10-Q 1 a2015-q110q_12312014.htm 10-Q 2015 - Q1 10Q_12/31/2014
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 December 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 December 31, 2014, 50,680,358 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
EZCORP, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
 
December 31,
2014
 
December 31,
2013
 
September 30,
2014
 
(Unaudited)
 
 
Assets:
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
77,599

 
$
38,486

 
$
56,329

Restricted cash
60,218

 
4,019

 
62,406

Pawn loans
150,930

 
153,421

 
162,444

Consumer loans, net
62,380

 
82,807

 
67,594

Pawn service charges receivable, net
30,241

 
30,842

 
31,044

Consumer loan fees and interest receivable, net
28,355

 
40,181

 
30,653

Inventory, net
133,986

 
142,711

 
139,419

Deferred tax asset
20,858

 
13,825

 
20,858

Prepaid income taxes
23,790

 
7,268

 
28,655

Receivables, prepaid expenses and other current assets
34,195

 
42,895

 
76,959

Total current assets
622,552

 
556,455

 
676,361

Investments in unconsolidated affiliates
99,219

 
97,424

 
91,098

Property and equipment, net
104,353

 
114,539

 
105,900

Restricted cash, non-current
3,454

 
2,742

 
4,257

Goodwill
337,498

 
434,835

 
346,577

Intangible assets, net
60,739

 
65,178

 
64,624

Non-current consumer loans, net
36,449

 
60,750

 
40,442

Deferred tax asset
11,630

 
7,521

 
13,154

Other assets, net
75,489

 
29,685

 
61,058

Total assets (1)
$
1,351,383

 
$
1,369,129

 
$
1,403,471

 
 
 
 
 
 
Liabilities and stockholders’ equity:
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Current maturities of long-term debt
$
24,789

 
$
16,737

 
$
10,673

Current capital lease obligations
258

 
533

 
418

Accounts payable and other accrued expenses
80,314

 
77,619

 
97,213

Other current liabilities
6,000

 
11,106

 
8,595

Customer layaway deposits
5,133

 
5,782

 
8,097

Total current liabilities
116,494

 
111,777

 
124,996

Long-term debt, less current maturities
324,029

 
235,289

 
356,430

Long-term capital lease obligations

 
253

 

Deferred gains and other long-term liabilities
10,803

 
22,938

 
11,359

Total liabilities (2)
451,326

 
370,257

 
492,785

Commitments and contingencies


 


 


Temporary equity:
 
 
 
 
 
Redeemable noncontrolling interest
31,868

 
57,578

 
35,498

Stockholders’ equity:
 
 
 
 
 
Class A Non-voting Common Stock, par value $.01 per share; shares authorized: 100 million as of December 31, 2014; 56 million as of December 31, 2013; and 100 million as of September 30, 2014; issued and outstanding: 50,680,358 as of December 31, 2014; 51,389,307 as of December 31, 2013; and 50,614,767 as of September 30, 2014
506

 
513

 
506

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
338,667

 
321,623

 
339,666

Retained earnings
562,437

 
622,449

 
547,177

Accumulated other comprehensive loss
(33,451
)
 
(3,321
)
 
(12,191
)
EZCORP, Inc. stockholders’ equity
868,189

 
941,294

 
875,188

Total liabilities and stockholders’ equity
$
1,351,383

 
$
1,369,129

 
$
1,403,471

See accompanying notes to interim condensed consolidated financial statements.




1


Assets and Liabilities of Grupo Finmart Securitization Trust
(1) Our consolidated assets as of December 31, 2014 and 2013 and September 30, 2014 include the following assets of Grupo Finmart's securitization trust that can only be used to settle its liabilities:

December 31,
2014
 
December 31,
2013
 
September 30,
2014
 
(Unaudited)
 
 

(in thousands)
Restricted cash
$
22,457

 
$

 
$
23,592

Consumer loans, net
35,069

 
34,123

 
41,588

Consumer loan fees and interest receivable, net
4,937

 
7,060

 
5,489

Restricted cash, non-current
123

 
2,742

 
133

Intangible assets, net
2,545

 
1,998

 
2,847

Total assets
$
65,131

 
$
45,923

 
$
73,649

(2) Our consolidated liabilities as of December 31, 2014 and 2013 and September 30, 2014 include the following liabilities for which the creditors of Grupo Finmart's securitization trust do not have recourse to the general credit of EZCORP, Inc.:
 
December 31,
2014
 
December 31,
2013
 
September 30,
2014
 
(Unaudited)
 
 
 
(in thousands)
Long-term debt
$
49,475

 
$
32,147

 
$
54,045

See accompanying notes to interim condensed consolidated financial statements.

2


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended December 31,
 
2014
 
2013
 
(Unaudited)
 
(in thousands, except per share amounts)
Revenues:
 
 
 
Merchandise sales
$
109,639

 
$
105,587

Jewelry scrapping sales
18,534

 
27,703

Pawn service charges
64,927

 
64,133

Consumer loan fees and interest
52,232

 
60,117

Consumer loan sales and other revenues
7,312

 
5,499

Total revenues
252,644

 
263,039

Merchandise cost of goods sold
72,388

 
63,588

Jewelry scrapping cost of goods sold
14,675

 
20,020

Consumer loan bad debt
15,251

 
15,574

Net revenues
150,330

 
163,857

Operating expenses:
 
 
 
Operations
103,656

 
104,955

Administrative
10,174

 
15,745

Depreciation
7,573

 
7,340

Amortization
1,457

 
1,365

Loss (gain) on sale or disposal of assets
259

 
(6,290
)
Total operating expenses
123,119


123,115

Operating income
27,211

 
40,742

Interest expense
8,958

 
4,530

Interest income
(525
)
 
(196
)
Equity in net income of unconsolidated affiliates
(2,194
)
 
(1,271
)
Other expense (income)
537

 
(168
)
Income from continuing operations before income taxes
20,435

 
37,847

Income tax expense
6,365

 
9,958

Income from continuing operations, net of tax
14,070

 
27,889

Income (loss) from discontinued operations, net of tax
1,043

 
(3,494
)
Net income
15,113

 
24,395

Net (loss) income from continuing operations attributable to redeemable noncontrolling interest
(147
)
 
1,826

Net income attributable to EZCORP, Inc.
$
15,260


$
22,569

 
 
 
 
Basic earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
Continuing operations
$
0.26

 
$
0.48

Discontinued operations
0.02

 
(0.06
)
Basic earnings per share
$
0.28

 
$
0.42

 
 
 
 
Diluted earnings (loss) per share attributable to EZCORP, Inc.:
 
 
 
Continuing operations
$
0.26

 
$
0.48

Discontinued operations
0.02

 
(0.06
)
Diluted earnings per share
$
0.28

 
$
0.42

 
 
 
 
Weighted-average shares outstanding:
 
 
 
Basic
53,650

 
54,332

Diluted
53,698

 
54,362

 
 
 
 
Net income from continuing operations attributable to EZCORP, Inc.
$
14,217

 
$
26,063

Income (loss) from discontinued operations attributable to EZCORP, Inc.
1,043

 
(3,494
)
Net income attributable to EZCORP, Inc.
$
15,260

 
$
22,569

See accompanying notes to interim condensed consolidated financial statements.

