FCFS

Business Context and Reporting Period

Company: First Cash Financial Services, Inc. (First Cash)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: First Cash is a leading provider of specialty consumer financial services, operating pawn stores, cash advance locations, and buy-here/pay-here automotive dealerships. As of December 31, 2006, the Company operated 407 locations across 13 U.S. states and 9 states in Mexico. The Company serves unbanked and underbanked consumers through secured pawn loans, short-term cash advances, and used vehicle financing.

Key Financial Metrics

Liquidity & Debt:

• Cash & Equivalents: $15,535,000 (Dec 31, 2006).
• Revolving Credit Facility: $50,000,000 total capacity; $8,000,000 outstanding; $42,000,000 available.
• Notes Payable: $9,438,000 total (related to Auto Master acquisition), with $2,250,000 current and $7,188,000 long-term.
• Debt-to-Equity: Total equity exceeded total liabilities by a ratio of approximately 4 to 1.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 30% to $269.7 million, driven by organic growth and the acquisition of Auto Master (buy-here/pay-here automotive segment) in August 2006.
• Profitability: Net income rose 25% to $31.7 million. Net income per share (diluted) increased from $0.76 to $0.97.
• Segment Expansion: The Company added 80 new locations in 2006 (27 pawn stores, 43 cash advance stores, and 10 automotive dealerships). The automotive segment contributed $24.5 million in revenue for the partial year.
• Expense Increases: Store operating expenses increased 20% and administrative expenses increased 27%, primarily due to new store openings, the Auto Master acquisition, and the adoption of SFAS 123(R) for share-based compensation ($583,000 non-cash charge).
• Receivables: Total customer receivables increased 95% to $87.0 million, largely due to the inclusion of $34.3 million in automotive receivables from the Auto Master acquisition.

Guidance, Outlook, and Risks

Outlook & Strategy:

• Management plans to open 75 to 80 new pawn and cash advance stores in 2007, plus 3 to 5 new automotive dealerships.
• Expansion is expected to be funded primarily through operating cash flows and the existing credit facility.
• Focus remains on increasing revenues and operating profits in existing stores while expanding into favorable demographics in the U.S. and Mexico.

Risks & Contingencies:

• Regulatory Risk: Significant exposure to state and federal regulations regarding cash advances and pawn lending. New legislation in Oregon (effective July 2007) is expected to negatively impact revenues in that state. Federal legislation capping interest rates for military personnel at 36% becomes effective in October 2007, though management does not expect a material adverse effect.
• Market Risk: Exposure to gold price fluctuations (impacting pawn collateral value and inventory margins) and foreign currency risk (Mexican peso operations).
• Credit Risk: Reliance on historical loss experience to estimate allowances for credit losses; actual losses could exceed provisions.
• Integration Risk: Risks associated with successfully integrating the Auto Master acquisition and managing a longer-maturing portfolio of automotive receivables.

Investor Verification Checklist

• Regulatory Impact: Verify the specific impact of the new Oregon payday lending regulations on the Company's seven locations in that state.
• Auto Master Integration: Monitor the performance of the newly acquired automotive segment, specifically the credit loss provision (27% of retail sales in 2006) and inventory turnover.
• Gold Price Sensitivity: Assess the Company's exposure to gold price volatility given significant gold inventory and collateral holdings.
• Debt Covenants: Confirm continued compliance with the Credit Facility covenants, specifically the 300% EBITDA borrowing limit.
• Stock Repurchases: Track the utilization of the remaining 1,539,000 shares available under the 2006 stock repurchase plan.