EZCORP INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
Source: | Edgar Online, Inc. |
The discussion in this section contains forward-looking statements that are based on our current expectations. Actual results could differ materially from those expressed or implied by the forward-looking statements due to a number of risks, uncertainties and other factors, including those identified in "Part I, Item 1A - Risk Factors" of this report. The following table presents summary consolidated financial data for our fiscal years endedSeptember 30, 2011 ("current year" or "fiscal 2011"),September 30, 2010 ("prior year" or "fiscal 2010") andSeptember 30, 2009 ("fiscal 2009"). Summary Financial Data Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Revenues: Sales $ 494,562 $ 411,865 $ 329,923 Pawn service charges 201,135 163,695 130,169 Signature loan fees 150,250 139,315 133,344 Auto title loan fees 21,701 17,707 3,589 Other 1,669 463 431 Total revenues 869,317 733,045 597,456 Cost of goods sold 295,620 251,122 203,589 Signature loan bad debt 36,328 31,709
33,553
Auto title loan bad debt 2,431 2,735 380 Net revenues $ 534,938 $ 447,479 $ 359,934 Net Income $ 122,159 $ 97,294 $ 68,472 In fiscal 2011, we reclassified fees from our Product Protection Plan and Jewelry VIP Program as well as layaway fees from "Other" revenue to "Sales," as fees from these products are incidental to sales of merchandise. Prior year figures have been reclassified to conform to this presentation and margins have been recalculated accordingly throughout management's discussion and analysis. Overview We are a leading provider of specialty consumer financial services. We provide collateralized, non-recourse loans, commonly known as pawn loans, and a variety of short-term consumer loans including payday loans, installment loans and auto title loans, and inTexas only, fee-based credit services to customers seeking loans. AtSeptember 30, 2011 , we operated a total of 1,111 locations, consisting of 433 U.S. pawn stores (operating as EZPAWN or Value Pawn), 178 pawn stores inMexico (operating as Empeño Fácil or EmpeñeSu Oro ), 436 U.S. financial services stores (operating primarily as EZMONEY), 49 financial services stores inCanada (operating as CASHMAX) and 15 financial and retail services stores (operating as Cash Converters). In addition, we are the franchisor for 13 franchisedCash Converters stores inCanada . We also own almost 30% ofAlbemarle & Bond Holdings PLC , one of theU.K.'s largest pawnbroking businesses with over 150 stores, and almost 33% ofCash Converters International Limited , which franchises and operates a worldwide network of over 600 locations that buy and sell second-hand merchandise and offer financial services. 27
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Our business consists of three reportable segments: The U.S. Pawn Operations, which operates only inthe United States ; Empeño Fácil, which operates only inMexico ; and EZMONEY Operations which operates 430 stores inthe United States and 64 stores inCanada . The following tables present stores by segment: Fiscal Year Ended September 30, 2011 Company-owned Stores U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated Franchises Stores in operation: Beginning of period 396 115 495 1,006 - New openings 10 57 15 82 1 Acquired 34 6 - 40 13 Sold, combined, or closed (1 ) - (16 ) (17 ) (1 ) End of period 439 178 494 1,111 13 Average number of stores during the period 415 145 497 1,058 6 Fiscal Year Ended September 30, 2010 Company-owned Stores U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated Franchises Stores in operation: Beginning of period 375 62 473 910 - New openings 7 53 51 111 - Acquired 16 - - 16 - Sold, combined, or closed (2 ) - (29 ) (31 ) - End of period 396 115 495 1,006 - Average number of stores during the period 381 84 481 946 - Fiscal Year Ended September 30, 2009 Company-owned Stores U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated Franchises Stores in operation: Beginning of period 300 38 471 809 - New openings - 23 19 42 - Acquired 77 1 - 78 - Sold, combined, or closed (2 ) - (17 ) (19 ) - End of period 375 62 473 910 - Average number of stores during the period 360 45 473 878 - Pawn and Retail Activities We earn pawn service charge revenues on our pawn lending. While allowable service charges vary by state and loan size, a majority of our U.S. pawn loans earn 20% per month. Our average U.S. pawn loan amount typically ranges between$125 and $135 but varies depending on the valuation of each item pawned. The total U.S. loan term ranges between 60 and 120 days, consisting of the primary term and grace period. InMexico , pawn service charges range from 15% to 21% per month, including applicable taxes, with the majority of loans earning 21%. The totalMexico pawn loan term is 40 days, consisting of the primary term and grace period. Individual loans are made in Mexican pesos depending on the valuation of each item pawned, but typically equate to between$65 and $70 U.S. dollars . In our pawn stores and certain financial services stores, we acquire inventory for retail sales through pawn loan forfeitures and through purchases of customers' merchandise and purchases of new or refurbished merchandise from third party vendors. The gross profit on sales of inventory depends primarily on our assessment of the loan or purchase value at the time the property is either accepted as loan collateral or purchased. Margins achieved upon 28
