10-Q 1 a2014-q310q_6302014.htm 10-Q 2014 - Q3 10Q_6/30/2014
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 June 30, 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 June 30, 2014, 50,612,246 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
 
June 30,
2014
 
June 30,
2013
 
September 30,
2013
 
(in thousands)
 
 
 
 
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
49,999

 
$
45,955

 
$
36,317

Restricted cash
13,248

 
3,132

 
3,312

Pawn loans
157,491

 
154,095

 
156,637

Consumer loans, net
76,748

 
42,883

 
64,683

Pawn service charges receivable, net
29,307

 
28,590

 
30,362

Consumer loan fees and interest receivable, net
38,351

 
35,315

 
36,292

Inventory, net
132,021

 
122,503

 
145,200

Deferred tax asset
13,825

 
15,716

 
13,825

Prepaid Income taxes
21,779

 
12,937

 
16,105

Prepaid expenses and other assets
113,458

 
37,377

 
34,217

Total current assets
646,227

 
498,503

 
536,950

Investments in unconsolidated affiliates
90,730

 
146,707

 
97,085

Property and equipment, net
109,458

 
110,312

 
116,281

Restricted cash, non-current
22,473

 
2,182

 
2,156

Goodwill
436,765

 
430,940

 
433,300

Intangible assets, net
62,915

 
60,687

 
58,772

Non-current consumer loans, net
51,798

 
82,935

 
70,294

Deferred tax asset
9,308

 

 
8,214

Other assets, net
92,693

 
28,835

 
29,138

Total assets (1)
$
1,522,367

 
$
1,361,101

 
$
1,352,190

 
 
 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt
$
21,029

 
$
33,525

 
$
30,436

Current capital lease obligations
520

 
533

 
533

Accounts payable and other accrued expenses
90,234

 
68,960

 
79,967

Other current liabilities
8,716

 
22,640

 
22,337

Customer layaway deposits
8,206

 
7,912

 
8,628

Total current liabilities
128,705

 
133,570

 
141,901

Long-term debt, less current maturities
360,628

 
198,374

 
215,939

Long-term capital lease obligations

 
521

 
391

Deferred tax liability

 
8,948

 

Deferred gains and other long-term liabilities
18,463

 
23,351

 
24,040

Total liabilities (2)
507,796

 
364,764

 
382,271

Commitments and contingencies


 


 


Temporary equity:
 
 
 
 
 
Redeemable noncontrolling interest
36,645

 
56,837

 
55,393

Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million and 54 million at June 30, 2014 and 2013; and 56 million at September 30, 2013; issued: 51,612,246 and 51,230,843 at June 30, 2014 and 2013; and 51,269,434 at September 30, 2013
519

 
512

 
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
347,216

 
317,258

 
320,777

Retained earnings
641,947

 
624,620

 
599,880

Accumulated other comprehensive income (loss)
115

 
(2,920
)
 
(6,674
)
Treasury stock, at cost (1 million shares at June 30, 2014 and none at June 30 and September 30, 2013)
(11,901
)
 

 

EZCORP, Inc. stockholders’ equity
977,926

 
939,500

 
914,526

Total liabilities and stockholders’ equity
$
1,522,367

 
$
1,361,101

 
$
1,352,190

Assets and Liabilities of Grupo Finmart Securitization Trust
(1) Our consolidated assets as of June 30, 2014, June 30, 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, $5.9 million as of June 30, 2014; Restricted cash, non-current, $16.7 million and $2.2 million as of June 30, 2014 and June 30, 2013, respectively, and $2.2 million as of September 30, 2013; Consumer loans, net, $42.9 million and $34.3 million as of June 30, 2014 and June 30, 2013, respectively, and $33.9 million as of September 30, 2013; Consumer loan fees and interest receivable, net, $6.6 million and $7.4 million as of June 30, 2014 and June 30, 2013, respectively, and $7.3 million as of September 30, 2013; Other assets, net, $2.9 million and $2.2 million as of June 30, 2014 and June 30, 2013, respectively, and $2.1 million as of September 30, 2013; and total assets, $75.0 million and $46.1 million as of June 30, 2014 and June 30, 2013, respectively, and $45.5 million as of September 30, 2013.
(2) Our consolidated liabilities as of June 30, 2014, June 30, 2013 and September 30, 2013 include $56.1 million, $32.3 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 the general credit of EZCORP, Inc.
See accompanying notes to interim condensed consolidated financial statements.

