File No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM S-3
REGISTRATION STATEMENT
Under the Securities Act of 1933
EZCORP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction
of incorporation or organization)
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74-2540145
(I.R.S. Employer
Identification Number)
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1901 CAPITAL PARKWAY
AUSTIN, TEXAS 78746
(512) 314-3400
(Address, including zip code, and telephone number, including area code, of registrants principal executive
offices)
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Connie Kondik
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Copies to:
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General Counsel
EZCORP, Inc.
1901 Capital Parkway
Austin, Texas 78746
Telephone: (512) 314-3400
Facsimile: (512) 314-3463
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Lee Polson
Strasburger & Price, LLP
600 Congress Avenue, Suite 1600
Austin, Texas 78701
Telephone: (512)-499-3600
Facsimile: (512) 499-3660
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Name, address, including zip code, and telephone
number, including area code, of agent for service
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Approximate dates of commencement of proposed sale to public: From time to time after this
registration statement becomes effective.
If the only securities being registered on this Form are being offered pursuant to dividend or
interest reinvestment plans, please check the following box:
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If any of the securities being registered on this form are to be offered on a delayed or continuous
basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the following box:
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering.
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If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act,
check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
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If this Form is a registration statement pursuant to General Instruction I.D. or a post-effective
amendment thereto that shall become effective upon filing with the Commission pursuant to Rule
462(e) under the Securities Act, check the following box.
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If this Form is a post-effective amendment to a registration statement filed pursuant to General
Instruction I.D. filed to register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the following box.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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CALCULATION OF REGISTRATION FEE
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Proposed
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Title of each class
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maximum
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Proposed maximum
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of securities
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Amount to be
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offering price per
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aggregate offering
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Amount of
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to be registered
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registered (1)
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unit
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price
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registration fee
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Class A Non-Voting
Common Stock
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1,625,015
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$
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13.59
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(2)
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$
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22,083,953.85
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$
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867.90
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(1)
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Pursuant to Rule 416 under the Securities Act of 1933 (the Securities Act), this
registration statement shall be deemed to cover or to proportionally increase or reduce, as
applicable, an indeterminate number of shares of Class A Non-voting Common Stock of the
Registrant issuable in the event the number of shares of the Registrant is increased, or
reduced, as applicable, by reason of any stock split, reverse stock split, stock dividend or
other similar transaction.
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(2)
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Estimated solely for the purpose of calculating the registration fee in accordance with Rule
457(c) promulgated under the Securities Act, on the basis of the average of the high and low
prices of the Registrants common stock as reported by the NASDAQ Global Select Market on June
18, 2008.
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The registrant hereby amends this registration statement on such date or dates as may be necessary
to delay its effective date until the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where an offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JUNE 23, 2008
PROSPECTUS
EZCORP, INC.
1,625,015 Shares of Class A Non-Voting Common Stock
This prospectus relates to 1,625,015 shares of Class A Non-voting Common Stock of EZCORP, Inc., a
Delaware corporation (EZCORP), that may be offered and sold from time to time by the several
selling stockholders. The selling stockholders will receive the Class A Non-voting Common Stock in
the merger of Value Merger Sub, Inc., a Florida corporation and wholly owned subsidiary of EZCORP
(Merger Sub), with and into Value Financial Services, Inc., a Florida corporation (VFS). See
The Merger and Merger Agreement for a description of the merger.
The registration of the shares does not necessarily mean that any of the shares will be offered or
sold by any of the selling stockholders. EZCORP will receive no proceeds of any sale of shares,
but will incur expenses in connection with the registration of these shares.
EZCORPs Class A Non-voting Common Stock is listed on the NASDAQ Global Select Market (NASDAQ)
under the symbol EZPW. On June 18, 2008, the closing sale price of the Class A Non-voting Common
Stock was $13.53 per share.
See Risk Factors beginning on page 8 of this Prospectus for a description of risk factors that
should be considered by purchasers of our Class A Non-voting Common Stock.
These securities have not been approved or disapproved by the Securities and Exchange Commission or
any state securities commission nor has the Securities and Exchange Commission or any state
securities commission passed upon the accuracy or adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
The date of this Prospectus is June 23, 2008
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EZCORP, INC.
1901 Capital Parkway
Austin, Texas 78746
(512) 314-3400
1. ABOUT THIS PROSPECTUS
The following summary highlights information contained in this prospectus or incorporated by
reference. While we have included what we believe to be the most important information about us
and this offering, the following summary may not contain all the information that may be important
to you. For a complete understanding of our business, the Merger and this offering, you should
read this entire prospectus carefully and the information to which we refer you and the information
incorporated into this prospectus by reference. Unless the context requires otherwise, in this
prospectus the terms EZCORP, we, us and our refer to EZCORP, Inc., a Delaware corporation.
References to selling stockholders refers to those stockholders listed herein under the heading
Selling Stockholders on page 11, who may sell shares from time to time as described in this
prospectus.
2. SUMMARY
On June 5, 2008, we entered into a definitive merger agreement with Value Financial Services, Inc.
(VFS). In the merger, which is scheduled to close on or about July 15, 2008, we expect to pay
total consideration of approximately $109.5 million, comprised of consideration to acquire all of
the outstanding capital stock of VFS, assumption of debt and payment of certain expenses associated
with the merger. We will merge our newly formed subsidiary, Value Merger Sub, Inc., (Merger Sub)
into VFS, and VFS will continue its operations as our wholly owned subsidiary. As part of the
merger consideration we will issue up to 1,625,015 shares of our Class A Non-voting Common Stock
(the Merger Shares) to fifteen (15) shareholders of VFS who are accredited investors, in a
privately negotiated transaction under Regulation D of the Securities and Exchange Commission
(SEC), and we will pay cash to the remaining VFS shareholders for their shares. The value of the
Merger Shares would have been approximately $21,986,000 on June 18, 2008, based on that days
closing price of our stock on the NASDAQ Global Select Stock Market.
We have agreed to register the Merger Shares with the SEC for resale by the VFS shareholders. This
prospectus describes the merger and the proposed resale by the selling shareholders.
3. EZCORP
We lend or provide credit services to individuals who do not have cash resources or access to
credit to meet their short-term cash needs. Our services include pawn loans and short-term
non-collateralized loans, often called payday loans or fee-based credit services to customers
seeking loans (collectively, signature loans). The pawn loans are non-recourse loans
collateralized by tangible personal property. We also sell merchandise, primarily collateral
forfeited from our pawn lending operations, to customers looking for good value. Our business,
operations and financial information are described in detail in our annual report on Form 10-K,
quarterly reports
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on Form 10-Q and other reports which are incorporated by reference into this prospectus. The
merger agreement is attached to our report on Form 8-K dated June 5, 2008 as Exhibit 10.2.
See
Information Incorporated by Reference, page 15.
Our principal executive offices are located at 1901 Capital Parkway, Austin, Texas 78746. Our
telephone number is (512) 314-3400.
4. THE MERGER AND MERGER AGREEMENT
On March 14, 2008, we agreed to purchase all of the outstanding capital stock of VFS for cash.
After performing a due diligence review and conducting further negotiations, on June 5, 2008, the
parties agreed to merge VFS into a newly formed subsidiary of EZCORP in a reverse merger, in which
VFS would continue operations as the surviving entity. We have agreed to pay approximately $109.5
million to acquire VFS, consisting of assumption of outstanding debt of approximately $35.0
million, exchange of cash and our Class A Non-voting Common Stock equal to approximately $73.1
million for the outstanding VFS stock, and estimated transaction costs of about $1.4 million.
Through the merger, we also will receive a net operating loss carry-forward, which we expect over
the next two years will reduce our cash paid for taxes by approximately $3.3 million.
The merger agreement contains several conditions that must be satisfied prior to closing by each
party, such as:
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Converting all of the VFS participating stock to common stock;
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Approving the merger agreement by the voting shareholders of each party;
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Satisfying any Hart-Scott-Rodino Act anti-trust review waiting periods;
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Obtaining any required contractual consents and governmental licenses or approvals;
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Issuing a fairness opinion to the VFS board by an independent third party; and
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Satisfying each partys contractual conditions and obligations contained in the
merger agreement.
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All such conditions have been or will be satisfied or waived before the merger is consummated and
the stock to be issued to the selling shareholders and sold in this offering is issued. The Merger
Shares will be validly issued, fully paid and non-assessable when issued to the selling
shareholders.
Reason for the Merger
Both EZCORP and VFS are in the pawn business. As part of EZCORPs business plan it seeks to grow
its pawn business and the number of pawn shops it operates through acquisition of other pawn
businesses, as well as by opening new stores. EZCORP has a small presence in Florida where it
operates 18 EZPAWN pawn stores. VFS operates 65 pawn shops in Florida, Georgia and Tennessee and
owns the second largest number of pawn shops in Florida. EZCORP and VFS believe that their
businesses are complementary and can be integrated with one another to achieve economies of scale
and increase overall profitability.
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Fairness Opinion
We understand that VFS intends to obtain a fairness opinion from the investment banking firm of
Stephens, Inc.
Source of Funds for the Merger
We expect the total consideration for the transaction to be approximately $109.5 million consisting
of a combination of the Merger Shares, our cash on hand, and borrowings, as follows:
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The Merger Shares, consisting of 1,625,015 shares of our Class A Non-voting Common Stock.
Based on the closing price of our stock on NASDAQ on June 18, 2008 of $13.53 per share, the
Merger shares would have a value of approximately $22.0 million.
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Cash from our cash reserves of approximately $20.0 million.
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Borrowings from our credit facility with Wells Fargo, as amended, N.A., of approximately
$67.5 million.
See The Credit Facility, page 6.
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Structure of the Merger
To effect the merger, we formed Merger Sub as a wholly owned subsidiary. At the effective time of
the merger, Merger Sub will merge with and into VFS in accordance with the provisions of Florida
law, with VFS continuing as the surviving entity. As a result of the merger, VFS will become our
wholly-owned subsidiary.
Approval of the Merger by EZCORP and VFS
EZCORP
. The merger has been recommended by our board of directors and the board of
directors of Merger Sub. It must be approved by the holder of our Class B Voting Common Stock and
by EZCORP as Merger Subs sole shareholder. The owner of all of our Class B Voting Common Stock
has indicated that it intends to approve the merger, and EZCORP will approve it as Merger Subs
shareholder.
VFS
. The merger was recommended by the board of directors of VFS. It must be approved by
the holders of a majority of the outstanding shares of each class of VFS stock.
Currently, VFS has four classes of stock authorized: common stock and three series of participating
stock, designated Series A-1, A-2 and B. Shares of the Series A-1, A-2 and B participating stock
are currently issued and outstanding. No shares of common stock are currently issued and
outstanding. As a condition to EZCORPs obligation to close, the merger agreement requires that
the three series of participating stock convert to common stock under the provisions in the VFS
amended and restated articles of incorporation designating and governing the participating stock.
To accomplish this, VFS expects to call a shareholders meeting prior to closing at which holders
of each series of participating stock will be asked to vote as a class to convert their
participating stock to common stock. The provisions designating each series of stock in the VFS
amended and restated articles of incorporation provide that, for each series, if a
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majority of the outstanding shares of the series of participating stock elect to convert their
stock to common, VFS may cause a mandatory conversion of the remaining shares of that series to
common stock. If a majority of the shareholders of each series of participating stock vote to
convert their shares, VFS will cause the mandatory conversion of any shares that did not vote in
favor of conversion. The holders of each series of participating stock have no right to appraisal
of their shares or other right to object, in the event of a mandatory conversion to common stock.
The VFS series A-2 participating stock is entitled to dividends of 16.54% of the face amount
($10.00) per share per annum. Any accrued, unpaid dividends on the A-2 shares accumulate and
compound annually, but are not recorded as a liability or a reduction of equity until declared by
VFSs board of directors. As of December 31, 2007, the accrued, unpaid dividends on the A-2
participating stock totaled approximately $1.24 million. We expect that, on the expected closing
date, the accrued dividends on the A-2 participating stock will equal approximately $2.5 million.
The accrued unpaid dividend must be paid at the time of conversion of the A-2 participating stock
to common stock. The conversion will occur immediately prior to closing of the merger, and thus
will result in either a reduction of the cash reserves of VFS or an increase in their debt
obligations incurred to pay the dividend. EZCORP will bear the cost of the payment of this
dividend, in that the payment will either reduce the assets or increase the outstanding debt of VFS
immediately prior to the merger. We have included the anticipated dividend payment in the assumed
total purchase price of $109.5 million.
VFS will also submit the merger to a vote of its shareholders at the same shareholders meeting. A
majority of the common shareholders must then approve the merger in order to complete it.
Conversion of Outstanding Common Stock of VFS in the Merger
At the effective time of the merger, the outstanding shares of common stock of VFS will convert
into the right to receive a payment equal to $11.00 per share. The form of the payment varies
among the VFS shareholders as follows:
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All holders of common stock of VFS, other than the selling stockholders, will
receive $11.00 cash for each share of VFS common stock that they own prior to the
merger; and
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Each selling stockholder will receive the number of Merger Shares listed next
to their name under the section Selling Stockholders below and a cash payment
equal to $11.00 per share times the number of VFS common shares they own, minus
the value of the Merger Shares they receive. The value per share of the Merger
Shares will equal the closing stock price of EZCORP Class A Non-voting Common
Stock on the NASDAQ Global Select Stock Market on the day immediately prior to
closing of the merger. The selling stockholders are all accredited investors.
The Merger Shares they receive are exempt from registration under the Securities
Act of 1933 pursuant to Regulation D, and will be restricted securities unless
and until the registration statement of which this prospectus is a part becomes
effective.
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Fractional Shares
No fractional shares of our stock will be issued to selling stockholders in the merger. Instead,
all holders of VFS common stock who would be entitled to receive a fractional share of our stock
will have the number of shares to which they are entitled rounded up to the next whole number of
shares.
Listing of Merger Shares on NASDAQ
We will apply to have the Merger Shares listed on the NASDAQ Global Select Stock Market where
shares of our Class A Non-voting Common Stock are currently traded.
Registration Rights and Guaranteed Stock Price for Certain Shares
In the merger agreement, we agreed to register the Merger Shares issued to the selling stockholders
and also agreed to guarantee the price of 401,489 shares of the Merger Shares to be sold by the
selling stockholders under this prospectus. We agreed that if the selling stockholders sold
401,489 of the Merger Shares within five days after closing for a price per share less than the
market price of our Class A Non-voting Common Stock on the day prior to the closing of the merger,
then we would pay to the selling stockholders any difference.
See Section 10 Plan of
Distribution, page 12.
Effective Time of Merger
The merger will become effective on the date the articles of merger are filed with the Secretary of
State of the State of Florida. We expect to close and consummate the merger on or about July 15,
2008.
Appraisal Rights
Under Florida law, if a majority of the VFS shareholders approve the merger and the merger is
consummated, shareholders of VFS who do not vote in favor of the merger will have the right to
demand that they be paid the fair value of their shares under the Florida Business Corporation Act.
VFS expects to notify its shareholders in writing of the proposed merger and seek their approval
either by vote at a shareholders meeting called for that purpose or by written consent. Any
shareholders who want to exercise their statutory appraisal rights must deliver to VFS before a
vote on the merger is taken, or within 20 days after receiving the notice of the action approving
the merger if the action is taken without a shareholders meeting, of the shareholders intent to
demand payment if the transaction is effectuated. Any shareholders seeking payment under the
statute must not vote their shares in favor of the merger.
Within 10 days after the merger is completed, VFS, as the surviving corporation in the merger, must
notify shareholders who have demanded payment of the completion of the merger. Shareholders who
seek appraisal and payment must notify VFS in writing within 40 days thereafter that they seek
appraisal or forfeit their right to seek appraisal. VFS will make an offer
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to purchase the shares for cash at an estimated fair value and, if the offer is not accepted, file
an action for appraisal and payment for the shares in a state court in Orlando, Florida.
The merger agreement provides that EZCORP may terminate the merger agreement if holders of more
than 10% of the outstanding VFS capital stock deliver valid and enforceable notices of their
intent to demand payment under the Florida appraisal statute.
Accounting Treatment of the Merger
This merger will be accounted for as a purchase business combination in accordance with Statement
of Financial Accounting Standards No. 141, Business Combinations. Upon acquisition, we will
assess the value of assets and liabilities acquired, and record those in our balance sheet through
a purchase price allocation. After the merger, Value Financial Services, Inc.s financial position
and results will be consolidated with those of EZCORP, Inc. as a wholly-owned subsidiary.
5. The Credit Facility
We have maintained a $40 million credit facility, but during 2008 through the date of this
prospectus, we have had no outstanding borrowings on the credit facility. Prior to closing we will
execute a Fifth Amended and Restated Credit Agreement (the Agreement) among EZCORP, Inc., Wells
Fargo Bank, N.A., as Agent and Issuing Bank, and various other banks and lending institutions. The
Agreement and the related loan documents will be placed in escrow pending the closing of the merger
agreement with Value Financial Services, Inc. The Agreement is contingent upon the closing of the
merger agreement with Value Financial Services, Inc. on or before September 30, 2008.
If the merger agreement with Value Financial Services, Inc. is closed on or before September 30,
2008, the Agreement will become effective and will provide for, among other things, (i) an $80
million revolving credit facility that EZCORP, Inc. may request to be increased to a total of $110
million (the Revolving Credit Facility) and (ii) a $40 million term loan (the Term Loan). If
the Agreement becomes effective, it will extend the maturity date of the Revolving Credit Facility
to the date that is three years from the closing of the merger agreement with Value Financial
Services, Inc. The maturity date of the Term Loan is four years from the closing of the merger
agreement with Value Financial Services, Inc.
Pursuant to the Agreement, EZCORP, Inc. may choose either a Eurodollar rate or the base rate.
Interest accrues at the Eurodollar rate plus 175 to 250 basis points or the base rate plus 0 to 50
basis points, depending upon the leverage ratio computed at the end of each calendar quarter.
