Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction — Form S-4 Filing Table of Contents
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1901 CAPITAL PARKWAY AUSTIN, TEXAS78746
(512) 314-3400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive
offices)
Connie Kondik, Esq.
Copies to:
General Counsel
EZCORP, Inc.
1901 Capital Parkway Austin, Texas78746
Telephone: (512) 314-3400
Facsimile: (512) 314-3463
Lee Polson, Esq.
Strasburger & Price, LLP
600 Congress Avenue, Suite 1600 Austin, Texas78701
Telephone: (512) 499-3600
Facsimile: (512) 536-5719
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Approximate dates of commencement of proposed sale to public: As soon as practicable after this
registration statement becomes effective.
If the securities being registered on this Form are being offered in connection with the
information of a holding company and there is compliance with General Instruction G, check the
following box. o
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. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) 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. o
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
o
Accelerated filer
þ
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
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 proxy statement/prospectus is not complete and may be changed. EZCORP may
not sell these securities until the registration statement filed with the Securities and Exchange
Commission, of which this document is a part, is declared effective. This proxy
statement/prospectus is not an offer to sell these securities and EZCORP is not soliciting an offer
to buy these securities in any state where an offer or sale is not permitted.
VALUE FINANCIAL SERVICES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Date: , 2008
Time: 5:00 p.m.
Place: The Memphis Hilton 939 Ridge Lake Boulevard Memphis, TN38120
Dear Shareholders:
The board of directors of Value Financial Services, Inc., a Florida corporation
(“VFS”), has called this special meeting of shareholders for the following purposes:
1.
To approve: (i) the articles of amendment to the amended and restated articles
of incorporation of VFS to amend the effective time of a mandatory conversion of series
A-1 participating stock, series A-2 participating stock and series B participating
stock to occur upon approval of such mandatory conversion with no requirement of prior
written notice, subject to approval and completion of the merger; and (ii) the
conversion of all participating stock into common stock, subject to approval and
completion of the merger (upon completion of the merger, all accrued and unpaid
dividends due to the holders of the series A-2 participating stock will be paid in
full).
2.
To approve the merger agreement by and between VFS, EZCORP, Inc., a Delaware
corporation (“EZCORP”) and Value Merger Sub, Inc., a Florida corporation
(“Merger Sub”) pursuant to which Merger Sub will merge with and into VFS. In
the merger, VFS ‘s shareholders will receive 0.75 shares of EZCORP’s Class A Non-voting
Common Stock (the “EZCORP Shares”) for each share of VFS’s common stock.
EZCORP will also pay a limited amount of additional consideration to VFS shareholders
who sell their EZCORP Shares in the open stock market within 125 days after closing of
the merger at prices either above or below $14.67 per share. Further, EZCORP will pay
cash of $11.00 per share for up to 20% of the outstanding VFS common stock, on an as
converted basis, to VFS shareholders who elect to receive cash instead of EZCORP
Shares.
3.
To transact any other business that may properly come before the special
meeting.
Appraisal Rights
VFS has determined that you are entitled to assert appraisal rights under Chapter 607 of the
Florida Statutes. In accordance with Florida law, a copy of Sections 607.1301-607.1333 of the
Florida Statutes, regarding your entitlement to assert appraisal rights, is attached as Exhibit
D to the accompanying proxy statement/prospectus.
Record Date
If you were a shareholder of record as of September 16, 2008, you are entitled to notice of
and to vote on matters to which you are entitled at the special meeting. A list of VFS’s
shareholders entitled to vote at the meeting will be available during business hours at our
offices, 1063 Maitland Commons Boulevard, Suite 200, Maitland, Florida32751 for examination by any
shareholder for any purpose germane to the meeting.
By Order of the Board of Directors,
/s/
John D.
Thedford
John D. Thedford Chairman of the Board, Chief Executive Officer and President
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
The following questions and answers are intended to address some commonly asked questions regarding
the special meeting, the merger, the merger agreement, the amendment and the conversion. These
questions and answers may not address all questions that may be important to you as a shareholder
of Value Financial Services, Inc. (“VFS”). Please refer to the more detailed information
contained elsewhere in this proxy statement/prospectus, the exhibits to this proxy
statement/prospectus and the documents referred to in and delivered with this proxy
statement/prospectus.
Q: WHAT AM I BEING ASKED TO VOTE ON?
A: Holders of outstanding VFS shares are being asked to vote on the following proposals:
1.
To approve: (i) the amendment; and (ii) the conversion, both of which are subject to approval
of the merger and the merger agreement and completion of the merger (upon completion of the
merger, all accrued and unpaid dividends due to the holders of the series A-2 participating
stock will be paid in full);
2.
To approve the merger agreement and the merger; and
3.
To transact any other business that may properly come before the special meeting.
Q: WHAT IS
THE DATE, TIME AND PLACE OF THE SPECIAL MEETING?
A: The special meeting of shareholders of VFS will be held at the Memphis Hilton located at 939
Ridge Lake Boulevard, Memphis, TN38120, on , 2008, at 5:00 p.m., local time.
Q: WHO IS SOLICITING MY PROXY?
A: This proxy is being solicited by the board of directors of VFS.
Q: WHAT ARE THE MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER?
A: Subject to the discussion under “Material United States Federal Income Tax Consequences of the
Merger,” in connection with the filing of the registration statement of which this document forms a
part, the merger will (1) qualify as a “reorganization” within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (which we refer to as the Internal Revenue Code or the
Code) and (2) EZCORP, Inc. (“EZCORP”), Value Merger Sub, Inc. and VFS will each be a “party to the reorganization”
within the meaning of Section 368(b) of the Internal Revenue Code. Assuming the merger so
qualifies, for United States federal income tax purposes, United States holders of VFS common stock
will recognize gain (but will not recognize any loss), and the gain recognized will be equal to the
lesser of (i) any cash received and (ii) the excess of (x) the sum of the cash received and the
fair market value of the EZCORP common stock received over (y) the VFS common shareholder’s tax
basis in the shares of VFS common stock exchanged. In addition, the VFS common shareholder will
recognize gain or loss attributable to cash received in lieu of a fractional share of EZCORP common
stock. Please refer to the section entitled “The Merger—Material United States Federal Income Tax
Consequences of the Merger” beginning on page [___] of this proxy statement/prospectus.
Q: WHAT IF I DON’T AGREE WITH VFS’S DETERMINATION OF THE FAIR VALUE OF MY SHARES?
A: Under Florida law, you are entitled to assert your appraisal rights with respect to your
shares and demand payment of your estimate of the fair value of your shares, as determined
immediately prior to completion of the merger. A court of competent jurisdiction would then make a
determination of the fair value of your shares, and VFS would pay you that amount, in cash. In
order to perfect your appraisal rights, you must not vote any of your shares in favor of the merger
or the merger agreement, and you must fully comply with the provisions in Sections
607.1301-607.1333 of the Florida Statutes, which are summarized in The Merger Agreement – Appraisal
Rights, page 82, and the full text of which is set forth in Exhibit Dattached to this
proxy statement/prospectus.
A: Yes. As a holder of VFS common stock, you are entitled to appraisal rights under the Florida
Business Corporation Act in connection with the merger if you meet certain conditions and follow
certain required procedures. See “The Merger—Appraisal Rights” beginning on page [___] of this
proxy statement/prospectus.
Q: WHAT IF THE AMENDMENT OR CONVERSION IS APPROVED AND THE MERGER IS NOT?
A: Neither the amendment nor the conversion will become effective unless the merger agreement and
the merger are approved and the merger is completed.
Q: WHAT IS THE EFFECT OF THE AMENDMENT?
A: Currently, if holders of any series of VFS participating stock vote to convert their shares
into common stock, the conversion will not become effective until ten days’ notice has been
delivered to each affected holder. The amendment removes the ten day notice requirement, such that
the conversion will occur upon approval of the conversion as described herein.
Q: WILL I BE PAID ANY OF THE UNPAID DIVIDENDS OWED TO ME?
A: It depends on the class of stock you hold as of the record date. The only shareholders
entitled to dividends are the holders of VFS series A-2 participating stock. Such holders will be
paid all of their accrued and unpaid dividends upon completion of the merger. As of June 30, 2008,
the accrued, unpaid dividends on the series A-2 participating stock totaled approximately $2.5
million. We estimate the accrued dividends on the series A-2 participating stock will equal
approximately $3.9 million upon completion of the merger and is approximately $3.4 million as of
the date of this proxy statement/prospectus.
Q: HOW DOES THE VFS BOARD OF DIRECTORS RECOMMEND THAT I VOTE?
A: The VFS board of directors recommends that you should vote “FOR” each of the proposals.
Q: HAVE ANY VFS SHAREHOLDERS ALREADY COMMITTED TO VOTE FOR THE PROPOSALS?
A: Yes, three members of the VFS board of directors have agreed to vote their shares in favor of
the merger. See The Voting Agreement, page 85.
Q: WHO IS ENTITLED TO VOTE AT THE SPECIAL MEETING?
A: Only shareholders of record as of the close of business on September 16, 2008, the record date
for the special meeting, are entitled to receive notice of and to vote at the special meeting. If
you hold shares of VFS series A-1 participating stock or VFS series B participating stock, you will
have one vote at the special meeting for each share you owned at the close of business on the
record date with respect to the merger. If you hold shares of VFS series A-2 participating stock,
you will have 4.43 votes at the special meeting for each share you owned at the close of business
on the record date with respect to the merger. With respect to the amendment and the conversion,
each share of each class of VFS participating stock is entitled to one vote within their respective
class.
Q: WHAT DO I NEED TO DO NOW? HOW DO I VOTE?
A: We urge you to read this proxy statement/prospectus, including its exhibits, carefully, and to
consider how the conversion, the amendment, the merger agreement and the merger affect you. If you
are a shareholder of record, then you can ensure that your shares are voted at the special meeting
by submitting your proxy.
Q: HOW ARE VOTES COUNTED?
A: For any proposal, you may vote “FOR,”“AGAINST” or “ABSTAIN.” Abstentions will not count as
votes cast on a proposal, but will count for the purpose of determining whether a quorum is
present. As a result, if you “ABSTAIN,” it has the same effect as if you vote “AGAINST” the
applicable proposal.
If you sign and return your proxy and do not indicate how you want to vote, your proxy will be
voted “FOR” each of the proposals, and in accordance with the judgment of the person(s) named as
attorneys in the proxy on any other matters properly brought before the meeting for a vote.
Q: MAY I VOTE IN PERSON?
A: Yes. You may attend the special meeting and vote your shares in person. We urge you to sign,
date and return the enclosed proxy card or to vote as soon as possible, even if you plan to attend
the special meeting, as it is important that your shares be represented and voted at the special
meeting. If you attend the special meeting, you may vote in person as you wish, even
though you have previously returned your proxy card. See Q: May I change my vote after I have
mailed my signed proxy card?, below.
Q: WHEN SHOULD I SEND IN MY PROXY CARD?
A: You should send in your proxy card as soon as possible so that your shares will be voted at
the special meeting.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You may change your vote at any time before the shares reflected on your proxy card are
voted at the special meeting. If your shares are registered in your name, you can do this in one
of three ways: (1) you can deliver to VFS a written notice stating that you would like to revoke
your proxy; the written notice should bear a date later than the proxy card; (2) you can complete,
execute and deliver to VFS a new, later-dated proxy card for the same shares, provided the new
proxy card is received before the polls close at the special meeting; or (3) you can attend the
meeting and vote in person. Your attendance alone will not revoke your proxy. Any written notice
of revocation should be delivered to VFS’ corporate secretary at or before the taking of the vote
at the special meeting.
Q: SHOULD I SEND IN MY STOCK CERTIFICATE(S) NOW?
A: No. After the merger is completed, you will receive written instructions, including a letter
of transmittal, for exchanging your shares for the applicable merger consideration.
Q: WHEN DO THE PARTIES EXPECT THE MERGER TO BE COMPLETED?
A: The parties expect to complete the merger immediately after shareholder approval of the
conversion, the amendment, the merger and the merger agreement. It should be noted that if the
merger has not been consummated by December 31, 2008, any of the parties to the merger agreement
may terminate the merger agreement.
Q: WHEN WILL I RECEIVE THE CONSIDERATION FOR MY SHARES?
A: After the merger is completed, you will receive written instructions, including a letter of
transmittal, that explain how to exchange your shares for the applicable consideration. When you
properly complete and return the required documentation described in the written instructions, you
will promptly receive from the paying agent a payment of the cash portion of the consideration for
your shares.
Q: WHO CAN HELP ANSWER MY OTHER QUESTIONS?
A: If you have any questions please call John Thedford at (407) 339-0064 or VFS’s legal counsel,
Jeffery Bahnsen, Esq., at (561) 955-7600.
The following is a summary of the information contained elsewhere in this proxy
statement/prospectus. This summary may not contain all of the information that is important to
you. You should carefully read this entire proxy statement/prospectus and the other documents to
which it refers. In particular, you should read the Exhibits attached to this proxy
statement/prospectus, including the merger agreement which is attached as Exhibit A and is
incorporated by reference into this proxy statement/prospectus. In addition, EZCORP incorporates
by reference into this proxy statement/prospectus important business and financial information
about EZCORP. You may obtain the information incorporated by reference into this proxy
statement/prospectus without charge by following the instructions in the section entitled Where You
Can Find More Information, page 122.
EZCORP is primarily a lender or provider of credit services to individuals who do not have
cash resources or access to credit to meet their short-term cash needs. In 294 U.S. EZPAWN and 30
Mexico Empeño Fácil locations open on June 30, 2008, EZCORP offers non-recourse loans
collateralized by tangible personal property, commonly known as pawn loans. At these locations,
EZCORP also sells merchandise, primarily collateral forfeited from its pawn lending operations, to
consumers looking for good value. In 461 EZMONEY locations and 71 EZPAWN locations open on June30, 2008, EZCORP offers short-term non-collateralized loans, often referred to as payday loans, or
fee based credit services to customers seeking loans.
VFS operates 60 stores in Florida, making it the second largest pawn lender in the state,
based on information provided by the National Pawnbrokers Association. VFS also operates seven
stores in Georgia and Tennessee, each of which has characteristics that VFS believes are generally
favorable to the provision of pawn loans.
Value Merger Sub, Inc.
1901 Capital Parkway Austin, TX78746
(512) 314-3400
Merger Sub is a wholly-owned subsidiary of EZCORP that was incorporated in Florida on June 5,2008. Merger Sub does not engage in any operations and exists solely to facilitate the merger.
Structure of the Merger (See Page 91)
Under the terms of the proposed merger, Merger Sub will be merged with and into VFS. The
separate corporate existence of Merger Sub will cease, and VFS will continue as the surviving
corporation and will become a wholly-owned subsidiary of EZCORP upon completion of the merger. The
merger agreement dated September 16, 2008, by and among EZCORP, VFS and Merger Sub is attached as
Exhibit A to this proxy statement/prospectus.
The completion of the merger is scheduled to take place immediately after the approval of the
(1) amendment of VFS’s articles of incorporation to amend the effective time of a mandatory
conversion of certain participating stock to occur upon approval of such mandatory conversion with
no requirement of prior written notice, (2) conversion of all shares of VFS participating stock
into VFS common stock, and (3) merger agreement and the merger by a majority of the VFS
shareholders and when each of the other conditions of the merger agreement have been satisfied or
waived. It should be noted that if the merger has not been consummated by December 31, 2008, any
of the parties to the merger agreement may terminate the merger agreement.
Merger
Consideration (See Page 91)
VFS shareholders will be entitled to receive, upon the effectiveness of the merger and at such
shareholder’s election, either (1) 0.75 shares of EZCORP
Class A Non-voting Common Stock (the “EZCORP Shares”), rounded
up to the nearest whole EZCORP Share, or (2) $11.00 cash for each share of VFS common stock owned
by such shareholder at the effective time of the merger. The cash consideration is limited to 20%
or less of the issued and outstanding VFS common stock, assuming for
all purposes the exercise or conversion into common stock of all
their outstanding capital stock other than common stock and exercise of
all options, warrants or other conversion rights or rights to acquire
VFS’s common stock (the “VFS Common Stock”), and will be prorated if more VFS shareholders than the maximum
decide to elect to receive the cash consideration.
The components of the merger consideration were developed by EZCORP to satisfy the following
concerns of EZCORP and VFS, and the needs of VFS shareholders as EZCORP perceived them:
•
EZCORP desired, to the extent acceptable to VFS shareholders, to issue EZCORP Shares
as consideration in the merger.
•
EZCORP realized that if it issued stock instead of cash as consideration, the time
involved to complete the merger would be longer because of the necessity for SEC
registration to issue the stock.
•
EZCORP believed that use of EZCORP stock as consideration would be acceptable to
more VFS shareholders if EZCORP provided some sort of price protection against market
swings in the EZCORP stock price.
•
EZCORP wanted to offer an incentive for taking EZCORP stock which would also improve
the price per share and thereby discourage competing offers, or at least make EZCORP’s
offer look more attractive to the VFS shareholders.
EZCORP believed that several of the smaller VFS shareholders wanted cash and not
stock.
These considerations led EZCORP to offer a limited option to receive either EZCORP stock or
cash in the merger and also to offer the deficiency guaranty and premium reserve described below.
If you sell your EZCORP Shares in open market sales on NASDAQ within 125 days after closing of the
merger, you may be entitled to additional payments described in the next section.
Value of Merger Consideration – the Deficiency Guaranty and the Premium Reserve (See Page 91)
Deficiency Guaranty
EZCORP has agreed to provide VFS shareholders some price protections if they sell their EZCORP
Shares received in the merger within 125 days after the closing of the merger. Pursuant to such
guaranty, EZCORP will pay a selling shareholder the difference between $14.67 per share and the
gross price per share the selling shareholder actually receives, if less than $14.67 per share, up
to a maximum of $4.01 per share.
If you sell your EZCORP Shares at $14.67 per share, you will receive the equivalent of $11.00
per share of VFS Common Stock ($14.67 x 0.75 EZCORP Shares = $11.00 per VFS share). If you sell
your EZCORP Shares at less than $10.66 per share within 125 days after the closing of the merger,
the total amount of consideration, including the deficiency guaranty, will be less than $11.00 per
share of VFS Common Stock, because the deficiency guaranty will not make up the entire difference
between the sale price of your EZCORP Shares and the $11.00 cash per share merger consideration.
Two examples of the deficiency guaranty are set forth below:
Deficiency
Total Amount
Equivalent
Sales Price of
Guaranty
Received for
Value per
EZCORP Share
Amount
EZCORP Share
VFS Share
$12.00
$
2.67
$
14.67
$
11.00
$10.00
$
4.01
$
14.01
$
10.51
In the second example above, the equivalent price per VFS share (when multiplied by the 0.75
exchange rate of EZCORP Shares per each share of VFS Common Stock) equals less than the $11.00
agreed value of VFS shares for purposes of the merger.
If and to the extent that a VFS shareholder does not sell their EZCORP Shares within 125 days
after the closing of the merger, they will not be entitled to any deficiency guaranty payment.
Premium Reserve
In addition to the deficiency guaranty, EZCORP has agreed to provide VFS shareholders who
decide to sell their EZCORP Shares within 125 days after the closing of the merger a premium for
sales of their EZCORP Shares for more than $14.67 per share. For VFS
shareholders who sell their EZCORP Shares for more than $14.67 per share and, after a five day
waiting period to facilitate share distribution, within the (1) first 35 day period from the date
of the closing of the merger, EZCORP will pay $1.33 per share, (2) second 30 day period from the
date of the closing of the merger, $1.00 per share, (3) third 30 day period from the date of the
closing of the merger, $0.67 per share, and (4) fourth 30 day period from the date of the closing
of the merger, $0.33 per share.
For example, a VFS shareholder who sells his stock for $15.00 per share within 125 days after the
closing of the merger would receive the following: in the following cases
Days
Premium
Total Amount
Equivalent
After
Sales Price of
Reserve
Received for
Value per
Closing
EZCORP Share
Amount
EZCORP Share
VFS Share
20
$
15.00
$
1.33
$
16.33
$
12.25
45
$
15.00
$
1.00
$
16.00
$
12.00
90
$
15.00
$
0.67
$
15.67
$
11.75
120
$
15.00
$
0.33
$
15.33
$
11.50
If and to the extent that a VFS shareholder does not sell their EZCORP Shares within 125 days
after the closing of the merger, or sell the shares for less than $14.67 per share, they will not
be entitled to any premium reserve payment.
EZCORP will promptly pay the full amount of any premium reserve payments that become due. The
maximum amount EZCORP will be required to pay is $6,646,527, if all VFS shareholders elect to
receive EZCORP Shares, and all of these shares are sold for more than $14.67 per share within 35
days after closing.
Comparative Market Prices and Share Information
EZCORP Class A Non-voting Common Stock is quoted on the NASDAQ Global Select Market under the
symbol “EZPW.” VFS, as a private company, does not have publicly traded stock. EZCORP offered to
pay $11.00 per share as merger consideration. The following table shows the closing sale price of
EZCORP Class A Non-voting Common Stock as reported on the NASDAQ Global Select Market on September16, 2008, the last trading day before we announced the merger, and on [ ], 2008, the last
practicable trading day before distribution of this document. This table also shows the implied
value of the EZCORP Shares to be used as merger consideration for each share of VFS common stock,
which we calculated by multiplying the closing price of EZCORP Shares on those dates by the
exchange ratio of 0.75. This implied value excludes the effect of any deficiency guaranty or
premium reserve payment, as described above, as we cannot predict whether VFS shareholders will
sell their EZCORP Shares during the period covered by the deficiency guarantee and premium reserve
or the price at which VFS shareholders would sell their EZCORP Shares.
The market price of EZCORP Class A Non-voting Common Stock will fluctuate prior to the merger. VFS
shareholders are urged to obtain current market quotations for EZCORP’s shares prior to making any
decision with respect to the merger.
The
EZCORP Shares are Non-Voting (See Page 99)
The EZCORP Shares to be issued in the merger do not have voting rights. Only the Series B
Voting Common Stock of EZCORP has the right to vote on any matter not required by the Delaware
General Corporation Law to be voted upon separately by each class of equity securities. As such,
VFS shareholders who receive EZCORP Shares in the merger will not have the right to vote for the
election of directors or for other matters generally requiring a vote of common stockholders of a
corporation. See Comparison of the Rights and Privileges of the VFS Common Stock and the EZCORP
Shares, page 99.
Conditions to Closing the Merger (See Page 93)
The respective obligations of EZCORP, VFS and Merger Sub to complete the merger are subject to
the satisfaction of a number of conditions.
Termination (See Page 95)
The merger agreement may be terminated by EZCORP, VFS or Merger Sub under certain
circumstances at any time prior to the completion of the merger, whether before or after adoption
of the merger agreement by VFS shareholders.
Termination Fee (See Page 96)
A termination fee of $5 million may be payable by VFS to EZCORP upon the termination of the
merger agreement under certain circumstances, including the failure of the VFS shareholders to
approve the merger.
Non-Solicitation Agreement (See Page 96)
VFS has agreed that it will not solicit or encourage, directly or indirectly, any proposal or
offer or engage in any negotiations with respect to any Acquisition Proposal, as such term is
defined in the merger agreement. VFS has also agreed that it will immediately cease and cause to
be terminated any existing negotiations with any third parties with respect to any Acquisition
Proposal.
VFS has agreed to promptly notify EZCORP if it receives any other acquisition proposals or
acquisition inquiries and the material terms thereof.
Recommendation
of the VFS Board of Directors to its Shareholders (See Pages 56 and 66)
The VFS board of directors has unanimously determined that the merger agreement and the merger
are advisable and fair to, and in the best interests of, VFS and its shareholders, and unanimously
approved the merger and the merger agreement. The VFS board of directors unanimously recommends
that the VFS shareholders vote “FOR” each of the proposals.
See Reasons for the Merger, page 66.You should read this section.
Risk
Factors (See Page 21)
VFS shareholders should carefully consider the risk factors listed in this proxy
statement/prospectus in evaluating whether to vote in favor of the proposal to adopt the merger
agreement.
Opinion of VFS’s Financial Advisor (See Page 69)
VFS’s financial advisor, Stephens, Inc., (“Stephens”), delivered its opinion to the
board of directors of VFS to the effect that, as of September 10, 2008, and based upon and subject
to the various considerations described in its written opinion, the consideration to be received by
the holders of VFS common stock pursuant to the merger agreement was fair, from a financial point
of view, to the holders of such common stock.
The full text of the written opinion of Stephens, which sets forth the assumptions made,
procedures followed, matters considered, and qualifications and limitations on the review
undertaken by Stephens in rendering its opinion, is attached as Exhibit C to this proxy
statement/prospectus. VFS shareholders are urged to, and should, read the opinion carefully and in
its entirety. Stephens provided its opinion for the use and benefit of the board of directors of
VFS in connection with its consideration of the merger. The Stephens opinion addresses only the
fairness, from a financial point of view, of the consideration to be received by the VFS
shareholders as of September 10, 2008, the date of the Stephens opinion. Although the merger
agreement was revised to provide each shareholder with the right to select the category of merger
consideration to be received (e.g., cash or stock), the VFS board did not request Stephens to
provide an updated fairness opinion because Stephens had only opined as to the fairness, from a
financial point of view, of the merger consideration of $11.00 per share and not as to the category
of consideration to be received. Accordingly, because the merger consideration of $11.00 per share
remained the same and Stephens had already opined as to its fairness, from a financial point of
view, the VFS board did not believe that an updated fairness opinion would have provided it with
any new or meaningful information. The Stephens opinion does not address the merits of the
underlying decision by VFS to engage in the merger and does not constitute a recommendation as to
how any holder of VFS Common Stock should vote on the proposed merger or any other matter.
Vote Required by VFS Shareholders (See Page 54)
The affirmative vote of a majority of the shares of each class of VFS stock, voting separately
as a class, is required to approve the amendment and the conversion. The affirmative
vote of a majority of the shares of the series A-1 and B participating stock voting together as a
class and the series A-2 participating stock voting separately as a class is required to approve
the merger and merger agreement.
As of the record date for the special meeting, VFS’s directors, executive officers and their
affiliates, as a group, beneficially owned and were entitled to vote an aggregate of approximately
57% of the outstanding series A-1, 8% of the outstanding series A-2 and 42% of the outstanding
series B participating stock.
Pursuant to a voting agreement entered into by and among EZCORP, Merger Sub and three VFS
directors who are shareholders of VFS, these VFS shareholders have agreed to vote their shares of
VFS Common Stock in favor of adoption of the merger agreement. As of the record date for the VFS
special meeting, VFS shareholders who are a party to the Voting Agreement collectively owned an
aggregate of approximately 47% of the outstanding series A-1, 8% of the outstanding series A-2 and
37% of the outstanding series B participating stock.
Interests of Certain VFS Officers and Directors in the Merger (See Page 86)
When considering the recommendation by the VFS board of directors, you should be aware that
John Thedford, the Chairman of the board, CEO and President of VFS, has interests in the merger
that are different from, or in addition to, those of other VFS shareholders. Mr. Thedford will be
released from his current employment obligations to VFS upon consummation of the merger. Mr.
Thedford will then become an employee of Texas EZPAWN, L.P., a subsidiary of EZCORP and his
title will be President of EZPAWN Worldwide. Mr. Thedford will be entitled to the following as the
President of EZPAWN Worldwide:
(1) A base salary of $524,000 per year, with consideration for yearly merit
increases, which are not guaranteed;
(2) An unguaranteed annual bonus whereby Mr. Thedford may not earn any bonus
or he may earn up to 150% of his base salary;
(3) Consideration for (no guaranty) stock compensation based on performance;
and
(4) Severance payment equal to one year’s salary if terminated without
cause.
In comparison, Mr. Thedford, under his current employment agreement with VFS, is entitled to a
base salary of $425,000 per year and is eligible to earn a yearly bonus of 100% of his base salary.
Mr. Thedford is not, however, eligible to receive any performance based equity compensation under
his current employment agreement with VFS.
EZCORP Will List the EZCORP Shares on NASDAQ (See Page 82)
EZCORP has agreed to use its reasonable best efforts to cause the EZCORP Shares to be issued
to VFS shareholders pursuant to the merger agreement to be authorized for listing on the NASDAQ
Global Select Market, subject to notice of issuance. The listing of the shares on the NASDAQ
Global Select Market (subject to notice of issuance) is a condition to VFS’s obligation to complete
the merger.
The merger will be accounted for as a purchase transaction for EZCORP, as the acquirer, for
financial reporting purposes under U.S. generally accepted accounting principles.
EZCORP’s Credit Facility (See Page 98)
EZCORP has secured an amendment to its existing credit facility with a banking syndicate led
by Wells Fargo Bank, N.A., as agent and issuing bank. This amendment to EZCORP’s credit facility
will provide for, among other things, (1) an $80 million revolving credit facility that EZCORP may
request to be increased to $110 million, and (2) a $40 million term loan.
The credit facility amendments and related loan documents have been placed in escrow pending
the earlier of (1) the closing of the merger or (2) December 31, 2008.
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF EZCORP
The tables below present summary selected consolidated financial data of EZCORP prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. The following selected
financial data should be read in conjunction with EZCORP’s consolidated financial statements and
related notes, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and other financial information in EZCORP’s Annual Report on Form 10-K for the fiscal
year ended September 30, 2007 as filed with the SEC on December 14, 2007, which is incorporated by
reference into this proxy statement/prospectus. See Where You Can Find More Information, page 122.
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA OF VFS
The tables below present summary selected consolidated financial data of VFS prepared in
accordance with U.S. generally accepted accounting principles, or GAAP. You should read the
information set forth below in conjunction with the selected consolidated financial data, the
audited consolidated financial statements and related notes, and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in this proxy statement/prospectus.
The summary selected consolidated operating data for the six months ended June 30, 2008 and
June 30, 2007, and the summary selected consolidated balance sheet data as of June 30, 2008 are
derived from the unaudited consolidated financial statements of VFS and the related notes thereto
that are contained elsewhere in this proxy statement/prospectus. The summary selected consolidated
operating data for the fiscal years ended December 31, 2007, 2006 and 2005 and the summary selected
consolidated balance sheet data as of December 31, 2007, 2006 and 2005 are derived from the audited
consolidated financial statements of VFS and the related notes thereto that are contained elsewhere
in this proxy statement/prospectus. The summary selected consolidated balance sheet data as of
June 30, 2007 are derived from the unaudited consolidated financial statements of VFS not contained
in this proxy statement/prospectus but that were prepared on the same basis as those contained
elsewhere in this proxy statement/prospectus. The summary selected consolidated statement of
income data for the fiscal years ended December 31, 2004 and 2003 and the summary selected balance
sheet data as of December 31, 2004 and 2003 are derived from the audited consolidated financial
statements of VFS not contained in this proxy statement/prospectus but that were prepared on the
same basis as those contained elsewhere in this proxy statement/prospectus.
For all periods presented, VFS had no outstanding common stock. Therefore, the calculation of
the weighted average number of common shares outstanding, basic and earnings (loss) per common
share, basic is not applicable.
**
For all periods presented, VFS had no outstanding common stock. Therefore, the calculation of
cash dividends declared per common share is not applicable. However, on April 3, 2007, VFS’s board
of directors declared a cash dividend totaling approximately $21.4 million to the holders of the
1,516,590 shares of Series A-2 participating stock outstanding, representing accumulated unaccrued
dividends for the period from August 2001 through June 2007.
For all periods presented, VFS had no outstanding common stock. Therefore, the calculation of
the weighted average number of common shares outstanding, basic and earnings (loss) per common
share, basic is not applicable.
**
For all periods presented, VFS had no outstanding common stock. Therefore, the calculation of
cash dividends declared per common share is not applicable. However, on April 3, 2007, VFS’s board
of directors declared a cash dividend totaling approximately $21.4 million to the holders of the
1,516,590 shares of Series A-2 participating stock outstanding, representing accumulated unaccrued
dividends for the period from August 2001 through June 2007.
SUMMARY SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following table presents summary unaudited pro forma condensed combined financial data
which reflects the merger. The summary unaudited pro forma condensed combined financial data are
derived from and should be read in conjunction with the unaudited pro forma condensed combined
financial statements and related notes thereto included in this proxy statement/prospectus. See
Unaudited Pro Forma Financial Statements, page 106, and Unaudited Pro Forma Financial Statements —
Notes to Unaudited Pro Forma Condensed Combined Financial Statements, page 112.
The following table presents for EZCORP Class A Non-voting Common Stock and VFS participating
stock, assuming conversion to common stock, certain historical, pro forma and pro forma-equivalent
per share financial information. In accordance with requirements of the SEC, the pro forma and pro
forma-equivalent per share information gives effect to the merger as if the merger had been
effective on the dates presented, in the case of the book value data, and as if the merger had
become effective on October 1, 2006, the beginning of the first period presented, in the case of
the net income and dividends paid data. The unaudited pro forma data in the table assumes that the
merger is accounted for using the purchase method of accounting and represents a current
preliminary estimate based on available information of the combined company’s results of
operations. The pro forma financial adjustments record the assets and liabilities of VFS at their
preliminary estimated fair values and are subject to adjustment as additional information becomes
available and as additional analyses are performed. See “Unaudited Pro Forma Condensed Combined
Financial Information” on page [ ]. The information in the following table is based on, and
should be read together with, the historical financial information that we have presented in our
prior filings with the SEC.
We anticipate that the merger will provide the combined company with financial benefits that
include reduced operating expenses and revenue enhancement opportunities. The unaudited pro forma
information, while helpful in illustrating the financial characteristics of the combined company
under one set of assumptions, does not reflect the impact of possible business model changes as a
result of current market conditions which may impact revenues, expense efficiencies and other
factors. It also does not necessarily reflect what the historical results of the combined company
would have been had our companies been combined during these periods nor is it indicative of the
results of operations in future periods or the future financial position of the combined company.
The Comparative Per Share Data for the nine months ended June 30, 2008 and the year ended September30, 2007 combines the historical income per share data of EZCORP and VFS giving effect to the
merger as if the merger had become effective on October 1, 2006, using the purchase method of
accounting. The pro forma adjustments are based upon available information and certain assumptions
that EZCORP management believes are reasonable. Upon completion of the merger, the operating
results of VFS will be reflected in the consolidated financial statements of EZCORP on a
prospective basis.
Due to different fiscal year-end dates, interim results are not directly comparable. EZCORP
interim results are for a nine-month period and VFS interim results are for a six-month
period. Pro Forma Combined results and Per Equivalent VFS Share results include the results
of each entity for the comparable EZCORP fiscal periods of the year ended September 30, 2007
and the nine months ended June 30, 2008.
(2)
Does not reflect the impact of possible business model changes that may impact revenues,
expense efficiencies and other factors that may result as a consequence of the merger and,
accordingly, does not attempt to predict future results.
(3)
Reflects VFS shares at the exchange ratio of 0.75.
(4)
For all periods presented, VFS had no outstanding common stock. Therefore, the calculation of
cash dividends paid per common share is not applicable. However, on April 3, 2007, VFS’s board
of directors declared a cash dividend totaling approximately $21.4 million to the holders of
the 1,516,590 shares of Series A-2 participating stock outstanding, representing accumulated
unaccrued dividends for the period from August 2001 through June 2007.
(5)
Book value as of September 30, 2007 is not meaningful (N/M) as purchase price accounting
adjustments were calculated as of June 30, 2008.
You should carefully consider the following risks before deciding whether to vote in favor of
the merger proposal. In addition, you should read and consider the risks associated with the
business of EZCORP, which risks can be found in the documents incorporated by reference into this
proxy statement/prospectus, because these risks will also affect the combined company.
Risks Related to the Merger and the Combined Entity
The integration of VFS with EZCORP’s business after the merger may not be successful or anticipated
benefits from the merger may not be realized.
After completion of the merger, EZCORP will have significantly larger operations than EZCORP
did prior to the merger. EZCORP’s ability to realize the benefits of the merger will depend in
part on the timely integration of VFS’s organization, operations, procedures, policies and
technologies with EZCORP, as well as the harmonization of differences in VFS’s business culture and
practices with EZCORP. EZCORP’s management will be required to devote a significant amount of time
and attention to integrating VFS’s business with EZCORP. There is a significant degree of
difficulty and management involvement inherent in that process. These difficulties include the
following:
•
integrating the operations of VFS’s business with EZCORP’s business while carrying
on the ongoing operations of each business;
•
diversion of management’s attention from the management of daily operations to the
integration of VFS with EZCORP;
•
managing a significantly larger company than before completion of the merger;
•
realizing economies of scale and eliminating duplicative overheads;
•
the possibility of faulty assumptions underlying EZCORP’s expectations regarding
the integration process;
•
coordinating businesses located in different geographic regions;
•
integrating VFS’s business culture and practices with EZCORP, which may prove to
be incompatible;
•
attracting and retaining the personnel associated with VFS’s business following
the merger;
•
creating and instituting uniform standards, controls, procedures, policies and
information systems and minimizing the costs associated with such matters; and
There is no assurance that VFS will be successfully or cost-effectively integrated into
EZCORP. The process of integrating VFS into EZCORP’s operations may cause an interruption of, or
loss of momentum in, the activities of EZCORP’s business. If EZCORP’s 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, the business of the combined companies could
suffer and the results of its operations and financial condition may be harmed.
All of the risks associated with the integration process could be exacerbated by the fact that
EZCORP 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 the combined companies do not
hire or retain employees with the requisite skills and knowledge to run its business – including
the acquired VFS business – after the merger, it may have a material adverse effect on the combined
companies.
EZCORP cannot assure you that it will realize the anticipated benefits and value of the merger
or successfully integrate VFS with EZCORP’s existing operations. Even if EZCORP is able to
successfully combine VFS’s business operations with EZCORP’s, 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 the combined companies fail to realize anticipated cost savings, synergies or
revenue enhancements EZCORP anticipates from the merger, its financial results and results of
operations may be adversely affected.
EZCORP has not engaged in any prior mergers and has not made any other acquisitions of
companies or assets as large as VFS. EZCORP has engaged in other acquisitions in the range of $20
million and less. It has not experienced significant operating problems with these acquisitions.
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 the business after the merger may affect the
combined companies’ customer activities and actions. This could cause its 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 anticipated from the merger.
VFS shareholders may receive merger consideration that is inconsistent with their elections.
Although VFS shareholders will be able to elect to receive cash or EZCORP Shares for their VFS
Common Stock, the merger agreement provides that the election to receive cash is limited to 20% of
the total VFS Common Stock. Because of this limitation, if you elect to receive cash, your election
may be re-allocated if the total cash elections exceed approximately 20% of the VFS Common Stock.
The Internal Revenue Service may not treat the merger as a tax-free transaction within the meaning
of Section 368(a) of the Code.
While the parties anticipate that the merger will qualify as a tax-free reorganization within
the meaning of Section 368(a) of the Code, there can be no assurance that the IRS will agree. A
successful IRS challenge to the status of the merger as a tax-free reorganization would result in a
VFS shareholder being treated as if he or she sold his or her VFS common stock in a
taxable transaction. In such event, a VFS shareholder would be required to recognize all of his or
her realized gain or loss with respect to the disposition of his or her VFS common stock equal to
the difference between such VFS shareholder’s basis in such stock and the fair market value, as of
the date the merger becomes effective, of the EZCORP common stock.
Risks Related to EZCORP
EZCORP will incur significant costs and expenses associated with the merger.
EZCORP expects to incur significant costs and expenses associated with the merger, which
include but are not limited to transaction fees (approximately $0.6 million), professional service
fees (approximately $0.5 million) and regulatory filing fees (approximately $0.1 million). EZCORP
also believes it 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 EZCORP. There can be no assurance that EZCORP will not incur additional
material charges in subsequent quarters to reflect additional costs associated with the merger and
the integration of VFS into EZCORP.
Issuance of the EZCORP Shares in the merger could have a dilutive effect and cause EZCORP’s
earnings per share to decrease.
In the merger, EZCORP will issue a total of nearly 5 million shares of its Class A Non-voting
Common Stock if all VFS shareholders elect to receive EZCORP Shares. This will increase the number
of issued and outstanding shares of EZCORP Class A Non-voting Common Stock by approximately 13%.
If EZCORP is unable to realize sufficient value from the acquisition of VFS and its assets in the
merger, the issuance of these shares would decrease the net asset value per share of EZCORP stock,
thereby decreasing the value of those shares in the hands of EZCORP shareholders and possibly
causing EZCORP’s stock market price to drop.
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 EZCORP’s
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 EZCORP’s
valuation and award the shareholders a significantly higher price than the $11.00 per share EZCORP
intends to pay. See The Merger Agreement – Appraisal Rights, page 82.
The Guaranty Fund and the Premium Reserve may increase the incentive of the VFS shareholders to
sell the EZCORP Shares they obtain in the merger and drive down the price of EZCORP stock.
To induce VFS’s board of directors and shareholders to approve the merger, EZCORP agreed to
pay additional cash consideration to the VFS shareholders if they sell their stock within 125 days
after closing of the merger, if they sell at a price either above or below $14.67 per EZCORP Share.
During the 125 day period, the additional cash consideration gives a limited amount of price
protection to VFS shareholders if the EZCORP Share price falls, and to provide an incentive to sell
EZCORP Shares at prices only in excess of the $14.67 valuation on which the merger consideration
was based. See The Merger Agreement – Value of Merger Consideration – the Deficiency Guaranty and
the Premium Reserve, page 91.
Because these additional payments are available for only a limited, 125 day period after
closing, VFS shareholders may feel an additional urge to sell their EZCORP Shares to obtain either
the price protection, if the price goes down, or the premium payment, if the price goes up. Thus,
these potential payments could increase selling of EZCORP Shares and send EZCORP’s share price
down, resulting in losses in EZCORP share value to those VFS shareholders who do not sell their
EZCORP Shares.
Stephens may not have considered all facts a VFS shareholder would believe to be important to a
decision whether to approve the merger.
The VFS board of directors received an opinion from Stephens dated September 10, 2008, that
the merger was fair to the VFS shareholders. At the time the opinion was rendered the proposed
transaction differed from the one embodied in the final merger agreement, principally because on
September 10, the exchange of EZCORP Shares in the merger was to be made only to a limited number
of VFS shareholders instead of to all VFS shareholders. In addition, Stephens did not address the
relative merits of the merger agreement in comparison with any potential alternatives to the
merger. Further, it does not address the underlying decision of the board to proceed with or
effect the merger, or any other aspect of the board’s consideration of the merger. Therefore, VFS
shareholders might conclude that the Stephens opinion failed to address all concerns that they wish
to have addressed in considering whether to approve the merger. See Reasons for the Merger, page
69, and The Stephens Fairness Opinion, page 69.
Risks Related to VFS
The merger agreement restricts VFS’s ability to negotiate with other potential acquirers and may
discourage others from making a more attractive acquisition offer.
The merger agreement contains a non-solicitation clause hat prevents VFS and its officers,
directors, employees, agents or representatives from directly or indirectly soliciting or
encouraging other acquisition proposals from third parties prior to the effective date. By
refraining from seeking other better offers, VFS may forego a potentially better acquisition
proposal from a third party. See The Merger Agreement – Non-Solicitation Agreement, page 96.
If VFS terminates the merger agreement it may be required to pay EZCORP a termination fee, and the
termination fee may discourage others from making a more favorable acquisition offer to VFS and may
increase the costs to VFS if the merger is not consummated.
The merger agreement requires VFS to pay a $5 million termination fee to EZCORP if:
•
VFS terminates the merger agreement because it has entered into an acquisition
transaction with a third party as described in the preceding paragraph;
•
The VFS board of directors fails to recommend the merger to its shareholders;
•
The VFS shareholders fail to approve the merger;
•
The merger agreement is terminated by EZCORP or the Merger Sub after a material
breach of the merger agreement by VFS; or
•
The merger agreement is terminated by EZCORP or the Merger Sub because VFS has
not satisfied any of the conditions precedent to EZCORP’s and Merger Sub’s obligations
to close.
Existence of the termination fee may discourage other third parties from considering an offer
to acquire VFS on terms more attractive than those contained in the merger agreement, because it
increases the cost of an acquisition of VFS by third parties by the $5 million amount of the fee.
It limits the ability of VFS to pursue alternatives to the merger that could potentially be better
for the VFS shareholders than the merger.
In addition, the termination fee is payable if the board of directors fails to recommend the
merger to the VFS shareholders, if the VFS shareholders do not vote to approve the merger or if the
merger agreement is terminated by EZCORP after a breach of the Agreement or fail to satisfy a
condition to closing by VFS. Potential payment of the termination fee in any of these events would
harm VFS’s financial results in the period in which the fee would become payable.
This proxy statement/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. The parties 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, the parties cannot predict all of the risks and uncertainties that could cause its 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 proxy statement/prospectus under the heading “Risk Factors” and
in the sections entitled “Risk Factors” in EZCORP’s Annual Report on Form 10-K for the year ended
September 30, 2007. These factors are not intended to be an all-encompassing list of risks and
uncertainties that may affect EZCORP’s operations, performance, development and results. You are
cautioned not to overly rely on these forward-looking statements, which are current only as of the
date hereof. The parties 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.