1


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Revenues:
 
 
 
 
 
 
 
Merchandise sales
$
89,170

 
$
86,576

 
$
298,211

 
$
281,262

Jewelry scrapping sales
20,273

 
26,288

 
74,169

 
113,579

Pawn service charges
59,917

 
60,397

 
183,212

 
187,812

Consumer loan fees and interest
61,144

 
59,234

 
192,258

 
183,119

Consumer loan sales and other
10,876

 
2,671

 
22,587

 
10,169

Total revenues
241,380

 
235,166

 
770,437

 
775,941

Merchandise cost of goods sold
55,751

 
51,050

 
183,196

 
164,711

Jewelry scrapping cost of goods sold
15,131

 
20,377

 
55,262

 
80,993

Consumer loan bad debt
17,246

 
12,518

 
46,100

 
34,496

Net revenues
153,252

 
151,221

 
485,879

 
495,741

Operating expenses:
 
 
 
 
 
 
 
Operations
109,575

 
104,230

 
330,408

 
309,346

Administrative
14,467

 
12,644

 
50,244

 
34,918

Depreciation
7,551

 
7,377

 
22,556

 
21,008

Amortization
1,640

 
1,591

 
5,555

 
3,621

(Gain) loss on sale or disposal of assets
(26
)
 
178

 
(5,974
)
 
220

Total operating expenses
133,207

 
126,020

 
402,789

 
369,113

Operating income
20,045

 
25,201

 
83,090

 
126,628

Interest expense, net
6,073

 
3,637

 
15,680

 
11,027

Equity in net income of unconsolidated affiliates
(2,117
)
 
(4,328
)
 
(3,880
)
 
(13,491
)
Impairment of investments

 

 
7,940

 

Other (income) expense
(370
)
 
96

 
786

 

Income from continuing operations before income taxes
16,459

 
25,796

 
62,564

 
129,092

Income tax expense
4,302

 
9,139

 
18,387

 
42,084

Income from continuing operations, net of tax
12,157

 
16,657

 
44,177

 
87,008

Income (loss) from discontinued operations, net of tax
186

 
(21,497
)
 
1,628

 
(24,813
)
Net income (loss)
12,343

 
(4,840
)
 
45,805

 
62,195

Net income from continuing operations attributable to redeemable noncontrolling interest
837

 
1,041

 
3,738

 
3,378

Net income (loss) attributable to EZCORP, Inc.
$
11,506

 
$
(5,881
)
 
$
42,067

 
$
58,817

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.21

 
$
0.29

 
$
0.74

 
$
1.56

Discontinued operations

 
(0.40
)
 
0.03

 
(0.46
)
Basic earnings per share
$
0.21

 
$
(0.11
)
 
$
0.77

 
$
1.10

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations
$
0.21

 
$
0.29

 
$
0.74

 
$
1.56

Discontinued operations

 
(0.40
)
 
0.03

 
(0.46
)
Diluted earnings per share
$
0.21

 
$
(0.11
)
 
$
0.77

 
$
1.10

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
54,308

 
54,196

 
54,338

 
53,465

Diluted
54,395

 
54,255

 
54,529

 
53,540

 
 
 
 
 
 
 
 
Net income from continuing operations attributable to EZCORP, Inc., net of tax
$
11,320

 
$
15,616

 
$
40,439

 
$
83,630

Income (loss) from discontinued operations attributable to EZCORP, Inc., net of tax
186

 
(21,497
)
 
1,628

 
(24,813
)
Net income (loss) attributable to EZCORP, Inc.
$
11,506

 
$
(5,881
)
 
$
42,067

 
$
58,817


See accompanying notes to interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Net income (loss)
$
12,343

 
$
(4,840
)
 
$
45,805

 
$
62,195

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
6,897

 
(15,529
)
 
9,504

 
(950
)
Foreign currency translation reclassification adjustment realized upon impairment

 

 
375

 

(Loss) gain on effective portion of cash flow hedge:
 
 
 
 
 
 
 
Other comprehensive (loss) gain before reclassifications
(497
)
 
2,388

 
(1,169
)
 