Terms of the Agreement require, among other things, that EZCORP, Inc. meet certain financial
covenants that EZCORP, Inc. believes will be achieved based upon its current and anticipated
performance. In addition, payment of dividends is prohibited and additional debt is restricted.
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6. Value Financial Services, Inc.
VFS is one of the largest providers of small, secured, non-recourse consumer loans, commonly known
as pawn loans, and related services in the United States, based on the number of pawnshops
operated. VFS was founded in 1994 by John Thedford, its president, chief executive officer and
chairman of the board, and now has 65 stores in three statesFlorida (58 stores), Tennessee (four
stores) and Georgia (three stores). VFS lends money on a short-term basis against pledged tangible
personal property such as jewelry, electronic equipment, tools, sporting goods, musical instruments
and other items of value, and also sells merchandise, including forfeited collateral from pawn
loans. VFSs customers typically require pawn loans for their immediate cash needs, and often use
VFSs services for reasons of convenience and/or lack of credit alternatives.
Pawn loans are typically small, though the amount can vary considerably based on VFSs customers
particular needs. The terms of VFSs pawn loans require that they be redeemed within 30 days,
subject to an automatic extension period of 30 days unless paid or renewed earlier, and may be
extended for additional 30-day periods upon the payment of accrued pawn service charges. In 2005,
2006 and 2007, approximately 78.8%, 77.8% and 77.7%, respectively, of the pawn loans made by VFS
were redeemed in full or were renewed or extended through the payment of accrued pawn service
charges. VFS operates under long-established regulatory guidelines that permit pawn service
charges ranging from 12.5% to 25.0% per month, depending on the state of origination, loan term and
size. A majority of VFSs pawn loans have pawn service charges of 25.0% per month as a result of
its store concentration in Florida, where VFS operates 58 out of its 65 stores.
VFS sells a wide range of merchandise in its stores, including merchandise that has been forfeited
to VFS when a pawn loan is not redeemed, as well as used goods purchased from the general public
and some new merchandise. For 2005, 2006 and 2007, VFS experienced profit margins on sales of
merchandise of 38.2%, 36.9% and 37.5%, respectively. During 2007, approximately 72.8% of the
merchandise VFS acquired was through loan forfeitures, 23.6% was through purchases from VFSs
customers, and the remaining 3.6% was through purchases from vendors. During the two-year period
from 2005 to 2007, same-store merchandise sales increased by
approximately 22.9%, from $663,345 per store in
2005 to $815,356 per store in 2007. During that same period, VFSs average retail merchandise sale increased
approximately 15%, from $90 in 2004 to $104 in 2007.
VFS opened its first store in Florida in 1994 and, as of March 31, 2008, operated 65 pawn and
jewelry stores, under the trade names Value Pawn and Jewelry in Florida and Georgia and Check
Jewelry & Loan in Tennessee. To date, VFS has opened all of its stores in three Southeastern
states due in part to favorable demographics and regulatory environments. For 2007 and the three
months ended March 31, 2008, VFS generated an average of approximately $1.7 million and $1.2
million, respectively, in revenues per store, resulting in average store-level operating margins of
21.4% and 21.2%, respectively. As of March 31, 2008, VFS had 614 employees. At March 31, 2008,
VFS had approximately 94,433 outstanding pawn loans totaling $15 million, with an average balance
of approximately $159 per loan. You should review
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Section 15 VFS Consolidated Financial Statements, beginning on page 19, for more complete
financial data regarding VFS.
7. RISK FACTORS
Investment in our Class A Non-voting Common Stock, as with any investment in a security, involves a
degree of risk. Important risk factors that could cause results or events to differ from current
expectations are described in Part I, Item IA, Risk Factors of our Annual Report on Form 10-K for
the year ended September 30, 2007, and Part II, Item IA, Risk Factors of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008. These factors are supplemented by those discussed
under Quantitative and Qualitative Disclosures about Market Risk in Part II, Item 7A of our
Annual Report on Form 10-K for the year ended September 30, 2007 and Part I, Item 3 of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2008. Each of the foregoing sections
of our Annual Report on Form 10-K for the year ended September 30, 2007 and our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2008 is incorporated herein by reference. Following is
an additional item that could cause results or events to differ from current expectations:
The integration of VFS with our business after the merger may not be successful or anticipated
benefits from the merger may not be realized.
After completion of the merger, we will have significantly larger operations than we did prior to
the merger. Our ability to realize the benefits of the merger will depend in part on the timely
integration of VFSs organization, operations, procedures, policies and technologies with ours, as
well as the harmonization of differences in VFSs business culture and practices with ours. Our
management will be required to devote a significant amount of time and attention to integrating
VFSs business with ours. There is a significant degree of difficulty and management involvement
inherent in that process. These difficulties include the following:
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integrating the operations of VFSs business with our business while carrying on
the ongoing operations of each business;
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diversion of managements attention from the management of daily operations to the
integration of VFS with us;
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managing a significantly larger company than before completion of the merger;
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realizing economies of scale and eliminating duplicative overheads;
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the possibility of faulty assumptions underlying our expectations regarding the
integration process;
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coordinating businesses located in different geographic regions;
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integrating VFSs business culture and practices with ours, which may prove to be
incompatible;
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attracting and retaining the personnel associated with VFSs business following
the merger;
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creating and instituting uniform standards, controls, procedures, policies and
information systems and minimizing the costs associated with such matters; and
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integrating information, purchasing, accounting, finance, sales, billing, payroll
and regulatory compliance systems.
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There is no assurance that VFS will be successfully or cost-effectively integrated into us. The
process of integrating VFS into our operations may cause an interruption of, or loss of momentum
in, the activities of our business. If our management is not able to effectively manage the
integration process, or if any significant business activities are interrupted as a result of the
integration process, our business could suffer and the results of our operations and financial
condition may be harmed.
All of the risks associated with the integration process could be exacerbated by the fact that we
may not have a sufficient number of employees with the requisite expertise to integrate the
businesses or to operate the combined business after the merger. If we do not hire or retain
employees with the requisite skills and knowledge to run our businessincluding the acquired VFS
businessafter the merger, it may have a material adverse effect on us.
We cannot assure you that we will realize the anticipated benefits and value of the merger or
successfully integrate VFS with our existing operations. Even if we are able to successfully
combine VFSs business operations with ours, it may not be possible to realize the full benefits
and value that are currently expected to result from the merger, or realize these benefits and
value within the time frame that is currently expected. For example, the elimination of
duplicative costs may not be possible or may take longer than anticipated, or the benefits and
value gained from the merger may be offset by costs incurred or delays in integrating the
companies. If we fail to realize anticipated cost savings, synergies or revenue enhancements we
anticipate from the merger, our financial results and results of operations may be adversely
affected.
A change in the business climate may cause the actual benefits and value of the merger to differ
from the anticipated benefits and value of the merger
A change in the business climate surrounding our business after the merger may affect our
customers activities and actions. This could cause our financial results and results of
operations to be adversely affected. This may also cause the actual benefits and value of the
merger to differ from the benefits and value we anticipate from the merger.
We will incur significant costs and expenses associated with the merger.
We expect to incur significant costs and expenses associated with the merger, which include but are
not limited to transaction fees, professional service fees and regulatory filing fees. We also
believe we may incur charges to operations, which are not currently reasonably estimable, in the
quarter in which the merger is completed or the following quarters, to reflect costs associated
with integrating VFS into us. There can be no assurance that we will not incur additional material
charges in subsequent quarters to reflect additional costs associated with the merger and the
integration of VFS into us.
9
The Florida Business Corporation Act gives shareholders the right to have the value of their stock
appraised by a Florida court, which could raise the cost of acquiring the VFS stock.
The Florida Business Corporation Act provides that shareholders who do not vote in favor of the
merger, assert their right to be paid fair value for their shares and do not accept our estimate
of the fair value of VFS shares after the merger, can seek to have a Florida state court review the
transaction and award them fair value for their shares. If a significant number of minority
shareholders assert these appraisal rights, a Florida court might disagree with our valuation and
award the shareholder a significantly higher price than the $11.00 per share we intend to pay.
See
Section 4 The Merger and Merger Agreement Appraisal Rights, page 5.
VFS, as our subsidiary, might be responsible for debts we do not know about.
After the merger VFS will continue to be responsible for all of its liabilities, and as our wholly
owned subsidiary, its liabilities will be consolidated with ours for financial reporting purposes.
Prior to signing the merger agreement we conducted a due diligence review of VFS; however, we
cannot be sure that we discovered all liabilities that VFS has or may incur prior to the merger.
If VFS has substantial liabilities that are not disclosed to us, VFS will nevertheless be required
to pay them, and that could significantly reduce the value of VFS and increase our consolidated
liabilities. We have not obtained agreements from any VFS directors, officers or shareholders to
indemnify us for undisclosed liabilities.
CAUTIONARY
STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY
AFFECT FUTURE RESULTS
Forward-Looking Information
This prospectus and the documents incorporated herein by reference include 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. We intend that all forward-looking
statements be subject to the safe harbors created by these laws. All statements other than
statements of historical information are forward-looking and may contain information about
financial results, economic conditions, trends, planned store openings, acquisitions and known
uncertainties. These statements are often, but not always, made with words or phrases like may,
should, could, predict, potential, believe, expect, anticipate, seek, estimate,
intend, plan, projection, outlook, expect, will, and similar expressions. All
forward-looking statements are based on current expectations regarding important risk factors.
Many of these risks and uncertainties are beyond our control, and in many cases, we cannot predict
all of the risks and uncertainties that could cause our actual results to differ materially from
those expressed in the forward-looking statements. Actual results could differ materially from
those expressed in the forward-looking statements, and you should not regard them as a
representation that the expected results will be achieved. Important risk factors that could cause
results or events to differ from current expectations are described in this prospectus under the
heading Risk Factors and in the sections entitled Risk Factors in our Annual Report on Form
10-K for the year ended September 30, 2007 and our Quarterly Report for the quarter ended March 31,
2008. These factors are not intended to be an all-encompassing list of risks and uncertainties
that may affect our operations, performance, development and results. You are cautioned not to
overly rely on these forward-looking statements, which are current only
10
as of the date hereof. We undertake no obligation to release publicly the results of any revisions
to these forward-looking statements that may be made to reflect events or circumstances after the
date of this report, including without limitation, changes in our business strategy or planned
capital expenditures, acquisitions, store growth plans or to reflect unanticipated events.
8. USE OF PROCEEDS
We will not receive any proceeds from the sale of the Merger Shares by the selling stockholders.
We have agreed to bear certain expenses in connection with the registration of the shares being
offered and sold by the selling stockholders.
9. SELLING STOCKHOLDERS
The selling stockholders or their permitted pledges, donees, transferees or other successors in
interest who we collectively refer to in this prospectus as selling stockholders, may from time
to time offer and sell any and all of the Merger Shares offered under this prospectus. This
prospectus generally covers the resale of 1,625,015 shares of Class A Non-voting Common received by
the selling stockholders in conjunction with the merger.
The table below names certain stockholders who may sell shares pursuant to this prospectus and
presents certain information with respect to beneficial ownership of our shares. We do not know
which (if any) of the stockholders named below actually will offer to sell shares pursuant to this
prospectus, or the number of shares that each of them will offer.
Beneficial ownership is determined in accordance with Rule 13d-3 of the Exchange Act. A person is
deemed to be the beneficial owner of any shares of Class A Non-voting Common Stock if that person
has or shares voting power or investment power with respect to those shares, or has the right to
acquire beneficial ownership at any time within 60 days of the date of the table. As used herein,
voting power is the power to vote or direct the voting of shares and investment power is the
power to dispose or direct the disposition of the shares.
Because the selling stockholders may offer all, some or none of the shares of the Merger Shares
pursuant to this prospectus and because there currently are no agreements, arrangements or
understandings with respect to the sale of any of these shares, no definitive estimate can be given
as to the amount of shares that will be held by the selling stockholders after completion of the
offering to which this prospectus relates. The following table has been prepared assuming that the
selling stockholders sell all of the Merger Shares beneficially owned by them that have been
registered by us and do not acquire any additional shares of stock. We cannot advise you as to
whether the selling stockholders will in fact sell any or all of their Merger Shares. In addition,
the selling stockholders may sell, transfer or otherwise dispose of, at any time and from time to
time, the Merger Shares in transactions exempt from the registration requirements of the Securities
Act after the date on which they provided the information set forth in the table below.
Information concerning the selling stockholders may change from time to time, and any changed
information will be set forth in prospectus supplements or post-effective amendments, as may be
appropriate.
11
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Amount of Shares
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Amount of Shares to
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Amount of Shares
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Owned Prior to the
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Percent Owned Prior
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Be Offered in the
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Owned After the
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Percent Owned After
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Stockholder
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Offering
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to the Offering
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Offering
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Offering
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the Offering
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Charles Slatery
(1)
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405,967
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24.98
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405,967
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0
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|
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|
0
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Kevin Hyneman
(1)
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272,871
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16.79
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272,871
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0
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0
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Joe Nicosia
(2)
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149,814
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9.22
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149,814
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0
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0
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James Lackie
(2)
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129,338
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7.96
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129,338
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0
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0
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William Haslam
(2)
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95,524
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5.88
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95,524
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0
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0
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James Haslam
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95,389
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5.87
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95,389
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0
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0
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Gordon Brothers
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81,532
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5.02
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81,532
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0
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0
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Phillco Partnership
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69,417
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4.27
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69,417
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0
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0
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Rick Olswanger
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64,484
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3.97
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64,484
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0
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0
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F. William Hackmeyer
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60,673
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3.73
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60,673
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0
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0
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Louis Baioni
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46,820
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2.88
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46,820
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0
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0
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Everett Hailey
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46,134
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2.84
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46,134
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0
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0
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Ray Cahnman
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40,766
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2.51
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40,766
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0
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0
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Berten, LLC
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36,760
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2.26
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36,760
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0
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0
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Charlie Trammell
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29,526
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1.82
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29,526
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0
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0
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Total
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1,625,015
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100
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%
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1,625,015
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0
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0
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%
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(1)
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Member of the Board of Value Financial Services, Inc. until the effective date of the
merger.
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(2)
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Member of the Board of Value Financial Services, Inc. until September 2005.
|
10. PLAN OF DISTRIBUTION
We are registering the Merger Shares to permit the resale of these shares of Class A Non-voting
Common Stock by the selling stockholders from time to time after the date of this prospectus. We
will not receive any of the proceeds from the sale by the selling stockholders of the shares of
Class A Non-voting Common Stock. We will bear all fees and expenses incident to our obligation to
register the shares of Class A Non-voting Common Stock.
The selling stockholders may sell all or a portion of the shares of Class A Non-voting Common Stock
beneficially owned by them and offered hereby from time to time directly or through one or more
underwriters, broker-dealers or agents. If the shares of Class A Non-voting Common Stock are sold
through underwriters or broker-dealers, the selling stockholders will be responsible for
underwriting discounts or commissions or agents commissions. The shares of Class A Non-voting
Common Stock may be sold in one or more transactions at fixed prices, at prevailing market prices
at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions which may involve crosses or block transactions
12
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on any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;
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in the over-the-counter market;
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in transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
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through the writing of options, whether such options are listed on an
options exchange or otherwise;
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through ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
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through block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
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through purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
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in an exchange distribution in accordance with the rules of the applicable exchange;
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through privately negotiated transactions;
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through short sales;
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through sales pursuant to Rule 144;
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in which broker-dealers agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
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by means of a combination of any such methods of sale; and
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by any other method permitted pursuant to applicable law.
|
If the selling stockholders effect such transactions by selling shares of Class A Non-voting Common
Stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or
agents may receive commissions in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of the shares of Class A Non-voting Common
Stock for whom they may act as agent or to whom they may sell as principal (which discounts,
concessions or commissions as to particular underwriters, broker-dealers or agents may be in excess
of those customary in the types of transactions involved). In connection with sales of the shares
of Class A Non-voting Common Stock or otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers, which may in turn engage in short sales of the shares of Class A
Non-voting Common Stock in the course of hedging in positions they assume. The selling stockholders
may also sell shares of Class A Non-voting
13
Common Stock short and deliver shares of Class A Non-voting Common Stock covered by this prospectus
to close out short positions and to return borrowed shares in connection with such short sales. The
selling stockholders may also loan or pledge shares of Class A Non-voting Common Stock to
broker-dealers that in turn may sell such shares.
The selling stockholders may pledge or grant a security interest in some or all of the shares of
Class A Non-voting Common Stock owned by them and, if they default in the performance of their
secured obligations, the pledgees or secured parties may offer and sell the shares of Class A
Non-voting Common Stock from time to time pursuant to this prospectus or any amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if
necessary, the list of selling stockholders to include the pledgee, transferee or other successors
in interest as selling stockholders under this prospectus. The selling stockholders also may
transfer and donate the shares of Class A Non-voting Common Stock in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
With respect to 401,489 of the Merger Shares, we have agreed to pay any difference between the
price received by the selling stockholder for the stock and the market price of our Class A
Non-voting Common Stock, as listed on NASDAQ, on the day preceding the closing of the merger. To
receive this payment, the merger agreement requires that the selling stockholders deposit their
shares with Stephens, Inc., as soon as practicable after the closing of the merger. Stephens, Inc.
or another broker designated by VFS (the Designated Broker) will then sell the shares within five
business days of the effectiveness of the registration statement related to the Merger Shares. If
the Merger Shares are sold by the Designated Broker at an average price per share less than the
market price of our Class A Non-voting Common Stock, as listed on NASDAQ, on the day preceding the
closing of the merger, we are obligated to pay such difference per share to the selling
stockholders for each of the first 401,489 shares that were tendered to the Designated Broker. We
do not know of any other arrangements made by the selling stockholders for the sale of any shares
of Class A Non-voting Common Stock. The selling stockholders are not obligated to sell any of the
shares being registered for sale.