THE MERGER PARTIES
EZCORP
EZCORP lends or provides 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 on Form 10-Q and other reports which are incorporated by reference into this
proxy statement/prospectus.
EZCORP’s principal executive offices are located at 1901 Capital Parkway, Austin, Texas78746.
Its telephone number is (512) 314-3400.
Value Financial Services
The following description of VFS, its history and business, is provided by the management of
VFS.
VFS was founded in 1994 by John Thedford, its president and chief executive officer, and
currently operates 67 stores in three states – Florida (60 stores), Tennessee (four stores) and
Georgia (three stores) under the trade names “Value Pawn and Jewelry” in Florida and Georgia and
“Check Jewelry & Loan” in Tennessee. For the year ended December 31, 2007 and the six months ended
June 30, 2008, its average revenue per store was approximately $1.7 million and $897,000,
respectively. It is the second largest pawn broker in Florida, based on information provided by
the National Pawnbrokers Association. 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. Its customers typically require pawn loans for their immediate cash needs, and
often use its services for reasons of convenience and/or lack of credit alternatives. As of June30, 2008, VFS employed over 600 team members.
VFS’s principal executive offices are located at 1063 Maitland Center Commons Blvd., Suite
200, Maitland, Florida32751. Its telephone number is (407) 339-6608.
Pawn Lending Activities
When receiving a pawn loan from VFS, a customer pledges personal property to VFS as security
for the loan. VFS delivers a pawn transaction agreement, commonly referred to as a pawn ticket, to
the customer, along with the proceeds of the loan. If the customer does not pay all accrued pawn
service charges or redeem the property within a specified time period (typically 60 days), the
customer forfeits the property to VFS, and VFS sells the property.
VFS’s customers are obligated to pay a pawn service charge to compensate VFS for the use of
the funds loaned. The pawn service charge is typically calculated as a percentage of the pawn loan
amount based on the size and duration of the transaction, in a manner similar to which interest is
charged on a bank loan, and ranges from 12.5% to 25.0% per month, or 187.5% to 300.0% annually, in
the states in which VFS currently operates, as permitted by applicable state pawnshop laws. These
pawn service charges contributed approximately 30.0% of VFS’s total revenues in 2005, 27.4% in 2006
and 26.7% in 2007.
Pledged property is held through the term of the pawn loan, which is 30 days with an automatic
extension period of 30 days unless the pawn loan is repaid or renewed earlier. In the event that
the borrower does not repay or renew a loan within the 60-day period, the unredeemed collateral is
forfeited to VFS and becomes inventory available for sale in the store. The collateral is
transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued
interest and service charges. The following table summarizes the life cycle of a typical pawn loan:
(1)
Example assumes a sale value of $170 and a 68.0% loan-to-value ratio.
Amounts shown are not cumulative.
VFS generally lends an amount equal to between 60.0% and 65.0% of the estimated resale value
of an item of collateral, based on its customer’s needs and its history with them. The principal
criteria VFS uses to determine the amount of a loan are the amount needed by the customer, the
customer’s transaction history with VFS, VFS’s perception of the customer’s emotional attachment to
the collateral and the estimated sale value of the collateral. VFS relies on many sources to
determine the estimated sale value, including its experience in selling similar items, catalogs,
“blue books,” newspapers and internet research. VFS does not use a standard or mandated percentage
of estimated sale value in determining the loan amount. Instead, VFS’s team members may set the
percentage for a particular item and determine whether the item’s sale, if it is forfeited to the
pawnshop, would yield a profit margin consistent with its historical experience with similar items.
Any proposed loan in excess of $500 requires approval from a regional manager. VFS holds the
pledged property through the term of the loan, which generally is 30 days with an automatic 30-day
extension period, unless earlier redeemed, renewed or extended. A majority of VFS’s pawn loans are
either paid in full with accrued pawn service charges or are renewed or extended by the customer’s
payment of accrued pawn service charges. If a customer does not repay, renew or extend the loan,
the unredeemed collateral is forfeited to VFS and becomes merchandise available for sale through
its pawnshops or to wholesale sources or a smelter. VFS does not record pawn loan losses or
charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that
is to be recovered through the merchandise sale function described below. VFS does not have
recourse against the customer for the loan. As a result, the customer’s creditworthiness is not a
factor in VFS’s loan decision, and a decision not to redeem pawned property does not affect the
customer’s personal credit status. When a customer fails to repay a pawn loan, VFS relies on the
sale of pawned property to recover the principal amount of the loan, plus a yield on the
investment.
VFS’s strategy is generally to make pawn loans where there is a substantial likelihood that
the customer will repay the loan and redeem the property. However, because the supply of inventory
available for sale in VFS’s stores is derived in part from forfeitures of pledged property, VFS
attempts to attain an appropriate balance of redemptions and forfeitures to ensure that there is an
appropriate level of inventory available for sale in its stores. 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.
At June 30, 2008, VFS had 111,728 outstanding pawn loans totaling approximately $18 million,
with an average balance of approximately $161 per loan.
Presented below is information with respect to pawn loans made, redeemed and forfeited for
VFS’s pawn lending operations for the years ended December 31, 2005, 2006 and 2007 and the six
months ended June 30, 2008 (in thousands):
2005
2006
2007
6/30/2008
No. of
No. of
No. of
No. of
Amount
Loans
Amount
Loans
Amount
Loans
Amount
Loans
Beginning balance
$
9,645
76
$
11,598
86
$
14,528
97
16,759
103
New loans made
51,119
480
62,080
515
71,600
559
36,964
278
Loans redeemed,
excluding renewals
and extensions
26,437
225
30,770
236
33,692
250
19,301
139
Loans forfeited
22,729
246
28,380
268
35,677
302
16,406
132
Net increase
(decrease) in pawn
loans outstanding at
end of the year
1,953
9
2,930
12
2,231
62
1,257
8
Ending balance
$
11,598
86
$
14,528
97
16,759
103
18,016
111
Loans renewed/extended
$
56,984
333
$
69,939
368
$
87,311
427
45,915
217
Merchandise Sales Activities
VFS sells merchandise that has been forfeited to it when a pawn loan is not redeemed. VFS
sells merchandise principally at its pawnshops, but it also sells some items through wholesale
sources or, in the case of some gold jewelry, to a smelter. VFS also sells in its pawnshops used
goods purchased from the general public and some new merchandise, principally accessory merchandise
that compliments and enhances the marketability of items such as tools, consumer electronics and
jewelry. While VFS offers refunds and exchanges for certain merchandise items, it generally does
not provide its customers with warranties on used merchandise. Proceeds from sales of merchandise
contributed 70.0% of VFS’s total revenues in 2005, 72.6% in 2006 and 71.9% in 2007. Presented below
is information with respect to the sources of merchandise acquired during the years ended
December 31, 2005, 2006 and 2007 (in thousands):
2005
2006
2007
Beginning balance
$
7,827
$
10,566
$
12,204
Merchandise acquired through loan forfeitures
22,729
28,383
35,676
Merchandise purchased from customers
6,507
9,086
11,596
Merchandise purchased from vendors
2,709
3,459
1,782
Total merchandise acquired
31,945
40,928
49,054
Less: merchandise sold
29,206
39,290
47,734
Ending balance
$
10,566
$
12,204
$
13,524
The recovery of the amount advanced and the realization of a profit on the sale of merchandise
depend on VFS’s initial assessment of the property’s estimated sale value when the
pawn loan is made. For 2005, 2006 and 2007, VFS experienced profit margins on sales of
merchandise of 38.2%, 36.9% and 37.5%, respectively. Changes in gold prices will also generally
increase or decrease the sale value of jewelry items acquired in pawn transactions and could
enhance or adversely affect VFS’s profit or recovery of the carrying cost of the acquired
collateral. VFS does not engage in any hedging transactions with respect to market prices for gold
or other precious metals. For 2005, 2006 and 2007, sales of jewelry represented approximately
48.7%, 47.6% and 44.9%, respectively, of VFS’s total retail merchandise sales.
The following table illustrates the percentage of merchandise held in inventory as of June 30,2008, by category:
Category
%
Jewelry
63.4
Electronics
16.2
Tools
7.0
Other
13.4
During the two-year period from 2005 to 2007, same-store merchandise sales increased by
approximately 22.9%, from $663,345 in 2005 to $815,356 in 2007. During that same period, the amount
of VFS’s average retail merchandise sale increased by 14.4%, from $90 in 2004 to $104 in 2007.
Customers may purchase merchandise on a layaway plan under which the customer makes an initial
cash deposit representing a portion of the sales price and pays the balance in regularly scheduled,
non-interest bearing payments. VFS segregates the layaway item and holds it until the customer has
paid the full sales price. If the customer fails to make a required payment, the customer’s deposit
is forfeited to VFS and the item is placed with the other merchandise held for sale. Layaways are
recorded as sales when paid in full. At June 30, 2008, VFS held approximately $866,000 in customer
layaway deposits.
VFS’s inventory is stated at the lower of cost or market. In the case of merchandise acquired
through forfeited pawn loans, the acquisition cost is the principal value of the pawn loan. VFS
provides an allowance for valuation and shrinkage of its merchandise. The amount of this allowance
is based on management’s evaluation of factors such as historical shrinkage and the quantity and
age of merchandise on hand. At June 30, 2008, total pawn operations merchandise on hand was $13.3
million, after deducting an allowance for valuation and shrinkage of merchandise of $0.3 million.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
The following discussion and analysis of VFS’ financial condition and results of operations is
provided by the management of VFS and should be read in conjunction with its consolidated financial
statements and related notes that appear elsewhere in this proxy statement/prospectus. In addition
to historical consolidated financial information, the following discussion contains forward-looking
statements that reflect the plans, estimates and beliefs of VFS. Actual results could differ
materially from those discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in this proxy
statement/prospectus, particularly in Risk Factors beginning on
page 21.
General
For 2007 and the six months ended June 30, 2008, VFS generated total revenues of $106.5
million and $58.3 million, respectively. VFS’ revenues have grown substantially in recent years, at
a compound annual growth rate of 19.3% from 2003 to 2007. From 2003 to 2007, its store operating
margins improved from 19.9% to 21.4%.
VFS believes that the experience and qualifications of a store manager are critical components
of a store’s success. VFS has found that there is a strong correlation between the length of
tenure of a store manager and the financial performance of that store, as a more experienced store
manager tends to better understand the needs of a particular store’s customers. As of June 30,2008, the average tenure of its store managers was 30.0 months, and 37 of its 67 store managers
have been VFS team members for two years or more.
Because there is such a compelling correlation with financial success, VFS allocates
significant resources to lowering its team member turnover and, correspondingly, team member
continuity in the same store. Improvements in these variables lead to efficiency gains and
productivity increases. Moreover, increased tenure leads to the establishment and maintenance of
long-term relationships with customers that breed customer loyalty and repeat business. VFS
estimates that approximately 80 percent of its transactions are related to repeat customers and it
considers customer relationships an important element in the determination of a store’s success.
The strength of an individual store team’s relationships with its customer base will largely
determine its success in developing its pawn loan portfolio and, by extension, its revenue
potential; the quality of a store’s pawn loan portfolio is a reliable indicator of a store’s
revenue potential. While approximately 50.0% of VFS’ revenues are directly derived from pawn
service charges on pawn loans, most sales revenues from merchandise sales are indirectly derived by
way of forfeited pawn loans that become merchandise for sale. Accordingly, it is critical for store
teams to cultivate and maintain customer relationships and increased team member continuity helps
to ensure that.
VFS’ human resources strategy depends on its ability to recruit and retain its team members.
The recruiting aspect of this approach is vulnerable to employment market conditions
as low unemployment shrinks the pool of available candidates. It is, however, important that
VFS not compromise the integrity of its hiring standards in response to challenging economic
conditions. With this in mind, VFS employs the use of an objective personality measurement tool to
assist in hiring decisions. Though this tool does not address the availability of candidates, it
does help to ensure that exceptions do not dilute VFS’ human resource approach.
While VFS believes that its successful performance has been the result of its strategic
management, it has also benefited recently from the external favorable spot pricing in the gold
market. VFS allocates a portion of its gold inventory each month to be sent to a gold smelter for
liquidation. This practice is a key component in VFS’s cash and inventory management processes that
has taken on greater significance over the years as gold pricing has steadily increased. Net
revenues derived from scrap gold sales totaled $9.6 million in 2007 and represented 16.4% of total
net revenues. By comparison, in 2003, net revenues derived from gold scrap sales totaled $1.4
million and represented 4.9% of net revenues.
A decline in the price of gold would result in a short-term negative impact to VFS’ gold scrap
sales revenues and the value of its jewelry inventories. VFS believes, however, that due to the
short-term nature of its loan transactions, it would be able to adapt quickly to the changing
market and mitigate this risk. VFS has the flexibility to shift resources in favor of its retail
sales operations in order to balance the revenue gains and losses.
Components of Revenues and Expenses
Its revenues are derived primarily from pawn service charges on pawn loans and sales of
merchandise, primarily forfeited collateral from pawn loans. If a pawn loan is not repaid prior to
the expiration of the automatic extension period, the property is forfeited to VFS and transferred
to inventory at a value equal to the principal amount of the loan, exclusive of accrued interest.
VFS accrues pawn service charge revenue based on anticipated redemption activity for pawn loans
during each reporting period. VFS has historically been able to estimate redemption rates with a
high degree of accuracy due to the short-term nature of its pawn loans. As a result, the yields on
its outstanding loan portfolio will fluctuate in correspondence with redemption activity. While
its redemption rates have historically averaged almost 80.0% over the course of any 12-month
period, seasonality and other economic factors produce periodic variations and, as a result, yield
rates will vary accordingly.
VFS also generates revenue from fee income and through forfeited layaway deposits. Fee income
results from fees collected from customers for the replacement of lost pawn tickets and for check
cashing services. Forfeited layaway deposits occur when a customer defaults on the layaway terms
and forfeits the respective deposits.
The cost of merchandise sales includes all costs related to the acquisition of merchandise.
In most cases, merchandise is acquired through forfeited pawn loans and the acquisition cost is the
principal value of the pawn loan. In the case of merchandise purchased from an outside vendor, its
cost will include the amount paid to the vendor plus any freight and taxes. In addition, a small
component of merchandise sales cost includes expenses associated with inventory loss and breakage.
Store operating expenses consist of all items directly related to the operation of its stores,
including salaries and related payroll costs, rent, utilities, equipment, advertising, property
taxes, licenses, supplies and security. Because VFS currently leases all 67 of its stores, rent is
its largest store operating expense after payroll costs. VFS is responsible for facility costs,
including taxes and insurance, under most of its leases.
General and administrative expenses consist of items relating to its administration and the
operation of its corporate offices, including the compensation and benefit costs of corporate
management, regional managers and other operations management personnel, accounting and
administrative costs, information technology costs, liability and casualty insurance and legal and
accounting fees. General and administrative expenses also include depreciation expenses and costs
of asset disposals related to its ongoing capital expenditures. Other expenses consist primarily
of asset disposal costs, which represent the remaining book value of equipment that is replaced
before the end of its depreciable life.
Critical Accounting Policies And Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based
on its consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these financial statements
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 financial
statements and the reported amounts of revenues and expenses during the reporting periods. On an
on-going basis, management evaluates its estimates and judgments, including those related to
revenue recognition, inventory, long-lived and intangible assets, income taxes, contingencies and
litigation. Management bases its estimates on historical experience, empirical data and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its consolidated financial statements.
Pawn service charges revenue recognition. VFS accrues pawn service charges revenue
based on anticipated redemption activity for pawn loans during each reporting period. 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 us to analyze the characteristics of its outstanding pawn loan portfolio
and estimate the probability of collection of pawn 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, VFS can quickly identify performance trends. For
2007, $28.0 million, or 98.5%, of recorded pawn service charges represented cash collected from
customers and the remaining $0.4 million, or 1.5%, represented an increase in the service charges
receivable during the year. At the end of 2007 and based on the revenue recognition method
described above, VFS had accrued $3.3 million of service charges
receivable. Assuming the year-end accrual of service charges revenue was over-estimated by
10.0%, service charges revenue would decrease by $0.3 million in 2008. Some or all the decrease
would potentially be mitigated through the profit on the sales of the related forfeited loan
collateral.
Inventory. Inventory represents merchandise acquired from forfeited pawn loans,
merchandise purchased directly from the public and new merchandise purchased from vendors. The
carrying value of the inventory is stated at the lower of cost or market. In the case of
merchandise acquired through forfeited pawn loans, the acquisition cost is the principal value of
the pawn loan. Management provides an allowance for shrinkage and valuation based on its
evaluation of the merchandise. Because pawn loans are made without recourse to the borrower, VFS
does not investigate or rely upon the borrower’s creditworthiness, but instead bases its lending
decision on an evaluation of the pledged personal property and the customer’s transaction history
with the company. The amount that VFS is willing to finance to any particular customer ranges
based on the store manager’s evaluation of the customer’s need and ability to repay backed by an
informal appraisal of the market value of the collateral. Overall, this appraisal generally results
in a loan-to-value ratio of approximately 60.0%. In 2007, VFS averaged costs of sales of 62.5%,
leading to sales profit margins of 37.5%. VFS uses numerous sources in determining an item’s
estimated market value including its experience in selling similar items, catalogs, “blue books,”
newspapers and internet research. VFS performs a physical count of its merchandise in each
location on a cyclical basis and reviews the composition of inventory by category and age in order
to assess the adequacy of the allowance, which was $0.3 million, representing 2.4% of the inventory
balance at December 31, 2007. Adverse changes in the market value of its inventory may require an
increase in the valuation allowance.
Valuation of Goodwill. VFS assesses the impairment of its goodwill whenever events or
changes in circumstances indicate that the carrying value may not be recoverable. Goodwill is an
intangible asset with an indefinite useful life, thus it is tested for impairment annually, or more
frequently if events or changes in circumstances indicate that the assets might be impaired.
Factors that could trigger an impairment review include significant underperformance relative to
expected or projected future cash flows, significant changes in the strategy of the overall
business and significant industry trends. When management determines that the carrying value of
goodwill may not be recoverable, impairment is measured based on the excess of the asset’s carrying
value over the estimated fair value.
Income Taxes. As part of the process of preparing its consolidated financial
statements, VFS is required to estimate income taxes in each of the jurisdictions in which VFS
operates. This process involves estimating the actual current tax exposure together with assessing
temporary differences in recognition of income for tax and accounting purposes. These differences
result in deferred tax assets and liabilities and are included within its consolidated balance
sheet. Management must then assess the likelihood that the deferred tax assets will be recovered
from future taxable income and, to the extent it believes that recovery is not likely, it must
establish a valuation allowance. An expense, or benefit, is included within the tax provision in
the statement of operations for any increase, or decrease, in the valuation allowance for a given
period.
Management judgment is required in determining the provision for income taxes, the deferred
tax assets and liabilities and any valuation allowance recorded against net deferred tax assets.
If VFS were to determine that it could not realize all or part of its net deferred tax assets in
the future, VFS would have to charge an adjustment to the deferred tax assets in the income taxes
in the period that such determination was made. Likewise, should VFS determine that it could in
the future realize its deferred tax assets in an amount exceeding the net recorded amount, VFS
could adjust the deferred tax assets to reduce the provision for income taxes in the period that
such determination was made.
Its net deferred tax assets include substantial amounts of net operating loss carryforwards,
totaling approximately $15.0 million and $12.8 million for federal and state, respectively. The
utilization of its net operating loss carryforwards may be limited in any given year under certain
circumstances. Events which may affect its ability to utilize these carryforwards include, but are
not limited to, future profitability, cumulative stock ownership changes of 50.0% 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.
Recently Issued Accounting Standards
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. In February 2008,
FASB issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157”,
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 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 adoption of SFAS No. 157 and FSP FAS 157-2 did not have a material effect on the
Company’s consolidated financial position or results of operations. The Company has not applied
the provisions of SFAS No. 157 to its nonfinancial assets and nonfinancial liabilities in
accordance with FSP FAS 157-2. The Company will apply the provisions of SFAS No. 157 to these
assets and liabilities beginning January 1, 2009 as required by FSP FAS 157-2.
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 was effective for fiscal years
beginning after November 15, 2007. The adoption of SFAS No. 159 did not have a material effect on
the Company’s consolidated financial position or results of operations.
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 the 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.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161, “Disclosure
about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS
No. 161”). SFAS No. 161 requires enhanced disclosures concerning (1) the manner in which an entity
uses derivatives (and the reason it uses them), (2) the manner in which derivatives and related
hedged items are accounted for under SFAS No. 133 and interpretations thereof, and (3) the effects
that derivatives and related hedged items have on an entity’s financial position, financial
performance, and cash flows. VFS must adopt SFAS No. 161 by January 1, 2009. VFS does not expect
SFAS No. 161 to have a material effect on its financial position, results of operations, or cash
flows.
The following table sets forth the components of its consolidated statements of operations for
the periods indicated, expressed in dollars and as a percentage of total revenues (dollars in
thousands):
Year Ended December 31,
Six Months Ended June 30 ,
2005
2006
2007
2007
2008
(Unaudited)
$
%
$
%
$
%
$
%
$
%
Revenue:
Merchandise sales
$
47,378
68.4
$
62,348
71.0
$
76,515
71.9
$
33,376
69.9
$
42,249
72.4
Pawn service charges
20,786
30.0
24,090
27.4
28,394
26.7
13,659
28.6
15,370
26.4
Other
1,085
1.6
1,376
1.6
1,566
1.5
718
1.5
711
1.2
Total revenue
69,249
100.0
87,814
100.0
106,475
100.0
47,754
100.0
58,331
100.0
Cost of merchandise sales
29,289
42.3
39,339
44.8
47,834
44.9
20,701
43.3
25,335
43.4
Net revenue
39,960
57.7
48,475
55.2
58,641
55.1
27,053
56.7
32,996
56.6
Store operating expenses
25,093
36.2
30,365
34.6
35,877
33.7
17,283
36.2
20,593
35.3
Store operating income
14,868
21.5
18,110
20.6
22,763
21.4
9,770
20.5
12,403
21.3
General and
administrative
expenses:
Administration
6,499
9.4
7,815
8.9
21,127
(1)
19.8
13,130
(2)
27.5
5,767
9.9
Depreciation
164
0.2
173
0.2
204
0.2
101
0.2
112
0.2
Other
60
0.1
108
0.1
355
0.3
117
0.5
10
0.0
Total general and
administrative expenses
6,724
9.7
8,097
9.2
21,686
20.4
13,348
28.0
5,889
10.1
Income (loss) from
operations
8,144
11.8
10,013
11.4
1,077
1.0
(3,578
)
(7.5
)
6,514
11.2
Non-operating expenses:
Interest expense
1,297
1.9
1,135
1.3
2,544
2.4
432
0.9
1,000
1.7
Net income (loss) before
income taxes
6,847
9.9
8,878
10.1
(1,467
)
(1.4
)
(4,010
)
(8.4
)
5,514
9.5
Income tax expense
(benefit)
2,593
3.7
3,448
3.9
(486
)
(0.5
)
(1,557
)
(3.3
)
2,188
3.8
Net income (loss)
$
4,254
6.1
$
5,430
6.2
$
(981
)
(0.9
)
$
(2,452
)
(5.1
)
$
3,326
5.7
Earnings (loss) per share:
Basic*
n/a
n/a
n/a
n/a
n/a
Diluted
$
0.69
$
0.88
$
(0.15
)
$
(0.40
)
$
0.50
Weighted average number
of shares outstanding:
Basic*
n/a
n/a
n/a
n/a
n/a
Diluted
6,160,646
6,160,646
6,413,097
6,175,959
6,646,369
(1)
Includes charges totaling $11.0 million to reflect the compensation expenses associated
with stock grants and loan forgiveness to the VFS executive officers and an outside
consultant, as well as charges associated with the company’s suspended initial public
offering and director and officer fees.
(2)
Includes charges totaling $8.2 million to reflect the compensation expense associated
with stock grants and loan forgiveness to the VFS executive officers and an outside
consultant.
*
For all periods presented, VFS had no outstanding common stock. Therefore, the
calculation of the weighted average number of common shares outstanding — basic and earnings
(loss) per common share — basic is not applicable.
The following table sets forth certain selected consolidated unaudited financial and
non-financial data for the periods indicated (dollars in thousands unless noted otherwise):
Average number of pawn loans per location at
end of period
1,431
1,572
1,619
1,814
1,719
Average pawn loan amount at end of period (not
in thousands)
$
135
$
149
$
162
$
149
$
161
Profit margin on merchandise sales
38.2
%
36.9
%
37.5
%
39.8
%
40.0
%
Profit margin on merchandise sales — retail only
39.2
%
36.9
%
37.1
%
38.1
%
37.1
%
Average annualized merchandise turnover
3.2×
3.3×
3.5×
3.4×
3.9×
Average balance of merchandise per location
$
154
$
197
$
212
$
199
$
200
Ending balance of merchandise per location
$
176
$
197
$
211
$
218
$
209
Pawnshop locations
Beginning of year
60
60
62
62
64
Start-ups
0
2
2
0
1
End of year
60
62
64
62
65
(1)
Store operating income margin is calculated as store operating income as a
percentage of total revenues.
(2)
EBITDA margin is calculated as EBITDA as a percentage of total revenues.
(3)
VFS defines EBITDA as its net income before depreciation, interest expense and
income tax expense (benefit). Management uses this measure as an indicator of cash generated
from operating activities. EBITDA is not a measurement of financial performance under GAAP
and should not be considered an alternative to net income or operating cash flows determined
in accordance with GAAP. VFS’s calculation of EBITDA may not be comparable to the calculation
of similarly titled measures reported by other companies. EBITDA is reconciled directly to
net income (loss) as follows:
Revenues. Total revenues increased $10.5 million, or 22.1%, to $58.3 million for the six
months ended June 30, 2008 from $47.8 million for the six months ended June 30, 2007. Same store
revenues, excluding the contribution from the one store opened in 2008, grew $10.1 million, or
21.1%, to $57.8 million for the six months ended June 30, 2008.
Merchandise sales. The following table summarizes merchandise sales and the related profit
for the six months ended June 30, 2008 compared to the six months ended June 30, 2007 ($ in
thousands):
Merchandise sales revenues, representing 72.4% of total revenues, increased $8.9 million, or
26.6%, to $42.2 million for the six months ended June 30, 2008 from $33.4 million in the
corresponding period in 2007. Retail merchandise sales, excluding gold scrapping activity,
increased $0.1 million, or 0.5%, to $25.1 million from $24.9 million. The gains were due to
improvements in its team member metrics, including turnover, continuity and productivity. Lower
turnover and increased continuity in position led to more experienced sales associates in the store
operations. Moreover, increased promotional activity led to additional customer traffic and a gain
of nearly 150,000 new customers in the six months ended June 30, 2008, representing an increase of
2.3% over new customer additions achieved in the corresponding period in 2007. Costs of sales were
elevated due to a combination of increased volume and promotional activity.
Sales of gold scrap increased $8.7 million, or 103.6%, to $17.2 million for the six months
ended June 30, 2008 from $8.4 million in the corresponding period in 2007. For the six months
ended June 30, 2008, spot gold market pricing increased 34.7% compared to the six months ended June30, 2007. In response to this favorable market pricing, VFS increased its gold scrapping volume
during the six months ended June 30, 2008 by 50.6% over its volume in the six months ended June 30,2007.
Pawn service charges. Revenues from pawn service charges increased $1.7 million, or
12.5%, to $15.4 million for the six months ended June 30, 2008 from $13.7 million in the
corresponding period in 2007. The annualized loan yield was 187.20% for the six months of 2008
compared to 186.0% for the first six months of 2007. Pawn loans outstanding increased $1.3 million,
or 7.6%, to $18.0 million from $16.7 million at June 30, 2007.
Cost of Merchandise Sales. Cost of merchandise sales increased $4.6 million, or
22.4%, to $25.3 million for the six months ended June 30, 2008 from $20.7 million for the six
months ended June 30, 2007. The increase was primarily due to a 26.6% increase in merchandise
sales in the six months ended June 30, 2008. Overall profit margins of 40.0% in the six months
ended June 30, 2008 represented an increase from the 39.8% overall profit margins achieved in the
six months ended June 30, 2007. Retail merchandise sales profit margins decreased in the six
months ended June 30, 2008 to 37.1% from 38.1% in the six months ended June 30, 2007 due primarily
to increased promotional activity and higher product acquisition costs. Profit margins on gold
scrap sales improved to 44.3% in the six months ended June 30, 2008 from 37.7% in the six months
ended June 30, 2007.
Net Revenue. Net revenue increased $5.9 million, or 21.8%, to $33.0 million for the
six months ended June 30, 2008 from $27.1 million in the corresponding period in 2007. On a
same-store basis, excluding the stores opened in 2008, net revenue increased $5.7 million, or
21.1%, for the six months ended June 30, 2008. The net revenue margin of 56.6% for the first six
months of 2008 reflected a decrease from the 56.7% margin in the first six months of 2007. This
was primarily due to a product mix shift of 391 basis points from pawn service charge revenues to
lower margin merchandise sales. The annualized inventory turnover rate of 3.9 times for the first
six months of 2008 was an increase over the 3.4 rate achieved during the first six months of 2007.
The table below summarizes the value of merchandise inventory based on age before the
valuation allowances of $333,000 at June 30, 2008 and $283,000 at June 30, 2007 ($ in thousands):
Store operating expenses. Store operating expenses increased $3.2 million, or 19.3%,
to $19.7 million for the six months ended June 30, 2008 from $16.5 million in the corresponding
period in 2007. Store operating expenses, as a percentage of revenues, declined to 33.8% in the
first six months of 2008 from 34.6% in the first six months of 2007 due to a combination of labor
efficiencies that resulted from increases in team member productivity and the fixed-cost nature of
some of its operating expenses, such as rent and facility expenses. Absolute spending increased
primarily due to higher payroll expenses related to the combined impact of higher store staffing
levels, which were increased in many stores in response to increased customer traffic, and talent
upgrades.
As a multi-unit operator in the pawn industry, the store operations expenses of VFS are
predominately related to personnel and occupancy expenses. Personnel expenses include base salary
and wages, performance incentives and benefits. Occupancy expenses include rent, property taxes,
insurance, utilities and maintenance. The combination of personnel and occupancy expenses
represents 91.3% of total store operating expenses in the first six months of 2008 and 91.5% in the
first six months of 2007. The remainder of the store operating expenses include supplies,
advertising, bank service charges, credit card fees and miscellaneous services.
General and administrative expenses. General and administrative expenses decreased
$7.3 million, or 55.7%, to $5.8 million for the six months ended June 30, 2008 from $13.1 million
in the corresponding period in 2007. General and administrative expenses, as a percentage of
revenues, declined to 9.9% in the first six months of 2008 from 29.1% in the first
six months of 2007. The decrease was due to the inclusion of charges totaling $8.2 million
that were recorded in the six months ended June 30, 2007 and reflected the compensation expenses
associated with stock grants and loan forgiveness to the VFS executive officers and an outside
consultant. These charges included $6.5 million of compensation expense associated with the grant
of 685,723 shares of Series A-1 participating stock and the reimbursement of personal tax
liabilities resulting from the grants. Additionally, VFS recorded a charge of $1.7 million to
account for the forgiveness of debt obligations from the company’s CEO to VFS. Excluding this
charge, general and administrative expenses increased $0.8 million, or 16.9%, to $5.8 million for
the six months ended June 30, 2008 from $4.9 million for the six months ended June 30, 2007. The
increase was due primarily to increased Regional Leader trainee staffing and training department
upgrades. This investment was initiated in order to improve employee retention and address ongoing
staffing needs in store operations.
Depreciation expense increased approximately $126,000, or 14.8%, to $973,000 for the six
months ended June 30, 2008 from $847,000 in the six months ended June 30 31, 2007. The increase
was primarily the result of increased capital spending on store remodels, computer hardware and
store security systems. Other expense consisted of losses on asset disposals of approximately
$10,000 for the six months ended June 30, 2008, which represented replacement upgrades to store
surveillance systems.
Interest expense. Interest expense, as a percentage of revenue, increased
approximately $568,000, or 131.7%, to $1.0 million for the six months ended June 30, 2008 from $0.4
million in the corresponding period in 2007. The increase was due to higher borrowing levels.
Average outstanding debt increased $15.4 million, or 129.0%, to $27.4 million for the six months
ended June 30, 2008 from $12.0 million for the six months ended June 30, 2007. The increase in debt
was due to additional financing that was incurred to pay $21.4 million in cumulative unpaid
dividends to holders of VFS Series A-2 participating stock in June 2007. Total debt outstanding at
June 30, 2008 decreased $7.6 million, or 20.5%, to $29.7 million from $37.3 million at June 30,2007.
Income taxes. VFS recorded income tax expense at an effective rate of 38.8% for the
first six months of 2008, the same as that recorded in the first six months of 2007. VFS does not
expect any changes in income tax rates for the next reporting period. As of June 30, 2008, VFS
holds a deferred tax asset of $6.6 million and, as a result, is able to minimize its cash payment
obligations. During the six months ended June 30, 2008, VFS made cash tax payments of
approximately $125,000. VFS expects to be able to continue to reduce its cash payments with its
deferred tax asset through the majority of 2009.
Net income. For the foregoing reasons, net income increased $5.8 million, or 235.6%,
to $3.3 million, or 5.7% of total revenues, for the six months ended June 30, 2008 from $(2.5)
million, or (5.1)% of total revenues, for the six months ended June 30, 2007.
Revenues. Total revenues increased $18.7 million, or 21.2%, to $106.5 million for the
year ended December 31, 2007 from $87.8 million for the year ended December 31, 2006. Same store
revenues, excluding the two stores opened in 2007, grew $18.6 million, or 21.2%, to $106.4
Merchandise Sales. The following table summarizes merchandise sales and the related
profit for the year ended December 31, 2007 compared to the year ended December 31, 2006 ($ in
thousands):
Merchandise sales revenues, representing 71.9% of total revenues, increased $14.2 million, or
22.7%, to $76.5 million in 2007 from $62.3 million in 2006. Retail merchandise sales, excluding
gold scrapping activity, increased $4.4 million, or 9.5%, to $51.4 million in 2007 from $46.9
million in 2006. The gains were due to improvements in its team member metrics, including
turnover, continuity and productivity, combined with an 11.0% increase in customer transactions.
Lower turnover and increased team member continuity led to more experienced sales associates in the
store operations. The increase in customer transactions was due, in part, to a gain of over
300,000 new customers in 2007, representing an increase of 6.0% over new customer additions
achieved in 2006.
Sales of gold scrap increased $9.7 million, or 63.0%, to $25.1 million in 2007 from $15.4
million in 2006. Spot gold market pricing increased 17.3% in 2007 compared to 2006. In response
to this favorable market pricing, VFS increased its gold scrapping volume during 2007 by 39.8% over
its volume in 2006.
Pawn service charges. Revenues from pawn service charges increased $4.3 million, or
17.9%, to $28.4 million in 2007 from $24.1 million in 2006. The annualized loan yield decreased to
177.6% in 2007 from 180.0% in 2006, due to a slightly lower redemption rate in 2007 compared to
2006. Pawn loans outstanding increased $2.2 million, or 15.4%, to $16.8 million in 2007 from $14.5
million in 2006. Same store pawn loan balances at December 31, 2007 were approximately $270,000
per store, or 15.0% higher than at December 31, 2006. This increase was due to the combined impact
of both a 15.9% incremental volume gain in new loan activity and an increase in the average new
loan amount to $128 in 2007 from $120 in 2006.
Cost of Merchandise Sales. Cost of merchandise sales increased $8.5 million, or
21.6%, to $47.8 million in 2007 from $39.3 million in 2006. The increase was due to a 22.7%
increase in merchandise sales in 2007. Overall profit margins of 37.5% in 2007 represented an
increase over the 36.9% overall profit margins achieved in 2006. Retail merchandise sales profit
margins grew in 2007 to 37.1% from 36.9% in 2006 due to improvements in the human resource metrics
of team member turnover and continuity. These improvements resulted in more experienced team
members and store teams and led to better decision-making and less discounting. Profit margins on
gold scrap sales improved to 38.3% in 2007 from 36.8% in 2006 due to favorable spot gold market
pricing.
Net Revenue. Net revenue increased $10.1 million, or 20.8%, to $58.6 million in 2007
from $48.5 million in 2006. On a same store basis, excluding the two stores opened in 2007, net
revenue increased $10.1 million, or 20.8%, to $58.6 million from $48.5 million in 2006. The net
revenue margin of 55.1% reflected a decrease from the 55.2% margin in 2006. This was primarily due
to an increase in merchandise sales as a percentage of in total revenues, to 71.9% in 2007 from
71.0% in 2006. Because merchandise sales have a lower profit margin than pawn service charge
revenues due to their associated cost component, the shift toward merchandise sales revenues
resulted in a reduction in overall net revenue margin. The annualized inventory turnover rate of
3.5 times in 2007 was an increase over the 3.3 rate achieved in 2006.
The table below summarizes the value of merchandise inventory based on age before the
valuation allowances of $333,000 at December 31, 2007 and $283,000 at December 31, 2006 ($ in
thousands):
Store operating expenses. Store operating expenses increased $5.5 million, or 18.1%,
to $35.9 million in 2007, from $30.4 million in 2006. Store operating expenses, as a percentage of
revenues, declined to 33.7% in 2007 from 34.6% in 2006 due to a combination of labor efficiencies
that resulted from increases in team member productivity and the fixed-cost nature of some of its
operating expenses, such as rent and facility expenses. The absolute spending increase was due to
increased staffing levels at the store level, increased management trainee hires and the addition
of two new stores in 2007. The management trainees were hired to provide management depth in
anticipation of new store expansion and natural attrition. The trainees are hired two years in
advance in order to prepare them with adequate training and experience before promoting them to a
store management role. This advanced hiring minimizes the transition period that normally occurs
subsequent to management changes and accelerates the path to profitability for new stores.
As a multi-unit operator in the pawn industry, its store operations expenses are predominately
comprised of personnel and occupancy expenses. Personnel expenses include base salary and wages,
performance incentives and benefits. Occupancy expenses include rent, property taxes, insurance,
utilities and maintenance. The combination of personnel and occupancy expenses represents 86.9% of
total store operating expenses in 2007 and 85.3% in 2006. The remainder of the store operating
expenses include supplies, advertising, bank service charges, credit card fees and miscellaneous
services.
General and administrative expenses. General and administrative expenses increased
$13.3 million, or 170.5%, to $21.1 million in 2007 from $7.8 million in 2006. The increase was
primarily due to the inclusion of charges totaling $11.0 million that were recorded during 2007.
These charges reflected the compensation expenses associated with stock grants, loan forgiveness to
the VFS CEO, accrual of director and officer fees and expenses related to the company’s suspended
initial public offering. The stock grants accounted for $6.5 million of compensation expense
associated with the grant of 685,723 shares of Series A-1 participating stock and the reimbursement
of personal tax liabilities resulting from the grants. Additionally, VFS recorded a charge of $1.7
million to account for the forgiveness of debt obligations from the company’s CEO to VFS. Accrued
directors and officers fees and IPO and other related expenses totaled $2.8 million. Excluding
these charges, general and administrative expenses increased $2.3 million, or 29.5%, to $10.1
million for 2007 from $7.8 million for 2006. Adjusted general and administrative expenses, as a
percentage of revenues, increased to 9.5% in 2007 from 8.9% in 2006. These expenses increased in
2007 due primarily to an initiative aimed at developing the company’s human resource infrastructure
in order to improve its recruiting and retention effectiveness.
Depreciation expense increased approximately $31,000, or 17.9%, to approximately $204,000 in
2007 from approximately $173,000 in 2006. The increase was due to accelerated capital investment
activity in 2007, including computer hardware replacements, store security and surveillance system
upgrades and two store openings.
Other expenses totaled approximately $355,000 in 2007, compared to approximately $108,000 in
2006. This expense included approximately $248,000 in write-offs of equipment that was replaced in
the store operations, such as computer hardware and surveillance equipment. Additionally, start-up
expenses for the company’s planned store openings in Mexico totaled approximately $107,000.
Interest expense. Interest expense increased by $1.4 million, or 127.3%, to $2.5
million in 2007 from $1.1 million in 2006. Interest expense, as a percentage of revenue, increased
to 2.4% in 2007 from 1.3% in 2006. The increase was due to higher borrowing levels in 2007. Average
outstanding debt increased $8.0 million, or 51.6%, to $23.4 million during 2007 from $15.4 during
2006. Total debt at December 31, 2007 of $31.2 million was $19.5 million, or 166.6%, higher than
the total debt balance of $11.7 million at December 31, 2006. The increase in debt was due to
additional financing that was incurred to pay $21.4 million in cumulative unpaid dividends to
holders of VFS Series A-2 participating stock in June 2007.
Income taxes. VFS recorded an income tax benefit of approximately $486,000 in 2007 due
to a net loss for the year of $1.5 million. In 2006, VFS recorded $3.4 million of income taxes at
an effective rate of 38.8%. VFS held a deferred tax asset of $8.7 million and, as a result, is
able to minimize its cash payment obligations VFS made cash tax payments of approximately $164,000
in 2006.
Net income. For the foregoing reasons, VFS recorded a net loss of approximately
$981,000 in 2007. This represented a decline compared to 2006 of $6.4 million, or 118.1%.
Revenues. Total revenues increased $18.6 million, or 26.8%, to $87.8 million for the
year ended December 31, 2006 from $69.2 million for the year ended December 31, 2005. Same-store
revenues, excluding the two stores opened in 2006, grew $17.5 million, or 25.3%, to $86.8 million
for the year ended December 31, 2006 from $69.2 million in the year ended December 31, 2005.
Merchandise sales. The following table summarizes merchandise sales and the related
profit for the year ended December 31, 2006 compared to the year ended December 31, 2005 (dollars
in thousands):
Merchandise sales revenues increased $15.0 million, or 31.6%, to $62.3 million, or 71.0% of
total revenues, in 2006 from $47.4 million, or 68.4% of total revenues, in 2005. Retail merchandise
sales, excluding gold scrapping activity, increased $7.1 million, or 17.9%, to $46.9 million in
2006 from $39.8 million in 2005. The gains were due to improvements in team member turnover,
continuity and productivity, combined with a 10.2% increase in customer transactions. Lower
turnover and increased team member continuity led to more experienced sales associates in the store
operations. The increase in customer transactions was due, in part, to a gain of nearly 200,000 new
customers in 2006, representing an increase of 7.9% over new customer additions achieved in 2005.
Sales of gold scrap increased $7.8 million, or 103.6%, to $15.4 million in 2006 from $7.6
million in 2005. Spot gold market pricing increased 39.3% in 2006 compared to 2005. In response to
this favorable market pricing, we increased our gold scrapping volume during 2006 by 52.6% over our
volume in 2005.
Pawn service charges. Revenues from pawn service charges increased $3.3 million, or
15.9%, to $24.1 million, or 27.4% of total revenues, in 2006 from $20.8 million, or 30.0% of total
revenues, in 2005. The annualized loan yield decreased to 180.0% in 2006 from 184.8% in 2005 due to
a slightly lower redemption rate in 2006 compared to 2005. Pawn loans outstanding increased $2.9
million, or 25.3%, to $14.5 million at December 31, 2006 from $11.6 million at December 31, 2005.
Same-store pawn loan balances at December 31, 2006 were approximately $238,000 per store, or 23.1%
higher than at December 31, 2005. This increase was due to the combined impact of both a 7.2%
incremental volume gain in new loan activity and an increase in the average new loan amount to $120
in 2006 from $106 in 2005.
Cost of merchandise sales. Cost of merchandise sales increased $10.1 million, or
34.3%, to $39.3 million in 2006 from $29.3 million in 2005. The increase was primarily due to a
31.6% increase in merchandise sales in 2006. Overall profit margins on merchandise sales of 36.9%
in
2006 represented a reduction from the 38.2% profit margins achieved in 2005. Retail
merchandise sales profit margins declined in 2006 to 36.9% from 39.2% in 2005 due primarily to
increased promotional activity and related discounting in 2006. Profit margins on gold scrap sales
improved to 36.8% in 2006 from 33.0% in 2005 due to favorable spot gold market pricing.
Net revenues. Net revenues increased $8.5 million, or 21.3%, to $48.5 million in 2006
from $40.0 million in 2005. On a same-store basis, excluding the two stores opened in 2006, net
revenues increased $8.1 million, or 20.2%, to $48.0 million from $40.0 million in 2005. The net
revenue margin of 55.2% in 2006 reflected a decrease from the 57.7% margin in 2005. This was
primarily due to an increase in merchandise sales as a percentage of in total revenues, to 71.0% in
2006 from 68.4% in 2005. Because merchandise sales have a lower profit margin than pawn service
charge revenues due to their associated cost component, the shift toward merchandise sales revenues
resulted in a reduction in overall net revenue margin. Additionally, the gross profit margin on
merchandise sales of 36.9% in 2006 reflected a decrease from the 38.2% gross profit margin in 2005.