3


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Three Months Ended December 31,
 
2014
 
2013
 
(Unaudited)
 
(in thousands)
Net income
$
15,113

 
$
24,395

Other comprehensive income:
 
 
 
Foreign currency translation (loss) gain
(27,145
)
 
4,716

Cash flow hedges:
 
 
 
Unrealized loss before reclassifications

 
(346
)
Amounts reclassified from accumulated other comprehensive loss
352

 
245

Unrealized holding loss on available-for-sale arising during period

 
(9
)
Income tax benefit (expense)
2,050

 
(894
)
Other comprehensive (loss) income, net of tax
(24,743
)
 
3,712

Comprehensive (loss) income
$
(9,630
)
 
$
28,107

Attributable to redeemable noncontrolling interest:
 
 
 
Net (loss) income
(147
)
 
1,826

Foreign currency translation (loss) gain
(3,569
)
 
359

Amounts reclassified from accumulated other comprehensive loss
86

 

Comprehensive (loss) income attributable to redeemable noncontrolling interest
(3,630
)

2,185

Comprehensive (loss) income attributable to EZCORP, Inc.
$
(6,000
)
 
$
25,922

See accompanying notes to interim condensed consolidated financial statements.


4


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended December 31,
 
2014
 
2013
 
(Unaudited)
 
(in thousands)
Operating activities:
 
 
 
Net income
$
15,113

 
$
24,395

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
9,030

 
9,363

Amortization (accretion) of debt discount (premium) and consumer loan premium (discount)
1,982

 
(432
)
Consumer loan loss provision
6,241

 
11,350

Deferred income taxes
1,497

 
693

Amortization of deferred financing costs
1,633

 
890

Amortization of prepaid commissions
2,967

 
1,937

Other adjustments
(176
)
 
(114
)
Loss (gain) on sale or disposal of assets
324

 
(6,422
)
Gain on sale of loan portfolio
(6,576
)
 
(4,543
)
Stock compensation expense (benefit)
(636
)
 
1,236

Income from investments in unconsolidated affiliates
(2,194
)
 
(1,271
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Service charges and fees receivable, net
(806
)
 
(2,292
)
Inventory, net
421

 
(385
)
Receivables. prepaid expenses, other current assets and other assets, net
(7,926
)
 
(17,870
)
Accounts payable and other accrued expenses
(10,911
)
 
(7,687
)
Customer layaway deposits
(2,895
)
 
(2,853
)
Deferred gains and other long-term liabilities
(278
)
 

Tax provision from stock compensation
167

 
390

Change in restricted cash
(933
)
 

Prepaid income taxes
4,769

 
8,472

Payments of restructuring charges
(2,285
)
 

Dividends from unconsolidated affiliates
2,407

 
2,597

Net cash provided by operating activities
10,935

 
17,454

Investing activities:
 
 
 
Loans made
(223,748
)
 
(232,294
)
Loans repaid
147,981

 
150,206

Recovery of pawn loan principal through sale of forfeited collateral
69,886

 
64,776

Additions to property and equipment
(8,954
)
 
(5,615
)
Acquisitions, net of cash acquired

 
(10,395
)
Investments in unconsolidated affiliates
(12,140
)
 

Proceeds from sale of assets
65,849

 
28,980

Net cash provided by (used in) investing activities
38,874

 
(4,342
)

5


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Financing activities:
 
 
 
Tax deficiency of stock compensation
(167
)
 
(389
)
Taxes paid related to net share settlement of equity awards
(196
)
 

Debt issuance costs

 
(3,080
)
Payout of deferred and contingent consideration
(6,000
)
 
(11,500
)
Proceeds from settlement of forward currency contracts
2,313

 

Change in restricted cash
(1,840
)
 
(1,263
)
Proceeds from revolving line of credit

 
80,887

Payments on revolving line of credit

 
(74,908
)
Proceeds from bank borrowings
3,609

 
16,703

Payments on bank borrowings and capital lease obligations
(23,805
)
 
(17,496
)
Net cash used in financing activities
(26,086
)
 
(11,046
)
Effect of exchange rate changes on cash and cash equivalents
(2,453
)
 
103

Net increase in cash and cash equivalents
21,270

 
2,169

Cash and cash equivalents at beginning of period
56,329

 
36,317

Cash and cash equivalents at end of period
$
77,599

 
$
38,486

 
 
 
 
Non-cash investing and financing activities:
 
 
 
Pawn loans forfeited and transferred to inventory
$
66,699

 
$
63,256

Deferred consideration

 
5,350

Contingent consideration

 
4,792

Note receivable from sale of assets

 
1,000

See accompanying notes to interim condensed consolidated financial statements.

6


EZCORP, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive (Loss) Income
 
EZCORP, Inc.
Stockholders’
Equity
 
Shares
 
Par Value
 
 
(Unaudited, except balances as of September 30, 2014 and 2013)
 
(in thousands)
Balances as of September 30, 2013
54,240

 
$
543

 
$
320,777

 
$
599,880

 
$
(6,674
)
 
$
914,526

Stock compensation


 

 
1,236

 

 

 
1,236

Release of restricted stock
120

 

 

 

 

 

Tax deficiency of stock compensation

 

 
(390
)
 

 

 
(390
)
Effective portion of cash flow hedge

 

 

 

 
(101
)
 
(101
)
Unrealized loss on available-for-sale securities

 

 

 

 
(6
)
 
(6
)
Foreign currency translation adjustment

 

 

 

 
3,460

 
3,460

Net income attributable to EZCORP, Inc.

 

 

 
22,569

 

 
22,569

Balances as of December 31, 2013
54,360

 
$
543

 
$
321,623

 
$
622,449

 
$
(3,321
)
 
$
941,294

 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2014
53,585

 
$
536

 
$
339,666

 
$
547,177

 
$
(12,191
)
 
$
875,188

Stock compensation benefit

 

 
(636
)
 

 

 
(636
)
Release of restricted stock
65

 

 

 

 

 

Tax deficiency of stock compensation

 

 
(167
)
 

 

 
(167
)
Taxes paid related to net share settlement of equity awards

 

 
(196
)
 

 

 
(196
)
Amounts reclassified from accumulated other comprehensive loss

 

 

 

 
266

 
266

Foreign currency translation adjustment

 

 

 

 
(21,526
)
 
(21,526
)
Net income attributable to EZCORP, Inc.

 

 

 
15,260

 

 
15,260

Balances as of December 31, 2014
53,650

 
$
536

 
$
338,667

 
$
562,437

 
$
(33,451
)
 
$
868,189

See accompanying notes to interim condensed consolidated financial statements.

