Company made its initial entry into the check cashing and payday advance business during the twelve months ended July 31, 1998, with the purchase of 11 stores in California and Washington. Management estimates there are approximately 7,000 such check cashing and payday advance locations throughout the United States. The check cashing and payday advance industry is experiencing rapid growth. During the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, the Company added 2, 4, 16 and 11 check cashing and payday advance stores to its network, respectively.
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, American Loan & Jewelry, Inc., Famous Pawn, Inc., JB Pawn, Inc., Miraglia, Inc., One Iron Ventures, Inc., Capital Pawnbrokers, Inc., Silver Hill Pawn, Inc., Elegant Floors, Inc. and First Cash, S.A. De C.V., First Cash, Ltd., First Cash Corp, First Cash Management, LLC, and First Cash, Inc. 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
The pawnshop industry in the United States is an established industry, with the highest concentration of pawnshops being in the Southeast and Southwest. 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 development of pawnshops. The Company believes that the majority of pawnshops are owned by individuals operating one to three locations. 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 check cashing and payday advance industry is a relatively new industry, and management estimates that there are approximately 7,000 check cashing and payday advance locations throughout the United States. Some states have enacted formal check cashing laws which regulate the amount of fees that operators may charge for cashing checks, and in some cases states have regulated the amount of service charges that may be charged on small consumer advances, commonly referred to as "payday advances". Management believes that at least half of the check cashing locations in the United States are operated by individuals owning from one to ten locations. Management further believes that this fragmented nature of the industry is due among other factors to the lack of qualified management personnel, the difficulty of developing adequate financial controls and reporting systems, and the lack of financial resources.
Business Strategy
The Company's primary business plan is to significantly expand its payday advance operations by opening new stores in Texas and other states, by accelerating the growth of its joint venture, Cash & Go, Ltd, which operates payday advance and check cashing kiosks inside convenience stores, and by expanding its payday advance operations in its existing pawn stores. Secondarily, the Company also plans to open new pawn stores in selective markets, including Mexico, and to selectively acquire check cashing and payday advance stores.
New Store Openings
The Company has opened 18 new pawn stores and 8 new check cashing/payday advance stores since its inception and currently intends to open additional check cashing and payday advance stores in locations where management believes appropriate demand and other favorable conditions exist. In addition, the Company's joint venture, Cash & Go, Ltd., has opened 36 financial services kiosks inside convenience stores since its inception in August 1999. Management seeks to locate new stores 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 can be ready for business within six weeks. The investment required to open a new pawn store includes inventory, funds available for pawn loans, 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 between $200,000 and $300,000 is required to fund a new pawn store for the first six months of operation. Because existing pawn stores already have an established customer base, loan portfolio, and retail-sales business, acquisitions generally contribute more quickly to revenues than do start-up stores. The Company estimates that approximately $100,000 to $150,000 is required to fund a new check cashing/payday advance store for the first six months of operation, which includes investments for leasehold improvements, equipment, loan portfolio, store operating cash, and start-up losses.
Acquisitions
Because of the highly fragmented nature of both the pawn industry and the check cashing/payday advance industry, as well as the availability of "mom & pop" sole proprietors willing to sell their stores, the Company believes that acquisition opportunities as well as favorable new store locations exist.
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 regulatory issues. Specific pawn store acquisition criteria include an evaluation of the volume of annual loan transactions, outstanding loan 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 check cashing/payday advance stores include the annual volume of transactions, location and condition of facilities, and a demographic evaluation of the surrounding area to determine the potential for the Company's payday advance product.
Store Clusters
Whether acquiring an existing store or opening a new store, the Company seeks to establish clusters of several stores in a specific geographic area in order to achieve certain economies of scale relative to supervision, purchasing and marketing. In Texas, such clusters have been established in the Dallas/Fort Worth metroplex, the Rio Grande Valley area, the Corpus Christi area, and the El Paso area. Store clusters have also been established in the St. Louis, Missouri area, the Oklahoma City, Oklahoma area, in Washington D.C. and its surrounding Maryland suburbs, in Baltimore, Maryland, in Northern California, in the Chicago, Illinois area, in South Carolina, and in the Pacific Northwest. The Company currently plans to continue its expansion in existing markets in Texas, Northern California, the Pacific Northwest and Mexico, and to enter new markets in other states with favorable demographics and regulatory environments.
Enhance Productivity of Existing and Acquired Stores
The primary factors affecting the profitability of the Company's existing store base are the level of loans outstanding, the volume of retail sales and gross profit on retail sales, the volume of check cashing and related consumer financial services, and the control of store expenses. 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/payday advance stores and to make customers feel more comfortable. In addition to well-lit parking facilities, several of the stores' exteriors display an attractive and distinctive awning similar to those used by contemporary convenience and video rental stores. The Company also has upgraded or refurbished the interior of certain of its stores and improved merchandise presentation by categorizing items into departments, improving the lighting and installing better in-store signage.
Operating Controls
The Company has an organizational structure that it believes is capable of supporting a larger, multi-state store base. Moreover, the Company has installed an employee training program for both store and corporate-level personnel that stresses productivity and professionalism. Each store is monitored on a daily basis from corporate headquarters via an online, real- time computer network, and the Company has strengthened its operating and financial controls by increasing its internal audit staff as well as the frequency of store audit visits. 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.
Pawn Lending Activities
The Company's pawn stores loan money against the security of pledged goods. The pledged goods are tangible personal property generally consisting of jewelry, electronic equipment, tools, sporting goods and musical equipment. The pledged goods provide security to the Company for the repayment of the loan, as pawn loans cannot be made with personal liability to the borrower. Therefore, the Company does not investigate the creditworthiness of the borrower, relying instead on the marketability and sale value of pledged goods as a basis for its credit decision. The Company contracts for a pawn service charge in lieu of interest to compensate it for the loan. The statutory service charges on loans at its Texas stores range from 12% to 240% on an annualized basis depending on the size of the loan, and from 36% to 240% on an annualized basis at the Company's Oklahoma stores. Loans made in the Maryland stores bear service charges of 144% to 240% on an annualized basis, while loans in Virginia earn 120% to 180% annually. In Washington, D.C., a flat $2 charge per month applies to all loans of up to $40, and a 48% to 60% annualized service charge applies to loans of greater than $40. In Missouri, loans bear a total service and storage charge of 240% on an annualized basis, and South Carolina rates range from 60% to 300%. As of December 31, 2000, the Company's average loan per pawn ticket was approximately $86. Service charges from pawn loans during the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998 accounted for approximately 19%, 27%, 29%, and 33%, respectively, of the Company's total revenues.
At the time a pawn transaction is entered into, a pawn loan agreement, commonly referred to as a pawn ticket, is delivered to the borrower 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 charge, maturity date, total amount that must be paid to redeem the pledged goods on the maturity date, and the annual percentage rate.