2,388

Amounts reclassified from accumulated other comprehensive income
272

 
(1,888
)
 
814

 
(1,888
)
Unrealized holding (loss) gain arising during period
(77
)
 
(1,457
)
 
540

 
(1,721
)
Income tax (expense) benefit
(1,096
)
 
1,189

 
(1,514
)
 
(1,848
)
Other comprehensive income (loss), net of tax
5,499

 
(15,297
)
 
8,550

 
(4,019
)
Comprehensive income (loss)
$
17,842

 
$
(20,137
)
 
$
54,355

 
$
58,176

Attributable to redeemable noncontrolling interest:
 
 
 
 
 
 
 
Net income
837

 
1,041

 
3,738

 
3,378

Foreign currency translation gain (loss)
1,581

 
(3,321
)
 
1,903

 
(1,212
)
Loss on effective portion of cash flow hedge
(90
)
 

 
(142
)
 

Comprehensive income (loss) attributable to redeemable noncontrolling interest
2,328

 
(2,280
)
 
5,499

 
2,166

Comprehensive income (loss) attributable to EZCORP, Inc.
$
15,514

 
$
(17,857
)
 
$
48,856

 
$
56,010

See accompanying notes to interim condensed consolidated financial statements.


3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Nine Months Ended June 30,
 
2014
 
2013
 
(in thousands)
Operating Activities:
 
 
 
Net income
$
45,805

 
$
62,195

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
28,083

 
25,732

Consumer loan loss provision
26,335

 
19,982

Deferred income taxes
(1,280
)
 
245

Other adjustments
4,252

 
73

(Gain) loss on sale or disposal of assets
(6,137
)
 
6,060

Gain on sale of loan portfolio
(14,312
)
 

Stock compensation
9,929

 
5,202

Income from investments in unconsolidated affiliates
(3,880
)
 
(13,491
)
Impairment of investments
7,940

 

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable, net
(4,407
)
 
(4,203
)
Inventory, net
1,061

 
(51
)
Prepaid expenses, other current assets, and other assets, net
(25,402
)
 
(13,119
)
Accounts payable and accrued expenses
(7,221
)
 
7,330

Customer layaway deposits
(433
)
 
588

Deferred gains and other long-term liabilities
943

 
439

Tax provision (benefit) from stock compensation
570

 
(321
)
Prepaid income taxes
(6,196
)
 
(5,664
)
Dividends from unconsolidated affiliates
5,129

 
8,418

Net cash provided by operating activities
60,779

 
99,415

Investing Activities:
 
 
 
Loans made
(705,181
)
 
(682,184
)
Loans repaid
476,196

 
451,182

Recovery of pawn loan principal through sale of forfeited collateral
182,004

 
181,461

Additions to property and equipment
(15,930
)
 
(33,351
)
Acquisitions, net of cash acquired
(12,990
)
 
(14,940
)
Investments in unconsolidated affiliates

 
(11,018
)
Proceeds from sale of assets
44,568

 

Other investing activities
143

 

Net cash used in investing activities
(31,190
)
 
(108,850
)
Financing Activities:
 
 
 
Proceeds from exercise of stock options

 
45

Tax provision (benefit) from stock compensation
(569
)
 
321

Taxes paid related to net share settlement of equity awards
(1,990
)
 
(3,596
)
Debt issuance costs
(12,686
)
 

Payout of deferred and contingent consideration
(23,000
)
 

Proceeds from issuance of convertible notes
200,000

 

Purchase of convertible notes hedges
(40,395
)
 

Proceeds from issuance of warrants
21,824

 

Purchase of subsidiary shares from noncontrolling interest
(21,139
)
 

Change in restricted cash
(29,992
)
 
96

Proceeds from revolving line of credit
389,900

 
403,131

Payments on revolving line of credit
(530,800
)
 
(385,964
)
Proceeds from bank borrowings
102,138

 
21,637

Payments on bank borrowings and capital lease obligations
(57,578
)
 
(28,001
)
Repurchase of common stock
(11,901
)
 

Net cash (used in) provided by financing activities
(16,188
)
 
7,669

Effect of exchange rate changes on cash and cash equivalents
281

 
(756
)
Net increase (decrease) in cash and cash equivalents
13,682

 
(2,522
)
Cash and cash equivalents at beginning of period
36,317

 
48,477

Cash and cash equivalents at end of period
$
49,999

 
$
45,955

 
 