7


EZCORP, Inc.
Notes to Interim Condensed Consolidated Financial Statements (Unaudited)
December 31, 2014
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
We are a leading provider of specialty consumer financial services. With approximately 7,000 teammates and approximately 1,400 locations and branches, we provide collateralized, non-recourse loans, commonly known as pawn loans, and a variety of short-term consumer loans including single-payment and multiple-payment unsecured loans and single-payment and multiple-payment auto title loans, or fee-based credit services to customers seeking loans in the United States, Mexico and Canada.
In addition, we are the franchisor for four Cash Converters stores in Canada pursuant to our acquisition of the Cash Converters master franchise in that country. We also own approximately 32% of Cash Converters International Limited ("Cash Converters International"), which is based in Australia and franchises and operates a worldwide network of over 750 locations that provide financial services and buy and sell second-hand goods.
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). 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 and notes included in our Annual Report on Form 10-K for the year ended September 30, 2014. The balance sheet as of September 30, 2014 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 months ended December 31, 2014 (the "current quarter") are not necessarily indicative of the results of operations for the full fiscal year.
The condensed 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 December 31, 2014, we owned 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 condensed consolidated financial statements. We account for our investment in 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, 2014.
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.
NOTE 2: DISCONTINUED OPERATIONS AND RESTRUCTURING
Discontinued Operations
During the fourth quarter of fiscal 2014, as part of our new strategy to concentrate on an integrated, customer-centric financial services model that is focused on our core businesses of pawn and unsecured lending, we implemented a plan to exit our online

8


lending businesses in the United States and the United Kingdom. As a result of this plan, our online lending operations in the United States (EZOnline) and in the United Kingdom (Cash Genie) have been included as discontinued operations.
During the third quarter of fiscal 2013, we implemented a plan to close 107 legacy stores in a variety of locations. These stores were generally older, smaller stores that did not fit our future growth profile.
As of December 31, 2014 and 2013, accrued lease termination costs, severance costs and other costs related to discontinued operations were $7.8 million and $3.8 million, respectively. These amounts are included under "Accounts payable and other accrued expenses" in our condensed consolidated balance sheets. During the quarters ended December 31, 2014 and 2013, $0.7 million and $1.7 million, respectively, in cash payments were made with respect to the recorded lease termination costs, severance costs and other costs related to discontinued operations. During the quarter ended December 31, 2014, the balance of accrued lease termination costs, severance costs and others related to discontinued operations was adjusted by $0.4 million due to foreign currency effects and other individually immaterial adjustments.
Discontinued operations in the quarters ended December 31, 2014 and 2013 include $1.3 million and $8.9 million of total revenues, respectively.

9


The table below summarizes the income (loss) from discontinued operations by operating segment:
 
Three Months Ended December 31,
 
2014
 
2013
 
(in thousands)
U.S. & Canada:
 
 
 
Net revenues
$
1,006

 
$
1,615

Expenses
77

 
4,402

Operating income (loss) from discontinued operations before taxes
929


(2,787
)
Total termination benefits related to the reorganization
(1,093
)
 
(640
)
Income (loss) from discontinued operations before taxes
2,022


(2,147
)
Income tax (provision) benefit
(224
)
 
111

Income (loss) from discontinued operations, net of tax
$
1,798


$
(2,036
)
 
 
 
 
Latin America:
 
 
 
Net revenues
$

 
$
(335
)
Expenses

 
390

Operating loss from discontinued operations before taxes


(725
)
Total termination benefits related to the reorganization

 
(1,917
)
Income from discontinued operations before taxes


1,192

Income tax provision

 
(359
)
Income from discontinued operations, net of tax
$


$
833

 
 
 
 
Other International:
 
 
 
Net revenues
$
266

 
$
2,034

Expenses
1,738

 
4,402

Operating loss from discontinued operations before taxes
(1,472
)

(2,368
)
Total termination costs related to the reorganization
(717
)
 

Loss from discontinued operations before taxes
(755
)

(2,368
)
Income tax benefit

 
77

Loss from discontinued operations, net of tax
$
(755
)

$
(2,291
)
 
 
 
 
Consolidated:
 
 
 
Net revenues
$
1,272


$
3,314

Expenses
1,815


9,194

Operating loss from discontinued operations before taxes
(543
)

(5,880
)
Total termination benefits related to the reorganization
(1,810
)

(2,557
)
Income (loss) from discontinued operations before taxes
1,267


(3,323
)
Income tax provision
(224
)

(171
)
Income (loss) from discontinued operations, net of tax
$
1,043


$
(3,494
)
All revenue, expense and income reported in these condensed consolidated financial statements have been adjusted to reflect reclassification of all discontinued operations.

10


Restructuring
During the fourth quarter of fiscal 2014, we conducted a company-wide operational review to realign our organization to streamline operations and create synergies and efficiencies. The operational review resulted in the reduction of non-customer-facing overhead. Changes in the balance of restructuring costs during the quarter ended December 31, 2014 resulting from this initiative are summarized as follows:
 
Three Months Ended December 31, 2014
 
(in thousands)
Balance as of September 30, 2014
$
6,121

Charged to expense
22

Cash payments
(2,285
)
Balance as of December 31, 2014
$
3,858

The accrual for restructuring costs as of December 31, 2014 represents the amounts to be paid related to severance for employees that have been terminated or identified for termination as a result of the initiatives described above. We estimate we will make the remaining payments during fiscal 2015, at which time this initiative will be substantially complete. We continue to review the impact of these actions and will determine if, based on future operating results, additional actions to reduce operating expenses are necessary. The amount of any potential future charges for such actions will depend upon the nature, timing and extent of those actions.
NOTE 3: EARNINGS PER SHARE
The two-class method is utilized for the computation of earnings per share. The two-class method requires a portion of net income to be allocated to participating securities, which are unvested awards of share-based payments with non-forfeitable rights to receive dividends or dividend equivalents, if declared. Income allocated to these participating securities is excluded from net earnings allocated to common shares. There were no participating securities outstanding during the quarters ended December 31, 2014 and 2013.
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 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("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.

11


Components of basic and diluted earnings per share and excluded anti-dilutive potential common shares are as follows: 
 
Three Months Ended December 31,
 
2014
 
2013
 
(in thousands, except per share amounts)
Net income from continuing operations attributable to EZCORP (A)
$
14,217

 
$
26,063

Income (loss) from discontinued operations, net of tax (B)
1,043

 
(3,494
)
Net income attributable to EZCORP (C)
$
15,260

 
$
22,569

 
 
 
 
Weighted-average outstanding shares of common stock (D)
53,650

 
54,332

Dilutive effect of restricted stock
48

 
30

Weighted-average common stock and common stock equivalents (E)
53,698


54,362

 
 
 
 
Basic earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / D)
$
0.26

 
$
0.48

Discontinued operations (B / D)
0.02

 
(0.06
)
Basic earnings per share (C / D)
$
0.28

 
$
0.42

 
 
 
 
Diluted earnings per share attributable to EZCORP:
 
 
 
Continuing operations (A / E)
$
0.26

 
$
0.48

Discontinued operations (B / E)
0.02

 
(0.06
)
Diluted earnings per share (C / E)
$
0.28

 
$
0.42

 
 
 
 
Potential common shares excluded from the calculation of diluted earnings per share:
 
 
 
Restricted stock

 
257

Warrants
14,317

 