The selling stockholders and any agents or broker-dealers that participate with the selling
stockholders in the distribution of any of the Merger Shares may be deemed to be underwriters
within the meaning of the Securities Act, and any discount or commission received by them and any
profit on the resale of the Merger Shares purchased by them may be deemed to be underwriting
discounts or commissions under the Securities Act.
11. EXPERTS
Accounting Matters
Our financial statements and effectiveness of internal control over financial reporting,
incorporated by reference in this Prospectus and Registration Statement, have been audited by BDO
Seidman, LLP, independent registered public accountants, to the extent and for the periods set
forth in their reports incorporated by reference, and are included in reliance upon the authority
of BDO Seidman, LLP, as experts in accounting and auditing in giving their reports.
14
The financial statements of VFS as of December 31, 2007, 2006 and 2005 and for the years then
ended are included in this prospectus. The financial statements for
the year ended December 31,
2007, have been audited by McGladrey & Pullen, LLP, independent accountants, as
indicated in their reports with respect thereto contained in this prospectus. The financial
statements for the years ended December 31, 2006 and 2005 were audited by Tedder, James, Worden, &
Associates, P.A., independent accountants, certain of whose partners merged with McGladrey &
Pullen, LLP effective June 1, 2007. These financial statements for the fiscal years 2007, 2006 and
2005 are included in the prospectus in reliance upon the authority of McGladrey & Pullen, LLP and
Tedder, James, Worden, & Associates, P.A., as experts in accounting and auditing in giving their
reports.
Legal Matters
The validity of our Class A Non-voting Common Stock offered pursuant to this prospectus will be
passed on by Strasburger & Price, L.L.P., Austin, Texas.
12. INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to incorporate by reference the information we file with them, which means that
we can disclose important information to you by referring you to those documents. The information
incorporated by reference is an important part of this prospectus, and information that we file
later with the SEC will automatically update and supersede previously filed information, including
information contained in this document. We incorporate by reference the documents listed below (SEC
file No. 000-19424) and any future filings we will make with the SEC under Sections 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 until all shares offered by this Prospectus are
sold or until this offering is otherwise completed:
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|
Our Annual Report on Form 10-K for the year ended September 30, 2007,
filed with the SEC on December 14, 2007.
|
|
|
|
Our Quarterly Reports on Form 10-Q for the periods ended December 31,
2007 and March 31, 2008, filed with the SEC on February 5, 2008 and
May 6, 2008.
|
|
|
|
Our Current Reports on Form 8-K dated September 27, 2007 (filed
October 3, 2007), October 3, 2007 (filed October 9, 2007), November 7,
2007 (filed November 8, 2007), November 8, 2007 (filed November 8,
2007), January 24, 2008 (filed January 24, 2008), March 17, 2008
(filed March 17, 2008), April 24, 2008 (filed April 24, 2008), May 12,
2008 (filed May 13, 2008), May 28, 2008 (filed June 2, 2008), June 5,
2008 (filed June 5, 2008), June 9, 2008 (filed June 9, 2008) and June
17, 2008 (filed June 17, 2008).
|
|
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|
The description of EZCORPs Common Stock and Common Stock Rights as
set forth in EZCORPs Form 8-A Registration Statement filed with the
Commission on July 24, 1991, including any amendment or report filed
for the purpose of updating such description
|
You may request free copies of these filings by writing or telephoning us at the following address:
15
EZCORP, Inc.
Attention: Investor Relations Department
1901 Capital Parkway
Austin, Texas 78746
(512) 314-3400
We file annual, quarterly and periodic reports and other information with the Securities and
Exchange Commission using the SECs EDGAR system. You can find our SEC filings on the SECs web
site,
www.sec.gov.
You may read and copy any materials that we file with the SEC at its
Public Reference Room at 100 F. Street, N.E., Washington, D.C. 20549. Our Class A Non-voting
Common Stock is listed on NASDAQ, under the symbol EZPW, and all reports and other information
that we file with NASDAQ may be inspected at its offices at 1735 K Street N.W., Washington, D.C.
20006.
We furnish our stockholders with an annual report, which contains audited financial statements, and
such other reports as we, from time to time, deem appropriate or as may be required by law. Our
fiscal year runs from October 1 through September 30.
Any statement contained in a document incorporated or deemed to be incorporated herein shall be
deemed modified or superseded for purposes of this prospectus to the extent that a statement
contained herein or in any other subsequently filed document that is deemed to be incorporated
herein modifies or supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this prospectus. You should
rely only on the information contained in this document or to which we have referred you. We have
not authorized anyone to provide you with information that is inconsistent with information
contained in this document or any document incorporated herein. This prospectus is not an offer to
sell these securities in any state where the offer or sale of these securities is not permitted.
The information in this prospectus is current as of the date it is mailed to security holders, and
not necessarily as of any later date. If any material change occurs during the period that this
prospectus is required to be delivered, this prospectus will be supplemented or amended.
13. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
Our Restated Certificate of Incorporation provides that no director will be personally liable to us
or any of our stockholders for monetary damages arising from the directors breach of a fiduciary
duty as a director, with certain limited exceptions.
Pursuant to the provisions of Section 145 of the Delaware General Corporation Law, every Delaware
corporation has the power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding (other than an action by
or in the right of the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of any corporation, partnership, joint venture, trust or other enterprise,
against any and all expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceeding. The power to indemnify applies (a) if
such person is successful on the merits or otherwise in the defense of any action,
16
suit or proceeding, or (b) if such person acted in good faith and in a manner he reasonably
believed to be in the best interest, or not opposed to the best interest, of the corporation and
with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
The power to indemnify applies to actions brought by or in the right of the corporation as well,
but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment
or settlement of the claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication unless the court, in its discretion,
believes that in the light of all the circumstances indemnification should apply.
To the extent any of the persons referred to in the two immediately preceding paragraphs is
successful in the defense of the actions referred to therein, such person is entitled, pursuant to
Section 145, to indemnification as described above.
Our Restated Certificate of Incorporation and Amended and Restated Bylaws specifically provide for
indemnification of officers and directors to the fullest extent permitted by the Delaware General
Corporation Law.
Insofar as indemnification by us for liabilities arising under the Securities Act of 1933, as
amended (the Securities Act), may be permitted to our directors, officers or persons controlling
EZCORP pursuant to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
14. RECENT LITIGATION DEVELOPMENTS
In May 2007, the State of Texas filed suit against EZCORP, Inc. and our Texas affiliates, TEXAS
EZPAWN L.P., TEXAS EZMONEY L.P., Payday Loan Management, Inc., and Texas EZPAWN Management, Inc., in
state district court in Bexar County alleging violations of the Texas Identity Theft statute,
Deceptive Trade Practices Act, and a provision of the Business and Commerce Code by allegedly
failing to safeguard and properly dispose of customers sensitive personal information. Despite
the Texas Attorney Generals allegations, we have no knowledge that any customer was harmed. After an
extended period of factual and legal debate and negotiation, we settled this matter with the Texas Attorney General by agreeing to a permanent injunction against TEXAS EZPAWN L.P. and Texas EZMONEY, L.P.
and making a payment of $600,000. The settlement includes the dismissal with prejudice of all claims against EZCORP, Inc., Payday Loan Management, Inc. and Texas EZPAWN Management, Inc. The settlement is
subject to final approval of the court.
The Florida Office of Financial Regulation has filed an administrative action against us alleging
that our Florida credit service organization business model used in eleven stores adjoining EZPAWN
locations violates state usury law. On March 25, 2008, an administrative law judge issued a
Recommended Order finding against us and recommending that the Florida Office of Financial
Regulation issue a cease and desist order against our credit services operations in Florida. On
June 12, 2008, the Florida Office of Financial Regulation issued a cease and desist
17
order as recommended by the administrative law judge. On June 13, 2008, we filed a Notice of Appeal
of the decision and a Motion for Stay Pending Appeal with the First District Court of Appeal of
Florida. On June 16, 2008, the Motion for Stay Pending Appeal was denied. As a result of the
denial we closed our 11 EZMONEY credit service organization stores in Florida pending the outcome
of the appeal process. We cannot give any assurance as to the ultimate outcome of this matter.
18
15. VFS CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of VFS for the years ended December 31, 2005, 2006 and 2007
are set forth below. Any person who is considering an investment in our Class A Non-voting Common
Stock should review the Consolidated Financial Statements of VFS to consider how our operations and
finances will be affected by the merger.
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
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Pages
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20
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Financial Statements
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22
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23
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24
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25
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27
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19
Independent Auditors Report
To the Board of Directors and Shareholders
Value Financial Services, Inc.
Maitland, Florida
We have audited the accompanying consolidated balance sheet of Value Financial Services, Inc. and
Subsidiary as of December 31, 2007, and the related consolidated statements of operations,
shareholders equity, and cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Value Financial Services, Inc. and Subsidiary as of
December 31, 2007, and the results of their operations and their cash flows for the year then ended
in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Orlando, Florida
June 2, 2008
McGladrey & Pullen, LLP is a member firm of RSM International,
an affiliation of separate and independent legal entities.
20
INDEPENDENT AUDITORS REPORT
To the Board of Directors and Shareholders
Value Financial Services, Inc.
Maitland, Florida
We have audited the accompanying consolidated balance sheets of Value Financial Services, Inc. and
Subsidiary as of December 31, 2005 and 2006, and the related consolidated statements of operations,
shareholders equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys 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, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Value Financial Services, Inc. and Subsidiary as of
December 31, 2005 and 2006, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of
America.
As discussed in Note 1(a) to the consolidated financial statements, the consolidated financial
statements have been restated.
/s/ Tedder, James, Worden & Associates, P.A.
Orlando, Florida
August 13, 2007, except for the effects
of the restatements to the consolidated
statements of operations and cash flows
and as described in Note 1(a), as to which the
date is November 8, 2007
21
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Years ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,646,001
|
|
|
$
|
759,674
|
|
|
$
|
795,055
|
|
Loans
|
|
|
11,598,110
|
|
|
|
14,528,302
|
|
|
|
16,759,212
|
|
Inventories, net
|
|
|
10,330,348
|
|
|
|
11,979,081
|
|
|
|
13,404,735
|
|
Service charges receivable, net of allowance for doubtful
service charges of approximately $1,468,000, $1,758,000,
and $2,048,000 in 2005, 2006 and 2007, respectively
|
|
|
2,261,928
|
|
|
|
2,832,862
|
|
|
|
3,274,926
|
|
Deferred tax assets
|
|
|
3,275,000
|
|
|
|
3,120,000
|
|
|
|
4,042,186
|
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
28,700
|
|
Advances to officers and directors
|
|
|
503,259
|
|
|
|
384,881
|
|
|
|
|
|
Advances to team members
|
|
|
20,160
|
|
|
|
108,132
|
|
|
|
101,114
|
|
Prepaid expenses and other
|
|
|
1,678,715
|
|
|
|
1,385,166
|
|
|
|
1,383,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
31,313,521
|
|
|
|
35,098,098
|
|
|
|
39,789,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
7,126,160
|
|
|
|
6,625,497
|
|
|
|
7,529,734
|
|
Goodwill
|
|
|
4,874,082
|
|
|
|
4,874,082
|
|
|
|
4,874,082
|
|
Deferred Tax Assets
|
|
|
8,131,922
|
|
|
|
5,031,326
|
|
|
|
4,645,523
|
|
Other Assets
|
|
|
217,247
|
|
|
|
220,225
|
|
|
|
336,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
51,662,932
|
|
|
$
|
51,849,228
|
|
|
$
|
57,174,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
560,255
|
|
|
$
|
488,900
|
|
|
$
|
468,749
|
|
Accrued expenses
|
|
|
1,815,138
|
|
|
|
2,237,069
|
|
|
|
5,258,222
|
|
Customer layaway deposits
|
|
|
598,769
|
|
|
|
741,724
|
|
|
|
767,830
|
|
Deferred rent
|
|
|
317,501
|
|
|
|
360,095
|
|
|
|
357,206
|
|
Income taxes payable
|
|
|
22,278
|
|
|
|
50,323
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
Current maturities of convertible subordinated debentures
|
|
|
58,881
|
|
|
|
3,926,802
|
|
|
|
66,736
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
3,372,822
|
|
|
|
7,804,913
|
|
|
|
10,918,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
13,125,867
|
|
|
|
7,380,721
|
|
|
|
26,784,307
|
|
Interest Rate Swap Liability
|
|
|
|
|
|
|
|
|
|
|
552,748
|
|
Convertible Subordinated Debentures, less current maturities
|
|
|
4,331,972
|
|
|
|
403,425
|
|
|
|
336,924
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
20,830,661
|
|
|
|
15,589,059
|
|
|
|
38,592,722
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1 participating stock, $0.01 par value; 3,622,598,
3,622,598 and 3,756,496 shares authorized in 2005, 2006 and
2007, respectively; 3,270,773, 3,270,773 and 3,756,496
shares issued and outstanding in 2005, 2006 and 2007,
respectively; convertible to common stock at a ratio of 1
to 1
|
|
|
32,708
|
|
|
|
32,708
|
|
|
|
37,565
|
|
Series A-2 participating stock, $0.01 par value; 2,500,000
shares authorized; 1,516,590 shares issued and outstanding
in 2005, 2006 and 2007; convertible to common stock at a
ratio of 1 to 1
|
|
|
15,166
|
|
|
|
15,166
|
|
|
|
15,166
|
|
Series B participating stock, $0.01 par value; 682,038
shares authorized; 614,988 shares issued and outstanding in
2005, 2006 and 2007; convertible to common stock at a ratio
of 1 to 1
|
|
|
6,150
|
|
|
|
6,150
|
|
|
|
6,150
|
|
Common stock, $0.01 par value; 35,000,000 shares
authorized; none issued and outstanding in 2005, 2006 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
52,671,080
|
|
|
|
52,671,080
|
|
|
|
55,580,562
|
|
Receivable from shareholder
|
|
|
(1,706,211
|
)
|
|
|
(1,708,445
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(20,186,622
|
)
|
|
|
(14,756,490
|
)
|
|
|
(37,057,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
30,832,271
|
|
|
|
36,260,169
|
|
|
|
18,581,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
51,662,932
|
|
|
$
|
51,849,228
|
|
|
$
|
57,174,591
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
22
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Years ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
47,378,531
|
|
|
$
|
62,348,048
|
|
|
$
|
76,514,562
|
|
Service charge revenues
|
|
|
20,785,777
|
|
|
|
24,090,466
|
|
|
|
28,394,105
|
|
Other revenues
|
|
|
1,085,035
|
|
|
|
1,376,117
|
|
|
|
1,565,905
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
69,249,343
|
|
|
|
87,814,631
|
|
|
|
106,474,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of merchandise sales
|
|
|
(29,288,787
|
)
|
|
|
(39,339,401
|
)
|
|
|
(47,834,046
|
)
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
39,960,556
|
|
|
|
48,475,230
|
|
|
|
58,640,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total store operating expenses (including non-cash
depreciation expense)
|
|
|
(25,092,771
|
)
|
|
|
(30,365,220
|
)
|
|
|
(35,877,495
|
)
|
|
|
|
|
|
|
|
|
|
|
Store operating income
|
|
|
14,867,785
|
|
|
|
18,110,010
|
|
|
|
22,763,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration
|
|
|
(6,499,566
|
)
|
|
|
(7,815,293
|
)
|
|
|
(21,126,934
|
)
|
Depreciation
|
|
|
(164,081
|
)
|
|
|
(173,102
|
)
|
|
|
(203,559
|
)
|
Loss on disposal of equipment
|
|
|
(59,895
|
)
|
|
|
(108,426
|
)
|
|
|
(247,978
|
)
|
Start-up expenses for Mexico operations
|
|
|
|
|
|
|
|
|
|
|
(107,296
|
)
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses
|
|
|
(6,723,542
|
)
|
|
|
(8,096,821
|
)
|
|
|
(21,685,767
|
)
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
8,144,243
|
|
|
|
10,013,189
|
|
|
|
1,077,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,297,285
|
)
|
|
|
(1,135,401
|
)
|
|
|
(2,544,181
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income tax
benefit (expense)
|
|
|
6,846,958
|
|
|
|
8,877,788
|
|
|
|
(1,466,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(2,593,194
|
)
|
|
|
(3,447,656
|
)
|
|
|
485,860
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,253,764
|
|
|
$
|
5,430,132
|
|
|
$
|
(981,057
|
)
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
23
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders Equity
Years ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A-1
|
|
|
Series A-2
|
|
|
Series B
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
participating stock
|
|
|
participating stock
|
|
|
participating stock
|
|
|
paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
shareholder
|
|
|
deficit
|
|
|
stock
|
|
|
Total
|
|
Balances, December 31, 2004
|
|
|
3,270,773
|
|
|
$
|
32,708
|
|
|
|
1,516,590
|
|
|
$
|
15,166
|
|
|
|
614,988
|
|
|
$
|
6,150
|
|
|
$
|
52,671,080
|
|
|
$
|
(954,250
|
)
|
|
$
|
(24,440,386
|
)
|
|
$
|
|
|
|
$
|
27,330,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(751,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(751,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,253,764
|
|
|
|
|
|
|
|
4,253,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
3,270,773
|
|
|
|
32,708
|
|
|
|
1,516,590
|
|
|
|
15,166
|
|
|
|
614,988
|
|
|
|
6,150
|
|
|
|
52,671,080
|
|
|
|
(1,706,211
|
)
|
|
|
(20,186,622
|
)
|
|
|
|
|
|
|
30,832,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable from shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,234
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,430,132
|
|
|
|
|
|
|
|
5,430,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
3,270,773
|
|
|
|
32,708
|
|
|
|
1,516,590
|
|
|
|
15,166
|
|
|
|
614,988
|
|
|
|
6,150
|
|
|
|
52,671,080
|
|
|
|
(1,708,445
|
)
|
|
|
(14,756,490
|
)
|
|
|
|
|
|
|
36,260,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of participating stock
|
|
|
685,723
|
|
|
|
6,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,107,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,114,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,320,027
|
)
|
|
|
|
|
|
|
(21,320,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
(577,123
|
)
|
|
|
(5,771
|
)
|
|
|
|
|
|
|
|
|
|
|
(150,000
|
)
|
|
|
(1,500
|
)
|
|
|
(1,198,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,162,736
|
)
|
|
|
(4,368,007
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale or retirement of treasury
stock
|
|
|
377,123
|
|
|
|
3,771
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,162,736
|
|
|
|
3,168,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of receivable from
shareholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,708,445
|
|
|
|
|
|
|
|
|
|
|
|
1,708,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(981,057
|
)
|
|
|
|
|
|
|
(981,057
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
3,756,496
|
|
|
$
|
37,565
|
|
|
|
1,516,590
|
|
|
$
|
15,166
|
|
|
|
614,988
|
|
|
$
|
6,150
|
|
|
$
|
55,580,562
|
|
|
$
|
|
|
|
$
|
(37,057,574
|
)
|
|
$
|
|
|
|
$
|
18,581,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
24
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,253,764
|
|
|
$
|
5,430,132
|
|
|
$
|
(981,057
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
4,114,339
|
|
Depreciation
|
|
|
1,434,703
|
|
|
|
1,674,534
|
|
|
|
1,815,775
|
|
Forgiveness of receivable from shareholder
|
|
|
|
|
|
|
|
|
|
|
1,708,445
|
|
Non-cash interest expense
|
|
|
|
|
|
|
|
|
|
|
552,748
|
|
Reserve for service charges receivable
|
|
|
171,848
|
|
|
|
290,055
|
|
|
|
289,601
|
|
Loss on disposal of equipment
|
|
|
59,895
|
|
|
|
108,426
|
|
|
|
247,975
|
|
Amortization of other assets
|
|
|
40,553
|
|
|
|
8,729
|
|
|
|
119,708
|
|
Reserve for inventory shrinkage and valuation
|
|
|
17,751
|
|
|
|
|
|
|
|
50,000
|
|
Deferred income taxes
|
|
|
2,521,819
|
|
|
|
3,255,596
|
|
|
|
(536,383
|
)
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in operating assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(751,846
|
)
|
|
|
(467,411
|
)
|
|
|
(319,812
|
)
|
Service charges receivable
|
|
|
(553,111
|
)
|
|
|
(860,989
|
)
|
|
|
(731,665
|
)
|
Income taxes receivable
|
|
|
|
|
|
|
|
|
|
|
(28,700
|
)
|
Prepaid expenses and other
|
|
|
34,019
|
|
|
|
293,549
|
|
|
|
1,812
|
|
Advances to officers and directors
|
|
|
(892,277
|
)
|
|
|
118,378
|
|
|
|
384,881
|
|
Advances to team members
|
|
|
(5,045
|
)
|
|
|
(87,972
|
)
|
|
|
7,018
|
|
Other assets
|
|
|
(44,310
|
)
|
|
|
(11,707
|
)
|
|
|
(117,578
|
)
|
Increase (decrease) in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(79,205
|
)
|
|
|
(71,355
|
)
|
|
|
(20,151
|
)
|
Accrued expenses
|
|
|
(441,935
|
)
|
|
|
421,931
|
|
|
|
3,021,153
|
|
Customer layaway deposits
|
|
|
77,408
|
|
|
|
142,955
|
|
|
|
26,106
|
|
Deferred rent
|
|
|
(30,662
|
)
|
|
|
42,594
|
|
|
|
(2,889
|
)
|
Income taxes payable
|
|
|
(26,403
|
)
|
|
|
28,045
|
|
|
|
(50,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,786,966
|
|
|
|
10,315,490
|
|
|
|
9,551,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal recovered on forfeited loans through dispositions
|
|
|
20,726,275
|
|
|
|
27,198,647
|
|
|
|
34,521,159
|
|
Loans repaid
|
|
|
26,436,842
|
|
|
|
30,769,721
|
|
|
|
33,692,098
|
|
Loans made
|
|
|
(51,119,261
|
)
|
|
|
(62,079,882
|
)
|
|
|
(71,599,884
|
)
|
Purchases of property and equipment
|
|
|
(1,194,203
|
)
|
|
|
(1,282,297
|
)
|
|
|
(2,967,987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,150,347
|
)
|
|
|
(5,393,811
|
)
|
|
|
(6,354,614
|
)
|
|
|
|
|
|
|
|
|
|
|
(Continued)
See the accompanying notes to consolidated financial statements.