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 loan 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, and newspapers. The Company also utilizes its computer network 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 loan 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 pledged property is held through the term of the loan, which is 30 days in Texas, South Carolina, Missouri, Virginia, Oklahoma and Maryland, with an automatic extension period of 15 to 60 days depending on state laws, unless the loan is earlier paid or renewed. In Washington, D.C., pledged property is held for 30 days. In the event the borrower does not pay or renew a loan within 90 days in Texas, South Carolina and Missouri, 60 days in Oklahoma, 45 days in Maryland and Virginia, and 30 days in Washington, D.C., the unredeemed collateral is forfeited to the Company and becomes inventory available for general liquidation or sale in one of the Company's stores. The Company does not record loan losses or charge- offs because if the loan is not paid, the principal amount loaned becomes the carrying cost of the forfeited collateral ("inventory") that is recovered by sale.
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 loaned. For the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, the Company's annualized yield on average pawn loan balance was 127%, 145%, 142%, and 136%, respectively.
Payday Advance Activities
The Company's check cashing/payday advance stores make secured, short- term advances in which the customer writes the store a personal check in exchange for cash, net of a transaction fee. Fees for payday advances may be regulated by state law and are generally 15% to 18% of the amount advanced per transaction. The term of these advances is thirty days or less. Service charges from payday advances during the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998 accounted for approximately 25%, 15%, 7%, and 1%, respectively, of the Company's total revenues.
To qualify for a payday advance, customers 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 their personal checking account for the amount of the advance, plus applicable fees. At maturity, the customer may either return to the store and pay off the advance with cash, in which case the check is returned to the customer, or the store can deposit the check into its checking account. A significant amount of payday advance checks deposited by the Company are returned by the bank; however, a large percentage of these bad debts are subsequently collected by the Company through various means. The profitability of the Company's check cashing stores is dependent upon adequate collection of these returned items.
Retail Activities
The Company acquires merchandise inventory primarily through forfeited pawn loans and purchases of used goods from the general public. Sales of inventory during the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, accounted for approximately 52%, 54%, 60%, and 64%, respectively, of the Company's total revenues for these periods. For the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, the Company realized gross profit margins on merchandise sales of 36%, 32%, 36%, and 33%, respectively.
By operating multiple stores, the Company is able to transfer inventory between stores to best meet consumer demand. The Company has established the necessary internal financial controls to implement such inter-store transfers.
Merchandise acquired by the Company through defaulted pawn loans is carried in inventory at the amount of the related pawn loan. Management believes that this practice lessens the likelihood that the Company will incur significant, unexpected inventory devaluations.
The Company does not provide financing to purchasers of its merchandise nor does it give the prospective buyer any warranties on the merchandise purchased. Nevertheless, the Company may, at its discretion, refund purchases if merchandise is returned because it was damaged or not in good working order when purchased. The Company permits its customers to purchase inventory on a "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.
Pawnshop Operations
The typical Company store is a free-standing 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 a distinctive awning and a layout similar to a contemporary convenience store or video rental store. 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 recall rapidly 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 sales, interest income, loans written and redeemed, and changes in inventory.
The Company attempts to attract retail shoppers seeking bargain prices through the use of seasonal promotions, special discounts for regular customers, prominent display of impulse purchase items such as jewelry and tools, tent sales and sidewalk sales, and a layaway purchasing plan. The Company attempts to attract and retain pawn loan customers by lending a competitively large percentage of the estimated sale value of items presented for pledge and by providing quick loan, renewal and redemption service 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. Each area supervisor reports to one of four regional vice-presidents.
The Company believes that profitability of its pawnshops is dependent, among other factors, upon its employees' ability to make loans 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 loan 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, among other factors, on sales, gross profits and special promotional contests.
Check Cashing/Payday Advance Operations
The Company's check cashing/payday advance locations are typically 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 a lighted sign, and distinctive, conservative window signage. The interiors usually feature an ample lobby, separated from employee work areas by floor-to-ceiling 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 check cashing/payday advance stores allow a store manager or clerk to recall rapidly customer check cashing histories, payday advance histories, and other vital information. The Company attempts to attract customers primarily through television advertisements and yellow page advertisements.
Each check cashing store employs a manager, an assistant manager, and between three 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 manager reports to a district manager who typically oversees two to five store managers.
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 and check cashing/payday advance operators. Both the pawnshop and check cashing/payday advance 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 both pawn loans and payday advances, customer service, and management of store employees. In addition, the Company competes with financial institutions, such as consumer finance companies, which generally lend on an unsecured as well as on 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, gun stores, discount retail stores, consumer electronics stores 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 addition, the Company faces competition in its acquisition program. There are several other publicly held pawnshop and check cashing companies, including Cash America International, Inc., ACE Cash Express, Inc. and EZCORP, Inc., that have announced active expansion and acquisition programs as well. Management believes that the increased competition for attractive acquisition candidates may increase acquisition costs.
Regulation
General
The Company is subject to extensive regulation in several jurisdictions in which it operates, including jurisdictions that regulate pawn lending, payday advance fees and check cashing fees. The Company is also subject to federal and state regulation relating to the reporting and recording of certain currency transactions. There can be no assurance that additional state or federal statutes or regulations will not be enacted at some future date which could inhibit the ability of the Company to expand, significantly decrease the service charges 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 prospects.
State Regulations
The Company operates in seven states that have licensing and/or fee regulations on pawn loans, including 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 pawn lender. 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.
The Company also operates in states which have licensing and/or fee regulations on check cashing and payday advances, including California, Washington, Missouri, South Carolina, Oregon, Illinois and Washington, D.C. The Company is licensed in each of the states in which a license is currently required for it to operate as a check casher and/or payday lender. 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.
Federal Regulations
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 person and result in either cash in or cash out totaling more than $10,000 during any one business day.
Other
In jurisdictions that do not have favorable payday lending laws, the Company has entered into agreements with out-of-state federally insured financial institutions to act as a loan servicer for such banks in that jurisdiction. The Company receives a fee from the financial institution for acting as that institution's loan servicer.
With respect to firearms and ammunition sales, each pawn store must comply with the regulations promulgated by the Department of the Treasury- Bureau of Alcohol, Tobacco and Firearms, which requires each pawn store dealing in firearms to maintain a permanent written record of all firearms received or disposed of and a similar record for all ammunition sales. The Company does not currently sell handguns to the public.
Under some municipal ordinances, pawn stores must provide the police department having jurisdiction copies of all daily transactions involving pawn loans and over-the-counter purchases. These daily transaction reports are designed to provide the local police 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. If these ordinances are applicable, a copy of the transaction ticket is provided to local law enforcement agencies for processing by the National Crime Investigative Computer to determine rightful ownership. Goods held to secure pawn loans or goods purchased which are determined to belong to an owner other than the borrower or seller are subject to recovery by the rightful owners.