Total potential common shares excluded
14,317

 
257

NOTE 4: STRATEGIC INVESTMENTS
Cash Converters International Limited
As of December 31, 2014, we owned 151,948,000 shares, or approximately 32%, of Cash Converters International, a company headquartered in Perth, Australia and publicly traded on the Australian Stock Exchange. Cash Converters International franchises and operates a worldwide network of over 750 specialty financial services and retail stores, with significant store concentrations in Australia and the United Kingdom, that buy and sell second-hand goods and provide pawn loans, short-term unsecured loans and other consumer finance products. Our initial total investment in Cash Converters International was acquired between November 2009 and November 2012 for approximately $68.8 million. An additional 15,100,000 shares were subsequently acquired in December 2014 for approximately $12.1 million in connection with a non-underwritten placement of 47,400,000 shares issued by Cash Converters International.
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 with the Australian Securities & Investments Commission for its fiscal periods ending December 31 and June 30. Due to the three month lag, income reported for our three month periods ended December 31, 2014 and 2013 represents our percentage interest in the results of Cash Converters International’s operations from July 1, 2014 to September 30, 2014 and July 1, 2013 to September 30, 2013, respectively.
During the quarters ended December 31, 2014 and 2013 our equity in Cash Converters International’s net income was $2.2 million and $2.4 million, respectively. Additionally, during the quarters ended December 31, 2014 and 2013 we recorded dividends from Cash Converters International of $2.4 million and $2.6 million, respectively.

12


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 June 30 of each year for balance sheet items and average exchange rates for the income statement items for the periods indicated):
 
As of June 30,
 
2014
 
2013
 
(in thousands)
Current assets
$
207,415

 
$
158,373

Non-current assets
178,764

 
153,279

Total assets
$
386,179

 
$
311,652

 
 
 
 
Current liabilities
$
95,242

 
$
90,524

Non-current liabilities
60,441

 
451

Shareholders’ equity:
 
 
 
Equity attributable to owners of the parent
233,788

 
220,676

Non-controlling interest
(3,292
)
 
1

Total liabilities and shareholders’ equity
$
386,179

 
$
311,652

 
Year ended June 30,
 
2014
 
2013
 
(in thousands)
Gross revenues
$
304,432

 
$
280,059

Gross profit
195,325

 
183,368

Profit for the period attributable to:
 
 
 
Owners of the parent
$
22,206

 
$
33,754

Non-controlling interest
(2,809
)
 

Profit for the year (net income)
$
19,397


$
33,754

Cash Converters International’s total assets increased 24% from June 30, 2013 to June 30, 2014 and its net income attributable to the owners of the parent decreased 34% for the fiscal year ended June 30, 2014, in U.S. dollars.
Albemarle & Bond Holdings, PLC
Prior to its bankruptcy reorganization, Albemarle & Bond Holdings, PLC ("Albemarle & Bond") was primarily engaged in pawnbroking, retail jewelry sales, check cashing and lending in the United Kingdom.

Albemarle & Bond’s fiscal year ended three months prior to ours; therefore, we reported the income from this investment on a three month lag. When it was a publicly traded reporting company on the London Stock Exchange, Albemarle & Bond filed semi-annual financial reports for its fiscal periods ending December 31 and June 30. Due to the three month lag, income reported for our three month period ended December 31, 2013 represents our percentage interest in the results of Albemarle & Bond’s operations from July 1, 2013 to September 30, 2013.
In March 2014, Albemarle & Bond entered into bankruptcy reorganization in the United Kingdom, and on April 15, 2014 Albemarle & Bond announced that the majority of its business and assets had been sold. In fiscal 2014 and 2013 we recognized other-than-temporary impairments of $7.9 million ($5.4 million, net of taxes) and $42.5 million ($28.7 million, net of taxes) which brought our carrying value of this investment to zero during the quarter ended June 30, 2014.
Prior to the quarter ended March 31, 2014, we accounted for our investment in Albemarle & Bond using the equity method.
During the quarter ended December 31, 2013 our equity in Albemarle & Bond’s net loss was $1.2 million. We received no dividends from Albemarle & Bond during the quarter ended December 31, 2013.
Fair Value Measurements
The fair value for Cash Converters International as of December 31, 2014 and 2013 and September 30, 2014 was considered a Level 1 estimate within the fair value hierarchy of FASB ASC 820-10-50, and was calculated as (a) the quoted stock price on

13


the Australian Stock Exchange 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 for owning a large percentage of outstanding shares.
There was no fair value attributable to Albemarle & Bond as of December 31, 2014 or September 30, 2014. The fair value for Albemarle & Bond as of each of those dates was considered a Level 2 estimate within the fair value hierarchy of FASB ASC 820-10-50. We calculated the fair value based on 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 as of December 31, 2013 was considered a Level 1 estimate within the fair value hierarchy of FASB ASC 820-10-50, and was calculated as (a) the quoted stock price on the London Stock Exchange multiplied by (b) the number of shares we owned multiplied by (c) the applicable foreign currency exchange rate at the date indicated. We included no control premium for owning a large percentage of outstanding shares.
The table below summarizes the carrying amount and fair value of each of these strategic investments as of the dates indicated:
 
December 31,
 
September 30,
 
2014
 
2013
 
2014
 
(in thousands of U.S. dollars)
Cash Converters International:
 
 
 
 
 
Recorded value
$
99,219

 
$
89,522

 
$
91,098

Fair value
123,932

 
117,778

 
128,956

Albemarle & Bond:
 
 
 
 
 
Recorded value
$

 
$
7,902

 
$

Fair value

 
4,871

 


14


NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents the balance of goodwill and each major class of intangible assets as of the specified dates:
 
December 31,
 
September 30,
 
2014
 
2013
 
2014
 
(in thousands)
Goodwill
$
337,498

 
$
434,835

 
$
346,577

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

 
$
8,836

 
$
8,836

Trade names
6,811

 
9,865

 
6,990

Domain name
13

 
215

 
13

Total indefinite-lived intangible assets, net
$
15,660

 
$
18,916

 
$
15,839

 
 
 
 
 
 
Definite-lived intangible assets, net:
 
 
 
 
 
Real estate finders’ fees
$
715

 
$
893

 
$
787

Non-compete agreements
354

 
563

 
391

Favorable lease
494

 
590

 
517

Franchise rights
1,158

 
1,322

 
1,222

Contractual relationship
10,395

 
11,796

 
11,760

Internally developed software
19,209

 
23,787

 
18,759

Deferred financing costs
12,554

 
7,087

 
15,143

Other
200

 
224

 
206

Total definite-lived intangible assets, net
$
45,079

 
$
46,262

 
$
48,785

 
 
 
 
 
 
Intangible assets, net
$
60,739

 
$
65,178

 
$
64,624

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 as of September 30, 2014
$
239,179

 
$
107,398

 
$

 
$
346,577

Effect of foreign currency translation changes

 
(9,079
)
 

 
(9,079
)
Balances as of December 31, 2014
$
239,179

 
$
98,319

 
$

 
$
337,498

 
U.S. &
Canada
 
Latin
America
 
Other
International
 
Consolidated
 
(in thousands)
Balances as of September 30, 2013
$
283,199

 
$
110,209

 
$
39,892

 
$
433,300

Effect of foreign currency translation changes

 
673

 
862

 
1,535

Balances as of December 31, 2013
$
283,199

 
$
110,882

 
$
40,754

 
$
434,835

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 quarter ended December 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.