25
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving line of credit
|
|
|
23,890,098
|
|
|
|
20,886,000
|
|
|
|
50,516,255
|
|
Repayments on revolving line of credit
|
|
|
(15,399,510
|
)
|
|
|
(26,631,146
|
)
|
|
|
(45,064,832
|
)
|
Borrowings on long-term debt
|
|
|
|
|
|
|
|
|
|
|
20,000,000
|
|
Principal payments on long-term debt
|
|
|
(7,401,259
|
)
|
|
|
|
|
|
|
(2,047,837
|
)
|
Principal payments on convertible subordinated debentures
|
|
|
(55,204
|
)
|
|
|
(60,626
|
)
|
|
|
(3,926,567
|
)
|
Dividend payments
|
|
|
|
|
|
|
|
|
|
|
(21,320,027
|
)
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(4,368,007
|
)
|
Sale of treasury stock
|
|
|
|
|
|
|
|
|
|
|
3,168,007
|
|
Payment of loan commitment fees
|
|
|
|
|
|
|
|
|
|
|
(118,000
|
)
|
Loans to shareholder
|
|
|
(751,961
|
)
|
|
|
(2,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
282,164
|
|
|
|
(5,808,006
|
)
|
|
|
(3,161,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
|
918,783
|
|
|
|
(886,327
|
)
|
|
|
35,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
727,218
|
|
|
|
1,646,001
|
|
|
|
759,674
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
1,646,001
|
|
|
$
|
759,674
|
|
|
$
|
795,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,405,642
|
|
|
$
|
1,103,244
|
|
|
$
|
1,902,214
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
64,200
|
|
|
$
|
164,016
|
|
|
$
|
129,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pawn loans forfeited and transferred to inventories
|
|
$
|
22,729,284
|
|
|
$
|
28,379,969
|
|
|
$
|
35,676,876
|
|
|
|
|
|
|
|
|
|
|
|
See the accompanying notes to consolidated financial statements.
26
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies
|
|
(a)
|
|
Restatement of Historical Financial Statements
|
|
|
|
|
Value Financial Services, Inc.s (VFS) previously reported financial statements
have been adjusted for certain items, summarized as follows:
|
|
|
|
In the consolidated statements of operations, VFS reclassified
$1,270,622 and $1,501,432 of depreciation expense for the years ended
2005 and 2006, respectively, which was previously included in general
and administrative expenses to store operating expenses, as VFS
believes the inclusion of the operating store-related depreciation in
store operating expenses is a better presentation of store operating
income than as previously reported;
|
|
|
|
|
In the consolidated statements of cash flows, VFS recorded $2,003,009,
and $1,181,322 for the years ended 2005 and 2006, respectively, as a
reduction to cash used to acquire inventories in operating activities
and principal recovered on forfeited loans through dispositions in
investing activities for the non-cash forfeitures of loans and related
collateral, as VFS believes the reduction of cash used to acquire
inventories in operating activities and principal recovered on
forfeited loans through dispositions in investing activities as it
relates to the non-cash activity of forfeited collateral being
reclassified to inventories is more reflective as a non-cash financing
activity than as cash used in operating as well as cash provided by
investing activities, as previously reported;
|
|
|
|
|
VFS has amended its consolidated statements of cash flows to report
its borrowings and repayments on its revolving line of credit on a
gross basis instead of a net basis since the maturity of the line of
credit was not short-term in nature and VFS, therefore, concluded that
the gross basis was more reflective of cash used in financing
activities than as previously reported. That resulted in the amended
reported of borrowings of $23,890,098 and $20,886,000 during the years
ended 2005 and 2006, respectively, and repayments of $15,399,510, and
$26,631,146 during the years ended 2005 and 2006, respectively. VFS
had previously reported net borrowings (repayments) of $8,490,588, and
($5,745,146) during the years ended 2005, and 2006, respectively; and
|
|
|
|
|
VFS has amended its consolidated statements of cash flows to report
the supplemental schedule of non-cash investing activities for loans
that have forfeited and the related transfer of the collateral to
inventories in the amounts of $22,729,284 and $20,886,000 during the
years ended 2005 and 2006, respectively.
|
|
|
|
The consolidated financial statements reflecting the impact of the restatements
noted above were issued to the VFS shareholders in August 2007. As a result,
details as to the differences between the amounts previously reported and the
restated amounts on each individual financial statement line item is not included
in these re-issued consolidated financial statements.
|
27
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
|
(b)
|
|
Reporting Entity and Principles of Consolidation
|
|
|
|
|
The accompanying consolidated financial statements include the accounts of Value
Financial Services, Inc. d/b/a Value Pawn and Jewelry Store, Inc. and its
wholly-owned subsidiary, Value Pawn Holdings, Inc. (collectively, the Company).
All significant intercompany accounts and transactions have been eliminated in
consolidation.
|
|
|
|
|
The Company is a provider of specialty financial services to individuals and offers
secured non-recourse loans, commonly referred to as pawn loans, through its pawn
lending operations. The pawn loan portfolio generates finance and service charges
revenue. A related activity of the lending operations is the sale of inventory,
primarily collateral from unredeemed pawn loans. As of December 31, 2005, the
Company operated 60 stores, as of December 31, 2006, the Company operated 62
stores, and as of December 31, 2007, the Company operated 64 stores, located in
Florida, Georgia, and Tennessee.
|
|
|
|
|
In November 2007, the Company organized two new subsidiary companies to operate
pawn store locations in Mexico. The new companies, VFS Mexico Services, LLC and
VFS Mexico Operations, LLC, are both Limited Liability Companies and are organized
under the laws of the State of Florida. The Company intends to open four pawn
store locations in Mexico during 2008.
|
|
|
|
|
In August 2007, the Companys board of directors approved and the Company filed a
registration statement on Form S-1 with the Securities and Exchange Commission for
an initial public offering (IPO) of the Companys common stock. In November
2007, the board of directors determined that it was in the best interests of the
shareholders to suspend the IPO activities and ultimately cancelled the IPO
initiative during early 2008. Over the course of the IPO process, the Company
accumulated approximately $1,190,500 of IPO related expenses. These costs include
approximately $586,300 in legal, accounting and other fees that were incurred, paid
and written off during 2007 and an additional $604,200 of underwriting and
accounting fees that were accrued and written off during 2007.
|
|
|
(c)
|
|
Use of Estimates
|
|
|
|
|
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of the
consolidated financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
|
28
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(d)
|
|
Revenue Recognition and Loans
|
|
|
|
|
Pawn loans (loans) are made on the pledge of tangible personal property for one
month with an automatic extension period of 30 days. The Company accrues pawn
service charge revenue based on anticipated redemption activity for pawn loans
during each reporting period. The Company has historically been able to estimate
redemption rates with a high degree of accuracy due to the short-term nature of its
pawn loans. Yields on the Companys outstanding loan portfolio fluctuate in
correspondence with redemption activity. For loans not repaid, the carrying value
of the forfeited collateral (inventories) is stated at the lower of cost (cash
amount loaned) or market. Revenues from the sale of inventory are recognized at
the time of sale and the risk of loss transfers to an unrelated third party.
Revenues consist of pawn service charges and sales of inventory. Other revenues as
reported on the consolidated statements of operations consist of proceeds from
layaway forfeitures, check cashing fees and lost ticket fees.
|
|
|
(e)
|
|
Allowance for Pawn Service Charges
|
|
|
|
|
The Company accrues finance and service charges revenue only on those pawn loans
that the Company deems collectible based on historical loan redemption statistics.
Pawn loans written during each calendar month are aggregated and tracked for
performance. Loan transactions may conclude based upon redemption, renewal or
forfeiture of the loan collateral. The gathering of this empirical data allows the
Company to analyze the characteristics of its outstanding pawn loan portfolio and
estimate the probability of collection of finance and service charges. If the
future actual performance of the loan portfolio differs significantly (positively
or negatively) from expectations, revenue for the next reporting period would be
likewise affected. Due to the short-term nature of pawn loans, the Company can
quickly identify performance trends.
|
|
|
(f)
|
|
Inventories
|
|
|
|
|
Inventories represent merchandise acquired from forfeited loans, merchandise
purchased directly from the public, and new merchandise purchased from vendors.
Merchandise purchased directly from vendors and customers is recorded at cost.
Merchandise from forfeited loans is recorded at the amount of the loan principal on
the unredeemed goods. The cost of inventories, determined on the specific
identification method, is removed from inventories and recorded as a cost of sales
at the time of sale. Inventories are stated at the lower of cost or market. The
Company provides an allowance for shrinkage and valuation based on managements
evaluation of the inventories. The allowance deducted from the carrying value of
inventories amounted to approximately $283,000 as of December 31, 2005 and December
31, 2006, and $333,000 as of December 31, 2007, respectively.
|
29
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(g)
|
|
Property and Equipment
|
|
|
|
|
Property and equipment are recorded at cost, less accumulated depreciation.
Depreciation expense is provided on a straight-line basis, using estimated useful
lives of five to 20 years for furniture and fixtures, equipment and vehicles. The
costs of improvements on leased stores are capitalized as leasehold improvements
and are amortized on a straight-line basis using an estimated useful life of up to
15 years, which represents the applicable lease period. Routine maintenance and
repairs are charged to expense as incurred. Major replacements and improvements
are capitalized. When assets are sold or retired, the related cost and accumulated
depreciation are removed from the accounts and gains or losses from dispositions
are credited or charged to income in the consolidated statements of operations.
|
|
|
(h)
|
|
Goodwill
|
|
|
|
|
Goodwill represents the excess of the purchase price over the fair value of net
assets acquired. Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, requires the use of a nonamortization
approach to account for purchased goodwill and certain intangibles. Under a
nonamortization approach goodwill is not amortized into results of operations but
instead is reviewed for impairment at least annually and written down and charged
to results of operations in the periods in which the recorded value of goodwill is
determined to be greater than its fair value. Based on the results of the initial
and subsequent impairment tests, management determined there have been no
impairments.
|
|
|
(i)
|
|
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of
|
|
|
|
|
The Company evaluates its long-lived assets for financial impairment as events or
changes in circumstances indicate that the carrying value of a long-lived asset may
not be fully recoverable. The Company evaluates the recoverability of long-lived
assets by measuring the carrying amount of the assets against their estimated
future cash flows (undiscounted and without interest charges). If such evaluations
indicate that the future undiscounted cash flows of certain long-lived assets are
not sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values.
|
|
|
(j)
|
|
Customer Layaway Deposits
|
|
|
|
|
Interim payments from customers on layaway sales are credited to customer layaway
deposits and are recorded as sales during the period in which final payment is
received.
|
|
|
(k)
|
|
Deferred Rent
|
|
|
|
|
Certain operating lease agreements provide for scheduled rent increases over the
lease term. As such, the rental payments are accrued and charged to expense on a
straight-line basis.
|
30
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(l)
|
|
Income Taxes
|
|
|
|
|
The Company accounts for income taxes utilizing the asset and liability method.
Deferred income taxes are recognized for the tax consequences in future years for
temporary differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change in deferred tax assets and
liabilities during the period. In determining the amount of any valuation
allowance required to offset deferred tax assets, an assessment is made that
includes anticipating future income and determining the likelihood of realizing
deferred tax assets.
|
|
|
|
|
Effective January 1, 2007, the Company began accounting for uncertainty in income
taxes recognized in the consolidated financial statements in accordance with
Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (FIN 48). FIN 48 requires that a
more-likely-than-not threshold be met before the benefit of a tax position may be
recognized in the consolidated financial statements and prescribes how such benefit
should be measured. It also provides guidance on derecognition, classification,
accrual of interest and penalties, accounting in interim periods, disclosure and
transition. It requires that the new standard be applied to the balances of assets
and liabilities as of the beginning of the period of adoption and that a
corresponding adjustment be made to the opening balance of accumulated deficit.