In connection with pawnshops operated by the Company, there is a risk that acquired merchandise may be subject to claims of 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's pawnshop and payday advance operations are subject to, and must comply with, extensive regulation, supervision and licensing from various federal, state and local statutes, ordinances and regulations. These statutes prescribed, among other things, service charges and interest rates that may be charged. These regulatory agencies have broad discretionary authority. There can be no assurance that additional local, state or federal legislation will not be enacted or that existing laws and regulations will not be amended which could have an adverse impact on the Company's operations and financial condition.
Employees
The Company had approximately 1,090 employees as of March 18, 2001, including approximately 53 persons employed in executive, administrative and accounting functions. None of the Company's employees are covered by collective bargaining agreements. The Company considers its employee relations to be satisfactory.
Insurance
The Company maintains fire, casualty, theft and public liability insurance for each of its pawn stores and check cashing/payday advance 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. and Oklahoma, as well as excess employer's indemnification insurance in Texas. The Company is a non-subscriber under the Texas Workers' Compensation Act and does not maintain other business risk insurance.
Item 2.
Item 2. Properties
The Company currently owns the real estate and buildings for three of its pawn stores and leases 146 pawn stores and check cashing/payday advance locations. Leased facilities are generally leased for a term of two to ten years with one or more options to renew. The Company's existing leases expire on dates ranging between 2001 and 2016. All current leases provide for specified periodic rental payments ranging from approximately $500 to $9,100 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 material adverse effect on the Company's operations. The Company's strategy is generally to lease, rather than purchase, space for its pawnshop and check cashing 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 and check cashing/payday advance locations are suitable for such purpose. The Company considers its equipment, furniture and fixtures to be in good condition.
The Company currently leases approximately 17,000 square feet in Arlington, Texas for its executive offices. The lease, which expires December 31, 2001, currently provides for monthly rental payments of approximately $25,000.
Item 3.
Item 3. Legal Proceedings
The Company was sued by three plaintiffs, who alleged that the Company engaged in deferred presentment transactions which violate the Federal Racketeering Influenced and Corrupt Organizations Act, the Federal Truth and Lending Act, common law and various state statutes and regulations. Class certification has been requested, but not yet been obtained. The Company intends to vigorously defend this claim. Since discovery has not yet commenced, nor the scope of the case been determined, management can provide no assurance as to the outcome of such litigation.
Additionally, the Company is from time to time a defendant (actual or threatened) in certain other lawsuits encountered in the ordinary course of its business, the resolution of which, in the opinion of management, should not have a material adverse effect on the Company's financial position, results of operations, or cash flows.
Item 4.
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 2000.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
On March 26, 2001, the closing sales price for the Common Stock as reported by the Nasdaq National Market was $4.94 per share. On March 26, 2001, there were approximately 83 stockholders of record of the Common Stock.
No cash dividends have been paid by the Company on its Common Stock, and the Company does not currently intend to pay cash dividends on its Common Stock. The current policy of the Company's Board of Directors is to retain earnings, if any, to provide funds for operation and expansion of the Company's business. Such policy will be reviewed by the Board of Directors of the Company from time to time in light of, among other things, the Company's earnings and financial position and limitations imposed by its revolving line of credit with its syndicate of commercial lenders (the "Credit Facility"). Pursuant to the terms of its agreement with its lenders, the Company is prohibited from paying any dividends until payment in full of its obligations under the Credit Facility.
Item 6.
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
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
The Company's pawn store revenues are derived primarily from service charges on pawn loans, service charges from short term, secured advances ("payday advances"), and the sale of unredeemed goods, or "merchandise sales." Pawn loans are made for a 30-day term with an automatic extension of 60 days in Texas, South Carolina and Missouri, 30 days in Oklahoma and 15 days in Maryland and Virginia. Pawn loans made in Washington, D.C. are made for a 120 day term with no automatic extension. All pawn loans are collateralized by tangible personal property placed in the custody of the Company. The annualized service charge rates on pawn loans are set by state laws and range between 12% and 240% in Texas and 36% and 240% in Oklahoma, depending on the size of the loan. Service charge rates are 144% to 240% on an annualized basis in Maryland, with a $6 monthly minimum charge. In Washington, D.C., loans up to $40 bear a flat $2 charge per month, while loans over $40 bear a 48% to 60% annualized rate. Missouri pawn loans bear service and storage charges totaling 240% per year, and in Virginia rates range from 120% to 180% annually. Annualized rates in South Carolina range from 60% to 300%. The Company now accrues pawn service charge revenue on a constant yield basis over the life of the loan for all pawn loans that the Company deems collection to be probable based on historical loan redemption statistics. If a loan 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 loan principal. Service charges from payday advances, which range from 15% to 18% of the amount advanced, are recognized on a constant-yield basis over the life of the advance, which is generally 30 days or less.
Effective January 1, 2000, the Company changed its method of income recognition on pawn loans. The Company now accrues pawn service charge revenue on a constant yield basis over the life of the loan for all pawn loans that the Company deems collection to be probable based on historical loan redemption statistics. For loans not repaid, the cost of the forfeited collateral (inventory) is the cash amount originally loaned. Prior to 2000, the Company recognized service charge income on a constant yield basis over the initial loan period for all pawn loans written. Service charges applicable to the extension periods or additional loan periods were not recognized as income until the loan was repaid or renewed. If the loan was not repaid, the carrying value of the forfeited collateral (inventory) was stated at the lower of cost (the principal amount loaned plus accrued service charges) or market. The Company believes the accounting change provides a more timely matching of revenues and expenses with which to measure the results of operations. The cumulative effect of the accounting method change on all periods since inception through December 31, 1999 is $2,287,000 (after an income tax benefit of $1,373,000) and is included as a one-time reduction of net income for the year ended December 31, 2000.
Revenues at the Company's check cashing and payday advance stores are derived primarily from check cashing fees, fees on payday advances, and fees from the sale of money orders and wire transfers. Payday advances carry a 15% to 18% service charge. The Company recognizes service charge income on payday advances on a constant-yield basis over the life of the advance, which is generally 30 days or less. The Company charges operating expense for the estimated net potential losses on returned checks in the same period in which revenues from the payday advances are recognized.
Although the Company has had significant increases in revenues due primarily to acquisitions and secondarily to new store openings, the Company has also incurred increases in operating expenses attributable to the additional stores and increases in administrative expenses attributable to building a management team and the support personnel required by the Company's growth. Operating expenses consist of all items directly related to the operation of the Company's stores, including salaries and related payroll costs, rent, utilities, equipment depreciation, advertising, property taxes, licenses, supplies, security and net returned checks (bad debts). Administrative expenses consist of items relating to the operation of the corporate office, including the salaries of corporate officers, area supervisors and other management, accounting and administrative costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses.
Presented below are selected consolidated data for the Company. The following table, as well as the discussion following, should be read in conjunction with Selected Financial Data included in Item 6 and the Consolidated Financial Statements and notes thereto of the Company required by Item 8.
