EZCORP Inc.

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EZCORP Inc.

1901 Capital Parkway
Austin, Texas 78746
U.S.A.
Telephone: (512) 314-3400
Fax: (512) 314-3404
Web site:http://www.ezcorp.com

Public Company
Incorporated: 1989
Employees: 2,100
Sales: $197.4 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: EZPW
NAIC: 522298 All Other Nondepositing Credit Intermediation

Owning and operating some 300 pawnshops under the name EZPAWN, EZCORP Inc. is the second largest pawnshop company in the country. The stores provide loans to customers who present property of value as collateral. EZPAWN stores accept pre-owned goods, such as, jewelry, sporting goods, and consumer electronics, in lieu of loan redemption and then sells those goods at approximately 70 percent of retail value. EZPAWN stores are located primarily in the south, including Texas, where the company owns nearly 200 stores, as well as Colorado, Oklahoma, and Indiana. The company also owns a large interest in Albemarie and Bond Holdings, a pawnshop operator in the United Kingdom.

1970s Origins and Rapid Momentum

Courtland L. Logue, Jr., opened his first pawn shop in Austin, Texas, in 1974. Employed as an accountant, Logue was inspired by the success of his father’s friend, who operated a pawn shop in Dallas. The store turned a good profit and required little effort, and Logue decided that, with hard work, he could be even more successful in the pawn business. The first EZPAWN was indeed a success, and eventually Logue was overseeing a chain; over the next 15 years he would open one new store a year. Logue located these stores near large grocery stores in lower-middle income communities rather than in impoverished neighborhoods, as was typical of the time. Operating under the banner EZPAWN or U-Pawn-It, the stores tended to be free standing or strip center stores, each with 3,000 square feet, approximately half storage and half retail space. Seeking to counter the stereotype of pawn shops as dingy or seedy, Logue distinguished his stores with vibrant blue awnings on the exterior and clean, bright, interiors, thus attracting more shoppers and making them comfortable.

Corporate reorganization and further expansion followed when the company was able to obtain $10 million in capital investment in May 1989. With 16 stores in business, Logue formed a corporate umbrella, Transamerica Pawn Holdings, which purchased the loosely organized EZPAWN stores. Over the next 18 months Transamerica acquired or opened 41 additional stores throughout Texas. Investment per store averaged $192,000, excluding real estate, with each store becoming profitable in three to six months.

By the end of fiscal 1991 (September 30), the company’s annual revenues had reached $23.8 million and net income was at $1.2 million. The retail business, the sale of goods forfeited in lieu of loan repayment, accounted for 54 percent of total revenues and 24 percent of net revenues (total revenues less cost of goods sold). The stores’ merchandise consisted primarily of jewelry, at 50 percent of retail sales, as well as consumer electronics, tools, musical instruments, and firearms. Because pawn loans were based on 20 to 65 percent of estimated resale value of the property, EZPAWN sold the goods at below market value. The service charges made on loans to sellers accounted for 46 percent of the company’s total revenues and 76 percent of net revenues in 1991. EZPAWN charged approximately 20 percent per month, or 240 percent per annum for loans up to $108, in accordance with state law, and less for loans of higher incremental amounts. Loan amounts averaged between $60 and $70.

Transamerica adopted the name EZCORP Inc. in December 1991, in conjunction with its initial public offering of stock on the NASDAQ exchange. Shares in EZCORP were offered at $9.75 each, and the sale netted $25 million for working capital and continued expansion. With 66 stores in operation, the company planned to open or purchase 40 additional stores in 1992 and 50 stores in 1993, expanding in existing markets or into adjacent markets. A secondary offering of stock in March 1992, at $16.50 per share, raised an additional $26.4 million.

With renewed capital, the company began a vigorous expansion program. During 1992 EZCORP opened 25 pawnshops and acquired another 45 existing shops, bringing the total number to 127 stores. Moreover, the company expanded outside Texas for the first time, with six stores in Oklahoma; 11 stores in Mississippi; two each in Colorado, Alabama, and Tennessee; and one in Arkansas. In its home state of Texas, the company’s total number of stores reached 103, with an EZCORP presence in Houston, Corpus Christi, Dallas, and San Antonio. Store expansion more than doubled revenues and net income. Strategies for growth at store level included improved profitability through cost controls, attracting new customers, and focus on the retail business, adding a line of new jewelry to its pre-owned merchandise.