The gross profit margin on retail sales, excluding gold scrap sales, was 36.9% in 2006, compared to
39.2% in 2005. The annualized inventory turnover rate of 3.3 times in 2006 was an increase over the
turnover rate of 3.2 times achieved in 2005.
The table below summarizes the value of merchandise inventory based on age before the
valuation allowance of $283,000 at December 31, 2006 and December 31, 2005 (dollars in thousands):
Store operating expenses. Store operating expenses increased $5.3 million, or 21.0%,
to $30.4 million in 2006 from $25.1 million in 2005. On a same-store basis, store operating
expenses increased $4.4 million, or 18.6%, to $28.3 million in 2006 from $23.8 million in 2005.
Store operating expenses, as a percentage of total revenues, declined to 34.6% in 2006 from 36.2%
in 2005 due to a combination of labor efficiencies that resulted from increases in team member
productivity and the fixed-cost nature of some of our operating expenses, such as rent and facility
expenses. The absolute spending increase was due to increased staffing levels at the store level,
increased management trainee hires and the addition of two new stores in 2006. The management
trainees were hired to provide management depth in anticipation of new store expansion and natural
attrition. The trainees are hired two years in advance in order to prepare them with adequate
training and experience before promoting them to a store management role.
This advanced hiring minimizes the transition period that normally occurs subsequent to
management changes and accelerates the path to profitability for new stores.
As a multi-unit operator in the pawn industry, our store operations expenses are predominately
related to personnel and occupancy expenses. Personnel expenses include base salary and wages,
performance incentives and benefits. Occupancy expenses include rent, property taxes, insurance,
utilities and maintenance. The combination of personnel and occupancy expenses represents 90.6% of
total store operating expenses in 2006 and 92.4% in 2005. The remainder of the store operating
expenses include supplies, advertising, bank service charges, credit card fees, depreciation and
miscellaneous services.
General and administrative expenses. General and administrative expenses increased
$1.4 million, or 20.4%, to $8.1 million in 2006 from $6.7 million in 2005. General and
administrative expenses, as a percentage of total revenues, declined to 9.2% in 2006 from 9.7% in
2005. Administration expenses, as a percentage of total revenue, were 8.9% in 2006 compared to 9.4%
in 2005. These expenses increased $1.3 million, or 20.3%, in 2006 compared to 2005 due primarily to
an increase in our recruiting efforts aimed at building the management trainee population. Other
expense totaled approximately $108,000 in 2006, compared to approximately $60,000 in 2005. This
expense represented write-offs of equipment that was replaced in the store operations, such as
computer hardware and surveillance equipment.
Interest expense. Interest expense decreased approximately $162,000, or 12.5%, to
$1.1 million, in 2006 from $1.3 million in 2005. Interest expense, as a percentage of total
revenues, decreased to 1.3% in 2006 from 1.9% in 2005. The reduction was due to lower borrowing
levels in 2006, the savings from which were somewhat offset by higher borrowing costs. Total debt
at December 31, 2006 of $11.7 million decreased $5.8 million, or 33.1%, compared to total debt at
December 31, 2005 of $17.5 million.
Income taxes. We recorded income tax expense at an effective rate of 38.8% in 2006,
compared to an effective tax rate of 37.9% in 2005. We held a deferred tax asset of $8.2 million at
December 31, 2006 and, as a result, were able to minimize our cash payment obligations to
approximately $164,000 in 2006. By comparison, we made cash tax payments of approximately $64,000
in 2005.
Net income. For the foregoing reasons, net income increased $1.2 million, or 27.7%,
to $5.4 million, or 6.2% of total revenues for the year ended December 31, 2006, from $4.3 million,
or 6.1% of total revenues, for the year ended December 31, 2005.
The principal sources of cash for VFS are cash from operations and borrowings under its credit
facility. Its primary uses of cash have been to fund pawn loans, acquire merchandise, meet debt
service requirements, finance capital expenditures and finance the expansion of its operations.
The following table summarizes cash flows from operating and investing activities during the
periods presented:
Net cash provided by (used in) financing activities
282
(5,808
)
(3,161
)
3,217
(1,488
)
Net cash provided by operating activities for the six months ended June 30, 2008 was $4.1
million compared to cash provided of $3.2 million for the six months ended June 30, 2007. The
increase in net cash provided was due to an improvement in operating results. Net cash provided by
operating activities was $9.6 million in 2007, $10.3 million in 2006 and $5.8 million in 2005. The
decrease in net cash provided by operating activities in 2007 from 2006 was primarily the result of
charges taken in 2007 for costs associated with the company’s suspended IPO. The improvement in net
cash provided by operating activities in 2006 from 2005 was due to an improvement in operating
results.
Net cash used in investing activities was $2.6 million for the six months ended June 30, 2008
compared to $(4.1) million for the six months ended June 30, 2007. Net cash used in investing
activities was $(6.4) million in 2007, $5.4 million in 2006 and $(5.2) million in 2005. The
investing activities of VFS primarily relate to its pawn loan activities, purchases of property and
equipment for its stores and investments in technology. Property and equipment includes new store
openings, store expansions, additional jewelry cases and shelving and facility upgrades. In 2007,
VFS opened two new stores.
For the six months ended June 30, 2008, capital expenditures were $1.5 million compared to
$1.0 million during the six months ended June 30, 2007. Capital expenditures were $3.0 million in
2007, $1.3 million in 2006 and $1.2 million in 2005. The increased capital spending in 2007 and
2006 was primarily due to facility upgrades and new store openings. In 2007, capital spending
increased due to investments in technology in the store locations to upgrade computer equipment,
surveillance and security systems. VFS opened two stores in both 2007 and 2006 and expects to open
five in 2008. The capital cost of opening a new store is approximately $250,000. The capital cost
includes leasehold improvements, signage, display cases and shelving, computer equipment and
security systems. In addition, the typical store requires working capital of approximately $150,000
to fund operations and investments in pawn loans and inventory.
Net cash provided by (used in) financing activities was $(1.5) million for the six months
ending June 30, 2008 compared to $3.2 million in the six months ended June 30, 2007. The change
was largely due to additional financing that was secured in June 2007. Net cash provided by (used
in) financing activities was $(3.2) million in 2007, $(5.8) million in 2006 and $0.3
million in 2005. The usage in 2007 and 2006 represents debt repayment while borrowing
increased in 2005 in support of the expansion of the company’s earning assets, pawn loans
receivable and merchandise available for sale.
Senior Credit Facility. In June 2007, VFS entered into a $37.0 million senior credit
facility with a national bank that is comprised of a $17.0 million working capital revolver and a
$20.0 million term loan. The working capital revolver matures in June 2009 and the term loan
matures in June 2012. VFS makes equal monthly payments of principal and interest on the term loan.
The interest rates on both loans are 30-day LIBOR-based plus a margin determined on the basis of
the company’s quarterly funded debt to EBITDA ratio. As of June 30, 2008, the applicable margins
were 1.8% and 1.95% and the applicable interest rates were 4.41% and 4.56% for the working capital
revolver and term loan, respectively. The rate on the term loan is hedged at a fixed 30-day LIBOR
rate of 5.73% plus the applicable margin for 75.0% of the outstanding balance. As a result, the
blended interest rate on the term loan at June 30, 2008 was 6.9%. At June 30, 2008, VFS had
approximately $13.4 million in outstanding advances against the working capital revolver and total
debt of $29.7 million. There are no prepayment penalties, although it is possible that some cash
payment will be due to the bank to fulfill the company’s obligations under the interest rate
hedging agreement. The extent of any payment will be determined by the applicable LIBOR rate at the
time the loan is repaid. At June 30, 2008, this potential liability was estimated to be $535,000.
The $20 million term loan was utilized as the primary financing source for the payment of
$21.4 million of accrued dividends to holders of the company’s series A-2 participating stock.
These dividends had been accruing continuously since the purchases of the securities by the holders
in 2001. In April 2007, the VFS board of directors authorized payment of the dividends. In
addition, in June 2007 VFS repaid the principal amount of $3.9 million to holders of its 1999
series convertible subordinated debentures. These debentures matured on June 30, 2007. This
repayment was funded through advances against the working capital revolver.
Convertible subordinated debentures. As of June 30, 2008, VFS owed $0.4 million on a
1998 offering of convertible subordinated debentures. These debentures matured at June 30, 2003
and are being repaid to the holders over ten years in 40 equal installment payments of principal
and interest. The interest rate is 6.5%. The option to convert to common stock at $20 per share
expired at maturity. VFS has the option to repay the outstanding principal ahead of schedule.
Operating leases. Operating leases are scheduled payments on existing store and other
administrative leases. These leases typically have initial terms of five years and may contain
provisions for renewal options and payment of real estate taxes and property insurance.
VFS believes that, based on current levels of operations and anticipated improvements in
operating results, cash flows from operations and borrowings available under its credit facility
will allow it to fund its liquidity and capital expenditure requirements for the foreseeable
future, including payment of interest and principal on its indebtedness. This belief is based upon
its historical growth rate and the anticipated benefits VFS expect from operating efficiencies.
VFS expects additional revenue growth to be generated by increased merchandise sales, pawn service
charge revenues, the maturity of recently opened new stores and the continued development of new
stores. VFS also expects operating expenses to increase, although the rate of increase is
expected to be less than the rate of revenue growth. Furthermore, VFS does not believe that
acquisitions or expansion are necessary to cover its fixed expenses, including debt service.
VFS entered into the commitments described above and other contractual obligations in the
normal course of business as a source of funds for asset growth and asset liability management and
to meet required capital needs. The following table summarizes its principal future obligations
and commitments as of June 30, 2008, excluding periodic interest payments:
Payments Due by Period
(in thousands)
Less Than
1 - 3
3 - 5
More than
Contractual Obligations
Total
1 Year
Years
5 years
5 Years
Working Capital Revolver
$
13,377
$
13,377
$
—
$
—
$
—
Term Loan
15,952
4,000
11,952
—
—
1998 Series Debentures
370
69
152
149
—
Estimated Interest Payments
3,167
1,012
2,083
72
—
Operating Leases
22,365
4,491
10,576
6,345
953
Total
$
55,231
$
22,949
$
24,763
$
6,566
$
953
Off-Balance Sheet Arrangements
VFS does not have any off-balance sheet arrangements.
Impact of Inflation
VFS does not believe that inflation has a material impact on its earnings from operations.
Seasonality
VFS’ business does have a seasonal aspect. The retail merchandise sales contribution to its
results is heavily weighted toward the second and fourth quarters of each year. If there is a
significant erosion of customer demand in either of these quarters there could be a material
negative impact on its operating results. With respect to its pawn lending operations, the first
three months of the calendar year typically represent an active period for redemption activity as
many customers use income tax “rapid refunds” to redeem their pawn loans. An increase in income
tax rates and a corresponding reduction in income tax refunds to its customers could lead to a
negative material impact on its business.
Quantitative and Qualitative Disclosures About Market Risk
In the operations of its business and the reporting of its consolidated financial results, VFS
is affected by changes in interest rates and gold prices. The principal risks of loss arising from
adverse changes in market rates and prices to which VFS are exposed relate to:
•
interest rates on debt; and
•
spot gold market pricing.
VFS has no market risk sensitive instruments entered into for trading purposes, as defined by
GAAP. Information contained in this section relates only to instruments entered into for purposes
other than trading.
Interest rates. Its outstanding indebtedness, and related interest rate risk, is
managed centrally by its finance department by implementing the financing strategies approved by
its board of directors. Its debt consists of fixed-rate subordinated notes and its senior credit
facility. Its senior credit facility carries variable rates of interest, however, at June 30,2008, $12 million of outstanding borrowings are rate protected through a floating-to-fixed hedging
contract. A change in interest rates is not expected to have a significant impact on its
consolidated financial position, results of operations or cash flows.
Gold pricing. VFS liquidates (scraps) a certain amount of its gold jewelry by selling
to a gold smelter based on the spot gold market price. This activity represented net revenues of
$2.5 million in 2005, $5.7 million in 2006 and $9.6 million in 2007. As a percentage of overall
net revenue, gold scrap represented 6.3%, 11.7% and 16.4%, in 2005, 2006 and 2007, respectively.
For the six months ended June 30, 2008, net revenues derived from gold scrap activities were $7.6
million, or 23.1% of overall net revenues. For the six months ended June 30, 2007, gold scrap
activities represented net revenue of $3.2 million, or 11.7% of overall net revenues.
A significant and sustained decline in the price of gold would negatively impact the value of
jewelry inventories held by VFS and the value of jewelry pledged as collateral by pawn customers.
As a result, the profit margins achieved by VFS on existing jewelry inventories would be negatively
impacted, as would be the potential profit margins on jewelry currently pledged as collateral by
pawn customers in the event it is forfeited by the pawn customer. In addition, a decline in gold
prices could result in a lower balance of pawn loans outstanding for VFS, as customers would
receive lower loan amounts for individual pieces of jewelry. VFS believes with its historic
redemption rates that many customers would be willing to add additional items of value to their
pledge in order to obtain the desired loan amount as well as redeeming items pawned, thus
mitigating a portion of this risk.
Security Ownership of Certain VFS Beneficial Owners and Management
The following table contains information regarding the ownership of VFS’s participating
stock as converted to common stock as of June 30, 2008, by:
i)
each person who is known by VFS to own beneficially more than 5% of the
outstanding shares of each class of equity securities;
ii)
each director and officer of VFS, and
iii)
all directors and officers of VFS as a group. To the knowledge of VFS, except
pursuant to applicable community property laws and except as otherwise indicated, each
shareholder identified in the table possesses sole voting and investment power with
respect to its or his shares.
All directors and
officers as a group (7 persons) (6)
2,143,426
57.06
126,010
8.3
257,952
41.9
2,925,075
44.01
Other Shareholders
James Lackie (7)
22,500
*
188,649
12.4
15,000
2.4
320,474
4.82
William Haslam (8)
22,500
*
142,792
9.4
—
—
236,688
3.56
James Haslam (9)
22,500
*
142,570
9.4
—
—
236,355
3.56
Joe Nicosia (10)
57,500
*
202,205
13.3
10,400
1.7
371,208
5.59
Phillco Partnership (11)
159,500
4.2
—
—
12,500
2.0
172,000
2.59
Rick Olswanger
48,529
1.3
101,010
6.7
10,238
1.7
159,777
2.40
F. William Hackmeyer
119,385
3.2
—
—
30,950
5.0
150,335
2.26
Everett Hailey
71,419
1.9
—
—
42,891
7.0
114,310
1.72
Gordon Brothers (12)
—
—
202,020
13.3
—
—
202,020
3.04
Louis Baioni
15,000
*
101,010
6.7
—
—
116,010
1.75
Ray Cahnman
—
—
101,010
6.7
—
—
101,010
1.52
Berten LLC (13)
—
—
91,083
6.0
—
—
91,083
1.37
*
Denotes less than 1.0%.
(1)
Number of shares on an as-converted to common stock
basis includes 137,614 shares issuable upon the
exercise of options that are immediately
exercisable.
(2)
Number of shares on an as-converted to common stock
basis includes 46,750 shares issuable upon the
exercise of options that are immediately
exercisable.
(3)
Number of shares on an as-converted to common stock
basis includes 46,750 shares issuable upon the
exercise of options that are immediately
exercisable.
(4)
Number of shares on an as-converted to common stock
basis includes 154,073 shares issuable upon the
exercise of options that are immediately
exercisable.
(5)
Number of shares on an as-converted to common stock
basis includes 12,500 shares issuable upon the
exercise of options that are immediately
exercisable.
(6)
See footnotes (1) through (5) above.
(7)
Number of shares on an as-converted to common stock
basis includes 94,325 shares issuable upon the
exercise of options that are immediately
exercisable.
(8)
Number of shares on an as-converted to common stock
basis includes 71,396 shares issuable upon the
exercise of options that are immediately
exercisable.
(9)
Number of shares on an as-converted to common stock
basis includes 71,285 shares issuable upon the
exercise of options that are immediately
exercisable.
Number of shares on an as-converted to common stock basis includes
101,103 shares issuable upon the exercise of options that are
immediately exercisable.
(11)
Phillco Partnership is controlled by Parker Phillips.
(12)
Gordon Brothers is controlled by Wendy Landon, as managing director
of GB Merchant Partners, LLC, the investment manager for both 1903
Onshore Funding, LLC, which holds 102,950 Series A-2 shares, and 1903
Offshore Loans SPV Limited, which holds 99,070 Series A-2 shares.
(13)
Berten LLC is controlled by Steve Tendrich.
THE SPECIAL MEETING OF VFS SHAREHOLDERS
General
VFS is furnishing this proxy statement/prospectus to VFS shareholders in connection with the
solicitation of proxies by the VFS board of directors for use at the special meeting of VFS
shareholders.
Date, Time and Place of the VFS Special Meeting
VFS will hold a special meeting of its shareholders on [ ] [ ], 2008, promptly at 5:00
p.m. local time at The Memphis Hilton, 939 Ridge Lake Boulevard, Memphis, TN38120.
Purpose of the VFS Special Meeting
At the VFS special meeting, including any adjournment or postponement thereof, VFS
shareholders will be asked to consider and vote upon and approve the following proposals:
1. The amendment to the VFS articles of incorporation and conversion of all series A-1
participating, series A-2 participating and series B participating stock into VFS common stock.
2. The adoption of the merger agreement dated as of September 16, 2008, among VFS, EZCORP and
Merger Sub.
3. The transaction of such other business as may properly come before the special meeting or
any adjournment or postponement thereof.
A copy of the merger agreement is attached to this proxy statement/prospectus as Exhibit A.
VFS shareholders are encouraged to read the merger agreement in its entirety.
THE MATTERS TO BE CONSIDERED AT THE VFS SPECIAL MEETING ARE OF GREAT IMPORTANCE TO VFS
SHAREHOLDERS. ACCORDINGLY, VFS SHAREHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE
INFORMATION PRESENTED IN THIS PROXY STATEMENT/PROSPECTUS AND THE OTHER INFORMATION INCORPORATED BY
REFERENCE HEREIN, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED PRE-ADDRESSED POSTAGE-PAID ENVELOPE.
Only VFS shareholders as of the close of business on September 16, 2008, and other persons
holding valid proxies for the special meeting are entitled to attend the VFS special meeting. VFS
shareholders and their proxies should be prepared to present valid government-issued photo
identification. Anyone who does not provide valid government-issued photo identification or comply
with the other procedures outlined above upon request may not be admitted to the special meeting.
Record Date and Shareholders Entitled to Vote
Record holders of VFS Common Stock at the close of business on September 16, 2008, the record
date, may vote at the special meeting. On September 16, 2008, VFS had 6,646,369 outstanding shares
of common stock on a fully diluted basis, which were held by 155 record holders, including 142
holders of series A-1 participating stock, 21 holders of series A-2 participating stock, and 67
holders of series B participating stock. On September 16, 2008, no shares of common stock of VFS
were outstanding.
A complete list of the shareholders entitled to vote at the special meeting will be available
for examination by any shareholder for any purpose germane to the special meeting, during ordinary
business hours for a period of at least two days prior to the special meeting, at the offices of
VFS at 1063 Maitland Commons Boulevard, Suite 200, Maitland, Florida32751. Such list will also be
available for examination at the special meeting.
How You Can Vote
You can vote your shares only if you are either represented by proxy or eligible to vote your
shares in person at the special meeting. You can submit your proxy by mail by completing and
returning the enclosed proxy card.
If you return a properly signed proxy card, we will vote your shares as you direct.
Required Vote, Quorum and Abstentions
In order to conduct business at the special meeting, a quorum of a majority of the total
number of votes entitled to be cast must be present in person or represented by proxy.
The affirmative vote of a majority of the shares of each class of VFS stock, voting separately
as a class, is required to approve the amendment and the conversion. The affirmative vote of a
majority of the shares of the series A-1 and B participating stock voting together as a class and
the series A-2 participating stock voting separately as a class is required to approve the merger
and merger agreement.
As of the record date for the VFS special meeting, VFS’s directors, executive officers and their
affiliates, as a group, beneficially owned and were entitled to vote an aggregate of approximately
57% of the outstanding series A-1 participating stock, 8% of the outstanding series A-2
participating stock and 42% of the outstanding series B participating stock. Additionally, these
persons, as a group, beneficially owned 2,925,075 shares of VFS Common Stock and were entitled to
vote an aggregate of approximately 28% of the VFS Common Stock.
Pursuant to a voting agreement entered into between EZCORP, Merger Sub and the three VFS directors
who own shares of VFS stock, John Thedford, Kevin Hyneman and Charles Slaterly, these directors
have agreed to vote their shares of VFS stock in favor of the amendment, the conversion and the
merger agreement. As of the record date for the VFS special meeting, these directors, as a group,
beneficially owned and were entitled to vote an aggregate of approximately 47% of the outstanding
series A-1 participating stock, 8% of the outstanding series A-2 participating stock and 37% of the
outstanding series B participating stock. Additionally, these directors, as a group, beneficially
owned 2,412,428 shares of VFS Common Stock and were entitled to vote an aggregate of approximately
24% of the VFS Common Stock.
Revoking Your Proxy
You can change your vote or revoke your proxy at any time before the final vote at the special
meeting. To do so, if you are the record holder, you may:
•
send a written, dated notice to the Secretary of VFS at VFS’s principal
executive offices stating that you would like to revoke your proxy;
•
complete, date and submit a new later-dated proxy card; or
•
vote in person at the special meeting. Your attendance alone will not revoke
your proxy.
Written notices of revocation should be addressed to Value Financial Services, Inc. Attn:
Corporate Secretary, 1063 Maitland Commons Boulevard, Suite 200, Maitland, Florida32751.
Any VFS shareholder who has a question about VFS or the adoption of the merger agreement, or
how to vote or revoke a proxy, or who wishes to obtain additional copies of this proxy
statement/prospectus should contact:
Value Financial Services, Inc.
1063 Maitland Commons Boulevard
Suite 200 Maitland, Florida32751
Attention: Corporate Secretary
(407) 339-0064
Other than the proposals described in this proxy statement/prospectus, the VFS board of
directors knows of no other matters to be acted upon at the special meeting. If any other matter
should be duly presented at the special meeting upon which a vote properly may be taken, shares
represented by all proxies received by VFS will be voted with respect thereto in accordance with
the judgment of the persons named as attorneys in the proxy.
Solicitation of Proxies and Expenses
VFS will be responsible for the expenses incurred in connection with the filing, printing and
mailing of this proxy statement/prospectus. VFS will be responsible for any fees incurred in
connection with the solicitation of proxies for the VFS special meeting. In addition to
solicitation by mail, the directors, officers, employees and agents of VFS may solicit proxies from
VFS shareholders by telephone, email, facsimile or in person. Some of these individuals may have
interests in the merger that are different from, or in addition to, the interests of VFS
shareholders generally. See Information About the Background and Terms of the Merger — Interests
of VFS’s Officers in the merger, page 86.
Shareholders Sharing an Address
VFS shareholders sharing an address with another shareholder may receive only one set of proxy
materials at that address unless they have provided contrary instructions. Any such shareholder
who wishes to receive a separate set of proxy materials now or in the future may write or call VFS
to request a separate copy of these materials as follows: Value Financial Services, Inc., 1063
Maitland Commons Boulevard, Suite 200, Maitland, Florida32751 or by sending an email to
pawlickil@vfservices.com, or calling VFS at (407) 339-0064.
Recommendation of the VFS Board of Directors
The VFS board of directors unanimously recommends that the VFS shareholders vote “FOR” the
amendment, “FOR” the conversion, and “FOR” the adoption of the merger agreement. If your submitted
proxy card does not specify how you want to vote your shares, your shares will be voted “FOR” the
amendment, “FOR” the conversion and “FOR” adoption of the merger agreement, in accordance with the
recommendation of the VFS board of directors.
PROPOSAL NO. 1 — CONVERSION OF ALL SERIES A-1 PARTICIPATING,
SERIES A-2 PARTICIPATING AND SERIES B PARTICIPATING STOCK
INTO COMMON STOCK OF VFS
VFS is asking each of you holding any of VFS’s series A-1 participating stock, series A-2
participating stock or series B participating stock to vote on a proposal to approve: (1) the
articles of amendment to the amended and restated articles of incorporation of VFS to amend the
effective time of a mandatory conversion of participating stock to occur upon approval of such
mandatory conversion with no requirement of prior written notice, the form of amendment is attached
hereto as Exhibit B for your review; and (2) the conversion of all shares of participating
stock into common stock immediately prior to consummation of the merger. The consummation of the
amendment and the conversion, however, shall be subject to and contingent upon the approval of the
merger agreement (defined below) and the consummation of the merger. Finally, upon consummation of
the merger, all accrued and unpaid dividends due to the holders of the series A-2 participating
stock will be paid in full. Each class of participating stock is entitled to vote on the amendment
and the conversion. Moreover, in order for the amendment to become effective and for the
conversion to be consummated, a majority of the shares of the holders of each class of
participating stock must approve the amendment and the conversion.
The VFS Board recommends that you vote “FOR” the amendment and the conversion.
PROPOSAL NO. 2 — THE MERGER
VFS also asks you to approve the merger agreement by and between VFS, EZCORP and Merger Sub
pursuant to which Merger Sub will merge with and into VFS. In the merger, VFS’s shareholders will
receive 0.75 shares of EZCORP’s Class A Non-voting Common Stock for each share of VFS’s common
stock. EZCORP will also pay a limited amount of additional consideration to VFS shareholders who
sell their EZCORP Shares in the open stock market within 125 days after closing of the merger at
prices either above or below $14.67 per share. Proposal No. 2 will be voted on by the holders of
VFS Common Stock after the conversion and will require the affirmative vote of a majority of the
shares of the outstanding VFS Common Stock.
The VFS Board recommends that you vote “FOR” the merger agreement and the merger
INFORMATION ABOUT THE BACKGROUND AND TERMS OF THE MERGER
Background
The following background discussion of the merger was provided by the VFS board and management
with regard to discussions with parties other than EZCORP.
The decision of the VFS board of directors to approve the merger and the merger agreement with
EZCORP and to recommend its adoption to the VFS shareholders stemmed from the board’s determination
that this alternative was in the best interests of the shareholders based on a series of events and
circumstances, which included the impact of current economic and industry conditions on its growth
prospects, and the risks that the foregoing placed on VFS’s ability to execute its growth strategy
and achieve its goals.
Over the past several years, VFS has from time to time engaged in discussions with various
private equity firms as well as strategic partners regarding potential investments in, or
acquisitions of, VFS. This included discussions with EZCORP. However, none of VFS’s discussions
led to a definitive agreement for a strategic business relationship or otherwise. VFS has also
looked at pursuing a leveraged buyout by management, as well as additional equity investment by
current VFS shareholders.
During this period, VFS financed its operations and growth through various credit facilities.
As the cost of debt increased, the VFS board determined that in order to continue to grow VFS’s
operations and earnings, VFS needed to undertake some form of equity financing. The VFS board also
wanted to provide shareholders with the opportunity for liquidity, if possible. Early last year,
the VFS board determined that the best opportunity to maximize value for, and provide liquidity to,
VFS shareholders was though an initial public offering of VFS shares.
During the summer of 2007, Sterling Brinkley, the Chairman of the Board of EZCORP, and John
Thedford, the president of VFS, kept in touch and occasionally discussed the possibility of some
investment or combination between the two companies. During the summer of 2007, members of the
board of VFS determined the best course of action was to pursue an IPO.
Throughout the IPO process, EZCORP remained interested in investing in VFS through a minority
transaction prior to the IPO to provide select Shareholders partial liquidity. On September 12,2007, Mr. Brinkley sent Mr. Thedford an email outlining terms and conditions regarding an EZCORP
minority investment in VFS. EZCORP offered to purchase up to 30% of VFS’s fully diluted shares
outstanding at $10.50 per share. Terms included the following: VFS would agree to not sell any
stock in the future at less than $10.50 per share, VFS would grant EZCORP the right to maintain a
fully-diluted ownership position of not less than 30% (terminating when IPO is completed), VFS
would grant EZCORP the right to appoint the Chairman of the Audit Committee, as well as two out of
six board members, and EZCORP’s ownership would be limited to 30%, regardless of shares owned.
On September 21, 2007, the board discussed the EZCORP proposal for a minority investment in
VFS. Charles Slatery noted that other large shareholders did not have the same rights as those
EZCORP was proposing. Mr. Slatery further stated that EZCORP should not have the right to select
the Chairman of the Audit Committee and two board members. Kevin Hyneman suggested, and the board
agreed, to approve the EZCORP email memo with three changes: EZCORP would not be granted the right
to select the Audit Committee Chairman, EZCORP would be granted the right to select one, not two,
VFS board members, and EZCORP would be limited to 30% ownership of VFS’s shares.
In a board meeting held on September 24, 2007, Mr. Thedford indicated to the board that EZCORP
would be willing to waive the term of its agreement requiring VFS not offer stock at a price less
than $10.50 per share. He also stated that he believed EZCORP would not require the right to elect
two board members as a requirement for the transaction. Mr. Thedford said he would obtain a formal
EZCORP proposal later in the week for the board to review.
During the next two months, conversations regarding a minority investment continued between
Mr. Thedford and EZCORP. However, given the prospect of an IPO, no formal agreement materialized.
By mid-November 2007, the dramatic changes in the public equity markets significantly impacted the
feasibility of an IPO. At that time, Mr. Thedford met with a potential strategic partner in the
same business as VFS (“Party A”), which expressed an interest in acquiring VFS. On
November 21, 2007 Party A submitted an unsolicited Letter of Intent to acquire VFS at a price of
$10.00 per share in cash. Then, on November 26, 2007, EZCORP submitted a non-binding proposal to
acquire at least 70% of VFS at $10.50 per share.
Due to interest received from potential buyers, on January 17, 2008, VFS engaged Stephens to
act as exclusive financial advisor and provide a fairness opinion on any potential transaction.
Stephens was instructed to assist VFS in identifying potential acquirers and conduct negotiations
in a potential transaction, should a transaction occur.
From the point when Stephens was engaged through March 14, 2008, Stephens approached seven
additional parties which had previously expressed interest in VFS (including private equity
investors referred to as Party B, Party C, Party D, and Party E, described below) and received, on
behalf of VFS, two additional offers from potential buyers. Also during this period, Party A
withdrew its offer, citing changes in market conditions.
On January 18, 2007, VFS received a Letter of Intent from a potential buyer (“Party
B”) to acquire VFS in a leveraged buyout transaction at $9.30 per share in which management
Shareholders would rollover 75% of their equity interest.
On January 29, after multiple conversations with Stephens regarding its interest in acquiring
VFS, another party (“Party C”) was provided with due diligence materials so that it could
move towards submission of a binding offer.
During January, one of the parties contacted (“Party D”) indicated that it was not
interested in a majority transaction due to size parameters. While it was open to examining a
minority recapitalization investment, Party D acknowledged an offer greater than $10.00 per share
would likely be a challenge.
During January, another party (“Party E”) indicated that it had some interest in
acquiring VFS, but was significantly behind in terms of the due diligence process. Additional
diligence information was sent to Party E, but Party E failed to respond to subsequent contact from
Stephens after the due diligence information was supplied.
On January 29, 2008, Stephens presented a process update to the VFS board of directors which
provided an overview of discussions with interested parties and the current status of each of the
parties. Stephens outlined the key due diligence items outstanding with each party, as well as its
view on each party’s willingness to increase its offer price.
On February 1, 2008, Party C submitted an offer to acquire VFS, offering an Enterprise
Valuation of $96.0 million, or approximately $9.87 per share based on VFS’s year end balance sheet.
Due to the nature of the offer, i.e. a specified enterprise value was submitted rather than a per
share valuation, Party C’s implied offer price per share fluctuated with VFS’s debt balance at any
given point in time. Based on March 31, 2008 projected net debt levels, the offer implied an offer
of approximately $10.55 per share. Party C also concurrently submitted a draft purchase agreement.
On February 11, 2008, Mr. Thedford, two members of the VFS board, Mr. Slatery and Mr. Hyneman,
and Stephens representatives met in New York with Mr. Phillip Cohen, financial adviser to EZCORP
who also controls all of EZCORP’s Class B Voting Common Stock, and Mr. Brinkley, the Chairman of
EZCORP. The purpose of the meeting was to discuss VFS’s business plan and forecasts, as well as
other aspects of VFS’s business. Discussion also centered on any integration between the two
companies if a transaction was to occur, as well as logistics behind any such transaction. During
the meetings, Mr. Brinkley discussed his desire to complete a transaction; however, he stated that
he would need, as proof of commitment, agreements signifying a vote in favor of the transaction
from a majority of each share class.
The EZCORP representatives conveyed to VFS a revised offer price of $11.00 per share.
EZCORP’s offer was contingent on the tender of a minimum of 70% of VFS’s outstanding shares, on an
as-converted basis. Along with its offer, EZCORP stated that it would immediately move to execute
a purchase agreement if it received voting agreements in which shareholders, representing a
majority of shares from each class of capital stock of VFS, agreed to vote in favor of the
transaction.
On March 14, 2008, EZCORP and VFS executed a purchase agreement (the “Purchase
Agreement”). On March 17, 2008, EZCORP issued a press release announcing the execution of the
Purchase Agreement. The Purchase Agreement, however, was terminable at any time by EZCORP.
On May 19, 2008, EZCORP brought to VFS’s attention certain liabilities, totaling $5.2 million,
that it felt should be paid by the selling shareholders through a reduction in the $11.00 per share
offer price. These liabilities included $3.2 million of items previously disclosed and/or accrued,
along with $2.0 million of new items not present in the financial information presented prior to
the signing of the Purchase Agreement.
On May 28, 2008, EZCORP agreed to acquire 100% of VFS’s outstanding capital stock for $11.00
per share (the “Offer Price”) and assume all outstanding liabilities. It was also agreed
that the transaction would be structured as a merger, and the Offer Price would be paid in the
form of cash and shares of EZCORP Class A Non-voting Common Stock.
During the week of May 30, 2008, EZCORP and VFS were advised by legal counsel that a pro rata
distribution of EZCORP Class A Non-voting Common Stock to all 155 shareholders would require a Form
S-4 filing, and a significant delay to the closing date. VFS agreed to restrict the distribution
of EZCORP Class A Non-voting Common Stock to up to 15 accredited shareholders in order to allow
EZCORP to file a Form S-3.
On June 4, 2008, VFS received written notice that EZCORP elected to terminate the Purchase
Agreement in order to move forward with a merger. On June 5, 2008, a merger agreement was executed
with EZCORP and the Merger Sub.
In connection with the new merger structure, VFS would be required to amend its articles of
incorporation and a majority of the holders of each class of VFS participating shares would be
required to vote in favor of converting such participating shares into VFS common shares.
On July 28, 2008, the VFS board met to discuss the amendment, the conversion, the merger and
the merger agreement. At the meeting, the VFS board discussed various market conditions beyond VFS’
control, primarily the actual, or perceived, decline in the United States economy, that had caused
the pawn industry to experience substantial growth in the first half of 2008. In particular, in
the three months following April 30, 2008, VFS had experienced higher than expected financial
performance. This growth and performance led to the following special circumstances which the VFS
board discussed at the meeting.
•
The merger consideration, as of December 31, 2007 represented; among other things: (1) a
fully diluted equity value of approximately $73 million; (2) an enterprise value of
approximately $104 million; and (3) a multiple of approximately 7.4 x the last twelve
months’ EBITDA of the Corporation (“LTM EBITDA”).
•
As of December 31, 2007, the LTM EBITDA was approximately $14.1 million; as of April 30,2008, the LTM EBITDA was approximately $15.2 million; and as of June 30, 2008, the LTM
EBITDA was approximately $16.1 million (the June 30, 2008 information is available for your
review in the financial statements attached hereto as Exhibit ).
The Merger Consideration, using the fully diluted equity value and enterprise value from
December 31, 2007, and the LTM EBITDA for June 30, 2008, represents a multiple of
approximately 6.6 instead of the approximately 7.4 used in December 31, 2007.
Based on the above special circumstances, the VFS board determined that the valuation analysis
utilized by Stephens and the VFS board in determining the fairness of the consideration
for the merger and the enterprise value of VFS, as well as the assumptions underlying the
Stephens Opinion, were no longer reliable to accurately evaluate the merger consideration. As a
result of this, the VFS board determined that it could not make a recommendation to the VFS
shareholders regarding whether to approve or not approve the amendment, the conversion, the merger
or the merger agreement.
VFS held a special meeting of its shareholders on August 8, 2008. At the special meeting a
majority of each class of VFS’s shareholders voted against the amendment, the conversion, the
merger and the merger agreement.
On August 9, 2008, the VFS board convened telephonically for a special board meeting. The
board agreed to terminate the merger agreement entered into with EZCORP on June 5, 2008, and
instructed its outside legal advisor, Greenberg Traurig, to send notice of VFS’s termination to
EZCORP that day, which Greenberg did.
On August 15, 2008, Mr. Cohen and Mr. Thedford had a telephone conversation in which a meeting
was proposed to be held in New York City with him and Mr. Brinkley, along with Mr. Hyneman and Mr.
Slatery, to determine the reason for the termination of the June 5, 2008 merger agreement and
explore whether there was any basis for another transaction. The meeting was held on August
19th and
attended by all five people. During the meeting, material differences
between the parties were identified in terms of price and
structure. It became clear to the parties that further negotiations
would not be productive, they determined that a transaction was not
possible, and terminated discussions.
On
August 23, 2008, Mr. Cohen initiated a telephone
conversation between himself, Mr. Thedford, Mr. Hyneman
and Mr. Slatery. During this conversation, Mr. Cohen presented a
possible structure to address the parties’ prior concerns and
impasse. He put forth the idea that EZCORP might acquire 100% of VFS shares pursuant to a merger transaction whereby each share of
VFS Common Stock would be converted into 0.75 shares of EZCORP Class A Non-voting Common Stock.
EZCORP, under this possible structure, would also provide VFS shareholders some price protections if they sell their EZCORP Shares
received in the merger within 125 days after the closing of the
merger. This possible structure would
require EZCORP to pay any VFS selling shareholder the difference between $14.67 per share and the
gross price per share the selling shareholder actually received, if less than $14.67 per share, up
to a maximum of $4.01 per share, and an aggregate of $20 million. (The total maximum amount payable
for the deficiency guaranty as it was finally negotiated is slightly less than $20 million.) In
addition to the deficiency guarantee payment, Mr. Cohen also
suggested that the parties consider having
EZCORP pay a premium to former VFS shareholders who sell their EZCORP Shares within 125 days after
the closing of the merger for more than $14.67 per share. The aggregate maximum for the premium
reserve would be $6,646,527. The amount the VFS shareholders would be paid depended on when they
sold their EZCORP Shares. If the VFS shareholders sold their EZCORP Shares within the first 30 day
period from the date of the closing of the merger, they would be paid $1.33 per share; during the
second 30 day period, $1.00 per share; during the third 30 day period, $.67 per share; and during
the fourth 30 day period from the date of the closing of the merger; $.33 per share.
After the
telephone call with VFS representatives, Mr. Cohen telephoned Mr. Brinkley, presented the idea for
the new structure and advised Mr. Brinkley that he had presented the
idea to VFS for their review.
Mr. Cohen and Mr. Brinkley discussed the various elements of the idea. Mr. Brinkley agreed to
contact VFS representatives directly in the next few days to discuss the proposal in greater
detail and determine whether VFS had interest in pursuing a new transaction based on the proposed
structure.
The
concerns considered by EZCORP in the new structure were:
• EZCORP preferred to issue its equity securities instead of paying cash because it
wanted to preserve its cash and minimize the use of its credit lines.
• The use of EZCORP
stock as merger consideration, in a general offering to VFS
shareholders, would delay the closing
while the securities were being registered. This delay would
introduce an element of uncertainty into the value of the merger
consideration. Mr. Cohen recommended addressing this uncertainty
by providing a price
protection, and so Mr. Cohen proposed for consideration the use
of the deficiency guaranty.
• EZCORP had
reason to believe that it was likely that VFS was in acquisition discussions with at least one
other party, possibly at a price greater than EZCORP’s valuation of $11.00 per share of VFS Common
Stock. To increase the attractiveness of the EZCORP stock as merger consideration and discourage
other potential bidders, Mr. Cohen put forth the idea of the premium reserve, which provided the
possibility of additional consideration based on the performance of EZCORP shares in the period
following the closing of the transaction.
The exchange ratio of 0.75 EZCORP Shares for each share of VFS Common Stock was offered by
EZCORP based on its cash offer of $11.00 per share of VFS Common Stock. EZCORP did not engage in a
detailed price analysis before settling on this ratio. EZCORP was aware that dividends
continued to accrue on the VFS Series A-2 Participating Stock and that VFS was
experiencing a profitable year, at least through the first six months of 2008, without engaging in
a more detailed price analysis in September 2008. The EZCORP stock price of $14.67 per share that
was used as the price on which the deficiency guaranty and the premium reserve were calculated was
the approximate trading price of EZCORP Class A Non-voting Common Stock on August 22, 2008, the
trading day immediately prior to the August 23 negotiation.
On August 25, 2008, VFS received a letter of intent from another private equity investor
(“Party F”) offering to purchase 100% of VFS’ outstanding shares for $11.50 per share, minus
certain expenses to be paid by VFS shareholders, which would have lowered the price paid per share
by approximately $0.18. The offer was available until August 31, 2008.
On August 28, 2008, the VFS board convened telephonically for a special board meeting.
Management updated the board on its analysis of the terms of the letter of intent provided by Party
F. One of the conditions to the offer was that management would be required to keep an equity
stake in the company equal to not less than 85% of its current equity interest. Management
informed the board that this provision was not acceptable to them. Furthermore, the offer was
subject to extensive due diligence and third-party debt financing. The board
instructed management to contact Party F and request that the deadline for a response be
extended until September 5, 2008 in order to give management and the board additional time to
review and discuss the proposal. The board also discussed the proposed new merger terms of EZCORP
and the board decided to request a written summary of the proposed merger terms from EZCORP.
Also
on August 28, 2008, EZCORP held an informational call with Mr. Cohen and a majority of the
EZCORP board members. Mr Brinkley updated the EZCORP board participants on the meeting with VFS
representatives on August 19, 2008, and Mr. Cohen’s subsequent idea on a possible structure. Mr. Brinkley
said that VFS had expressed interest in further exploring Mr. Cohen’s idea and had requested a written summary of the proposed terms. Mr. Brinkley, Mr. Cohen and the participating EZCORP board
members discussed the proposal and next steps in pursuing a possible new transaction with VFS.
On August 29, 2008, Mr. Brinkley, Mr. Thedford, Mr. Hyneman, Mr. Slatery, and representatives
from Greenberg and Strasburger & Price, outside legal advisor for EZCORP, convened telephonically
to discuss the written summary of proposed merger terms circulated by EZCORP the day before. The
parties agreed to meet the following Tuesday in Austin to pursue further discussions.
On September 2 and 3, 2008, Mr. Thedford and representatives from Greenberg and Strasburger
met in Austin to discuss the terms for a proposed new merger agreement. Mr. Brinkley and Mr.
Hyneman joined these discussions telephonically. During these discussions the parties agreed that
only the 18 largest VFS shareholders would receive EZCORP Shares, and the corresponding deficiency
guarantee and premium reserve, and all the other VFS shareholders would receive $11.00 cash for
each of their VFS shares. The parties felt that this structure would enable the transaction to be
closed rather quickly, as EZCORP would be able to use the simpler Form S-3 to register with the SEC
the EZCORP Shares to be issued in the merger. If all VFS shareholders were receiving EZCORP Shares
in exchange for their VFS shares, EZCORP would have to use a Form S-4 to register the EZCORP Shares
to be issued in the merger with the SEC, which would delay the closing of the merger for several
months and also require both parties to incur additional legal expenses.
From September 4 to September 10, 2008, Mr. Thedford and Mr. Brinkley continued their
discussions but no major changes in the terms of the proposed transaction were made. At the
instruction of Mr. Thedford and Mr. Brinkley the parties’ law firms, Greenberg and Strasburger,
drafted a revised merger agreement and a registration statement to the EZCORP Shares to be issued
to VFS shareholders in the proposed transaction.
On September 5, 2008, Party F terminated its offer and any further discussions regarding its
acquisition of VFS.
On September 10, 2008, Stephens rendered its written opinion to the VFS board that as of that
date, and based upon and subject to certain matters stated in that opinion, from a financial point
of view, the merger consideration to be offered by EZCORP to VFS shareholders in the merger was
fair to the VFS shareholders.