The Company has three primary operating segments: pawn lending stores, check cashing and payday advance stores, and a software and hardware provider. The Company's pawn stores offer non-recourse loans on the collateral of pledged tangible personal property. The Company's pawn stores also offer short-term secured consumer loans commonly referred to as payroll advances. The Company's check cashing and payday advance stores provide check cashing services, short-term secured consumer loans, bill payment services, money transfer services and money order sales. The Company's computer software subsidiary, Answers, etc., provides turnkey point of sale operating systems to other check cashing and payday advance operators unaffiliated with the Company. Information concerning the segments is set forth below (in thousands):
Results of Operations
Twelve Months Ended December 31, 2000 Compared to Twelve Months Ended December 31, 1999
Total revenues increased 8% to $105,858,000 for the fiscal year ended December 31, 2000 ("Fiscal 2000") as compared to $97,751,000 for the fiscal year ended December 31, 1999 ("Fiscal 1999"). The change resulted from an increase in revenues of $663,000 generated by the 18 pawn and check cashing/payday advance stores which were opened or acquired during Fiscal 1999 and Fiscal 2000, and an increase of $7,444,000, at the 130 stores which were in operation during all of Fiscal 1999 and Fiscal 2000. Of the $8,107,000 increase in total revenues, 22%, or $1,820,000, was attributable to increased merchandise sales, 74%, or $5,967,000 was attributable to increased service charges on pawn loans and payday advances, $32,000 was attributable to increased check cashing fees, and the remaining increase of $288,000, or 4% was attributable to the increase in other income. As a percentage of total revenues, merchandise sales decreased from 54% to 52% during Fiscal 2000 as compared to Fiscal 1999, service charges increased from 42% to 44%, check cashing fees and other income remained at 4%.
The aggregate receivables balance decreased 6% from $23,568,000 at December 31, 1999 to $22,043,000 at December 31, 2000. Of the $1,525,000 decrease, an increase of $1,594,000 was attributable to growth at the 18 pawn and check cashing/payday advance stores opened or acquired during Fiscal 1999 and Fiscal 2000, while a $3,119,000 decrease was attributable to the 130 pawn stores and check cashing/payday advance stores which were in operation during all of Fiscal 1999 and Fiscal 2000. The annualized yield on the average aggregate receivables balance was 204% during Fiscal 2000 compared to 183% during Fiscal 1999. The Company's average receivables balance per store decreased from $160,000 as of December 31, 1999 to $149,000 as of December 31, 2000, primarily due to our lowering of our loan to value ratio on pawn loans during 2000; as well as a higher ratio of payday advance stores in the Company's store count as of December 31, 2000, which generally have lower per-store receivables balances than the Company's pawn stores.
Gross profit as a percentage of merchandise sales increased from 32% during Fiscal 1999 to 36% during Fiscal 2000. This increase in the Company's gross profit margin was primarily the result of the change in accounting principle in Fiscal 2000. The 1999 pro forma gross profit as a percentage of merchandise sales was 39%. Sales of scrap gold had a negative effect on gross profit margins during Fiscal 1999 and Fiscal 2000. Factoring out the negative impact of scrap sales, pro forma margins would have been 41% and 39% during Fiscal 1999 and Fiscal 2000, respectively.
Operating expenses increased 20% to $47,082,000 during Fiscal 2000 compared to $39,243,000 during Fiscal 1999, primarily as a result of the addition of 18 pawn stores and check cashing/payday advance stores in Fiscal 1999 and Fiscal 2000, and increases in net bad debt expense in 2000 due to increases in the volume of payday advances in the pawnshops. During the fourth quarter of 2000 the Company recorded a one-time non-cash pretax charge in the amount of $765,000 to write-off fixed assets and goodwill relating to approximately nine stores. These stores are primarily located in the Company's East Coast market, and continue to be unprofitable or under performing locations. This one-time store closing charge had a $0.05 per share impact on the Company's earnings per share. The Company will continue to evaluate and aggressively address any stores that do not measure up to the Company's earnings expectations. Administrative expenses increased 22% to $8,387,000 during Fiscal 2000 compared to $6,867,000 during Fiscal 1999 due primarily to the addition of personnel to supervise store operations. Interest expense increased to $2,859,000 in Fiscal 2000 compared to $2,602,000 in Fiscal 1999 as a result of higher average outstanding debt balances and higher average interest rates during Fiscal 2000.
For Fiscal 2000 and 1999, the Company's effective federal income tax rates of 38% and 33%, respectively, differed from the statutory tax rate of 34% primarily as a result of state income taxes, utilization of tax net operating loss carryforwards from acquisitions, and amortization of non- deductible intangible assets.
Twelve Months Ended December 31, 1999 Compared to Twelve Months Ended July 31, 1998
Total revenues increased 66% to $97,751,000 for the fiscal year ended December 31, 1999 ("Fiscal 1999") as compared to $59,004,000 for the fiscal year ended July 31, 1998 ("Fiscal 1998"). The change resulted from an increase in revenues of $37,948,000 generated by the 90 pawn and check cashing/payday advance stores which were opened or acquired during Fiscal 1998, the five months ended December 31, 1998 and Fiscal 1999, and an increase of $799,000, or 2%, at the 57 stores which were in operation during all of Fiscal 1998 and Fiscal 1999. Of the $38,747,000 increase in total revenues, 39%, or $14,979,000, was attributable to increased merchandise sales, 52%, or $20,298,000 was attributable to increased service charges on pawn loans and payday advances, 5%, or $1,929,000 was attributable to increased check cashing fees, and the remaining increase of $1,541,000, or 4% was attributable to the increase in other income. As a percentage of total revenues, merchandise sales decreased from 64% to 54% during Fiscal 1999 as compared to Fiscal 1998, service charges increased from 35% to 42%, check cashing fees increased from 0% to 2%, and other income increased from 1% to 2%, respectively.
The aggregate receivables balance increased 38% from $17,054,000 at July 31, 1998 to $23,568,000 at December 31, 1999. Of the $6,514,000 increase, $2,668,000 was attributable to growth at the 97 pawn and check cashing/payday advance stores in operation at July 31, 1998 and December 31, 1999, while $3,846,000 was attributable to the addition of 50 pawn stores and check cashing/payday advance stores since August 1, 1998. The annualized yield on the average aggregate receivables balance was 183% during Fiscal 1999 compared to 136% during Fiscal 1998. The Company's average receivables balance per store decreased from $176,000 as of July 31, 1998 to $160,000 as of December 31, 1999, primarily due to a higher ratio of payday advance stores in the Company's store count as of December 31, 1999, which generally have lower per-store receivables balances than the Company's pawn stores.