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sale of inventory are a function of the assessment of value at the time the pawn loan was originated or, in the case of purchased merchandise, the purchase price. We record an inventory valuation allowance for obsolete or slow-moving inventory based on the type and age of merchandise. We generally establish a higher allowance percentage on general merchandise, as it is more susceptible to obsolescence, and establish a lower allowance percentage on jewelry, as it generally has greater inherent commodity value. AtSeptember 30, 2011 our total allowance was 9.5% of gross inventory compared to 7.4% atSeptember 30, 2010 . Changes in the valuation allowance are charged to merchandise cost of goods sold. Signature Loan and Auto Title Loan Activities AtSeptember 30, 2011 , 286 of our U.S. financial services stores and 25 of our U.S. pawn stores inTexas offered credit services to customers seeking short-term consumer loans from unaffiliated lenders. We do not participate in any of the loans made by the lenders, but earn a fee for helping customers obtain credit and for enhancing customers' creditworthiness by providing letters of credit to the unaffiliated lenders. Customers may obtain two types of signature loans from the unaffiliated lenders. In all stores offering signature loan credit services, customers can obtain payday loans, with principal amounts up to$1,500 but averaging about$520 . Terms of these loans are generally less than 30 days, averaging about 16 days, with due dates corresponding with the customers' next payday. We typically earn a fee of 22% of the loan amount for our credit services offered in connection with payday loans. In 286 of the U.S. financial services stores offering credit services, customers can obtain longer-term unsecured installment loans from the unaffiliated lenders. The installment loans offered in connection with our credit services typically carry terms of about five months with ten equal installment payments, including principal amortization, due on customers' paydays. Installment loan principal amounts range from$1,525 to $3,000 , but average about$2,015 . With each semi-monthly or bi-weekly installment payment, we earn a fee of 10% of the initial loan amount. AtSeptember 30, 2011 , payday loans comprised 94% of the balance of signature loans brokered through our credit services, and installment loans comprised the remaining 6%. Outside ofTexas , we earn signature loan fee revenue on our payday loans. In 15 U.S. pawn stores, 74 U.S. financial services stores and 64 Canadian financial services stores we make payday loans subject to state or provincial law. The average payday loan amount is approximately$435 and the term is generally less than 30 days, averaging about 16 days. We typically charge a fee of 15% to 22% of the loan amount. In 117 of our U.S. financial services stores and three U.S. pawn stores, we make installment loans subject to state law. These installment loans carry a term of four to seven months, with a series of equal installment payments including principal amortization, due monthly, semi-monthly or on the customers' paydays. Total interest and fees on these loans vary in accordance with state law and loan terms, but over the entire loan term, total approximately 45% to 130% of the original principal amount of the loan. We began offering installment loans rather than payday loans inColorado inAugust 2010 , inWisconsin inJanuary 2011 and inMissouri inJune 2011 . Installment loan principal amounts range from$100 to $3,000 , but average approximately$530 . AtSeptember 30, 2011 , 397 of our U.S. financial services stores and 44 of our U.S. pawn stores offered auto title loans or, inTexas , credit services to assist customers in obtaining auto title loans from unaffiliated lenders. Auto title loans are 30-day loans secured by the titles to customers' automobiles. Loan principal amounts range from$100 to $10,000 , but average about$810 . We earn a fee of 12.5% to 25% of auto title loan amounts. Acquisitions In the fiscal year endedSeptember 30, 2010 , we acquired 16 pawn stores located in theChicago metropolitan area, Central andSouth Florida ,Corpus Christi, Texas andLas Vegas, Nevada for approximately$21.8 million in cash. In the year endedSeptember 30, 2011 , we acquired 40 pawn stores located in theChicago metropolitan area,Georgia , Central andSouth Florida ,Iowa ,Wisconsin ,Utah and the Mexican states ofHidalgo andTlaxcala for approximately$66.2 million in cash and the issuance of approximately 0.2 million shares ofEZCORP stock valued at$7.3 million . All stores were acquired as part of our continuing strategy to acquire pawn stores to enhance and diversify our earnings. The results of all acquired stores have been consolidated with our results since their acquisition. InApril 2011 we also acquired the trademark and licensing rights ofCash Converters inCanada , including rights to receive fees from 13 stores operated by franchisees inCanada . 29
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Other