On September 11, 2008, the VFS board convened telephonically for a special board meeting to
receive a status update on the proposed merger with EZCORP and
discuss any open issues. After the VFS board meeting, the EZCORP
board convened a special meeting. Mr. Brinkley updated the EZCORP
board on the status of the VFS transaction and obtained approval of
the proposed new terms subject to completion of the revised agreement.
On September 12, 2008, the VFS board convened in the morning telephonically for a special
board meeting. A representative of Greenberg was also in attendance. Greenberg reviewed with the
board the remaining open issues with respect to the merger agreement, including issues regarding
having only the 18 largest VFS shareholders receive EZCORP Shares. The VFS board discussed
offering the ability to have any of the VFS shareholders acquire
EZCORP Shares. Or in the alternative, have the option to acquire either 0.75 EZCORP Shares or
$11.00 cash for each VFS share. The VFS board decided not to approve the merger under the current
terms, and instructed management to schedule a call with Mr. Brinkley for later in the day to
discuss changing the terms of the proposed merger to allow all VFS shareholders to elect to receive
either 0.75 EZCORP Shares, with the price protections, or $11.00 for each VFS share they own.
In the afternoon of September 12, 2008, certain VFS board members, Mr. Brinkley, along with
representatives of Greenberg and Strasburger, convened telephonically to discuss issues regarding
the fact that only the top 18 shareholders of VFS would receive EZCORP Shares in the transaction.
During this discussion, both parties agreed that the merger agreement would be revised to provide
all VFS shareholders with the option to elect to receive either 0.75 EZCORP Shares, with the price
protections, or $11.00 cash for each VFS share they own. Mr. Brinkley
then stipulated that any cash consideration would
be limited to 20% or less of the consideration to be paid for the VFS
common stock, and would be pro rata if more VFS shareholders
than the maximum elected to receive the cash consideration.
From September 13 to September 15, 2008, attorneys from Greenberg and Strasburger redrafted
the merger agreement to reflect the new terms of the merger involving the offer of either the
combination EZCORP Shares with price protections or $11.00 cash as merger consideration, under the
direction of Mr. Thedford and Mr. Brinkley.
On September 15, 2008, the VFS board convened telephonically for a special board meeting. At
this meeting, representatives of Greenberg and VFS’s management reviewed with the VFS board the
final changes to the merger agreement, which had been provided to the directors prior to the
meeting, and the voting agreement, and responded to questions from the directors regarding the
terms and conditions of the merger agreement. The final proposal submitted by EZCORP reflected a
purchase price of 0.75 shares of EZCORP Class A Non-voting Coming Stock or $11.00 cash for each VFS
share owned by such shareholder at the effective time of the merger. The cash consideration would
be limited to 20% or less of the consideration to be paid for the VFS common stock and would be pro rata if more VFS shareholders
than the maximum elected to receive the cash consideration.
Although the merger agreement was revised to provide each shareholder with the right to select
the category of merger consideration to be received (e.g., cash or stock), the VFS board did not
request Stephens to provide an updated fairness opinion because Stephens had only opined as to the
fairness, from a financial point of view, of the merger consideration of $11.00 per share and not
as to the category of consideration to be received. Accordingly, because the merger consideration
of $11.00 per share remained the same and Stephens had already opined as to its fairness, from a
financial point of view, the VFS board did not believe that an updated fairness opinion would have
provided it with any new or meaningful information.
At the conclusion of the September 15, 2008 meeting, the VFS board unanimously adopted
resolutions approving the merger agreement with EZCORP, the merger, the amendment, the conversion
and the other transactions contemplated by the merger agreement, declaring the merger advisable and
in the best interests of VFS shareholders, authorizing VFS to enter into the merger agreement and
recommending that VFS shareholders approve the merger agreement, the merger, the amendment and the
conversion.
The merger agreement was executed by VFS, EZCORP and Merger Sub on September 16, 2008, and the
voting agreement was executed by the three directors of VFS and EZCORP on
September 16, 2008. On September 17, 2008, after the close of trading on the NASDAQ Global
Market, EZCORP issued its press release announcing the signing of the merger agreement and the
voting agreement.
Recommendations of the EZCORP and VFS Boards of Directors
EZCORP. The merger was recommended by the board of directors of Merger Sub and approved by
EZCORP’s board of directors on behalf of EZCORP as the sole shareholder of Merger Sub on September16, 2008.
VFS. By unanimous vote, the VFS board of directors, at a meeting held on September 16, 2008,
determined that the merger agreement and the transactions contemplated by the merger agreement were
advisable for, fair to and in the best interests of VFS and its shareholders, and approved the
merger agreement, the merger, the amendment, the conversion and the other transactions contemplated
by the merger agreement. The VFS board of directors unanimously recommends that VFS shareholders
vote FOR the proposals to adopt the amendment, the conversion, the merger agreement and the merger.
Reasons for the Merger
The board of directors and management of VFS has provided the following description of their
reasoning in considering the transactions presented in this proxy statement/prospectus.
In reaching its decision to approve the amendment, the conversion, the merger agreement, the
merger and the other transactions contemplated by the merger agreement and to recommend that VFS
shareholders vote in favor of each of the foregoing, VFS’s board of directors consulted extensively
with VFS’s management and VFS’s financial and legal advisors. VFS’s board of directors considered a
number of potentially positive factors, including but not limited to the following material
factors:
•
an assessment of alternatives to the merger, including development
opportunities and other possible acquisition candidates, and the
determination that the merger with EZCORP presented a unique
opportunity to enhance and expand VFS’ operations;
•
the risks involved in VFS implementing its existing growth strategy
with respect to increasing market share outside of Florida would be
significantly reduced by merging with EZCORP, as the merger would
provide instant market share and positioning to VFS;
•
the competitive position of current and likely competitors in the
industry in which VFS competes, and current industry, economic, and
market conditions, each indicated that VFS would benefit as it would
be able to compete with larger pawn companies as they implement their
growth strategies in Florida and the Southeast in general;
•
Stephens’ oral and written opinion that, as of September 10, 2008, the
merger consideration to be received by the holders of the VFS shares
in the merger was fair, from a financial point of view, to such
shareholders;
•
the terms and conditions of the merger agreement permitted holders of
VFS shares to
participate in the deficiency guaranty and the premium
reserve, which provides holders of VFS shares the opportunity to
receive merger consideration in excess of what they would have
received under other prior offers in connection with transactions
similar to the merger;
•
in the prior merger agreement with EZCORP, the price of EZCORP Shares
VFS shareholders would receive was determined on the day of the
closing instead of a 30 day weighted average, and that since the
execution of the prior merger agreement, the EZCORP Shares had
increased in value substantially, and the merger agreement contains
the deficiency guaranty;
•
other offers received with respect to transactions similar to the
merger, including but not limited to, the fact that one such offer was
contingent on due diligence, third party financing and management
retaining 85% of their current equity position in VFS, and the
likelihood of the greatest liquidity position for the holders of VFS
shares in connection with the merger versus the other offers;
•
the price of gold was trending upward at the time of the execution of
the prior merger agreement but at the time of the execution of the
merger agreement, gold was trending downward indicated that trading
multiples in the industry could fall if the value of gold continued to
fall;
•
feedback from VFS shareholders indicated that they desired VFS to
execute an exit strategy;
•
the cash consideration to be received by VFS shareholders electing to
receive cash was not subject to any financing contingency and EZCORP
had shown adequate resources from which to fund such cash payment,
which provides certainty and immediate value to these VFS
shareholders;
•
the business, competitive position, strategy and prospects of EZCORP,
its success to date in integrating other acquired, although smaller,
businesses and the perceived value of EZCORP and VFS as a combined
business each indicated that VFS would achieve a greater opportunity
for growth in a shorter period of time than it would if it implemented
its existing growth strategy or merged with other potential pawn
companies;
•
the likelihood that the proposed merger would be completed, in light
of the financial capabilities of EZCORP as well as its reputation,
provided certainty with respect to the merger; and
•
the trends in the pawn industry, specifically the significant trend in
positive valuations and increased trading multiples in companies
similarly situated to VFS provided VFS shareholders the opportunity to
receive consideration greater than they would have under the prior
merger agreement.
The VFS board of directors also considered a variety of risks and other potentially negative
factors resulting from the merger, including but not limited to the following material factors:
VFS will no longer exist as an independent private company, therefore, its
shareholders will forgo any future increase in value that might result from possible
growth as a standalone company;
•
risks and contingencies related to the announcement and pendency of the merger that
may adversely affect VFS, including the unknown impacts of the merger on customers,
employees, suppliers, and relationships with other third parties, including the
potential negative reaction of these parties to the fact that VFS would be merging
with another party or acquired by EZCORP;
•
the conditions to EZCORP’s obligation to complete the merger and the right of EZCORP
to terminate the merger agreement in certain circumstances, including for breaches
by VFS of its representations, warranties, covenants and agreements in the merger
agreement, involve certain risks that the merger may not be consummated;
•
VFS and/or EZCORP might not receive necessary regulatory approvals and clearances to
complete the merger or that governmental authorities could attempt to condition the
merger on one or more of the parties’ compliance with certain burdensome terms or
conditions;
•
under the terms of the merger agreement, VFS cannot solicit other acquisition
proposals and must pay EZCORP a termination fee of $5 million if the merger
agreement is terminated under certain circumstances, which, in addition to being
costly, might have the effect of discouraging other parties from proposing an
alternative transaction that might be more advantageous to shareholders than the
merger;
•
certain directors and executive officers of VFS may have interests that may
conflict with the interests of other VFS shareholders with respect to the merger,
including, but not limited to the fact that an affiliate of EZCORP intends to employ
Mr. Thedford;
•
pursuant to the merger agreement, VFS must generally conduct its business in the
ordinary course and is subject to a variety of other restrictions on the conduct of
its business prior to closing of the merger or termination of the merger agreement,
which may delay or prevent it from pursuing business opportunities that may arise or
preclude actions that would be advisable if VFS were to remain an independent
company;
•
because the stock portion of the merger consideration is a fixed
exchange ratio of EZCORP common stock to VFS common stock, VFS shareholders could
be, despite the deficiency guaranty, adversely affected by a decrease in the trading
price of EZCORP’s common stock during the pendency of the merger and the
effectiveness of the registration of the EZCORP Shares, and the fact that the
deficiency guaranty is limited to $20 million;
•
the integration by EZCORP and VFS could be more difficult than
originally expected, which could adversely affect the value of the EZCORP Shares;
•
EZCORP’s equity would be substantially diluted after giving effect to the merger; and
•
the possibility that, notwithstanding the likelihood of the merger being completed,
the merger might not be completed and the possible negative effects that may result
from the
public announcement of termination of the merger agreement, including but
not limited to negative effects on VFS’s operating results, particularly in light of
the costs incurred in connection with the merger.
The foregoing discussion of the information and factors considered by VFS’s board of directors
is not exhaustive, but VFS believes it includes all the material factors considered by its board of
directors. In view of the wide variety of factors considered in connection with its evaluation of
the merger and the complexity of these matters, VFS’s board of directors did not consider it
practicable to, and did not attempt to, quantify or otherwise assign relative or specific weight or
values to any of these factors. Rather, VFS’s board of directors viewed its position and
recommendation as being based on an overall analysis and on the totality of the information
presented to and factors considered by it. In addition, in considering the factors described
above, individual directors may have given different weights to different factors. After
considering this information, all members of VFS’s board of directors unanimously approved the
amendment, the conversion, the merger agreement and the merger, and recommended that VFS
shareholders adopt and approve each of the foregoing.
The Stephens Fairness Opinion
VFS retained Stephens to act as a financial advisor to VFS in connection with the possible
sale of VFS or an interest in VFS to another business organization, whether by merger or sale of
all or substantially all of VFS’s assets. In its role as financial advisor, Stephens was
requested, among other things, to review and analyze strategic alternatives, and to furnish an
opinion as to the fairness, from a financial point of view, to shareholders of the consideration to
be offered to those Shareholders in a potential transaction (for purposes of this section regarding
the Stephens opinion, the transaction is the merger). VFS selected Stephens because Stephens is a
nationally recognized investment banking firm with substantial experience in transactions similar
to the merger agreement and is familiar with VFS and its business, and with other consumer finance
companies and their respective businesses. As part of its investment banking business, Stephens is
continually engaged in the valuation of financial businesses and their securities in connection
with mergers and acquisitions.
On September 10, 2008, Stephens rendered its written opinion to the board that as of that
date, and based upon and subject to certain matters stated in that opinion, from a financial point
of view, the merger consideration to be offered by EZCORP Shares to VFS shareholders in the merger
was fair to the VFS shareholders.
The following description summarizes the important aspects of the Stephens opinion. The full
text of Stephens’ written opinion, which describes, among other things, the assumptions made,
procedures followed, matters considered and limitations on the scope of the review undertaken by
Stephens in delivering its opinion, is attached as Exhibit C to this document. The VFS
shareholders are urged to read the opinion carefully and in its entirety.
Stephens addressed its opinion in connection with the merger consideration to the board. The
opinion does not constitute a recommendation to any VFS shareholder as to how they should vote with
respect to the merger agreement or any other matter. The opinion addresses only the
fairness of the merger consideration to the shareholders from a financial point of view as of
the date of the opinion. It does not address the relative merits of the merger agreement in
comparison with any potential alternatives to the merger. Further, it does not address the
underlying decision of the board to proceed with or effect the merger, or any other aspect of the
board’s consideration of the merger.
VFS’s historical financial statements provided by VFS’s management,
o
certain internal financial statements and other
financial and operating data (including financial projections) concerning
VFS prepared by management of VFS,
certain Quarterly Reports on Form 10-Q of EZCORP, and
o
other financial information concerning the respective
businesses and operations of VFS and EZCORP furnished to Stephens by VFS
and EZCORP for purposes of Stephens’ analysis;
•
held discussions with members of the board and senior management of VFS and
EZCORP regarding:
o
past and current business operations,
o
financial condition,
o
results of operations, and
o
growth initiatives and future prospects of the respective companies;
•
reviewed the market prices, valuation multiples, publicly reported financial
condition and results of operations for both VFS and EZCORP and compared them with
those of certain publicly traded companies that Stephens deemed to be relevant;
•
compared the proposed financial terms of the merger agreement with the financial
terms of certain other transactions that Stephens deemed to be relevant; and
•
performed such other analyses and provided such other services as Stephens has
deemed necessary or appropriate.
In conducting its review and analysis and in arriving at its opinion, Stephens assumed and
relied upon the accuracy and completeness of the financial and other information provided to or
otherwise made available to Stephens, or that was discussed with or reviewed by Stephens, or that
was publicly available. Stephens did not attempt or assume any responsibility for independent
verification of that information. Stephens further relied upon the assurances of management that
they were not aware of any facts or circumstances that would make that information inaccurate or
misleading. In arriving at its opinion, Stephens assumed that the estimates provided by our
management were a reasonable basis to evaluate future financial
performance. Stephens also examined and prepared financial estimates that analyzed, in its
view, normalized pawn growth by affecting estimates for lower gold prices. In arriving at its
opinion, Stephens did not conduct a physical inspection of any properties and facilities and did
not make or obtain any evaluations or appraisals of any assets or liabilities. The Stephens
opinion necessarily was based upon market, economic and other conditions as they existed on, and
could be evaluated as of, the date of the Stephens opinion.
For purposes of rendering its opinion, Stephens assumed that, in all respects material to its
analyses:
•
the merger agreement will be completed substantially in accordance with the
terms set forth in the merger agreement;
•
the representations and warranties of each party in the merger agreement and in
all related documents and instruments referred to in the merger agreement are true
and correct;
•
each party to the merger agreement and all related documents will perform all of
the covenants and agreements required to be performed by such party under such
documents;
•
all conditions to the completion of the merger agreement will be satisfied
without any waivers; and
•
in the course of obtaining the necessary regulatory, contractual, or other
consents or approvals for the merger agreement, no restrictions, termination or
other payments or amendments or modifications, will be imposed that will have a
material adverse effect on the future results of operations or financial condition
of the combined entity or the contemplated benefits of the merger agreement,
including the cost savings, revenue enhancements and related expenses expected to
result from the merger agreement.
Stephens’ opinion is not an expression of an opinion as to the prices at which the EZCORP
Shares will trade following the merger agreement and it is not an expression of an opinion as to
the actual value of the EZCORP Shares when issued pursuant to the merger agreement.
In performing its review and analyses, Stephens made numerous assumptions with respect to
industry performance, general business, economic, market and financial conditions and other
matters, many of which are beyond the control of Stephens, VFS and EZCORP. Any estimates contained
in the analyses performed by Stephens are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by these analyses.
Additionally, estimates of the value of the businesses or securities do not purport to be
appraisals or to reflect the prices at which such businesses or securities might actually be sold.
Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In
addition, the Stephens opinion was among several factors relied upon by the board in making its
determination to approve the merger agreement. Consequently, the analyses described below should
not be viewed as determinative of the decision of the board with respect
to the approval of the merger agreement.
The following represents a summary of the material financial analyses performed by Stephens in
connection with providing its September 10, 2008 opinion. The summary is not a complete
description of the analyses underlying the Stephens opinion or the presentation provided by
Stephens to the board, but summarizes the material analyses performed and presented in connection
with such opinion. The preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of financial analysis and
the application of those methods to the particular circumstances. Therefore, a fairness opinion is
not readily susceptible to partial analysis or summary description. In arriving at its opinion,
Stephens did not attribute any particular weight to any analysis or factor that it considered, but
rather made qualitative judgments as to the significance and relevance of each analysis and factor.
Some of the summaries of financial analyses performed by Stephens include information
presented in tabular format. In order to fully understand the financial analyses performed by
Stephens, you should read the tables together with the text of each summary. The tables alone do
not constitute a complete description of the financial analyses. Considering the data set forth in
the tables without considering the full narrative description of the financial analyses, including
the methodologies and assumptions underlying the analyses, could create a misleading or incomplete
view of the financial analyses performed by Stephens.
Implied Transaction Multiples
Stephens calculated the merger consideration to be paid as a multiple of the last twelve
months’ EBITDA, EBIT, and Net Income, and 2008 estimates based on information provided by VFS’s
management.
Stephens calculated an implied equity value by multiplying $11.00 by the sum of the number of
all shares of Series A-1, Series A-2, plus Series B participating stock after conversion into
common stock, assuming the exercise of all in-the-money options, less the proceeds from such
exercise. Stephens then calculated an implied enterprise value based on the equity value plus (1)
total debt outstanding, plus (2) Series A-2 Dividends Payable of $3.1 million, plus (3) other
liabilities assumed by EZCORP at close which total $300,000.
As used in this description of Stephens’ financial analyses, “EBITDA” means earnings before
interest, taxes, depreciation and amortization, “EBIT” means earnings before interest and taxes,
and “Net Income” means EBIT less interest and taxes.
Stephens reviewed and analyzed seven public companies in the alternative financial services
(“AFS”) industry that it viewed as reasonably comparable to VFS. Stephens chose the following
companies due to their various similarities to VFS, but also noted that none of the companies had
wholly the same operations, size, and combinations of businesses and risks as VFS:
•
Advance America, Cash Advance Centers, Inc.
•
Cash America International, Inc.
•
Dollar Financial Corp.
•
EZCORP, Inc.
•
First Cash Financial Services, Inc.
•
QC Holdings, Inc.
•
World Acceptance Corporation
These companies were selected, among other reasons, because they share similar business
characteristics to VFS. However, none of the companies selected is identical or directly
comparable to VFS. Accordingly, Stephens made judgments and assumptions concerning differences in
financial and operating characteristics of the selected companies and other factors that could
affect the public trading value of the selected companies. Below is a table showing the EBITDA and
Net Income multiples reflected in recent trading prices of these selected companies based upon the
reported and consensus estimated revenues and earnings of such companies for the twelve months
ended June 30, 2008 and the 2008 calendar year.
The reported and estimated last twelve months ended June 30, 2008, 2008E and 2009E EBITDA for
each of the selected comparable companies were based on market consensus estimates, public filings,
and other publicly available information at the time the opinion was delivered. The following
analysis assumes equity value to be enterprise value less total debt; and implied share price is
calculated as enterprise value less total debt, plus options proceeds, divided by total shares and
options outstanding. The following analysis assumes $1.0 million of public company costs for VFS.
The multiples chosen to apply to VFS’s metrics represent a range surrounding the median trading
multiple of the seven publicly traded AFS companies.
LTM 6/30/08
EBITDA
2008E EBITDA
2009E EBITDA
Multiple Range
7.0x — 8.0x
5.9x — 6.9x
5.5x — 6.5x
Enterprise Value
($ millions)
$104.7 — $119.8
$97.6 — $114.1
$99.3 — $117.5
Equity Value
($ millions)
$71.1 — $86.2
$64.0 — $80.5
$65.6 — $83.8
Implied Share Price
$10.70 — $12.97
$9.63 — $12.11
$9.88 — $12.61
Selected Merger and Acquisition Transactions
Stephens reviewed the following eleven selected merger and acquisition transactions involving
AFS companies. These transactions were selected, among other reasons, because they involved
businesses that share some similar business characteristics with VFS. However, none of the
transactions selected are identical or directly comparable to the merger. Accordingly, Stephens
made judgments and assumptions concerning differences in financial, operating and other
characteristics of the businesses involved in the selected transactions and other factors that
could affect the transaction value of the selected transactions. To the extent transaction details
were disclosed publicly, Stephens Inc. was able to review the transaction revenue and EBITDA
multiples based on the reported revenues and EBITDA of the target companies during the twelve month
period preceding their acquisitions and to develop an implied range of enterprise values for VFS.
In this analysis, Stephens reviewed the transaction prices and determined the multiples of the
target companies’ ''last twelve months’’ EBITDA represented by each transaction price. Stephens
then developed multiples to apply to the last twelve months’’ EBITDA of VFS to estimate a range of
implied enterprise values for VFS. The multiples chosen to apply to VFS’s metrics were not
entirely mathematical in nature, but were developed with careful consideration of the differences
in the businesses and operating characteristics of VFS and the target companies as well as other
market factors which could affect the market values of these companies.
The implied share price is calculated by multiplying VFS’s last twelve months’ EBITDA by the
applied multiples developed by Stephens (to get a range of implied enterprise values), subtracting
VFS’s total debt, adding the aggregate exercise price of outstanding options, and dividing that
result by the total number of outstanding shares and options of VFS.
Enterprise
Value / LTM
EBITDA
Applied Multiples
5.9x – 6.9x
Implied Share Price
$
9.20 – $11.62
Discounted Cash Flow Analysis — Scenario I
Stephens performed an analysis of the present value of projected future cash flows of VFS
based on VFS management’s financial projections, which were as follows:
The terminal value multiple was chosen to be 6.4x projected 2012 EBITDA based on the median
comparable company acquisition multiple. The cash flows were discounted using a range of discount
rates, 20.2% — 24.2%, based on the company’s weighted average cost of capital of 22.2%.
Terminal
Multiple
Assumed Discount Rate
20.2
%
22.2
%
24.2
%
Implied Price per Share:
6.4x
$
15.27
$
14.02
$
12.88
Discounted Cash Flow Analysis — Scenario II
Stephens performed an analysis of the present value of projected future cash flows of Value
assuming normalized pawn industry growth to reflect recent declines in gold prices, which were as
follows:
The terminal value multiple was chosen to be 6.5x projected 2012 EBITDA based on the median
comparable company acquisition multiple. The cash flows were discounted using a range of discount
rates, 20.2% — 24.2%, based on the company’s weighted average cost of capital of 22.2%.
Terminal
Multiple
Assumed Discount Rate
20.2
%
22.2
%
24.2
%
Implied Price per Share:
6.4x
$
11.94
$
10.94
$
10.02
Leveraged Buyout Analysis
Stephens performed an analysis of the implied price per share consideration to the
Shareholders from a financial acquirer in a leveraged buyout transaction. The implied price per
share was calculated using a range of required rates of return of 30.0% — 35.0%, based on similar
transactions in the AFS industry, and recent regulatory developments. The terminal value multiple
was chosen to be 6.4x projected 2012 EBITDA based on the median comparable company acquisition
multiple. Any additional assumptions regarding the leveraged buyout were based on precedent
transactions and Stephens’ estimates.
As part of its valuation analysis, Stephens estimated the value of VFS’s Net Operating Loss
Carryforwards to an acquirer in a change of control transaction. These Net Operating Loss
Carryforwards totaled approximately $7.7 million as of July 31, 2008. The utilization of these Net
Operating Loss Carryforwards will be limited in such a transaction to an annual amount equal to
equity value multiplied by the long term tax-exempt rate, as outlined in Section 382 of the
Internal Revenue Code. Stephens performed an analysis of the projected future cash flows to an
acquirer based on an 8.0% discount rate and used the present value to calculate an implied value
per share.
8.0% Discount
Rate
Implied Price per Share:
$
0.37
Stephens reviewed the implied share prices for VFS based on comparable company analysis, the
selected merger and acquisition transactions, the discounted cash flow analysis, the leveraged
buyout analysis and the value per share to an acquirer of VFS’s Net Operating Loss Carryforwards,
and compared them to the consideration to be received by the Shareholders in the merger of $11.00
per share in cash.
Relative Stock Price Performance
Stephens also analyzed the price performance of EZCORP Class A Non-Voting Common Stock from
September 9, 2005 to September 9, 2008 on the NASDAQ Global Select Stock Market and compared that
performance to an index created using six companies in the AFS sector (excluding EZCORP) over the
same period. Those comparable companies included:
This analysis indicated the following cumulative changes in price over the period:
Percent Change
EZCORP
174.4
%
Comparable Companies
13.7
%
Selected Peer Group Analysis
Stephens compared the operating and financial performance of EZCORP to two groups: (i)
publicly traded companies with a pawn business that is a meaningful part of their operations, and
(ii) the broader AFS companies:
•
Pawn Brokerage Companies:
o
Cash America International, Inc.
o
First Cash Financial Services, Inc.
•
AFS Companies:
o
Advance America Cash Advance Centers, Inc.
o
Dollar Financial Corp.
o
QC Holdings, Inc.
o
World Acceptance Corporation
The comparisons were based on:
•
Various operating metrics, including:
o
Revenue mix
o
Revenue and earnings performance
o
Loan yields
o
Profitability ratios
o
Store operating efficiency
o
Asset quality
•
Various measures of market performance, including:
To perform this analysis, Stephens used the financial information as of and for the quarter
ended June 30, 2008 and market price information as of September 9, 2008. Below is the summary
operating comparison of publicly traded pawn operators:
Cash America
First Cash
International,
Financial
EZCORP,
Inc.
Services, Inc.
Inc.
Revenue per Store
$
1,198
$
762
$
947
Average Pawn Loan Balance Per Store
$
283
$
155
$
203
Average Merchandise Held for
Disposition Per Store
$
186
$
86
$
118
Annualized Yield on Pawn Loans
126.9
%
144.3
%
146.0
%
Margin on
Disposition of Merchandise as a % of Proceeds
from Sale
37.9
%
47.2
%
39.5
%
Average Annualized Merchandise
2.7x
N/A
3.5x
Turnover
Stephens also compared certain operating and market performance ratios of EZCORP to the AFS
peer group. Stephens’ analysis showed the following concerning EZCORP’s financial performance:
EZCORP
Median
High
Low
Shares
Non-Payday Revenue %
55.9
%
100.0
%
0.0
%
71.4
%
Calendar Year 2008 Revenue Growth
9.2
%
15.5
%
(3.8
)%
26.2
%
Calendar Year 2009 Revenue Growth
7.7
%
14.0
%
3.3
%
15.1
%
Calendar Year 2008 EBITDA Growth
5.9
%
44.1
%
(25.5
)%
31.0
%
Calendar Year 2009 EBITDA Growth
13.1
%
20.7
%
7.0
%
11.7
%
EBITDA Margin
19.4
%
32.1
%
14.3
%
21.1
%
Return on Total Assets
10.7
%
12.7
%
8.7
%
16.9
%
Return on Common Equity
25.1
%
51.4
%
13.6
%
18.8
%
Enterprise Value / 2008 EBITDA
6.0x
8.6x
4.4x
7.0x
Enterprise Value / 2009 EBITDA
4.9x
7.1x
3.9x
6.3x
Equity Value / 2008 Earnings per
Share
10.3x
15.1x
7.3x
12.5x
Equity Value / 2009 Earnings per
Share
9.0x
12.5x
6.4x
10.9x
Equity Value / Book Equity
2.5x
2.7x
2.3x
2.8x
Financial Impact Analysis
Stephens performed pro forma merger analyses that combined projected income statement and
balance sheet information. Assumptions regarding the accounting treatment, acquisition
adjustments, and cost savings were used to calculate the financial impact that the merger agreement
would have on certain projected financial results of the pro forma company. This analysis
indicated the merger agreement is expected to be accretive to EZCORP’s estimated
2008 and 2009 GAAP earnings per share. This analysis was based on published earnings
estimates for EZCORP, management estimates for VFS and estimated annual cost savings equal to $1.0
million. For all of the above analyses, the actual results achieved by the pro forma company
following the merger agreement may vary from the projected results and any variations may be
material.
Other Analysis
In its September 10, 2008 presentation, Stephens reviewed the relative financial and market
performance of VFS and EZCORP to a variety of relevant industry peer groups and indices. Stephens
also reviewed historical earnings growth, historical stock performance, earnings estimates, stock
liquidity and research coverage for EZCORP.
Miscellaneous
The preparation of a fairness opinion is a complex process and is not susceptible to partial
analysis or summary description. In arriving at its opinion, Stephens considered the results of
all of its analyses as a whole and did not attribute any particular weight to any analysis or
factor considered by Stephens. Furthermore, Stephens believes that the summary provided and the
analyses described above must be considered as a whole and that selecting any portion of Stephens’
analyses, without considering all of them, would create an incomplete view of the process
underlying Stephens’ analysis and opinion. As a result, the ranges of valuations resulting from
any particular analysis or combination of analyses described above were merely utilized to create
points of reference for analytical purposes and should not be taken to be the view of Stephens with
respect to our actual value.
In performing its analyses, Stephens made numerous assumptions with respect to industry
performance, general business and economic conditions, and other matters, many of which are beyond
the control of Stephens or VFS. Any estimates contained in the analyses of Stephens are not
necessarily indicative of future results or actual values, which may be significantly more or less
favorable than those suggested by those estimates. The analyses performed were prepared solely as
part of the analysis by Stephens of the fairness to shareholders of the consideration to be offered
to those Shareholders in the merger, from a financial point of view, and were prepared in
connection with the delivery by Stephens of its opinion to the VFS board.
VFS has paid Stephens a fee for rendering its opinion as to the fairness of the merger
consideration, from a financial perspective, to the Shareholders. See Certain Fees in Connection
with the Merger, page 82. The board was aware of this compensatory agreement when it received
advice from Stephens, when it reviewed the Stephens opinion and when it approved the merger.
A copy of the Stephens opinion is attached hereto as Exhibit C for your review. The
fairness opinion indicates that the opinion “is not intended to be relied upon or confer any rights
or remedies upon any . . . shareholder or other equity holder” of VFS. The availability of such a
disclaimer as a defense to a suit against Stephens would have to be resolved by a court of
competent jurisdiction, if such a suit were to occur. The resolution of the question of the
availability of such a defense to Stephens would have no effect on the rights or responsibilities
of the VFS board of directors under applicable state law. The availability of a state law defense
based on such a disclaimer would have no effect on the rights or responsibilities of either
Stephens or the board of directors under the federal securities law.
Conversion of VFS Participating Stock to Common Stock
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
were issued and outstanding prior to the VFS special meeting. As a condition to EZCORP’s
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. At the special meeting, holders
of each series of participating stock will vote as a class on whether 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 majority of the
outstanding shares of the series of participating stock elect to convert their stock to common
stock, VFS may cause a mandatory conversion of the remaining shares of that series to common stock.
After the vote on the conversion and the amendment at the special meeting, VFS intends to exercise
its authority to cause the mandatory conversion of all shares, including those shares that are not
voted 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 to the 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
VFS’s board of directors. As of June 30, 2008, the accrued, unpaid dividends on the A-2
participating stock totaled approximately $2.5 million. VFS expects that, on the expected
completion of the merger, the accrued dividends on the A-2 participating stock will equal
approximately $3.9 million. The accrued unpaid dividend is due and payable at the time of
conversion of the A-2 participating stock to common stock. The conversion will occur
contemporaneously with the closing of the merger, and thus will result in either a reduction of the
cash reserves of VFS or an increase in its 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.
Source of Funds for the Merger
EZCORP expects the total consideration for the transaction to be approximately $115.9 million
($80.6 million to acquire VFS’s net assets plus $35.3 million required to pay off the VFS debt
immediately following the merger), plus contingent cash consideration, consisting of a combination
of the EZCORP Shares, cash on hand, and borrowings, as follows:
•
The EZCORP Shares, consisting of up to 4,985,000 shares of EZCORP Class A
Non-voting Common Stock if all VFS shareholders elect to receive EZCORP Shares in the
merger. If the maximum amount of VFS shareholders elect to receive the cash
consideration, a total of approximately 3,988,000 EZCORP Shares will be issued in the
merger. Based on the closing price of EZCORP stock on NASDAQ on September 16, 2008 of
$16.35 per share, the EZCORP Shares would have a value of approximately $81.5 million
if the maximum number of
EZCORP Shares are issued and $65.2 million if the minimum number of EZCORP Shares
are issued.
•
Cash from EZCORP cash reserves of approximately $20.0 million.
•
Borrowings of approximately $30.7 million, plus any contingent cash payments
pursuant to the Deficiency Guaranty and the Premium Reserve, and assuming that 20% of
the VFS shareholders elect to receive cash in lieu of EZCORP Shares. See The Credit
Facility, page 98.
Listing of Merger Shares on NASDAQ
EZCORP has applied to have the EZCORP Shares listed on the NASDAQ Global Select Market where
its shares of Class A Non-voting Common Stock are currently traded.
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,
EZCORP will assess the value of assets and liabilities acquired, and record those in EZCORP’s
balance sheet through a purchase price allocation. After the merger, VFS’s financial position and
results will be consolidated with those of EZCORP, Inc. as a wholly-owned subsidiary.
Certain Fees in Connection with the Merger
In connection with the merger, VFS has paid certain fees to Stephens. In particular, VFS has
previously paid Stephens $800,000 in connection with the Stephens opinion as well as other services
performed in connection with the merger. These services include contacting other prospective
purchasers, discussing proposed transactions with other prospects, and consulting with VFS on
potential effects of this and other possible transactions. VFS has reimbursed Stephens’ expenses
of approximately $18,000.
Appraisal Rights
The following section describes appraisal rights available under Florida law. Please also read
the full text of the relevant provisions of the FBCA, which are reprinted in their entirety as
Exhibit D to this proxy statement/prospectus. If you desire to exercise your appraisal rights, you
should review carefully the FBCA and are urged to consult a legal advisor before electing or
attempting to exercise these rights.
Each VFS shareholder entitled to vote on the merger agreement and the merger who complies with
the FBCA, with respect to appraisal rights, is entitled to receive in cash the “fair value” of
their VFS Common Stock. “Fair value” means the value of VFS shares as determined immediately
before the merger is effective as determined by “using customary and current valuation concepts and
techniques generally employed for similar businesses in the context of the merger, excluding any
appreciation or depreciation in anticipation of the corporate action unless exclusion would be
inequitable to the corporation and its remaining shareholders.” VFS shareholders are entitled to
assert their appraisal rights and demand payment and receive fair
value in cash for their shares under Sections 607.1301 — 607.1333 of the FBCA. In order to perfect
your appraisal rights, you must fully comply with the statutory procedures in Sections 607.1301 -
607.1333 of the FBCA summarized below. Failure to follow these procedures will result in a
termination or waiver of your appraisal rights. VFS urges you to read those sections in their
entirety and to consult with your legal advisor. In order to assert these appraisal rights, you
must do the following:
• not vote, or cause or permit to be voted, any of your shares in favor of the
merger agreement; and
• either before the vote on the merger agreement is taken (before the special
meeting), deliver written notice of your intent to demand payment for your shares if
the merger is completed (the “Shareholder Appraisal Notice”) to the following person
at the address listed below:
• or before the vote on the merger agreement is taken, deliver the Shareholder
Appraisal Notice to John Thedford, at the annual meeting.
Note: Simply voting against the merger agreement does not satisfy the requirement to give
notice. Also, the Shareholder Appraisal Notice must be signed in the same manner as the shares are
registered on the books of VFS.
If you deliver the Shareholder Appraisal Notice, and the merger is consummated, VFS will send
you the written appraisal notice and form required under Section 607.1322 of the FBCA (the
“Corporation Appraisal Notice and Form”) within 10 days after the Articles of Merger are filed with
the Florida Department of State, which will consummate the merger. VFS Appraisal Notice and Form
will contain VFS’s estimate of the fair value of the shares as determined by the board of directors
in its reasonable judgment. As stated, under the FBCA, fair value of VFS’s shares is to be
determined immediately prior to consummation of the merger. It is anticipated that the merger will
close as soon as practicable after shareholder approval of the conversion, the amendment, the
merger and the merger agreement by a majority of the VFS Shareholders, and the satisfaction or
waiver of the closing conditions contained in the merger agreement. To receive payment for your
shares, VFS must receive from you, at any time before the expiration of the date specified in the
notice (which deadline may not be less than 40 days nor more than 60 days after the date the
appraisal notice and form are sent to you), the following:
•
the completed Corporation Appraisal Notice and Form in which you either (i)
approve of the merger or (ii) disapprove of the merger and instead state your estimated
fair value for the shares and a demand for payment of your estimated value plus
interest, and
If you do not complete and sign a VFS Appraisal Notice and Form and deliver it to VFS within
the prescribed time period, you will forfeit your rights to receive payment for your shares in
excess of the merger consideration. If your properly completed and signed Corporation Appraisal
Notice and Form are filed with VFS within the prescribed time period, you will be entitled to
payment of the fair value of the shares, in accordance with the discussion below, and you will not
be entitled to vote or exercise any other rights of a Shareholder (unless you subsequently withdraw
your demand, as also discussed below).
If the merger is approved, the Exchange Agent (as defined in the merger agreement) will make
payment for your shares in accordance with the terms and conditions set forth in the merger
agreement. If you indicate on a VFS Appraisal Notice and Form that you do not approve the merger
agreement, but fail to demand payment for the shares at your estimated value plus interest, you
will have waived your right to demand payment of your estimated value and interest and, instead you
will be entitled only to the payment offered in connection with the merger in the VFS Appraisal
Notice and Form sent to you. If you make a demand for payment of your estimated value and the
issue of fair value remains unsettled thereafter, either you or VFS may, but are not required to,
commence a court proceeding and petition the court for a determination of the fair value of the
shares and accrued interest.
You may decline to exercise appraisal rights and withdraw from the appraisal process by
notifying VFS in writing before the expiration of a date that will be specified in the VFS
Appraisal Notice and Form. You will not be able to withdraw from the process after such date
without VFS’s written consent. If you withdraw from the appraisal process in conformance with the
foregoing, you will again have the same rights you had prior to signing and returning the notice
and form to VFS. Further, if VFS for any reason does not proceed with the consummation of the
merger, your appraisal rights will cease and your status as a shareholder will be restored.
If VFS and the shareholder asserting appraisal rights are unable to agree on the fair value of the
shares, under the FBCA, VFS would be required to file within 60 days after receipt of the
shareholders’’ demand, an appraisal action in a court in the county where VFS had its principal
office prior to the merger. The court would be required to determine the fair value of the shares
of the VFS Common Stock. If VFS fails to file such proceeding within 60 days, any shareholder
asserting appraisal rights may do so. All shareholders asserting appraisal rights, except for
those that have agreed upon a value with VFS, are deemed to be parties to the proceeding. In such a
proceeding, the court may, if it so elects, appoint one or more persons as appraisers to receive
evidence and recommend a decision on the question of fair value. VFS would be required to pay each
shareholder asserting appraisal rights the amount found to be due within ten days after final
determination of the proceedings. At the court’s discretion, the judgment may include interest at
a rate determined by the court. Upon payment of this judgment, the shareholder would cease to have
any further appraisal rights with respect to his or her VFS Common Stock.
The court in any appraisal proceeding will determine the costs and expenses (including
attorneys’ and experts’ fees) of any appraisal proceeding and such costs and expenses will be
assessed against EZCORP. However, all or any part of such costs and expenses (including attorneys’
and experts’ fees) may be apportioned and assessed against all or some of the shareholders that
request an appraisal, in such amount as the court deems equitable, if the court determines that the
shareholders acted arbitrarily or not in good faith with respect to the shareholders’ appraisal
rights. If the court finds that counsel for one shareholder substantially
benefited other shareholders, and attorneys’’ fees should not be assessed against VFS, the court
may award counsel fees to be paid out of the amounts awarded to benefited shareholders.
Failure to Comply with Statutory Requirements
You must take each step in the indicated order and in strict compliance with the FBCA to
assert your appraisal rights. If you fail to follow the steps, you will lose the right to demand a
value for your shares other than the merger consideration.
Failure to follow the procedures set forth in Sections 607.1301 through 607.1333 of the FBCA
regarding appraisal rights will constitute a waiver of any such rights. Shareholders may wish to
consult independent counsel before exercising their appraisal rights.
The Voting Agreement
The following description describes the material terms of the voting agreement signed by
certain directors of VFS, which is attached as Exhibit E to this proxy statement/prospectus. EZCORP
and VFS encourage you to read the form of voting agreement in its entirety.
Mr. John Thedford, Mr. Charles Slattery and Mr. Kevin Hyneman entered into a voting agreement
with EZCORP and Merger Sub, Inc. on September 16, 2008. In the voting agreement, each VFS
shareholder that is a party to the voting agreement agreed to vote all shares of VFS stock owned by
him or her as follows:
•
in favor of the adoption of the merger agreement and the merger; and
•
in favor of the amendment to VFS’s Amended and Restated Articles of
Incorporation and the conversion of all series A-1 participating, series A-2
participating and series B participating stock into common stock of VFS.
Each VFS shareholder that is a party to the voting agreement also agreed that he will not
transfer, assign, convey or dispose of any shares of VFS stock owned by him unless each person or
entity to whom any securities are transferred agrees to comply with all of the terms and provisions
of the voting agreement. As of the record date for the VFS special meeting, approximately 36% of
the voting shares of VFS stock entitled to vote at the special meeting, were owned by the VFS
shareholders who are a party to the voting agreement.
The obligations of the VFS shareholders who are a party to the voting agreement will terminate
upon the earlier to occur of the valid termination of the merger agreement, the effective time of
the merger or December 31, 2008.
Under the terms of the merger agreement, Mr. John Thedford will be released from his current
employment obligations to VFS upon consummation of the merger. After the effective date of the
merger, EZCORP and Mr. Thedford intend for Mr. Thedford to become an employee of Texas EZPAWN,
L.P., a subsidiary of EZCORP, and his title will be President of EZPAWN Worldwide. Mr. Thedford
will be entitled to the following as the President of EZPAWN Worldwide:
(1)
A base salary of $524,000 per year, with consideration for yearly merit
increases, which are not guaranteed;
(2)
An unguaranteed annual bonus whereby Mr. Thedford may not earn any bonus or he
may earn up to 150% of his base salary;
(3)
Consideration for (no guaranty) stock compensation based on performance; and
(4)
Severance payment equal to one year’s salary if terminated without cause.
In comparison, Mr. Thedford, under his current employment agreement with VFS, is entitled to a
base salary of $425,000 per year and is eligible to earn a yearly bonus of 100% of his base salary.
Mr. Thedford is not, however, eligible to receive any performance based equity compensation under
his current employment agreement with VFS.
Wilton A. Whitcomb III, Vice President and Chief Financial Officer, and Lawrence Kahlden, Vice
President and Chief Operating Officer, are both currently subject to employment agreements with VFS
that run through the year 2009. Neither has entered into any employment arrangement with EZCORP or
any of its affiliates regarding employment after the effective date of the merger. Currently, it
is contemplated that each of the Mr. Whitcomb’s and Mr. Kahlden’s employment agreements will be
unaffected by the merger.
Material United States Federal Income Tax Consequences of the Merger
In the opinion of Strasburger & Price, LLP, the following discussion summarizes the material
United States federal income tax consequences of the merger to “United States holders” (as defined
below) of VFS common stock. This summary applies only to VFS shareholders who are United States
holders and who hold their shares of VFS common stock, and will hold the shares of EZCORP common
stock received in exchange for their shares of VFS common stock, as capital assets within the
meaning of section 1221 of the Code (generally, assets held for investment).
For purposes of this discussion, a “United States holder” means:
· a citizen or resident of the United States;
· a corporation or other entity taxable as a corporation created or organized under the
laws of the United States or any state thereof or in the District of Columbia;
· a trust, the substantial decisions of which are controlled by one or more United States
persons and which is subject to the primary supervision of a United States court, or a trust that
validly has elected under applicable Treasury Regulations to be treated as a United States person
for United States federal income tax purposes; or
· an estate that is subject to United States federal income tax on its income regardless
of its source.
