EZCORP, Inc. - SEC Filing

1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO _____________ COMMISSION FILE NUMBER 0-19424 EZCORP, INC. ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 74-2540145 -------- ---------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1901 CAPITAL PARKWAY AUSTIN, TEXAS 78746 -------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (512) 314-3400 --------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NA --------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: The only class of voting securities of the registrant issued and outstanding is the Class B Voting Common Stock, par value $.01 per share, 100% of which is owned by one record holder who is an affiliate of the registrant. There is no trading market for the Class B Voting Common Stock. As of June 30, 2000, 10,822,010 shares of the registrant's Class A Non-voting Common Stock, par value $.01 per share and 1,190,057 shares of the registrant's Class B Voting Common Stock, par value $.01 per share were outstanding. ================================================================================

2 EZCORP, INC. INDEX TO FORM 10-Q PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of June 30, 2000, June 30, 1999 and September 30, 1999........................................................................................ 1 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended June 30, 2000 and 1999.................................................................. 2 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2000 and 1999............................................................................................. 3 Notes to Interim Condensed Consolidated Financial Statements.............................................. 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................................ 7 PART II. OTHER INFORMATION......................................................................................... 13 SIGNATURE........................................................................................................... 14

3 PART I ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, JUNE 30, SEPTEMBER 30, 2000 1999 1999 --------- --------- ------------ (In thousands) Assets: Current assets: Cash and cash equivalents $ 1,229 $ 1,889 $ 2,899 Pawn loans 45,770 51,891 53,940 Service charges receivable 8,575 15,446 16,671 Inventory, net 39,976 50,212 58,241 Deferred tax asset 8,023 1,882 1,824 Federal income tax receivable 1,949 230 1,695 Prepaid expenses and other current assets 2,906 3,622 3,787 --------- --------- --------- Total current assets 108,428 125,172 139,057 Investment in unconsolidated affiliate 14,488 12,998 13,195 Property and equipment, net 65,265 56,483 60,608 Other assets: Goodwill, net 13,429 14,013 13,868 Other intangible assets, net 3,130 3,082 3,153 Notes receivable from related parties 3,220 3,000 3,000 Other assets, net 1,220 1,508 1,196 --------- --------- --------- Total assets $ 209,180 $ 216,256 $ 234,077 ========= ========= ========= Liabilities and stockholders' equity: Current liabilities: Current maturities of long-term debt $ 76,012 $ 10 $ 11 Accounts payable and other accrued expenses 9,596 8,599 11,049 Customer layaway deposits 2,245 2,256 2,422 Total current liabilities 87,853 10,865 13,482 Long-term debt, less current maturities 103 70,115 83,112 Deferred tax liability 1,696 24 1,696 Other long-term liabilities 387 114 102 --------- --------- --------- Total long-term liabilities 2,186 70,253 84,910 Commitments and contingencies Stockholders' equity: Preferred Stock, par value $.01 per share; Authorized 5,000,000 shares; none issued and outstanding -- -- -- Class A Non-voting Common Stock, par value $.01 per Share; Authorized 40,000,000 shares; 10,831,043 issued And 10,822,010 outstanding at June 30, 2000, June 30, 1999, And September 30, 1999 108 108 108 Class B Voting Common Stock, convertible, par value $.01 per share; Authorized 1,198,990 shares; 1,190,057 issued And outstanding at June 30, 2000, June 30, 1999, and September 30, 1999 12 12 12 Additional paid-in capital 114,501 114,470 114,470 Retained earnings 4,905 21,379 21,715 --------- --------- --------- 119,526 135,969 136,305 Treasury stock (9,033 shares) (35) (35) (35) Receivable from stockholder (729) (729) (729) Accumulated other comprehensive income 379 (67) 144 --------- --------- --------- Total stockholders' equity 119,141 135,138 135,685 --------- --------- --------- Total liabilities and stockholders' equity $ 209,180 $ 216,256 $ 234,077 ========= ========= ========= See Notes to Interim Condensed Consolidated Financial Statements (unaudited). 1