See Note 4.
|
|
|
|
|
Management must evaluate tax positions taken on the Companys tax returns for all
periods that are open to examination by taxing authorities and make a judgment as
to whether and to what extent such positions are more likely than not to be
sustained based on merit. Management judgment is required in determining the
provision for income taxes, the deferred tax assets and liabilities and any
valuation allowance recorded against deferred tax assets. Management judgment is
also required in evaluating whether tax benefits meet the more-likely-than-not
threshold for recognition under FIN 48.
|
|
|
|
|
It is the Companys policy to classify interest and penalties on income tax
liabilities as interest expense and administrative expense, respectively. The
Company did not change its policy on classification of such amounts upon adoption
of FIN 48.
|
31
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(m)
|
|
Operations and Administration Expenses
|
|
|
|
|
Operations expenses include expenses incurred for personnel; occupancy and
marketing that are directly related to the pawn lending operations. These costs are
incurred within the lending locations. In addition, similar costs related to
non-home office management and supervision and oversight of locations are included
in operations expenses. Administration expenses include expenses incurred for
personnel and general office activities such as accounting and legal directly
related to corporate administrative functions.
|
|
|
(n)
|
|
Hedging and Derivatives Activity
|
|
|
|
|
The Companys risk management policy is to use derivative financial instruments, as
appropriate, to manage the interest expense related to debt with variable interest
rates. These instruments are not designated as hedges; accordingly, gains and
losses related to changes in fair value are reflected in the consolidated
statements of operations at each reporting date. As of December 31, 2007, the
Company had an interest rate derivative with a notional amount of $13,500,000 which
effectively converted a portion of the Companys debt from a variable rate of
interest based on one-month LIBOR plus a margin determined on the basis of the
Companys quarterly funded debt to EBITDA ratio to a fixed LIBOR rate of 5.73% plus
the same margin. The fair value of this interest rate swap was a liability of
$552,748 which has been recorded as a non-current liability and the change in the
fair value as an increase in interest expense in the accompany consolidated
financial statements.
|
|
|
(o)
|
|
Accounting for Stock-Based Compensation
|
|
|
|
|
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123(R), Share-Based Payment, using the modified
prospective transition method. Under this transition method, compensation cost
represents the cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of SFAS No. 123 and compensation cost for
all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123(R).
|
|
|
|
|
Prior to January 1, 2006, the Company accounted for stock options under the
recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock
Issue to Employees, and related interpretations, as permitted by FASB Statement
No. 123, Accounting for Stock-Based Compensation. No stock-based employee
compensation cost was recognized in the accompanying consolidated statement of
operations for the year ended December 31, 2005 as all options granted under the
Plan had an exercise price equal to the market value of the underlying common stock
on the date of grant.
|
|
|
|
|
Results for prior periods have not been restated to reflect the impact of adopting
the new standard. Pro forma net income and reported net income were the same for
the year ended December 31, 2005 as there were no material stock options requiring
amortization of cost.
|
32
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(p)
|
|
Concentration of Credit Risk
|
|
|
|
|
Financial instruments, which potentially subject the Company to concentrations of
credit risk, consist principally of cash and loans. The Company places its cash
with high credit quality financial institutions. At various times throughout the
years ended December 31, 2006 and 2007 some deposits held at financial institutions
were in excess of federally insured limits. However, the Company has not
experienced any losses in such accounts and management believes the Company is not
exposed to any significant credit risk on these accounts.
|
|
|
|
|
Almost all of the Companys pawn loans are to customers whose ability to pay is
dependent upon the economics prevailing in their locations; however, concentrations
of credit risk with respect to pawn loans are limited due to the large number of
customers and generally short payment terms. The Company also requires a pledge of
tangible personal property to help further reduce credit risk.
|
|
|
(q)
|
|
Recent Accounting Pronouncements
|
|
|
|
|
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value to be
the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date and
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. It establishes a fair value hierarchy and expands disclosures about
fair value measurements in both interim and annual periods. SFAS No. 157 will be
effective for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years. In December 2007, FASB issued proposed FASB Staff
Position (FSP) FAS 157-b, which delays the effective date of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed
in the financial statements on a nonrecurring basis. The proposed FSP partially
defers the effective date of SFAS No. 157 to fiscal years beginning after November
15, 2008 and interim periods within those fiscal years for items within the scope
of this FSP. The Company does not expect SFAS No. 157 to have a material effect on
the Companys consolidated financial position or results of operations, but
anticipates additional disclosures when SFAS No. 157 becomes effective.
|
|
|
|
|
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No.
159). SFAS No. 159 permits entities to choose, at specified election dates, to
measure eligible items at fair value (the fair value option) and requires an
entity to report unrealized gains and losses on items for which the fair value
option has been elected in earnings at each subsequent reporting date. Upfront
costs and fees related to items for which the fair value option is elected shall be
recognized in earnings as incurred and not deferred. SFAS No. 159 will be
effective for fiscal years beginning after November 15, 2007. The Company does not
expect SFAS No. 159 to have a material effect on the Companys consolidated
financial position or results of operations.
|
33
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(1)
|
|
Summary of Significant Accounting Policies, Continued
|
|
(q)
|
|
Recent Accounting Pronouncements, Continued
|
|
|
|
|
In December 2007, FASB issued Statement of Financial Accounting Standards No. 141,
Business Combinations Revised (SFAS No. 141(R)). SFAS No. 141(R)
establishes principles and requirements for how an acquirer in a business
combination: recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interests in the
acquiree; recognizes and measures goodwill acquired in the business combination or
a gain from a bargain purchase price; and, determines what information to disclose
to enable users of the consolidated financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The application of SFAS No. 141(R) will cause management to
evaluate future transaction returns under different conditions, particularly the
near term and long term economic impact of expensing transaction costs up front.
|
|
|
(r)
|
|
Reclassifications
|
|
|
|
|
Certain amounts in the consolidated financial statements for 2005 and 2006 have
been reclassified to conform to the presentation format adopted in 2007 (see Note 1(a)). These
reclassifications have no effect on net income or shareholders equity as
previously reported.
|
(2)
|
|
Property and Equipment
|
|
|
|
Major classifications of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
December 31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Cost
|
|
Depreciation
|
|
Net
|
|
Leasehold
Improvements
|
|
$
|
7,867,864
|
|
|
$
|
(3,687,631
|
)
|
|
$
|
4,180,233
|
|
|
$
|
8,158,693
|
|
|
$
|
(4,306,828
|
)
|
|
$
|
3,851,865
|
|
Furniture and
fixtures
|
|
|
6,573,471
|
|
|
|
(4,130,274
|
)
|
|
|
2,443,197
|
|
|
|
7,031,872
|
|
|
|
(4,803,003
|
)
|
|
|
2,228,869
|
|
Equipment
|
|
|
3,293,678
|
|
|
|
(2,790,948
|
)
|
|
|
502,730
|
|
|
|
3,512,997
|
|
|
|
(2,968,234
|
)
|
|
|
544,763
|
|
|
|
|
|
|
$
|
17,735,013
|
|
|
$
|
(10,608,853
|
)
|
|
$
|
7,126,160
|
|
|
$
|
18,703,562
|
|
|
$
|
(12,078,065
|
)
|
|
$
|
6,625,497
|
|
|
|
|
34
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(2)
|
|
Property and Equipment, Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold Improvements
|
|
$
|
8,879,376
|
|
|
$
|
(5,063,055
|
)
|
|
$
|
3,816,321
|
|
Furniture and fixtures
|
|
|
7,486,041
|
|
|
|
(4,979,710
|
)
|
|
|
2,506,331
|
|
Equipment
|
|
|
4,406,518
|
|
|
|
(3,199,436
|
)
|
|
|
1,207,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,771,932
|
|
|
$
|
(13,242,201
|
)
|
|
$
|
7,529,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense of property and equipment amounted to approximately $1,434,700,
$1,674,500 and $1,815,800 for the years ended December 31, 2005, 2006 and 2007
respectively.
|
|
(3)
|
|
Accrued Expenses
|
|
|
|
The major components of accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued salaries and related benefits
|
|
$
|
724,096
|
|
|
$
|
777,989
|
|
|
$
|
1,371,195
|
|
Accrued director and officer fees
|
|
|
|
|
|
|
|
|
|
|
1,507,250
|
|
Accrued initial public offering
costs (see Note 1(a))
|
|
|
|
|
|
|
|
|
|
|
604,204
|
|
Employee insurance payable
|
|
|
236,931
|
|
|
|
440,101
|
|
|
|
438,533
|
|
Accrued sales tax payable
|
|
|
378,730
|
|
|
|
405,002
|
|
|
|
346,687
|
|
Accrued interest expense
|
|
|
211,672
|
|
|
|
228,351
|
|
|
|
197,862
|
|
Accrued lease termination costs
|
|
|
210,191
|
|
|
|
215,514
|
|
|
|
362,966
|
|
Other
|
|
|
53,518
|
|
|
|
170,112
|
|
|
|
429,525
|
|
|
|
|
|
|
$
|
1,815,138
|
|
|
$
|
2,237,069
|
|
|
$
|
5,258,222
|
|
|
|
|
|
|
In connection with the Companys IPO initiative
undertaken during 2007 (see Note 1(b)), the
board of directors approved a total of $1,507,250 to be paid to certain of the Companys
board members and members of management for their efforts in the IPO process. The accrued
director and officer fees as of December 31, 2007 above represent fees earned during 2007
for the aforementioned efforts.
|
35
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(3)
|
|
Accrued Expenses, Continued
|
|
|
|
The following tables set forth the details and cumulative activity in the accruals
associated with store closings in 2002 and 2004 of the Company in the consolidated balance
sheets as of December 31, 2005, December 31, 2006 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
December 31,
|
|
|
|
|
|
Cash
|
|
December 31,
|
|
|
2004
|
|
Provisions
|
|
Reductions
|
|
2005
|
|
Lease termination costs
|
|
$
|
396,290
|
|
|
$
|
|
|
|
$
|
(186,099
|
)
|
|
$
|
210,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
December 31,
|
|
|
|
|
|
Cash
|
|
December 31,
|
|
|
2005
|
|
Provisions
|
|
Reductions
|
|
2006
|
|
Lease termination costs
|
|
$
|
210,191
|
|
|
$
|
215,514
|
|
|
$
|
(210,191
|
)
|
|
$
|
215,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
|
|
|
|
|
|
|
Accrual as of
|
|
|
December 31,
|
|
|
|
|
|
Cash
|
|
December 31,
|
|
|
2006
|
|
Provisions
|
|
Reductions
|
|
2007
|
|
Lease termination costs
|
|
$
|
215,514
|
|
|
$
|
330,000
|
|
|
$
|
(182,548
|
)
|
|
$
|
362,966
|
|
|
|
|
(4)
|
|
Income Taxes
|
|
|
|
Income tax expense (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
61,375
|
|
|
$
|
163,989
|
|
|
$
|
45,899
|
|
State
|
|
|
10,000
|
|
|
|
28,071
|
|
|
|
4,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,375
|
|
|
|
192,060
|
|
|
|
50,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense
(benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
2,143,806
|
|
|
|
2,779,757
|
|
|
|
(465,685
|
)
|
State
|
|
|
378,013
|
|
|
|
475,839
|
|
|
|
(70,698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,521,819
|
|
|
|
3,255,596
|
|
|
|
(536,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,593,194
|
|
|
$
|
3,447,656
|
|
|
$
|
(485,860
|
)
|
|
|
|
36
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(4)
|
|
Income Taxes, Continued
|
|
|
|
Actual income tax expense differs from the expected tax expense, computed by applying the
U.S. federal corporate income tax rate, to the income from continuing operations before
income taxes, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Income tax expense (benefit)
computed at the federal statutory
rate
|
|
$
|
2,282,367
|
|
|
$
|
3,018,448
|
|
|
$
|
(498,752
|
)
|
State income tax expense (benefit),
net of federal tax benefit
|
|
|
243,676
|
|
|
|
328,659
|
|
|
|
( 49,610
|
)
|
Non-deductible expenses
|
|
|
23,388
|
|
|
|
59,904
|
|
|
|
53,102
|
|
Change in federal valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
43,763
|
|
|
|
40,645
|
|
|
|
9,400
|
|
|
|
|
|
|
$
|
2,593,194
|
|
|
$
|
3,447,656
|
|
|
$
|
(485,860
|
)
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that, some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income or the reversal of deferred tax liabilities during the period in
which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax assets, projects future taxable income, and tax planning
strategies in making this assessment.
|
37
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(4)
|
|
Income Taxes, Continued
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Deferred tax assets and liabilities at December 31, 2005,
2006 and 2007 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
10,647,845
|
|
|
$
|
6,771,265
|
|
|
$
|
5,649,641
|
|
Allowance for doubtful service
charges
|
|
|
552,466
|
|
|
|
661,614
|
|
|
|
770,591
|
|
Allowance for inventory
|
|
|
106,511
|
|
|
|
106,571
|
|
|
|
125,326
|
|
Deferred rent
|
|
|
119,476
|
|
|
|
135,504
|
|
|
|
134,416
|
|
Charitable contribution carryforward
|
|
|
7,246
|
|
|
|
12,193
|
|
|
|
18,808
|
|
Accrued expenses
|
|
|
12,189
|
|
|
|
246,708
|
|
|
|
944,042
|
|
Tax credits
|
|
|
213,774
|
|
|
|
412,764
|
|
|
|
491,519
|
|
Revenue recognition
|
|
|
1,786,838
|
|
|
|
1,786,838
|
|
|
|
2,067,811
|
|
Interest rate swap
|
|
|
|
|
|
|
|
|
|
|
201,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,446,345
|
|
|
|
10,133,457
|
|
|
|
10,378,045
|
|
|
|
|
Deferred tax liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(1,204,726
|
)
|
|
|
(1,003,112
|
)
|
|
|
(562,422
|
)
|
Intangible assets
|
|
|
(834,697
|
)
|
|
|
(979,019
|
)
|
|
|
(1,127,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,039,423
|
)
|
|
|
(1,982,131
|
)
|
|
|
(1,690,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,406,922
|
|
|
$
|
8,151,326
|
|
|
$
|
8,687,709
|
|
|
|
|
These amounts are included in the accompanying consolidated balance sheets under the following
captions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
3,275,000
|
|
|
$
|
3,120,000
|
|
|
$
|
4,042,186
|
|
Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
10,171,345
|
|
|
|
7,013,457
|
|
|
|
6,335,859
|
|
Deferred tax liabilities
|
|
|
(2,039,423
|
)
|
|
|
(1,982,131
|
)
|
|
|
(1,690,336
|
)
|
|
|
|
Net non-current
|
|
|
8,131,922
|
|
|
|
5,031,326
|
|
|
|
4,645,523
|
|
|
|
|
Net deferred tax assets
|
|
$
|
11,406,922
|
|
|
$
|
8,151,326
|
|
|
$
|
8,687,709
|
|
|
|
|
38
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(4)
|
|
Income Taxes, Continued
|
|
|
|
The Companys net deferred tax assets include substantial amounts of net operating loss
carryforwards, totaling approximately $17,628,000 and $15,287,000 for federal and state
income tax purposes, respectively, as of December 31, 2006, and $15,022,000 and $12,752,000
for federal and state income tax purposes, respectively, as of December 31, 2007. The
utilization of the Companys net operating loss carryforwards may be limited in any given
year under certain circumstances. Events which may affect the Companys ability to utilize
these carryforwards include, but are not limited to, future profitability, cumulative stock
ownership changes of 50% or more over a three-year period, as defined by Section 382 of the
Internal Revenue Code, and the timing of the utilization of the tax benefit carryforwards.
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that, some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income or the reversal of deferred tax liabilities during the period in
which those temporary differences become deductible. Management considers the scheduled
reversal of deferred tax assets, projections of future taxable income, and tax planning
strategies in making this assessment. No valuation allowance has been provided for these
deferred tax assets at December 31, 2007 as management has deemed that full realization of
these assets is more likely than not.
|
|
|
|
As of December 31, 2007, the Company had a net operating loss carryforward of approximately
$15,022,000 for federal and $12,752,000 for state income tax purposes, which will expire
between 2021 and 2022. The federal and state net operating loss carryforwards will expire
in each of the years ending December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
State
|
|
2021
|
|
$
|
8,581,000
|
|
|
$
|
6,490,000
|
|
2022
|
|
|
6,440,000
|
|
|
|
6,262,000
|
|
|
|
|
|
|
$
|
15,022,000
|
|
|
$
|
12,752,000
|
|
|
|
|
|
|
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the
implementation of FIN 48, the Company did not recognize a change in the liability for
unrecognized tax benefits related to tax positions taken in prior periods, and thus, did
not record a change in its opening accumulated deficit. During the year ended December 31,
2007, there was no activity related to prior or current years tax positions, settlements
or reductions resulting from expirations of unrecognized tax benefits or obligations.
|
|
|
|
Accordingly, there are no unrecognized tax benefits that, if recognized, would affect the
effective tax rate. No interest or penalties have been accrued in the consolidated
financial statements related to unrecognized tax benefits. The Company does not expect a
significant increase or decrease in unrecognized tax benefits during the next 12 months.
As of December 31, 2007, the Companys 2004 through 2007 tax years were open to examination
by the Internal Revenue Service and major state taxing jurisdictions.
|
39
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(5)
|
|
Long-Term Debt
|
|
|
|
On December 16, 2005, the Company entered into a revolving line of credit arrangement with
a commercial bank (the Line of Credit). Under the terms of the Line of Credit, the
initial borrowing limit of $15,000,000 was reduced in increments of $1,250,000 on April 3,
2006; January 3, 2007; and April 3, 2007; and was to be reduced by an additional $1.25
million on January 3, 2008. The balance was due in full upon maturity on November 30,
2008. Interest was due monthly at the one-month LIBOR rate plus a margin determined on the
basis of the Companys quarterly funded debt to EBITDA ratio. An availability fee equal to
0.1% per annum was charged on the difference between the borrowing limit and the
outstanding principal balance.
|
|
|
|
The Line of Credit was collateralized by substantially all of the Companys assets and
contains certain conditions and covenants that prevented or restricted the Company from
engaging in certain transactions without the consent of the lender. The Company was also
required to maintain certain financial covenants, including a Funded Debt to EBITDA Ratio,
a Liabilities to Tangible Net Worth Ratio, and a Fixed Charge Coverage Ratio. Among the
other conditions and covenants of the Line of Credit, the most restrictive required that
the Company abide by annual and quarterly reporting requirements; maintain its primary
depository account with the commercial bank; not enter into new debt agreements that would
cause the Companys total debt to exceed the Line of Credit borrowing limit by $500,000;
not retire any long-term debt entered into prior to the date of the Line of Credit at a
date in advance of its legal obligation to do so; not retire or otherwise acquire any of
its capital stock; and not extend any credit or loan or advance any monies to any parent
entity, subsidiary, officer, director, shareholder or any other affiliate, except that the
Company could make loans to its employees in the ordinary course of business of up to
$500,000. The Company repurchased and retired 200,000 shares of Series A-1 Participating
Stock in April 2007; however a waiver for this repurchase was granted by the bank. As of
June 30, 2007, the Line of Credit was paid in full.
|
|
|
|
On June 15, 2007, the Company entered into an agreement for a $37 million senior credit
facility with a new bank (the Credit Facility). The Credit Facility is comprised of a
$17 million working capital line of credit and a $20 million term loan. The line of credit
matures in two years while the term loan carries a five-year maturity. The Company will
make equal monthly payments of principal and interest over the five-year term. Interest
rates are based on 30-day LIBOR plus a margin that is determined by the Companys funded
debt to EBITDA ratio. The Company entered into an interest rate swap agreement that
applies a fixed annual LIBOR rate of 5.73% to 75% of the outstanding principal balance of
the term loan. The margin ranges from 150-195 basis points on the line of credit (interest
rate of 6.95% as of December 31, 2007) and from 165-210 basis points on the term loan
(interest rate of 7.13% as of December 31, 2007). At funding, the Company was at the high
end of the pricing range. In addition, there is an unused line fee on the line of credit
of 10-20 basis points, depending on the Companys funded debt to EBITDA ratio. The Company
paid an upfront commitment fee of $118,000 which is being amortized over the life of the
Credit Facility. With the proceeds from the Credit Facility, the Company retired its
previous Line of Credit.
|
40
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(5)
|
|
Long-Term Debt, Continued
|
|
|
|
The Credit Facility is collateralized by substantially all of the Companys assets and
contains conditions and covenants that prevent or restrict the Company from engaging in
certain transactions without the consent of the lender. The Company is also required to
maintain certain financial covenants, including a leverage ratio and a fixed charge
coverage ratio. Among the other conditions and covenants, the Credit Facility requires the
Company to (i) abide by annual and quarterly reporting requirements; (ii) maintain its
primary depository account with the commercial bank; (iii) not enter into new debt
agreements that exceed $50,000; (iv) not incur capital expenditures in excess of $3,000,000
in any fiscal year; (v) not retire or otherwise acquire any of its capital stock; (vi) not
extend any credit or loan or advance any monies to any person in excess of $50,000; and
(vii) not make cash distributions to shareholders without the lenders prior consent. As
of and during the year ended December 31, 2007 and as of March 31, 2008, the Company was in
noncompliance with several of the negative covenants of the Credit Facility; however, the
Company has requested and received waivers from the bank for the respective noncompliance.