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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 December 31,
 
2014
 
2013
 
(in thousands)
Amortization expense in continuing operations
$
1,457

 
$
1,365

Amortization expense in discontinued operations

 
575

Operations expense
26

 
30

Interest expense
1,633

 
890

Total expense from the amortization of definite-lived intangible assets
$
3,116

 
$
2,860

The following table presents our estimate of the amount and classification of future amortization expense for definite-lived intangible assets:
Fiscal Years Ended September 30,
 
Amortization expense
 
Operations expense
 
Interest expense
 
 
(in thousands)
2015
 
$
4,362

 
$
80

 
$
3,189

2016
 
5,776

 
106

 
3,077

2017
 
5,542

 
106

 
2,515

2018
 
4,574

 
106

 
2,435

2019
 
3,844

 
78

 
1,338

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

16


NOTE 6: LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
The following table presents our long-term debt instruments and balances under capital lease obligations outstanding as of December 31, 2014 and 2013 and September 30, 2014. The non-recourse debt matures at various months in the years so indicated in the table below:
 
December 31, 2014
 
December 31, 2013
 
September 30, 2014
 
Carrying
Amount
 
Debt (Discount) Premium
 
Carrying
Amount
 
Debt Premium
 
Carrying
Amount
 
Debt (Discount) Premium
 
(in thousands)
Recourse to EZCORP:
 
 
 
 
 
 
 
 
 
 
 
Domestic line of credit up to $200 million due 2015
$

 
$

 
$
146,500

 
$

 
$

 
$

2.125% cash convertible senior notes due 2019
187,727

 
(42,273
)
 

 

 
185,693

 
(44,307
)
Cash convertible senior notes due 2019 embedded derivative
45,163

 

 

 

 
36,994

 

Capital lease obligations
258

 

 
786

 

 
418

 

Non-recourse to EZCORP:
 
 
 
 
 
 
 
 
 
 
 
Secured foreign currency debt up to $3 million due 2014

 

 
871

 
76

 
63

 
3

Secured foreign currency debt up to $9 million due 2014

 

 

 

 
86

 

Secured foreign currency debt up to $19 million due 2015

 

 
4,138

 

 

 

Secured foreign currency debt up to $5 million due 2016

 

 
4,867

 

 

 

Secured foreign currency debt up to $9 million due 2016
3,431

 

 

 

 
4,796

 

Secured foreign currency debt up to $23 million due 2017
20,360

 

 
22,962

 

 
22,240

 

Consumer loans facility due 2017

 

 
32,147

 

 

 

Consumer loans facility due 2019
49,475

 

 

 

 
54,045

 

10% unsecured notes due 2014

 

 
7,703

 

 
1,158

 

11% unsecured notes due 2014

 

 
110

 

 

 

9% unsecured notes due 2015
12,504

 

 
16,546

 

 
29,875

 

10% unsecured notes due 2015
1,632

 

 
420

 

 
943

 

11% unsecured notes due 2015
4,483

 

 

 

 
4,897

 

10% unsecured notes due 2016
108

 

 
121

 

 
118

 

12% secured notes due 2016
3,507

 
114

 

 

 
3,881

 
174

12% secured notes due 2017

 

 
4,160

 
333

 

 

12% unsecured notes due 2019

 

 
11,481

 

 

 

12% secured notes due 2020
20,428

 

 

 

 
22,314

 

Total
349,076

 
(42,159
)

252,812


409


367,521


(44,130
)
Less current portion
25,047

 
114

 
17,270

 
280

 
11,091

 
177

Total long-term debt and capital lease obligations
$
324,029

 
$
(42,273
)
 
$
235,542

 
$
129

 
$
356,430

 
$
(44,307
)
Domestic Line of Credit up to $200 Million Due 2015
On May 10, 2011, we entered into a senior secured credit agreement with a syndicate of five banks. The credit agreement provided for a four year $175 million revolving credit facility that we could, under the terms of the agreement, request to be increased to a total of $225 million. On May 31, 2013, we amended the senior secured credit agreement to increase our revolving credit facility from $175 million to $200 million. We used approximately $119.4 million of net proceeds from the 2.125% cash convertible senior notes due 2019, as described below, to repay all outstanding borrowings under the senior secured credit agreement and terminated that agreement in June 2014.
2.125% Cash Convertible Senior Notes Due 2019
In June 2014, we issued $200.0 million aggregate principal amount of 2.125% cash convertible senior notes due 2019 (the “Convertible Notes”). We granted the initial purchasers the option to purchase up to an additional $30.0 million aggregate principal amount of Convertible Notes. Such option was exercised in full on June 27, 2014, and we issued an additional $30.0 million principal amount of Convertible Notes on July 2, 2014. All of the Convertible Notes were issued pursuant to an indenture dated June 23, 2014 (the "Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee.

17


The Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The Convertible Notes pay interest semi-annually in arrears at a rate of 2.125% per annum on June 15 and December 15 of each year, commencing on December 15, 2014, and will mature on June 15, 2019 (the "Maturity Date").
Prior to December 15, 2018, the Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date, as described below. At maturity, the holders of the Convertible Notes will be entitled to receive cash equal to the principal amount of the Convertible Notes plus unpaid accrued interest.
The Convertible Notes are unsubordinated unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the Convertible Notes; equal in right of payment with all of our other unsecured unsubordinated indebtedness; and effectively junior to all debt or other obligations (including trade payables) of our wholly-owned subsidiaries. The Indenture governing the Convertible Notes does not contain any financial covenants.
We incurred transaction costs of approximately $8.9 million related to the issuance of the Convertible Notes, which we recorded as deferred financing costs included under “Intangible assets, net” in our condensed consolidated balance sheets. Deferred financing costs are being amortized to interest expense using the effective interest method over the expected term of the Convertible Notes.
Under the terms of our Convertible Notes, payment of dividends requires a conversion rate adjustment equal to the conversion rate in effect immediately prior to the open of business on the ex-dividend date for such dividend multiplied by the last reported sale price of the Class A Non-voting Common Stock (“Class A Common Stock”) on the trading day immediately preceding the ex-dividend date for such dividend, divided by the difference between the last reported sale price of the Class A Common Stock on the trading day immediately preceding the ex-dividend date for such dividend and the amount in cash per share we distribute to all or substantially all holders of Class A Common Stock. Should we pay dividends in the future, our certificate of incorporation provides that cash dividends on common stock, when declared, must be declared and paid at the same per share amounts on both classes of stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors.
Convertible Notes Embedded Derivative
We account for the cash conversion feature of the Convertible Notes as a separate derivative instrument (the “Convertible Notes Embedded Derivative”), which had a fair value of $46.5 million on the issuance date that was recognized as the original issue discount of the Convertible Notes. This original issue discount is being amortized to interest expense over the term of the Convertible Notes using the effective interest method. As of December 31, 2014 and September 30, 2014, the Convertible Notes Embedded Derivative is recorded as a non-current liability under "Long-term debt, less current maturities" in our condensed consolidated balance sheets, and will be marked to market in subsequent reporting periods. The classification of the Convertible Notes Embedded Derivative liability as current or non-current on the condensed consolidated balance sheets corresponds with the classification of the net balance of the Convertible Notes as discussed below.
The Convertible Notes are convertible into cash, subject to satisfaction of certain conditions and during the periods described below, based on an initial conversion rate of 62.2471 shares of Class A Common Stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $16.065 per share of our Class A Common Stock). Upon conversion of a note, we will pay cash based on a daily conversion value calculated on a proportionate basis for each trading day in the applicable 80 trading day observation period as described in the Indenture. The conversion rate will not be adjusted for any accrued and unpaid interest.
Holders may surrender their Convertible Notes for conversion into cash prior to December 15, 2018 only under the following circumstances (the “Early Conversion Conditions”): (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2014 (and only during such fiscal quarter), if the last reported sale price of our Class A Common Stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price, as defined in the Indenture, per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our Class A Common Stock and the conversion rate on such trading day; or (3) upon the occurrence of specified corporate events, as defined in the Indenture. On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, holders may convert their notes into cash at any time, regardless of the foregoing circumstances.
If a holder elects to convert its Convertible Notes in connection with certain make-whole fundamental changes, as that term is defined in the Indenture, that occur prior to the Maturity Date, we will in certain circumstances increase the conversion rate for