Holders of VFS common stock who are not United States holders may have different tax
consequences than those described below and are urged to consult their own tax advisors regarding
the tax treatment to them under United States and non-United States tax laws.
This discussion does not address all of the United States federal income tax consequences that
may be relevant to particular United States holders in light of their individual circumstances, and
does not address any aspect of state, local, foreign, estate or gift taxation that may be
applicable to a United States holder. In addition, this discussion does not consider any specific
facts or circumstances that may be relevant to a United States holder subject to special rules
under United States federal income tax laws, including without limitation:
· banks, trusts and other financial institutions;
· tax-exempt organizations;
· insurance companies;
· cooperatives;
· dealers in securities or foreign currencies;
· mutual funds, regulated investment companies or real estate investment trusts;
· traders in securities that elect to use a mark-to-market method of accounting;
· holders whose functional currency is not the United States dollar;
· partnerships or other entities treated as partnerships for United States federal income
tax purposes;
· holders who hold shares as part of a hedge, straddle or other risk reduction,
constructive sale or conversion transaction; and
· holders who acquired their shares upon the exercise of employee stock options or
otherwise as compensation or through a tax-qualified retirement plan.
If a partnership or other entity treated as a partnership for United States federal income tax
purposes holds shares of VFS common stock, the tax treatment of a partner generally will depend on
the status of the partner and on the activities of the partnership. Partners of partnerships
holding VFS common stock should consult their tax advisors about the tax consequences of the merger
to them.
This discussion is based upon the provisions of the Code, applicable Treasury Regulations,
published positions of the Internal Revenue Service (the “IRS”), judicial decisions
and other applicable authorities, all as in effect on the date of the registration statement
of which this proxy statement/prospectus is a part. There can be no assurance that future
legislative, administrative or judicial changes or interpretations, which changes or
interpretations could apply retroactively, will not affect the accuracy of this discussion. No
rulings have been or will be sought from the IRS concerning the tax consequences of the merger. As
such, there can be no assurance that the IRS will not take a contrary position regarding the tax
consequences of the merger described in this discussion or that any such contrary position would
not be sustained.
Tax matters are very complicated, and the tax consequences of the merger to VFS shareholders
will depend on each such stockholder’s particular tax situation.
THIS SUMMARY OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY AND IS NOT
TAX ADVICE. VFS STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND OF CHANGES IN APPLICABLE TAX LAWS.
For United States federal income tax purposes, the parties intend that the merger (i) qualify
as a “reorganization” within the meaning of Section 368(a) of the Code and (ii) EZCORP, Value
Merger Sub, Inc. and VFS will each be a “party to the reorganization” within the meaning of Section
368(b) of the Code.
It is assumed for purposes of the remainder the discussion that the merger will qualify as a
“reorganization” with the meaning of Section 368(a) of the Code and that EZCORP, Value Merger Sub,
Inc. and VFS will each be a party to the reorganization within the meaning of Section 368(b) of the
Code.
Tax Consequences of the Merger
· A VFS common stockholder who exchanges his or her shares of VFS common stock for cash and
shares of EZCORP common stock pursuant to the merger will recognize gain (but will not recognize
any loss), and the gain recognized will be equal to the lesser of (i) any cash received and (ii)
the excess, if any, of (x) the sum of the cash received and the fair market value of the EZCORP
common stock received (determined at the effective time of the merger) over (y) the VFS common
stockholder’s tax basis in the shares of VFS common stock exchanged therefor. The amount of gain
(or non-recognized loss) must be computed separately for each block of VFS common stock that was
purchased by the VFS common stockholder in the same transaction, and a loss realized on one block
of stock may not be used to offset a gain realized on another block of stock. A VFS common
stockholder to whom these rules may apply should consult his or her tax advisor regarding the
manner in which gain or loss should be computed for different blocks of VFS common stock
surrendered in the merger. Any recognized gain will generally be long-term capital gain if the
stockholder’s holding period for the shares of VFS common stock surrendered is more than one year
at the effective time of the merger, except as discussed immediately below.
· Notwithstanding the above, if the cash received has the effect of a distribution of
a dividend, any recognized gain will be treated as a dividend to the extent of the VFS
shareholder’s ratable share of accumulated earnings and profits as computed for United States
federal income tax purposes. In general, the determination of whether any gain recognized in the
merger will be treated as capital gain or dividend income will depend upon whether, and to what
extent, the exchange in the merger reduces the VFS common stockholder’s deemed percentage ownership
interest in EZCORP after the merger. For purposes of this determination, a VFS common stockholder
will be treated as if he or she first exchanged all of his or her shares of VFS common stock solely
for shares of EZCORP common stock and then EZCORP immediately redeemed a portion of those shares in
exchange for the cash that the VFS common stockholder actually received. In determining whether
the receipt of cash has the effect of a distribution of a dividend, the Code’s constructive
ownership rules must be taken into account. The IRS has indicated in rulings that any reduction in
the interest of a minority stockholder who owns a small number of shares in a publicly and widely
held corporation and who exercises no control over corporate affairs would result in capital gain
as opposed to dividend treatment. Each VFS common stockholder should consult his or her tax
advisor regarding the application of these rules.
· Each VFS shareholder’s aggregate tax basis in the shares of EZCORP common stock received in
the merger will be the same as his or her aggregate tax basis in the VFS common stock surrendered
in the merger, increased by the amount of gain recognized (including any portion of the gain that
is treated as a dividend as described above, but excluding any gain attributable to the receipt of
cash in lieu of a fractional share of EZCORP common stock) and decreased by (i) any cash received
and (ii) the amount of any tax basis allocable to any fractional share interest for which cash is
received. The holding period of the shares of EZCORP common stock received in the merger by a VFS
common stockholder will include the holding period of the shares of VFS common stock that he or she
surrendered in the merger. If a VFS common stockholder has differing tax bases and/or holding
periods in respect of the stockholder’s shares of VFS common stock, the stockholder should consult
with a tax advisor in order to identify the tax bases and/or holding periods of the particular
shares of EZCORP common stock that the stockholder receives.
· A cash payment received by a VFS common stockholder in lieu of a fractional share of EZCORP
common stock generally will be treated as received in exchange for that fractional share interest,
and gain or loss generally will be recognized for federal income tax purposes on the receipt of the
cash payment, measured by the difference between the amount of cash received and the portion of the
basis of the VFS common stock allocable to the fractional share interest. The gain or loss will be
long-term capital gain or loss if the VFS common stock is considered to have been held for more
than one year at the effective time of the merger. T he deductibility of capital losses is subject
to limitations.
Status of the Tax-Free Merger
If the IRS were to successfully challenge the qualification of the merger as a tax-free
exchange, a VFS common stockholder would generally be required to recognize gain or loss with
respect to the VFS common stock surrendered in the merger equal to the difference between such
holder’s adjusted tax basis in the surrendered stock and the fair market value, as of the closing
of the merger, of the EZCORP common stock received in the merger. Generally, in such event, the
VFS common stockholder’s tax basis in the EZCORP common stock received would equal the fair market
value of such EZCORP common stock as of the date of the merger, and the VFS common stockholder’s
holding period for the EZCORP common stock would begin on the
day after the merger. Any gain or loss that a VFS common stockholder recognizes with respect to
its VFS common stock would be characterized as gain or loss from the sale of a capital asset. The
deductibility of capital losses would be subject to limitation.
VFS Stockholders Exercising Appraisal Rights
VFS common stockholders are entitled to appraisal rights in connection with the merger,
subject to properly perfecting such rights. If a VFS common stockholder receives cash pursuant to
the exercise of appraisal rights, such stockholder generally will recognize gain or loss, measured
by the difference between the amount of cash received and such holder’s tax basis in such VFS
common stock. A VFS common stockholder who exercises appraisal rights is urged to consult his or
her tax advisor.
Reporting Requirements
A United States holder who receives shares of EZCORP common stock as a result of the merger
will be required to retain records pertaining to the merger. Each United States holder who is
required to file a United States federal income tax return and who is a “significant holder” that
receives shares of EZCORP common stock generally will be required to file a statement with such
holder’s United States federal income tax return setting forth, among other information, the fair
market value (determined immediately before the merger) of the holder’s VFS common stock that was
transferred in the merger and the holder’s tax basis (determined immediately before the merger) in
the VFS common stock. A “significant holder” is a United States holder who, immediately before the
merger, owned either (i) at least 5% (by vote or value) of the outstanding stock of VFS or (ii)
securities of VFS with a tax basis of $1.0 million or more.
Information Reporting and Backup Withholding
VFS common stockholders may be subject to “backup withholding” for United States federal income tax
purposes on any cash received in the merger unless certain requirements are met. Payments will not
be subject to backup withholding if the stockholder (i) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (ii) provides EZCORP or the
paying agent, as appropriate, with the stockholder’s correct taxpayer identification number and
completes an IRS Form W-9 in which the stockholder certifies that the stockholder is not subject to
backup withholding. The taxpayer identification number of an individual is his or her Social
Security number. Any amount paid as backup withholding tax will be credited against the
stockholder’s United States federal income liability provided the stockholder furnishes the
required information to the IRS.
THE MERGER AGREEMENT
The following summary describes the material provisions of the merger agreement. The
provisions of the merger agreement are complicated and not easily summarized. The rights and
obligations of the parties are governed by the express terms and conditions of the merger agreement
and not by this summary. The merger agreement is attached as Exhibit A to this proxy
statement/prospectus and is incorporated by reference into this proxy
statement/prospectus, and we encourage you to read it carefully in its entirety for a more
complete understanding of the merger agreement.
Structure of the Merger
To effect the merger, EZCORP formed Merger Sub as a new 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
EZCORP’s wholly-owned subsidiary.
Merger Consideration
In the merger EZCORP will exchange the EZCORP Shares for VFS Company Stock at the rate of 0.75
EZCORP Shares for each issued and outstanding share of VFS Common Stock.
EZCORP has also agreed to pay $11.00 per share cash (the “Cash Consideration”) for up
to 20% of the VFS Common Stock (the “Cash Consideration Number”) to VFS shareholders who
elect, at their option, to receive cash instead of the EZCORP Shares in exchange for some or all of
their VFS Common Stock. If the number of shares of VFS Common Stock with respect to which a valid
Election is made does not exceed the Cash Consideration Number, each share for which an Election is
made shall be converted into the Cash Consideration. If the number of shares of VFS Common Stock
with respect to which a valid Election is made exceeds the Cash Consideration Number, the number of
shares of VFS Common Stock with respect to which a valid Election is made that shall be converted
into Cash Consideration shall be determined as follows:
•
First, a unit proration factor (the “Unit Proration Factor”) shall be
determined by dividing the Cash Consideration Number by the number of shares with
respect to which a valid Election was made;
•
Second, only those shares equal to the number of shares of each electing VFS
shareholder with respect to which a valid Election is made multiplied by the Unit
Proration Factor shall be paid the Cash Consideration; and
•
Third, all remaining shares of VFS Common Stock with respect to which a valid
Election is made shall receive EZCORP Shares in the merger.
If all VFS Common Stock is exchanged for EZCORP Shares in the merger, EZCORP will issue
approximately 4,984,935 EZCORP Shares in exchange for the VFS Common Stock. If the maximum number
of VFS shareholders elect to take the Cash Consideration, EZCORP will pay approximately $14.6
million in cash and issue approximately 3,988,000 EZCORP Shares in exchange for the VFS Common
Stock.
Value of Merger Consideration – the Deficiency Guaranty and the Premium Reserve
The price per share of the Cash Consideration and the number of EZCORP Shares to be issued in
the merger were determined based on an estimated value of $11.00 per share of VFS Common Stock. At
the time that VFS and EZCORP agreed on the merger consideration, the price of EZCORP Class A
Non-voting Common Stock was approximately $14.67 per share on
NASDAQ. The 0.75 : 1.0 exchange ratio of EZCORP Shares for VFS Common Stock was determined using a
price per share of $14.67 per EZCORP share compared to $11.00 per VFS share ($11.00 ÷ $14.67 =
0.75).
EZCORP share prices vary in trading on NASDAQ, as do other publicly traded common stocks, and
at the time of closing of the merger, there can be no guarantee that the price of EZCORP Shares
will be more or less than the $14.67 price that was used to set the exchange ratio. In order to
reduce the risk to VFS shareholders that the EZCORP Shares they receive in the merger will be worth
less than $14.67 per share after the merger, the merger agreement contains a Deficiency Guaranty
for a limited amount of time, for shareholders who sell their shares in the open market at less
than $14.67 per share. In addition, EZCORP has agreed to
pay a Premium Reserve for a limited amount of time to shareholders who sell their shares in the
open market for more than $14.67 per share. The Deficiency Guaranty and Premium Reserve are
described below.
Deficiency Guaranty
In the merger agreement, EZCORP agreed to provide a Deficiency Guaranty to VFS shareholders
who receive EZCORP Shares in the merger. EZCORP has agreed that, for 125 days after closing of the
merger, including a five day waiting period for distribution of EZCORP Shares, if a selling
shareholder sells any of their EZCORP Shares received in the merger in open market sales at less
than $14.67 per share, EZCORP will pay the selling shareholder the difference between the sales
price per share and $14.67, up to a maximum of $4.01 per EZCORP Share.
If you sell your EZCORP Shares at $14.67 per share, you will receive the equivalent of $11.00
per share of VFS Common Stock ($14.67 x 0.75 EZCORP Shares = $11.00 per VFS share). If you sell
your EZCORP Shares at less than $10.66 per share within 125 days after the closing of the merger,
the total amount of consideration, including the deficiency guaranty, will be less than $11.00 per
share of VFS Common Stock, because the deficiency guaranty will not make up the entire difference
between the sale price of your EZCORP Shares and the $11.00 cash per share merger consideration.
Two examples of the deficiency guaranty are set forth below:
Deficiency
Total Amount
Equivalent
Sales Price of
Guaranty
Received for
Value per
EZCORP Share
Amount
EZCORP Share
VFS Share
$12.00
$
2.67
$
14.67
$
11.00
$10.00
$
4.01
$
14.01
$
10.51
In the second example above, the equivalent price per VFS share (when multiplied by the 0.75
exchange rate of EZCORP Shares per each share of VFS Common Stock) equals less than the $11.00
agreed value of VFS shares for purposes of the merger.
If and to the extent that a VFS shareholder does not sell their EZCORP Shares within 125 days
after the closing of the merger, they will not be entitled to any deficiency guaranty payment.
In addition, for 125 days after closing of the merger, including the five day waiting period,
EZCORP has agreed to pay a Premium Reserve to selling shareholders who sell their EZCORP Shares
received in the merger in open market sales for more than $14.67 per share. EZCORP will pay up to
a maximum of $6,646,527 to selling shareholders who sell their EZCORP Shares for more than $14.67
per share after the five day waiting period, as follows:
•
For the first 35 days after closing of the merger, $1.33 per share;
•
From the 36th to the 65th day after closing of the
merger, $1.00 per share;
•
From the 66th to the 95th day after closing of the
merger, $0.67 per share; and
•
From the 96th to the 125th day after closing of the
merger, $0.33 per share.
For example, a VFS shareholder who sells his stock for $15.00 per share within 125 days after the
closing of the merger would receive the following: in the following cases
Days
Premium
Total Amount
Equivalent
After
Sales Price of
Reserve
Received for
Value per
Closing
EZCORP Share
Amount
EZCORP Share
VFS Share
20
$
15.00
$
1.33
$
16.33
$
12.25
45
$
15.00
$
1.00
$
16.00
$
12.00
90
$
15.00
$
0.67
$
15.67
$
11.75
120
$
15.00
$
0.33
$
15.33
$
11.50
If and to the extent that a VFS shareholder does not sell their EZCORP Shares within 125 days
after the closing of the merger, or sell the shares for less than $14.67 per share, they will not
be entitled to any premium reserve payment. In either such case they will receive less than $11.00
per VFS share if they get less than $14.67 per EZCORP Share.
EZCORP will promptly pay the full amount of any premium reserve payments that become due. The
maximum amount EZCORP will be required to pay is $6,646,527, if all VFS shareholders elect to
receive EZCORP Shares, and all of these shares are sold for more than $14.67 per share within 35
days after closing.
Conditions to Closing the Merger
The merger agreement contains several conditions that must be satisfied prior to closing by
each party. Each condition may be waived, except as noted below. EZCORP’s obligation to close and
consummate the merger is conditioned on the satisfaction of the following conditions by VFS:
•
Converting all of the VFS capital stock or convertible securities to VFS common
stock (1);
Satisfying any Hart-Scott-Rodino Act anti-trust review waiting periods(2);
•
Obtaining any required contractual consents and governmental licenses or
approvals;
•
Obtaining a termination and mutual release of the obligations of VFS and its
president, John Thedford, under the employment agreement between VFS and Mr.
Thedford(3);
•
Obtaining an opinion from VFS’s tax advisor on the application of certain
federal income tax concepts to VFS(4); and
•
Satisfying VFS’s contractual conditions and obligations contained in the merger
agreement.
(1) Because the VFS restated articles of incorporation require a penalty payment if a change in
control occurs before the participating stock is converted to common, EZCORP will not waive this
requirement.
(2) All applicable anti-trust review waiting periods have been satisfied.
(3) Texas EZPAWN, L.P., a subsidiary of EZCORP, intends to employ Mr. Thedford as an executive upon
completion of the merger.
(4) EZCORP and VFS have previously received the required opinion of the tax advisor.
The obligation of VFS to close and consummate the merger is conditioned on the satisfaction of
the following conditions by EZCORP:
•
Delivering the merger consideration for payment to the VFS shareholders upon
closing(1);
•
Approving the merger agreement by the sole shareholder of the Merger Sub(2);
•
Satisfying any Hart-Scott-Rodino Act anti-trust review waiting periods(3);
•
Obtaining any required contractual consents and governmental licenses or
approvals;
•
Receiving a fairness opinion from a third party as to the fairness of the
merger, the merger agreement and the voting agreement (4);
•
Approving the issuance of the EZCORP Shares to be issued to Mr. Thedford, the
president of VFS, by a committee of the EZCORP board of directors in order to exempt
Mr. Thedford from the prohibition imposed by Section 16(b) of the Securities Exchange
Act of 1934 that he must not have sold shares of EZCORP within six months before or
after the merger at prices in excess of the price at which he is deemed to have
acquired his EZCORP Shares in the merger (5).
•
Registering with the SEC the EZCORP Shares to be issued in the merger (6);
Listing the EZCORP Shares to be issued in the merger on the NASDAQ Global
Select Market (6); and
•
Satisfying EZCORP’s contractual conditions and obligations contained in the
merger agreement.
The obligation of each party to close and consummate the merger are conditioned upon approving
the merger agreement by the holders of a majority of VFS Common Stock.
(1)
VFS will not waive the requirement that the merger consideration be paid.
(2)
EZCORP, as the sole shareholder of the Merger Sub, has approved the merger and the merger
agreement.
(3)
All applicable anti-trust review waiting periods have been satisfied.
(4)
VFS has obtained an opinion from Stephens that the terms of the merger, the merger agreement
and the voting agreement are fair to the VFS shareholders. See The Stephens Fairness Opinion,
page 69.
(5)
The EZCORP board’s compensation committee has given the required approval.
(6)
Federal securities law requires that the registration statement become effective prior to the
issuance of the EZCORP Shares as merger consideration, so this requirement cannot be waived.
The EZCORP Shares have been or will be approved for listing on the NASDAQ Global Select Market
prior to mailing this proxy statement/prospectus.
While either EZCORP or VFS could waive provisions requiring that the other party obtain all
required licenses and third party approvals and satisfy the contractual conditions and obligations
of the merger agreement, the parties do not anticipate that any such waivers will be given if the
waiver would materially change the consideration to be paid by EZCORP or the value of VFS as a
merged entity. If any such waiver would constitute a material change in the terms of the merger
transaction, the parties will consult and decide whether to revise and recirculate this proxy
statement/prospectus and seek any required postponement in the shareholders’ meeting, or to
terminate the proposed transaction.
Termination
The merger agreement may, by written notice given prior to or at the closing of the merger, be
terminated:
•
By EZCORP, the Merger Sub or VFS for material breaches by the other party if
such breach has not been waived or cured within 15 days after the breaching party’s
receipt of written notice thereof;
•
By EZCORP or the Merger Sub if any of the conditions precedent to their
obligations to close are not satisfied (or waived) as of the Closing Date or by VFS if
any of the conditions precedent to its obligation to close is not satisfied (or waived)
by the Closing Date;
By EZCORP if VFS receives notices from holders of more than 10% of the VFS
Common Stock of their intent to demand payment pursuant to appraisal rights granted in
the Florida Business Corporation Act.;
•
By mutual consent of all parties to the merger agreement;
•
By any of the parties to the merger agreement if the Closing has not occurred
on or before December 31, 2008;
•
By VFS if VFS, any of its subsidiaries or the VFS board of directors approves,
recommends, authorizes, proposes or announces to enter into an Acquisition Transaction,
if and only to the extent that VFS’s board of directors reasonably determines, after
consultation with, and taking into account the advice of, outside legal counsel, that
the failure to do so would be inconsistent with its fiduciary obligations. An
“Acquisition Transaction” means any tender offer or exchange offer, any merger,
consolidation, liquidation, dissolution, recapitalization, reorganization or other
business combination, any acquisition, sale or other disposition of all or a
substantial portion of the assets or VFS or any similar transaction involving VFS, its
securities or any significant subsidiary as defined under Rule 405 promulgated by the
SEC. See Non-Solicitation Agreement, below.
Termination Fee
VFS has agreed to pay EZCORP a termination fee of $5 million if:
•
VFS terminates the merger agreement because it has entered into an acquisition
transaction with a third party as described in the preceding paragraph;
•
The VFS board of directors fails to recommend the merger to its shareholders;
•
The VFS shareholders fail to approve the merger;
•
The merger agreement is terminated by EZCORP or the Merger Sub after a material
breach of the merger agreement by VFS; or
•
The merger agreement is terminated by EZCORP or the Merger Sub because VFS has
not satisfied any of the conditions precedent to EZCORP’s and Merger Sub’s obligations
to close.
Non-Solicitation Agreement
VFS has agreed that, prior to effectiveness of the merger, it will not knowingly permit any of
its officers, directors, employees, agents or representatives (including, without limitation, any
investment banker, attorney or accountant retained by it) to solicit or encourage, directly or
indirectly, any inquiries, any proposal or offer with respect to any Acquisition Transaction (any
such proposal being referred to in the Agreement as an “Acquisition Proposal”) or engage in any
negotiations concerning an Acquisition Proposal; and (b) it will immediately cease and cause to be
terminated any existing negotiations with any parties with respect to any of the foregoing;
provided, that nothing contained in the agreement shall prevent VFS or its board of directors from
(A) making a recommendation for or against accepting a third party; or (B) providing information to
or engaging in any negotiations or discussions with any person or entity who has made an
unsolicited bona fide Acquisition Proposal that involves an Acquisition Transaction that VFS’s
board of directors in good faith determines, after consultation with its legal counsel and
financial advisors, represents a superior transaction for the shareholders of VFS when compared
to the merger, if and only to the extent that VFS’s board of directors reasonably determines, after
consultation with, and taking into account the advice of, outside legal counsel, that the failure
to do so would be inconsistent with its fiduciary obligations. VFS has agreed to promptly notify
EZCORP if any such information is requested from it or any such negotiations or discussions are
sought to be initiated with VFS and agreed to promptly communicate to EZCORP the terms of any
proposal or inquiry and the identity of the party making such proposal or inquiry which it may
receive in respect of any such transaction.
Indemnification
The covenants in the merger agreement shall survive the closing of the merger for a period of
one year. VFS will indemnify and hold harmless the Merger Sub and EZCORP for material breaches of
its representations, warranties (which are listed in the merger agreement) or covenants contained
in or related to the merger agreement. The Merger Sub and EZCORP will indemnify and hold harmless
VFS for material breaches of its representations, warranties or covenants contained in or related
to the merger agreement.
No Fractional Shares
No fractional shares of EZCORP 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.
Exchange of Certificates
EZCORP will deposit with American Stock Transfer and Trust Company or such other bank or trust
company designated by EZCORP and reasonably satisfactory to VFS (the “Exchange Agent”),
certificates representing the merger consideration. Promptly after the Effective Date, EZCORP
shall cause the Exchange Agent to mail to each record holder of our common stock: (1) a letter of
transmittal; and (2) instructions for use in effecting the surrender of their common stock for the
merger consideration, including instructions for making an election to receive the Cash
Consideration instead of EZCORP Shares.
Conduct Pending Closing
Pending the closing of the merger agreement, VFS agrees to: (1) conduct its business only in
the ordinary course (as defined in the merger agreement) unless with EZCORP’s prior written
consent; (2) use its reasonable best efforts to maintain current business practices; (3) confer
with EZCORP regarding material operational matters; and (4) provide EZCORP with certain interim
financial statements.
The merger is subject to compliance with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, referred to as the HSR Act. Pursuant to the HSR Act the merger may not be
completed unless certain filings have been submitted to the U.S. Federal Trade Commission, referred
to as the FTC, and the Antitrust Division of the U.S. Department of Justice, referred to as the
Antitrust Division, and the applicable waiting period has expired or been terminated. EZCORP and
VFS filed the appropriate notification and report forms with the FTC and the Antitrust Division on
June 11, 2008, and all applicable anti-trust waiting periods have expired.
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. EZCORP expects to close and consummate the merger as
soon after the shareholders’ meeting as practicable.
EZCORP’s Credit Facility
EZCORP has maintained a $40 million credit facility, but during 2008 through the date of this
proxy statement/prospectus, we have had no outstanding borrowings on the credit facility. EZCORP
has executed 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 were placed in escrow pending the
closing of the merger agreement with VFS. The Agreement is contingent upon the closing of the
merger agreement with VFS on or before December 31, 2008.
If the merger agreement with VFS is closed on or before December 31, 2008, the Agreement will
become effective and will provide for, among other things, (i) an $80 million revolving credit
facility that EZCORP 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 VFS. The maturity date of the Term Loan will be four
years from the closing of the merger agreement with VFS.
Pursuant to the Agreement, EZCORP 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. From
the date the credit facility becomes effective through the date EZCORP reports to the lenders its
interim results for the period ending June 30, 2009, EZCORP may choose to pay interest to the
lenders for outstanding borrowings at the Eurodollar rate plus 250 basis points or the base rate
plus 50 basis points, regardless of our leverage ratio during that period. Terms of the Agreement
require, among other things, that EZCORP meet certain financial covenants that EZCORP believes will
be achieved based upon its current and anticipated performance. In addition, payment of dividends
is prohibited and additional debt is restricted.
COMPARISON OF THE RIGHTS AND PRIVILEGES OF THE VFS COMMON STOCK AND THE EZCORP SHARES
The following is a general overview of the effect, with respect to VFS shareholders who elect
to exchange their VFS Common Stock for EZCORP Shares in the merger. It is not intended to be a
complete statement of all differences affecting stockholder rights under Delaware and Florida law,
or under the organizational documents of EZCORP and VFS.
As a result of the merger, VFS shareholders that do not elect to receive all cash
consideration for their shares of VFS Common Stock will become holders of EZCORP Shares. VFS is a
Florida corporation governed by the Florida Business Corporation Act (“FBCA”) and VFS’s
Articles of Incorporation and Bylaws. EZCORP, on the other hand, is a Delaware corporation
governed by the Delaware General Corporation Law (“DGCL”) and EZCORP’s Certificate of
Incorporation and Bylaws. The material differences between the rights of holders of VFS Common
Stock and those holding EZCORP Shares are summarized below.
Current holders of VFS series A-1 participating stock, series A-2 participating stock and
series B participating stock should note that, assuming the amendment and the conversion are
approved, that their participating stock shall be converted into common stock of VFS immediately
prior to the consummation of the merger. Thus, this discussion is limited to a discussion of
share/stock holder rights under Florida law and Delaware law and certain rights granted those
holding VFS Common Stock and those holding EZCORP Shares.
Authorized Capital Stock and Number of Directors
VFS. VFS’s amended and restated articles of incorporation authorize VFS to issue 50,000,000
shares, consisting of (i) 35,000,000 VFS Common Stock, par value $0.01 per share; and (ii)
15,000,000 Participating Shares (defined below). VFS’s bylaws state that the number of directors
of VFS shall be fixed from time to time, within the limits of its Articles of Incorporation (if
any), by resolution of the board of directors, but the number shall not be less than one.
EZCORP. EZCORP’s amended certificate of incorporation authorizes EZCORP to issue 57,000,000
shares of capital stock, classified as (i) 54,000,000 shares of EZCORP Class A Non-voting Common
Stock, par value $0.01 per share; and (ii) 3,000,000 shares of EZCORP’s Class B Voting Common
Stock, par value $0.01 per share. On September 26, 2008, EZCORP amended its certificate of
incorporation to eliminate its entire series of preferred stock and all references thereto, none of
which was issued or outstanding, and increased its authorized shares of Class A Non-voting Common
Stock from 50,000,000 to 54,000,000 to accommodate the shares to be registered with this
Registration Statement. The designations and powers, preferences and rights and qualifications,
limitations or restrictions of all EZCORP Shares are undetermined until fixed by resolution of the
board of directors. EZCORP’s bylaws state that the number of directors shall not be less than one.
Shareholder Meetings
VFS. Under the FBCA, a special meeting of the shareholders may be called by any person or
persons authorized to do so by the corporation’s articles of incorporation or bylaws.
VFS’s Bylaws
provide that a special meeting of the shareholders may be called by the President,
the board of directors, or by the President upon the written request of the holders of not
less than 51% of all shares entitled to vote on the issue proposed to be considered at the special
meeting.
EZCORP. Under the DGCL, stockholders of Delaware corporations do not have a right to call
special meetings unless such right is conferred upon the stockholders in the corporation’s
certificate of incorporation or bylaws. Although EZCORP’s Certificate of Incorporation does not
confer to its stockholders the right to call a special stockholders meeting, its Bylaws permit a
special meeting of the stockholders to be called by the Chairman of the Board, the President or the
board of directors and requires that a special meeting be called by the President or Secretary upon
the written request of the stockholders of record of not less than ten percent of all shares
entitled to vote at such special meeting. EZCORP’s Certificate of Incorporation states that
holders of EZCORP Shares have no voting rights other than what may be required under the DGCL.
Thus, unless otherwise provided by Delaware law, holders of EZCORP Shares are not entitled to call
a special meeting of EZCORP’s stockholders.
Notice of Meetings
Under the FBCA and the DGCL, share/stock holders generally must be provided written notice of
an annual or special share/stock holders meeting not less than 10 days nor more than 60 days prior
to a meeting. However, under Delaware law, in the case of a stockholder meeting called to vote on
a merger, consolidation or sale of substantially all of the assets of the corporation, stockholders
must be given written notice of not less than 20 days before the meeting. The Bylaws of VFS
provide for shareholder notice consistent with Delaware and Florida law, however, EZCORP’s Bylaws
do not contain the shorter 20 day notice requirement for a stockholder meeting called to vote on a
merger, consolidation or sale of substantially all of the assets of the corporation. Despite the
absence of such a provision, the DGCL’s requirement of 20 days’ prior notice before a meeting
called to vote on a merger, consolidation or sale of substantially all of the assets of the
corporation would govern the notice requirements.
Written Consents of Shareholders
Under the FBCA and the DGCL, the share/stock holders may take action without a meeting if a
consent in writing to such action is signed by the share/stock holders having the minimum number of
votes that would be necessary to take such action at a meeting, unless prohibited in the articles
or certificate of incorporation as the case may be. Both VFS and EZCORP’s Bylaws permit share/stock
holder action by written consent. Holders of EZCORP Shares are precluded from acting by written
consent because the EZCORP Shares are non-voting.
Election of Directors
VFS. The FBCA provides that directors are to be elected in the manner provided in the
corporation’s articles of incorporation. Under VFS’s Bylaws, members of the board are elected by
the shareholders at each annual meeting of the shareholders and serve until the next annual meeting
or until their successors have been elected or appointed. If a vacancy occurs, such vacancy may be
filled by either a majority of the remaining members of the board of directors or by an election at
an annual or special meeting of shareholders called for that purpose.
EZCORP. Under the DGCL, the directors of a corporation shall be elected by a plurality of the
votes cast by the holders of shares entitled to vote in the election of directors at a meeting of
stockholders at which a quorum is present, unless the certificate of incorporation provides for
cumulative voting. EZCORP’s Certificate of Incorporation does not provide for cumulative voting.
Holders of EZCORP Shares are not entitled to elect directors.
Removal of Directors
VFS. Under the FBCA, if cumulative voting is not authorized, once a director has been
elected, he or she may be removed by the shareholders if the number of votes cast to remove him or
her is greater than the number of votes cast not to remove him or her, unless the articles of
incorporation provide that directors may be removed only for cause. If the director was elected by
a voting group of shareholders, only the shareholders of that voting group may participate in the
vote to remove the director. VFS’s Articles of Incorporation permit removal of a director with our
without cause.
EZCORP. Under the DGCL, unless cumulative voting is authorized, a majority of the shares
entitled to vote at the election of directors may affect a removal of a director with or without
cause. EZCORP’s Certificate of Incorporation does not provide for cumulative voting.
VFS. The FBCA requires amendments to the articles of incorporation to be approved by the
shareholders of the corporation upon recommendation of the corporation’s board of directors. Unless
the FBCA, the articles of incorporation, or the board of directors requires a greater vote or
voting by groups, amendments to the articles of incorporation must be approved by a majority of the
votes cast. Unless otherwise required by the bylaws or the articles of incorporation, the FBCA
permits a corporation’s board of directors to adopt or amend bylaws that do not conflict with the
bylaws that may have been adopted by the shareholders. Bylaws that fix greater quorum or voting
requirements for shareholders may not be adopted, amended or repealed by the board of directors.
VFS’s Bylaws permit the board of directors, as well as the shareholders, to amend the corporation’s
bylaws
EZCORP. Unless the certificate of incorporation specifically provides otherwise, Delaware law
requires only the affirmative vote of a majority of all outstanding voting shares to effect certain
amendments to the certificate of incorporation. The DGCL also requires the shares of a class to
vote separately on amendments in certain circumstances. EZCORP’s Bylaws permit the board of
directors, as well as the stockholders, to amend the corporation’s bylaws.
Dissenters’ Rights
VFS. Under the FBCA, holders of record of VFS Common Stock are entitled to dissenters’ rights
assuming they follow the procedures mandated by the FBCA. If a corporation and the shareholder
asserting appraisal rights are unable to agree on the fair value of the corporation’s shares, the
corporation would be required to file within 60 days after receipt of the shareholders’ demand, an
appraisal action in a court in the county where the corporation had its principal office. The
court would be required to determine the fair value of the corporation’s
shares. A corporation
would be required to pay each shareholder asserting appraisal rights the amount found to be due
within ten days after final determination of the proceedings. At the
court’s discretion, the judgment may include interest at a rate determined by the court. Upon
payment of this judgment, the shareholder would cease to have any further appraisal rights with
respect to his or her shares.
EZCORP. Under the DGCL, a stockholder has the right, in connection with certain mergers or
consolidations, to dissent from certain corporate transactions and receive the fair market value of
his shares in cash in lieu of the consideration he otherwise would receive in the transaction. In
order for a dissenting stockholder to assert his dissenters’ rights, he must timely file a petition
for appraisal with the Delaware Court of Chancery which will appraise the shares (excluding any
appreciation or depreciation in the share price which occurs as a consequence of or in expectation
of the transaction). In addition, a Delaware corporation can provide in its certificate of
incorporation that appraisal rights are available to stockholders in certain other situations in
which such rights are not otherwise available under Delaware law. No such provision is included in
EZCORP’s Certificate of Incorporation.
Under the DGCL, unless the certificate of incorporation provides otherwise, appraisal rights
are not available to stockholders of a corporation if the shares are listed on a national
securities exchange or quoted on the NASDAQ National Market or held of record by more than 2,000
stockholders and stockholders are permitted by the terms of the merger or consolidation to accept
in exchange for their shares:
(1)
shares of stock of the surviving or resulting corporation,
(2)
shares of stock of another corporation which is listed on a national
securities exchange, quoted on the NASDAQ National Market or held of
record by more than 2,000 stockholders,
(3)
cash in lieu of fractional shares described in (1) and (2) above, or
(4)
any combination of the consideration described in (1) through (3) above.
In addition, appraisal rights are not available to stockholders of a Delaware corporation in a
merger if the corporation is the surviving corporation and no vote of its stockholders is required.
Because EZCORP is listed on the NASDAQ, stockholders do not have dissenters’ rights under the
DGCL.
Dividends
VFS. Under the FBCA, a corporation may pay distributions to its shareholders unless (a) the
corporation would not be able to pay its debts as they become in the usual course of business; or
(b) the corporation’s total assets would be less then the sum of its total liabilities, unless the
corporation’s articles of incorporation permit otherwise, plus the amount that would be needed upon
dissolution to satisfy the preferential rights of shareholders superior to those shareholders
receiving the distribution. Under VFS’s Articles of Incorporation and Bylaws, dividends are shared
pro rata among holders of the VFS Common Stock.
EZCORP. Under Delaware law, a corporation can pay dividends to the extent of its surplus, and
if no surplus is available, dividends can be paid to the extent of its net profits for the current
and/or preceding fiscal year. Dividends cannot be declared, however, if the corporation’s
capital has been diminished to an amount less than the aggregate amount of all capital
represented by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. Under EZCORP’s Certificate of Incorporation and Bylaws, subject to the
prior rights and preferences of holders of EZCORP’s preferred stock, holders of the EZCORP Shares
and shares of EZCORP Class B Voting Common Stock share dividends pro rata.
Preferred Stock
VFS. The FBCA provides that, if authorized by the articles of incorporation, a corporation’s
board of directors may issue participating stock with certain rights and privileges. Although
VFS’s Articles of Incorporation provide for the issuance of participating stock, immediately prior
to the merger, all of such shares shall be converted into VFS Common Stock.
EZCORP. On September 26, 2008, EZCORP amended its certificate of incorporation to eliminate
its entire series of preferred stock and all references thereto, none of which was issued or
outstanding.
Preemptive Rights
VFS. Under the FBCA, shareholders of a corporation are denied preemptive rights unless such
rights are expressly granted to stockholders in the articles of incorporation. VFS’s Articles of
Incorporation do not provide for preemptive rights to holders of the VFS Common Stock.
EZCORP. Under the DGCL, stockholders of a corporation are denied preemptive rights unless such
rights are expressly granted to stockholders in the certificate of incorporation. EZCORP’s
Certificate of Incorporation does not provide for preemptive rights to holders of the EZCORP
Shares.
Limitation of Liability of Directors
VFS. The FBCA protects all directors from liability to the corporation or shareholders for
monetary damages for any statement, vote, decision or failure to act, regardless of whether or not
a provision to that effect is included in the corporation’s articles of incorporation. This
protection does not apply if the director breached or failed to perform his or her duties as a
director, and the breach or failure constitutes a violation of the criminal law, a transaction from
which the director derived an improper personal benefit, where the director’s actions constituted a
conscious disregard for the best interests of the corporation, or an act committed in bad faith.
Under VFS’s Articles of Incorporation, directors are not personally liable to VFS or its
shareholders for monetary damages for breach of fiduciary duty as a director, except for liability:
(i) for any breach of the director’s duty of loyalty to VFS or its shareholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
(iii) from liability imposed by Section 607.0834 of the FBCA for unlawful distributions; and (iv)
for any transaction from which the director derived an improper personal benefit.
EZCORP. Subject to certain exceptions, the DGCL permits the certificate of incorporation or
bylaws to include a provision that eliminates a director’s liability to stockholders for monetary
damages for any breach of fiduciary duty as a director. The certificate of incorporation or
bylaws, however, cannot eliminate the liability of a director for breach of the director’s duty of
loyalty to the corporation or its stockholders; acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; unlawful payment
of dividends or unlawful stock purchase or redemption; or any transactions from which the director
derived an improper personal benefit. EZCORP’s Certificate of Incorporation contains similar
provisions to VFS’s Articles of Incorporation with respect to director liability.
Indemnification of Directors
Under the DGCL and the FBCA, a corporation can indemnify its directors if a director acted in
good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of
the corporation. Furthermore, the DGCL and the FBCA each allow for a corporation to indemnify its
directors with respect to any criminal action or proceeding when the director had no reasonable
cause to believe his conduct was unlawful. Indemnification is not allowed under either the DGCL or
the FBCA if a director has been adjudged liable to the corporation.
EZCORP’s Certificate of Incorporation requires the indemnification of its directors. VFS’s
Articles of incorporation provides for VFS to indemnify its officers, directors, employees and
agents to the fullest extent permitted by the FBCA.
Anti-Takeover Laws
Affiliated Transactions and Certain Business Combinations. The FBCA requires that any
“affiliated transaction,” which term includes a merger, sale of significant assets of the
corporation and similar extraordinary corporate transactions, between the corporation and an
interested shareholder (generally defined as any person who is the beneficial owner of more than
ten percent (10%) of the outstanding voting shares of the corporation) be approved by the
affirmative vote of the holders of two-thirds of the voting shares of the corporation other than
the shares beneficially owned by the interested shareholder. The voting requirements of the FBCA
will not apply, however, to an affiliated transaction if: (a) the affiliated transaction has been
approved by a majority of the corporation’s disinterested directors; (b) the corporation has not
had more than 300 shareholders at any time during the preceding three years; (c) the interested
shareholder has been the beneficial owner of at least 80% of the corporation’s outstanding voting
shares for at least five (5) years; (d) the interested shareholder is the beneficial owner of at
least ninety percent (90%) of the outstanding voting shares of the corporation; or (e) certain fair
price requirements have been met. The statute also provides that the restrictions contained therein
shall not apply to any corporation whose articles of incorporation or bylaws contain a provision
expressly electing not to be governed thereby. VFS is subject to the FBCA’s affiliate transaction
statute.
The DGCL similarly prohibits a corporation from entering into certain “business combinations”
between the corporation and an “interested stockholder” (generally defined as any person who is the
beneficial owner of more than 15% of the outstanding voting shares of the corporation), unless the
corporation’s board of directors has previously approved either (a) the business combination in
question or (b) the stock acquisition by which such interested
stockholder’s beneficial ownership
interest reached 15%. The prohibition lasts for three years from the date the interested
stockholder’s beneficial ownership reached 15%. Notwithstanding the preceding, the DGCL allows a
corporation to enter into a business combination with an interested stockholder if: (a) the
business combination is approved by the corporation’s board of directors and is authorized by an
affirmative vote of at least two-thirds of the outstanding voting stock of the corporation which is
not owned by the interested stockholder, or (b) such interested
stockholder owned at least 85% of the outstanding voting stock of the corporation at the time
the transaction commenced. The statute also provides that the restrictions contained therein shall
not apply to any corporation whose certificate of incorporation contains a provision expressly
electing not to be governed thereby. EZCORP is subject to the DGCL’s affiliated transaction
statute.
Control Share Regulation. Unless the articles of incorporation or bylaws provide otherwise,
the FBCA restricts the voting rights of a person who acquires “control shares” in an “issuing
public corporation.”“Control shares” are defined under the FBCA as those shares that, when added
to all other shares of the issuing public corporation owned by a person or in respect to which that
person may exercise or direct the exercise of voting power, would entitle that person to exercise
the voting power of the corporation in the election of directors within any of the following ranges
of voting power: (a) one-fifth or more but less than one-third of all voting power; (b) one-third
or more but less than a majority of all voting power; or (c) a majority or more of all voting
power. An “issuing public corporation” is a corporation that has: (a) 100 or more shareholders;
(b) its principal place of business, its principal office or substantial assets within Florida; and
(c) either (i) more than ten percent (10%) of its shareholders reside in Florida, (ii) more than
ten percent (10%) of its shares are owned by Florida residents, or (iii) 1,000 shareholders reside
in Florida. However, Florida’s “control share” anti-takeover statute does not apply to a merger
transaction that is subject to shareholder approval. The effect of this statute is discussed below
only to illustrate the effect of FBCA’s control share acquisition statute on holders of the VFS
Common Stock because the DGCL does not contain a similar statute.
If a control share acquisition has been made, the control shares have no voting rights unless
the holders of a majority of shares (other than those held by the acquirer and the corporation’s
officers and employee-directors) grant voting rights to those shares by resolution. Any person who
proposes to make or has made a control share acquisition (an “Acquirer”) may, at his or her
election, deliver an acquiring person statement to the issuing public corporation setting forth
certain information concerning the Acquirer and the acquisition of his shares, together with a
request for a shareholders meeting to determine his voting rights, which meeting must be held
within fifty (50) days of the date of the request. The Acquirer must pay the expenses of the
shareholders meeting.