The Company had $849,898 in checks outstanding in excess of bank deposits in the Companys
bank accounts as of December 31, 2007, which are included in the line of credit balance in
the accompanying consolidated balance sheets and borrowings on revolving line of credit in
the accompanying consolidated statements of cash flows. The bank does not require funding
of the account until the checks are presented to the bank for payment.
|
|
|
|
Long-term debt as of December 31, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving line of credit
with a commercial bank
|
|
$
|
13,125,867
|
|
|
$
|
7,380,721
|
|
|
$
|
12,832,144
|
|
Term loan
|
|
|
|
|
|
|
|
|
|
|
17,952,163
|
|
|
|
|
Total long-term debt
|
|
|
13,125,867
|
|
|
|
7,380,721
|
|
|
|
30,784,307
|
|
Less: current maturities
of long-term debt
|
|
|
|
|
|
|
|
|
|
|
(4,000,000
|
)
|
|
|
|
Total long-term debt,
less current maturities
|
|
$
|
13,125,867
|
|
|
$
|
7,380,721
|
|
|
$
|
26,784,307
|
|
|
|
|
|
|
Future principal maturities of long-term debt as of December 31, 2007,
are due in future years as follows:
|
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
|
2008
|
|
$
|
4,000,000
|
|
2009
|
|
|
16,832,144
|
|
2010
|
|
|
4,000,000
|
|
2011
|
|
|
4,000,000
|
|
2012
|
|
|
1,952,163
|
|
|
|
|
|
|
|
$
|
30,784,307
|
|
|
|
|
|
41
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(6)
|
|
Convertible Subordinated Debentures, Participating Stock and Options
|
|
|
|
A private placement of $8,260,775 convertible subordinated debentures (the 1998
debentures) which are automatically convertible to common stock upon an initial public
offering where the gross offering is not less than $5 million and the shares of common
stock sold are at a price per share of not less than $24, a merger or the sale of
substantially all of the Companys assets, or are voluntarily convertible for five years at
the holders option at a conversion price of $20 per share, was authorized and fully
subscribed during 1998. Interest on the outstanding 1998 debentures is payable quarterly at
a rate of 6.5%, and the 1998 debentures mature in 15 years.
|
|
|
|
In April 1999, the Company authorized and fully subscribed a private placement of
$15,047,600 convertible subordinated debentures (the 1999 debentures) which are
automatically convertible to common stock upon an initial public offering, merger, or other
significant event (which would result in a valuation of $40 per share after the
transaction), or are voluntarily convertible for five years at the holders option at a
conversion price of $24 per share. Interest on the outstanding 1999 debentures is payable
quarterly at an initial rate of 6.4%. During November 2002, the interest rate was reduced
to 6.4% unless the prime rate exceeds 6.4% in which case interest is at prime. Interest is
currently payable at prime (8.25% at December 31, 2006) and any difference is accrued and
will be payable at maturity. The maturity date for the 1999 debentures was June 30, 2007.
The Company repaid and retired $3,864,000 of long-term debt in June 2007, representing the
1999 convertible subordinated debentures. Additionally, the Company paid $194,000 of
deferred interest the 1999 debenture holders had earned between November 2002 and August
2005. This interest had been deferred in accordance with the terms of an Amendment that
the 1999 debenture holders agreed to in November 2002. In August 2001, the Company entered
into exchange agreements with certain holders of the $16,547,600 outstanding 1999
debentures in which certain holders exchanged their 1999 debentures for shares of the
Companys Series A-1 participating stock. Under the exchange agreement, the holder of the
outstanding 1999 debentures received one share of Series A-1 participating stock for every
$10 of outstanding debentures. Each Series A-1 holder is entitled to one vote per share
owned. This exchange transaction resulted in the issuance of 1,112,000 shares of Series
A-1 participating stock and the retirement of $11,120,000 of the 1999 debentures. The
Company granted certain shareholders warrants to purchase 145,648 shares of its Series A-1
participating stock at an option price of $10 per share which was exercisable on or before
September 6, 2006. No warrants have ever been exercised and expired on September 6, 2006.
|
|
|
|
In August 2001, the Company entered into stock purchase agreements for its Series A-2
participating stock. The purchase price was $9.90 per share and was payable in either cash
or payment to the bank for which an unsecured note payable of the Company is guaranteed by
the individual purchaser of Series A-2 participating stock. This stock purchase
transaction resulted in the issuance of 1,415,981 shares of Series A-2 participating stock
and the retirement of $2,545,750 unsecured notes payable to banks. During 2002, an
additional 100,609 shares of Series A-2 participating stock was issued.
|
42
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(6)
|
|
Convertible Subordinated Debentures, Participating Stock and Options, Continued
|
|
|
|
The Series A-2 participating stock carries a liquidation value of $9.90 per share with
preference to all other capital stock and a cumulative dividend rate of 14.54% increasing
0.5% each six months through August 2003 to 16.04%. The Company had redemption rights on
the Series A-2 stock until August 31, 2003. Any Series A-2 stock outstanding after this
date receives additional voting rights such that each share is entitled to 4.43 votes and
the dividend rate increased to 16.54% and that rate continues throughout the life of the
Series A-2 stock. Accumulated and unpaid dividends compound annually. There is no
provision for accrual of the cumulative unpaid dividends unless declared by the Companys
board of directors. The total unaccrued cumulative unpaid dividends on the Series A-2
participating stock is approximately $13,957,000, $18,749,000 and $1,240,000 as of December
31, 2005, 2006 and 2007, respectively.
|
|
|
|
In August 2001, the Company entered into exchange agreements with certain holders of the
$8,260,775 outstanding 1998 debentures in which certain holders exchanged their 1998
debentures for shares of the Companys Series B participating stock. Each Series B holder
is entitled to one vote per share owned. Under the exchange agreement, the holder of the
outstanding 1998 debentures received one share of Series B participating stock for every
$10 of outstanding debentures. This exchange resulted in the issuance of 614,988 shares of
Series B participating stock and the retirement of $6,194,880 of the 1998 debentures.
Additionally, the Series A-2 holders purchased option rights to purchase 758,295 shares of
common stock (see Note 8). On April 3, 2007, the Companys board of directors authorized
management to secure the necessary funds to make a dividend payment to the holders of
Series A-2 Participating Stock by June 30, 2007. The Company made payments totaling $21.3
million to the Series A-2 Participating Stock holders, representing dividends accrued
through the applicable payment dates in June 2007. Dividends continue to accumulate at the
annual rate of 16.54%, but will not be accrued by the Company until they are approved and
authorized by the board of directors.
|
|
|
|
Pursuant to EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock, management has determined that the Series
A-2 option rights should be classified as a liability. However, the fair value of these
option rights was calculated using the Black-Scholes Option Pricing Model and deemed to be
immaterial. In addition, as of December 31, 2007 this liability for the option rights
would be reclassified to additional paid-in capital upon completion of an initial public
offering.
|
|
|
|
There are also 21,000 options outstanding that were granted in 1999 to the Companys board
of directors. These options can be exercised at an exercise price of $20.00 per share. If
not exercised by 2009, the options will terminate. None of these options are required to
be converted to common stock upon filing of an initial public offering.
|
|
|
|
Each share of participating stock is convertible, at the option of the holder, into the
number of fully paid and nonassessable shares of common stock determined by dividing the
applicable original price by the conversion price applicable to that share in effect at the
date of conversion, initially on a one-for-one basis. The Company may at any time require
the conversion of all of the outstanding shares of the various series of participating
stock if (a) the Company is at such time effecting a initial public offering or (b) at any
time in which the holders of a majority of the then outstanding shares of such series of
participating stock elect to convert their shares into common stock. None of the various
series of participating stock were converted to common stock in connection with the
Companys filing and subsequent suspension of its IPO during 2007.
|
43
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(6)
|
|
Convertible Subordinated Debentures, Participating Stock and Options, Continued
|
|
|
|
The Series A-1 participating stock has a liquidation value of $10 per share plus 8.0% per
annum. The Series B participating stock has a liquidation value of $10 per share plus 6.0%
per annum. Both the Series A-1 and B participating stocks are subordinate in liquidation
to the Series A-2 participating stock and do not provide for dividends. As of December 31,
2005, December 31, 2006 and December 31, 2007, there were 795,374, 795,374 and 126,010,
respectively, shares of the Companys Series A-2 participating stock held by directors of
the Company. In addition, approximately $2,448,200 was paid to such directors of the
Company during June 2007 representing the accumulated unaccrued dividends related to the
Series A-2 participating stock for the period from August 2001 through June 2007.
|
|
|
|
Below is a summary of the outstanding 1998 and 1999 debentures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2005
|
|
2006
|
|
2007
|
|
1998 debentures
|
|
$
|
526,853
|
|
|
$
|
466,227
|
|
|
$
|
403,660
|
|
1999 debentures
|
|
|
3,864,000
|
|
|
|
3,864,000
|
|
|
|
|
|
|
|
|
|
|
|
4,390,853
|
|
|
|
4,330,227
|
|
|
|
403,660
|
|
Less current maturities of 1998 and 1999
debentures
|
|
|
(58,881
|
)
|
|
|
(3,926,802
|
)
|
|
|
(66,736
|
)
|
|
|
|
Total debentures, less current maturities
|
|
$
|
4,331,972
|
|
|
$
|
403,425
|
|
|
$
|
336,924
|
|
|
|
|
|
(a)
|
|
Common Stock
|
|
|
|
|
The Company is authorized to issue 35,000,000 shares of common stock with a par
value of $0.01 per share. There were no shares issued or outstanding for all
periods presented.
|
|
|
(b)
|
|
Participating Stock
|
|
|
|
|
The Company is authorized to issue 15,000,000 shares of participating stock with a
par value of $0.01 per share. Of the authorized shares of participating stock,
3,756,496 shares are designated Series A-1 Participating Stock, 2,500,000 shares
are designated Series A-2 Participating Stock, and 682,038 shares are designated
Series B Participating Stock. The balance of shares of authorized participating
stock may be issued from time to time in one or more series as the board of
directors may determine. See Note 6 for the rights, preferences and conversion
features of the related participating stock series.
|
44
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(7)
|
|
Shareholders Equity, Continued
|
|
(b)
|
|
Participating Stock, Continued
|
|
|
|
|
On June 15, 2007, the Companys board of directors approved employment agreements
for the three Company officers, John Thedford, Chief Executive Officer, Woody
Whitcomb, Chief Financial Officer and Lawrence Kahlden, Chief Operating Officer.
The employment agreements were documented and executed by the Company. The
agreements cover a three-year period from January 1, 2007 through December 31, 2009
and establish compensation, including a one-time grant of 640,008 shares of Series
A-1 Participating Stock, divided among the three officers. An additional 45,715
shares of Series A-1 Participating Stock were granted to an outside consultant.
The grant price was set at $6.00 per share (based on a recent stock transaction)
and resulted in a charge to compensation expense of approximately $6.5 million
(including approximately $2.4 million of taxes paid on behalf of the officers)
during the year ended December 31, 2007.
|
|
|
(c)
|
|
Treasury Stock
|
|
|
|
|
Treasury stock is recorded at cost. During the year ended December 31, 2007, the
Company repurchased shares of Series A-1 and B Participating Stock which were
immediately sold or retired.
|
|
|
|
|
During February 2007, the Company repurchased 377,123 shares of Series A-1
Participating Stock for $2,262,736 and 150,000 shares of Series B Participating
Stock for $900,000 (for a total of $3,162,736) from a former director of the
Company (who resigned in July 2007) and immediately re-sold these shares to a group
of investors which included a director, three officers and four other existing
unrelated shareholders of the Company.
|
|
|
|
|
During April 2007, the Company repurchased 200,000 shares of Series A-1
Participating Stock from an unrelated shareholder for $1,200,000. The Company
immediately retired the shares upon redemption.
|
|
|
(d)
|
|
Receivable from Shareholder
|
|
|
|
|
During 2002, the Company loaned a key employee, who is also its chief executive
officer and a shareholder, approximately $954,000 in order to purchase 95,425
shares of the Companys Series A-1 Participating Stock. During 2005, the Company
entered into an employment agreement with this same key employee. Under the
provisions of the agreement, the Company advanced an additional amount of
approximately $754,000 for the purpose of purchasing 87,707 additional shares of
the Companys Series A-1 Participating Stock and consolidated the payments made
with the previously outstanding note receivable from that shareholder. Pursuant to
the consolidated promissory note and pledge agreement between the key employee and
the Company, payment of the indebtedness was secured by 183,132 shares of Series
A-1 Participating Stock held by the Company. Upon the occurrence of a default, the
Company had the right to reassign, sell or otherwise dispose of the pledged shares.
The promissory note did not contain performance goals, nor did it contain any loan
forgiveness provisions. The employment agreement expired during 2005.
|
45
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(7)
|
|
Shareholders Equity, Continued
|
|
(d)
|
|
Receivable from Shareholder, Continued
|
|
|
|
|
The Company had classified the note as contra-equity in the accompanying
consolidated balance sheets. In June 2007, pursuant to the Companys employment
agreement with its chief executive officer, the Company forgave the indebtedness
owed to the Company by its chief executive officer in the aggregate amount of
approximately $1.7 million. This amount was recorded as compensation expense in
the Companys consolidated financial statements in June 2007. As of December 31,
2005, December 31, 2006 and December 31, 2007, the total amount of the consolidated
note receivable from the shareholder is approximately $1,706,000, $1,708,000 and
$0, respectively.
|
(8)
|
|
Stock Options and Option Rights
|
|
|
|
In 1999, the board of directors and shareholders approved an Incentive Stock Option Plan
for non-employee board members (the Board Plan). The maximum number of options reserved
is 100,000 at an option price to be determined by the board of directors or a committee of
the board to reflect market value at the date of grant. In July 1999, 21,000 options at an
option price of $20 were granted under the Board Plan and are fully exercisable at the date
of grant for a period of 10 years.
|
|
|
|
In 2001, the board of directors and stockholders approved a plan to offer $21 million of
Series A-2 participating stock at a price of $9.90 per share. In conjunction with this
offering, investors purchased an option for $0.10 per share under an Option Right
Agreement. The option is exercisable for ten years and provides the holder with the option
to either: (a) purchase one-half share of common stock at a price of $.01 per share for
every share of Series A-2 participating stock purchased; or (b) receive a liquidation
preference in the amount of $2.70 for every Option Right purchased. As of December 31,
2006, the Series A-2 holders are entitled to purchase 1,516,590 option rights, which would
entitle them to purchase 758,295 shares of common stock. All option rights have been
purchased but none have ever been exercised.
|
|
|
|
The following table summarizes information about stock option activity under the Board Plan
during 2005 and 2006:
|
|
|
|
|
|
|
|
Shares
|
|
Balance, December 31, 2005
|
|
|
21,000
|
|
Options granted
|
|
|
|
|
Options exercised
|
|
|
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
21,000
|
|
Options granted
|
|
|
|
|
Options exercised
|
|
|
|
|
Options forfeited
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
21,000
|
|
|
|
|
|
46
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(8)
|
|
Stock Options and Option Rights, Continued
|
|
|
|
The status of stock options outstanding under the Board Plan as of December 31, 2007 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
Aggregate
|
Exercise
|
|
Number
|
|
average
|
|
average
|
|
Number
|
|
intrinsic
|
Price
|
|
outstanding
|
|
remaining life
|
|
exercise price
|
|
exercisable
|
|
value
|
|
$20.00
|
|
|
21,000
|
|
|
|
2.50
|
|
|
$
|
20.00
|
|
|
|
21,000
|
|
|
$
|
|
|
|
(9)
|
|
Employee Benefit Plan
|
|
|
|
The Company has a defined contribution plan (the Plan) qualifying under Section 401(k) of
the Internal Revenue Code. Substantially all team members who have met certain service
requirements are eligible for participation in the Plan. Participants may defer and
contribute to the Plan up to 25% of their compensation not to exceed the IRS limit. The
participants contributions vest immediately, while the Company contributions vest over
five years. The Company increased its discretionary contribution match during 2006 to 100%
of the participants contributions, not to exceed $5,000 in any Plan year. The Companys
contribution to the Plan totaled approximately $94,100, $169,900 and $279,300 for the years
ended December 31, 2005, 2006 and 2007, respectively.
|
|
(10)
|
|
Commitments and Contingencies
|
|
|
|
The Company leases its store level and administrative facilities under
operating leases. Future minimum rentals due under non-cancelable leases
including closed stores are as follows for each of the years ending
December 31:
|
|
|
|
|
|
2008
|
|
$
|
4,941,000
|
|
2009
|
|
|
4,174,000
|
|
2010
|
|
|
3,682,000
|
|
2011
|
|
|
2,720,000
|
|
2012
|
|
|
2,415,000
|
|
Thereafter
|
|
|
3,930,000
|
|
|
|
|
|
|
|
$
|
21,862,000
|
|
|
|
|
|
|
|
|
Rent expense totaled approximately $4,497,000, $4,686,000 and $5,069,000
for the years ended December 31, 2005, 2006 and 2007, respectively. Most
of the Companys leases have renewal options for one or two three- to
five-year periods.
|
47
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(10)
|
|
Commitments and Contingencies, Continued
|
|
(a)
|
|
Operating Leases, Continued
|
|
|
|
|
The Company subleases some of the above facilities. Future minimum rentals
expected under these subleases are as follows for the years ending December 31:
|
|
|
|
|
|
2008
|
|
$
|
72,000
|
|
2009
|
|
|
27,000
|
|
2010
|
|
|
24,000
|
|
2011
|
|
|
2,000
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
$
|
125,000
|
|
|
|
|
|
|
|
|
Rental income received from subleases totaled approximately $214,900, $164,000 and
$157,600 for the years ended December 31, 2005, 2006 and 2007, respectively, and
has been recorded as a reduction of rent expense in the accompanying consolidated
statements of operations.
|
|
|
(b)
|
|
Legal Proceedings
|
|
|
|
|
The Company is involved in various claims and legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Companys consolidated
financial position, results of operations or liquidity and, as such, no accrual has
been made in the accompanying consolidated financial statements.
|
|
|
(c)
|
|
Losses from Hurricanes and Insurance Recoveries
|
|
|
|
|
During 2005, the State of Florida was hit by a hurricane which damaged some of the
Companys pawnshop locations. In addition, business interruption losses were
incurred at several of the Companys pawnshop locations as a result of the
hurricane that hit Florida. The total business interruption insurance recoveries
recognized during the year ended 2005 totaled approximately $59,000 and is included
in net sales in the accompanying consolidated statements of operations.
|
|
|
|
|
In connection with the hurricane losses described above, the Company also recorded
receivables of approximately $79,000 for damage at the affected pawnshop locations
which is included in prepaid expenses and other in the accompanying consolidated
balance sheet as of December 31, 2005.
|
48
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(10)
|
|
Commitments and Contingencies, Continued
|
|
(d)
|
|
Gain from Theft and Insurance Recoveries
|
|
|
|
|
During 2005, one of the Companys locations in Tampa was the victim of a burglary.