Gross profit as a percentage of merchandise sales decreased from 33% during Fiscal 1998 to 32% during Fiscal 1999. This decrease in the Company's gross profit margin was primarily the result of lower gold prices during Fiscal 1999 compared to Fiscal 1998, which yielded lower margins on scrap jewelry sales during Fiscal 1999.
Operating expenses increased 100% to $39,243,000 during Fiscal 1999 compared to $19,608,000 during Fiscal 1998, primarily as a result of the addition of 90 pawn stores and check cashing/payday advance stores in Fiscal 1998, the five months ended December 31, 1998 and Fiscal 1999, and the addition of personnel viewed as necessary to support the increased number of store level transactions. Administrative expenses increased 66% to $6,867,000 during Fiscal 1999 compared to $4,134,000 during Fiscal 1998 due primarily to the addition of personnel to supervise store operations. Interest expense increased to $2,602,000 in Fiscal 1999 compared to $2,031,000 in Fiscal 1998 as a result of higher average outstanding debt balances during Fiscal 1999.
For Fiscal 1999 and 1998, the Company's effective federal income tax rates of 33% and 37%, respectively, differed from the statutory tax rate of 34% primarily as a result of state income taxes, utilization of tax net operating loss carryforwards from acquisitions, and amortization of non- deductible intangible assets.
Liquidity and Capital Resources
The Company's operations and acquisitions have been financed with funds generated from operations, bank and other borrowings, and the issuance of the Company's securities.
The Company currently maintains a $50,000,000 long-term line of credit with a group of commercial lenders (the "Credit Facility"). At December 31, 2000, $39,000,000 was outstanding under this Credit Facility and an additional $9,327,000 was available to the Company pursuant to the available borrowing base. The Credit Facility bears interest at the prevailing LIBOR rate (which was approximately 6.6% at December 31, 2000) plus one percent, and matures on September 1, 2002. Amounts available under the Credit Facility are limited to 325% of the Company's earnings before income taxes, interest, depreciation and amortization for the trailing twelve months. Under the terms of the Credit Facility, the Company is required to maintain certain financial ratios and comply with certain technical covenants. The Company was in compliance with these requirements and covenants during the year ended December 31, 2000 and as of March 26, 2001. 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 is prohibited from paying dividends to its stockholders. Substantially all of the unencumbered assets of the Company have been pledged as collateral against indebtedness under the Credit Facility.
In December 2000, the Company acquired the assets of one pawn store in LaFeria, Texas and one pawn store in Laredo, Texas. The aggregate purchase price for these two acquisitions was $1,200,000. The Company financed substantially all of the cash purchase price for its Fiscal 2000 acquisitions through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
In February 1999, the Company acquired the assets of two pawn stores in El Paso, Texas. In September 1999, the Company acquired the assets of one pawn store in Arlington, Virginia, and in October 1999, the Company acquired the assets of one pawn store in Palm View, Texas. The aggregate purchase price for these four acquisitions was $2,019,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. The Company financed substantially all of the cash purchase price for its fiscal 1999 acquisitions through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
The Company acquired the assets of one pawn store in Alice, Texas in September 1998, five pawn stores in El Paso, Texas in October 1998, one pawn store in Dallas, Texas in October 1998, and twelve pawn stores in South Carolina in November 1998. In addition, the Company acquired the assets of three check cashing and payday advance stores in California in August 1998, and one check cashing and payday advance store in San Francisco, California in December 1998. The aggregate purchase price for these 23 stores acquired during the five months ended December 31, 1998 was $8,175,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. In December 1998, the Company also acquired 100% of the outstanding common stock of One Iron Ventures, Inc., which operates eleven payday advance stores in the Chicago, Illinois area, for a total purchase price of $5,704,000 consisting of 430,000 shares of First Cash Financial Services, Inc. common stock valued at $4,623,000, or $10.75 per share, assumed liabilities of $904,000, and legal, consulting and assumed liabilities totaling $177,000. The Company financed substantially all of the cash purchase price for acquisitions made during the five months ended December 31, 1998 through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
As of December 31, 2000, the Company's primary sources of liquidity were $6,611,000 in cash and cash equivalents, $2,707,000 in service charges receivable, $22,043,000 in receivables, $17,221,000 in inventories and $9,327,000 of available and unused funds under the Company's Credit Facility. The Company had working capital as of December 31, 2000 of $41,835,000 and a liabilities to equity ratio of 0.8 to 1.
Net cash provided by operating activities of the Company during the year ended December 31, 2000 was $14,628,000, consisting primarily of net income before non-cash depreciation and amortization and cumulative effect of change in accounting principle of $9,385,000, plus decreases in inventory and accrued service fees of $1,568,000 and $728,000 respectively. Net cash used for investing activities during the year ended December 31, 2000 was $4,998,000, which was primarily comprised of cash provided from decreasing receivables of $1,021,000, and cash paid for acquisitions, other fixed asset additions, and cash paid to fund the expansion of our Cash & Go, Ltd. joint venture of $6,019,000. Net cash used by financing activities was $13,736,000 during the year ended December 31, 2000, which primarily consisted of a net decrease in the Company's debt of $10,252,000 and an increase in common stock receivables from officers of $3,234,000.
The profitability and liquidity of the Company is affected by the amount of pawn loans outstanding, which is controlled in part by the Company's lending decisions. The Company is able to influence the frequency of loan redemption by increasing or decreasing the amount loaned in relation to the resale value of the pledged property. Tighter credit decisions generally result in smaller loans in relation to the estimated resale value of the pledged property and can thereby decrease the Company's aggregate loan balance and, consequently, decrease pawn service charges. Additionally, small loans in relation to the pledged property's estimated resale value tends to increase loan redemptions and improve the Company's liquidity. Conversely, providing larger loans in relation to the estimated resale value of the pledged property can result in an increase in the Company's pawn service charge income. Also, larger average loan balances can result in an increase in loan forfeitures, which increases the quantity of goods on hand and, unless the Company increases inventory turnover, reduces the Company's liquidity. The Company's renewal policy allows customers to renew pawn loans by repaying all accrued interest on such pawn loans, effectively creating a new loan transaction. In addition to these factors, the Company's liquidity is affected by merchandise sales and the pace of store expansions.
Management believes that the Credit Facility and cash generated from operations will be sufficient to accommodate the Company's current operations for fiscal 2001. The Company has no significant capital commitments. The Company currently has no written commitments for additional borrowings or future acquisitions; however, the Company intends to continue to grow and will likely seek additional capital to facilitate expansion. The Company will evaluate acquisitions, if any, based upon opportunities, acceptable financing, purchase price, strategic fit and qualified management personnel.