4 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 --------- --------- --------- --------- (In thousands, except per share amounts) Revenues: Sales $ 28,448 $ 29,124 $ 105,973 $ 99,883 Pawn service charges 13,511 24,563 43,086 73,936 Other 279 215 816 581 --------- --------- --------- --------- 42,238 53,902 149,875 174,400 Cost of goods sold 16,085 25,382 63,455 85,504 --------- --------- --------- --------- Net revenues 26,153 28,520 86,420 88,896 Operating expenses: Operations 20,669 21,059 64,446 61,311 Administrative 4,817 3,600 14,314 10,545 Depreciation and amortization 2,492 2,458 7,575 6,939 --------- --------- --------- --------- 27,978 27,117 86,335 78,795 --------- --------- --------- --------- Operating income (loss) (1,825) 1,403 85 10,101 Interest expense, net 1,196 849 3,728 2,514 Equity in net income of unconsolidated affiliate (69) (75) (216) (348) (Gain) loss on sale of assets 208 -- (242) -- --------- --------- --------- --------- Income (loss) before income taxes (3,160) 629 (3,185) 7,935 Income tax expense (benefit) (1,010) 160 (1,019) 2,936 --------- --------- --------- --------- Income (loss) before cumulative effect of a change in accounting principle (2,150) 469 (2,166) 4,999 Cumulative effect on prior years (to September 30, 1999) of change in method of revenue recognition, net of tax -- -- (14,344) -- --------- --------- --------- --------- Net income (loss) $ (2,150) $ 469 $ (16,510) $ 4,999 ========= ========= ========= ========= Amounts per common share (fully diluted): Income (loss) before cumulative effect of a change in accounting principle $ (0.18) $ 0.04 $ (0.18) $ 0.42 Cumulative effect on prior years (to September 30, 1999) of change in method of revenue recognition, net of tax $ -- $ -- $ (1.19) $ -- --------- --------- --------- --------- Net income (loss) $ (0.18) $ (0.04) $ (1.37) $ 0.42 ========= ========= ========= ========= Weighted average shares outstanding: Basic 12,012 12,011 12,012 12,005 ========= ========= ========= ========= Fully Diluted 12,012 12,015 12,012 12,011 ========= ========= ========= ========= Cash dividends per common share $ -- $ 0.0125 $ 0.0250 $ 0.0375 --------- --------- --------- --------- Pro forma amounts assuming the new revenue recognition method is applied retroactively: Net income (loss) $ (2,150) $ (945) $ (16,510) $ 2,849 Net income (loss) per diluted share $ (0.18) $ (0.08) $ (1.37) $ 0.24 See Notes to Interim Condensed Consolidated Financial Statements (unaudited). 2

5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED JUNE 30, 2000 1999 --------- --------- (In thousands) Operating Activities: Net income (loss) $ (16,510) $ 4,999 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Cumulative effect of a change in accounting principle 14,344 -- Depreciation and amortization 7,575 6,939 Deferred income taxes 1,489 -- Net (gain)/loss on sale or disposal of assets (242) 149 Income from investment in unconsolidated affiliate (216) (348) Changes in operating assets and liabilities: Service charges receivable 927 (603) Inventory 3,575 (6,052) Notes receivable from related parties (220) Prepaid expenses, other current assets, and other assets, net 1,103 5 Accounts payable and accrued expenses (1,307) (201) Customer layaway deposits (176) 78 Other long-term liabilities (121) (38) Federal income taxes receivable (428) 610 Net cash provided by operating activities 9,793 5,538 Investing Activities: Pawn loans forfeited and transferred to inventory 53,688 55,589 Pawn loans made (138,316) (152,493) Pawn loans repaid 92,798 94,971 --------- --------- Net decrease in loans 8,170 (1,933) Additions to property, plant, and equipment (14,956) (19,213) Additions to intangible assets (621) (1,793) Acquisitions, net of cash acquired -- (1,803) Investment in unconsolidated affiliate (841) (1,777) Proceeds from sale of assets 4,093 -- --------- --------- Net cash used in investing activities (4,155) (26,519) Financing Activities: Proceeds from bank borrowings 31,500 38,000 Payments on borrowings (38,508) (16,008) Payment of dividends (300) (450) --------- --------- Net cash provided by (used in) financing activities (7,308) 21,542 --------- --------- Change in cash and cash equivalents (1,670) 561 Cash and cash equivalents at beginning of period 2,899 1,328 --------- --------- Cash and cash equivalents at end of period $ 1,229 $ 1,889 ========= ========= Non-cash Investing and Financing Activities: Foreign currency translation adjustment $ 235 $ (37) Issuance of stock options $ 31 $ 72 See Notes to Interim Condensed Consolidated Financial Statements (unaudited). 3

6 NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2000 NOTE A: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of EZCORP, Inc. and Subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. The accompanying financial statements should be read with the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. The Company's business is subject to seasonal variations, and operating results for the nine-month period ended June 30, 2000 are not necessarily indicative of the results of operations for the full fiscal year. NOTE B: CHANGE IN ACCOUNTING PRINCIPLE During the second quarter of fiscal 2000, the Company changed its method of revenue recognition on pawn loans by reducing the accrual of pawn service charge revenue to the estimated amount which will be realized through loan collection and recording forfeited collateral at the lower of cost (the principal amount of the loan) or market. Previously, pawn service charges were accrued on all loans, and the carrying value of the forfeited collateral was the lower of cost (principal amount of loan plus accrued pawn service charges) or market. The Company believes the new method of revenue recognition is preferable in that it better aligns reported net revenues and earnings with current economic trends in its business and the management of the Company. In addition, the Company believes the new method improves comparability of its operating results and financial position with similar companies. The new method has been applied as of the beginning of the current fiscal year (October 1, 1999). The charge of $14.3 million included in the accompanying income statement for the nine months ended June 30, 2000 represents the cumulative effect of applying the new method retroactively (net of an income tax benefit of $7.4 million). The pro forma amounts presented on the accompanying statements of operations for prior periods represent the effect of retroactive application assuming the new accounting method, net of related income taxes, to prior periods. NOTE C: ACCOUNTING PRINCIPLES AND PRACTICES The provision for federal income taxes has been calculated based on the Company's estimate of its effective tax rate for the full fiscal year. The Company provides inventory reserves for shrinkage and cost in excess of estimated market value. The Company estimates these reserves using analysis of sales trends, inventory aging, sales margins and shrinkage on inventory. At June 30, 2000 (after giving effect to the change in accounting principle discussed in Note B), inventory reserves were $1.2 million. Inventory reserves at June 30, 1999 and September 30, 1999 amounted to $7.1 million and $8.3 million, respectively ($1.2 million and $1.4 million, respectively, pro forma for the effect of the accounting change). Property and equipment is shown net of accumulated depreciation of $65.3 million, $56.5 million, and $60.6 million at June 30, 2000, June 30, 1999, and September 30, 1999, respectively. Certain prior year balances have been reclassified to conform to the fiscal 2000 presentation. 4