A receivable of approximately $526,000 for insurance reimbursement on stolen assets
and business interruption has been included in prepaid expenses and other assets in
the accompanying consolidated balance sheets. Related gains from insurance
proceeds of approximately $182,000 and $240,000 are included in net sales and
service charge revenues, respectively, for the year ended December 31, 2005.
Included in cost of sales are losses related to inventory write-offs of
approximately $297,000 for the year ended December 31, 2005. The total insurance
reimbursement of $530,000 was received during 2006.
|
|
|
|
|
During 2007, one of the Companys locations in West Palm Beach was the victim of a
burglary. A receivable of approximately $789,000 for insurance reimbursement on
stolen assets and business interruption has been included in prepaid expenses and
other assets in the accompanying consolidated balance sheets. Related gains from
insurance proceeds of approximately $388,000 and $132,000 are included in net sales
and service charge revenues, respectively, for the year ended December 31, 2007.
The total insurance reimbursement of $1,168,000 was received during 2008.
|
|
|
|
|
During October 2007, one of the Companys pawn store locations in Tampa was the
victim of a burglary. A receivable of approximately $235,000 for insurance
reimbursement on stolen assets has been included in prepaid expenses and other
assets in the accompanying consolidated balance sheets.
|
|
|
|
|
During December 2007, one of the Companys pawn store locations in Atlanta Georgia
was the victim of a robbery. A report has been filed with the Companys Insurance
Company; however, the claim amount has not yet been finalized.
|
49
VALUE FINANCIAL SERVICES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements(Continued)
Years Ended December 31, 2005, 2006 and 2007
(11)
|
|
Fair Values of Financial Instruments
|
|
|
|
The carrying amounts and estimated fair values of financial instruments as of December 31,
2005, December 31, 2006 and December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
December 31, 2006
|
|
December 31, 2007
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
Value
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,646,001
|
|
|
$
|
1,646,001
|
|
|
$
|
759,674
|
|
|
$
|
759,674
|
|
|
$
|
795,055
|
|
|
$
|
795,055
|
|
Loans
|
|
|
11,598,110
|
|
|
|
11,598,110
|
|
|
|
14,528,302
|
|
|
|
14,528,302
|
|
|
|
16,759,212
|
|
|
|
16,759,212
|
|
Cash advances, net
|
|
|
523,419
|
|
|
|
523,419
|
|
|
|
493,013
|
|
|
|
493,013
|
|
|
|
101,114
|
|
|
|
101,114
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
swap liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552,748
|
|
|
|
552,748
|
|
Convertible
subordinated
debentures
|
|
|
4,390,853
|
|
|
|
4,390,853
|
|
|
|
4,330,227
|
|
|
|
4,330,227
|
|
|
|
403,660
|
|
|
|
403,660
|
|
Long-term debt
|
|
|
13,125,867
|
|
|
|
13,125,867
|
|
|
|
7,380,721
|
|
|
|
7,380,721
|
|
|
|
30,784,307
|
|
|
|
30,784,307
|
|
|
|
The carrying amounts of financial instruments including cash, loans and cash advances
approximated fair value as of December 2005, 2006 and 2007 because of the relatively
short-term nature and maturity of these instruments. The Companys bank credit facility
bears interest at a rate that is frequently adjusted on the basis of market rate changes.
The fair value of the remaining long-term debt instruments are estimated based on market
values for debt issues with similar characteristics or rates currently available for debt
with similar terms. In order to manage interest rate exposure, the Company, from time to
time, enters into interest rate swap agreements (see Note 1(m). These interest rate swaps
are recorded at fair value and, therefore, the carrying value equals fair value of these
financial instruments.
|
|
(12)
|
|
Subsequent Event
|
|
|
|
In March 2008, the Company entered into an agreement to sell up to 100%, but not less than
70%, of the equity ownership to EZCORP, Inc. Closing of the transaction is expected to
occur in July 2008.
|
50
16. PRO FORMA FINANCIAL INFORMATION
EZCORP, Inc. and Subsidiaries
Pro Forma Combined Financial Statements of EZCORP, Inc. and Subsidiaries
and Value Financial Services, Inc. (Unaudited)
The unaudited pro forma financial information included below has been prepared to illustrate the
pro forma effects of our acquisition of Value Financial Services, Inc. (VFS). The pro forma
combined balance sheet was prepared as if our acquisition of VFS were completed on the balance
sheet date of March 31, 2008. The pro forma statements of operations give effect to the
acquisition of VFS as if it had occurred on October 1, 2006, the beginning of the earliest period
presented. This pro forma information has been prepared and is being furnished for informational
purposes only and does not purport to be indicative of what would have resulted had the sale
transaction occurred on the dates indicated or what may result in the future.
51
EZCORP, Inc. and Subsidiaries
Pro Forma Combined Balance Sheet as of March 31, 2008 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Reported
|
|
|
VFS
|
|
|
Adjustments
|
|
|
Combined
|
|
|
|
(In thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
35,551
|
|
|
$
|
316
|
|
|
$
|
(20,000
|
)
|
|
$
|
15,867
|
|
Pawn loans
|
|
|
56,701
|
|
|
|
15,046
|
|
|
|
|
|
|
|
71,747
|
|
Payday loans, net
|
|
|
5,290
|
|
|
|
|
|
|
|
|
|
|
|
5,290
|
|
Pawn service charges receivable, net
|
|
|
8,983
|
|
|
|
2,941
|
|
|
|
|
|
|
|
11,924
|
|
Signature loan fees receivable, net
|
|
|
4,781
|
|
|
|
|
|
|
|
|
|
|
|
4,781
|
|
Inventory, net
|
|
|
35,999
|
|
|
|
12,360
|
|
|
|
|
|
|
|
48,359
|
|
Deferred tax asset, net
|
|
|
9,006
|
|
|
|
4,141
|
|
|
|
|
|
|
|
13,147
|
|
Federal income tax receivable
|
|
|
|
|
|
|
11
|
|
|
|
(11
|
)
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
7,281
|
|
|
|
1,631
|
|
|
|
|
|
|
|
8,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
163,592
|
|
|
|
36,446
|
|
|
|
(20,011
|
)
|
|
|
180,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
|
36,904
|
|
|
|
|
|
|
|
|
|
|
|
36,904
|
|
Property and equipment, net
|
|
|
38,413
|
|
|
|
7,802
|
|
|
|
|
|
|
|
46,215
|
|
Deferred tax asset, non-current
|
|
|
5,346
|
|
|
|
3,676
|
|
|
|
|
|
|
|
9,022
|
|
Goodwill
|
|
|
24,422
|
|
|
|
4,874
|
|
|
|
54,022
|
|
|
|
83,318
|
|
Other assets, net
|
|
|
5,350
|
|
|
|
322
|
|
|
|
6,860
|
|
|
|
12,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
274,027
|
|
|
$
|
53,120
|
|
|
$
|
40,871
|
|
|
$
|
368,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
$
|
22,202
|
|
|
$
|
6,109
|
|
|
$
|
|
|
|
$
|
28,311
|
|
Customer layaway deposits
|
|
|
2,456
|
|
|
|
842
|
|
|
|
|
|
|
|
3,298
|
|
Federal income taxes payable
|
|
|
2,363
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
2,352
|
|
Current maturities of long-term debt
|
|
|
|
|
|
|
4,068
|
|
|
|
5,932
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,021
|
|
|
|
11,019
|
|
|
|
5,921
|
|
|
|
43,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
20,729
|
|
|
|
34,869
|
|
|
|
55,598
|
|
Interest rate swap liability
|
|
|
|
|
|
|
800
|
|
|
|
|
|
|
|
800
|
|
Deferred gains and other long-term liabilities
|
|
|
3,003
|
|
|
|
357
|
|
|
|
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
3,003
|
|
|
|
21,886
|
|
|
|
34,869
|
|
|
|
59,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,024
|
|
|
|
32,905
|
|
|
|
40,790
|
|
|
|
103,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
59
|
|
|
|
(59
|
)
|
|
|
|
|
Class A Non-voting Common Stock
|
|
|
384
|
|
|
|
|
|
|
|
16
|
|
|
|
400
|
|
Class B Voting Common Stock
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
Additional paid-in capital
|
|
|
133,430
|
|
|
|
55,581
|
|
|
|
(35,301
|
)
|
|
|
153,710
|
|
Cumulative effect of adopting a new accounting principle
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
(106
|
)
|
Retained earnings (accumulated deficit)
|
|
|
107,418
|
|
|
|
(35,425
|
)
|
|
|
35,425
|
|
|
|
107,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
241,156
|
|
|
|
20,215
|
|
|
|
81
|
|
|
|
261,452
|
|
Treasury stock, at cost (27,099 shares)
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
Accumulated other comprehensive income
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
2,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
244,003
|
|
|
|
20,215
|
|
|
|
81
|
|
|
|
264,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
274,027
|
|
|
$
|
53,120
|
|
|
$
|
40,871
|
|
|
$
|
368,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note A to Pro Forma Combined Financial Statements (unaudited).
52
EZCORP, Inc. and Subsidiaries
Pro Forma Combined Statement of Operations for the Year Ended September 30, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Reported
|
|
|
VFS
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Combined
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
192,987
|
|
|
$
|
72,027
|
|
|
$
|
|
|
|
|
|
|
|
$
|
265,014
|
|
Pawn service charges
|
|
|
73,551
|
|
|
|
27,417
|
|
|
|
|
|
|
|
|
|
|
|
100,968
|
|
Signature loan fees
|
|
|
104,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,347
|
|
Other
|
|
|
1,330
|
|
|
|
1,511
|
|
|
|
|
|
|
|
|
|
|
|
2,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
372,215
|
|
|
|
100,955
|
|
|
|
|
|
|
|
|
|
|
|
473,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
118,007
|
|
|
|
45,729
|
|
|
|
|
|
|
|
|
|
|
|
163,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
254,208
|
|
|
|
55,226
|
|
|
|
|
|
|
|
|
|
|
|
309,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
128,602
|
|
|
|
32,215
|
|
|
|
180
|
|
|
|
(B)
|
|
|
|
160,997
|
|
Signature loan bad debt
|
|
|
28,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,508
|
|
Administrative
|
|
|
31,749
|
|
|
|
17,652
|
|
|
|
|
|
|
|
(C)
|
|
|
|
49,401
|
|
Depreciation and amortization
|
|
|
9,812
|
|
|
|
1,772
|
|
|
|
|
|
|
|
|
|
|
|
11,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
198,671
|
|
|
|
51,639
|
|
|
|
180
|
|
|
|
|
|
|
|
250,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
55,537
|
|
|
|
3,587
|
|
|
|
(180
|
)
|
|
|
|
|
|
|
58,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,654
|
)
|
Interest expense
|
|
|
281
|
|
|
|
1,504
|
|
|
|
2,520
|
|
|
|
(D)
|
|
|
|
4,305
|
|
Equity in net income of unconsolidated affiliate
|
|
|
(2,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,945
|
)
|
(Gain) / loss on sale / disposal of assets
|
|
|
(72
|
)
|
|
|
243
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
59,927
|
|
|
|
1,840
|
|
|
|
(2,700
|
)
|
|
|
|
|
|
|
59,067
|
|
Income tax expense
|
|
|
22,053
|
|
|
|
696
|
|
|
|
(997
|
)
|
|
|
(E)
|
|
|
|
21,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,874
|
|
|
$
|
1,144
|
|
|
$
|
(1,703
|
)
|
|
|
|
|
|
$
|
37,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,034
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
42,659
|
|
Diluted
|
|
|
43,230
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
44,855
|
|
See Notes to Pro Forma Combined Financial Statements (unaudited).
53
EZCORP, Inc. and Subsidiaries
Pro Forma Combined Statement of Operations for the Six Months Ended March 31, 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Reported
|
|
|
VFS
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Combined
|
|
|
|
|
(In thousands, except per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
116,837
|
|
|
$
|
46,397
|
|
|
$
|
|
|
|
|
|
|
|
$
|
163,234
|
|
Pawn service charges
|
|
|
44,693
|
|
|
|
14,953
|
|
|
|
|
|
|
|
|
|
|
|
59,646
|
|
Signature loan fees
|
|
|
63,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,694
|
|
Other
|
|
|
707
|
|
|
|
815
|
|
|
|
|
|
|
|
|
|
|
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
225,931
|
|
|
|
62,165
|
|
|
|
|
|
|
|
|
|
|
|
288,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
70,272
|
|
|
|
28,200
|
|
|
|
|
|
|
|
|
|
|
|
98,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
155,659
|
|
|
|
33,965
|
|
|
|
|
|
|
|
|
|
|
|
189,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
74,592
|
|
|
|
19,303
|
|
|
|
90
|
|
|
|
(B)
|
|
|
|
93,985
|
|
Signature loan bad debt
|
|
|
16,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,302
|
|
Administrative
|
|
|
19,734
|
|
|
|
8,632
|
|
|
|
(1,507
|
)
|
|
|
(C)
|
|
|
|
26,859
|
|
Depreciation and amortization
|
|
|
5,946
|
|
|
|
979
|
|
|
|
|
|
|
|
|
|
|
|
6,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
116,574
|
|
|
|
28,914
|
|
|
|
(1,417
|
)
|
|
|
|
|
|
|
144,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
39,085
|
|
|
|
5,051
|
|
|
|
1,417
|
|
|
|
|
|
|
|
45,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194
|
)
|
Interest expense
|
|
|
156
|
|
|
|
2,164
|
|
|
|
(152
|
)
|
|
|
(D)
|
|
|
|
2,168
|
|
Equity in net income of unconsolidated affiliate
|
|
|
(2,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,165
|
)
|
(Gain) / loss on sale / disposal of assets
|
|
|
243
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
41,045
|
|
|
|
2,835
|
|
|
|
1,569
|
|
|
|
|
|
|
|
45,449
|
|
Income tax expense
|
|
|
15,474
|
|
|
|
1,131
|
|
|
|
591
|
|
|
|
(E)
|
|
|
|
17,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,571
|
|
|
$
|
1,704
|
|
|
$
|
978
|
|
|
|
|
|
|
$
|
28,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
41,360
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
42,985
|
|
Diluted
|
|
|
43,241
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
44,866
|
|
See Notes to Pro Forma Combined Financial Statements (unaudited).