The Company currently intends to continue to engage in a plan of expansion through existing store acquisitions and new store openings. The Company currently plans to open between 10 and 15 check cashing/payday advance locations; as well as 25 to 30 check cashing/payday advance kiosks for Cash & Go, Ltd., the Company's 50% convenience store joint venture. These new locations will be funded through the Company's Credit Facility. While the Company continually looks for, and is presented with, potential acquisition candidates, the Company has no definitive plans or commitments for further acquisitions. The Company has no immediate plans to open any other new stores. If the Company encounters an attractive opportunity to acquire or open a new store in the near future, the Company will seek additional financing, the terms of which will be negotiated on a case-by- case basis. Between January 1, 2001 and March 26, 2001, the Company opened one new check cashing/payday advance location.
Forward Looking Information
This annual report contains certain statements that are "forward- looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "estimates," "will," "should," "plans," or "anticipates" or the negative thereof, or other variations thereon, or comparable terminology, or by discussions of strategy. Such statements include, but are not limited to, the discussions of the Company's operations, liquidity, and capital resources. Forward-looking statements are included in the "Liquidity and Capital Resources" section of this annual report. 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. Generally, these statements relate to business plans, strategies, anticipated strategies, levels of capital expenditures, liquidity and anticipated capital funding needed to effect the business plan. All phases of the Company's operations are subject to a number of uncertainties, risks and other influences, many of which are outside the control of the Company and cannot be predicted with any degree of accuracy. Factors such as changes in regional or national economic conditions, changes in governmental regulations, unforeseen litigation, changes in interest rates or tax rates, significant changes in the prevailing market price of gold, future business decisions and other uncertainties may cause results to differ materially from those anticipated by some of the statements made in this report. In light of the significant uncertainties inherent in the forward-looking statements made in this report, the inclusion of such statements should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Security holders are cautioned that such forward-looking statements involve risks and uncertainties. The forward-looking statements contained in this report speak only as of the date of this report and the Company expressly disclaims any obligation or undertaking to release any updates or revisions to any such statement to reflect any change in the Company's expectations or any change in events, conditions or circumstance on which any such statement is based.
Inflation
The Company does not believe that inflation has had a material effect on the amount of loans and payday advances made or unredeemed goods sold by the Company or its results of operation.
Seasonality
The Company's retail business is seasonal in nature with its highest volume of sales of unredeemed goods occurring during the first and fourth calendar quarters of each year. The Company's lending and payday advance activities are also seasonal, with the highest volume of lending activity occurring during the second and third calendar quarters of each year.
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB101") "Revenue Recognition In Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk in the form of interest rate risk. At December 31, 2000, the Company had $39 million outstanding under its revolving line of credit. This revolving line is priced with a variable rate based on LIBOR or a base rate, plus one percent. See "Note 8 - Revolving Credit Facility". Based on the average outstanding indebtedness during the year ended December 31, 2000, a 10% increase in interest rates would have increased the Company's interest expense by approximately $310,000 for the year ended December 31, 2000.
Item 8.
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 14(a)(1) and (2) of this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no disagreements concerning matters of accounting principles or financial statement disclosure between the Company and Deloitte & Touche LLP requiring disclosure hereunder.
PART III
In accordance with General Instruction G(3), a presentation of information required in response to Items 10, 11, 12, and 13 shall appear in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the Company's year end and shall be incorporated herein by reference when filed.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements: Page Report of Independent Auditors..................... Consolidated Balance Sheets........................ Consolidated Statements of Income.................. Consolidated Statements of Cash Flows.............. Consolidated Statements of Changes in Stockholders' Equity........................................... Notes to Consolidated Financial Statements.........
(b) During Fiscal 2000 the Company filed no reports on Form 8-K.
(c) Exhibits: 3.1(5) Amended Certificate of Incorporation 3.2(6) Amended Bylaws 4.2a(2) Common Stock Specimen 10.3(1) First Cash, Inc. 1990 Stock Option Plan 10.8(8) Employment Agreement -- Rick Powell 10.15(8) Employment Agreement -- Rick L. Wessel 10.59(4) Acquisition Agreement - Miraglia, Inc. 10.60(3) Audited Financial Statements of Miraglia, Inc. for the ten months ended May 31, 1998. 10.61(5) Acquisition Agreement for Twelve Pawnshops in South Carolina 10.62(5) Acquisition Agreement for One Iron Ventures, Inc. 10.63(5) First Cash Financial Services, Inc. 1999 Stock Option Plan 18.1(7) Letter re Change in Accounting Principle 21.0(8) Subsidiaries 23.1(8) Independent Auditors' Consent of Deloitte & Touche LLP 23.2(8) Consent of Brewer & Pritchard, P.C.
(d) All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(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 Form 8-K dated September 22, 1998. (4) 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. (5) 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. (6) 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. (7) Filed as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 2000 (File No. 0 - 19133) and incorporated herein by reference. (8) Filed herein.
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.
FIRST CASH FINANCIAL SERVICES, INC.
/S/ PHILLIP E. POWELL ------------------------------------------ Phillip E. Powell, Chief Executive Officer March 26, 2001
/S/ RICK L. WESSEL -------------------------------------------- Rick L. Wessel, Principal Accounting Officer March 26, 2001
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 and March 26, 2001 --------------------- Chief Executive Officer Phillip E. Powell
/S/ RICK L. WESSEL President, Chief Financial March 26, 2001 --------------------- Officer, Secretary and Rick L. Wessel Treasurer
/S/ JOE R. LOVE Director March 26, 2001 --------------------- Joe R. Love
/S/ RICHARD T. BURKE Director March 26, 2001 --------------------- Richard T. Burke
REPORT OF INDEPENDENT AUDITORS
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, 2000 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years ended December 31, 2000 and 1999, the five months ended December 31, 1998 and the year ended July 31, 1998. These consolidated 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the years ended December 31, 2000 and 1999, the five months ended December 31, 1998 and the year ended July 31, 1998 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the Company changed its method of accounting for income recognition on pawn loans in 2000.
DELOITTE & TOUCHE LLP Fort Worth, Texas February 6, 2001
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 which retail previously- owned merchandise acquired through loan forfeitures. In addition to making short-term secured loans, most of the Company's pawn stores offer short- term secured advances ("payday advances"). The Company also operates check cashing and payday advance stores that provide payday advances, check cashing services, and other related financial services. The Company also supplies computer hardware and software to third-party check cashing operators, as well as ongoing technical support, and owns "firstcash.com", a website offering previously-owned jewelry, electronics and other products. As of December 31, 2000, the Company owned 116 pawn stores and 32 check cashing and payday advance 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. All significant intercompany accounts and transactions have been eliminated. In August 1999, the Company entered into a joint venture to form Cash & Go, Ltd., a company which owns financial services kiosks inside convenience stores. The Company presently has a 50% ownership interest in the partnership, which is accounted for by the equity method of accounting whereby the Company records its 50% share of the partnership's earnings or losses in its consolidated financial statements. The joint venture had a pretax loss of $179,000 and $203,000 for the years ended December 31, 2000 and 1999, respectively. The Company funds substantially all of the capital requirements of the joint venture, and at December 31, 2000 and 1999, had a receivable from this joint venture totaling $4,580,000 and $1,816,000, respectively. This receivable bears interest at the prime rate plus 1%, and matures on August 31, 2002.