EZCORP continued its fast pace of growth the following year, increasing its outlets by 25 new units and 34 acquired units, for a company wide total of 186 units. The company added 30 stores in Texas, three in Oklahoma, eight in Colorado, nine in Alabama; and five in Tennessee; EZPAWN entered the pawnshop market in Georgia with four stores in the Atlanta area. Total revenue and net income more than doubled again, to $108.6 million and $6.1 million, respectively.

By 1993 the company’s financial performance was strong, given the maturity of its stores as well as the greater number of them. EZCORP also improved operations through loan analysis, additions to its internal audit staff which adjusted store level controls, and investment in a retail inventory management system. Retail sales also improved with gross profit margins at 25 percent in 1993 and a 131 percent increase in revenues to $63.8 million. EZCORP attributed improvements to same store sales growth, the addition of new jewelry, and fewer wholesale purchases. The company reduced the prices on old inventory and sold slow-moving gold and silver jewelry as scrap metal to clear out retail display space for higher profit goods. In November 1993, EZCORP centralized jewelry cleaning and refurbishment at a new 8,100 square foot processing center. The company prepared to build on its successful retail sales with advertising and promotion of its new and pre-owned jewelry.

Mid-1990s: Management Changes and Financial Challenges

The company continued to grow at a fast pace in late 1993 and in 1994, establishing 48 new stores and acquiring six stores. The company entered the Indiana market for the first time with nine stores. In existing markets EZCORP added seven new stores in Georgia, 20 new stores in Texas, one in Arkansas, three in Alabama, and ten in Colorado. Despite, or perhaps because of, such rapid growth, net income fell due to several charges, including management recruitment and relocation, inventory markdown and clearance pricing, and inventory evaluation. Also, EZCORP reworked its method of estimating the accrual of pawn service charges, on a loan-by-loan basis, resulting in lower estimates. Logue’s new jewelry program proved to be the biggest problem, resulting in a $5 million loss in fiscal 1991 alone. As a result of the slowdown and financial struggles, the board of directors decided to make some radical changes, forcing Logue to resign and replacing him with Vincent Lambiase as CEO and President.

EZCORP reorganized the executive office with personnel particularly adept at handling a large chain of stores. Lambiase created three executive-level positions: chief financial officer, vice-president of operations, and vice-president of marketing and merchandising. He also decentralized certain controls and decision-making responsibilities to the store level, while store managers reported to regional managers. EZCORP used computer technology to facilitate management, with a new point-of-sale computer system and management information systems that allowed regional and central managers to obtain real-time data from individual store systems.

While Fortune magazine named EZCORP one of America’s Fastest-Growing Companies for 1995, the pace of EZCORP’s growth slowed as it closed or consolidated unprofitable stores. EZCORP closed six stores in Texas, one in Oklahoma, two in Mississippi, and two in Georgia. Nevertheless, the company opened three new stores in Louisiana (two in New Orleans) and one store in Florida, entering those markets for the first time, and added five stores in Colorado, 12 in Indiana (primarily in the Indianapolis area), and one in Alabama. These stores tended to be larger than the company’s older units, with 2,000 square feet of retail selling space and 4,000 square feet of storage and administrative space. Each store operated with a store manager, an assistant manager, and three to four sales representatives. Investment for newly established stores averaged $450,000 each for the first year, for inventory, pawn loans, property, and equipment, and $250,000 for each acquired store.

Still, such impressive growth belied financial problems, and eventually the company’s struggles became public knowledge. EZCORP’s stock value dropped from $28 in 1993 to approximately $4 in 1995, as net losses of $15.8 million were reported. To immediately address its problems, EZCORP moved to scrap its jewelry program and refine its lending practices. The latter was achieved by instituting management incentive programs to improve lending practices, loan redemption rates, and inventory turnover at an acceptable rate of cash return. Improvements to EZCORP’s loan portfolio resulted in a lower inventory of unredeemed goods and better quality forfeited merchandise. A new inventory reserve methodology refined merchandise valuation, more closely matching the loan amounts to potential sale prices and profit margins.

Company Perspectives:

EZPAWN offers instant cash loans and bargains in 300 + stores in 12 states. EZPAWN is the second largestpawnship chain in America. Convenient, clean, bright stores with friendly EZPAWN associates will help you get an instant cash loan or find that perfect bargain.