 
 
Non-cash Investing and Financing Activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
171,288

 
$
192,150

Issuance of common stock due to acquisitions
$

 
$
38,705

Deferred consideration
$
2,692

 
$
25,872

Contingent consideration
$

 
$
7,148

Accrued additions to property and equipment
$

 
$
107

Issuance of common stock to 401(k) plan
$
557

 
$

Equity adjustment due to noncontrolling interest purchase
$
6,588

 
$

Receivable from sale of portfolio
$
38,269

 
$

Receivable from issuance of convertible notes
$
30,000

 
$

Payable to purchase convertible note hedges
$
6,059

 
$

Warrants receivable related to issuance of convertible notes
$
3,282

 
$

Deferred finance cost payable related to convertible notes
$
2,400

 
$

Payable to purchase additional shares of noncontrolling interest
$
8,636

 
$

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)
 
Treasury Stock
 
EZCORP, Inc.
Stockholders’
Equity
 
Shares
 
Par Value
 
Shares
 
Amount
 
(in thousands)
Balances at September 30, 2012
51,226

 
$
512

 
$
268,626

 
$
565,803

 
$
(113
)
 

 
$

 
$
834,828

Stock compensation

 

 
5,202

 

 

 

 

 
5,202

Stock options exercised
18

 

 
45

 

 

 

 

 
45

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
400

 
4

 

 

 

 

 

 
4

Excess tax benefit from stock compensation

 

 
321

 

 

 

 

 
321

Taxes paid related to net share settlement of equity awards

 

 
(3,596
)
 

 

 

 

 
(3,596
)
Effective portion of cash flow hedge

 

 

 

 
500

 

 

 
500

Unrealized loss on available-for-sale securities

 

 

 

 
(1,120
)
 

 

 
(1,120
)
Foreign currency translation adjustment

 

 

 

 
(2,272
)
 

 

 
(2,272
)
Net income attributable to EZCORP, Inc.

 

 

 
58,817

 

 

 

 
58,817

Balances at June 30, 2013
54,201

 
$
542

 
$
317,258

 
$
624,620

 
$
(2,920
)
 

 
$

 
$
939,500

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at September 30, 2013
54,240

 
$
543

 
$
320,777

 
$
599,880

 
$
(6,674
)
 

 
$

 
$
914,526

Issuance of common stock related to 401(k) match
45

 
$
1

 
557

 

 

 

 

 
558

Stock compensation

 

 
9,929

 

 

 

 

 
9,929

Purchase of subsidiary shares from noncontrolling interest

 

 
(6,594
)
 

 
(15
)
 

 

 
(6,609
)
Release of restricted stock
297

 
5

 

 

 

 

 

 
5

Tax deficiency of stock compensation

 

 
(569
)
 

 

 

 

 
(569
)
Taxes paid related to net share settlement of equity awards

 

 
(1,990
)
 

 

 

 
(1
)
 
(1,991
)
Effective portion of cash flow hedge

 

 

 

 
(213
)
 

 

 
(213
)
Net proceeds from sale of warrants

 

 
25,106

 

 

 

 

 
25,106

Unrealized gain on available-for-sale securities

 

 

 

 
351

 

 

 
351

Foreign currency translation adjustment

 

 

 

 
6,291

 

 

 
6,291

Foreign currency translation reclassification adjustment realized upon impairment

 

 

 

 
375

 

 

 
375

Net income attributable to EZCORP, Inc.

 

 

 
42,067

 

 

 

 
42,067

Purchase of treasury stock

 

 

 

 

 
1,000

 
(11,900
)
 
(11,900
)
Balances at June 30, 2014
54,582

 
$
549

 
$
347,216

 
$
641,947

 
$
115

 
1,000

 
$
(11,901
)
 
$
977,926


See accompanying notes to interim condensed consolidated financial statements.


