10-Q 1 a2014-q210q_3312014.htm 10-Q 2014 - Q2 10Q_3/31/2014
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
 
 
FORM 10-Q
 
 
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                         
Commission File No. 0-19424
 
 
 
 
EZCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware
74-2540145
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1901 Capital Parkway
Austin, Texas
78746
(Address of principal executive offices)
(Zip Code)
(512) 314-3400
Registrant’s telephone number, including area code:
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
The only class of voting securities of the registrant issued and outstanding is the Class B Voting Common Stock, par value $.01 per share, all of which is owned by an affiliate of the registrant. There is no trading market for the Class B Voting Common Stock.
As of March 31, 2014, 51,411,973 shares of the registrant’s Class A Non-voting Common Stock, par value $.01 per share, and 2,970,171 shares of the registrant’s Class B Voting Common Stock, par value $.01 per share, were outstanding.



EZCORP, Inc.
INDEX TO FORM 10-Q
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Supplementary Data (unaudited)

EZCORP, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2014
 
March 31,
2013
 
September 30,
2013
 
(in thousands)
 
 
 
 
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
32,198

 
$
41,443

 
$
36,317

Restricted cash
21,104

 
1,204

 
3,312

Pawn loans
128,683

 
138,380

 
156,637

Consumer loans, net
75,501

 
36,596

 
64,683

Pawn service charges receivable, net
24,733

 
25,388

 
30,362

Consumer loan fees and interest receivable, net
40,033

 
33,507

 
36,292

Inventory, net
129,013

 
116,517

 
145,200

Deferred tax asset
13,825

 
15,716

 
13,825

Income tax receivable
17,702

 
3,079

 
16,105

Prepaid expenses and other assets
54,321

 
42,421

 
34,217

Total current assets
537,113

 
454,251

 
536,950

Investments in unconsolidated affiliates
88,685

 
147,232

 
97,085

Property and equipment, net
111,419

 
118,979

 
116,281

Restricted cash, non-current
9,575

 
2,197

 
2,156

Goodwill
435,048

 
438,016

 
433,300

Intangible assets, net
69,016

 
60,387

 
63,805

Non-current consumer loans, net
61,724

 
77,414

 
70,294

Deferred tax asset
9,619

 

 
8,214

Other assets, net
30,037

 
20,723

 
24,105

Total assets (1)
$
1,352,236

 
$
1,319,199

 
$
1,352,190

 
 
 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt
$
14,228

 
$
34,912

 
$
30,436

Current capital lease obligations
533

 
533

 
533

Accounts payable and other accrued expenses
70,812

 
63,298

 
79,967

Other current liabilities
12,121

 
36,096

 
22,337

Customer layaway deposits
8,986

 
8,191

 
8,628

Total current liabilities
106,680

 
143,030

 
141,901

Long-term debt, less current maturities
214,254

 
137,376

 
215,939

Long-term capital lease obligations
106

 
648

 
391

Deferred tax liability

 
10,104

 

Deferred gains and other long-term liabilities
18,613

 
19,872

 
24,040

Total liabilities (2)
339,653

 
311,030

 
382,271

Commitments and contingencies


 


 


Temporary equity:
 
 
 
 
 
Redeemable noncontrolling interest
58,107

 
52,982

 
55,393

Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million and 54 million at March 31, 2014 and 2013; and 56 million at September 30, 2013; issued and outstanding: 51,411,973 and 51,208,328 at March 31, 2014 and 2013; and 51,269,434 at September 30, 2013
513

 
508

 
513

Class B Voting Common Stock, convertible, par value $.01 per share; 3 million shares authorized; issued and outstanding: 2,970,171
30

 
30

 
30

Additional paid-in capital
327,385

 
315,092

 
320,777

Retained earnings
630,441

 
630,501

 
599,880

Accumulated other comprehensive (loss) income
(3,893
)
 
9,056

 
(6,674
)
EZCORP, Inc. stockholders’ equity
954,476

 
955,187

 
914,526

Total liabilities and stockholders’ equity
$
1,352,236

 
$
1,319,199

 
$
1,352,190

Assets and Liabilities of Grupo Finmart Securitization Trust
(1) Our consolidated assets as of March 31, 2014, March 31, 2013 and September 30, 2013 include the following assets of Grupo Finmart's securitization trust that can only be used to settle its liabilities: Restricted cash, $17.8 million as of March 31, 2014; Restricted cash, non-current, $5.8 million and $2.2 million as of March 31, 2014 and March 31, 2013, respectively, and $2.2 million as of September 30, 2013; Consumer loans, net, $42.2 million and $36.1 million as of March 31, 2014 and March 31, 2013, respectively, and $33.9 million as of September 30, 2013; Consumer loan fees and interest receivable, net, $6.2 million and $8.1 million as of March 31, 2014 and March 31, 2013, respectively, and $7.3 million as of September 30, 2013; Intangible assets, net, $2.4 million and $3.0 million as of March 31, 2014 and March 31, 2013, respectively, and $2.1 million as of September 30, 2013; and total assets, $74.4 million and $49.4 million as of March 31, 2014 and March 31, 2013, respectively, and $45.5 million as of September 30, 2013.
(2) Our consolidated liabilities as of March 31, 2014, March 31, 2013 and September 30, 2013 include $55.7 million, $34.0 million, and $32.0 million, respectively, of long-term debt for which the creditors of Grupo Finmart's securitization trust do not have recourse to EZCORP, Inc.
See accompanying notes to interim condensed consolidated financial statements.

1


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Merchandise sales
$
103,454

 
$
100,082

 
$
209,041

 
$
194,686

Jewelry scrapping sales
26,193

 
42,582

 
53,896

 
87,291

Pawn service charges
59,162

 
62,015

 
123,295

 
127,415

Consumer loan fees and interest
64,785

 
60,751

 
131,114

 
123,885

Other revenues
6,106

 
2,684

 
11,711

 
7,498

Total revenues
259,700

 
268,114

 
529,057

 
540,775

Merchandise cost of goods sold
63,857

 
58,716

 
127,445

 
113,661

Jewelry scrapping cost of goods sold
20,111

 
29,311

 
40,131

 
60,616

Consumer loan bad debt
10,422

 
8,457

 
28,854

 
21,978

Net revenues
165,310

 
171,630

 
332,627

 
344,520

Operating expenses:
 
 
 
 
 
 
 
Operations
108,064

 
101,831

 
220,833

 
205,116

Administrative
20,032

 
8,603

 
35,777

 
22,274

Depreciation
7,539

 
7,071

 
15,005

 
13,631

Amortization
1,975

 
1,316

 
3,915

 
2,030

Loss (gain) on sale or disposal of assets
342

 
13

 
(5,948
)
 
42

Total operating expenses
137,952

 
118,834

 
269,582

 
243,093

Operating income
27,358

 
52,796

 
63,045

 
101,427

Interest expense, net
5,275

 
3,753

 
9,607

 
7,390

Equity in net income of unconsolidated affiliates
(492
)
 