7 NOTE D: EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ---------- ------- ----------- ------- Numerator Numerator for basic and diluted earnings per share: net income (loss) $ (2,150) $ 469 $ (16,510) $ 4,999 ========= ======= ========== ======= Denominator Denominator for basic earnings per share: Weighted average shares 12,012 12,011 12,012 12,005 Effect of dilutive securities: Employee Stock Options -- -- -- -- Warrants -- 4 -- 6 --------- ------- ---------- ------- Dilutive potential common shares -- 4 -- 6 --------- ------- ---------- ------- Denominator for diluted earnings per share: adjusted weighted average shares and assumed conversions 12,012 12,015 12,012 12,011 ========= ======= ========== ======= Basic earnings (loss) per share $ (0.18) $ 0.04 $ (1.37) $ 0.42 ========= ======= ========== ======= Diluted earnings (loss) per share $ (0.18) $ 0.04 $ (1.37) $ 0.42 ========= ======= ========== ======= For the three months ended June 30, 2000, options to purchase 1,600,854 weighted average shares of common stock at an average price of $11.06 per share were outstanding. For the nine months ended June 30, 2000, options to purchase 1,598,515 weighted average shares of common stock at an average price of $11.15 per share were outstanding. These options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the three months ended June 30, 1999, options to purchase 1,615,855 weighted average shares of common stock at an average price of $11.22 per share were outstanding. For the nine months ended June 30, 1999, options to purchase 1,509,082 weighted average shares of common stock at an average price of $11.33 per share were outstanding. These options were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. NOTE E: INVESTMENT IN UNCONSOLIDATED AFFILIATE The Company owns 13,276,666 common shares of Albemarle & Bond Holdings, plc ("A&B"), representing 29.86% of A&B's outstanding shares. The Company accounts for its investment in A&B using the equity method. Since A&B's fiscal year ends three months prior to the Company's fiscal year, the income reported by the Company for its investment in A&B is on a three month lag. The income reported for the Company's nine month period ended June 30, 2000 represents its percentage interest in the results of A&B's operations, reduced by the amortization of the excess purchase price over fair market value, from July 1, 1999 to December 31, 1999 and an estimate of earnings for January 2000 through March 2000. The company plans to reconcile this amount during its fiscal year ending September 30, 2000 after A&B's results have been reported to the public. The company does not expect the actual results to differ materially from this estimate. 5

8 NOTE F: DEBT At June 30, 2000 the Company was not in compliance with the leverage and fixed charge coverage ratio covenants of its credit agreement with several banks. The Company has obtained a waiver with respect to these covenants at June 30, 2000. The Company intends to amend its covenants prior to September 30, 2000 such that no future non-compliance will be expected. However, this amendment is not yet completed and the Company anticipates that, absent an amendment, it will again be out of compliance with the same covenants at September 30, 2000. Accordingly, the Company has classified its debt as a current liability. The credit agreement matures December 3, 2001. The outstanding balance under the agreement bears interest, payable monthly, at the agent bank's Prime Rate or Eurodollar rate plus 0 to 450 basis points, depending on certain performance criteria. In addition, the Company pays an unused commitment fee equal to a fixed rate of 25 basis points of the unused amount of the total commitment. At June 30, 2000, the Company had $76 million outstanding under this credit agreement. NOTE G: CONTINGENCIES From time to time, the Company is involved in litigation relating to claims arising from its normal business operations. Currently, the Company is a defendant in several lawsuits, some of which involve claims for substantial amounts. While the ultimate outcome of these lawsuits cannot be predicted at this time, based upon consultation with its legal counsel, the Company believes the resolution of these matters will not have a material adverse effect on the Company's financial condition or results of operations. However, there can be no assurance as to the ultimate outcome of these matters. NOTE H: COMPREHENSIVE INCOME/(LOSS) Comprehensive income/(loss) includes net income and other revenues, expenses, gains and losses that are excluded from net income but are included as a component of total shareholders' equity. Comprehensive loss for the three and nine months ended June 30, 2000 was approximately $(2.2) million and $(16.3) million, and the comprehensive income for the three and nine months ended June 30, 1999 was approximately $0.5 million and $5.0 million, respectively. The difference between comprehensive income (loss) and net income (loss) results primarily from the effect of foreign currency translation adjustments in accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation." The accumulated balance of foreign currency activity excluded from net income is presented in the Condensed Consolidated Balance Sheets as "Accumulated other comprehensive income." 6