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.
Receivables and income recognition - Receivables on the accompanying balance sheet consist of pawn loans and payday advances. Pawn loans ("loans") 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 loan for all pawn loans that the Company deems collection to be probable based on historical loan redemption statistics. If the loan is not repaid, the principal amount loaned becomes the carrying value of the forfeited collateral ("inventory") which is recovered through sale. Payday advances are made for thirty days or less. The Company recognizes the service charges associated with payday advances on a constant yield basis over the term of the payday advance.
Returned checks - The Company charges operating expense for the estimated net potential losses on returned checks in the same period in which revenues from the payday advances are recognized.
Operating expenses - Costs incurred in operating the pawn stores and check cashing stores have been classified as operating expenses. Operating expenses include salary and benefit expense of store employees, rent and other occupancy costs, bank charges, security, net returned checks, 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 - Inventories represent merchandise purchased directly from the public and merchandise acquired from forfeited loans. Inventories purchased directly from customers are recorded at cost. Inventories from forfeited loans are recorded at the amount of the loan principal on the unredeemed goods. The cost of inventories is determined on the specific identification method. 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 inventory 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 thirty-one years for buildings and three to ten 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 retired.
Intangible assets - Intangible assets consist of the excess of purchase price over net assets acquired and non-compete agreements. Excess purchase price over net assets acquired is being amortized on a straight- line basis over an estimated useful life of forty years and payments relative to non-compete agreements are amortized over their estimated useful lives, generally ranging from five to ten years. The Company's amortization policy is reviewed annually by the Board of Directors to determine if any change is appropriate. Management of the Company periodically evaluates the carrying value of the excess purchase price over the net tangible assets of businesses acquired to determine that no diminution in carrying value has occurred by comparing expected future cash flows, undiscounted and without interest charges, to the net carrying value of the related intangibles. Upon any such diminution in value, an appropriate amount would be charged to earnings.
Long-lived assets - Long-lived assets (i.e., property, plant and equipment and intangible 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. During the fourth quarter of 2000 the Company recorded a one-time non-cash pretax charge in the amount of $765,000 to write-off fixed assets and goodwill relating to approximately nine stores.
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 short-term 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, 2000 and 1999, the five months ended December 31, 1998, and the fiscal year ended July 31, 1998 was $1,283,000, $1,112,000, $191,000 and $248,000, respectively.
Stock-Based Compensation - Compensation expense is recorded with respect to stock option grants and retention stock awards to employees using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") had been applied. The Company accounts for stock-based employee compensation plans under the intrinsic method pursuant to APB 25 and has made the disclosures in the footnotes as required by SFAS 123.
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.
Pervasiveness of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and related revenues and expenses and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates and assumptions are subject to a number of risks and uncertainties which may cause actual results to differ materially from the Company's estimates.
Reclassification - Certain amounts as of December 31, 1999 and for the year ended December 31, 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, have been reclassified in order to conform with the 2000 presentation.
New Accounting Standards - Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS 133 effective January 1, 2001. The adoption of SFAS 133 did not have a significant impact on the financial position, results of operations, or cash flows of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB101") "Revenue Recognition In Financial Statements." SAB 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. The adoption of SAB 101 did not have a material effect on the Company's financial position or results of operations.
NOTE 3 - CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2000, the Company changed its method of income recognition on pawn loans. The Company now accrues pawn service charge revenue on a constant yield basis over the life of the loan for all pawn loans that the Company deems collection to be probable based on historical loan redemption statistics. For loans not repaid, the cost of the forfeited collateral (inventory) is the cash amount originally loaned. Prior to 2000, the Company recognized service charge income on a constant yield basis over the initial loan period for all pawn loans written. Service charges applicable to the extension periods or additional loan periods were not recognized as income until the loan was repaid or renewed. If the loan was not repaid, the carrying value of the forfeited collateral (inventory) was stated at the lower of cost (the principal amount loaned plus accrued service charges) or market. The Company believes the accounting change provides a more timely matching of revenues and expenses with which to measure the results of operations. The cumulative effect of the accounting method change on all periods since inception through December 31, 1999 is $2,287,000 (after an income tax benefit of $1,373,000) and is included as a one-time reduction of net income for the year ended December 31, 2000.
Operating results for Fiscal 2000 have been calculated using the new accounting method. The effect for Fiscal 2000 of adopting the change in income recognition on pawn loans was to decrease net income before cumulative effect of change in accounting principle $9,000, and decrease net income $2,296,000 ($.26 per share.) The unaudited pro forma amounts shown in the statements of income reflect the effect of retroactive application on service charge revenues, cost of goods sold, and related income taxes.
NOTE 4 - BUSINESS ACQUISITIONS
In December 2000, the Company acquired the assets of one pawn store in LaFeria, Texas, and one pawn store in Laredo, Texas. The aggregate purchase price for these two acquisitions was $1,200,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. The Company financed substantially all of the cash purchase price for its fiscal 2000 acquisitions through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
In February 1999, the Company acquired the assets of two pawn stores in El Paso, Texas. In September 1999, the Company acquired the assets of one pawn store in Arlington, Virginia, and in October 1999, the Company acquired the assets of one pawn store in Palm View, Texas. The aggregate purchase price for these four acquisitions was $2,019,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. The Company financed the cash purchase price for its fiscal 1999 acquisitions through its Credit Facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
The Company acquired the assets of one pawn store in Alice, Texas in September 1998, five pawn stores in El Paso, Texas in October 1998, one pawn store in Dallas, Texas in October 1998, and twelve pawn stores in South Carolina in November 1998. In addition, the Company acquired the assets of three check cashing and payday advance stores in California in August 1998, and one check cashing and payday advance store in San Francisco, California in December 1998. The aggregate purchase price for these 23 stores acquired during the five months ended December 31, 1998 was $8,175,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. In December 1998, the Company also acquired 100% of the outstanding common stock of One Iron Ventures, Inc., which operates eleven payday advance stores in the Chicago, Illinois area, for a total purchase price of $5,704,000 consisting of 430,000 shares of First Cash Financial Services, Inc. common stock valued at $4,623,000, or $10.75 per share, assumed liabilities of $904,000, and legal, consulting and assumed liabilities totaling $177,000. The Company financed substantially all of the cash purchase price for acquisitions made during the five months ended December 31, 1998 through its credit facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding receivable balances, inventory on hand, location and condition of the facilities, and projected future operating results.