18


Convertible Notes converted in connection with such make-whole fundamental changes by a specified number of shares of Class A Common Stock. In addition, the conversion rate is subject to customary anti-dilution adjustments (for example, certain dividend distributions or tender or exchange offer of our Class A Common Stock).
Upon the occurrence of a fundamental change, as defined in the Indenture, holders may require us to repurchase for cash all or any portion of the then outstanding Convertible Notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest.
Impact of Early Conversion Conditions on Financial Statements
As of December 31, 2014, the Convertible Notes were not convertible because the Early Conversion Conditions described above had not been met. Accordingly, the net balance of the Convertible Notes of $187.7 million is classified as a non-current liability in our condensed consolidated balance sheets as of December 31, 2014. The classification of the Convertible Notes as current or non-current in the condensed consolidated balance sheets is evaluated at each balance sheet date and may change from time to time depending on whether any of the Early Conversion Conditions has been met.
If any of the Early Conversion Conditions is met in any future fiscal quarter, we would classify our net liability under the Convertible Notes as a current liability in the condensed consolidated balance sheets as of the end of that fiscal quarter. If none of the Early Conversion Conditions have been met in a future fiscal quarter prior to the one year period immediately preceding the Maturity Date, we would classify our net liability under the Convertible Notes as a non-current liability in the condensed consolidated balance sheets as of the end of that fiscal quarter. If the note holders elect to convert their Convertible Notes prior to maturity, any unamortized discount and transaction costs will be expensed at the time of conversion. If the entire outstanding principal amount had been converted on December 31, 2014, we would have recorded an expense of $50.2 million associated with the conversion, comprised of $42.3 million of unamortized debt discount and $7.9 million of unamortized debt issuance costs. As of December 31, 2014, none of the note holders had elected to convert their Convertible Notes.
Convertible Notes Hedges
In connection with the issuance of the Convertible Notes, we purchased cash-settled call options (the “Convertible Notes Hedges”) in privately negotiated transactions with certain of the initial purchasers or their affiliates (in this capacity, the “Option Counterparties”). The Convertible Notes Hedges provide us with the option to acquire, on a net settlement basis, approximately 14.3 million shares of our Class A Common Stock at a strike price of $16.065, which is equal to the number of shares of our Class A Common Stock that notionally underlie the Convertible Notes and corresponds to the conversion price of the Convertible Notes. The Convertible Notes Hedges have an expiration date that is the same as the Maturity Date of the Convertible Notes, subject to earlier exercise. The Convertible Notes Hedges have customary anti-dilution provisions similar to the Convertible Notes. If we exercise the Convertible Notes Hedges, the aggregate amount of cash we will receive from the option counterparties to the Convertible Notes Hedges will cover the aggregate amount of cash that we would be required to pay to the holders of the converted Convertible Notes, less the principal amount thereof. As of December 31, 2014, we have not purchased any shares under the Convertible Notes Hedges.
The aggregate cost of the Convertible Notes Hedges was $46.5 million (or $21.3 million net of the total proceeds from the Warrants sold, as discussed below). The Convertible Notes Hedges are accounted for as a derivative asset and are recorded in the condensed consolidated balance sheets at their estimated fair value under "Other assets, net." The fair value of the Convertible Notes Hedges was $45.2 million as of December 31, 2014. The Convertible Notes Embedded Derivative liability and the Convertible Notes Hedges asset will be adjusted to fair value each reporting period and unrealized gains and losses will be reflected in the condensed consolidated statements of operations. The Convertible Notes Embedded Derivative and the Convertible Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments are expected to offset and not have a net impact on the condensed consolidated statements of operations.
The classification of the Convertible Notes Hedges asset as current or long-term on the condensed consolidated balance sheets corresponds with the classification of the Convertible Notes, which is evaluated at each balance sheet date and may change from time to time depending on whether any of the Early Conversion Conditions has been met.
Convertible Notes Warrants
In connection with the issuance of the Convertible Notes, we also sold net-share-settled warrants (the “Warrants”) in privately negotiated transactions with the Option Counterparties for the purchase of up to approximately 14.3 million shares of our Class A Common Stock at a strike price of $20.83 per share, for total proceeds of $25.1 million, net of issuance costs, which was recorded as an increase in stockholders' equity. The Warrants have customary anti-dilution provisions similar to the Convertible Notes. As a result of the Warrants, we will experience dilution to our diluted earnings per share if our average closing stock price exceeds $20.83 for any fiscal quarter. The Warrants expire on various dates from September 2019 through February