9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion in this section of this report contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in this section and those discussed elsewhere in this report. ACCOUNTING CHANGE During the second quarter of fiscal 2000, the Company changed its method of revenue recognition on pawn loans by reducing the accrual of pawn service charge revenues to the estimated amount that will be realized through loan collection, and recording forfeited collateral at the lower of the principal balance of the loan or estimated market value. Previously, pawn service charges were accrued on all loans, and the carrying value of the forfeited collateral was the lower of cost (principal amount of loan plus accrued pawn service charges) or market. The Company believes the new method of revenue recognition is preferable in that it better aligns reported net revenues and earnings with current economic trends in its business and the management of the Company. Additionally, the new method improves the comparability of the Company's financial position and operating result with similar companies. This change was made effective October 1, 1999, the first day of the Company's fiscal year. During the period of time between the inception of a pawn loan and the later sale of the forfeited collateral, the change in accounting principle will not affect the amount of net revenues or earnings reported by the Company. It will affect only the timing of net revenues and earnings recognition. The new method will more closely align net revenues and earnings recognition with the actual collection of cash from loan payments and the sale of forfeited collateral. Additionally, the new method will reduce the impact of short-term or permanent changes in the market value of forfeited collateral on inventory reserve requirements. In management's opinion, these factors will reduce the reliance upon accounting estimates in reporting the Company's results of operations. Management has implemented changes in the Company's operating practices and taken other actions, including the modification of employee compensation programs, to provide additional incentives for cash returns on capital employed. Adoption of the new accounting method is consistent with these actions and will present external financial statements on a basis more reflective of how the Company is managed internally. The new method has been applied as of the beginning of the current fiscal year (October 1, 1999). The charge of $14.3 million included in the accompanying income statement for the nine months ended June 30, 2000 represents the cumulative effect of applying the new method retroactively (net of an income tax benefit of $7.4 million). The pro forma amounts presented on the accompanying statements of operations for prior periods represent the effect of retroactive application assuming the new accounting method, net of related income taxes, to prior periods. 7

10 Third Quarter Ended June 30, 2000 vs. Third Quarter Ended June 30, 1999 The following table sets forth selected, unaudited, consolidated financial data with respect to the Company for the three months ended June 30, 2000 and 1999. THREE MONTHS ENDED % OR JUNE 30, (a) POINT 2000 1999 CHANGE(b) -------- -------- --------- (PRO FORMA) NET REVENUES: Sales $ 28,448 $ 29,124 (2.3)% Pawn service charges 13,511 14,086 (4.1)% Other 279 215 29.8% -------- -------- Total revenues 42,238 43,425 (2.7)% Cost of goods sold 16,085 17,083 (5.8)% ------- ------- Net revenues $ 26,153 $ 26,342 (0.7)% ======= ======= Other data: Gross profit as a percent of sales 43.5% 41.3% 2.2 pts. Average annual inventory turnover 1.6x 1.9x (0.3)x Inventory per store at end of the period $ 119 $ 116 2.6% Loan balance per store at end of period $ 136 $ 159 (14.5)% Average annualized yield on loan portfolio 128% 120% 8.0 pts. Redemption rate 79% 77% 2.0 pts. Expenses as a percent of total revenues: Operating 48.9% 48.4% 0.6 pts. Administrative 11.4% 8.3% 3.1 pts. Depreciation and amortization 5.9% 5.7% 0.2 pts. Interest, net 2.8% 2.0% 0.8 pts. Locations in operation: Beginning of period 336 318 Acquired -- 1 Established -- 7 Sold, combined or closed -- -- -------- -------- End of period 336 326 ======== ======== - ---------- (a) In thousands, except percentages, inventory turnover and store count. (b) In comparing the period differences between dollar amounts or per store counts, a percentage change is used. In comparing the period differences between two percentages, a percentage point (pt.) change is used. 8