In April 1998, the Company acquired 100% of the outstanding common stock of JB Pawn, Inc., which operates ten pawn stores in Texas and Maryland, for a total cash price of $2,000,000 (see Note 5 - Related Party Transactions). In June 1998, the Company acquired 100% of the outstanding common stock of Miraglia, Inc. for a total purchase price of $21,175,000 consisting of 850,000 shares of First Cash Financial Services common stock valued at $8,712,000, or $10.25 per share, a $6,000,000 note payable to the sellers, $6,300,000 cash, and legal, consulting and assumed liabilities totaling $163,000. Miraglia, Inc. operates eleven check cashing stores located in California and Washington, as well as Answers, etc., a provider of software to third-party operators of check cashing stores. In addition to JB Pawn, Inc. and Miraglia, Inc., the Company acquired a total of 19 additional individual pawnshops in various regions at various times during the fiscal year for an aggregate purchase price of $4,813,000, including legal, consulting, assumed liabilities and other costs incidental to the acquisitions. The Company financed substantially all of the cash purchase price for all of its fiscal 1998 acquisitions through its credit facility. The purchase price for these acquisitions was determined based upon the volume of annual loan and sales transactions, outstanding loan balances, inventory on hand, location and condition of the facilities, and projected future operating results.
All of these acquisitions have 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 dates of acquisition. The excess purchase price over the fair market value of the net tangible assets acquired and identifiable intangible assets has been recorded as goodwill. Goodwill and other intangible assets, net of accumulated amortization, resulting from acquisitions was $53,508,000 and $54,600,000 as of December 31, 2000 and 1999, respectively. The results of operations of the acquired companies are included in the consolidated financial statements from their respective dates of acquisition. In connection with these acquisitions, the Company entered into non-compete agreements with the former owners, generally ranging from five to ten years.
NOTE 5 - RELATED PARTY TRANSACTIONS
From August 1996 through March 1998, the Company was involved in a management agreement to operate and manage pawnshops for JB Pawn, Inc., a Texas corporation which, up until March 31, 1998, was 100% owned and controlled by Mr. Jon Burke, the brother of Mr. Richard Burke, a director of First Cash Financial Services, Inc. Through March 31, 1998, JB Pawn, Inc. owned and provided 100% of the financing for its pawnshops, and incurred all direct costs to operate the pawnshops, including payroll, store operating expenses, cost of inventory, and pawn loans. The Company received a monthly management fee for each store managed, and provided computer support, accounting, auditing, oversight and management of these stores. As discussed in Note 4, the Company purchased 100% of the outstanding common stock of JB Pawn, Inc. on April 1, 1998. The Company recorded management fee revenue of $247,000 under this agreement during the fiscal year ended July 31, 1998. In January 1996, the Company issued to Mr. Jon Burke warrants to purchase 50,000 shares of the Company's common stock at an exercise price of $4.625 per share for consulting services to be provided through January 2001. The warrants vest over a five year period.
In June 1998, in conjunction with the purchase of Miraglia, Inc. (see Note 4 - Acquisitions), the Company entered into lease agreements for one of its check cashing locations, as well as for certain office space located in Concorde, California. These properties are partially owned by Mr. Blake Miraglia, an employee of the Company. Total lease payments made pursuant to these leases were $130,000, $239,000, $100,000 and $20,000 during the fiscal years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the fiscal year ended July 31, 1998, respectively, which approximated market rates. In addition, the Company has an outstanding, unsecured note payable due July 5, 2003, bearing interest at 7%, to Mr. Miraglia, which amounted to $1,281,000 and $1,761,000 as of December 31, 2000 and December 31, 1999, respectively, including accrued interest.
At December 31, 2000 and 1999, the Company had notes receivable outstanding from certain of its officers totaling $5,826,000 and $2,592,000, respectively. These notes are secured by a total of 784,000 shares of common stock of the Company owned by these individuals, term life insurance policies, and bear interest at seven percent. These notes are due upon the sale of the underlying shares of common stock.
NOTE 6 - PROPERTY AND EQUIPMENT
NOTE 7 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
NOTE 8 - REVOLVING CREDIT FACILITY
The Company currently maintains a $50,000,000 long-term line of credit with a group of commercial lenders (the "Credit Facility"). At December 31, 2000, $39,000,000 was outstanding under this Credit Facility and an additional $9,327,000 was available to the Company pursuant to the available borrowing base. The Credit Facility bears interest at the prevailing LIBOR rate (which was approximately 6.6% at December 31, 2000) plus one percent, and matures on September 1, 2002. Amounts available under the Credit Facility are limited to 325% of the Company's earnings before income taxes, interest, depreciation and amortization for the trailing twelve months. Under the terms of the Credit Facility, the Company is required to maintain certain financial ratios and comply with certain technical covenants. The Company was in compliance with these requirements and covenants during the year ended December 31, 2000. Pursuant to the terms of the Credit Facility, the Company is prohibited from paying any dividends.
NOTE 9 - LONG-TERM DEBT AND NOTES PAYABLE
NOTE 10 - INCOME TAXES
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company applies the intrinsic value method in accounting for its stock option and warrant issuances. Accordingly, no compensation cost has been recognized for its stock option and warrant grants. Had compensation cost for the Company's stock options and warrants been determined based on the fair value at the grant dates for such option and warrant awards, the Company's net income would have been reduced by $1,349,000, $748,000, $262,000, and $397,000 during the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, respectively. Basic and diluted earnings per share would have been reduced by $0.15 and $0.15, $0.09 and $0.08, respectively, during the years ended December 31, 2000 and 1999, by $0.03 and $0.03, respectively, during the five months ended December 31, 1998, by $0.07 and $0.06, respectively, during the year ended July 31, 1998.
NOTE 13 - FIRST CASH 401(k) PLAN
The First Cash 401(k) Plan (the "Plan") is provided by the Company for all full-time employees who have been employed with the Company for one year. Under the Plan, a participant may contribute up to 15% of earnings, with the Company matching the first 3% at a rate of 50%. The employee contributions are paid to a corporate trustee and invested in various funds. Company contributions are invested in its common stock, and contributions made to participants' accounts become fully vested upon completion of five years of service. The total Company contributions to the Plan were $146,000, $121,000, $48,000, and $95,000 for the years ended December 31, 2000 and 1999, the five months ended December 31, 1998, and the year ended July 31, 1998, respectively.
NOTE 14 - OPERATING SEGMENT INFORMATION
The Company has three reportable operating segments: pawn lending stores, check cashing/payday advance stores, and a software and hardware provider. The Company's pawn stores offer non-recourse loans on the collateral of pledged tangible personal property. The Company's pawn stores also provide short-term unsecured consumer loans, commonly referred to as payroll advances. The Company's check cashing and payday advance stores provide check cashing services, short-term unsecured consumer loans, bill payment services, money transfer services and money order sales. The Company's computer software subsidiary, Answers, etc., provides turnkey point of sale operating systems to other check cashing and payday advance operators unaffiliated with the Company.
The accounting policies of the segments are the same as those described in Note 2. Management of the Company evaluates performance based on the operating income of each segment. There are no intersegmental sales. Each segment is supervised separately. Information concerning the segments is set forth below (in thousands):