If an Acquirer acquires a majority of the outstanding shares of the corporation and is granted
full voting rights pursuant to the procedure outlined above, the other shareholders of the
corporation have dissenters’ rights to require the corporation to purchase their shares for a “fair
value.” The term “fair value” is defined as a value not less than the highest price paid per share
by the acquirer in the control share acquisition.
Introduction to Unaudited Pro Forma Condensed Combined Financial Statements
On September 16, 2008, EZCORP, VFS and Merger Sub entered into a merger agreement under which,
upon completion, VFS will become a wholly-owned subsidiary of EZCORP in a transaction to be
accounted for using the purchase method of accounting for business combinations. Under the terms
of the merger agreement, at the effective time of the merger, each outstanding share of VFS common
stock will be converted into the right to receive either (i) $11.00 in cash, without interest, or
0.75 of a share of EZCORP Class A Non-voting Common Stock.
The following unaudited pro forma condensed combined balance sheet is based on historical
balance sheets of EZCORP and VFS and has been prepared to reflect the merger as if it had been
completed on the balance sheet date of June 30, 2008. The following unaudited pro forma condensed
combined statements of operations give effect to the merger as if it had taken place on October 1,2006, the beginning of the earliest period presented, in accordance with SEC guidance. Although
VFS’s fiscal year ends on a different date than that of EZCORP, all VFS information presented in
the Pro Forma Combined Statements of Operations are actual amounts for the periods indicated. For
example, the VFS information presented in the Pro Forma Statement of Operations for the year ended
September 30, 2007 reflects VFS’s performance for the twelve months then ended and not amounts
reported in the VFS annual audited financial statements for the year ended December 31, 2007.
The merger will be accounted for under the purchase method of accounting in accordance with
Statement of Financial Accounting Standards No. 141, “Business Combinations.” Under the purchase
method of accounting, the total estimated purchase price, calculated as described in Note A to
these unaudited pro forma condensed combined financial statements, is allocated to the net tangible
and intangible assets of VFS based on their estimated fair values. Management has made a
preliminary allocation of the estimated purchase price to the tangible and intangible assets
acquired and liabilities assumed based on various preliminary estimates. A final determination of
these estimated fair values, which cannot be made prior to the completion of the merger, will be
based on the actual net tangible and intangible assets of VFS that exist as of the date of
completion of the merger, and upon the final purchase price.
The unaudited pro forma condensed combined financial statements are based on the estimates and
assumptions which are preliminary and have been made solely for purposes of developing such pro
forma information. They do not include liabilities that may result from integration activities
which are not presently estimable. The management of EZCORP and VFS are in the process of making
these assessments, and estimates of these costs are not currently known. However, liabilities
ultimately may be recorded for severance costs for VFS employees, costs of vacating some facilities
of VFS, or other costs associated with exiting activities of VFS that would affect the pro forma
condensed combined financial statements. Any such liabilities would be recorded as an adjustment
to the purchase price and an increase in goodwill. In addition, the pro forma condensed combined
financial statements do not include any potential operating efficiencies or cost savings from
expected synergies. The unaudited pro forma condensed combined financial statements are not
necessarily an indication of the results that would have been achieved had the merger been
completed as of the dates indicated or that may be achieved in the future.
In the merger agreement, we agreed to exchange three-quarters of a share of EZCORP’s Class A
Non-voting Common Stock for each of the 6,646,370 shares of VFS’s common stock we expect to be
outstanding on the acquisition date, and to round up to the nearest whole share any fractional
shares. We also agreed to make certain cash contingency payments to VFS shareholders selling
EZCORP Shares within 125 days of effectiveness of this registration statement, assuming such shares
are sold above or below $14.67 per share, as described in the merger agreement. At the option of
each VFS shareholder, we also agreed to pay cash consideration of $11.00 per VFS share in lieu of
issuing EZCORP Shares for up to twenty percent of the outstanding VFS shares. For purposes of
these pro forma combined financial statements and the preliminary purchase price allocation, we
assumed no contingency payments and that twenty percent of VFS shareholders elect to receive $11.00
cash consideration in lieu of EZCORP Shares; however, we cannot predict the amount of any
contingent payment that might be made or what percentage of VFS shareholders ultimately will elect
to receive cash in lieu of EZCORP Shares, and the ultimate purchase price will be adjusted to
reflect any changes in actual behavior compared to our assumptions herein. Notes A and G to these
pro forma financial statements describe differences in the pro forma results under differing
assumptions as to the amount of contingency payments actually made and the number of shareholders
electing to receive cash in lieu of EZCORP Shares.
For purposes of preparing these pro forma condensed combined financial statements, we have assumed
consummation of the following transactions upon completion of the merger:
-
Conversion of all VFS participating stock into VFS common stock
-
Exchanging 0.75 EZCORP Shares for each VFS common share for those shareholders electing
to receive EZCORP Shares (assumed 80% elect to receive EZCORP Shares)
-
Cash payment to all VFS shareholders electing to receive cash in lieu of EZCORP Shares
(assumed 20% elect to receive cash)
-
Use of $20 million of EZCORP’s cash on hand as part of the merger consideration
-
Use of $1 million of EZCORP’s cash on hand to pay deferred financings costs related to
its Fifth Amended and Restated Credit Facility, expected to become effective at the time of
the merger
-
Closing of the EZCORP Fifth Amended and Restated Credit Facility
-
VFS’ payment of all accrued, unpaid dividends on its Series A-2 participating stock
immediately preceding closing of the merger, with an offsetting increase in VFS’
outstanding debt to finance the payment (estimated at $2.4 million at June 30, 2008)
-
Retirement of VFS’ outstanding debt at the date of the merger (including the borrowings
to finance its payment of its Series A-2 accrued, unpaid dividends)
-
Borrowing upon EZCORP’s Fifth Amended and Restated Credit Facility for approximately
$1.1 million of transaction-related expenses and the payment of VFS’ outstanding debt and
merger consideration not otherwise covered by EZCORP’s cash on hand (as described above)
and EZCORP Shares to be issued as merger consideration
These unaudited pro forma condensed combined financial statements should be read in
conjunction with the historical consolidated financial statements and notes thereto of EZCORP and
VFS and other financial information pertaining to EZCORP and VFS including “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Risk Factors” incorporated by
reference or included herein.
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 June 30, 2008
The pro forma adjustments to the unaudited pro forma combined balance sheet as of June 30, 2008
consist of the allocation of the expected total purchase price to the estimated fair value of VFS’s
net assets, including the elimination of VFS’s existing equity, and the financing of the
acquisition, including the use of $20 million of cash as consideration, the issuance of 3,987,979
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 as a use of cash. Included in the estimated
total purchase price is the accumulated dividend of approximately $2.4 million we anticipate being
paid on VFS’s series A-2 participating stock immediately preceding the acquisition, as if it had
occurred at June 30, 2008. VFS’s 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 $80.6 million at the anticipated
closing date of November 1, 2008 (plus the assumption of approximately $35.3 million of VFS debt,
aggregating to $115.9 million), assuming no contingent payments and that twenty percent of VFS
shareholders elect to receive cash consideration in lieu of EZCORP Shares, as described above. For
purposes of preparing the pro forma unaudited balance sheet as of June 30, 2008, we must assume the
acquisition was completed June 30, 2008. The assumed purchase price at that date is less than the
assumed purchase price at November 1, 2008, due to the following primary differences in value
between the dates:
•
the effects of VFS’ ongoing daily operations, including the anticipated seasonal growth in
outstanding pawn loan and inventory balances between June and November and VFS’s growth in net
assets as a result of their expected earnings between the two dates
•
The difference between our actual closing price of $16.35/share on the date we announced
the merger and $15.92/share assumed in theses pro forma financial statements (in accordance
with SEC guidance for pro forma financial information, using a daily average of the closing
market price for our stock from two business days prior to announcing the merger to two
business days after announcing the merger).
•
the continuing accrual of dividends on VFS’ Series A-2 participating stock, which will
increase VFS’ outstanding debt immediately prior to our assumption / retirement of that debt
upon merger
At June 30, 2008, the unaudited pro forma purchase price allocation of non-cash assets and
liabilities to be acquired, which is preliminary and subject to change, was as follows based on the
estimated fair values of each item:
In calculating the assumed total purchase price to include in the above preliminary pro forma
purchase price allocation, we estimated the value of the EZCORP Shares to be issued as merger
consideration at $15.92 per share, which is the five-day average of the closing price of our stock
from two business days prior to the announcement of the merger to two business days after the
announcement of the merger.
In our estimation of the purchase price allocation, we have made all adjustments we believe to be
appropriate to adjust VFS’s assets and liabilities to their fair value, including the recording of
the fair value of VFS’s trademarks and tradenames and a favorable lease asset for leases that
appear to be at favorable terms in relation to current market terms. Included in the total
purchase price
is a significant amount allocated to goodwill, or the excess of purchase price over
the remaining
net assets acquired. The total agreed purchase price was determined through lengthy negotiations
with the VFS board and executive management, as described in the proxy/prospectus included in this
S-4, and reflects what we believe to be the value of the entire company, including the goodwill we
will acquire and from which we will benefit in the future. We believe it is reflective of VFS’s
future earning potential, which is far greater than its recorded net assets other than goodwill.
The schedule below presents the calculation of the total assumed purchase price to be paid and its
components, assuming 20% of VFS shareholders elect to receive cash consideration in lieu of EZCORP
Shares (dollars in thousands):
Anticipated stock consideration (5,317,096 VFS shares
exchanged for 0.75 EZCORP Shares each plus 157 EZCORP
Shares for rounding fractional shares up to the nearest
whole share times $15.92 per EZCORP share)
$
63,489
Anticipated cash consideration for 20% of VFS shareholders
electing to receive cash in lieu of EZCORP Shares
(1,329,274 VFS shares times $11.00/share)
Because VFS will be required to pay its accumulated, unpaid Series A-2 participating stock dividend
prior to the merger with EZCORP and because VFS did not have the funds available to pay such
dividend on the assumed pro forma acquisition date of June 30, 2008, we assumed in our purchase
price allocation an increase in VFS’s outstanding debt at the pro forma date of acquisition, which
increases the amount of VFS debt we anticipate paying off immediately following the acquisition and
replacing with borrowings under our credit facility. After consummation of our acquisition of VFS,
there will no longer be any dividend payable to any class of VFS or EZCORP stock.
In accordance with SFAS No. 141, any payment made under the deficiency guaranty will result in no
change to the total purchase price, but rather will result in a revaluation of the different
components of consideration paid for the acquisition. Specifically, any cash payments made under
the deficiency guaranty will be recorded as part of the purchase price, with an equal and
offsetting reduction in the amount previously recorded for EZCORP Shares issued at the date of
acquisition to reduce their value to the lower current value of those securities at the date of the
related sales. The net result will be no change in the total purchase price, but a decrease in the
amount of Additional Paid-in Capital as a result of the reduction in value assigned to the
securities and an offsetting reduction in cash.
Any payments made under the premium reserve,
which was provided as part of the total purchase
consideration, is part of the cost of the acquisition in accordance with EITF 97-15, accounting for Contingency Arrangements Based on Security Prices in a Purchase Business Combination.
We would expect any premium reserve payment to result in a
decrease to cash and an adjustment to Additional Paid-in Capital
recorded for EZCORP Shares issued at the date of the acquisition. The entries to be recorded upon the payment of any deficiency guaranty or
premium reserve will have no other effects on our financial statements, other than a decrease in
the interest income that we could have otherwise recognized as we will not be able to invest the
cash used to make such payments.
Below are notes describing the pro forma balance sheet adjustments, as noted on the face of the pro
forma combined balance sheet:
(1)
$20.0 million of cash will be used as part of the merger consideration paid to VFS
shareholders electing to receive cash and to cover merger related costs anticipated to be
capitalized as part of the total purchase price. $1.0 million of cash will be paid to our
bank syndication and will be recorded as deferred financing costs related to our credit
facility, which we are amending, restating, and re-syndicating to finance this merger.
(2)
These adjustments remove the goodwill currently on VFS’s books and record the goodwill
arising from this merger.
(3)
This adjustment records $1.0 million of deferred financing costs we expect to pay upon
closing of our credit agreement which is being amended and restated to finance this merger,
to record the $4.1 million fair value of trademarks and tradenames being acquired from VFS
that are not currently recorded in their books, and to record $1.8 million of favorable
lease assets we will be acquiring from VFS that are not currently recorded on their books.
(4)
These entries remove the VFS debt that is expected to be repaid immediately upon
closing of the merger and to record the debt EZCORP expects to borrow to finance a portion
of the merger consideration.
(5)
These entries remove the equity currently recorded by VFS and recognizes the estimated
value of EZCORP stock to be issued as a portion of the merger consideration.
Note B: Operations Expense
In our preliminary estimate of the fair value of VFS’s net assets to include in the purchase price
allocation, we identified a number of VFS’s 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 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.
The pro forma $1.5 million reduction of Administrative expense in the nine month period ended June30, 2008 removes the success fee VFS paid to its directors and officers upon reaching an agreement
to be acquired by us.
Included in VFS’s historical results for this same period but excluded as a pro forma adjustment is
VFS’s $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 VFS’s 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 an $8.2 million charge to
VFS’s 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 VFS’s 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 VFS’s
administrative functions with ours.
Note D: Interest Expense
The pro forma adjustment to interest expense recognizes the estimated change in 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
VFS’s debt that will be retired immediately following the transaction, and the loss of interest
income on our cash assumed to be used in the transaction. The table below presents the amount of
the pro forma adjustment to interest expense arising from each of these components in the periods
presented (in thousands):
Use of $21 million of cash ($20 million towards the
purchase and $1 million of deferred financing costs
on debt used to finance the acquisition)
$
891
$
668
$
668
Amortization of $1 million of deferred financing costs
333
250
250
Interest expense related to new debt assumed to
finance the acquisition
1,313
985
984
Elimination of interest expense incurred by VFS
(1,504
)
(2,351
)
(669
)
Net pro forma adjustment to interest expense
$
1,033
$
(448
)
$
1,233
For purposes of estimating the pro forma interest expense, we applied an interest rate of 4.24%,
comprised of the 1-month LIBOR market rate as of the date of the merger announcement 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. Because our applicable interest
rate floats with changes in LIBOR, the assumed interest expense would vary with changes in
prevailing interest rates. If LIBOR increased by 0.125% (1/8%) over the assumed rate, pro forma
interest expense would increase by $61,000 for the year ended September 30, 2007 and $46,000 for
the nine-month periods ended June 30, 2008 and 2007. Net income would decrease by $39,000 for the
year ended September 30, 2007 and $29,000 for the nine-month periods ended June 30, 2008 and 2007.
EZCORP has executed 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 were placed in escrow pending
the closing of the merger agreement with VFS. The Agreement is contingent upon the closing of the
merger agreement with VFS on or before December 31, 2008.
If the merger agreement with VFS is closed on or before December 31, 2008, the Agreement will
become effective and will provide for, among other things, (i) an $80 million revolving credit
facility that EZCORP 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 VFS. The maturity date of the Term Loan will be four
years from the closing of the merger agreement with VFS.
Pursuant to the Agreement, EZCORP 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. From
the date the credit facility becomes effective through the date EZCORP reports to the lenders its
interim results for the period ending June 30, 2009, EZCORP may choose to pay interest to the
lenders for outstanding borrowings at the Eurodollar rate plus 250 basis points or the base rate
plus 50 basis points, regardless of our leverage ratio during that period. We anticipate that upon
closing of the merger agreement, we would elect the Eurodollar rate and have assumed that in these
pro forma financial statements. Terms of the Agreement require, among other things, that EZCORP
meet certain financial covenants that EZCORP believes will be achieved based upon its current and
anticipated performance. In addition, payment of dividends is prohibited and additional debt is
restricted.
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 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 3,987,979 shares expected to be issued
to current VFS shareholders as part of the consideration for the acquisition.
VFS shareholders have the option to elect to receive cash consideration in lieu of EZCORP Shares as
merger consideration for up to 20% of the total number of EZCORP Shares offered. As explained
above, the pro forma financial statements and notes above assume that 20% of the VFS shareholders
do elect to receive cash in lieu of EZCORP Shares. The following disclosures are presented to
indicate the range of possible pro forma results, assuming instead that all VFS shareholders elect
to receive EZCORP Shares and none elect to receive cash. In each instance, the change in net
income arises from the change in interest expense due to the change in assumed debt, net of income
taxes. Earnings (loss) per share are affected by the change in net income and the dilutive effect
of additional shares assumed outstanding:
The purchase price allocation to VFS’s net assets acquired would be unchanged from that presented
in Note A regardless of the percentage of VFS shareholders electing to receive cash in lieu of
EZCORP Shares.
Note H: 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:
Section 145 of the General Corporation Law of the State of Delaware provides that a Delaware
corporation may 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, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such corporation) by
reason of the fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or proceeding, provided
such person acted in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that such person’s conduct was unlawful.
Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or agent of another
corporation or enterprise, against any liability asserted against such person and incurred by such
person in any such capacity, arising out of such person’s status as such, whether or not the
corporation would otherwise have the power to indemnify such person against liability under Section
145.
Our Restated Certificate of Incorporation provides that no director will be personally liable
to us or any of our shareholders for monetary damages arising from the director’s 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.
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.
EXPERTS
Accounting Matters
Our financial statements and effectiveness of internal control over financial reporting, and
schedule, incorporated by reference in this proxy statement/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.
The financial statements of VFS as of December 31, 2007, 2006 and 2005 and for the years then
ended are included in this proxy statement/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 proxy statement/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 proxy statement/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 proxy
statement/prospectus will be passed on by Strasburger & Price, L.L.P., Austin, Texas. An opinion
on the material federal income tax consequences of the merger described in this proxy
statement/prospectus will be rendered by Strasburger & Price, LLP, Dallas, Texas.
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 proxy
statement/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 Proxy statement/prospectus are sold or until
this offering is otherwise completed:
The description of EZCORP’s Common Stock and Common Stock Rights as
set forth in EZCORP’s 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:
EZCORP, Inc.
Attention: Investor Relations Department
1901 Capital Parkway Austin, Texas78746
(512) 314-3400
We file annual, quarterly and periodic reports and other information with the Securities and
Exchange Commission using the SEC’s EDGAR system. You can find our SEC filings on
the SEC’s 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.
2006.
We furnish our shareholders 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 proxy statement/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 proxy
statement/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
proxy statement/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 proxy statement/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 proxy statement/prospectus is required to
be delivered, this proxy statement/prospectus will be supplemented or amended.
Report of Independent Registered Public Accounting Firm
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 Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 U.S. generally accepted accounting principles.
Report of Independent Registered Public Accounting Firm
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 Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). 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 U.S. generally accepted accounting principles.
As discussed in Note 1(a) to the consolidated financial statements, the consolidated financial
statements have been restated.
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
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.
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
)
Weighted average number of common shares
outstanding:
Basic*
n/a
n/a
n/a
Diluted
6,160,646
6,160,646
6,413,097
Earnings (loss) per common share:
Basic*
n/a
n/a
n/a
Diluted
$
0.69
$
0.88
$
(0.15
)
*
For all periods presented, the Company had no outstanding common stock. Therefore, the
calculation of the weighted average number of common shares outstanding — basic and earnings (loss)
per common share — basic is not applicable
See the accompanying notes to consolidated 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.
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 Company’s 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 Company’s 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.
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 Company’s 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 Doubtful 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 as adjustments to the allowance are recorded in service charge
revenues in the accompanying consolidated statements of operations. 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 management’s
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.
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.
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 Company’s 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 Company’s 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.
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 Company’s 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 Company’s debt from a variable rate of
interest based on one-month LIBOR plus a margin determined on the basis of the
Company’s 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.
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 Company’s 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 November15, 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 Company’s 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 Company’s
consolidated financial position or results of operations.
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.
(s)
Earnings (Loss) per Common Share
Basic earnings (loss) per common share (“EPS”) is not presented in the accompanying
consolidated financial statements due to the fact that for all periods presented,
the Company had no outstanding common stock. Therefore, the calculation of the
weighted average number of common shares outstanding — basic and earnings (loss)
per common share — basic is not applicable. The Company applies the treasury stock
method of reflecting the dilutive effect of outstanding stock-based compensation in
the calculation of diluted EPS in accordance with SFAS No. 128, “Earnings Per
Share” (“SFAS No. 128”). SFAS No. 128 requires that proceeds from the exercise of
options and warrants shall be assumed to be used to purchase common shares at the
average market price during the reported period. The incremental shares (i.e., the
difference between the number of shares assumed issued upon exercise and the number
of shares assumed purchased) must be included in the number of weighted average
common shares used for the calculation of diluted EPS.
Diluted EPS is calculated by giving effect to the potential dilution that could
occur if securities or other contracts to issue common shares were exercised and
converted into common shares during the year, assuming the conversion of all of the
Company’s participating stock into common stock. Diluted EPS includes all
outstanding shares of the Company’s Series A-1, A-2 and B participating stock
and dilutive common stock options of 758,295 for the years ended December 31, 2005,
2006 and 2007.
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:
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 Company’s 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 Company’s
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.
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.
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:
The Company’s 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 Company’s net operating loss carryforwards may be limited in any given
year under certain circumstances. Events which may affect the Company’s 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 Company’s 2004 through 2007 tax years were open to examination
by the Internal Revenue Service and major state taxing jurisdictions.
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.
The Credit Facility is collateralized by substantially all of the Company’s 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 lender’s 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 Company’s
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:
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 Company’s assets, or are voluntarily convertible for five years at
the holder’s 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 holder’s 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
Company’s 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.
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 Company’s
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 December31, 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 Company’s 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 Company’s 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 Company’s 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 Company’s 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
Company’s filing and subsequent suspension of its IPO during 2007.
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 Company’s 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:
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
(7)
Shareholders’ Equity
(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.
On June 15, 2007, the Company’s 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 Company’s 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 Company’s 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.
The Company had classified the note as contra-equity in the accompanying
consolidated balance sheets. In June 2007, pursuant to the Company’s 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 Company’s 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 2006 and 2007:
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 participant’s contributions, not to exceed $5,000 in any Plan year. The Company’s
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
(a)
Operating Leases
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 Company’s leases have renewal options for one or two three- to
five-year periods.
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 Company’s 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
Company’s pawnshop locations. In addition, business interruption losses were
incurred at several of the Company’s 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.
During 2005, one of the Company’s 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-off’s 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 Company’s 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 Company’s 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 Company’s pawn store locations in Atlanta Georgia
was the victim of a robbery. A report has been filed with the Company’s Insurance
Company; however, the claim amount has not yet been finalized.
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 Company’s 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.
Service charges receivable, net of allowance for
doubtful service charges of approximately $2,246,000 and
$2,048,000 in 2008 and 2007, respectively
3,520,084
3,274,926
Deferred tax assets
3,686,374
4,042,186
Income tax receivable
59,189
28,700
Advances to officers and directors
76,136
—
Advances to team members
28,112
101,114
Prepaid expenses and other
2,037,712
1,383,229
Total current assets
41,463,428
39,789,157
Property and equipment, net
8,055,566
7,529,734
Goodwill
4,874,082
4,874,082
Deferred tax assets
2,907,539
4,645,523
Other assets
364,086
336,095
Total assets
$
57,664,701
$
57,174,591
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable
$
241,489
$
468,749
Accrued expenses
3,988,088
5,258,222
Customer layaway deposits
865,939
767,830
Deferred rent
384,338
357,206
Current maturities of long-term debt
17,377,245
4,000,000
Current maturities of convertible subordinated debentures
68,922
66,736
Total current liabilities
22,926,021
10,918,743
Long-term debt
11,952,164
26,784,307
Swap interest liability
577,168
552,748
Convertible Subordinated Debentures, less current maturities
301,908
336,924
Total liabilities
35,757,261
38,592,722
Contingencies (Note 4)
Shareholders’ equity:
Series A-1 participating stock, $0.01 par value;
3,756,496 authorized in 2008 and 2007; 3,756,496 shares
issued and outstanding in 2008 and 2007; convertible to
common stock at a ratio of 1 to 1
37,565
37,565
Series A-2 participating stock, $0.01 par value;
2,500,000 shares authorized; 1,516,590 shares issued and
outstanding in 2008 and 2007; convertible to common
stock at a ratio of 1 to 1
15,166
15,166
Series B participating stock, $0.01 par value; 682,038
shares authorized; 614,988 shares issued and outstanding
in 2008 and 2007; convertible to common stock at a ratio
of 1 to 1
6,150
6,150
Common stock, $0.01 par value; 35,000,000 shares
authorized; none issued or outstanding in 2008 and 2007
—
—
Additional paid-in capital
55,580,562
55,580,562
Accumulated deficit
(33,732,003
)
(37,057,574
)
Total shareholders’ equity
21,907,440
18,581,869
Total liabilities and shareholders’ equity
$
57,664,701
$
57,174,591
See the accompanying notes to consolidated financial statements.
Total store operating expenses (including
non-cash depreciation expense)
(10,122,389
)
(8,696,449
)
(20,592,554
)
(17,282,919
)
Store operating income
6,049,035
4,761,079
12,403,269
9,769,831
General and administrative expenses:
Administration
(2,805,980
)
(10,735,175
)
(5,767,223
)
(13,130,097
)
Depreciation
(57,498
)
(50,838
)
(112,153
)
(100,745
)
Loss on disposal of equipment
(9,071
)
(111,623
)
(9,910
)
(116,931
)
Total general and administrative expenses
(2,872,549
)
(10,897,636
)
(5,889,286
)
(13,347,773
)
Income (loss) from operations
3,176,486
(6,136,557
)
6,513,983
(3,577,942
)
Non-operating expenses:
Interest expense
(450,114
)
(256,766
)
(1,000,009
)
(431,680
)
Net income (loss) before income tax
benefit (expense)
2,726,372
(6,393,323
)
5,513,974
(4,009,622
)
Income tax benefit (expense)
(1,082,051
)
2,482,824
(2,188,403
)
1,557,123
Net income (loss)
$
1,644,321
$
(3,910,499
)
$
3,325,571
$
(2,452,499
)
Weighted average number of common shares outstanding:
Basic*
n/a
n/a
n/a
n/a
Diluted
6,646,369
6,191,104
6,646,369
6,175,959
Earnings (loss) per common share:
Basic*
n/a
n/a
n/a
n/a
Diluted
$
0.25
$
(0.63
)
$
0.50
$
(0.40
)
*
For all periods presented, the Company had no outstanding common stock. Therefore, the
calculation of the weighted average number of common shares outstanding — basic and earnings
(loss) per common share — basic is not applicable.
See the accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
(1)
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Management has included
all adjustments it considers necessary for a fair presentation. These adjustments are of a
normal, recurring nature. The accompanying financial statements should be read in
conjunction with the Notes to Consolidated Financial Statements for the year ended December31, 2007. The balance sheet at December 31, 2007 has been derived from the audited
financial statements at the date but does not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements.
Certain prior period balances have been reclassified to conform to the current presentation.
Our business is subject to seasonal variations, and operating results for the three and
six-month periods ended June 30, 2008 (the “current quarter” and “current year-to-date
period”) are not necessarily indicative of the results of operations for the full year.
(2)
Summary of Significant Accounting Policies
(a)
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.
(b)
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 Company’s 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.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(2)
Summary of Significant Accounting Policies, Continued
(c)
Allowance for Doubtful 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 as adjustments to the allowance are recorded in service charge
revenues in the accompanying consolidated statements of operations. Due to the
short-term nature of pawn loans, the Company can quickly identify performance
trends.
(d)
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 management’s
evaluation of the inventories. The allowance deducted from the carrying value of
inventories amounted to approximately $333,000 as of December 31, 2007, and at June30, 2008, respectively.
(e)
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.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(2)
Summary of Significant Accounting Policies, Continued
(f)
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.
(g)
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.
(h)
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.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(2)
Summary of Significant Accounting Policies, Continued
(i)
Hedging and Derivatives Activity
The Company’s 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. At June 30, 2008, the Company had an interest
rate derivative with a notional amount of $12,000,000 which effectively converted a
portion of the Company’s debt from a variable rate of interest based on one-month
LIBOR plus a margin determined on the basis of the Company’s quarterly funded debt
to EBITDA ratio to a fixed LIBOR rate of 5.73% plus the same margin. At June 30,2008, the fair value of this interest rate swap was a liability of $577,168 which
has been recorded as a non-current liability and the change in the fair value as an
increase in interest expense in the accompanying consolidated financial statements.
(j)
Accounting for Stock-Based Compensation
The Company accounts for share-based payments in accordance with 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).
(k)
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. In February 2008, FASB
issued FASB Staff Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No.
157”, 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 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 adoption of
SFAS No. 157 and FSP FAS 157-2 did not have a material effect on the Company’s
consolidated financial position or results of operations. The Company has not
applied the provisions of SFAS No. 157 to its nonfinancial assets and nonfinancial
liabilities in accordance with FSP FAS 157-2. The Company will apply the provisions
of SFAS No. 157 to these assets and liabilities beginning January 1, 2009 as
required by FSP FAS 157-2. See Note 5.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(2)
Summary of Significant Accounting Policies, Continued
(k)
Recent Accounting Pronouncements, Continued
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 was effective for
fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 did
not have a material effect on the Company’s consolidated financial position or
results of operations.
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 the 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 December15, 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.
In March 2008, FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosure about Derivative Instruments and Hedging Activities — an amendment of
FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced
disclosures concerning (1) the manner in which an entity uses derivatives (and the
reason it uses them), (2) the manner in which derivatives and related hedged items
are accounted for under SFAS No. 133 and interpretations thereof, and (3) the
effects that derivatives and related hedged items have on an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The Company does not expect SFAS No. 161 to have a material
effect on the Company’s consolidated financial position, results of operations, or
cash flows.
(l)
Reclassifications
Certain amounts in the consolidated financial statements for 2005 and 2006 have been
reclassified to conform to the presentation format adopted in 2007. These
reclassifications have no effect on net income or shareholders’ equity as previously
reported.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(m)
Earnings (Loss) per Common Share
Basic earnings (loss) per common share (“EPS”) is not presented in the accompanying
consolidated financial statements due to the fact that for all periods presented,
the Company had no outstanding common stock. Therefore, the calculation of the
weighted average number of common shares outstanding — basic and earnings (loss)
per common share — basic is not applicable. The Company applies the treasury stock
method of reflecting the dilutive effect of outstanding stock-based compensation in
the calculation of diluted EPS in accordance with SFAS No. 128, “Earnings Per Share”
(“SFAS No. 128”). SFAS No. 128 requires that proceeds from the exercise of options
and warrants shall be assumed to be used to purchase common shares at the average
market price during the reported period. The incremental shares (i.e., the
difference between the number of shares assumed issued upon exercise and the number
of shares assumed purchased) must be included in the number of weighted average
common shares used for the calculation of diluted EPS.
Diluted EPS is calculated by giving effect to the potential dilution that could
occur if securities or other contracts to issue common shares were exercised and
converted into common shares during the year, assuming the conversion of all of the
Company’s participating stock into common stock. Diluted EPS includes all
outstanding shares of the Company’s Series A-1, A-2 and B participating stock and
dilutive common stock options of 758,295 for the three and six months ended June 30,2008 and 2007.
(3)
Participating Stock
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 Company’s
board of directors. The total unaccrued cumulative unpaid dividends on the Series A-2
participating stock is approximately $2,478,000 and $1,222,000 as of June 30, 2008 and
December 31, 2007, respectively.
(4)
Contingencies
(a)
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 Company’s consolidated
financial position, results of operations or liquidity and, as such, no accrual has
been made in the accompanying consolidated financial statements.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(b)
Gain from Theft and Insurance Recoveries
During October 2007, one of the Company’s pawn store locations in Tampa, Florida was
the victim of a burglary. A report has been filed with the Company’s Insurance
Company; however, the claim amount has not yet been finalized. Insurance proceeds in
the amount of $125,000 have been received during 2008.
During December 2007, one of the Company’s pawn store locations in Atlanta, Georgia
was the victim of a robbery. A report has been filed with the Company’s Insurance
Company; however, the claim amount has not yet been finalized. Insurance proceeds in
the amount of $200,000 have been received during 2008
During June and August 2008, two of the Company’s pawn store locations located in
Orlando and Kissimmee, Florida were the victims of a robbery. A report has been
filed with the Company’s Insurance Company; however, the claim amount has not yet
been finalized. No amounts have been recorded in the accompanying financial
statements in connection with these robberies.
(5)
Fair Value Measurements
The Company adopted the provisions of SFAS No. 157 and FSP FAS 157-2 on January 1, 2008.
The adoption of these pronouncements did not have a material effect on the Company’s
consolidated financial position or results of operations. 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.
Notes to Consolidated Financial Statements—(Continued) (Unaudited)
(5)
Fair Value Measurements, Continued
It establishes a fair value hierarchy and expands disclosures about fair value measurements
in both interim and annual periods. SFAS No. 157 enables the reader of the financial
statements to assess the inputs used to develop fair value measurements by establishing a
hierarchy for ranking the quality and reliability of the information used to determine fair
values. FSP FAS 157-2 defers the effective date for FAS No. 157 until January 2009 for
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the
financial statements on a nonrecurring basis. SFAS No. 157 requires that assets and
liabilities carried at fair value will be classified and disclosed in one of the following
categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by
market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The Company’s financial liabilities that are measured at fair value on a recurring basis as
of June 30, 2008 are as follows:
June 30,
Fair Value Measurements Using
2008
Level 1
Level 2
Level 3
Financial assets:
Interest rate swap
$
577,168
$
—
$
577,168
$
—
The Company measures the value of its interest rate swap under Level 2 inputs as defined by
SFAS No. 157. The Company relies on a mark to market valuation based on yield curves using
observable market interest rates for the interest rate.
(6)
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.; however, the Company terminated the agreement
on August, 9, 2008. In September 2008, the Company entered into an agreement to sell up to
100% of the equity ownership to EZCORP, Inc. Closing of the transaction is expected to
occur by December 31, 2008.
THIS MERGER AGREEMENT (this “Agreement”), dated September 16, 2008, is made by and
between EZCORP, Inc., a Delaware corporation (“EZCORP”), Value Merger Sub, Inc., a Florida
corporation (the “Merger Sub”), and Value Financial Services, Inc., a Florida corporation,
(the “Company”) (together, the “Constituent Corporations”).
RECITALS:
A. The boards of directors of each of the Company, EZCORP and the Merger Sub have each
approved, adopted and declared advisable and in the best interests of the holders of capital stock
of each of the Company, EZCORP and the Merger Sub, respectively, this Agreement, the merger of the
Merger Sub with and into the Company (the “Merger”) in accordance with the terms of this
Agreement and the applicable provisions of the Florida Business Corporation Act (“FBCA”).
B. This Merger is authorized by Section 1101 of the FBCA.
C. Concurrently with the execution and delivery of this Agreement and as a condition to the
willingness of EZCORP and the Merger Sub to enter into this Agreement, each director of the Company
who holds shares of capital stock of the Company is entering the voting agreement with EZCORP and
the Merger Sub in the form attached hereto as Exhibit B (the “Voting Agreement”),
pursuant to which, among other things, such shareholders will agree to vote all of their shares of
capital stock of the Company in favor of adopting and approving this Agreement and the conversion
of all shares of capital stock or convertible securities of the Company into shares of common stock
of the Company.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises herein made, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Merger
Sub, EZCORP and the Company agree as follows:
1 Definitions.
For purposes of this Agreement, the following terms shall have the meanings set forth below
and any derivatives of the terms shall have correlative meanings:
“Company Common Stock” shall mean shares of common stock of the Company (assuming for
all purposes the exercise or conversion of all then outstanding participating stock or other
capital stock of the Company, options, warrants, conversion rights, commitments or other rights to
acquire the Company’s common stock, whether vested or unvested).
“Credit Facility” shall mean the $37 million financing arrangement between the Company
and Fifth Third Bank, dated June 15, 2007.
“Contracts” shall mean, collectively, all oral and written contracts, agreements,
instruments, documents, leases, indentures, insurance policies, undertakings or other obligations.
“Disclosure Schedule” shall mean the disclosure schedule attached hereto and
incorporated herein.
“EZCORP Shares” shall have the meaning contained in Section 3.1(a)(1)(A).
“Financial Statements” shall mean, collectively, the audited financial statements
(including balance sheets and statement of earnings, stockholders’ equity and cash flow) of the
Company for each of its fiscal years ending December 31, 2004, through and including December 31,2007.
“Governmental Authority” shall mean the government of the United States or any foreign
jurisdiction, any state, county, municipality or other governmental or quasi governmental unit, or
any agency, board, bureau, instrumentality, department or commission (including any court or other
tribunal) of any of the foregoing and any body exercising or entitled to exercise any
administrative, executive, judicial, legislative, police, regulatory or taxing authority of any
nature whatsoever.
“Hart-Scott-Rodino Act” shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
“Knowledge” shall mean that an individual:
(1) is actually aware of such fact or other matter, or
(2) a prudent individual in the position of the Company could be expected to discover or
otherwise become aware of such fact or other matter in the course of conducting a reasonable
investigation concerning the existence of such fact or other matter.
A Person other than an individual will be deemed to have “Knowledge” of a particular fact or
matter if any individual who is serving as a director, officer, partner, executor, or trustee of
such Person (or in any similar capacity) has, or at any time had, Knowledge of such fact or matter.
“Laws” shall mean, collectively, all federal, state, local, municipal, foreign or
international constitutions, laws, statutes, ordinances, rules, regulations, codes, or principles
of common law.
“Leases” shall mean, collectively, leases, contracts, agreements and other documents
providing the Company with a right to use specified real and/or personal property.
“Licenses” shall mean, collectively, governmental, regulatory, administrative and non
governmental licenses, permits, approvals, certifications, accreditations, notices and other
authorizations.
“Material Adverse Change” or “Material Adverse Effect” shall mean any materially
adverse change in or effect on the financial condition, business, operations, assets, properties or
results of operations of the affected party; provided, however, that none of the following shall be
deemed to have caused, constitute, or be taken into account in determining whether there has been a
Material Adverse Change or Material Adverse Effect: (1) any change or effect arising from or
relating to: (a) financial, banking or securities markets (including any disruption thereof and any
decline in the price of any security or any market index); (b) changes in United States generally
accepted accounting principles; (c) changes in the affected party’s general industry or the economy
of the U.S. as a whole; and (d) adverse changes or effects arising from the announcement or
consummation of the transactions contemplated hereby; (2) any change or effect in the Ordinary
Course; and (3) any change or effect that is cured before the earlier of (a) the Closing Date
and/or (b) the date on which this Agreement is terminated pursuant to Section 10.
“Orders” shall mean all decisions, injunctions, writs, guidelines, orders,
arbitrations, awards, judgments, subpoenas, verdicts or decrees entered, issued, made or rendered
by any Governmental Authority.
“Ordinary Course” shall mean the ordinary course of the Company’s business, consistent
with the past practices of the Company. The Ordinary Course does not include any transaction with
an officer, director, shareholder or investor of the Company.
“Person” shall mean any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint venture, estate,
trust, association, organization, labor union, or other entity or Governmental Authority.
“SEC” shall mean the United States Securities and Exchange Commission.
2 The Merger.
2.1 Merger. Upon the terms and conditions set forth in this Agreement, and in
accordance with the applicable provisions of the FBCA, at the Effective Date (defined in
Section 2.3), the Merger Sub shall be merged with and into the Company, which latter shall
be the surviving corporation (the Company is also sometimes called the “Surviving
Corporation” herein).
2.2 Continuing Corporate Existence. Except as may otherwise be set forth
herein, the corporate existence of the Company, with all its purposes, powers, franchises,
privileges, rights and immunities, shall continue unaffected and unimpaired by the Merger,
and the corporate existence and identity of the Merger Sub, with all its purposes, powers,
franchises, privileges, rights and immunities, at the Effective Date shall be merged with
and into that of the Company, and the separate corporate existence and identity of the
Merger Sub shall thereafter cease except to the extent continued by statute.
2.3 Effective Date. The Merger shall become effective at the date and time
when the articles of merger are filed with the Secretary of State of Florida (the
“Effective Date”).
(c) Those persons serving as directors and officers of the Merger Sub on the Effective
Date of the Merger shall become the directors and officers of the Company as of the
Effective Date.
(d) Those persons serving as directors and officers of the Company on the Effective
Date of the Merger shall cease holding their respective offices in the Company as of the
Effective Date.
2.5 Rights and Obligations of the Company. At the Effective Date, the Company
as the Surviving Corporation shall have the following rights and obligations.
(a) The Company shall have all the rights, privileges, immunities and powers and shall
be subject to all the duties and liabilities of a corporation organized under the laws of
the State of Florida.
(b) The Company shall possess all of the rights, privileges, immunities and franchises,
of either a public or private nature, of the Company and the Merger Sub, and all property,
real, personal and mixed, and all debts due on whatever account, and all other choses in
action, and every other interest of or belonging or due to the Merger Sub and the Company
shall be taken and deemed to be transferred to or invested in the Company without further
act or deed.
(c) At the Effective Date, the Company shall thenceforth be responsible and liable for
all contracts, liabilities and obligations of the Company and the Merger Sub, and any claim
existing or action or proceeding pending by or against the Company or the Merger Sub may be
prosecuted against the Company as if the Merger had not occurred, or the Company may be
substituted in its place. Neither the rights of creditors nor any liens upon the property
of the Company shall be impaired by the Merger.
2.6 Closing. Consummation of the transactions contemplated by this Agreement
(the “Closing”) shall take place at the offices of Strasburger & Price, L.L.P., in
Austin, Texas, as soon as possible when each of the other conditions of this Agreement have
been satisfied or waived, and shall proceed promptly to conclusion, at such place, time and
date as shall be determined by the parties hereto. The day on which the Closing shall occur
is herein called the “Closing Date.” Each of the Constituent Corporations will
cause to be prepared, executed, and delivered the Articles of Merger to be filed with
the Secretary of State of Florida and all other appropriate and customary documents as any
party or its counsel may reasonably request for the purpose of consummating the transactions
contemplated by this Agreement. All actions taken at the Closing shall be deemed to have
been taken simultaneously at the time the last of any such actions is taken or completed.
3 Conversion of Securities.
3.1 On the Effective Date, by virtue of the Merger and without any action on the part
of EZCORP, Merger Sub, the Company or the holders of the Company Common Stock:
(a) except as set forth in subsection 3.1(d):
(1) each share of Company Common Stock issued and outstanding immediately prior to the
Effective Date shall be canceled and automatically converted, subject to Section 3.2(d),
into the right to receive either the EZCORP Shares or the Cash Consideration, as applicable
(the EZCORP Shares or the Cash Consideration, as applicable, the “Merger
Consideration”), with the form of Merger Consideration determined as follows:
(A) as to shares with respect to which an Election has been validly
made and not revoked, $11.00 per share (the “Cash Consideration”);
and
(B) as to all other shares, 0.75 shares of EZCORP Class A Non-voting
Common Stock (the “EZCORP Shares”);
(2) each share of Company Common Stock held in treasury by the Company or any
Subsidiary of the Company immediately prior to the Effective Date shall be canceled and
extinguished without any conversion thereof and no payment or distribution shall be made
with respect thereto; and
(3) each share of common stock of Merger Sub issued and outstanding immediately prior
to the Effective Date shall be converted into and exchanged for one validly issued, fully
paid and nonassessable share of common stock of the Company.
(b) Each Person who on or prior to the date of the Company shareholders’ meeting called
to vote upon the merger as described in Section 7.4 (the “Election Deadline”) is a
holder of record of shares of Company Common Stock shall be entitled, with respect to all or
a portion of such shares of Company Common Stock, to make an “Election” on or prior
to the Election Deadline, to receive the Cash Consideration on the basis set forth in this
Agreement.
(1) EZCORP and the Merger Sub shall prepare a form, in form and substance reasonably
acceptable to the Company (an “Election Form”) pursuant to which a holder of record
of shares of Company Common Stock may make an Election with
respect to all or a portion of the shares of Company Common Stock held by such holder.
The Election Form shall provide that the Election is being made as of the date the Election
Form is submitted and as of the Effective Time. The Company shall mail the Election Form,
together with the Disclosure Statement, to each holder of record of shares of Company Common
Stock on the record date for the Company shareholders’ meeting described in Section 7.4 and
shall use its reasonable best efforts to make the Election Form available to any person who
becomes a record holder of shares of Company Common Stock during the period between the
record date and the Election Deadline.
(2) An Election shall be effective only if the Company shall have received an Election
Form covering the shares of Company Common Stock to which such Election applies, executed
and completed in accordance with the instructions set forth in such Election Form on or
prior to the Election Deadline and may not be withdrawn. An Election may be revoked or
changed only by delivering to the Company, on or prior to the Election Deadline, a written
notice of revocation or, in the case of a change, a properly completed revised Election Form
that identifies the shares of Company Common Stock to which the revised Election Form
applies. Delivery to the Company prior to the Election Deadline of a revised Election Form
with respect to any shares of Company Common Stock shall result in the revocation of all
prior Election Forms with respect to all such shares of Company Common Stock.