11 Nine Months Ended June 30, 2000 vs. Nine Months Ended June 30,1999 The following table sets forth selected, unaudited, consolidated financial data with respect to the Company for the nine months ended June 30, 2000 and 1999. NINE MONTHS ENDED % OR JUNE 30, (a) POINT 2000 1999 CHANGE(b) --------- --------- --------- (PRO FORMA) Net revenues: Sales $ 105,973 $ 99,883 6.1% Pawn service charges 43,086 43,125 (0.1)% Other 816 581 40.4% --------- --------- Total revenues 149,875 143,589 4.4% Cost of goods sold 63,455 57,958 9.5% --------- --------- Net revenues $ 86,420 $ 85,631 0.9% ========= ========= Other data: Gross profit as a percent of sales 40.1% 42.0% (1.9) pts. Average annual inventory turnover 2.0x 2.1x (0.1)x Inventory per store at end of the period $ 119 $ 116 2.6% Loan balance per store at end of period $ 136 $ 159 (14.5)% Average annualized yield on loan portfolio 126% 121% 5.0 pts. Redemption rate 79% 77% 2.0 pts. Expenses as a percent of total revenues: Operating 43.0% 42.7% 0.3 pts. Administrative 9.6% 7.3% 2.3 pts. Depreciation and amortization 5.1% 4.8% 0.3 pts. Interest, net 2.5% 1.8% 0.7 pts. Locations in operation: Beginning of period 331 286 Acquired -- 4 Established 5 36 Sold, combined or closed -- -- ------- --------- End of period 336 326 ====== ========= - ---------- (a) In thousands, except percentages, inventory turnover and store count. (b) In comparing the period differences between dollar amounts or per store counts, a percentage change is used. In comparing the period differences between two percentages, a percentage point (pt.) change is used. 9

12 RESULTS OF OPERATIONS The following discussion compares results for the three and nine month periods ended June 30, 2000 ("Fiscal 2000 Periods") to the three and nine month periods ended June 30, 1999 ("Fiscal 1999 Periods"). The discussion should be read in conjunction with the accompanying financial statements and related notes. For purposes of management's discussion and analysis of results of operations and financial condition, all comparisons to the Fiscal 2000 Periods reflect the pro forma effects of applying the new accounting principle to the consolidated financial statements as if the change had occurred on September 30, 1998. The Company's primary activity is the making of small, non-recourse loans secured by tangible personal property. The income earned on this activity is pawn service charge revenue. For the three month Fiscal 2000 Period, pawn service charge revenue decreased $0.6 million from the three month Fiscal 1999 Period to $13.5 million. This resulted from a decrease in same store pawn service charge revenues ($1.0 million) primarily due to a 12 percent reduction in average same store pawn loan balances, offset by an increase in pawn service charge revenues from new stores not open the full three month period ($0.4 million). The annualized yield on the average pawn loan balance increased 8 percentage points from the three month Fiscal 1999 Period to 128 percent. For the nine month Fiscal 2000 Period, pawn service charge revenue remained unchanged from the nine month Fiscal 1999 Period of $43.1 million. This resulted from an increase in pawn service charge revenues from new stores not open the full nine month period ($2.6 million), offset by a decrease in same store pawn service charge revenues ($2.6 million) primarily due to a 9 percent reduction in average same store pawn loan balances. The annualized yield on the average pawn loan balance increased 5 percentage points from the nine month Fiscal 1999 Period to 126 percent. Variations in the annualized loan yield, as we saw between these periods, are due generally to changes in loan redemption rates and a mix shift between loans with different yields. A secondary, but related, activity of the Company is the sale of merchandise, primarily collateral forfeited from its lending activity. For the three month Fiscal 2000 Period, sales decreased $0.7 million from the three month Fiscal 1999 Period to approximately $28.4 million. This resulted from a decrease in same store merchandise sales ($2.1 million) offset by an increase in new store sales ($1.0 million) and an increase in jewelry which was sold to scrap dealers or through wholesale channels ($0.4 million). Annualized inventory turnover for the three month Fiscal 2000 Period, at 1.6 times, was lower than the Fiscal 1999 Period's 1.9 times. For the nine month Fiscal 2000 Period, sales increased $6.1 million from the Fiscal 1999 Period to $106.0 million. This resulted from an increase in new store sales ($7.7 million), and an increase in jewelry sold to scrap dealers or through wholesale channels ($0.6 million), offset by a decrease in same store merchandise sales ($2.2 million). Annualized inventory turnover, at 2.0 times, was lower in the nine month Fiscal 2000 Period compared to the nine month Fiscal 1999 Period. For the three month Fiscal 2000 Period, gross profits as a percentage of sales increased 2.2 percentage points from the three month Fiscal 1999 Period to 43.5 percent. This increase results from higher gross margins on merchandise sales (3.4 percentage points), a decrease in inventory shrinkage when measured as a percentage of merchandise sales (down 0.3 of a percentage point to approximately 1.0 percent) offset by lower gross margins on wholesale and scrap jewelry sales (1.5 of a percentage point). For the nine month Fiscal 2000 Period, gross profits as a percentage of sales decreased 1.9 percentage points from the nine month Fiscal 1999 Period to 40.1%. This decrease results from lower margins on both merchandise sales (1.2 percentage points) and wholesale and scrap jewelry sales (0.8 of a percentage point), offset by a decrease in inventory shrinkage when measured as a percentage of merchandise sales (down 0.1 of a percentage point to approximately 1.1 percent). In the three month Fiscal 2000 Period, operating expenses as a percentage of total revenues increased 0.6 percentage points from the three month Fiscal 1999 Period to 48.9 percent, primarily from 10 new stores (2.5 percentage points), offset by a decrease in same store operating expenses (1.9 percentage points). Administrative expenses increased 3.1 percentage points to 11.4 percent, primarily due to non-capitalizable software development costs (1.5 of a percentage point) and higher labor expense (0.8 percentage points). 10

