FCFS

Business Context and Reporting Period

Company: First Cash Financial Services, Inc. (First Cash)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Year ended December 31, 1999
Business Overview: First Cash is the nation's third-largest publicly traded pawnshop operator. As of December 31, 1999, the Company operated 114 pawn stores and 33 check cashing/payday advance stores across the U.S. and Mexico. Revenue is derived from pawn lending (service charges), retail sales of forfeited collateral, and check cashing/payday advance fees. The Company also owns "Answers, etc.," a software provider for third-party operators, and holds a 50% interest in "Cash & Go, Ltd.," a joint venture operating financial kiosks.

Key Financial Metrics (Year Ended Dec 31, 1999)

Revenue Mix: Merchandise sales (54%), Service charges (42%), Check cashing fees (2%), Other (2%).
Profitability: Gross profit margin on merchandise sales was 31.6%. Effective tax rate was 33%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 66% to $97.8 million from $59.0 million in the prior fiscal year (ended July 31, 1998). This was driven by the addition of 90 new stores (acquisitions and openings) and a 2% increase in same-store revenue.
• Net Income: Net income rose 71% to $6.5 million from $3.8 million.
• Expense Increases: Operating expenses doubled to $39.2 million, and administrative expenses increased 66% to $6.9 million, primarily due to the expanded store base and necessary corporate support personnel.
• Receivables: Aggregate receivables increased 43% to $24.5 million. The annualized yield on average receivables improved to 181% from 136%.
• Margin Compression: Gross profit margin on merchandise sales declined from 33% to 32%, attributed to lower gold prices affecting scrap jewelry sales.

Guidance, Outlook, and Risks

Outlook and Strategy: Management intends to continue expansion through new store openings and acquisitions, focusing on payday advance operations and store clusters to achieve economies of scale. The Company plans to utilize its Credit Facility and cash from operations to fund growth in fiscal 2000.

Liquidity: The Company maintains a $55 million revolving credit facility with $4.3 million available as of year-end. Substantially all unencumbered assets are pledged as collateral. Dividends are prohibited under the credit agreement.

Risks and Contingencies:

• Regulatory: Operations are subject to extensive state and federal regulations regarding lending rates, check cashing fees, and currency reporting. Changes in laws could materially adversely affect operations.
• Competition: The industry is highly fragmented but facing increased competition from other publicly traded operators and financial institutions.
• Market Risk: The Company is exposed to interest rate risk on its variable-rate debt. A 10% increase in rates would increase interest expense by approximately $239,000.
• Inventory Valuation: Profitability depends on the accurate assessment of collateral value; over-valuation can lead to reduced marketability of forfeited goods.

Investor Verification Checklist

• Debt Covenants: Verify continued compliance with the 325% EBITDA borrowing base limit and other financial ratios required by the $55 million Credit Facility.
• Acquisition Integration: Assess the profitability timeline of the 90 stores added in the last 18 months, given the doubling of operating expenses.
• Gold Price Sensitivity: Monitor the impact of fluctuating gold prices on the gross margin of scrap jewelry sales, which recently compressed margins.
• Payday Advance Growth: Evaluate the collection rates on returned checks in the rapidly expanding payday advance segment, which now represents a significant portion of revenue.
• Regulatory Environment: Track legislative changes in key operating states (Texas, California, etc.) regarding fee caps on payday advances and pawn loans.