(c) Proration
(1) The number of shares of Company Common Stock eligible to be converted into the
right to receive the Cash Consideration shall not exceed twenty percent (20%) of the shares
of Company Common Stock issued and outstanding on the Election Deadline (the “Cash
Consideration Number”).
(2) If the number of shares of Company Common Stock with respect to which a valid
Election is made does not exceed the Cash Consideration Number, each share for which an
Election is made shall be converted into the Cash Consideration. If the number of shares of
Company Common Stock with respect to which a valid Election is made exceeds the Cash
Consideration Number, the number of shares of Company Common Stock with respect to which a
valid Election is made that shall be converted into Cash Consideration shall be determined
as follows:
(A) First, a unit proration factor (the “Unit Proration
Factor”) shall be determined by dividing the Cash Consideration Number
by the number of shares with respect to which a valid Election was made;
(B) Second, only those shares equal to the number of shares of each
electing Company shareholder with respect to which a valid Election is made
multiplied by the Unit Proration Factor shall be paid the Cash
Consideration; and
(C) Third, all remaining shares of Company Common Stock with respect to
which a valid Election is made shall receive EZCORP Shares in the Merger.
(d) Notwithstanding any provisions of this Agreement to the contrary, shares of the
Company Common Stock which are issued and outstanding immediately prior to the Effective
Date and which are held by any Person who has properly exercised their appraisal rights
under the FBCA (the “Appraisal Shares”) will not be converted into or represent a
right to receive the applicable Merger Consideration pursuant to this Section 3.1. The
holders thereof will be entitled only to such rights as are granted by Section 1302 of the
FBCA. Each holder of Appraisal Shares who becomes entitled to payment for such shares of
Company Common Stock pursuant to Section 1302 of the FBCA will receive payment therefor from
the Company in accordance with the FBCA; provided, however, that (1) if any
such holder of Appraisal Shares fails to establish its entitlement to appraisal rights as
provided in Section 1323 of the FBCA, or (2) if any such holder of Appraisal Shares
effectively withdraws its demand for appraisal of such shares of the Company Common Stock or
loses its right to appraisal and payment for its shares of the Company Common Stock under
Section 1323 or 1326 of the FBCA, such holder will forfeit the right to appraisal of such
shares of the Company Common Stock and each such share of the Company’s common stock will be
treated as if such share had been converted, as of the Effective Date, into a right to
receive the applicable Merger Consideration, without interest thereon, as provided in
subsection 3.1(a)(1).
3.2 Exchange of Certificates.
(a) Exchange Agent. EZCORP shall deposit, or shall cause to be deposited, with
American Stock Transfer and Trust Company or such other bank or trust company that may be
designated by EZCORP and is reasonably satisfactory to the Company (the “Exchange
Agent”), for the benefit of the holders of shares of the Company Common Stock, for
exchange in accordance with this Section 3 through the Exchange Agent, cash representing the
Cash Consideration and certificates representing the EZCORP Shares issuable pursuant to
Section 3.1 as of the Effective Date (the “Exchange Fund”). If requested by the
Exchange Agent, the Company and EZCORP will enter into a mutually acceptable exchange agent
agreement which will set forth the duties, responsibilities and obligations of the Exchange
Agent. The Exchange Agent shall, pursuant to irrevocable instructions, deliver the EZCORP
Shares contemplated to be issued pursuant to Section 3.1, out of the Exchange Fund. Except
as contemplated by Section 3.2(f) hereof, the Exchange Fund shall not be used for any other
purpose.
(b) Exchange Procedures. As promptly as practicable after the Effective Date
(but in any event within five business days after the Effective Date), EZCORP shall cause
the Exchange Agent to mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of Company Common
Stock (or other certificate or agreement representing shares of capital stock of the Company
which has been converted into Company Common Stock) (the “Certificates”) (1) a
letter of transmittal (which shall be in customary form and shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Exchange Agent) and (2)
instructions for use in effecting the surrender of the Certificates in exchange for
certificates representing EZCORP Shares. Upon surrender to the Exchange Agent of a
Certificate for cancellation, together with such letter of transmittal, duly executed and
completed in accordance with the instructions thereto, and such other documents as may be
reasonably required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor either the Cash Consideration or a certificate
representing that number of EZCORP Shares which such holder has the right to receive in
respect of the shares of Company Common Stock formerly represented by such Certificate
(after taking into account all shares of the Company Common Stock then held by such holder)
to which such holder is entitled pursuant to Section 3.1, and the Certificate so surrendered
shall forthwith be canceled. In the event of a transfer of ownership of shares of Company
Common Stock which is not registered in the transfer records of the Company, the applicable
Merger Consideration may be issued to a transferee if the Certificate representing such
shares of Company Common Stock is properly endorsed and presented to the Exchange Agent,
accompanied by all documents required to evidence and effect such transfer and by evidence
satisfactory to EZCORP that any applicable share transfer taxes have been paid. Until
surrendered as contemplated by this Section, each Certificate shall be deemed at all times
after the Effective Date to represent only the right to receive upon such surrender the
applicable Merger Consideration.
(c) No Further Rights in Company Common Stock. The Merger Consideration paid
and issued (and represented by certificates delivered) upon conversion of the shares of the
Company Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of the Company Common
Stock.
(d) No Fractional Shares. No certificates or scrip representing fractional
EZCORP Class A Non-voting Common Stock shall be issued upon the surrender for exchange of
Certificates. In lieu of any such fractional share, each holder of Company Common Stock who
would otherwise have been entitled to a fraction of a share of EZCORP Class A Non-voting
Common Stock upon surrender of Certificates for exchange shall be entitled to have the
number of shares such holder is to receive rounded up to the next whole number of shares.
(e) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of shares of Company Common Stock for twelve months
after the Effective Date shall be delivered to EZCORP, upon demand, and any holders of shares of Company Common Stock who have not theretofore complied with this Section 3 shall
thereafter look only to EZCORP for the applicable Merger Consideration. Any portion of the
Exchange Fund remaining unclaimed by holders of shares of Company Common Stock as of a date
which is immediately prior to such time as such amounts would otherwise escheat to or become
property of any government entity shall, to the extent permitted by applicable Law, become
the property of EZCORP free and clear of any claims or interest of any person previously
entitled thereto.
(f) No Liability. None of EZCORP, Merger Sub, or the Company shall be liable
to any holder of shares of Company Common Stock for any such Merger Consideration delivered
to a public official pursuant to any abandoned property, escheat or similar Laws.
(g) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed and, if required by the Company, the posting by
such person of a bond, in such reasonable amount as the Company may direct, as indemnity
against any claim that may be made against it with respect to such Certificate, the Exchange
Agent will issue in exchange for such lost, stolen or destroyed Certificate, the applicable
Merger Consideration.
3.3 Deficiency Guaranty.
(a) The parties contemplate that some or all of the EZCORP Shares received by Company
shareholders pursuant to Section 3.1(a)(1)(B) will be offered for sale (the “Selling
EZCORP Shareholders”) for a period beginning five (5) days after the Closing Date and
ending one hundred twenty-five (125) days after the Closing Date (the “Guaranty
Period”). If a Selling EZCORP Shareholder sells any of the EZCORP Shares issued as part
of the Merger Consideration during the Guaranty Period, in sales that comply with the manner
of sale provisions contained in SEC Rule 144(f) (17 C.F.R. Section 230.144(f), hereafter,
“Rule 144(f)”), for a gross sales price of less than Fourteen Dollars and
Sixty-Seven Cents ($14.67) per EZCORP Share, EZCORP will pay the Selling EZCORP Shareholder
the difference between the gross sales price per EZCORP Share and $14.67, up to a maximum of
$4.01 per EZCORP Share, up to a maximum of all payments to all Selling EZCORP Shareholders
of Twenty Million Dollars ($20,000,000.00) (the “Deficiency Guaranty Amount”).
(b) Payments to Selling EZCORP Shareholders up to the Deficiency Guaranty Amount will
be made on a first come, first served basis until the amount of the balance of the
Deficiency Guaranty Amount is exhausted, in the date and time order that Selling EZCORP
Shareholders present proof of sale of EZCORP Shares issued as part of the Merger
Consideration to EZCORP or its designated agent.
(c) EZCORP will cause the payment in respect of the Deficiency Guaranty Amount to be
made within five business days of receipt by EZCORP or its designated agent of proof of
sales of EZCORP Shares by EZCORP Selling Shareholders in form satisfactory to EZCORP.
(d) EZCORP will cause the Exchange Agent to transmit instructions for claiming and
receiving payment from the Deficiency Guaranty Amount with the letter of transmittal
described in Section 3.2(b).
3.4 Premium Reserve.
(a) EZCORP will pay the Selling EZCORP Shareholders a “Premium Reserve Amount”
of up to Six Million Six Hundred Forty-Six Thousand Five Hundred Twenty-
Seven Dollars ($6,646,527.00), if a Selling EZCORP Shareholder sells any of the EZCORP
Shares issued as part of the Merger Consideration during the Guaranty Period, in sales that
comply with the manner of sale provisions contained in Rule 144(f), for a gross sales price
of more than Fourteen Dollars and Sixty-Seven Cents ($14.67) per EZCORP Share, according to
the following schedule:
(1) For the first thirty (30) days of the Guaranty Period, $1.33 per EZCORP
Share;
(2) For the second thirty (30) days of the Guaranty Period, $1.00 per EZCORP
Share;
(3) For the third thirty (30) days of the Guaranty Period, $0.67 per EZCORP
Share;
(4) For the fourth thirty (30) days of the Guaranty Period, $0.33 per EZCORP
Share;
(b) EZCORP will cause the Exchange Agent to transmit instructions for claiming and
receiving payment of the Premium Reserve Amount with the letter of transmittal described in
Section 3.2(b).
(c) EZCORP will cause the payment in respect of the Premium Reserve Fund to be made
within five business days of receipt by EZCORP or its designated agent of proof of sales of
EZCORP Shares by EZCORP Selling Shareholders in form satisfactory to EZCORP.
3.5 Stock Transfer Books. At the Closing Date, the stock transfer books of the
Company shall be closed and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. From and after the Effective Date,
the holders of Certificates representing shares of Company Common Stock outstanding immediately
prior to the Effective Date shall cease to have any rights with respect to such shares of Company
Common Stock, except as otherwise provided in this Agreement or by Law. On or after the Effective
Date, any Certificates presented to the Exchange Agent or EZCORP for any reason shall be converted
into the applicable Merger Consideration.
3.6 Closing Certificates. At the Closing, (a) EZCORP shall deliver to the Company a
certificate, in form and substance satisfactory to the Company and signed by its Chief Executive
Officer and Chief Financial Officer, certifying in reasonable detail the calculation of the number
of issued and outstanding shares of EZCORP Class A Non-voting Common Stock on the Closing Date,
including all shares issuable on the conversion of other classes of securities and all shares
issuable on the exercise of outstanding stock options and warrants, together with all supporting
materials used in such calculation, and (b) the Company shall deliver to EZCORP a certificate,
signed by its Chief Executive Officer and Chief Financial Officer, certifying in reasonable detail
the calculation of the aggregate number of Company Common Stock, including common stock issued and
outstanding immediately prior to the Effective Date.
3.7 Changes in Capitalization. If, between the date of this Agreement and the
Effective Date, the outstanding shares of EZCORP Class A Non-voting Common Stock or the Company
Common Stock are changed into a different number or class of shares by means of any stock split,
division or subdivision of shares, stock dividend, reverse stock split, consolidation of shares,
reclassification, recapitalization or other similar transaction, then the Merger Consideration
shall be appropriately adjusted; provided that no adjustment shall be made under this Section if
the number of outstanding shares of the Company Common Stock increases as a result of the exercise
of the Company’s stock options, warrants, conversion rights or other rights to acquire the Company
Common Stock.
3.8 Appraisal Shares. No more than ten (10) days after the Effective Date, the
Surviving Corporation shall give notice in writing to each holder of Appraisal Shares in the form
required by Section 1322 of the FBCA. Within forty (40) days after the date on which notice is
mailed, each holder of Appraisal Shares must either accept the Company’s offer as stated in the
Company’s notice or, if the offer is not accepted, such shareholder shall provide to the Company
its estimated fair value of the shares of the Company Common Stock and a demand for the payment of
such shareholder’s estimated value plus interest. If any holder of Appraisal Shares fails to
respond as provided in this Section 3.8, then such shareholder shall have waived, in accordance
with the FBCA, the right to demand appraisal with respect to the shares of the Company Common
Stock.
4 Conduct Pending Closing.
4.1 From the date of this Agreement until Closing, the Company will:
(a) conduct its business only in the Ordinary Course unless otherwise expressly
approved by EZCORP in writing (which approval will not be unreasonably withheld, conditioned
or delayed);
(b) use its reasonable best efforts to preserve intact the current business
organization of the Company, keep available the services of the current officers, employees,
and agents of the Company, and maintain the relations and good will with suppliers,
customers, landlords, creditors, employees, agents, and others having business relationships
with the Company;
(c) [Intentionally Left Blank];
(d) confer with EZCORP concerning operational matters of a material nature;
(e) provide to EZCORP copies of the Company’s unaudited interim financial statements
for each three month period ended March 31, June 30 and September 30 of each fiscal year and
annual financial statements ending December 31 of each fiscal year from the date of this
Agreement until its Closing or termination; together with internally prepared supplemental
notes concerning the status of the Company’s assets and liabilities for the interim three
month periods, which interim financial statements shall be prepared in accordance with
generally accepted accounting principles maintained and applied on a consistent basis
throughout the indicated periods, and fairly present the financial condition and results of
operation of the Company at the dates and for the relevant
periods indicated, except that the interim unaudited financial statements do not
include footnotes and certain financial presentations normally required under generally
accepted accounting principles; and
(f) Notwithstanding anything to the contrary set forth in this Agreement, no party to
this Agreement will be required to undertake and/or comply with any covenant, obligation,
request or otherwise undertake any action required by this Agreement, if doing so would be,
or be deemed to be, in violation of any Laws, based upon the reasonable advice of such
party’s legal counsel.
4.2 Time is of the Essence. Time is of the essence in performing the terms of this
Agreement. Prior to Closing, the Company, Merger Sub and EZCORP will cooperate in obtaining every
consent, approval, ratification, waiver or other authorization (“Consent”) necessary under
any Contract, Order, License, Law or restriction to which the Company or EZCORP is subject or a
party to the extent failure to obtain any such Consent would have a Material Adverse Effect as a
result of the Closing and consummation of this Agreement, and in updating the previous due
diligence requests from EZCORP that are listed in the attached Schedule 4.2.
The Company represents and warrants that, except as set forth in the attached Disclosure
Schedule, which Disclosure Schedule shall be deemed to be representations and warranties as if made
hereunder:
5.1 Enforceability. The Company has all necessary power and authority to enter into
and, subject to the requisite approval by the Company’s shareholders, consummate the transactions
contemplated by this Agreement in accordance with its terms. This Agreement is a valid and binding
obligation of the Company, enforceable against it in accordance with its terms.
5.2 Organization and Qualification. The Company is a corporation duly organized and
validly existing under the Laws of the State of Florida. The Company is qualified to transact
business as a domestic or foreign corporation or organization in every jurisdiction where the
failure to so qualify would have a Material Adverse Effect.
5.3 Conflicting Obligations on Execution. The execution and delivery of this
Agreement do not: (a) conflict with or violate any provisions of, or result in the maturation or
acceleration of, any obligations under any Contract, Order, License, Law or restriction to which
the Company is subject or a party to the extent such conflict or violation has a Material Adverse
Effect; or (b) violate any restriction or limitation, or result in the termination, or loss of any
right (or give any third party the right to cause such termination or loss), of any kind to which
they are bound or have to the extent such violation, termination or loss has a Material Adverse
Effect, other than the Credit Facility and certain Leases.
5.4 Capitalization. The capitalization of the Company as set forth in the Investor
Listing dated December 31, 2007 (“Cap Table”) and delivered to EZCORP is complete and accurate as
of the execution of this Agreement. There are no outstanding options, warrants,
convertible securities or other rights to subscribe for or acquire any capital stock or
securities convertible into capital stock of the Company, other than as set forth in the Cap Table.
All capital stock has been issued in compliance with applicable federal and state securities Laws.
5.5 Organizational Documents. True, correct and complete copies of the articles of
incorporation, by-laws and other organizational documents, as amended, of the Company have been
delivered to EZCORP. Except as provided in this Agreement, there has been no change in the rights,
preferences or other terms of the Company’s capital stock since the filing of the Company’s Amended
and Restated Articles of Incorporation with the Secretary of State of Florida on September 10,2001.
5.6 Financial Statements. The Company has provided to EZCORP true and complete copies
of the Company’s audited Financial Statements for the fiscal years ending December 31, 2007, 2006,
2005 and 2004. The Company’s Financial Statements and other books and records of account
accurately reflect all of the assets, liabilities, transactions and results of operations of the
Company, and the Financial Statements have been prepared based upon and in conformity therewith.
The Financial Statements have been prepared in accordance with generally accepted accounting
principles maintained and applied on a consistent basis throughout the indicated periods, and
fairly present the financial condition and results of operation of the Company at the dates and for
the relevant periods indicated, except that interim unaudited Financial Statements do not include
footnotes and certain financial presentations normally required under generally accepted accounting
principles.
5.7 Licenses. The Company possesses all Licenses as are necessary for the consummation
of the transactions contemplated hereby or the conduct of its business or operations where the
failure to have such License would have a Material Adverse Effect. Neither the execution of this
Agreement nor the consummation of the transactions contemplated hereby will result in the
revocation, or an adverse change in the terms or conditions, of any of the Licenses, to the extent
such revocation or adverse change has a Material Adverse Effect, and all Licenses shall continue in
full force and effect in accordance with their present terms unaffected by the consummation of the
transactions contemplated hereby.
5.8 Litigation. There are no claims, lawsuits, actions, arbitrations or other
proceedings or governmental investigations (collectively, “Claims”) pending with respect to this
Agreement and the transactions contemplated hereby. The Company has not received written notice of
any Claims, which would have a Material Adverse Effect, pending or against the Company or any of
its officers, directors, employees or affiliates involving, affecting or relating to the Company or
the transactions contemplated by this Agreement, nor have any such matters been threatened against
the Company. There are no outstanding judgments, Orders, injunctions, decrees, stipulations or
awards (whether rendered by a court or administrative agency, or by arbitration) regarding the
Company.
5.9 Compliance With Law. To the Knowledge of the Company, the conduct of the
Company’s business does not violate, and the Company is not in default under, any Law or Order.
5.10 Brokerage. The Company has not incurred, nor made commitment for, any brokerage,
finder’s or similar fee in connection with the transaction contemplated by this Agreement, other
than to Stephens Inc.
5.11 No Material Adverse Change. Since December 31, 2007, there has not been any
Material Adverse Change, and no event has occurred or circumstance exists that may result in a
Material Adverse Effect.
5.12 Representations and Warranties True and Correct. The representations and
warranties contained herein, and all other documents, certifications, materials and written
statements or information given to the Merger Sub or EZCORP by or on behalf of the Company or
disclosed on the Disclosure Schedule, do not include any untrue statement of a material fact or
omit to state a material fact required to be stated herein or therein in order to make the
statements herein or therein, in light of the circumstances under which they are made, not
misleading.
6 Merger Sub’s and EZCORP’s Representations and Warranties.
The Merger Sub and EZCORP represent and warrant that:
6.1 Organization. The Merger Sub is a corporation duly organized and validly existing
under the laws of the State of Florida. EZCORP is a corporation duly organized and validly
existing under the laws of the State of Delaware.
6.2 Enforceability; Conflicting Obligations. This Agreement and all other agreements
of the Merger Sub and EZCORP contemplated hereby are or, upon the execution thereof, will be the
valid and binding obligations of the Merger Sub and EZCORP enforceable against it in accordance
with their terms. The execution and delivery of this Agreement do not, the issuance and delivery of
the EZCORP Shares will not, and the consummation of the purchase of the shares will not, conflict
with or violate any provision of the articles of organization of the Merger Sub or EZCORP, nor any
provisions of, or result in the acceleration of, any obligation of the Merger Sub or EZCORP.
6.3 Authorization. The Merger Sub and EZCORP have all necessary corporate power and
authority to enter into and perform the transactions contemplated herein in accordance with the
terms and conditions hereof. The execution and delivery of this Agreement, and the performance by
the Merger Sub and EZCORP of their obligations contained herein, have been duly approved by the
Merger Sub and EZCORP.
6.4 Brokerage. The Merger Sub and EZCORP have not incurred, nor made commitment for,
any brokerage, finder’s or similar fee in connection with the transactions contemplated by this
Agreement.
6.5 Litigation. There is no litigation, proceeding or governmental investigation
pending, or to the Merger Sub’s or EZCORP’s knowledge, threatened against or relating to the
transactions contemplated herein.
6.6 Isuance of EZCORP Shares. The EZCORP Shares to be exchanged for the Company
Common Stock will, when delivered to the Company’s shareholders, be validly issued, fully paid,
non-assessable and not subject to any pre-emptive rights.
6.7 Funds Available. Each of EZCORP and Merger Sub is solvent and, at Closing, EZCORP
will have all funds in place necessary to pay and deliver the cash portion of the Merger
Consideration as contemplated hereby without any contingencies existing. As of the date hereof
there are, and as of the Effective Date there will be, sufficient authorized and unissued shares of
EZCORP’s Class A Non-voting Common Stock to enable EZCORP to issue and deliver the portion of the
Merger Consideration consisting of EZCORP Shares as contemplated hereby.
6.8 Financial Reports and SEC Documents. EZCORP’s Annual Report on Form 10-K for the
fiscal year ended September 30, 2007, and all other reports, registration statements, definitive
proxy statements or information statements filed or to be filed by it with the SEC subsequent to
September 30, 2007 under the Securities Act of 1933, as amended (the “Securities Act”), or
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in the form
filed together with any amendments required to be made with respect thereto, that were required to
be filed with any applicable Governmental Authority under any applicable Law (collectively,
“SEC Documents”) as of the date filed, (a) complied in all material respects with the
applicable requirements under the Securities Act or the Exchange Act, as the case may be, and (b)
did not contain any untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and each of the balance sheets or statements of
condition contained in or incorporated by reference into any such SEC Document (including the
related notes and schedules thereto) fairly presents the consolidated financial position of EZCORP
as of its date, and each of the statements of income or results of operations and changes in
shareholders’ equity and cash flows or equivalent statements in such SEC Documents (including any
related notes and schedules thereto) fairly present the consolidated results of operations, changes
in shareholders’ equity and cash flows, as the case may be, of EZCORP for the periods to which they
relate, in each case in accordance with generally accepted accounting principles consistently
applied during the periods involved, except in each case as may be noted therein, subject to normal
year-end audit adjustments and the absence or limitation of footnotes in the case of unaudited
statements.
6.9 Representations and Warranties True and Correct. The representations and
warranties contained herein, and all other documents, certifications, materials and written
statements or information given to the Company by or on behalf of the Merger Sub and EZCORP, do not
include any untrue statement of a material fact or omit to state a material fact required to be
stated herein or therein in order to make the statements herein or therein, in light of the
circumstances under which they are made, not misleading.
7 Additional Agreements.
7.1 Hart-Scott-Rodino. The Merger Sub, EZCORP and the Company will file any
Notification and Report Forms and related material that each party may be required to file with the
Federal Trade Commission and the Antitrust Division of the United States Department of Justice
under the Hart-Scott-Rodino Act, will use such party’s commercially reasonable efforts
to obtain an early termination of the applicable waiting period, and will make any further
filings pursuant thereto that may be necessary, proper, or advisable in connection therewith. The
fees and expenses of any such filing shall be borne 50% by EZCORP and 50% by the Company.
7.2 Release of Thedford Employment Agreement at Closing. At Closing, the Company
shall deliver to EZCORP an unconditional release of John Thedford from all of his obligations under
the Employment Agreement between the Company and Mr. Thedford effective as of January 1, 2007 and
any amendments thereto, and an unconditional release of the Company by Mr. Thedford from all of the
Company’s obligations under the Employment Agreement between the Company and Mr. Thedford effective
as of January 1, 2007 and any amendments thereto. The Company acknowledges that EZCORP intends to
employ Mr. Thedford as an executive of Texas EZPAWN, L.P., immediately after Closing.
7.3 Section 382 Opinion. The Company has delivered to EZCORP an opinion from the
Company’s auditor, McGladrey & Pullen, LLC, to the effect that, based on the procedures performed
and the facts and assumptions set forth in the opinion, the auditor has concluded that the Company
should not have experienced an ownership change, as defined in Section 382(g)(1) of the Internal
Revenue Code of 1986, as amended, during the period beginning January 1, 1998 and ending December31, 2007, no event has occurred that caused or would cause an ownership change the Company under 26
U.S.C. § 382 and federal regulations adopted thereunder (the “382 Opinion”), together with
the auditors’ work papers and supporting information, whether created by the Company or by its
auditors, relating to the 382 Opinion. The Company has no knowledge of any events or circumstances
that would contradict the opinion of McGladrey & Pullen, LLC.
7.4 Company Shareholder Meeting.
(a) As promptly as reasonably practicable, but not more than three business days after
the Registration Statement with respect to the EZCORP Shares has been declared effective by
the SEC, the Company shall cause a notice of special meeting of shareholders and a proxy
statement (the “Disclosure Statement”) to be mailed to its shareholders. In the
Disclosure Statement, the Company’s Board of Directors will recommend that (1) Company
shareholders approve this Agreement and Merger, and (2) approve the conversion of all
outstanding shares of capital stock of the Company to Company Common Stock. The Company
shall hold the shareholders’ meeting (the “Shareholders’ Meeting”) as promptly as
reasonably practicable after the Registration Statement has been declared effective by the
SEC, in compliance with Rule 14e-1 of the SEC, but in no event later than thirty-five (35)
days after the Registration Statement has been declared effective by the SEC.
(b) As promptly as reasonably practicable after the execution by all parties of this
Agreement, the Company shall provide to EZCORP a draft of the Disclosure Statement.
(a) As promptly as reasonably practicable after the execution of this Agreement by the
parties, EZCORP shall file with the SEC a registration statement on Form S-4 or such other
form as appropriate to register the EZCORP Shares (together with any amendments thereof or
supplements thereto, the “Registration Statement”) to be issued in the Merger.
EZCORP shall use its reasonable best efforts to respond as promptly as practicable to any
comments of the SEC with respect thereto and to cause the Registration Statement to be
declared effective by the SEC. EZCORP shall take all or any action required under any
applicable federal or state securities laws in connection with the issuance of the EZCORP
Shares. The Company shall furnish all information concerning the Company as EZCORP may
reasonably request in connection with such actions and the preparation of the Registration
Statement, including the Disclosure Statement, and use its reasonable best efforts to cause
McGladrey & Pullen, LLC to issue its consent thereto. EZCORP shall advise the Company in
writing as promptly as practicable after (1) the Registration Statement has been declared
effective by SEC, (2) any supplement or amendment to the Registration Statement has been
filed, (3) the issuance of any stop order with respect to the Registration Statement, (4)
the suspension of the qualification of EZCORP Shares covered thereby for offering or sale in
any jurisdiction, or (5) the receipt of any request by the SEC for amendment of the
Registration Statement or comments thereon and responses thereto or requests by the SEC for
additional information, and EZCORP shall promptly provide to the Company copies of all
correspondence between EZCORP or any of its representatives or advisors and the SEC related
to the Registration Statement.
(b) The information supplied by EZCORP for inclusion in the Registration Statement
shall not, at (1) the time the Registration Statement becomes effective under the Securities
Act and (2) the Effective Date, contain any untrue statement of a material fact or fail to
state any material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made, not
misleading. If, at any time prior to the Effective Date, any event or circumstance relating
to EZCORP or any EZCORP subsidiary, or their respective officers or directors, that should
be set forth in an amendment or a supplement to the Registration Statement should be
discovered by EZCORP, EZCORP shall promptly inform the Company thereof. All documents that
EZCORP is responsible for filing with the SEC in connection with the Merger or the other
transactions contemplated by this Agreement will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and the rules and
regulations thereunder and the Exchange Act and the rules and regulations thereunder.
(c) The information supplied by the Company for inclusion in the Registration Statement
shall not, at (1) the time the Registration Statement becomes effective under the Securities
Act and (2) the Effective Date, contain any untrue statement of a material fact or fail to
state any material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made, not
misleading. If, at any time prior to the Effective Date, any event or circumstance relating
to the Company or any Company subsidiary, or their respective officers or
directors, that should be set forth in an amendment or a supplement to the Registration
Statement should be discovered by the Company, the Company shall promptly inform EZCORP.
7.6 The Company shall use its reasonable best efforts to obtain the approval of a majority of
shareholders eligible to vote thereon of the conversion of all of the Company’s issued and
outstanding capital stock to Company Common Stock, the Merger, and this Agreement.
7.7 Listing of Shares. Prior to the Effective Date, EZCORP shall file with the NASDAQ
Stock Market such notices, forms and other documents as may be required to cause the EZCORP Shares
to be listed and approved for quotation on the NASDAQ Global Select market as of the Effective
Date.
7.8 Section 16 Matters. Prior to the Effective Date, EZCORP shall use its reasonable
best efforts to cause any acquisitions of EZCORP capital stock resulting from the Merger from each
person who may be subject to the reporting requirements of Section 16 of the Exchange Act with
respect to EZCORP following the Effective Date, to be exempt under Rule 16b-3 promulgated under the
Exchange Act.
7.9 Public Announcements. EZCORP and Merger Sub will provide the Company drafts of,
and solicit the Company’s comments on, any press release or other public statements with regards to
the Merger or this Agreement prior to making the release or public statement.
8 Conditions Precedent to Merger Sub’s and EZCORP’s Obligation to Close.
The obligation of the Merger Sub and EZCORP to consummate the transactions contemplated by
this Agreement shall be subject to the satisfaction and fulfillment of each of the following
express conditions precedent prior to and on the Closing Date (any of which may be waived by Merger
Sub, in whole or in part):
8.1 Approval by the Company. The holders of a majority of the issued and outstanding
Company Common Stock shall have voted in favor of the Merger, including all shares of common stock
issuable upon conversion of all other classes of capital stock to Company Common Stock
8.2 Conversion of Capital Stock. Prior to the vote by the Company’s shareholders on
whether to approve the Merger, all shares of capital stock or convertible securities of the Company
shall have been converted into shares of Company Common Stock.
8.3 Hart-Scott-Rodino. All applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated and the Merger Sub,
EZCORP and the Company shall have received all authorizations, consents, and approvals of
governments and governmental agencies.
8.4 Representation and Warranties. All the representations and warranties in this
Agreement made by the Company (except as contained in Section 5.3 relating to the Credit Facility
and certain Leases) must be accurate in all material respects as of the Closing Date as if made on
the Closing Date.
8.5 Performance of Covenants and Obligations. The Company shall have performed and
complied with all of its covenants and obligations under this Agreement, including but not limited
to the applicable additional agreements contained in Section 7, which are to be performed or
complied with by it prior to or on the Closing Date.
8.6 Material Adverse Change. From and after June 5, 2008, and until the Closing Date,
the Merger Sub and EZCORP shall have reasonably determined that there has been no Material Adverse
Change.
8.7 Consent. The Company shall have obtained every Consent necessary under any
Contract, Order, License, Law or restriction to which the Company is subject or a party to the
extent failure to obtain any such Consent would have a Material Adverse Effect as a result of the
Closing and consummation of this Agreement.
9 Conditions to the Company’s Obligation to Close.
The obligation of the Company to consummate the transactions contemplated by this Agreement
shall be subject to the satisfaction and fulfillment of the following express conditions precedent
prior to and on the Closing Date (any of which may be waived by the Company, in whole or in part):
9.1 Approval by the Merger Sub. The holder of a majority of the outstanding common
stock of the Merger Sub shall have voted in favor of the Merger.
9.2 Representations and Warranties. All the representations and warranties in this
Agreement made by the Merger Sub and EZCORP must be accurate in all material respects as of the
Closing Date as if made on the Closing Date.
9.3 Performance of Covenants and Obligations. The Merger Sub and EZCORP shall have
performed and complied with all of its material covenants and obligations under this Agreement,
including but not limited to the additional agreements contained in Section 7, which are to be
performed or complied with by them prior to or on the Closing Date.
9.4 Payment of Purchase Price. The Merger Sub shall have caused the payments to be
made and the EZCORP Shares to be delivered as described in Section 3 hereof.
9.5 Fairness Opinion. The Company shall have received a fairness opinion from a third
party as to this Agreement, the Voting Agreement, and the terms of each of them.
9.6 Shareholder Approval. Holders of a majority of each outstanding series of capital
stock of the Company shall have approved the conversion of such shares into Company Common Stock
prior to the Merger.
9.7 Hart-Scott-Rodino. All applicable waiting periods (and any extensions thereof)
under the Hart-Scott-Rodino Act shall have expired or otherwise been terminated and the Merger Sub,
EZCORP and the Company shall have received all authorizations, consents, and approvals of
governments and governmental agencies.
9.8 Registration Statement and Related Matters. The Registration Statement shall have
been declared effective by the SEC under the Securities Act, no stop order suspending the
effectiveness of the Registration Statement shall have been issued by the SEC and no proceeding for
that purpose shall have been initiated by the SEC and not concluded or withdrawn, the EZCORP Shares
shall have been approved for listing on the NASDAQ Global Select Market, and EZCORP shall have
provided to the Company a certificate, signed by a duly authorized officer of EZCORP, to the effect
that the foregoing conditions set forth in this Section 9.8 have been satisfied. The parties
understand and agree that the Registration Statement will not be filed with the SEC until after all
conditions precedent to the Company’s obligation to close have been satisfied, except for the
payment of the purchase price under Section 9.4 and the conditions contained in this Section 9.8.
The parties intend that no conditions of Closing will be within the control of the Company nor any
of the shareholders who receive EZCORP Shares at the time that the Registration Statement is filed.
10 Non-Solicitation; Termination.
10.1 Non-Solicitation. Prior to the Effective Date, (a) the Company shall not
knowingly permit any of its officers, directors, employees, agents or representatives (including,
without limitation, any investment banker, attorney or accountant retained by it) to solicit or
encourage, directly or indirectly, any inquiries, any proposal or offer with respect to any
Acquisition Transaction (defined below) (any such proposal being referred to in the Agreement as an
“Acquisition Proposal”) or engage in any negotiations concerning an Acquisition Proposal;
and (b) it will immediately cease and cause to be terminated any existing negotiations with any
parties with respect to any of the foregoing; provided, that nothing contained in the agreement
shall prevent the Company or its board of directors from (A) complying with Rule 14e-2 promulgated
by the SEC with regard to an Acquisition Proposal; or (B) providing information to or engaging in
any negotiations or discussions with any person or entity who has made an unsolicited bona fide
Acquisition Proposal that involves an Acquisition Transaction that the Company’s board of directors
in good faith determines, after consultation with its legal counsel and financial advisors,
represents a superior transaction for the shareholders of the Company when compared to the Merger,
if and only to the extent that the Company’s board of directors reasonably determines, after
consultation with, and taking into account the advice of, outside legal counsel, that the failure
to do so would be inconsistent with its fiduciary obligations. The Company will promptly notify
EZCORP if any such information is requested from it or any such negotiations or discussions are
sought to be initiated with the Company and will promptly communicate to EZCORP the terms of any
proposal or inquiry and the identity of the party making such proposal or inquiry which it may
receive in respect of any such transaction. In this Agreement, “Acquisition Transaction”
means any tender offer or exchange offer, any merger, consolidation, liquidation, dissolution,
recapitalization, reorganization or other business combination, any acquisition, sale or other
disposition of all or a substantial portion of the assets or the Company or any similar transaction
involving the Company, its securities or any significant subsidiary as defined under Rule 405
promulgated by the SEC.
10.2 Termination. This Agreement may, by written notice given prior to or at Closing,
be terminated:
(a) By either the Merger Sub, EZCORP or the Company if a material breach of any
provision of this Agreement has been committed by the other party and such breach has not
been waived or cured (if such breach is capable of being cured within 15 days after the
breaching party’s receipt of written notice thereof;
(b) (1) by the Merger Sub or EZCORP if any of the conditions in Section 8 have not been
satisfied as of the Closing Date, or if, prior to that time, satisfaction of a condition is
or becomes impossible (unless the failure to satisfy the condition results primarily from
the Merger Sub or EZCORP itself breaching any representation, warranty, or covenant
contained in this Agreement) and Merger Sub or EZCORP has not waived such condition on or
before the Closing Date; or (2) by the Company if any of the conditions in Section 9 have
not been satisfied as of the Closing Date, or if, prior to that time, satisfaction of a
condition is or becomes impossible (unless the failure to satisfy the condition results
primarily from the Company breaching any representation, warranty, or covenant contained in
this Agreement) and the Company has not waived such condition on or before the Closing Date;
(c) By EZCORP if the Company receives from the holders of more than 10% of its issued
and outstanding shares of capital stock valid and enforceable notices of their intent to
demand payment for their shares pursuant to FBCA Section 1321;
(d) by mutual consent of the Merger Sub, EZCORP and the Company;
(e) by any of the Merger Sub, EZCORP or the Company if the Closing has not occurred
(other than through the failure of any party seeking to terminate this Agreement to comply
fully with its obligations under this Agreement) on or before December 31, 2008; and
(f) by the Company if the Company or any of its subsidiaries (or the Company’s board of
directors) shall have approved, recommended, authorized, proposed, or publicly announced its
intention to enter into an Acquisition Transaction (other than the Merger); provided,
however, that the right to terminate the Agreement pursuant to subsection (f) shall not be
available to the Company if, at such time, it is in material breach of any representation,
warranty, covenant or agreement set forth in the Agreement.
10.3 Termination Fee. The Company will pay to EZCORP a fee of Five Million Dollars
($5,000,000.00) (the “Termination Fee”) in immediately available funds, if:
(a) the Agreement is terminated by the Company under Section 10.2(f) or pursuant to any
other Acquisition Event (defined below);
(b) the Agreement is not approved by the shareholders of the Company at the
Shareholders’ Meeting;
(c) the Agreement is not recommended for approval to the shareholders of the Company by
the board of directors of the Company;
(d) the Agreement is terminated by EZCORP or the Merger Sub pursuant to Section 10.2(a)
after a material breach of any provision of this Agreement by the Company; or
(e) the Agreement is terminated by EZCORP or the Merger Sub pursuant to Section
10.2(b)(1).
The Termination Fee will be payable at the time of termination if such fee becomes payable pursuant
to subsections (b), (c), (d) or (e) above, or on the second business day following the occurrence
of the Acquisition Event if such fee becomes payable under subsection (a) above. In this
Agreement, “Acquisition Event” shall mean the termination of this Agreement by the Company
pursuant to any (i) Acquisition Transaction or (ii) series of transactions that results in any
person, entity or group other than EZCORP or the Merger Sub acquiring more than 50% of the
outstanding Company Common Stock.
11 Indemnification.
11.1 Survival of Representations. All covenants and obligations in this Agreement and
the Disclosure Schedule shall survive the Closing for a period of one year. The right to
indemnification, payment of damages or any other remedy based on such representations, warranties,
covenants and obligations will not be affected by any investigation conducted with respect to, or
any Knowledge acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or
inaccuracy of or compliance with, any such representation, warranty, covenant, or obligation. The
waiver of any condition based on the accuracy of any representation or warranty, or on the
performance of or compliance with any covenant or obligation, will not affect the right to
indemnification, payment of damages, or other remedy based on such representations, warranties,
covenants, and obligations.
11.2 Indemnification.
(a) The Company will indemnify and hold harmless the Merger Sub and EZCORP for, and
will pay to the Merger Sub and EZCORP the amount of, any loss liability, claim, damage,
expense or deficiency including, but not limited to, reasonable attorneys’ fees and other
costs and expenses from or in connection with:
(1) Any material breach of any representation or warranty made by the Company
in this Agreement, the Disclosure Schedule and any other certificate or document
delivered by the Company pursuant to this Agreement; or
(2) Any material breach by the Company of any covenant or obligation of the
Company in this Agreement.
(b) The Merger Sub and EZCORP will indemnify and hold harmless the Company for, and
will pay to the Company the amount of, any loss, liability, claim, damage, expense or
deficiency including, but not limited to, reasonable attorneys’ fees and other costs and
expenses from or in connection with:
(1) Any material breach of any representation or warranty made by the Merger
Sub or EZCORP in this Agreement and any other certificate or document delivered by
Merger Sub or EZCORP pursuant to the Agreement; or
(2) Any material breach by the Merger Sub or EZCORP of any covenant or
obligation of the Merger Sub or EZCORP in this Agreement.
12.1 Further Assurances. Each party hereto from time to time hereafter, and upon
request, shall execute, acknowledge and deliver such other instruments as reasonably may be
required to more effectively carry out the terms and conditions of this Agreement.
12.2 Payment of A-2 Dividend. The parties acknowledge and understand that this
Agreement contemplates payment of the accrued unpaid dividend on the Company’s A-2 shares in cash
at the time of conversion of said shares to common, as provided in the Amended and Restated
Articles of Incorporation of the Company.
12.3 Benefit and Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their heirs, successors, assignees, and beneficiaries in interest.
The Merger Sub may assign this Agreement only to affiliates that are 100% owned by EZCORP, Inc.,
EZPAWN Florida, Inc., or another 100% owned subsidiary of EZCORP, Inc.
12.4 Governing Law. This Agreement shall be governed by and construed in accordance
with the internal Laws of the State of Florida (regardless of its conflict of laws principles), and
without reference to any rules of construction regarding the party responsible for the drafting
hereof.
12.5 Expenses. Except as otherwise herein provided, all expenses and costs incurred in
connection with this Agreement or the transactions herein provided for shall be paid by the party
incurring such expenses and costs.
12.6 Notices. All notices, demands, and communications provided for herein or made
hereunder shall be given in writing and shall be deemed given to a party at the earlier of (a) when
actually delivered to such party; (b) when facsimile transmitted to such party to the facsimile
number indicated for such party below (or to such other facsimile number for a party as such party
may have substituted by notice pursuant to this Section); or (c) when mailed to such party by
registered or certified U.S. Mail (return receipt requested) or sent by overnight courier,
confirmed by receipt, and addressed to such party at the address designated below for such party
(or to such other address for such party as such party may have substituted by notice pursuant to
this Section):
12.7 Counterparts. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument, provided that all such counterparts, in the aggregate, shall contain
the signatures of all parties hereto.
12.8 Headings. All Section headings herein are inserted for convenience only and shall
not modify or affect the construction or interpretation of any provision of this Agreement.
12.9 Amendment, Modification and Waiver. This Agreement may not be modified, amended
or supplemented except by mutual written agreement of the Merger Sub and the Company. Both the
Merger Sub and the Company may waive in writing any term or condition contained in this Agreement
and intended to be for its benefit; provided, however, that no waiver by either party, whether by
conduct or otherwise, in any one or more instances, shall be deemed or construed as a further or
continuing waiver of any such term or condition.
12.10 Entire Agreement. This Agreement, any Exhibit attached hereto, and the
Disclosure Schedule represent the entire agreement of the parties with respect to the subject
matter hereof and supersede and replace any prior understandings and agreements with respect
to the subject matter hereof and no provision or document of any kind shall be included in or form
a part of such agreement unless signed and delivered to the other party by the party to be charged.
12.11 Third Party Beneficiaries. No third parties are intended to benefit from this
Agreement, and no third party beneficiary rights shall be implied from anything contained in this
Agreement.
ARTICLES OF AMENDMENT
TO
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF VALUE FINANCIAL SERVICES, INC.
Pursuant to the provisions of Florida Business Corporations Act, the undersigned corporation adopts
the following Articles of Amendment to its Amended and Restated Articles of Incorporation:
1.
The name of the corporation is Value Financial Services, Inc. (the “Company”).
The Amendment to the Amended and Restated Articles of Incorporation set forth below was
adopted by the holders of the Company’s Series A-1 Participating Stock, Series A-2
Participating Stock and Series B Participating Stock (the “Participating
Stockholders”) and the number of votes cast by each class of the Participating
Stockholders approving the Amendment was sufficient for approval of the Amendment.
Section 4(g) of ARTICLE 4 — CAPITAL STOCK, relating to THE DESIGNATIONS,
RELATIVE POWERS, PREFERENCES AND RIGHTS, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS AND
OTHER MATTERS RELATING TO SERIES A-1 PARTICIPATING STOCK is deleted in its entirety and
replaced with the following:
“(g) Mandatory Conversion. The Corporation may at any time require the
conversion of all of the outstanding shares of Series A-1 Stock if: (i) the
Corporation is at such time effecting a Public Offering; or (ii) at any time the
holders of a majority of the then outstanding shares of Series A-1 Stock elect to
convert their shares of Series A-1 Stock into Common Stock. Any such mandatory
conversion shall only be effected at the time of and subject to: (1) as to
conversion under subsection (i) above, the closing of the sale of such
shares pursuant to such Public Offering; or (2) as to a conversion under
subsection (ii) above, upon notice by a majority of the holders of the
then outstanding shares of Series A-1 Stock.”