(4,125
)
 
(1,763
)
 
(9,163
)
Impairment of investments
7,940

 

 
7,940

 

Other expense (income)
1,324

 
405

 
1,156

 
(96
)
Income from continuing operations before income taxes
13,311

 
52,763

 
46,105

 
103,296

Income tax expense
4,204

 
16,273

 
14,085

 
32,945

Income from continuing operations, net of tax
9,107

 
36,490

 
32,020

 
70,351

(Loss) income from discontinued operations, net of tax
(40
)
 
(1,610
)
 
1,442

 
(3,316
)
Net income
9,067

 
34,880

 
33,462

 
67,035

Net income from continuing operations attributable to redeemable noncontrolling interest
1,075

 
899

 
2,901

 
2,337

Net income attributable to EZCORP, Inc.
$
7,992

 
$
33,981

 
$
30,561

 
$
64,698

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.66

 
$
0.53

 
$
1.28

Discontinued operations

 
(0.03
)
 
0.03

 
(0.06
)
Basic earnings per share
$
0.15

 
$
0.63

 
$
0.56

 
$
1.22

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.66

 
$
0.53

 
$
1.28

Discontinued operations

 
(0.03
)
 
0.03

 
(0.06
)
Diluted earnings per share
$
0.15

 
$
0.63

 
$
0.56

 
$
1.22

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
54,374

 
54,172

 
54,353

 
53,099

Diluted
54,586

 
54,252

 
54,583

 
53,172

 
 
 
 
 
 
 
 
Net income from continuing operations attributable to EZCORP, Inc., net of tax
$
8,032

 
$
35,591

 
$
29,119

 
$
68,014

(Loss) income from discontinued operations attributable to EZCORP, Inc., net of tax
(40
)
 
(1,610
)
 
1,442

 
(3,316
)
Net income attributable to EZCORP, Inc.
$
7,992

 
$
33,981

 
$
30,561

 
$
64,698


See accompanying notes to interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net income
$
9,067

 
$
34,880

 
$
33,462

 
$
67,035

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
(2,109
)
 
11,111

 
2,607

 
14,579

Foreign currency translation reclassification adjustment realized upon impairment
375

 

 
375

 

Gain (loss) on effective portion of cash flow hedge:
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
(326
)
 

 
(672
)
 

Amounts reclassified from accumulated other comprehensive income
297

 

 
542

 

Unrealized holding gain (loss) arising during period
626

 
(221
)
 
617

 
(264
)
Income tax benefit (expense)
476

 
(1,057
)
 
(418
)
 
(3,037
)
Other comprehensive income, net of tax
(661
)
 
9,833

 
3,051

 
11,278

Comprehensive income
$
8,406

 
$
44,713

 
$
36,513

 
$
78,313

Attributable to redeemable noncontrolling interest:
 
 
 
 
 
 
 
Net income
1,075

 
899

 
2,901

 
2,337

Foreign currency translation (loss) gain
(37
)
 
2,760

 
322

 
2,109

(Loss) on effective portion of cash flow hedge
(52
)
 

 
(52
)
 

Comprehensive income attributable to redeemable noncontrolling interest
986

 
3,659

 
3,171

 
4,446

Comprehensive income attributable to EZCORP, Inc.
$
7,420

 
$
41,054

 
$
33,342

 
$
73,867

See accompanying notes to interim condensed consolidated financial statements.


3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Operating Activities:
 
 
 
Net income
$
33,462

 
$
67,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,886

 
16,415

Consumer loan loss provision
17,365

 
12,900

Deferred income taxes
(1,624
)
 
1,400

Other adjustments
2,551

 

(Gain) loss on sale or disposal of assets
(6,081
)
 
42

Gain on sale of loan portfolio
(5,784
)
 

Stock compensation
8,268

 
3,054

Income from investments in unconsolidated affiliates
(1,763
)
 
(9,163
)
Impairment of investments
7,940

 

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable, net
2,625

 
2,366

Inventory, net
1,777

 
(3,034
)
Prepaid expenses, other current assets, and other assets, net
(15,778
)
 
(7,072
)
Accounts payable and accrued expenses
(11,155
)
 
(2,743
)
Customer layaway deposits
353

 
812

Deferred gains and other long-term liabilities
1,554

 
350

Tax provision (benefit) from stock compensation
411

 
(342
)
Income taxes receivable/payable
(1,987
)
 
7,320

Dividends from unconsolidated affiliates
2,597

 
4,828

Net cash provided by operating activities
53,617

 
94,168

Investing Activities:
 
 
 
Loans made
(448,159
)
 
(440,917
)
Loans repaid
325,171

 
307,930

Recovery of pawn loan principal through sale of forfeited collateral
130,359

 
129,965

Additions to property and equipment
(10,643
)
 
(23,506
)
Acquisitions, net of cash acquired
(10,282
)
 
(12,279
)
Investments in unconsolidated affiliates

 
(11,018
)
Proceeds from sale of assets
29,546

 

Other investing activities
94

 

Net cash provided by (used in) investing activities
16,086

 
(49,825
)
Financing Activities:
 
 
 
Proceeds from exercise of stock options

 
6

Tax provision (benefit) from stock compensation
(411
)
 
342

Taxes paid related to net share settlement of equity awards
(629
)
 
(3,596
)
Debt issuance costs
(5,176
)
 
(259
)
Payout of deferred and contingent consideration
(23,000
)
 

Purchase of subsidiary shares from noncontrolling interest
(1,082
)
 

Change in restricted cash
(25,099
)
 
2,303

Proceeds from revolving line of credit
217,493

 
148,265

Payments on revolving line of credit
(273,070
)
 
(194,805
)
Proceeds from bank borrowings
86,661

 
1,172

Payments on bank borrowings and capital lease obligations
(49,497
)
 
(5,170
)
Net cash used in financing activities
(73,810
)
 
(51,742
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
365

Net decrease in cash and cash equivalents
(4,119
)
 
(7,034
)
Cash and cash equivalents at beginning of period
36,317

 
48,477

Cash and cash equivalents at end of period
$
32,198

 
$
41,443

 
 
 
 
Non-cash Investing and Financing Activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
118,050

 
$
130,675

Issuance of common stock due to acquisitions
$

 
$
38,705

Deferred consideration
$
5,331

 
$
24,000

Contingent consideration
$

 
$
4,792

Accrued additions to property and equipment
$
122

 
$

Note receivable from sale of assets
$
15,903

 
$

Purchase of shares from noncontrolling interest
$
619

 
$

See accompanying notes to interim condensed consolidated financial statements.