Included in the current year-to-date period results is a pre-tax administrative expense charge of$10.9 million related to theOctober 2010 retirement of our former Chief Executive Officer, including$3.4 million attributable to a cash payment and$7.5 million attributable to the vesting of restricted stock. The current year-to-date period income tax expense reflects a$3.8 million tax benefit related to this charge. Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . 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 to be 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 from the estimates under different assumptions or conditions. We believe the following critical accounting policies and estimates could have a significant impact on our results of operations. You should refer to Note A of our consolidated financial statements for a more complete review of other accounting policies and estimates used in the preparation of our consolidated financial statements. Pawn Loan and Sales Revenue Recognition: We record pawn service charges using the interest method for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several factors, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following two months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. If a pawn loan is not repaid, we value the forfeited collateral (inventory) at the lower of cost (pawn loan principal) or market value of the property. We record sales revenue and the related cost when this inventory is sold, or when we receive the final payment on a layaway sale. Sales tax collected upon the sale of inventory is excluded from the amount recognized as sales and instead recorded as a liability in "Accounts payable and other accrued expenses" on our balance sheets until remitted to the appropriate governmental authorities. Signature Loan Credit Service Fee Revenue Recognition: We earn credit service fees when we assist customers in obtaining signature loans from unaffiliated lenders. We initially defer recognition of the fees we expect to collect, net of direct expenses, and recognize that deferred net amount over the life of the related loans. We reserve the percentage of credit service fees we expect not to collect. Accrued fees related to defaulted loans reduce credit service fee revenue upon loan default, and increase credit service fee revenue upon collection. Signature loan credit service fee revenue is included in "Signature loan fees" on our statements of operations. Signature Loan Credit Service Bad Debt: We issue letters of credit to enhance the creditworthiness of our customers seeking signature loans from unaffiliated lenders. The letters of credit assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, the principal, accrued interest and late fees owed to the lenders by the borrowers plus any insufficient funds fees. Although amounts paid under letters of credit may be collected later, we charge those amounts to signature loan bad debt upon default. We record recoveries under the letters of credit as a reduction of bad debt at the time of collection. After attempting collection of bad debts internally, we occasionally sell them to an unaffiliated company as another method of recovery, and record the proceeds from such sales as a reduction of bad debt at the time of the sale. The majority of our credit service customers obtain short-term signature loans with a single maturity date. These short-term loans, with maturity dates averaging about 16 days, are considered defaulted if they have not been repaid or renewed by the maturity date. Other credit service customers obtain installment loans with a series of payments due over as much as a seven-month period. If one payment of an installment loan is delinquent, that one payment is 30
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considered defaulted. If more than one installment payment is delinquent at any time, the entire loan is considered defaulted. Allowance for Losses on Signature Loan Credit Services: We provide an allowance for losses we expect to incur under letters of credit for brokered signature loans that have not yet matured. The allowance is based on recent loan default experience adjusted for seasonal variations. It includes all amounts we expect to pay to the unaffiliated lenders upon loan default, including loan principal, accrued interest and insufficient funds fees, net of the amounts we expect to collect from borrowers (collectively, "Expected LOC Losses"). Changes in the allowance are charged to signature loan bad debt. We include the balance of Expected LOC Losses in "Accounts payable and other accrued expenses" on our balance sheets. Based on the expected loss and collection percentages, we also provide an allowance for the signature loan credit service fees we expect not to collect, and charge changes in this allowance to signature loan fee revenue. Signature Loan Revenue Recognition: We accrue fees in accordance with state and provincial laws on the percentage of signature loans (payday loans and installment loans) we have made that we believe to be collectible. Accrued fees related to defaulted loans reduce fee revenue upon loan default, and increase fee revenue upon collection. Signature Loan Bad Debt: We consider a payday loan defaulted if it has not been repaid or renewed by the maturity date. If one payment of an installment loan is delinquent, that one payment is considered defaulted. If more than one installment payment is delinquent at any time, the entire installment loan is considered defaulted. Although defaulted loans may be collected later, we charge the loan principal to signature loan bad debt upon default, leaving only active loans in the reported balance. We record collections of principal as a reduction of signature loan bad debt when collected. After attempting collection of bad debts internally, we occasionally sell them to an unaffiliated company as another method of recovery and record the proceeds from such sales as a reduction of bad debt at the time of sale. Signature Loan Allowance for Losses: We provide an allowance for losses on signature loans that have not yet matured and related fees receivable, based on recent loan default experience adjusted for seasonal variations. We charge any changes in the principal valuation allowance to signature loan bad debt. We record changes in the fee receivable valuation allowance to signature loan fee revenue. Auto Title Loan Credit Service Fee Revenue Recognition: We earn auto title credit service fees when we