Section 5(g) of ARTICLE 4 — CAPITAL STOCK, relating to THE DESIGNATIONS,
RELATIVE POWERS, PREFERENCES AND RIGHTS, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS AND
OTHER MATTERS RELATING TO SERIES A-2 PARTICIPATING STOCK is deleted in its entirety and
replaced with the following:
“(g) Mandatory Conversion. The Corporation may at any time require the
conversion of all of the outstanding shares of Series A-2 Stock if: (i) the
Corporation is at such time effecting a Public Offering; or (ii) at any time the
holders of a majority of the then outstanding shares of Series A-2 Stock elect to
convert their shares of Series A-2 Stock into Common Stock. Any such mandatory
conversion shall only be effected at the time of and subject to: (1) as to
conversion under subsection (i) above, the closing of the sale of such
shares pursuant to such Public Offering; or (2) as to a conversion under
subsection (ii) above, upon notice by a majority of the holders of the
then outstanding shares of Series A-2 Stock.”
Section 4(g) of ARTICLE 4 — CAPITAL STOCK, relating to THE DESIGNATIONS,
RELATIVE POWERS, PREFERENCES AND RIGHTS, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS AND
OTHER MATTERS RELATING TO SERIES B PARTICIPATING STOCK is deleted in its entirety and
replaced with the following:
“(g) Mandatory Conversion. The Corporation may at any time require the
conversion of all of the outstanding shares of Series B Stock if: (i) the
Corporation is at such time effecting a Public Offering; or (ii) at any time the
holders of a majority of the then outstanding shares of Series B Stock elect to
convert their shares of Series B Stock into Common Stock. Any such mandatory
conversion shall only be effected at the time of and subject to: (1) as to
conversion under subsection (i) above, the closing of the sale of such
shares pursuant to such Public Offering; or (2) as to a conversion under
subsection (ii) above, upon notice by a majority of the holders of the
then outstanding shares of Series B Stock.”
IN WITNESS WHEREOF, the undersigned has executed these Articles of Amendment to Amended and
Restated Articles of Incorporation in his capacity as a President of
the Company, as of this ___ day
of , 2008.
Board of Directors Value Financial Services, Inc.
1063 Maitland Center Commons Blvd.
Suite 200 Maitland, FL32751
Members of the Board:
We have acted as financial advisor to Value Financial Services, Inc. (the “Company”) in
connection with the proposed acquisition by EZCORP, Inc. (“EZCORP”) of the outstanding shares of
Common Stock (as defined below) of the Company in a transaction (the “Transaction”) pursuant to the
proposed Merger Agreement received by Stephens Inc. in draft form on September 11, 2008 (the
“Agreement”) between EZCORP, Value Merger Sub, Inc. and the Company. The Transaction contemplates
EZCORP purchasing each share of common stock of the Company that would be outstanding following the
exercise of all outstanding options for common stock of the Company and the conversion to common
stock of all of the Company’s outstanding Series A-1, Series A-2 and Series B Participating
Preferred Stock (the “Common Stock”). Pursuant to Schedule 1 in the Agreement, seventeen (17)
shareholders will exchange each share of their Common Stock at a value of $11.00 per share for 0.75
shares of EZCORP Class A Non-Voting Common Stock (the “Stock Consideration”). Each remaining
shareholder will receive $11.00 per share in cash for each share of Common Stock (the “Cash
Consideration”, and together with the Stock Consideration, the “Consideration”).
In addition, we have been asked to provide our opinion to the Board of Directors of the
Company as to whether the Consideration to be paid in the Transaction is fair from a financial
point of view to the shareholders of the Company, including the disinterested shareholders of the
Company. For purposes of this opinion, the term “disinterested shareholders” means holders of the
Common Stock other than directors, officers and employees of the Company.
In connection with our services to the Company and its Board of Directors we have, among other
things:
i.
assisted the Company in exploring and discussing potential alternative
transactions with potential investors or purchasers;
ii.
reviewed and analyzed the Company’s historical financial statements provided by
Company management;
reviewed and analyzed certain internal financial statements and other financial
and operating data (including financial projections) concerning the Company prepared by
management of the Company;
iv.
reviewed and analyzed certain filings made with the Securities and Exchange
Commission by EZCORP, including, but not limited to certain Annual Reports on Form 10-K
and certain Quarterly Reports on Form 10-Q for EZCORP;
v.
reviewed and analyzed certain research analyst estimates of the future
performance of EZCORP;
vi.
compared the financial performance of the Company and EZCORP with that of
certain comparable publicly-traded companies and their securities;
vii.
reviewed the financial terms, to the extent publicly available, of certain
comparable transactions;
viii.
reviewed the Agreement and related documents;
ix.
reviewed and analyzed other financial information concerning the respective
businesses and operations of the Company and EZCORP furnished to Stephens by the
Company and EZCORP;
x.
discussed with management of the Company and EZCORP the operations of, and
future business prospects for, the Company and EZCORP;
xi.
assisted in the deliberations of the Company regarding the material terms of
the Transaction and in the Company’s negotiations with EZCORP; and
xii.
performed such other analyses and provided such other services as we have
deemed necessary or appropriate.
We have relied on the accuracy and completeness of the information and financial data provided
to us or discussed with us, and our opinion is based upon such information. We have not
independently verified such information or financial data. We have inquired into the reliability
of such information and financial data only to the limited extent necessary to provide a reasonable
basis for our opinion. We have not assumed any responsibility for making or undertaking an
independent evaluation or appraisal of any of the assets or liabilities of the Company or of EZCORP
or for providing any certification of value. With respect to forecasts and other pro forma
information regarding the future financial performance or future financial situation of the Company
prepared by or discussed with management of the Company, we have assumed that they have been
reasonably prepared and reflect management’s best currently available estimates and judgments of
the future financial performance or future financial situation of the Company. With respect to
forecasts and other pro forma information regarding the future financial performance or future
financial situation of EZCORP reviewed by us or discussed with management of the Company, we have
assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgments of the future
financial performance or future financial situation of EZCORP. Our opinion is necessarily based on
economic, monetary, market and other conditions as in effect on, and the information made available
to us as of, the date hereof. We assume no responsibility for updating or revising our opinion
based on circumstances or events occurring after the date hereof.
In rendering our opinion, we have assumed that the Transaction will be consummated on the
terms set forth in the Agreement, without any waiver or modification that would be material to our
analysis. We have further assumed that the necessary regulatory or other consents will be secured
without the imposition of any restrictions, amendments or modifications to the Transaction that
would be material to our analysis. In addition, we have assumed that the representations and
warranties contained in the Agreement and all agreements related thereto are true and complete.
With your permission, for purposes of this opinion we have also assumed that 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 Transaction will completely and accurately reflect the value of
EZCORP Class A Non-Voting Common Stock as of the time of closing of the Transaction, and that the
value of the per-share consideration to be received by shareholders receiving EZCORP Class A
Non-Voting Common Stock as consideration for their shares of the Company is at least the same as
the value of the per-share consideration to be received by shareholders receiving only cash as the
consideration for their shares of the Company.
You have advised us of the provisions of the Company’s charter and of the various contractual
obligations that govern the manner in which the proceeds are to be divided among and distributed to
the Company’s shareholders. We have not been asked to express any opinion, and do not express any
opinion, as to the fairness of the manner in which the proceeds are expected to be distributed
among the Company’s shareholders. We have not been asked to express any opinion, and do not
express any opinion, as to the fairness of the amount or nature of the compensation to any of the
Company’s officers, directors or employees, or to any group of such officers, directors or
employees, relative to the compensation to other shareholders of the Company. We have not been
asked to evaluate, and have not evaluated, the solvency or fair value of the Company or of EZCORP
under any state or federal laws relating to bankruptcy, insolvency or similar matters.
As part of our investment banking business, we regularly issue fairness opinions and are
continually engaged in the valuation of companies and their securities in connection with business
reorganizations, private placements, negotiated underwritings, mergers and acquisitions and
valuations for estate, corporate and other purposes. Our fairness committee has approved our
opinion as to the fairness of the Transaction. We have acted as financial adviser to the Company
in connection with the Transaction and received a fee (and reimbursement of our expenses) for our
services. In addition, the Company has agreed to indemnify us against certain liabilities that
could arise out of our engagement, including certain liabilities that could arise from providing
this opinion letter. We have also been asked to assist certain shareholders receiving EZCORP Class
A Non-Voting Common Stock as a part of the consideration for their shares of the Company, following
the closing of the Transaction, with selling some or all of such
EZCORP Class A Non-Voting Common Stock. We will receive a fee for such services and indemnity
against certain liabilities that could arise out of our providing such services.
We are a full service securities firm engaged, either directly or through our affiliates, in
securities trading, investment management, risk management, hedging, financing and brokerage
activities for both companies and individuals. In the ordinary course of these activities, we may
provide such services to EZCORP and its affiliates, may actively trade the equity securities (or
related derivatives securities) of EZCORP for our own account and for the accounts of our customers
and may at any time hold long and short positions of such securities. We regularly prepare and
publish research reports about EZCORP and its Class A Non-Voting Common Stock, and we make a market
in EZCORP Class A Non-Voting Common Stock.
Based on the foregoing and our general experience as investment bankers, and subject to the
qualifications stated herein, we are of the opinion on the date hereof that the Consideration to be
received by the disinterested shareholders of the Company in the Transaction is fair to them from a
financial point of view.
This opinion is for the use and benefit of the Board of Directors of the Company. Our opinion
does not address the merits of the underlying decision by the Company to engage in the Transaction,
the merits of the Transaction as compared to other alternatives potentially available to the
Company or the relative effects of any alternative transaction in which the Company might engage,
nor is it intended to be a recommendation to any person as to any specific action that should be
taken in connection with the Transaction, nor are we expressing any opinion as to the prices at
which the shares of EZCORP Class A Non-Voting Common Stock will trade at any time. This opinion is
not intended to be relied upon or confer any rights or remedies upon any employee, creditor,
shareholder or other equity holder of the Company, or any other person or entity, other than the
Board of Directors of the Company. Neither this opinion nor its substance may be disclosed by you
to anyone other than your advisors without our written permission. Notwithstanding the foregoing,
this opinion, a summary discussion of our underlying analyses and our role as your financial
advisor may be included in communications to the Company’s shareholders, provided that we approve
of the form and content of such disclosures prior to publication.
607.1301 Appraisal rights; definitions.—The following definitions apply to ss. 607.1302-607.1333:
(1) “Affiliate” means a person that directly or indirectly through one or more intermediaries
controls, is controlled by, or is under common control with another person or is a senior executive
thereof. For purposes of s. 607.1302(2)(d), a person is deemed to be an affiliate of its senior
executives.
(2) “Beneficial shareholder” means a person who is the beneficial owner of shares held in a voting
trust or by a nominee on the beneficial owner’s behalf.
(3) “Corporation” means the issuer of the shares held by a shareholder demanding appraisal and,
for matters covered in ss. 607.1322-607.1333, includes the surviving entity in a merger.
(4) “Fair value” means the value of the corporation’s shares determined:
(a) Immediately before the effectuation of the corporate action to which the shareholder objects.
(b) Using customary and current valuation concepts and techniques generally employed for similar
businesses in the context of the transaction requiring appraisal, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion would be inequitable to the
corporation and its remaining shareholders.
(c) For a corporation with 10 or fewer shareholders, without discounting for lack of marketability
or minority status.
(5) “Interest” means interest from the effective date of the corporate action until the date of
payment, at the rate of interest on judgments in this state on the effective date of the corporate
action.
(6) “Preferred shares” means a class or series of shares the holders of which have preference over
any other class or series with respect to distributions.
(7) “Record shareholder” means the person in whose name shares are registered in the records of
the corporation or the beneficial owner of shares to the extent of the rights granted by a nominee
certificate on file with the corporation.
(8) “Senior executive” means the chief executive officer, chief operating officer, chief financial
officer, or anyone in charge of a principal business unit or function.
(9) “shareholder” means both a record shareholder and a beneficial shareholder.
(1) A shareholder of a domestic corporation is entitled to appraisal rights, and to obtain payment
of the fair value of that shareholder’s shares, in the event of any of the following corporate
actions:
(a) Consummation of a conversion of such corporation pursuant to s. 607.1112 if shareholder
approval is required for the conversion and the shareholder is entitled to vote on the conversion
under ss. 607.1103 and 607.1112(6), or the consummation of a merger to which such corporation is a
party if shareholder approval is required for the merger under s. 607.1103 and the shareholder is
entitled to vote on the merger or if such corporation is a subsidiary and the merger is governed by
s. 607.1104;
(b) Consummation of a share exchange to which the corporation is a party as the corporation whose
shares will be acquired if the shareholder is entitled to vote on the exchange, except that
appraisal rights shall not be available to any shareholder of the corporation with respect to any
class or series of shares of the corporation that is not exchanged;
(c) Consummation of a disposition of assets pursuant to s. 607.1202 if the shareholder is entitled
to vote on the disposition, including a sale in dissolution but not including a sale pursuant to
court order or a sale for cash pursuant to a plan by which all or substantially all of the net
proceeds of the sale will be distributed to the shareholders within 1 year after the date of sale;
(d) An amendment of the articles of incorporation with respect to the class or series of shares
which reduces the number of shares of a class or series owned by the shareholder to a fraction of a
share if the corporation has the obligation or right to repurchase the fractional share so created;
(e) Any other amendment to the articles of incorporation, merger, share exchange, or disposition
of assets to the extent provided by the articles of incorporation, bylaws, or a resolution of the
board of directors, except that no bylaw or board resolution providing for appraisal rights may be
amended or otherwise altered except by shareholder approval; or
(f) With regard to a class of shares prescribed in the articles of incorporation prior to October1, 2003, including any shares within that class subsequently authorized by amendment, any amendment
of the articles of incorporation if the shareholder is entitled to vote on the amendment and if
such amendment would adversely affect such shareholder by:
1. Altering or abolishing any preemptive rights attached to any of his or her shares;
2. Altering or abolishing the voting rights pertaining to any of his or her shares, except as such
rights may be affected by the voting rights of new shares then being authorized of any existing or
new class or series of shares;
3. Effecting an exchange, cancellation, or reclassification of any of his or her shares, when such
exchange, cancellation, or reclassification would alter or abolish the shareholder’s voting rights
or alter his or her percentage of equity in the corporation, or effecting a reduction or
cancellation of accrued dividends or other arrearages in respect to such shares;
4. Reducing the stated redemption price of any of the shareholder’s redeemable shares, altering or
abolishing any provision relating to any sinking fund for the redemption or purchase of any of
his or her shares, or making any of his or her shares subject to redemption when they are not
otherwise redeemable;
5. Making noncumulative, in whole or in part, dividends of any of the shareholder’s preferred
shares which had theretofore been cumulative;
6. Reducing the stated dividend preference of any of the shareholder’s preferred shares; or
7. Reducing any stated preferential amount payable on any of the shareholder’s preferred shares
upon voluntary or involuntary liquidation.
(2) Notwithstanding subsection (1), the availability of appraisal rights under paragraphs (1)(a),
(b), (c), and (d) shall be limited in accordance with the following provisions:
(a) Appraisal rights shall not be available for the holders of shares of any class or series of
shares which is:
1. Listed on the New York Stock Exchange or the American Stock Exchange or designated as a
national market system security on an interdealer quotation system by the National Association of
Securities Dealers, Inc.; or
2. Not so listed or designated, but has at least 2,000 shareholders and the outstanding shares of
such class or series have a market value of at least $10 million, exclusive of the value of such
shares held by its subsidiaries, senior executives, directors, and beneficial shareholders owning
more than 10 percent of such shares.
(b) The applicability of paragraph (a) shall be determined as of:
1. The record date fixed to determine the shareholders entitled to receive notice of, and to vote
at, the meeting of shareholders to act upon the corporate action requiring appraisal rights; or
2. If there will be no meeting of shareholders, the close of business on the day on which the
board of directors adopts the resolution recommending such corporate action.
(c) Paragraph (a) shall not be applicable and appraisal rights shall be available pursuant to
subsection (1) for the holders of any class or series of shares who are required by the terms of
the corporate action requiring appraisal rights to accept for such shares anything other than cash
or shares of any class or any series of shares of any corporation, or any other proprietary
interest of any other entity, that satisfies the standards set forth in paragraph (a) at the time
the corporate action becomes effective.
(d) Paragraph (a) shall not be applicable and appraisal rights shall be available pursuant to
subsection (1) for the holders of any class or series of shares if:
1. Any of the shares or assets of the corporation are being acquired or converted, whether by
merger, share exchange, or otherwise, pursuant to the corporate action by a person, or by an
affiliate of a person, who:
a. Is, or at any time in the 1-year period immediately preceding approval by the board of
directors of the corporate action requiring appraisal rights was, the beneficial owner of 20
percent or more of the voting power of the corporation, excluding any shares acquired pursuant to
an offer for all shares having voting power if such offer was made within 1 year prior to the
corporate action requiring appraisal rights for consideration of the same kind and of a value equal
to or less than that paid in connection with the corporate action; or
b. Directly or indirectly has, or at any time in the 1-year period immediately preceding approval
by the board of directors of the corporation of the corporate action requiring appraisal rights
had, the power, contractually or otherwise, to cause the appointment or election of 25 percent or
more of the directors to the board of directors of the corporation; or
2. Any of the shares or assets of the corporation are being acquired or converted, whether by
merger, share exchange, or otherwise, pursuant to such corporate action by a person, or by an
affiliate of a person, who is, or at any time in the 1-year period immediately preceding approval
by the board of directors of the corporate action requiring appraisal rights was, a senior
executive or director of the corporation or a senior executive of any affiliate thereof, and that
senior executive or director will receive, as a result of the corporate action, a financial benefit
not generally available to other shareholders as such, other than:
a. Employment, consulting, retirement, or similar benefits established separately and not as part
of or in contemplation of the corporate action;
b. Employment, consulting, retirement, or similar benefits established in contemplation of, or as
part of, the corporate action that are not more favorable than those existing before the corporate
action or, if more favorable, that have been approved on behalf of the corporation in the same
manner as is provided in s. 607.0832; or
c. In the case of a director of the corporation who will, in the corporate action, become a
director of the acquiring entity in the corporate action or one of its affiliates, rights and
benefits as a director that are provided on the same basis as those afforded by the acquiring
entity generally to other directors of such entity or such affiliate.
(e) For the purposes of paragraph (d) only, the term “beneficial owner” means any person who,
directly or indirectly, through any contract, arrangement, or understanding, other than a revocable
proxy, has or shares the power to vote, or to direct the voting of, shares, provided that a member
of a national securities exchange shall not be deemed to be a beneficial owner of securities held
directly or indirectly by it on behalf of another person solely because such member is the
recordholder of such securities if the member is precluded by the rules of such exchange from
voting without instruction on contested matters or matters that may affect substantially the rights
or privileges of the holders of the securities to be voted. When two or more persons agree to act
together for the purpose of voting their shares of the corporation, each member of the group formed
thereby shall be deemed to have acquired beneficial ownership, as of the date of such agreement, of
all voting shares of the corporation beneficially owned by any member of the group.
(3) Notwithstanding any other provision of this section, the articles of incorporation as
originally filed or any amendment thereto may limit or eliminate appraisal rights for any class or
series of preferred shares, but any such limitation or elimination contained in an amendment to the
articles of incorporation that limits or eliminates appraisal rights for any of such shares that
are outstanding immediately prior to the effective date of such amendment or that the corporation
is or may be required to issue or sell thereafter pursuant to any conversion, exchange, or other
right existing immediately before the effective date of such amendment shall not apply to any
corporate action that becomes effective within 1 year of that date if such action would otherwise
afford appraisal rights.
(4) A shareholder entitled to appraisal rights under this chapter may not challenge a completed
corporate action for which appraisal rights are available unless such corporate action:
(a) Was not effectuated in accordance with the applicable provisions of this section or the
corporation’s articles of incorporation, bylaws, or board of directors’’ resolution authorizing the
corporate action; or
(b) Was procured as a result of fraud or material misrepresentation.
607.1303 Assertion of rights by nominees and beneficial owners.—
(1) A record shareholder may assert appraisal rights as to fewer than all the shares registered in
the record shareholder’s name but owned by a beneficial shareholder only if the record shareholder
objects with respect to all shares of the class or series owned by the beneficial shareholder and
notifies the corporation in writing of the name and address of each beneficial shareholder on whose
behalf appraisal rights are being asserted. The rights of a record shareholder who asserts
appraisal rights for only part of the shares held of record in the record shareholder’s name under
this subsection shall be determined as if the shares as to which the record shareholder objects and
the record shareholder’s other shares were registered in the names of different record
shareholders.
(2) A beneficial shareholder may assert appraisal rights as to shares of any class or series held
on behalf of the shareholder only if such shareholder:
(a) Submits to the corporation the record shareholder’s written consent to the assertion of such
rights no later than the date referred to in s. 607.1322(2)(b)2.
(b) Does so with respect to all shares of the class or series that are beneficially owned by the
beneficial shareholder.
607.1320 Notice of appraisal rights.—
(1) If proposed corporate action described in s. 607.1302(1) is to be submitted to a vote at a
shareholders’’ meeting, the meeting notice must state that the corporation has concluded that
shareholders are, are not, or may be entitled to assert appraisal rights under this chapter. If the
corporation concludes that appraisal rights are or may be available, a copy of ss.
607.1301-607.1333 must accompany the meeting notice sent to those record shareholders entitled to
exercise appraisal rights.
(2) In a merger pursuant to s. 607.1104, the parent corporation must notify in writing all record
shareholders of the subsidiary who are entitled to assert appraisal rights that the corporate
action became effective. Such notice must be sent within 10 days after the corporate action became
effective and include the materials described in s. 607.1322.
(3) If the proposed corporate action described in s. 607.1302(1) is to be approved other than by a
shareholders’’ meeting, the notice referred to in subsection (1) must be sent to all shareholders
at
the time that consents are first solicited pursuant to s. 607.0704, whether or not consents are
solicited from all shareholders, and include the materials described in s. 607.1322.
607.1321 Notice of intent to demand payment.—
(1) If proposed corporate action requiring appraisal rights under s. 607.1302 is submitted to a
vote at a shareholders’’ meeting, or is submitted to a shareholder pursuant to a consent vote under
s. 607.0704, a shareholder who wishes to assert appraisal rights with respect to any class or
series of shares:
(a) Must deliver to the corporation before the vote is taken, or within 20 days after receiving
the notice pursuant to s. 607.1320(3) if action is to be taken without a shareholder meeting,
written notice of the shareholder’s intent to demand payment if the proposed action is effectuated.
(b) Must not vote, or cause or permit to be voted, any shares of such class or series in favor of
the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1) is not entitled to
payment under this chapter.
607.1322 Appraisal notice and form.—
(1) If proposed corporate action requiring appraisal rights under s. 607.1302(1) becomes
effective, the corporation must deliver a written appraisal notice and form required by paragraph
(2)(a) to all shareholders who satisfied the requirements of s. 607.1321. In the case of a merger
under s. 607.1104, the parent must deliver a written appraisal notice and form to all record
shareholders who may be entitled to assert appraisal rights.
(2) The appraisal notice must be sent no earlier than the date the corporate action became
effective and no later than 10 days after such date and must:
(a) Supply a form that specifies the date that the corporate action became effective and that
provides for the shareholder to state:
1. The shareholder’s name and address.
2. The number, classes, and series of shares as to which the shareholder asserts appraisal rights.
3. That the shareholder did not vote for the transaction.
4. Whether the shareholder accepts the corporation’s offer as stated in subparagraph (b)4.
5. If the offer is not accepted, the shareholder’s estimated fair value of the shares and a demand
for payment of the shareholder’s estimated value plus interest.
(b) State:
1. Where the form must be sent and where certificates for certificated shares must be deposited
and the date by which those certificates must be deposited, which date may not be earlier than the
date for receiving the required form under subparagraph 2.
2. A date by which the corporation must receive the form, which date may not be fewer than 40 nor
more than 60 days after the date the subsection (1) appraisal notice and form are sent, and state
that the shareholder shall have waived the right to demand appraisal with respect to the shares
unless the form is received by the corporation by such specified date.
3. The corporation’s estimate of the fair value of the shares.
4. An offer to each shareholder who is entitled to appraisal rights to pay the corporation’s
estimate of fair value set forth in subparagraph 3.
5. That, if requested in writing, the corporation will provide to the shareholder so requesting,
within 10 days after the date specified in subparagraph 2., the number of shareholders who return
the forms by the specified date and the total number of shares owned by them.
6. The date by which the notice to withdraw under s. 607.1323 must be received, which date must be
within 20 days after the date specified in subparagraph 2.
(c) Be accompanied by:
1. Financial statements of the corporation that issued the shares to be appraised, consisting of a
balance sheet as of the end of the fiscal year ending not more than 15 months prior to the date of
the corporation’s appraisal notice, an income statement for that year, a cash flow statement for
that year, and the latest available interim financial statements, if any.
2. A copy of ss. 607.1301-607.1333.
607.1323 Perfection of rights; right to withdraw.—
(1) A shareholder who wishes to exercise appraisal rights must execute and return the form
received pursuant to s. 607.1322(1) and, in the case of certificated shares, deposit the
shareholder’s certificates in accordance with the terms of the notice by the date referred to in
the notice pursuant to s. 607.1322(2)(b)2. Once a shareholder deposits that shareholder’s
certificates or, in the case of uncertificated shares, returns the executed forms, that shareholder
loses all rights as a shareholder, unless the shareholder withdraws pursuant to subsection (2).
(2) A shareholder who has complied with subsection (1) may nevertheless decline to exercise
appraisal rights and withdraw from the appraisal process by so notifying the corporation in writing
by the date set forth in the appraisal notice pursuant to s. 607.1322(2)(b)6. A shareholder who
fails to so withdraw from the appraisal process may not thereafter withdraw without the
corporation’s written consent.
(3) A shareholder who does not execute and return the form and, in the case of certificated
shares, deposit that shareholder’s share certificates if required, each by the date set forth in
the notice described in subsection (2), shall not be entitled to payment under this chapter.
607.1324 shareholder’s acceptance of corporation’s offer.—
(1) If the shareholder states on the form provided in s. 607.1322(1) that the shareholder accepts
the offer of the corporation to pay the corporation’s estimated fair value for the shares, the
corporation shall make such payment to the shareholder within 90 days after the corporation’s
receipt of the form from the shareholder.
(2) Upon payment of the agreed value, the shareholder shall cease to have any interest in the
shares.
607.1326 Procedure if shareholder is dissatisfied with offer.—
(1) A shareholder who is dissatisfied with the corporation’s offer as set forth pursuant to s.
607.1322(2)(b)4. must notify the corporation on the form provided pursuant to s. 607.1322(1) of
that shareholder’s estimate of the fair value of the shares and demand payment of that estimate
plus interest.
(2) A shareholder who fails to notify the corporation in writing of that shareholder’s demand to
be paid the shareholder’s stated estimate of the fair value plus interest under subsection (1)
within the timeframe set forth in s. 607.1322(2)(b)2. waives the right to demand payment under this
section and shall be entitled only to the payment offered by the corporation pursuant to s.
607.1322(2)(b)4.
607.1330 Court action.—
(1) If a shareholder makes demand for payment under s. 607.1326 which remains unsettled, the
corporation shall commence a proceeding within 60 days after receiving the payment demand and
petition the court to determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the 60-day period, any shareholder who has made
a demand pursuant to s. 607.1326 may commence the proceeding in the name of the corporation.
(2) The proceeding shall be commenced in the appropriate court of the county in which the
corporation’s principal office, or, if none, its registered office, in this state is located. If
the corporation is a foreign corporation without a registered office in this state, the proceeding
shall be commenced in the county in this state in which the principal office or registered office
of the domestic corporation merged with the foreign corporation was located at the time of the
transaction.
(3) All shareholders, whether or not residents of this state, whose demands remain unsettled shall
be made parties to the proceeding as in an action against their shares. The corporation shall serve
a copy of the initial pleading in such proceeding upon each shareholder party who is a resident of
this state in the manner provided by law for the service of a summons and complaint and upon each
nonresident shareholder party by registered or certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced under subsection (2) is
plenary and exclusive. If it so elects, the court may appoint one or more persons as appraisers to
receive evidence and recommend a decision on the question of fair value. The appraisers shall have
the powers described in the order appointing them or in any amendment to the order. The
shareholders demanding appraisal rights are entitled to the same discovery rights as parties in
other civil proceedings. There shall be no right to a jury trial.
(5) Each shareholder made a party to the proceeding is entitled to judgment for the amount of the
fair value of such shareholder’s shares, plus interest, as found by the court.
(6) The corporation shall pay each such shareholder the amount found to be due within 10 days
after final determination of the proceedings. Upon payment of the judgment, the shareholder shall
cease to have any interest in the shares.
607.1331 Court costs and counsel fees.—
(1) The court in an appraisal proceeding shall determine all costs of the proceeding, including
the reasonable compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs against all or
some of the shareholders demanding appraisal, in amounts the court finds equitable, to the extent
the court finds such shareholders acted arbitrarily, vexatiously, or not in good faith with respect
to the rights provided by this chapter.
(2) The court in an appraisal proceeding may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all shareholders demanding appraisal if the
court finds the corporation did not substantially comply with ss. 607.1320 and 607.1322; or
(b) Against either the corporation or a shareholder demanding appraisal, in favor of any other
party, if the court finds that the party against whom the fees and expenses are assessed acted
arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter.
(3) If the court in an appraisal proceeding finds that the services of counsel for any shareholder
were of substantial benefit to other shareholders similarly situated, and that the fees for those
services should not be assessed against the corporation, the court may award to such counsel
reasonable fees to be paid out of the amounts awarded the shareholders who were benefited.
(4) To the extent the corporation fails to make a required payment pursuant to s. 607.1324, the
shareholder may sue directly for the amount owed and, to the extent successful, shall be entitled
to recover from the corporation all costs and expenses of the suit, including counsel fees.
607.1332 Disposition of acquired shares.—Shares acquired by a corporation pursuant to payment of
the agreed value thereof or pursuant to payment of the judgment entered therefor, as provided in
this chapter, may be held and disposed of by such corporation as authorized but unissued shares of
the corporation, except that, in the case of a merger or share exchange, they may be held and
disposed of as the plan of merger or share exchange otherwise provides. The shares of the surviving
corporation into which the shares of such shareholders demanding appraisal rights would have been
converted had they assented to the merger shall have the status of authorized but unissued shares
of the surviving corporation.
607.1333 Limitation on corporate payment.—
(1) No payment shall be made to a shareholder seeking appraisal rights if, at the time of payment,
the corporation is unable to meet the distribution standards of s. 607.06401. In such event, the
shareholder shall, at the shareholder’s option:
(a) Withdraw his or her notice of intent to assert appraisal rights, which shall in such event be
deemed withdrawn with the consent of the corporation; or
(b) Retain his or her status as a claimant against the corporation and, if it is liquidated, be
subordinated to the rights of creditors of the corporation, but have rights superior to the
shareholders not asserting appraisal rights, and if it is not liquidated, retain his or her right
to be paid for the shares, which right the corporation shall be obliged to satisfy when the
restrictions of this section do not apply.
(2) The shareholder shall exercise the option under paragraph (1)(a) or paragraph (b) by written
notice filed with the corporation within 30 days after the corporation has given written notice
that the payment for shares cannot be made because of the restrictions of this section. If the
shareholder fails to exercise the option, the shareholder shall be deemed to have withdrawn his or
her notice of intent to assert appraisal rights.
This Voting Agreement (the “Voting Agreement”) is entered as of September ___, 2008,
by and between the undersigned shareholders (the “Shareholders”) of Value Financial
Services, Inc., a Florida corporation (the “Company”), Value Merger Sub, Inc., a Delaware
corporation (“Merger Sub”), and EZCORP, Inc., a Delaware corporation (“EZCORP”).
Recitals
A. Concurrently with the execution and delivery of this Voting Agreement, the Company, Merger
Sub and EZCORP have entered into a Merger Agreement (the “Merger Agreement”) providing for
the merger of the Merger Sub with and into the Company (the “Merger”), and which requires
that a majority of each series of capital stock of the Company shall approve the conversion into
common stock of all shares of capital stock other than the Company’s common stock, including the
conversion into common stock of the Company’s Series A-1 Participating, Series A-2 Participating
and Series B Participating Preferred stock, all in accordance with the requirements of the Florida
Business Corporation Act, the Company’s Amended and Restated Articles of Incorporation and the
Company’s Bylaws.
B. As an inducement and a condition to EZCORP’s entering into the Merger Agreement, pursuant
to which each shareholder will receive the Merger Consideration provided in the Merger Agreement in
exchange for each share of the Company’s common stock owned by such Shareholder, the Shareholders
have entered into this Voting Agreement.
C. Each Shareholder owns (either beneficially or of record), and/or has the authority to vote
(either through record or beneficial ownership or by valid proxy the number of shares (the
“Shares”) of capital stock of the Company set forth opposite such Shareholder’s name on
Schedule A hereto.
Now therefore, the parties agree as follows:
1 Agreement with Respect to Shares. Each Shareholder agrees to vote all Shares and any
other shares of capital stock of the Company which Shareholder, directly or indirectly, controls at
a special meeting or any other meeting of shareholders of the Company, however called, and in any
action by consent of the shareholders of the Company (a) in favor of the Merger and (b) in favor of
the conversion of all Series A-1 Participating, Series A-2 Participating and Series B Participating
Preferred stock into common stock of the Company.
2 Covenants. Each Shareholder agrees with respect to himself and the Shares owned by the
Shareholder that:
2.1 He shall not, except consistent with the terms of this Voting Agreement, (i) transfer
(which term shall include, without limitation, for the purposes of this Voting Agreement, any sale,
gift, pledge or other disposition), or consent to any transfer of, any or all of the Shares or any
interest therein, (ii) enter into any contract, option or other agreement or understanding with
respect to any transfer of any or all of the Shares or any interest therein, (iii) take any other
action that would in any way restrict, limit or interfere with the performance of its obligations
hereunder or the transactions contemplated hereby, or (iv) grant any proxies or powers of attorney
with respect to any of the Shares, deposit any Shares into a voting trust or enter into a voting
agreement with respect to such Shares. Notwithstanding the foregoing, Shareholder may transfer his
Shares if such transferee becomes a party to and bound by all of the terms of this Voting
Agreement.
2.2 He will not enter into any transaction, take any action, or directly or indirectly cause any
event to occur that would result in any of the representations or warranties of 2
Shareholder herein contained not being true and correct at and as of the time immediately
after the occurrence of such transaction, action or event.
3 Representations and Warranties. Each Shareholder represents and warrants with respect to himself
and the Shares owned by the Shareholder that:
3.1 He is the record or beneficial owner of the number of Shares set forth on Schedule A
opposite his name and, except for the Shares, he is not the record or beneficial owner of any
shares of capital stock of the Company.
3.2 This Voting Agreement has been duly executed and delivered by Shareholder and constitutes
the legal, valid and binding obligation of Shareholder, enforceable against Shareholder in
accordance with its terms. Shareholder has all necessary power and authority to execute and deliver
this Voting Agreement, to perform his obligations hereunder and to consummate the transactions
contemplated hereby. Neither the execution and delivery of this Voting Agreement nor the
consummation by Shareholder of the transactions contemplated hereby will result in a violation of,
or a default under, or conflict with, any contract, trust, commitment, agreement, understanding,
arrangement or restriction of any kind to which Shareholder is a party or bound or to which the
Shares are subject which would materially impair the ability of Shareholder to perform hereunder.
Consummation by Shareholder of the transactions contemplated hereby will not violate, or require
any consent, approval, or notice under, any provision of any judgment, order, decree, statute, law,
rule or regulation applicable to Shareholder or the Shares.
3.3 The Shares owned by Shareholder and the certificates representing such Shares are now and
at all times during the term hereof will be held by Shareholder or by a nominee or custodian for
its benefit, free and clear of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances whatsoever, except for any
such encumbrances or proxies arising hereunder.
4 Specific Performance. Each party hereto severally acknowledges that it will be impossible to
measure in money the damage to the other party if the party hereto fails to comply with any of the
obligations imposed by this Voting Agreement, that every such obligation is material and that, in
the event of any such failure, the other party will not have an adequate remedy at law or damages.
Accordingly, each party hereto severally agrees that injunctive relief or other equitable remedy,
in addition to remedies at law or damages, is the appropriate remedy for such failure an will not
oppose the granting of such relief on the basis that the other party has an adequate remedy at law.
Each party hereto
severally agrees that he will not seek and agrees to waive any requirement for,
the securing or posting of a bond in connection with any other party’s seeking or obtaining such
equitable relief.
5 Termination. This Voting Agreement, and all rights and obligations of the parties hereunder,
shall terminate upon the first to occur of (a) the consummation of the Merger, (b) December 31,2008, or (c) the date of termination of the Merger Agreement in connection with the terms thereof.
6 Miscellaneous.
6.1 The headings contained in this Voting Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Voting Agreement.
6.2 This Voting Agreement constitutes the entire agreement relating to the subject matter
covered herein, and supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof.
6.3 Neither this Voting Agreement nor any of the rights, interests or obligations under this
Voting Agreement shall be assigned, in whole or in part, by operation of law or otherwise, by any
of the parties without the prior written consent of the other parties, except that this Voting
Agreement shall be binding upon Shareholder and its successors and assigns and except as provided
in Section 14.1.
6.4 The construction and performance of this Voting Agreement will be governed by the laws of
the State of Florida, regardless of the laws that might otherwise govern under applicable
principles of conflicts of laws thereof.
6.5 If any term, provision, covenant or restriction herein, or the application thereof to any
circumstance, shall, to any extent, be held by a court of competent jurisdiction to be invalid,
void or unenforceable, the remainder of the terms, provisions, covenants and restrictions herein
and the application thereof to any other circumstances, shall remain in full force and effect,
shall not in any way be affected, impaired or invalidated, and shall be enforced to the fullest
extent permitted by law.
6.6 No amendment, modification or waiver in respect of this Voting Agreement shall be
effective against any party unless is shall be in writing and signed by such party.
6.7 This Voting Agreement may be executed in one or more counterparts, all of which shall be
considered one and the same agreement, and shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties, it being understood
that all parties need not sign the same counterpart.
IN WITNESS WHEREOF, the parties have executed this Voting Agreement to become effective as of
the day and year first above written.
VALUE FINANCIAL SERVICES, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON AUGUST 8, 2008
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of Value Financial Services, Inc. (the “Corporation”)
hereby constitutes and appoints John Thedford, as attorney and proxy, with the power to appoint a
substitute, and hereby authorizes him to represent and vote, as designated below, all of the votes
which the undersigned is entitled to cast at the Special Meeting of Shareholders of the Corporation
to be held on August 8, 2008, or at any and all adjournments or postponements thereof, with respect
to the matters set forth below and described in the Notice of Special Meeting of Shareholders and
the Proxy Statement dated July 29, 2008.
Proposal 1:
To consider and act upon a proposal to approve: (1) the Articles of Amendment (the “Amendment”) to the Amended and
Restated Articles of Incorporation of the Corporation (the “Articles”) to amend the effective time of a mandatory
conversion of Series A-1 Participating Stock, Series A-2 Participating Stock and Series B Participating Stock
(collectively, the “Preferred Stock”) to occur upon approval of such mandatory conversion with no requirement of
prior written notice subject to approval of the Merger; and (2) the conversion (the “Conversion”) of all Preferred
Stock into common stock subject to approval of the Merger (defined below) (simultaneously upon consummation of the
Conversion, all accrued and unpaid dividends due to the holders of the Series A-2 Participating Stock will be paid
in full).
o FOR AMENDMENT AND CONVERSION
o AGAINST AMENDMENT AND CONVERSION
o ABSTAIN
Proposal 2:
To approve and ratify the Merger Agreement (the “Merger Agreement”) by and among the Corporation, Value Merger Sub,
Inc., a Florida corporation (“Merger Sub”) and EZCORP, Inc., a Delaware Corporation (“EZ”), dated as of June 5,2008 (and the Merger as defined below)), pursuant to which, Merger Sub, a wholly-owned subsidiary of EZ, would
merge with and into the Corporation (the “Merger”), and whereby certain of the Corporation’s shareholders would
receive a cash payment of $11.00 per share of Corporation common stock held by them (the “Cash Consideration”) and
certain of the Corporation’s shareholders would receive a combination of the Cash Consideration and Class A
Non-voting shares of EZ (the “EZ Shares” and collectively with the Cash Consideration, the “Merger Consideration”).
o FOR APPROVAL
o AGAINST APPROVAL
o ABSTAIN
Proposal 3:
To transact any other business that may properly come before the Special Meeting.
o FOR APPROVAL
o AGAINST APPROVAL
o ABSTAIN
This proxy, when properly executed, will be voted in the manner directed herein by the
undersigned shareholder(s). IF NO INDICATION IS MADE, THIS PROXY WILL BE VOTED “FOR” EACH OF THE
PROPOSALS ABOVE AND THE PROXY HOLDER WILL VOTE ON ANY MATTER UNDER PROPOSAL NO. 3 IN HIS DISCRETION
AND IN HIS BEST JUDGMENT.
Please date and sign below exactly as your name appears on your stock certificate. When
shares are held by joint tenants, both should sign. When signing as corporate officer, partner,
attorney, executor, administrator, trustee or guardian, please specify your full title as such.
PART II — INFORMATION NOT REQUIRED IN PROXY STATEMENT/PROSPECTUS
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
$
3,188
Legal fees and expenses
100,000
Exchange agent fee
25,000
Miscellaneous expenses
25,000
Total:
$
153,188
(1)
All items other than SEC registration fee are estimates.
Indemnification of Directors and Officers
EZCORP’s Restated Certificate of Incorporation provides that no director will be personally
liable to EZCORP or any of its shareholders for monetary damages arising from the director’s 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.
EZCORP’s 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.
(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.
(4) That, for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(A) Each prospectus filed by the registrant pursuant to Rule 424(b)(3)
shall be deemed to be part of the registration statement as of the date the
filed prospectus was deemed part of and included in the registration
statement; and
(B) Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or
(x) for the purpose of providing the information required by section 10(a)
of the Securities Act of 1933 shall be deemed to be part of and included in
the registration statement as of the earlier of the date such form of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the prospectus.
As provided in Rule 430B, for liability purposes of the issuer and any
person that is at that date an underwriter, such date shall be deemed to be
a new effective date of the registration statement relating to the
securities in the registration statement to which that prospectus relates,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof. Provided, however, that no statement
made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that
is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such effective date; or prospectus relates, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of
sale prior to such effective date, supersede or modify any statement that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such effective date; or
(ii)
If the registrant is subject to Rule
430C, each prospectus filed pursuant to Rule 424(b) as part of
a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to
be part of and included in the registration statement as of the
date it is first used after effectiveness. Provided, however,
that no statement made in a registration statement or
prospectus that is part of the registration statement or made
in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or
modify any statement that was made in
the registration
statement or prospectus that was part of the registration
statement or made in any such document immediately prior to
such date of first use.
(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.
(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 EZCORP’s 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.
Additionally, the undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or
13 of this Form, within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes information contained
in documents filed subsequent to the effective date of the registration statement through the date
of responding to the request.
Additionally, the undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the company being acquired
involved therein, that was not the subject of and included in the registration statement when it
became effective.
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-4/A 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
November 4, 2008.
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.
Merger Agreement dated September 16, 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 in Exhibit A to the proxy
statement/prospectus.
3.1
Conformed Amended Certificate of Incorporation of EZCORP, Inc., incorporated by
reference to Exhibit 3.1 of the Registration Statement on Form S-4 filed September
26,2008 (File No. 333-153703).
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).
The description of EZCORP’s Common Stock and Common Stock Rights as set forth in
EZCORP’s 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.
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.
8.1*
Opinion of Strasburger & Price, L.L.P., as to tax matters.
10.1+
Form of Fifth Amended and Restated Credit Agreement among EZCORP, Inc., Wells Fargo
Bank, N.A., and other financial institutions, dated June 27, 2008 (to become effective
and be dated upon completion of the Merger with Value Financial Services, Inc.)
Voting Agreement between EZCORP, Merger Sub, and the selling shareholders listed in
Section 9 of this registration statement, dated September16, 2008, incorporated in
Exhibit E to the proxy statement/prospectus.
10.3*
Form of Exchange Agreement between EZCORP, Merger Sub, VFS and American Stock Transfer
and Trust Company, dated October ___, 2008.