19


2020 and must be settled in net shares of our Class A Common Stock. Therefore, upon expiration of the Warrants, we will issue shares of Class A Common Stock to the purchasers of the Warrants that represent the value by which the price of the Class A Common Stock exceeds the strike price stipulated within the particular warrant agreement. As of December 31, 2014, there were 14.3 million warrants outstanding.
Convertible Notes Interest Expense
Total interest expense attributable to the Convertible Notes for the quarter ended December 31, 2014 was $3.3 million, comprised of contractual interest expense and debt discount amortization of $1.3 million and $2.0 million, respectively. The effective interest rate for the first quarter ended December 31, 2014 was approximately 7%.
As of December 31, 2014, the remaining unamortized issuance discount will be amortized over the next four years assuming no early conversion.
Non-Recourse Debt to EZCORP
On January 30, 2012, we acquired a 60% ownership interest in Grupo Finmart. On June 30, 2014, we acquired an additional 16% of the ordinary shares outstanding of Grupo Finmart, increasing our ownership percentage from 60% to 76%. Non-recourse debt amounts in the table previously presented represent Grupo Finmart’s third party debt. All unsecured notes are collateralized with Grupo Finmart's assets. All foreign currency debt is guaranteed by Grupo Finmart's loan portfolio or collateralized cash at Grupo Finmart’s option. As of December 31, 2014, Grupo Finmart’s foreign currency debt was guaranteed by consumer loans totaling $43.8 million, included under “Consumer loans, net” and “Non-current consumer loans, net” in our condensed consolidated balance sheets, and collateralized cash totaling $56.7 million, included under “Restricted cash” and “Restricted cash, non-current” in our condensed consolidated balance sheets.
Interest on secured foreign currency debt due 2016 is charged at the Mexican Interbank Equilibrium ("TIIE") plus a margin of 5%, or a total of 8.2% as of December 31, 2014. The 12% secured notes due 2016 and secured foreign currency debt due 2016 each require monthly payments of $0.1 million with the remaining principal due at maturity. The secured foreign currency debt due in 2017 has a 14.5% interest rate and requires monthly payments of $1.7 million, beginning May 2016, with the remaining principal due at maturity. The 12% secured notes due in 2020 require monthly payments of $1.1 million, beginning December 2018, with the remaining principal due at maturity.
Consumer Loans Facility Due 2017
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. 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.
Consumer Loans Facility Due 2019
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 $31.3 million was primarily used to repay the previous securitization borrowing facility due in 2017 and the transaction costs associated with this transaction. The cash proceeds of approximately $18.2 million are restricted primarily for $15.8 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 $2.4 million of interest and trust maintenance costs to be recovered at repayment. The restricted cash proceeds of $15.8 million are recourse to Grupo Finmart unless additional eligible loans are delivered within the two year period specified in the agreement. The borrowing facility has a two year lending period, ending February 17, 2016, and fully and matures on March 19, 2019. Upon the termination of the lending period, Grupo Finmart has an option to start prepaying the principal 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 consumer loans facility due 2019 totaling approximately $2.5 million are included under “Intangible assets, net” in our 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.

20


Interest on the consumer loans facility due 2019 is charged at TIIE plus a margin of 2.5%, or a total of 5.8% as of December 31, 2014.
9% Unsecured Notes Due 2015
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 an outside party, thereby increasing the total consolidated notes balance. Grupo Finmart used a portion of the net proceeds of the offering to repay existing indebtedness and the remaining portion for general operating purposes. In December 2014, Grupo Finmart repaid $17.5 million of these outstanding notes.
NOTE 7: STOCK COMPENSATION
Our net income includes the following compensation costs related to our stock compensation arrangements:
 
Three Months Ended December 31,
 
2014
 
2013
 
(in thousands)
Gross compensation costs
$
(636
)
 
$
1,236

Income tax benefits
(1,034
)
 
(425
)
Net compensation (benefit) expense
$
(1,670
)
 
$
811

NOTE 8: REDEEMABLE NONCONTROLLING INTEREST
The following table provides a summary of the activities in our redeemable noncontrolling interest during the quarters ended December 31, 2014 and 2013:
 
Redeemable Noncontrolling Interest
 
(in thousands)
Balance as of September 30, 2013
$
55,393

Net income attributable to redeemable noncontrolling interest
1,826

Foreign currency translation adjustment attributable to redeemable noncontrolling interest
359

Balance as of December 31, 2013
$
57,578

 
 
Balance as of September 30, 2014
$
35,498

Net loss attributable to redeemable noncontrolling interest
(147
)
Foreign currency translation adjustment attributable to redeemable noncontrolling interest
(3,569
)
Amounts reclassified from accumulated other comprehensive loss
86

Balance as of December 31, 2014
$
31,868

NOTE 9: INCOME TAXES
Income tax expense is provided at the U.S. tax rate on financial statement earnings, adjusted for the difference between the U.S. tax rate and the rate of tax in effect for non-U.S. earnings deemed to be permanently reinvested in our non-U.S. operations. Deferred income taxes have not been provided for the potential remittance of non-U.S. undistributed earnings to the extent those earnings are deemed to be permanently reinvested, or to the extent such recognition would result in a deferred tax asset.
The current quarter’s effective tax provision rate from continuing operations is 31% of pre-tax income compared to 26% for the prior-year quarter. The effective tax rate for the quarter ended December 31, 2014 was higher primarily due to the elimination of the tax rate differential on discontinued foreign operations, a reduction of costs paid to offshore affiliates and lower non-U.S. undistributed earnings.
NOTE 10: CONTINGENCIES
We are involved in various claims, suits, investigations and legal proceedings, including those described below. We are unable to determine the ultimate outcome of any current litigation or regulatory actions. An unfavorable outcome could have a material

21


adverse effect on our financial condition, results of operations or liquidity. We have not recorded a liability for any of these matters as of December 31, 2014 because we do not believe at this time that any loss is probable or that the amount of any loss can be reasonably estimated.
Shareholder derivative litigation — On July 28, 2014, Lawrence Treppel, a purported holder of Class A Non-voting Common Stock, filed a derivative action in the Court of Chancery of the State of Delaware styled Treppel v. Cohen, et al. (C.A. No. 9962-VCP). The complaint, as originally filed and as amended on September 23, 2014, names as defendants Phillip E. Cohen, the beneficial owner of all of our outstanding Class B Voting Common Stock; several current and former members of our Board of Directors (Joseph J. Beal, Sterling B. Brinkley, John Farrell, Pablo Lagos Espinosa, William C. Love, Thomas C. Roberts and Paul E. Rothamel); three entities controlled by Mr. Cohen (MS Pawn Limited Partnership, the record holder of our Class B Voting Common Stock; MS Pawn Corporation, the general partner of MS Pawn Limited Partnership; and Madison Park LLC); and EZCORP, Inc., as nominal defendant. The amended complaint asserts the following claims:
Claims against the current and former Board members for breach of fiduciary duties and waste of corporate assets in connection with the Board’s decision to enter into advisory services agreements with Madison Park from October 2004 to June 2014;
Claims against Mr. Cohen and MS Pawn Limited Partnership for aiding and abetting the breaches of fiduciary duties relating to the advisory services agreements with Madison Park; and
Claims against Mr. Cohen and Madison Park for unjust enrichment for payments under the advisory services agreements.
The plaintiff seeks (a) a recovery for the Company in the amount of the damages the Company has sustained as a result of the alleged breach of fiduciary duties, waste of corporate assets and aiding and abetting, (b) disgorgement by Mr. Cohen and Madison Park of the benefits they received as a result of the related party transactions and (c) reimbursement of costs and expenses, including reasonable attorney’s fees.
On October 13, 2014, motions to dismiss were filed on behalf of each defendant. The defendants filed their opening briefs in support of the motions to dismiss on November 12, 2014, and the plaintiff filed his response brief on January 9, 2015. The defendants' reply briefs are expected to be filed by early February 2015. On November 13, 2014, pursuant to the parties’ stipulation, the court dismissed the action as to Mr. Brinkley, Mr. Rothamel and Mr. Lagos.
We intend to continue to defend vigorously against the claims asserted in this lawsuit. Although the lawsuit does not seek relief against the Company, we have certain indemnification obligations to the other defendants (including Madison Park and Mr. Cohen), which obligations include the payment of attorney’s fees in advance of the outcome. We cannot predict the outcome of this lawsuit, or the amount of time and expense that will be required to resolve it.
Federal securities litigation — On August 22, 2014, Jason Close, a purported holder of Class A Non-voting Common Stock, for himself and on behalf of other similarly situated holders of Class A Non-voting Common Stock, filed a lawsuit in the United States District Court for the Southern District of New York styled Close v. EZCORP, Inc., et al. (Case No. 1:14-cv-06834-ALC). The complaint names as defendants EZCORP, Inc., Paul E. Rothamel (our former chief executive officer) and Mark Kuchenrither (our president and chief operating officer and current chief financial officer) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In general, the complaint alleges that the implementation of certain strategic and growth initiatives were less successful than represented by the defendants, that certain of the Company’s business units and investments were not performing as well as represented by the defendants and that, as a result, the defendants’ disclosures and statements about the Company’s business and operations were materially false and misleading at all relevant times.
On October 17, 2014, the Automotive Machinists Pension Plan, also purporting to be the holder of Class A Non-voting Common Stock and acting for itself and on behalf of other similarly situated holders of Class A Non-voting Common Stock, filed a lawsuit in the United Stated District Court for the Southern District of New York styled Automotive Machinists Pension Plan v. EZCORP, Inc., et al (Case No. 1:14-cv-8349-ALC). The complaint names EZCORP, Inc., Mr. Rothamel and Mr. Kuchenrither as defendants, but also names Mr. Cohen and MS Pawn Limited Partnership. The complaint likewise asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder, alleging generally that (1) EZCORP and the officer defendants (Mr. Rothamel and Mr. Kuchenrither) issued false and misleading statements and omissions concerning the business and prospects, and compliance history, of the Company’s online lending operations in the U.K. and the nature of the Company’s consulting relationship with entities owned by Mr. Cohen and the process the Board of Directors used in agreeing to it, and (2) Mr. Cohen and MS Pawn Limited Partnership, as controlling persons of EZCORP, participated in the preparation and dissemination of the Company’s disclosures and controlled the Company’s business strategy and activities.