4


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Income (Loss)
 
EZCORP, Inc.
Stockholders’
Equity
 
Shares
 
Par Value
 
 
(in thousands)
Balances at September 30, 2012
51,226

 
$
512

 
$
268,626

 
$
565,803

 
$
(113
)
 
$
834,828

Stock compensation

 

 
3,054

 

 

 
3,054

Stock options exercised
3

 

 
6

 

 

 
6

Issuance of common stock due to acquisitions
1,965

 
20

 
38,685

 

 

 
38,705

Issuance of common stock due to purchase of subsidiary shares from noncontrolling interest
592

 
6

 
10,398

 

 

 
10,404

Purchase of subsidiary shares from noncontrolling interest

 

 
(2,423
)
 

 
85

 
(2,338
)
Release of restricted stock
392

 

 

 

 

 

Excess tax benefit from stock compensation

 

 
342

 

 

 
342

Taxes paid related to net share settlement of equity awards

 

 
(3,596
)
 

 

 
(3,596
)
Unrealized loss on available-for-sale securities

 

 

 

 
(172
)
 
(172
)
Foreign currency translation adjustment

 

 

 

 
9,256

 
9,256

Net income attributable to EZCORP, Inc.

 

 

 
64,698

 

 
64,698

Balances at March 31, 2013
54,178

 
$
538

 
$
315,092

 
$
630,501

 
$
9,056

 
$
955,187

 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2013
54,240

 
$
543

 
$
320,777

 
$
599,880

 
$
(6,674
)
 
$
914,526

Stock compensation

 

 
8,276

 

 

 
8,276

Purchase of subsidiary shares from noncontrolling interest

 

 
(619
)
 

 
(15
)
 
(634
)
Release of restricted stock
142

 

 

 

 

 

Tax deficiency of stock compensation

 

 
(420
)
 

 

 
(420
)
Taxes paid related to net share settlement of equity awards

 

 
(629
)
 

 

 
(629
)
Effective portion of cash flow hedge

 

 

 

 
(78
)
 
(78
)
Unrealized gain on available-for-sale securities

 

 

 

 
401

 
401

Foreign currency translation adjustment

 

 

 

 
2,098

 
2,098

Foreign currency translation reclassification adjustment realized upon impairment

 

 

 

 
375

 
375

Net income attributable to EZCORP, Inc.

 

 

 
30,561

 

 
30,561

Balances at March 31, 2014
54,382

 
$
543

 
$
327,385

 
$
630,441

 
$
(3,893
)
 
$
954,476

See accompanying notes to interim condensed consolidated financial statements.


5


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
March 31, 2014

NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Our management has included all adjustments it considers necessary for a fair presentation. These adjustments are of a normal, recurring nature except for those related to discontinued operations (described in Note 2) and acquired businesses (described in Note 3).
The accompanying financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2013. The balance sheet at September 30, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Our business is subject to seasonal variations, and operating results for the three and six months ended March 31, 2014 (the "current quarter" and "current six-month period") are not necessarily indicative of the results of operations for the full fiscal year.
The consolidated financial statements include the accounts of EZCORP, Inc. ("EZCORP") and its consolidated subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. As of March 31, 2014, we own 60% of the outstanding equity interests in Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart"), doing business under the brands "Crediamigo" and "Adex," and 59% of Renueva Comercial S.A.P.I. de C.V. ("TUYO"), and therefore, include their results in our consolidated financial statements. We account for our investments in Albemarle & Bond Holdings, PLC ("Albemarle & Bond") and Cash Converters International Limited ("Cash Converters International") using the equity method.
There have been no changes in significant accounting policies as described in our Annual Report on Form 10-K for the year ended September 30, 2013.
Recently Adopted Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740)—Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward or Tax Credit Carryforward Exists. This update provides that an entity's unrecognized tax benefit, or a portion of its unrecognized tax benefit, should be presented in its financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with one exception. That exception states that, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This update applies prospectively to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. Retrospective application is also permitted. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-03 did not have a material effect on our financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This update, requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update requires entities to apply the amendments for periods beginning after December 15, 2012 and interim periods within those annual periods and to provide the required disclosures for all reporting periods presented. The adoption of ASU 2013-02 did not have a material effect on our financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-04, Liabilities (Topic 405)—Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (a consensus of the FASB

6


Emerging Issues Task Force). This update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date (except for obligations addressed within existing guidance in U.S. GAAP). Examples of obligations within the scope of ASU 2013-04 include debt arrangements, other contractual obligations and settled litigation and judicial rulings. ASU 2013-04 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-04 did not have a material effect on our financial position, results of operations or cash flows.
In March 2013, the FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830) — Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). This update applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-05 did not have a material effect on our financial position, results of operations or cash flows.
Recently Issued Accounting Pronouncements
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update provides guidance for the reporting of discontinued operations if (1) a component or group of components of an entity meets the criteria in FASB ASC Paragraph 205-20-45-1E to be classified as held for sale; (2) the component of an entity or group of components of an entity is disposed of by sale; or (3) the component of an entity or group of components of an entity is disposed of other than by sale (for example, by abandonment or in a distribution to owners in a spinoff). This update states that a discontinued operation can also include a business or nonprofit activity. Among other disclosures, ASU No. 2014-08 requires an entity to present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections, respectively, of the statement of financial position. ASU 2014-08 is effective prospectively for (1) all disposals of components that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years; and (2) all businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. We do not anticipate that the adoption of ASU No. 2014-08 will have a material effect on our financial position, results of operations or cash flows.
NOTE 2: DISCONTINUED OPERATIONS
During the third quarter of fiscal 2013, we implemented a plan to close 107 legacy stores (all of which were in operation at March 31, 2013) in a variety of locations. These stores were generally older, smaller stores that did not fit our future growth profile.
Store closures as discontinued operations included:
57 stores in Mexico, 52 of which were small, jewelry-only asset group formats. We will continue to operate our full-service store-within-a-store ("SWS") locations under the Empeño Fácil brand, and expect to continue our storefront growth in Mexico.
29 stores in Canada, where we were in the process of transitioning to an integrated buy/sell and financial services model under the Cash Converters brand. The affected asset group consisted of stores that were not optimal for that model because of location or size. We will continue to operate full-service buy/sell and financial services center stores under the Cash Converters brand in Canada and the United States.
20 financial services stores in Dallas, Texas and the State of Florida, where we exited both locations primarily due to onerous regulatory requirements.
One jewelry-only concept store, which was our only jewelry-only store in the United States.
Due to discontinued operations, we incurred charges in the fiscal year ended September 30, 2013 for lease termination costs, asset and inventory write-downs to net realizable liquidation value, uncollectible receivables, and employee severance costs. During the second quarter ended March 31, 2014, we recorded $0.5 million of pre-tax gains related to these termination costs, primarily lease terminations of $0.4 million, as negotiated amounts were lower than the initial lease buyout estimates recorded in the prior year. During the six-month period ended March 31, 2014, we recorded $3.1 million of pre-tax gains related to these

7


termination costs, primarily lease terminations of $2.2 million, as negotiated amounts were lower than the initial lease buyout estimates recorded in the prior year, and inventory write-downs of $0.6 million. These gains have been recorded as part of income from discontinued operations in our three and six-month periods ended March 31, 2014 condensed consolidated statement of operations, respectively.
As of March 31, 2014 accrued severance and lease termination costs related to discontinued operations were $2.2 million. This amount is included in accounts payable and accrued liabilities in our condensed consolidated balance sheet. During the three and six-month periods ended March 31, 2014, cash payments of $1.2 million and $2.9 million, respectively, were made with regard to the recorded termination costs.