13 In the nine month Fiscal 2000 Period, operating expenses as a percentage of total revenues increased 0.3 of a percentage point from the 1999 Period to 43 percent. This increase results primarily from new stores (4.6 of a percentage point), offset by a reduction in same store operating expenses (4.3 of a percentage point). Administrative expenses increased 2.3 percentage points to 9.6 percent, primarily from higher labor expense (0.5 of a percentage point), the write-down of a past due note receivable (0.3 of a percentage point), and non-capitalizable software development costs (0.3 of a percentage point). For the three month and nine month Fiscal 2000 Period, interest expense as a percent of total revenue increased by 0.8 and 0.7 of a percentage point, respectively, from the Fiscal 1999 Periods due to increased average debt balances and higher interest rates. The Company is examining several means to improve operating performance, including rationalizing under-performing markets and stores, as well as cost reductions in certain areas. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine month Fiscal 2000 Period was $9.8 million compared to $5.5 million provided in the Fiscal 1999 Period, an increase of $4.3 million. The impact of lower net income levels was more than offset by decreases in inventory and other operating assets and larger non-cash items such as depreciation and amortization. The change in accounting principle had no impact on cash generated from operating activities. Net cash used in investing activities was $4.2 million for the Fiscal 2000 Period compared to $26.5 million used in the Fiscal 1999 Period. The change is due to larger decreases in pawn loan balances in the Fiscal 2000 Period compared to the Fiscal 1999 Period, lower levels of capital expenditures and investments, and proceeds of $4.1 million from the sale of certain assets. In the Fiscal 2000 Period, the Company invested approximately $15.0 million to upgrade or replace existing equipment and computer systems, open five newly established stores, and make improvements to several existing stores. The Company funded these expenditures from cash flow provided by operating activities while reducing bank borrowings by approximately $7.0 million. The Company plans to significantly reduce its new store expansion. The Company anticipates that cash flow from operations and funds available under its bank line of credit will be adequate to fund limited capital expenditures and working capital requirements for the remainder of the fiscal year. However, there can be no assurance that the Company's cash flow from operating activities and funds available under the line of credit will be adequate for these expenditures. At June 30, 2000 the Company was not in compliance with the leverage and fixed charge coverage ratio covenants of its credit agreement with several banks. The Company has obtained a waiver with respect to these covenants at June 30, 2000. The Company intends to amend its covenants prior to September 30, 2000 such that no future non-compliance will be expected. However, this amendment is not yet completed and the Company anticipates that, absent an amendment, it will again be out of compliance with the same covenants at September 30, 2000. Accordingly, the Company has classified its debt as a current liability. SEASONALITY Historically, pawn service charge revenues are highest in the fourth fiscal quarter (July, August and September) due to higher loan demand during the summer months and merchandise sales are highest in the first and second fiscal quarters (October through March) due to the holiday season and tax refunds. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion about the Company's market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. The Company is exposed to market risk related to changes in interest rates and foreign currency exchange rates. The Company does not use derivative financial instruments. The Company's earnings are affected by changes in interest rates due to the impact those changes have on its variable-rate debt instruments. The majority of the Company's long-term debt at June 30, 2000 is comprised of variable-rate debt instruments. At June 30, 2000, the interest rate on the majority of the Company's variable-rate debt instruments was 131 basis points higher than it was at September 30, 1999. If interest rates average 131 basis points more during fiscal 2000, the Company's interest expense for the year would increase by approximately $0.8 million. This amount is determined by considering the impact of the recent interest rate increase on the Company's variable rate long-term debt at June 30, 2000. 11

14 The Company's earnings and financial position are affected by foreign exchange rate fluctuations related to the equity investment in Albemarle & Bond Holdings, plc ("A&B"). A&B's functional currency is the U.K. pound. The U.K. pound exchange rate can directly and indirectly impact the Company's results of operations and financial position in several ways, including potential economic recession in the U.K. resulting from a devalued pound. The impact on the Company's financial position and results of operations of a hypothetical change in the exchange rate between the U.S. dollar and the U.K. pound cannot be reasonably estimated. The translation adjustment representing the weakening in the U.K. pound during the quarter ended June 30, 2000 was approximately $0.1 million. On June 30, 2000, the U.K. pound closed at 0.6583 to 1.00 U.S. dollar, an increase from 0.6186 at December 31, 1999. No assurance can be given as to the future valuation of the U.K. pound and how further movements in the pound could effect future earnings or the financial position of the Company. FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statement of historical information provided herein are forward-looking and may contain information about financial results, economic conditions, trends and known uncertainties. The Company cautions the reader that actual results could differ materially from those expected by the Company depending on the outcome of certain factors, including without limitation (i) fluctuations in the Company's inventory and loan balances, inventory turnover, average yield on loan portfolio, redemption rates, labor and employment matters, competition, operating risk, acquisition and expansion risk, liquidity and capital requirements, the Company's ability to amend its credit agreement with mutually satisfactory terms, and the effect of government and environmental regulations and (ii) adverse changes in the market for the Company's services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligations to release publicly the results of any revisions to these forward-looking statements which may be made to reflect events or circumstances after the date hereon, including without limitation, changes in the Company's business strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events. 12