5


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
June 30, 2014

NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview of Operations
We are a leader in delivering easy cash solutions to our customers across channels, products, services and markets. With approximately 7,300 teammates and approximately 1,400 locations and branches, we give our customers multiple ways to access instant cash, including pawn loans and consumer loans in the United States, Mexico, Canada and the United Kingdom. We offer these products through our four primary channels: in-store, online, at the worksite and through our mobile platforms. At our pawn and buy/sell stores and online, we also sell merchandise, primarily collateral forfeited from pawn lending operations and used merchandise purchased from customers.
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). Furthermore, certain reclassifications of prior period amounts have been made to conform to the current period presentation. These reclassifications did not have a material impact on our financial position, results of operations or cash flows.
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 nine months ended June 30, 2014 (the "current quarter" and "current nine-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 June 30, 2014, we own 76% 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 except for the following addition.
Treasury Stock
We account for treasury stock under the cost method. When treasury stock is re-issued, proceeds in excess of cost are recorded as a component of additional paid-in capital in our consolidated balance sheets. Any deficiency is recorded as a component of additional paid-in capital to the extent that there are previously recorded gains to offset the losses. If there are no treasury stock gains in additional paid-in capital, the losses upon re-issuance of treasury stock are recorded as a component of retained earnings in our consolidated balance sheets.
Use of Estimates and Assumptions
The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory, loan loss allowances, long-lived and intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience, observable trends and various other assumptions that we believe are reasonable under the circumstances. We use this information to make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from the estimates under different assumptions or conditions.

6




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 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 May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 will be added to the Accounting Standards Codification as Topic 606, Revenue from Contracts with Customers, and will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, as well as some cost guidance in Subtopic 605-35, Revenue Recognition - Construction-Type and Production-Type Contracts. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, the guidance provides that an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a

7


performance obligation. Notably, the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer (e.g., assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles - Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement in ASU 2014-09. For public entities, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and early application is prohibited. We do not anticipate that the adoption of ASU No. 2014-09 will have a material effect on our financial position, results of operations or cash flows.
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 June 30, 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 three and nine-month periods ended June 30, 2013, we recorded $23.8 million of pre-tax charges, primarily lease terminations of $9.1 million, inventory write-downs of $7.8 million, and fixed asset write-downs of $5.8 million. During the third quarter ended June 30, 2014, we recorded $0.8 million of pre-tax gains related to these termination costs, primarily related to lease terminations, as negotiated amounts were lower than the initial lease buyout estimates recorded in the prior year. During the nine-month period ended June 30, 2014, we recorded $3.9 million of pre-tax gains related to these termination costs, primarily related to lease terminations of $3.0 million, as negotiated amounts were lower than the initial lease buyout estimates recorded in the prior year, and release of inventory write-down reserves of $0.6 million. These charges and gains have been recorded as part of income (loss) from discontinued operations in our three and nine-month periods ended June 30, 2014 and 2013 condensed consolidated statements of operations, respectively.
As of June 30, 2014 and 2013, accrued severance and lease termination costs related to discontinued operations were $0.9 million and $23.8 million, respectively. This amount is included in accounts payable and other accrued expenses in our condensed consolidated balance sheets. During the three and nine-month periods ended June 30, 2014, cash payments of $0.5

8


million and $3.4 million, respectively, were made with regard to the recorded termination costs. As of June 30, 2013, no cash payments had been made with regard to the recorded termination costs.

Discontinued operations in the three-month periods ended June 30, 2014 and 2013 include $0.1 million and $3.2 million of total revenues, respectively. The nine-month periods ended June 30, 2014 and 2013 include $2.9 million and $11.6 million of total revenues, respectively.

The table below summarizes the operating income and losses from discontinued operations by operating segment:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
U.S. & Canada
 
 
 
 
 
 
 
Net revenues
$
(26
)
 
$
1,495

 
$
189

 
$
4,519

Operating expenses
102

 
2,942

 
505

 
8,980

Operating loss from discontinued operations before taxes
(128
)
 
(1,447
)
 
(316
)
 
(4,461
)
Total termination (gain) loss related to the reorganization
(793
)
 
13,427

 
(1,744
)
 
13,427

Income (loss) from discontinued operations before taxes
665

 
(14,874
)
 
1,428

 
(17,888
)
Income tax (provision) benefit
(166
)
 
839

 
(131
)
 
1,010

Income (loss) from discontinued operations, net of tax
$
499

 
$
(14,035
)
 
$
1,297

 
$
(16,878
)
 
 
 
 
 
 
 
 
Latin America
 
 
 
 
 
 
 
Net revenues
$
(438
)
 