22


On October 21, 2014, the plaintiff in the Automotive Machinists Pension Plan action filed a motion to consolidate the Close action and the Automotive Machinists Pension Plan action and to appoint the Automotive Machinists Pension Plan as the lead plaintiff. On November 18, 2014, the court consolidated the lawsuits under the caption In Re EZCORP, Inc. Securities Litigation (Case No. 1:14-cv-06834-ALC), and, on January 26, 2015, appointed the lead plaintiff and lead counsel.
The consolidated case is at a very early procedural stage. We cannot predict the outcome of the litigation, but we intend to defend vigorously against all allegations and claims.
SEC Investigation — On October 23, 2014, we received a notice from the Fort Worth Regional Office of the SEC that it was conducting an investigation into certain matters involving EZCORP, Inc. The notice was accompanied by a subpoena, directing us to produce a variety of documents, including all minutes and materials related to Board of Directors and Board committee meetings since January 1, 2009 and all documents and communications relating to our historical advisory services relationship with Madison Park (the business advisory firm owned by Mr. Cohen) and LPG Limited (a business advisory firm owned by Lachlan P. Given, currently our Executive Chairman and a member of our Board of Directors). The SEC has also issued subpoenas to current and former members of our Board of Directors requesting production of similar documents. We have provided a number of documents in response to the subpoenas and are cooperating fully with the SEC in its investigation.
NOTE 11: OPERATING SEGMENT INFORMATION
Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision-making purposes.
We currently report our segments as follows:
U.S. & Canada — All business activities in the United States and Canada
Latin America — All business activities in Mexico and other parts of Latin America
Other International — Our equity interest in the net income of Cash Converters International

23


There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our condensed consolidated financial statements. The following tables present operating segment information for the quarters ended December 31, 2014 and 2013, including reclassifications discussed in Note 1 and adjustments to reflect reclassification of all discontinued operations discussed in Note 2.
 
Three Months Ended December 31, 2014
  
U.S. &
Canada
 
Latin
America
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
90,059

 
$
19,580

 
$

 
$
109,639

 
$

 
$
109,639

Jewelry scrapping sales
17,127

 
1,407

 

 
18,534

 

 
18,534

Pawn service charges
57,035

 
7,892

 

 
64,927

 

 
64,927

Consumer loan fees and interest
42,162

 
10,070

 

 
52,232

 

 
52,232

Consumer loan sales and other revenues
420

 
6,892

 

 
7,312

 

 
7,312

Total revenues
206,803

 
45,841

 

 
252,644

 

 
252,644

Merchandise cost of goods sold
59,031

 
13,357

 

 
72,388

 

 
72,388

Jewelry scrapping cost of goods sold
13,414

 
1,261

 

 
14,675

 

 
14,675

Consumer loan bad debt
14,310

 
941

 

 
15,251

 

 
15,251

Net revenues
120,048

 
30,282

 

 
150,330

 

 
150,330

Operating expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
84,746

 
18,910

 

 
103,656

 

 
103,656

Administrative

 

 

 

 
10,174

 
10,174

Depreciation
4,400

 
1,391

 

 
5,791

 
1,782

 
7,573

Amortization
71

 
419

 

 
490

 
967

 
1,457

Loss on sale or disposal of assets
3

 
256

 

 
259

 

 
259

Interest expense
8

 
5,206

 

 
5,214

 
3,744

 
8,958

Interest income
(17
)
 
(474
)
 

 
(491
)
 
(34
)
 
(525
)
Equity in net income of unconsolidated affiliates

 

 
(2,194
)
 
(2,194
)
 

 
(2,194
)
Other expense
3

 
390

 

 
393

 
144

 
537

Segment contribution
$
30,834

 
$
4,184

 
$
2,194

 
$
37,212

 


 


Income (loss) from continuing operations before income taxes
 
 
 
 
 
 
$
37,212

 
$
(16,777
)
 
$
20,435


24


 
Three Months Ended December 31, 2013
  
U.S. &
Canada
 
Latin
America
 
Other
International
 
Total Segments
 
Corporate Items
 
Consolidated
 
(in thousands)
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Merchandise sales
$
88,890

 
$
16,697

 
$

 
$
105,587

 
$

 
$
105,587

Jewelry scrapping sales
25,925

 
1,778

 

 
27,703

 

 
27,703

Pawn service charges
57,069

 
7,064

 

 
64,133

 

 
64,133

Consumer loan fees and interest
45,824

 
14,293

 

 
60,117

 

 
60,117

Consumer loan sales and other revenues
377

 
5,122

 

 
5,499

 

 
5,499

Total revenues
218,085

 
44,954

 

 
263,039

 

 
263,039

Merchandise cost of goods sold
53,047

 
10,541

 

 
63,588

 

 
63,588

Jewelry scrapping cost of goods sold
18,570

 
1,450

 

 
20,020

 

 
20,020

Consumer loan bad debt
14,183

 
1,391

 

 
15,574

 

 
15,574

Net revenues
132,285

 
31,572

 

 
163,857

 

 
163,857

Operating expenses (income):
 
 
 
 
 
 
 
 
 
 
 
Operations
86,573

 
18,382

 

 
104,955

 

 
104,955

Administrative

 

 

 

 
15,745

 
15,745

Depreciation
4,244

 
1,459

 

 
5,703

 
1,637

 
7,340

Amortization
103