15 PART II ITEM 1. LEGAL PROCEEDINGS From time to time, the Company is involved in litigation relating to claims arising from its normal business operations. Currently, the Company is a defendant in several lawsuits. Some of these lawsuits involve claims for substantial amounts. While the ultimate outcome of these lawsuits cannot be ascertained, after consultation with counsel, the Company believes the resolution of these suits will not have a material adverse effect on the Company's financial condition or results of operations. However, there can be no assurance as to the ultimate outcome of these matters. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES At June 30, 2000, the Company obtained a waiver from its credit agreement lenders for the breach of its leverage ratio covenant and its fixed charge coverage ratio covenant at that date. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT INCORPORATED BY NUMBER DESCRIPTION REFERENCE TO 10.80 Limited Waiver between the Company and Filed herewith Wells Fargo Bank Texas, N.A., as Agent and Issuing Bank, re: $85 million Revolving Credit Loan. 27 Financial Data Schedule Filed herewith (b) Reports on Form 8-K The Company has not filed any reports on Form 8-K for the quarter ended June 30, 2000. 13

16 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EZCORP, INC. (Registrant) Date: August 14, 2000 By: /s/ DAN N. TONISSEN ------------------------------------------ (Signature) Daniel N. Tonissen Senior Vice President, Chief Financial Officer & Director 14

17 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.80 Limited Waiver between the Company and Wells Fargo Bank Texas, N.A., as Agent and Issuing Bank, re: $85 million Revolving Credit Loan. 27 Financial Data Schedule

1 EXHIBIT 10.80 EZCORP, INC. LIMITED WAIVER AS OF AUGUST 14, 2000 WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION AS AGENT AND ISSUING BANK

2 As of August 14, 2000 EZCORP, INC. 1901 Capitol Parkway Austin, Texas 78746 Re: Limited Waiver Gentlemen: Reference is hereby made to that certain Credit Agreement dated as of December 10, 1998 (as the same has been amended, supplemented or modified from time to time, the "Credit Agreement"), among EZCORP, INC., a Delaware corporation (the "Borrower"), each of the Lenders and Wells Fargo Bank Texas, National Association (successor by consolidation to Wells Fargo Bank (Texas), National Association), as Agent for itself and the other Lenders and as the Issuing Bank. All capitalized terms used and not otherwise defined herein shall have their respective meanings as set forth in the Credit Agreement. The Borrower has notified the Agent and the Lenders it is not in compliance with Sections 10.2 (Leverage Ratio) and 10.5 (Fixed Charge Coverage Ratio) of the Credit Agreement for the Fiscal Quarter ended June 30, 2000 (herein the "Financial Covenant Violations") and has requested the Agent and Lenders not exercise any remedies as a result of such Financial Covenant Violations. The Agent, the Lenders and the Issuing Bank hereby agree (i) not to exercise any remedies under the Loan Documents solely as a result of the Financial Covenant Violations, and (ii) to continue to make Advances and issue Letters of Credit as long as all the conditions precedent set forth in Section 6.2 of the Credit Agreement are complied with, except only any non-compliance which results solely as a result of the Financial Covenant Violations, in each case of (i) and (ii), from June 30, 2000 through and including September 15, 2000 (herein the "Limited Waiver"). Subsequent to September 15, 2000, the Agent and the Lenders may exercise any and all remedies as a result of the Financial Covenant Violations. In connection with the Limited Waiver, Borrower agrees contemporaneously with the execution and delivery hereof, to pay to the Agent for the pro rata benefit of the Lenders based on the Commitments a fee in the amount of Two Hundred Thousand Dollars ($200,000.00). The Limited Waiver is effective only to the extent specifically stated above and is limited as specified herein. Except as expressly stated herein, the Limited Waiver shall not be construed as a consent to or waiver of any Default which may now exist or hereafter occur or any violation of any term, covenant or provision of the Credit Agreement or any other Loan Document. All rights and remedies of the Lenders and the Agent are hereby expressly reserved with respect to any such other violation or Default. The Limited Waiver does not affect or diminish the right of the Agent and the Lenders to require strict performance by the Borrower and each Guarantor of each provision of any Loan Document to which it is a party, except as expressly provided herein. All terms and provisions of, and all rights and remedies of the Agent and the Lenders under, the Loan Documents shall continue in full force and effect and are hereby confirmed and ratified in all respects.