Discontinued operations in the three-month periods ended March 31, 2014 and 2013 include $0.2 million and $4.0 million of total revenues, respectively. The six-month periods ended March 31, 2014 and 2013 include $2.8 million and $8.5 million of total revenues, respectively.

The table below summarizes the operating losses from discontinued operations by operating segment:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
U.S. & Canada
 
 
 
 
 
 
 
Net revenues
$
30

 
$
1,503

 
$
215

 
$
3,017

Operating expenses
116

 
2,898

 
403

 
6,031

Operating loss from discontinued operations before taxes
(86
)
 
(1,395
)
 
(188
)
 
(3,014
)
Total termination gain related to the reorganization
(311
)
 

 
(951
)
 

Income (loss) from discontinued operations before taxes
225

 
(1,395
)
 
763

 
(3,014
)
Income tax (provision) benefit
(76
)
 
66

 
35

 
171

Income (loss) from discontinued operations, net of tax
$
149

 
$
(1,329
)
 
$
798

 
$
(2,843
)
 
 
 
 
 
 
 
 
Latin America
 
 
 
 
 
 
 
Net revenues
$
(474
)
 
$
783

 
$
(809
)
 
$
1,731

Operating expenses
7

 
1,184

 
397

 
2,406

Operating loss from discontinued operations before taxes
(481
)
 
(401
)
 
(1,206
)
 
(675
)
Total termination gain related to the reorganization
(209
)
 

 
(2,126
)
 

(Loss) income from discontinued operations before taxes
(272
)
 
(401
)
 
920

 
(675
)
Income tax benefit (provision)
83

 
120

 
(276
)
 
202

(Loss) income from discontinued operations, net of tax
$
(189
)
 
$
(281
)
 
$
644

 
$
(473
)
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
Net revenues
$
(444
)
 
$
2,286

 
$
(594
)
 
$
4,748

Operating expenses
123

 
4,082

 
800

 
8,437

Operating loss from discontinued operations before taxes
(567
)
 
(1,796
)
 
(1,394
)
 
(3,689
)
Total termination gain related to the reorganization
(520
)
 

 
(3,077
)
 

(Loss) income from discontinued operations before taxes
(47
)
 
(1,796
)
 
1,683

 
(3,689
)
Income tax benefit (provision)
7

 
186

 
(241
)
 
373

(Loss) income from discontinued operations, net of tax
$
(40
)
 
$
(1,610
)
 
$
1,442

 
$
(3,316
)

All revenue, expense and income reported in these condensed consolidated financial statements have been adjusted to reflect reclassification of all discontinued operations.


8


NOTE 3: ACQUISITIONS
On November 29, 2013, Grupo Finmart acquired an unsecured long-term consumer loan portfolio for approximately $15.7 million. This transaction was accounted for as an asset purchase. Refer to Note 13 for further detail.
During the six-month period ended March 31, 2014, we had no acquisitions accounted for as a business combination.
Go Cash
On November 20, 2012, we entered into a definitive agreement with Go Cash, LLC and certain of its affiliates ("Go Cash" or "EZCORP Online") to acquire substantially all the assets of Go Cash's online lending business. This acquisition of assets was completed on December 20, 2012 and accounted for as a business combination. No liabilities were assumed other than trade payables and accounts payable incurred prior to closing in the ordinary course of business, which were approximately $0.2 million.
The assets acquired include a proprietary software platform, including a loan management system and a lending decision science engine, that will enable geographic expansion both within the U.S. and internationally; an internal customer service and collections call center; a portion of the existing Go Cash multi-state loan portfolio; and related assets, including customer lists, customer data and customer transaction information. We hired substantially all of Go Cash's employees, including the management team, an internal underwriting and customer experience analytics team, and an experienced customer service and collections call center team.
The total purchase price is performance-based and will be determined over a period of four years following the closing. The total consideration of $55.6 million includes the performance consideration element, which is based on the net income generated by the "Post-Closing Business Unit" (which includes all of our online consumer lending business). Within a specified period after the end of each of the first four years following the closing, we will make a contingent supplemental payment equal to the difference between (a) the adjusted net income for such year, multiplied by 6.0, and (b) all consideration payments previously paid. Each payment may be made, in our sole discretion, in cash or in the form of shares of EZCORP Class A Non-Voting Common Stock. A minimum of $50.8 million will be paid, of which $27.8 million was paid at closing, $6.0 million was paid on November 12, 2013, $5.0 million was paid on December 19, 2013 and the remaining $12.0 million will be paid in installments over the next two years. The initial payment was made in the form of 1,400,198 shares of EZCORP Class A Non-Voting Common Stock, and the November and December 2013 payments were made in cash.
Based on the final purchase price allocation, the contingent consideration was valued at $4.8 million. This amount was calculated using a Monte Carlo simulation, whereby future net income is simulated over the earn-out period. For each simulation path, the earn-out payments were calculated and then discounted to the valuation date. The fair value of the earn-out was then estimated to be the arithmetic average of all paths. The model utilized forecasted net income, and the valuation was performed in a risk-neutral framework. The significant inputs used for the valuation are not observable in the market, and thus this fair value measurement represents a Level 3 measurement within the fair value hierarchy. This contingent consideration element was valued and recorded during the first quarter ended December 31, 2013.

The three and six month periods ended March 31, 2014 include $4.2 million and $7.2 million in total revenues and $0.7 million and $3.5 million in losses related to EZCORP Online. The three and six month periods ended March 31, 2013 include $1.4 million and $1.5 million in total revenues and $2.8 million and $3.1 million in losses related to EZCORP Online.
TUYO
On November 1, 2012, we acquired a 51.0% interest in Renueva Comercial S.A.P.I. de C.V., a company headquartered in Mexico City and doing business under the name "TUYO", for approximately $1.1 million. On January 1, 2014, we acquired an additional 7.9% interest in TUYO for $1.1 million, increasing our ownership percentage to 58.9%. This transaction was treated as an equity transaction and not an adjustment to the purchase price of the initial controlling interest acquisition of TUYO. Refer to Note 9 for further detail. As of March 31, 2014, TUYO owned and operated 19 stores in Mexico City and the surrounding metropolitan area. In these stores, TUYO buys quality used merchandise from customers and then resells that merchandise to other customers. TUYO also sells refurbished or other merchandise acquired in bulk from wholesalers. As this acquisition was individually immaterial, we present its related information, other than information related to the redeemable noncontrolling interest, combined with other immaterial acquisitions.
Pursuant to the acquisition agreement, the sellers have a put option with respect to their remaining shares of TUYO. The sellers have the right to sell their TUYO shares to EZCORP during a specified exercise period, with specified limitations on the number of shares that may be sold within a consecutive 12-month period. Under the guidance in ASC 480-10-S99, securities that are redeemable for cash or other assets are to be classified outside of permanent equity; therefore, we have included the redeemable noncontrolling interest related to TUYO in temporary equity.