$
752

 
$
(1,247
)
 
$
2,483

Operating expenses
9

 
1,076

 
406

 
3,482

Operating loss from discontinued operations before taxes
(447
)
 
(324
)
 
(1,653
)
 
(999
)
Total termination loss (gain) related to the reorganization

 
10,336

 
(2,126
)
 
10,336

(Loss) income from discontinued operations before taxes
(447
)
 
(10,660
)
 
473

 
(11,335
)
Income tax benefit (provision)
134

 
3,198

 
(142
)
 
3,400

(Loss) income from discontinued operations, net of tax
$
(313
)
 
$
(7,462
)
 
$
331

 
$
(7,935
)
 
 
 
 
 
 
 
 
Consolidated
 
 
 
 
 
 
 
Net revenues
$
(464
)
 
$
2,247

 
$
(1,058
)
 
$
7,002

Operating expenses
111

 
4,018

 
911

 
12,462

Operating loss from discontinued operations before taxes
(575
)
 
(1,771
)
 
(1,969
)
 
(5,460
)
Total termination (gain) loss related to the reorganization
(793
)
 
23,763

 
(3,870
)
 
23,763

Income (loss) from discontinued operations before taxes
218

 
(25,534
)
 
1,901

 
(29,223
)
Income tax (provision) benefit
(32
)
 
4,037

 
(273
)
 
4,410

Income (loss) from discontinued operations, net of tax
$
186

 
$
(21,497
)
 
$
1,628

 
$
(24,813
)

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


9


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 nine-month period ended June 30, 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 nine month periods ended June 30, 2014 include $4.2 million and $11.4 million in total revenues and $1.7 million and $5.2 million in losses related to EZCORP Online. The three and nine month periods ended June 30, 2013 include $2.3 million and $3.9 million in total revenues and $2.4 million and $5.6 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 June 30, 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.

10



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 76% 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 nine-month period ended June 30, 2014 and approximately $0.5 million for the nine-month period ended June 30, 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.

11


The following table provides information related to the acquisition of domestic and foreign pawn 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 June 30, 2013 and September 30, 2013 reflect all measurement period adjustments recorded since the acquisition date. As of June 30, 2013 and 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, restricted stock awards, and warrants.

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.

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Components of basic and diluted earnings per share and excluded anti-dilutive potential common shares are as follows: 
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP, Inc., net of tax (A)
$
11,320

 
$
15,616

 
$
40,439

 
$
83,630

Income (Loss) from discontinued operations, net of tax (B)
186

 
(21,497
)
 
1,628

 
(24,813
)
Net income (loss) attributable to EZCORP (C)
11,506

 
(5,881
)
 
42,067

 
$
58,817

 
 
 
 
 
 
 
 
Weighted average outstanding shares of common stock (D)
54,308

 
54,196

 
54,338

 
53,465

Dilutive effect of stock options and restricted stock
87

 
59

 
191

 
75

Weighted average common stock and common stock equivalents (E)
54,395

 
54,255

 
54,529

 
$
53,540

 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations attributable to EZCORP, Inc. (A / D)
$
0.21

 
$
0.29

 
$
0.74

 
$
1.56

Discontinued operations (B / D)

 
(0.40
)
 
0.03

 
(0.46
)
Basic earnings per share (C / D)
$
0.21

 
$
(0.11
)
 
$
0.77

 
$
1.10

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
 
 
 
 
Continuing operations attributable to EZCORP, Inc. (A / E)
$
0.21

 
$
0.29

 
$
0.74

 
$
1.56

Discontinued operations (B / E)

 
(0.40
)
 
0.03

 
(0.46
)
Diluted earnings per share (C / E)
$
0.21

 
$
(0.11
)
 
$
0.77

 
$
1.10

 
 
 
 
 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share:
 
 
 
 
 
 
 
Stock options and restricted stock
214

 

 
213

 

Warrants
14,317

 

 
14,317

 

Total potential common shares excluded
14,531

 

 
14,530

 

NOTE 5: STRATEGIC INVESTMENTS
Cash Converters International Limited
At June 30, 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 nine-month periods ended June 30, 2014 and 2013 represents our percentage interest in the results of Cash Converters International’s operations from July 1, 2013 to March 31, 2014 and July 1, 2012 to March 31, 2013, 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. The quarter ended March 31, 2014 reflects the continuing upward trend that commenced in prior quarter and Cash Converters International expects this trend to continue.