3 IN ADDITION, TO INDUCE THE AGENT, THE LENDERS AND THE ISSUING BANK TO AGREE TO THE LIMITED WAIVER, BORROWER AND EACH GUARANTOR REPRESENT AND WARRANT THAT AS OF THE DATE OF THEIR EXECUTION OF THIS LETTER AGREEMENT THERE ARE NO CLAIMS OR OFFSETS AGAINST OR DEFENSES OR COUNTERCLAIMS TO THEIR OBLIGATIONS UNDER THE LOAN DOCUMENTS AND IN ACCORDANCE THEREWITH EACH OF THEM: (a) WAIVER. WAIVES ANY AND ALL SUCH CLAIMS, OFFSETS, DEFENSES OR COUNTERCLAIMS, WHETHER KNOWN OR UNKNOWN, ARISING PRIOR TO THE DATE OF ITS EXECUTION OF THIS LETTER AGREEMENT, AND (b) RELEASE. RELEASES AND DISCHARGES THE AGENT, THE LENDERS AND THE ISSUING BANK, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, SHAREHOLDERS, AFFILIATES AND ATTORNEYS (COLLECTIVELY, THE "RELEASED PARTIES") FROM ANY AND ALL OBLIGATIONS, INDEBTEDNESS, LIABILITIES, CLAIMS, RIGHTS, CAUSES OF ACTION OR DEMANDS WHATSOEVER, WHETHER KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, IN LAW OR EQUITY, WHICH THE BORROWER OR ANY GUARANTOR EVER HAD, NOW HAS, CLAIMS TO HAVE OR MAY HAVE AGAINST ANY RELEASED PARTY ARISING PRIOR TO THE DATE HEREOF AND FROM OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY AND HEREBY. THIS LETTER AGREEMENT EMBODIES THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO RELATING TO THE LIMITED WAIVER SET FORTH HEREIN AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE LIMITED WAIVER SET FORTH HEREIN AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. THIS LETTER AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. This letter agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same letter agreement. This letter agreement shall not be effective unless and until the Agent, the Lenders, the Issuing Bank, the Borrower and the Guarantors each have executed and delivered a counterpart hereof, whereupon this letter agreement shall be effective as of the date first above written. Signatures transmitted by facsimile shall be effective as originals. -2-

4 By executing this letter agreement in the spaces provided below, (a) the Agent, the Lenders and the Issuing Bank agree to the terms, conditions and provisions hereof, (b) the Borrower agrees to the terms, conditions and provisions hereof, and (c) the Guarantors (i) consent and agree to the Limited Waiver and the other terms, conditions and provisions hereof, and (ii) agree that the Guaranties and all other Loan Documents to which the Guarantors, respectively, are a party are, and shall continue to be, in full force and effect and are hereby confirmed and ratified in all respects. AGENT AND LENDERS AND ISSUING BANK: WELLS FARGO BANK TEXAS, NATIONAL ASSOCIATION, as Agent and as a Lender and as Issuing Bank By: ---------------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- -3-

5 BANK ONE, TEXAS, NATIONAL ASSOCIATION By: ----------------------------------------- Name: ------------------------------------ Title: ----------------------------------- GUARANTY FEDERAL BANK, F.S.B. By: ----------------------------------------- Name: ------------------------------------ Title: ----------------------------------- COMERICA BANK-TEXAS By: ----------------------------------------- Name: ------------------------------------ Title: ----------------------------------- THE CHASE MANHATTAN BANK (successor by merger to Chase Bank of Texas, National Association) By: ----------------------------------------- Name: ------------------------------------ Title: ----------------------------------- ACCEPTED AND AGREED TO as of the date first above written: BORROWER: EZCORP, INC. By: -------------------------------- Name: --------------------------- Title: -------------------------- -4-

6 GUARANTORS: EZPAWN ALABAMA, INC. EZPAWN ARKANSAS, INC. EZPAWN COLORADO, INC. EZPAWN FLORIDA, INC. EZPAWN GEORGIA, INC. EZPAWN HOLDINGS, INC. EZPAWN INDIANA, INC. EZPAWN LOUISIANA, INC. EZPAWN NEVADA, INC. EZPAWN NORTH CAROLINA, INC. EZPAWN OKLAHOMA, INC. EZPAWN TENNESSEE, INC. TEXAS EZPAWN MANAGEMENT, INC. EZ CAR SALES, INC. EZPAWN CONSTRUCTION, INC. EZPAWN KANSAS, INC. EZPAWN KENTUCKY, INC. EZPAWN MISSOURI, INC. EZPAWN SOUTH CAROLINA, INC. EZCORP INTERNATIONAL, INC. EZ MONEY NORTH CAROLINA, INC. By: ------------------------------------ Name: ------------------------------- Title: ------------------------------ TEXAS EZPAWN L.P. By: TEXAS EZPAWN MANAGEMENT, INC., its sole general partner By: -------------------------------- Name: --------------------------- Title: -------------------------- -5-

5 9-MOS SEP-30-2000 OCT-01-1999 JUN-30-2000 1,229 0 54,345 0 39,976 108,428 109,165 43,900 209,180 87,853 0 0 0 120 119,021 209,180 105,973 149,875 63,455 149,548 0 0 3,728 (3,185) (1,019) (2,166) 0 0 (14,344) (16,510) (1.37) (1.37)