9



The acquisition date fair value of the TUYO redeemable noncontrolling interest was estimated by applying an income and market approach. This fair value measurement was based on significant inputs that are not observable in the market and thus represents a Level 3 measurement. Key assumptions include discount rates of 10% and 18% representing discounts for lack of control and lack of marketability respectively that market participants would consider when estimating the fair value of the noncontrolling interest. The fair market value of TUYO was determined using a multiple of future earnings. See Note 14 for additional details relating to the fair value disclosures.

Other - 2013

On April 26, 2013, Grupo Finmart, our 60% owned subsidiary, purchased 100% of the outstanding shares of Fondo ACH, S.A. de C.V., a specialty consumer finance company. The total purchase price is performance-based and will be determined over a period of four years. A minimum of $3.5 million will be paid, of which $2.7 million was paid at closing with the remaining due on January 2, 2017. The performance consideration element will be based on interest income generated by the acquired portfolios and new loans made through Fondo ACH's contractual relationships. The contingent consideration element of the purchase price, which is the amount in excess of the guaranteed $3.5 million, has been valued at $2.3 million as of the acquisition date and recorded during the quarter ended March 31, 2014. As this acquisition was individually immaterial, we present its related information combined with other immaterial acquisitions.
The fiscal year ended September 30, 2013, includes the December 2012 acquisition of 12 pawn locations in Arizona, which was a new state of operation for EZCORP. As this acquisition was individually immaterial, we present its related information combined with other immaterial acquisitions.
All acquisitions were made as part of our continuing strategy to enhance and diversify our earnings over the long-term. The factors contributing to the recognition of goodwill were based on several strategic and synergistic benefits we expect to realize from the acquisitions. These benefits include our initial entry into several markets and a greater presence in others, as well as the ability to further leverage our expense structure through increased scale. There were no transaction related expenses for the six-month period ended March 31, 2014 and approximately $0.5 million for the six-month period ended March 31, 2013, which were expensed as incurred and recorded as operations expense. These amounts exclude costs related to transactions that did not close and future acquisitions. The results of all acquisitions have been consolidated with our results since their respective closing. Pro forma results of operations have not been presented because it is impracticable to do so, as historical audited financial statements in U.S. GAAP are not readily available.

10


The following table provides information related to the acquisition of domestic and foreign retail and financial services locations during fiscal 2013:
 
Fiscal Year Ended September 30, 2013
 
Go Cash
 
Other Acquisitions
Current assets:
(in thousands)
Pawn loans
$

 
$
5,714

Consumer loans, net

 
1,079

Service charges and fees receivable, net
23

 
399

Inventory, net

 
2,441

Prepaid expenses and other assets
120

 
508

Total current assets
143

 
10,141

Property and equipment, net
268

 
1,078

Goodwill
44,020

 
17,187

Intangible assets
11,215

 
2,685

Non-current consumer loans, net

 
3,336

Other assets
124

 
314

Total assets
55,770

 
34,741

Current liabilities:
 
 
 
Accounts payable and other accrued expenses
202

 
560

Customer layaway deposits

 
103

Total current liabilities
202

 
663

Total liabilities
202

 
663

Redeemable noncontrolling interest

 
2,836

Net assets acquired
$
55,568

 
$
31,242

 
 
 
 
Goodwill deductible for tax purposes
$
44,020

 
$

 
 
 
 
Indefinite-lived intangible assets acquired:
 
 
 
Domain name
$
215

 
$

Definite-lived intangible assets acquired (1):
 
 
 
Non-compete agreements
$

 
$
30

Internally developed software
$
11,000

 
$
66

Contractual relationship
$

 
$
2,589

(1) The weighted average useful life of definite-lived intangible assets acquired is five years.

Per FASB ASC 805-10-25, adjustments to provisional purchase price allocation amounts made during the measurement period shall be recorded as if the accounting for the business combination had been completed at the acquisition date. Thus, the acquirer shall revise comparative information for prior periods presented in financial statements. The amounts above and our condensed consolidated balance sheets as of March 31, 2013 and September 30, 2013 reflect all measurement period adjustments recorded since the acquisition date. As of March 31, 2013 these adjustments include $1.1 million decrease in the value of intangibles assets and a $4.8 million increase to deferred gains and other long-term liability for a net increase in goodwill of $5.9 million. As of September 30, 2013, these adjustments include a $6.9 million increase to deferred gains and other long-term liability, a $4.8 million increase to goodwill, a $1.9 million increase to intangible assets, and a $0.2 million net increase to various other assets.
NOTE 4: EARNINGS PER SHARE
We compute basic earnings per share on the basis of the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock awards.


11


Potential common shares are required to be excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vest, as defined by FASB ASC 718-10-25, are greater than the cost to re-acquire the same number of shares at the average market price, and therefore the effect would be anti-dilutive.
Components of basic and diluted earnings per share and excluded anti-dilutive potential common shares are as follows: 
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP, Inc., net of tax (A)
$
8,032

 
$
35,591

 
$
29,119

 
$
68,014

(Loss) Income from discontinued operations, net of tax (B)
(40
)
 
(1,610
)
 
1,442

 
(3,316
)
Net income attributable to EZCORP (C)
7,992

 
33,981

 
$
30,561

 
$
64,698

 
 
 
 
 
 
 
 
Weighted average outstanding shares of common stock (D)
54,374

 
54,172

 
54,353

 
53,099

Dilutive effect of stock options and restricted stock
212

 
80

 
230

 
73

Weighted average common stock and common stock equivalents (E)
54,586

 
54,252

 
54,583

 
53,172

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations attributable to EZCORP, Inc. (A / D)
$
0.15

 
$
0.66

 
$
0.53

 
$
1.28

Discontinued operations (B / D)

 
(0.03
)
 
0.03

 
(0.06
)
Basic earnings per share (C / D)
$
0.15

 
$
0.63

 
$
0.56

 
$
1.22

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations attributable to EZCORP, Inc. (A / E)
$
0.15

 
$
0.66

 
$
0.53

 
$
1.28

Discontinued operations (B / E)

 
(0.03
)
 
0.03

 
(0.06
)
Diluted earnings per share (C / E)
$
0.15

 
$
0.63

 
$
0.56

 
$
1.22

 
 
 
 
 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share
544

 