13


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 June 30, 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 nine-month periods ended June 30, 2014 and 2013 represents our percentage interest in the results of Albemarle & Bond’s operations from July 1, 2013 to March 31, 2014 and July 1, 2012 to March 31, 2013, 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 September 30, 2013.

As of March 31, 2014, we concluded that this investment was further 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 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

14


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 June 30, 2013 and Cash Converters International as of June 30, 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 June 30, 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.
 
June 30,
 
September 30,
 
2014
 
2013
 
2013
 
(in thousands of U.S. dollars)
Albemarle & Bond:
 
 
 
 
 
Recorded value
$

 
$
52,252

 
$
9,439

Fair value

 
33,920

 
9,439

Cash Converters International:
 
 
 
 
 
Recorded value
$
90,730

 
$
94,455

 
$
87,645

Fair value
139,213

 
133,732

 
165,663




15


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:
 
 
June 30,
 
September 30,
 
2014
 
2013
 
2013
 
(in thousands)
Goodwill
$
436,765

 
$
430,940

 
$
433,300

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

 
$
8,836

 
$
8,836

Trade name
9,970

 
9,654

 
9,791

Domain name
228

 
215

 
215

Total indefinite-lived intangible assets
$
19,034

 
$
18,705

 
$
18,842

 
 
 
 
 
 
Definite-lived intangible assets:
 
 
 
 
 
Real estate finders’ fees
$
841

 
$
940

 
$
902

Non-compete agreements
431

 
789

 
673

Favorable lease
541

 
640

 
614

Franchise rights
1,294

 
1,376

 
1,388

Contractual relationship
12,648

 
14,534

 
14,039

Internally developed software
27,914

 
23,465

 
22,088

Other
212

 
238

 
226

Total definite-lived intangible assets
$
43,881

 
$
41,982

 
$
39,930

 
 
 
 
 
 
Intangible assets, net
$
62,915

 
$
60,687

 
$
58,772


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

 
1,228

 
2,237

 
3,465

Balances at June 30, 2014
$
283,199

 
$
111,437

 
$
42,129

 
$
436,765


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

 
$
110,401

 
$
39,956

 
$
374,663

Acquisitions
57,825

 
2,282

 

 
60,107

Goodwill impairment
(29
)
 

 

 
(29
)
Effect of foreign currency translation changes
(2
)
 
(1,446
)
 
(2,353
)
 
(3,801
)
Balances at June 30, 2013
$
282,100

 
$
111,237

 
$
37,603

 
$
430,940


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 third quarter ended June 30, 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.

16


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 following table presents the amount and classification of amortization of definite-lived intangible assets recognized as expense in each of the periods presented:
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(in thousands)
Amortization expense in continuing operations
$
1,640

 
$
1,591

 
$
5,555

 
$
3,621

Operations expense
30

 
64

 
91

 
131

Total expense from the amortization of definite-lived intangible assets
$
1,670

 
$
1,655

 
$
5,646

 
$
3,752

The following table presents our estimate of future amortization expense for definite-lived intangible assets:
 
Fiscal Years Ended September 30,
 
Amortization expense
 
Operations expense
 
 
(in thousands)
2014
 
$
1,959

 
$
30

2015
 
7,324

 
109

2016
 
6,878

 
106

2017
 
6,603

 
106

2018
 
5,781

 
106

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

17


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 June 30, 2014 and 2013 and September 30, 2013.

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

 
$

 
$
122,500

 
$

 
$
140,900

 
$

2.125% Cash Convertible Senior Notes Due 2019
183,694

 
(46,306
)
 

 

 

 

Cash Convertible Senior Notes Due 2019 embedded derivative
46,454

 

 

 

 

 

Capital lease obligations
520

 

 
1,054

 

 
924

 

Non-recourse to EZCORP:
 
 
 
 
 
 
 
 
 
 
 
Secured foreign currency debt up to $3.8 million due 2014
251

 
28

 
1,562

 
124

 
1,207

 
99

Secured foreign currency debt up to $5.2 million due 2015
1,218

 

 
8,929

 

 
6,281

 

Secured foreign currency debt up to $19.2 million due 2015
5,516