assist customers in obtaining auto title loans from unaffiliated lenders. We recognize the fee revenue ratably over the life of the loan, and reserve the percentage of fees we expect not to collect. Auto title loan credit service fee revenue is included in "Auto title loan fees" on our statements of operations. Bad Debt and Allowance for Losses on Auto Title Loan Credit Services: We issue letters of credit to enhance the creditworthiness of our customers seeking auto title loans from unaffiliated lenders. The letters of credit assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, all amounts owed to the lenders by the borrowers plus any late fees. Through a charge to auto title loan bad debt, we provide an allowance for losses we expect to incur under letters of credit for brokered auto title loans, and record actual charge-offs against this allowance. The allowance includes all amounts we expect to pay to the unaffiliated lenders upon loan default, including principal, accrued interest and late fees, net of the amounts we expect to collect from borrowers or through the sale of repossessed vehicles. We include the allowance for expected losses in "Accounts payable and other accrued expenses" on our balance sheets. Auto Title Loan Revenue Recognition: We accrue fees in accordance with state laws on the percentage of auto title loans we have made that we believe to be collectible. We recognize the fee revenue ratably over the life of the loan. Auto Title Loan Bad Debt and Allowance for Losses: Based on historical collection experience, the age of past-due loans and amounts we expect to receive through the sale of repossessed vehicles, we provide an allowance for losses on auto title loans and related fees receivable. We charge any increases in the principal valuation allowance to auto title loan bad debt and charge uncollectable loans against this allowance. We record changes in the fee receivable valuation allowance to auto title loan fee revenue. 31
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Income Taxes: We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and their tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Stock Compensation: We account for stock compensation in accordance with the fair value recognition provisions of FASB ASC 718-10-25 (Compensation - Stock Compensation). The fair value of restricted shares is measured as the closing market price of our stock on the date of grant, which is amortized over the vesting period for each grant. When granted, our policy is to estimate the grant-date fair value of options using the Black-Scholes-Merton option-pricing model and amortize that fair value to compensation expense on a ratable basis over the options' vesting periods. Fair Value of Financial Instruments: We have elected not to measure at fair value any eligible items for which fair value measurement is optional. We determine the fair value of financial instruments by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values, due primarily to their short-term nature. The recorded value of our outstanding debt is assumed to estimate its fair value, as it has no prepayment penalty and a floating interest rate based on market rates. Acquisitions: We adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805-10-65 (Business Combinations - Revised) onOctober 1, 2009 , and have applied it prospectively to all business acquisitions completed since that date. In accordance with FASB ASC 805-10-65, we allocate the total acquisition price to the fair value of assets and liabilities acquired and now immediately expense transaction costs that would have been included in the purchase price allocation under previous accounting standards. Results of Operations Fiscal 2011 Compared to Fiscal 2010 The following discussion compares our results of operations for the year endedSeptember 30, 2011 to the year endedSeptember 30, 2010 . It should be read with the accompanying consolidated financial statements and related notes. In fiscal 2011, consolidated total revenues increased 19%, or$136.3 million , to$869.3 million , compared to the prior year. Same store total revenues increased$70.4 million , or 10%, and new and acquired stores contributed$65.9 million . Net income increased 26% or$24.9 million . Excluding the onetime$10.9 million charge related to the retirement of our former Chief Executive Officer and the related tax benefit, net income increased 33% to$129.3 million from$97.3 million in the prior year. 32
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U.S. Pawn Operations Segment
The following table presents selected financial data for the U.S. Pawn Operations segment:
Fiscal Years Ended September 30,
2011 2010 (Dollars in thousands) Merchandise sales $ 256,643 $ 226,424 Jewelry scrapping sales 195,276 163,667 Pawn service charges 184,234 154,505 Signature loan fees 2,501 1,930 Auto title loan fees 1,539 1,659 Other 634 442 Total revenues 640,827 548,627 Merchandise cost of goods sold 147,239 131,825 Jewelry scrapping cost of goods sold 120,767 104,531 Signature loan bad debt 923 641 Auto title loan bad debt 165 236 Net revenues 371,733 311,394 Operations expense 177,191 161,145 Store operating income $ 194,542 $ 150,249 Other data: Gross margin on merchandise sales 42.6 % 41.8 % Gross margin on jewelry scrapping sales 38.2 % 36.1 % Gross margin on total sales 40.7 % 39.4 % Average pawn loan balance per pawn store at period end $ 311 $ 292 Average yield on pawn loan portfolio (a) 158 % 156 % Pawn loan redemption rate 81.1 % 80.5 %
(a) Average yield on pawn loan portfolio is calculated as pawn service charge
revenues for the period divided by the average pawn loan balance during the
period.