 
236

 
7

NOTE 5: STRATEGIC INVESTMENTS
Cash Converters International Limited
At March 31, 2014, we owned 136,848,000 shares, or approximately 32%, of Cash Converters International Limited, a publicly traded company headquartered in Perth, Australia. Cash Converters International franchises and operates a worldwide network of over 700 specialty financial services and retail stores that provide pawn loans, short-term unsecured loans and other consumer finance products, and buy and sell second-hand goods, with significant store concentrations in Australia and the United Kingdom. Those shares include 12,430,000 shares that we acquired in November 2012 for approximately $11.0 million in cash as part of a share placement. Our total investment in Cash Converters International was acquired between November 2009 and November 2012 for approximately $68.8 million.
We account for our investment in Cash Converters International using the equity method. Since Cash Converters International’s fiscal year ends three months prior to ours, we report the income from this investment on a three-month lag. Cash Converters International files semi-annual financial reports for its fiscal periods ending December 31 and June 30. Due to the three-month lag, income reported for our six-month periods ended March 31, 2014 and 2013 represents our percentage interest in the results of Cash Converters International’s operations from July 1, 2013 to December 31, 2013 and July 1, 2012 to December 31, 2012, respectively.
Conversion of Cash Converters International’s financial statements into U.S. GAAP resulted in no material differences from those reported by Cash Converters following IFRS.
In its functional currency of Australian dollars, Cash Converters International’s total assets increased 32% from December 31, 2012 to December 31, 2013 and its net income attributable to the owners of the parent decreased 46% for the six months ended December 31, 2013. This decrease is primarily due to a decline in short-term personal lending as a result of regulatory changes in Australia. Cash Converters International sees these regulatory changes as an opportunity to capitalize on their strong compliance culture and critical mass in terms of stores and financing capability. For the month of December 2013, loan

12


volumes returned to record levels as the customers are becoming more familiar with the documentation required to meet the new regulatory requirements.
The following table presents summary financial information for Cash Converters International’s most recently reported results after translation to U.S. dollars (using the exchange rate as of December 31 of each year for balance sheet items and average exchange rates for the income statement items for the periods indicated):
 
As of December 31,
 
2013
 
2012
 
(in thousands)
Current assets
$
202,735

 
$
169,739

Non-current assets
148,010

 
141,258

Total assets
$
350,745

 
$
310,997

Current liabilities
$
77,263

 
$
38,735

Non-current liabilities
52,522

 
31,591

Shareholders’ equity:
 
 
 
Equity attributable to owners of the parent
224,026

 
240,671

Non-controlling interest
(3,065
)
 

Total liabilities and shareholders’ equity
$
350,746

 
$
310,997

 
 
Six Months Ended December 31,
 
2013
 
2012
 
(in thousands)
Gross revenues
$
143,517

 
$
140,123

Gross profit
91,605

 
95,149

Profit for the period attributable to:
 
 
 
Owners of the parent
$
9,103

 
$
19,143

Noncontrolling interest
(2,417
)
 


Albemarle & Bond Holdings, PLC
At March 31, 2014, we owned 16,644,640 ordinary shares of Albemarle & Bond, representing approximately 30% of its total outstanding shares. Our total cost for those shares was approximately $27.6 million. Albemarle & Bond is primarily engaged in pawnbroking, retail jewelry sales, check cashing and lending in the United Kingdom. We account for the investment using the equity method.
Since Albemarle & Bond’s fiscal year ends three months prior to ours, we report the income from this investment on a three-month lag. Albemarle & Bond files semi-annual financial reports for its fiscal periods ending December 31 and June 30. Due to the three-month lag, income reported for our six-month periods ended March 31, 2014 and 2013 represents our percentage interest in the results of Albemarle & Bond’s operations from July 1, 2013 to December 31, 2013 and July 1, 2012 to December 31, 2012, respectively.
On April 19, 2013, Albemarle & Bond announced that it expected profits for their full fiscal year (ending June 30, 2013) to be materially below market expectations, citing reduction in gold buying profit and pressures on its pawn loan business due to the challenging gold environment and increased competition. In addition Albemarle & Bond's Board of Directors announced that their CEO would step down earlier than planned. In early October 2013, Albemarle & Bond announced that discussions to underwrite an equity funding had failed and they were in ongoing discussions with their banks to negotiate covenants. The market price of Albemarle & Bond’s stock declined as a result of this information. Due to these events, we evaluated the economic and strategic benefits of continuing to hold this investment. Based on the review as of October 18, 2013, we determined that the fair value of this investment was less than its carrying value as of September 30, 2013 and that this impairment was other than temporary. As a result, we recognized an other than temporary impairment of $42.5 million ($28.7 million, net of taxes), which brought our carrying value of this investment to $9.4 million at the end of the year ended September 30, 2013.

As of March 31, 2014, we concluded that this investment was impaired, and that such impairment was other than temporary. In reaching this conclusion, we considered all available evidence, including that (i) Albemarle & Bond had not achieved

13


forecasted revenue or operating results, (ii) Albemarle & Bond had been negatively impacted by the falling price of gold on the international markets, a drop of more than 20% this year, (iii) Albemarle & Bond commenced a formal sale process of the company on December 5, 2013 and then terminated the process on January 27, 2014 after deciding that none of the proposals deemed to represent a fair value for the company, and (iv) a prolonged drop in Albemarle & Bond's stock price as a result of the above aforementioned factors. The active trading of Albemarle & Bond was suspended on March 24, 2014. Despite the final sale of Albemarle & Bond in April 2014 we believe limited value, if any, is attributable to our investment. As a result, we recognized an other than temporary impairment of $7.9 million ($5.4 million, net of taxes) during the quarter ended March 31, 2014, which brought our carrying value of this investment to zero.
Conversion of Albemarle & Bond’s financial statements into U.S. GAAP resulted in no material differences from those reported by Albemarle & Bond following IFRS.
The table below summarizes the recorded value and fair value of each of these strategic investments at the dates indicated. The fair values of Albemarle & Bond as of March 31, 2013 and Cash Converters International as of March 31, 2014 and 2013 as well as September 30, 2013 are considered Level 1 estimates within the fair value hierarchy of FASB ASC 820-10-50, and were calculated as (a) the quoted stock price on each company’s principal market multiplied by (b) the number of shares we owned multiplied by (c) the applicable foreign currency exchange rate at the dates indicated. We included no control premium by owning a large percentage of outstanding shares.
The fair value for Albemarle & Bond at March 31, 2014 is considered a Level 2 estimate within the fair value hierarchy of FASB ASC 820-10-50. We calculated the fair value based on (a) the last known stock price after all active trading was suspended on March 21, 2014 and (b) Albemarle & Bond's announcement of limited, if any, value available to the ordinary shares of its stock, which was considered to be an unobservable input insignificant to the overall determination of the Albemarle & Bond fair value. The fair value for Albemarle & Bond at September 30, 2013 is considered a Level 2 estimate within the fair value hierarchy of FASB ASC 820-10-50. We calculated the fair value based on (a) the quoted average stock price of Albemarle & Bond over the two week period subsequent to the October announcement multiplied by (b) the number of shares we owned multiplied by (c) the applicable foreign currency exchange rate as of the dates indicated during the post September 30, 2013 measurement date. We believe this measurement date allowed the market to react and adjust to the information released by Albemarle & Bond the first week of October 2013, as previously mentioned, and therefore resulted in a reasonable fair value as of September 30, 2013.
 