EZCORP continued to open new stores but also closed stores that did not meet certain performance standards. At the end 1995 the company closed an additional 18 stores. At the start of 1996 EZCORP operated 245 stores in 11 states: 147 in Texas; 24 in Colorado; 21 in Indiana; 15 in Alabama; nine in Mississippi; nine in Georgia; eight in Oklahoma; seven in Tennessee; three in Louisiana; one in Arkansas; and one in Florida.

To provide another outlet for excess jewelry inventory, EZCORP opened two JewelryLand Outlet stores in Atlanta in September 1996. The 1,500-square-foot stores resembled typical mall jewelry stores but operated like the retail end of a pawnshop. At 60 to 70 percent of actual value, jewelry prices ranged from $10 to $5,000. The company expected to draw a customer base similar to those realized at discounters such as Target and Wal-Mart.

Economic Prosperity in Late 1990s Proves Bad for Pawnshops

EZCORP rebounded from its mid-1990s financial difficulties. In 1998, the company closed only one store, acquired three stores, and established 35 new stores, for a total of 286 stores in operation. EZCORP entered three new markets, California, with six stores in Sacramento, and Las Vegas and Raleigh-Durham, with three stores each. Same store growth improved with a higher average loan rate of $70 and higher loan redemption, at 80 percent. During fiscal 1998 net income reached $9.2 million on $197.4 million in total revenues.

However, the gains EZCORP made in between 1996 and 1998 were offset as the U.S. economy improved, and the demand for collateral-based, high interest loans declined. Profitability suffered as the company made fewer loans; the volume increases declined from 17 to 13 percent between 1998 and 1999. Profit margins on merchandise decreased as well, from 16 percent in 1998 to 12 percent in 1999. Still, EZCORP celebrated a milestone as its 300th store opened in November 1998; by the end of the following year, the company would boast a chain of 334 stores.

The company attempted to reach a wider audience through the Internet with EZPAWN.com. The web site offered over 400,000 items for sale, but was intended primarily to sell its pre-owned, one-of-a-kind jewelry. A “virtual-photo jewelry tray” contained similar styles of jewelry for display upon request at the web site. The site taught consumers to look at the gram weight of gold jewelry, helping them to understand the difference in valuation of jewelry. EZPAWN.com was the first pawnshop to be listed on shop@aol, an online shopping destination, and was located in that site’s Jewelry and Watches Department.

In August 2000 Joseph Rotunda, after five months as COO, became CEO at EZCORP, while Lambiase became vice-chairman of the board. Rotunda brought experience from Thom Americas, where he oversaw impressive growth of the Rent-A-Center, Remco, and U-Can-Rent stores, which increased from a total of 700 to 1,400 stores. CEO Rotunda began a restructuring program to reduce debt and overhead expenses. EZCORP closed 37 stores in 2000, reducing the chain to 299 units in 12 states, and planned to close another 17 stores. Fiscal 2000 saw a net loss of $32.6 million. Rotunda attempted to improve profitability by changing lending guidelines, adjusting interest rates, and reinstating lending on hunting rifles. He hoped to improve operations through a new management compensation plan, employee training, and a new program of standards for operation.

Moreover, EZCORP sought to offset the decline in demand for pawnshop loans by offering payday loan advances. While many people no longer needed to pawn belongings to make ends meet, a good economy made consumer spending escalate; perceiving a need to supplement the cash available to them between paychecks, consumers flocked to check-cashing service centers, which offered loans whereby a personal check covered the amount of the loan plus interest until the customer’s next payday. Customers tended to be steady workers who occasionally needed extra money between paychecks. EZCORP began to test offer the service at stores in Texas in late 2000 and planned to extend the service to its pawnshops nationwide in 2001. As the economy began to slump in 2001, EZCORP could also perhaps expect its pawn facilities to realize greater revenues.

Principal Subsidiaries

EZPAWN Colorado, Inc.; EZPAWN Indiana, Inc.; EZPAWN Oklahoma, Inc; Texas EZPAWN Management, Inc.; EZCORP International Inc.

Principal Competitors

Cash America International, Inc.; First Cash Financial Services, Inc.; PawnMart, Inc.

Key Dates:

1974:: Courtland Logue, Jr., establishes an EZPAWN store in Austin.
1989:: Reincorporation ensues with the help of $10 million capital investment.
1991:: A name change to EZCORP accompanies initial public offering of stock.
1992:: 70 stores are established or acquired.
1994:: New management and restructuring addresses problems of growth.
1995:: 245 stores are in operation in ten states.
1998:: Prosperous economy leads to slowdown in pawn industry.
2000:: Company initiates payday loan advance service in Texas.