54
EZCORP, Inc. and Subsidiaries
Pro Forma Combined Statement of Operations for the Six Months Ended March 31, 2007
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Reported
|
|
|
VFS
|
|
|
Adjustments
|
|
|
Notes
|
|
|
Combined
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
99,012
|
|
|
$
|
37,259
|
|
|
$
|
|
|
|
|
|
|
|
$
|
136,271
|
|
Pawn service charges
|
|
|
34,518
|
|
|
|
13,052
|
|
|
|
|
|
|
|
|
|
|
|
47,570
|
|
Signature loan fees
|
|
|
47,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,108
|
|
Other
|
|
|
692
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
181,330
|
|
|
|
51,084
|
|
|
|
|
|
|
|
|
|
|
|
232,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
60,197
|
|
|
|
23,764
|
|
|
|
|
|
|
|
|
|
|
|
83,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
121,133
|
|
|
|
27,320
|
|
|
|
|
|
|
|
|
|
|
|
148,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
|
|
62,492
|
|
|
|
15,443
|
|
|
|
90
|
|
|
|
(B)
|
|
|
|
78,025
|
|
Signature loan bad debt
|
|
|
8,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,944
|
|
Administrative
|
|
|
15,495
|
|
|
|
4,484
|
|
|
|
|
|
|
|
|
|
|
|
19,979
|
|
Depreciation and amortization
|
|
|
4,699
|
|
|
|
856
|
|
|
|
|
|
|
|
|
|
|
|
5,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
91,630
|
|
|
|
20,783
|
|
|
|
90
|
|
|
|
|
|
|
|
112,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
29,503
|
|
|
|
6,537
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
35,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
(881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(881
|
)
|
Interest expense
|
|
|
147
|
|
|
|
502
|
|
|
|
1,510
|
|
|
|
(D)
|
|
|
|
2,159
|
|
Equity in net income of unconsolidated affiliate
|
|
|
(1,465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,465
|
)
|
(Gain) / loss on sale / disposal of assets
|
|
|
24
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31,678
|
|
|
|
5,983
|
|
|
|
(1,600
|
)
|
|
|
|
|
|
|
36,061
|
|
Income tax expense
|
|
|
11,721
|
|
|
|
2,349
|
|
|
|
(592
|
)
|
|
|
(E)
|
|
|
|
13,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,957
|
|
|
$
|
3,634
|
|
|
$
|
(1,008
|
)
|
|
|
|
|
|
$
|
22,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
40,773
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
42,398
|
|
Diluted
|
|
|
43,347
|
|
|
|
|
|
|
|
1,625
|
|
|
|
(F)
|
|
|
|
44,972
|
|
See Notes to Pro Forma Combined Financial Statements (unaudited).
55
Notes to Pro Forma Combined Financial Statements of EZCORP, Inc. and subsidiaries
and Value Financial Services, Inc. (Unaudited)
Note A: Pro Forma Adjustments to the Unaudited Pro Forma Combined Balance Sheet as of March 31,
2008
The pro forma adjustments to the unaudited pro forma combined balance sheet as of March 31, 2008
consist of the allocation of the expected total purchase price to the estimated fair value of VFSs
net assets, including the elimination of VFSs existing equity, and the financing of the
acquisition, including the use of $20 million of cash, the issuance of 1,625,015 additional EZCORP,
Inc. common shares to current VFS shareholders, and the additional borrowings to finance the
remainder of the transaction. To finance a portion of the VFS acquisition, we are refinancing our
credit agreement to a total availability of $120 million, including a $40 million fully amortizing
term loan with a four-year maturity and an $80 million revolving credit facility with a three-year
term. As our amended and restated credit agreement will contain, in part, a $40 million term loan
with a four year fully amortizing balance, $10 million of the new debt will be due within one year
and was classified as current. We also anticipate paying debt issuance costs of approximately $1
million upon completion of the credit agreement amendment, and have included this as a pro forma
increase to Other Assets, net and to Long-term debt. In the pro forma adjustments, we also
reclassified VFSs income taxes receivable as an offset to our income taxes payable. Included in
the estimated total purchase price is the accumulated dividend of approximately $2.5 million we
anticipate being paid on VFSs series A-2 preferred stock immediately preceding the acquisition.
VFSs accumulated dividends are not recorded as liabilities or as a reduction of equity until
declared by its board of directors.
We expect the total acquisition purchase price to be approximately $109.5 million at the
anticipated closing date of July 15, 2008. For purposes of preparing the pro forma unaudited
balance sheet as of March 31, 2008, we assumed the acquisition was completed March 31, 2008. The
assumed purchase price at that date is less than the assumed purchase price at July 15, 2008 due to
VFSs activities between the two dates.
56
At March 31, 2008, the unaudited pro forma purchase price allocation of non-cash assets and
liabilities acquired, which is preliminary and subject to change, was as follows based on the
estimated fair values of each item:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008
|
|
|
Estimated Useful
|
|
|
|
($000s)
|
|
|
Life (years)
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Pawn loans
|
|
$
|
15,046
|
|
|
|
|
|
Pawn service charges receivable, net
|
|
|
2,941
|
|
|
|
|
|
Inventory, net
|
|
|
12,360
|
|
|
|
|
|
Deferred tax asset, net
|
|
|
4,141
|
|
|
|
|
|
Federal income taxes receivable
|
|
|
11
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
1,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
36,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
7,802
|
|
|
|
|
|
Deferred tax asset, non-current
|
|
|
3,676
|
|
|
|
|
|
Goodwill
|
|
|
58,896
|
|
|
|
|
|
Trademarks and trade names
|
|
|
4,060
|
|
|
Indefinite
|
Favorable lease asset
|
|
|
1,800
|
|
|
|
10
|
|
Other assets, net
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
112,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
$
|
6,109
|
|
|
|
|
|
Customer layaway deposits
|
|
|
842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap liability
|
|
|
800
|
|
|
|
|
|
Deferred gains and other long-term liabilities
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
8,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
104,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note B: Operations Expense
In our preliminary estimate of the fair value of VFSs net assets to include in the purchase price
allocation, we identified a number of VFSs store leases that appear to be at favorable rates
compared to current market rates. As a result, we anticipate recording a $1.8 million favorable
lease asset, which must be amortized to rent expense over the terms of the related leases. For
purposes of these pro forma financial statements, we assumed the amortization period will average
ten years. The pro forma increase to Operations expense is due to the estimated amortization of
this favorable lease asset. Our estimate of the fair value of the favorable lease
57
asset is preliminary and subject to change as we complete our valuation of the assets to be
acquired. Any change in the estimated fair value of this asset upon final valuation will likely
result in an offsetting change to the amount of the purchase price allocated to goodwill, and an
increase or decrease in the expected amortization of the favorable lease asset.
Note C: Administrative Expense
The pro forma $1.5 million reduction of Administrative expense in the six month period ended March
31, 2008 removes the success fee VFS paid to its directors and officers upon reaching an agreement
to be acquired by us.
Included in VFSs historical results for this same period but excluded as a pro forma adjustment is
VFSs $1.3 million write-off of costs related to abandoning its initial public offering upon
entering discussions with us. While this is a unique item we do not expect to recur, we did not
remove it in a pro forma adjustment as VFSs abandonment of its IPO attempt might have occurred
even if we had not reached an agreement on the acquisition.
In the year ended September 30, 2007, VFS forgave a note receivable from an officer and made
significant vested stock grants to several officers. These resulted in a $7.9 million charge to
VFSs Administrative expense in the period. We have made no pro forma adjustment related to these
charges.
While we expect to gain efficiencies and leverage from combining VFSs administrative functions
with ours and reducing duplication of overhead expenses, we have not yet determined the precise
changes to be made. Accordingly, we have included in our pro forma adjustments no reduction in
administrative expense that may be realized once we determine how best to integrate VFSs
administrative functions with ours.
Note D: Interest Expense
The pro forma adjustment to interest expense recognizes the estimated incremental interest expense
we would have incurred on the debt used to finance the acquisition, the amortization of the assumed
debt issuance costs related to the new credit agreement, the removal of interest expense related to
VFSs debt that will be retired in the transaction, and the loss of interest income on our cash
assumed to be used in the transaction. For purposes of estimating the pro forma interest expense,
we applied an interest rate of 4.23%, comprised of the current 1-month LIBOR market rate plus the
1.75% current applicable interest rate spread, as specified in the amended credit agreement we
expect to complete to finance a portion of the acquisition.
Note E: Income Tax Expense
The pro forma adjustment to income tax expense recognizes the change in income tax expense we would
have incurred in each period, using our effective tax rate in each applicable period and
58
the net increase or decrease in pre-tax income resulting from the pro forma adjustments described
in Notes B, C, and D above.
Note F: Weighted Average Shares Outstanding
The pro forma adjustment to the weighted average shares outstanding increases both basic and
diluted weighted average shares outstanding to recognize the 1,625,015 shares to be issued to
current VFS shareholders as part of the consideration for the acquisition.
Note G: Composition of Sales and Cost of Goods Sold
Sales and cost of goods sold, as presented on the accompanying pro forma statements of operations,
include amounts related to merchandise sales in the companies stores as well as jewelry scrapping
sales to gold refiners and diamond purchasers. In the periods presented, unaudited sales and cost
of goods sold were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
September 30, 2007
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
(in thousands)
|
EZCORP, Inc. and Subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
141,094
|
|
|
$
|
85,174
|
|
|
$
|
77,386
|
|
Jewelry scrapping sales
|
|
$
|
51,893
|
|
|
$
|
31,663
|
|
|
$
|
21,626
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
192,987
|
|
|
$
|
116,837
|
|
|
$
|
99,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
83,501
|
|
|
$
|
51,416
|
|
|
$
|
46,158
|
|
Jewelry scrapping sales
|
|
$
|
34,506
|
|
|
$
|
18,856
|
|
|
$
|
14,039
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
118,007
|
|
|
$
|
70,272
|
|
|
$
|
60,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value Financial Services, Inc.:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
50,799
|
|
|
$
|
28,534
|
|
|
$
|
27,522
|
|
Jewelry scrapping sales
|
|
$
|
21,228
|
|
|
$
|
17,863
|
|
|
$
|
9,737
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
72,027
|
|
|
$
|
46,397
|
|
|
$
|
37,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
|
$
|
32,212
|
|
|
$
|
18,274
|
|
|
$
|
17,645
|
|
Jewelry scrapping sales
|
|
$
|
13,517
|
|
|
$
|
9,926
|
|
|
$
|
6,119
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
45,729
|
|
|
$
|
28,200
|
|
|
$
|
23,764
|
|
|
|
|
|
|
|
|
|
|
|
59
EZCORP, INC.
1,625,015 SHARES OF CLASS A NON-VOTING COMMON STOCK
June 23, 2008
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14 Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses in connection with the issuance and
distribution of the securities registered hereby, all of which will be paid by EZCORP:
|
|
|
|
|
Item
|
|
Amount
(1)
|
|
|
SEC registration fee
|
|
$
|
868
|
|
Legal fees and expenses
|
|
|
75,000
|
|
Miscellaneous expenses
|
|
|
25,000
|
|
|
|
|
|
Total:
|
|
$
|
100,868
|
|
|
|
|
(1)
|
|
All items other than SEC registration fee are estimates.
|
Item 15 Indemnification of Directors and Officers
Our Restated Certificate of Incorporation provides that no director will be personally liable to
EZCORP or any of its stockholders for monetary damages arising from the directors breach of a
fiduciary duty as a director, with certain limited exceptions.
Pursuant to the provisions of Section 145 of the Delaware General Corporation Law, every Delaware
corporation has the power to indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding (other than an action by
or in the right of the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of any corporation, partnership, joint venture, trust or other enterprise,
against any and all expenses, judgments, fines and amounts paid in settlement and reasonably
incurred in connection with such action, suit or proceeding. The power to indemnify applies (a) if
such person is successful on the merits or otherwise in the defense of any action, suit or
proceeding, or (b) if such person acted in good faith and in a manner he reasonably believed to be
in the best interest, or not opposed to the best interest, of the corporation and with respect to
any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the corporation as well,
but only to the extent of defense and settlement expenses and not to any satisfaction of a judgment
or settlement of the claim itself, and with the further limitation that in such actions no
indemnification shall be made in the event of any adjudication unless the court, in its discretion,
believes that in the light of all the circumstances indemnification should apply.
To the extent any of the persons referred to in the two immediately preceding paragraphs is
successful in the defense of the actions referred to therein, such person is entitled, pursuant to
Section 145, to indemnification as described above.
II-1
Our Restated Certificate of Incorporation and Amended and Restated Bylaws specifically provide for
indemnification of officers and directors to the fullest extent permitted by the Delaware General
Corporation Law.
Item 16 Exhibits and Financial Statements
See the Exhibit Index which is incorporated herein by reference.
Item 17 Undertakings
The undersigned registrant hereby undertakes:
(a) to file, during any period in which it offers or sells securities, a post-effective
amendment to this registration statement:
(1) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933.
(2) to reflect in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum aggregate offering
price set for the in the Calculation of Registration Fee table in the effective registration
statement.
(3) to include any additional material information on the plan of distribution not previously
disclosed in the registration statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (a)(1), (a)(2) and (a)(3) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission by EZCORP pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement, or is contained in a form of prospectus filed pursuant to
Rule 424(b) that is part of the Registration Statement.
(b) that, for the purpose of determining any liability under the Securities Act of 1933,
EZCORP will treat each post-effective amendment as a new registration statement relating to the
securities offered therein, and the offering of the securities at that time to be the initial bona
fide offering thereof.
II-2
(c) to remove from registration by means of a post-effective amendment any of the securities
that remain unsold at the termination of the offering.
(d) for the purposes of determining any liability under the Securities Act of 1933, each
filing of EZCORPs annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 shall be deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers, and controlling persons of EZCORP pursuant to the foregoing
provisions of this registration statement, or otherwise, EZCORP has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by EZCORP of expenses
incurred or paid by a director, officer or controlling person of EZCORP in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, EZCORP will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such issue.
II-3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Dan N. Tonissen or Joseph L. Rotunda, or either of them, as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, EZCORP, Inc., certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of Austin, State of Texas, on June 23, 2008.
|
|
|
|
|
|
EZCORP, INC.
|
|
|
/s/ Joseph L. Rotunda
|
|
|
Joseph L. Rotunda
|
|
|
President and Chief Executive Officer
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been
signed by the following persons, in the capacities and on the dates indicated.
|
|
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Sterling B. Brinkley
|
|
|
Sterling B. Brinkley, Chairman of the Board and
|
|
|
Director
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Joseph L. Rotunda
|
|
|
Joseph L. Rotunda, Chief Executive Officer, President
|
|
|
(Principal Executive Officer) and Director
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Dan N. Tonissen
|
|
|
Dan N. Tonissen, Senior Vice President, Chief
|
|
|
Financial Officer, Assistant Secretary (Principal
Financial and Accounting Officer) and Director
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Thomas C. Roberts
|
|
|
Thomas C. Roberts, Director
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Gary Matzner
|
|
|
Gary Matzner, Director
|
|
|
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Richard M. Edwards
|
|
|
Richard M. Edwards, Director
|
|
|
|
|
|
|
|
|
Date: June 23, 2008
|
/s/ Richard D. Sage
|
|
|
Richard D. Sage, Director
|
|
|
|
|
EXHIBIT INDEX
|
|
|
Exhibit
|
|
Description
|
|
|
|
2.1
|
|
Merger Agreement dated June 5, 2008, by and between EZCORP, Inc., a Delaware
corporation, Value Merger Sub, Inc., a Florida corporation, and Value Financial
Services, Inc., a Florida corporation, incorporated by reference to Exhibit 10.2 of
EZCORPs 8-K filed June 5, 2008 (File No. 33-41317).
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of EZCORP, incorporated by reference
to Exhibit 3.1 to the Registration Statement on Form S-1 effective August 23, 1991
(File No. 33-41317).
|
|
|
|
3.1A
|
|
Certificate of Amendment to the Certificate of Incorporation of EZCORP, incorporated
by reference to Exhibit 3.1A to the Registration Statement on Form S-1 effective July
15, 1996 (File No. 33-41317).
|
|
|
|
3.1B
|
|
Amended Certificate of Incorporation of EZCORP, incorporated by reference to Exhibit
3.1B to EZCORPs Annual Report on Form 10-K for the year ended September 30, 2006
(File No. 0-19424).
|
|
|
|
3.2
|
|
Bylaws of EZCORP, incorporated by reference to Exhibit 3.2 to the Registration
Statement on Form S-1 effective August 23, 1991 (File No. 33-41317).
|
|
|
|
3.3
|
|
Amendment to the Bylaws, incorporated by reference to Exhibit 3.3 to EZCORPs
Quarterly Report on Form 10-W for the quarter ended June 30, 1994 (File No.
000-19424).
|
|
|
|
3.4
|
|
Amendment to the Certificate of Incorporation of EZCORP, incorporated by to Exhibit
3.4 to EZCORPs Annual Report on Form 10-K for the year ended September 30, 1994 (File
No. 000-19424).
|
|
|
|
3.5
|
|
Amendment to the Certificate of Incorporation of EZCORP, incorporated by reference to
Exhibit 3.5 to EZCORPs Annual Report on Form 10-K for the year ended September 30,
1997 (File No. 000-19424).
|
|
|
|
3.6
|
|
Amendment to the Certificate of Incorporation of EZCORP, incorporated by reference to
Exhibit 3.6 to EZCORPs Quarterly Report on Form 10-Q for the quarter ended March 31,
1998 (File No. 000-19424).
|
|
|
|
4.1
|
|
The description of EZCORPs Common Stock and Common Stock Rights as set forth in
EZCORPs Form 8-A Registration Statement filed with the Commission on July 24, 1991,
including any amendment or report filed for the purpose of updating such description.
|
|
|
|
Exhibit
|
|
Description
|
|
|
|
4.2
|
|
Specimen of Class A Non-voting Common Stock certificate of the Company, incorporated
by reference to Exhibit 4.1 to the Registration Statement on Form S-1 effective August
23, 1991 (File No. 33-41317).
|
|
|
|
5.1*
|
|
Opinion of Strasburger & Price, L.L.P., as to the validity of the shares being offered.
|
|
|
|
10.1**
|
|
Fifth Amended and Restated Credit Agreement among EZCORP, Inc., Wells Fargo Bank,
N.A., and other financial institutions, dated June ___, 2008.
|
|
|
|
23.1*
|
|
Consent of BDO Seidman, LLP.
|
|
|
|
23.2*
|
|
Consent of McGladrey & Pullen, LLP.
|
|
|
|
23.3*
|
|
Consent of Tedder, James, Worden, & Associates, P.A.
|
|
|
|
23.4*
|
|
Consent of Strasburger & Price, L.L.P. (included in Exhibit 5.1).
|
|
|
|
24.1
|
|
Power of Attorney (included on signature page).
|
|
|
|
*
|
|
Filed with this Form S-3.
|
|
**
|
|
To be filed by amendment.
|
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