March 31,
 
September 30,
 
2014
 
2013
 
2013
 
(in thousands of U.S. dollars)
Albemarle & Bond:
 
 
 
 
 
Recorded value
$

 
$
53,053

 
$
9,439

Fair value

 
54,103

 
9,439

Cash Converters International:
 
 
 
 
 
Recorded value
$
88,685

 
$
94,179

 
$
87,645

Fair value
121,478

 
208,110

 
165,663



14


NOTE 6: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the balance of goodwill and each major class of intangible assets at the specified dates:
 
 
March 31,
 
September 30,
 
2014
 
2013
 
2013
 
(in thousands)
Goodwill
$
435,048

 
$
438,016

 
$
433,300

 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
 
 
Pawn licenses
$
8,836

 
$
8,836

 
$
8,836

Trade name
9,887

 
9,772

 
9,791

Domain name
215

 
215

 
215

Total indefinite-lived intangible assets
$
18,938

 
$
18,823

 
$
18,842

 
 
 
 
 
 
Definite-lived intangible assets:
 
 
 
 
 
Real estate finders’ fees
$
866

 
$
1,079

 
$
902

Non-compete agreements
479

 
934

 
673

Favorable lease
565

 
668

 
614

Franchise rights
1,263

 
1,439

 
1,388

Deferred financing costs
7,678

 
5,975

 
5,033

Contractual relationship
12,886

 
13,162

 
14,039

Internally developed software
26,121

 
18,033

 
22,088

Other
220

 
274

 
226

Total definite-lived intangible assets
$
50,078

 
$
41,564

 
$
44,963

 
 
 
 
 
 
Intangible assets, net
$
69,016

 
$
60,387

 
$
63,805


The following tables present the changes in the carrying value of goodwill over the periods presented:
 
U.S. &
Canada
 
Latin
America
 
Other
International
 
Consolidated
 
(in thousands)
Balances at September 30, 2013
$
283,199

 
$
110,209

 
$
39,892

 
$
433,300

Effect of foreign currency translation changes

 
513

 
1,235

 
1,748

Balances at March 31, 2014
$
283,199

 
$
110,722

 
$
41,127

 
$
435,048


 
U.S. &
Canada
 
Latin
America
 
Other
International
 
Consolidated
 
(in thousands)
Balances at September 30, 2012
$
224,306

 
$
110,401

 
$
39,956

 
$
374,663

Acquisitions
58,925

 
2,221

 

 
61,146

Effect of foreign currency translation changes
(1
)
 
4,578

 
(2,370
)
 
2,207

Balances at March 31, 2013
$
283,230

 
$
117,200

 
$
37,586

 
$
438,016


In accordance with ASC 350-20-35, Goodwill - Subsequent Measurement, we test goodwill and intangible assets with an indefinite useful life for potential impairment annually, or more frequently when there are events or circumstances that indicate that it is more likely than not that an impairment exists. During the second quarter ended March 31, 2014, we evaluated such events and circumstances and concluded that it was not more likely than not that a goodwill or intangible assets impairment existed. We will continue to monitor if an interim triggering event is present in subsequent periods, and we will perform our required annual impairment test in the fourth quarter of our fiscal year.

15


The amortization of most definite-lived intangible assets is recorded as amortization expense. The favorable lease asset and other intangibles are amortized to operations expense (rent expense) over the related lease terms. The deferred financing costs are amortized to interest expense over the life of the related debt instruments. The following table presents the amount and classification of amortization recognized as expense in each of the periods presented:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Amortization expense in continuing operations
$
1,975

 
$
1,316

 
$
3,915

 
$
2,030

Operations expense
31

 
32

 
61

 
67

Interest expense
1,660

 
760

 
2,550

 
1,524

Total expense from the amortization of definite-lived intangible assets
$
3,666

 
$
2,108

 
$
6,526

 
$
3,621

The following table presents our estimate of future amortization expense for definite-lived intangible assets:
 
Fiscal Years Ended September 30,
 
Amortization expense
 
Operations expense
 
Interest expense
 
 
(in thousands)
2014
 
$
4,284

 
$
60

 
$
2,690

2015
 
8,333

 
109

 
2,253

2016
 
7,886

 
106

 
1,134

2017
 
7,663

 
106

 
880

2018
 
5,232

 
106

 
617

As acquisitions and dispositions occur in the future, amortization expense may vary from these estimates.

16


NOTE 7: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The following table presents our long-term debt instruments and balances under capital lease obligations outstanding at March 31, 2014 and 2013 and September 30, 2013. The recourse line of credit is due in May 2015; the non-recourse debt matures at various months in the years so indicated in the table below:

 
March 31, 2014
 
March 31, 2013
 
September 30, 2013
 
Carrying
Amount
 
Debt Premium
 
Carrying
Amount
 
Debt Premium
 
Carrying
Amount
 
Debt Premium
 
(in thousands)
Recourse to EZCORP:
 
 
 
 
 
 
 
 
 
 
 
Domestic line of credit up to $200 million due 2015
$
83,000

 
$

 
$
74,000

 
$

 
$
140,900

 
$

Capital lease obligations
639

 

 
1,181

 

 
924

 

Non-recourse to EZCORP:
 
 
 
 
 
 
 
 
 
 
 
Secured foreign currency line of credit up to $4 million due 2014
528

 
51

 
2,009

 
156

 
1,207

 
99

Secured foreign currency line of credit up to $19 million due 2015
2,616

 

 
12,142

 

 
6,281

 

Secured foreign currency line of credit up to $5 million due 2015
2,863

 

 

 

 

 

Secured foreign currency line of credit up to $5 million due 2016
1,077

 

 

 

 

 

Secured foreign currency line of credit up to $23 million due 2017
22,929

 

 
22,352

 

 
22,822

 

Consumer loans facility due 2017

 

 
33,995

 

 
31,951

 

Consumer loans facility due 2019
55,715

 

 

 

 

 

10% unsecured notes due 2013

 

 
664

 

 
503

 

15% unsecured notes due 2013

 

 
14,273

 
825

 
12,884

 
244

10% unsecured notes due 2014
7,212

 

 
2,373

 

 
8,925

 

11% unsecured notes due 2014
110

 

 
5,347

 

 
110

 

9% unsecured notes due 2015
29,933

 

 

 

 
16,068

 

10% unsecured notes due 2015
696

 

 
444

 

 
418

 

15% secured notes due 2015

 

 
4,561

 
513

 
4,185

 
381

10% unsecured notes due 2016
121

 

 
128

 

 
121

 

12% secured notes due 2017
4,103

 
281

 

 

 

 

12% secured notes due 2019
17,579

 

 

 

 

 

Total long-term obligations
229,121

 
332

 
173,469

 
1,494

 
247,299

 
724

Less current portion
14,761

 
255

 
35,445

 
1,141

 
30,969

 
543

Total long-term and capital lease obligations
$
214,360

 
$
77

 
$
138,024

 
$
353

 
$
216,330

 
$
181

On May 10, 2011, we entered into a new senior secured credit agreement with a syndicate of five banks, replacing our previous credit agreement. Among other things, the new credit agreement provides for a four-year $175 million revolving credit facility that we may, under the terms of the agreement, request to be increased to a total of $225 million. Upon entering the new credit agreement, we repaid and retired our $17.5 million outstanding debt. On May 31, 2013, we amended the senior secured credit agreement to increase our revolving credit facility from $175 million to $200 million. The new credit facility increases our available credit and provides greater flexibility to make investments and acquisitions both domestically and internationally. No other terms of our senior secured credit agreement were modified.
Pursuant to the credit agreement, we may choose to pay interest to the lenders for outstanding borrowings at LIBOR plus 200 to 275 basis points or the banks' base rate plus 100 to 175 basis points, depending on our leverage ratio computed at the end of each calendar quarter. On the unused amount of the credit facility, we pay a commitment fee of 37.5 to 50.0 basis points depending on our leverage ratio calculated at the end of each quarter. Terms of the credit agreement require, among other things, that we meet certain financial covenants, restrict dividend payments and limit other and non-recourse debt. At March 31, 2014, we were in compliance with all covenants.
At March 31, 2014, $83.0 million was outstanding under our revolving credit agreement. This facility is collateralized with EZCORP’s domestic assets. We have also issued $3.1 million in letters of credit, leaving $113.9 million available on our revolving credit facility. The outstanding bank letters of credit were required under our workers' compensation insurance program and for our international office in Miami, Florida.

17


Deferred financing costs related to our credit agreement are included in intangible assets, net on the condensed consolidated balance sheets and are being amortized to interest expense over the term of the agreement.
Our senior secured credit agreement will expire in May 2015. We are actively working to replace this credit facility with a new financing facility.
On January 30, 2012, we acquired a 60% ownership interest in Grupo Finmart. Non-recourse debt amounts in the table above represent Grupo Finmart’s third-party debt. All unsecured notes are collateralized with Grupo Finmart's assets and are due at maturity. All lines of credit are guaranteed by Grupo Finmart's loan portfolio. Interest on lines of credit due 2014, 2015 and 2016 is charged at the Mexican Interbank Equilibrium ("TIIE") plus a margin varying from 5% to 10%. The line of credit due 2014 requires monthly payments of $0.1 million with remaining principal due at maturity. The two lines of credit due 2015 require monthly payments of $0.5 million with the remaining principal due at maturity. The line of credit due 2016 requires monthly payments of $0.1 million with the remaining principal due at maturity. The line of credit due 2017 has a 14.5% interest rate, requires monthly payments of $1.9 million, and the remaining principal is due at maturity. The 12% secured notes due 2017 require monthly payments of $0.1 million with the remaining principal due at maturity. The 12% secured notes due 2019 require monthly payment of $1.0 million with the remaining principal due at maturity.
At acquisition, we performed a valuation to determine the fair value of Grupo Finmart's debt. As a result, we recorded a debt premium on Grupo Finmart’s debt. This debt premium is being amortized as a reduction of interest expense over the life of the debt. The fair value was determined by using an income approach, specifically the discounted cash flows method based on the contractual terms of the debt and risk adjusted discount rates.
On July 10, 2012, Grupo Finmart entered into a securitization transaction to transfer the collection rights of certain eligible consumer loans to a bankruptcy remote trust in exchange for cash on a non-recourse basis. The trust received financing as a result of the issuance of debt securities and delivered the proceeds of the financing to Grupo Finmart. The securitization agreement called for a two-year lending period in which the trust would use principal collections of the consumer loan portfolio to acquire additional collection rights up to $114.6 million in eligible loans from Grupo Finmart. Upon the termination of the lending period, the collection received by the trust would be used to repay the debt. Grupo Finmart would continue to service the underlying loans in the trust. On February 17, 2014, Grupo Finmart repaid this facility. In connection with this repayment, we wrote off the deferred financing costs related to this facility.
On February 17, 2014, Grupo Finmart entered into a new securitization transaction to transfer collection rights of certain eligible consumer loans to a bankruptcy remote trust in exchange for cash. The trust received financing as a result of the issuance of debt securities and delivered the proceeds of the financing to Grupo Finmart. The unrestricted cash received from this borrowing in the amount of $35.2 million was primarily used to repay the previous securitization borrowing facility due 2017 and the transaction costs associated with this transaction. The cash proceeds of approximately $20.5 million is restricted primarily for $17.8 million of collection rights on the additional eligible loans from Grupo Finmart, which Grupo Finmart expects to deliver to the trust within the next 12 months, and $2.7 million of interest and trust maintenance costs to be recovered at repayment. The restricted cash proceeds of $17.8 million is recourse to Grupo Finmart unless additional eligible loans are delivered within two-year period specified in the agreement. The borrowing facility has a two year lending period and matures on March 19, 2019. Upon the termination of the lending period, Grupo has an option to start prepaying the principle early from the collection received by the trust. Grupo Finmart will continue to service the underlying loans in the trust.
Deferred financing costs related to the new consumer loans facility, totaling approximately $2.5 million are included in intangible assets, net on the condensed consolidated balance sheets and are being amortized to interest expense over the term of the agreement.
Grupo Finmart is the primary beneficiary of the securitization trust because Grupo Finmart has the power to direct the most significant activities of the trust through its role as servicer of all the receivables held by the trust and through its obligation to absorb losses or receive benefits that could potentially be significant to the trust. Consequently, we consolidate the trust.
As of March 31, 2014, borrowings under the securitization borrowing facility due 2019 amounted to $55.7 million. Interest is charged at TIIE plus a 2.5% margin, or a total of 6.3% as of March 31, 2014.
On May 15, 2013, Grupo Finmart issued and sold $30.0 million of 9% Global Registered Notes due November 16, 2015. Notes with an aggregate principal amount of $14.0 million were originally purchased by EZCORP and, therefore, eliminated in consolidation in prior periods. On March 31, 2014, EZCORP sold its outstanding notes in the amount of $11.7 million to the outside party, thereby increasing the total consolidated notes balance. As a result of this transaction we recorded a loss of $0.7 million, which is included under (loss) gain on sale or disposal of assets in our three and six month period ended March 31, 2014 condensed consolidated statement of operations. Grupo Finmart used a portion of the net proceeds of the offering to repay existing indebtedness, and used the remaining portion for general operating purposes.

18


NOTE 8: COMMON STOCK, OPTIONS AND STOCK COMPENSATION
Our net income includes the following compensation costs related to our stock compensation arrangements:
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2014