The U.S. Pawn Operations segment total revenues increased$92.2 million , or 17%, from the prior year to$640.8 million . Same store total revenues increased$46.7 million , or 9% and new and acquired stores net of closed stores contributed$45.5 million . The overall increase in total revenues comprised a$61.8 million increase in merchandise and jewelry scrapping sales, a$29.7 million increase in pawn service charges, and minor increases in loan fees and other revenues. In fiscal 2011, we acquired 34 U.S. pawn stores for$68.3 million , and we opened 10 new U.S. pawn stores. As part of these acquisitions, we began operations in three new states;Iowa ,Utah andWisconsin , bringing the total number of states in which we have pawn operations to 16 atSeptember 30, 2011 . Our current year U.S. pawn service charge revenue increased 19%, or$29.7 million , from the prior year to$184.2 million . Same store pawn service charges increased$18.4 million , or 12%, with new and acquired stores net of closed stores contributing$11.3 million . The same store improvement was due to a higher average same store pawn loan balance coupled with higher yield. The yield improved primarily due to a slightly higher loan redemption rate as we continued to focus on loan values and better qualifying customers to determine those that prefer to sell their merchandise rather than use it as collateral for a loan. Inventory purchases represented 30% of all inventory additions during the year. The current year merchandise sales gross profit increased$14.8 million , or 16%, from the prior year to$109.4 million . This was due to a$13.0 million , or 6%, increase in same store sales, a$17.2 million increase in sales from new and acquired stores net of closed stores, and a 0.8 percentage point improvement in gross margins. 33
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Gross profit on jewelry scrapping sales increased$15.4 million , or 26%, from the prior year to$74.5 million . Jewelry scrapping revenues increased$31.6 million , or 19%, due to a 28% increase in proceeds realized per gram of gold jewelry scrapped partially offset by a 9% decrease in gold volume. Same store jewelry scrapping sales increased$15.7 million , or 10%, and new and acquired stores contributed$15.9 million . Jewelry scrapping sales include the sale of approximately$8.1 million of loose diamonds removed from scrap jewelry in the current year and$3.2 million in the prior year. As a result of the higher average cost per gram of jewelry scrapped, scrap cost of goods increased$16.2 million , or 16%. Operations expense increased to$177.2 million (48% of net revenues) in the current year from$161.1 million (52% of net revenues) in the prior year. The dollar increase in expense was primarily due to higher operating costs resulting from new and acquired stores. The improvement as a percent of net revenues is from greater scale at same stores and from expense management improvements made at acquired and existing stores. In the current year, the$60.1 million greater net revenue from pawn activities, the$0.2 higher signature and auto title loan contribution, and the$16.0 million higher operations expense resulted in a$44.3 million overall increase in store operating income from the U.S. Pawn Operations segment. For the current year, the U.S. Pawn segment contributed 73% of consolidated store operating income compared to 71% in the prior year. Empeño Fácil Segment The following table presents selected financial data for the Empeño Fácil segment after translation to U.S. dollars from its functional currency of the Mexican peso: Fiscal Years Ended September 30, 2011 2010 (Dollars in thousands) Merchandise sales $ 25,237 $ 14,030 Jewelry scrapping sales 15,997 7,389 Pawn service charges 16,901 9,190 Other 122 - Total revenues 58,257 30,609 Merchandise cost of goods sold 14,672 8,459 Jewelry scrapping cost of goods sold 12,205 6,137 Net revenues 31,380 16,013 Operations expense 20,636 11,658 Store operating income $
10,744 $ 4,355
Other data: Gross margin on merchandise sales 41.9 % 39.7 % Gross margin on jewelry scrapping sales 23.7 % 16.9 % Gross margin on total sales 34.8 % 31.9 % Average pawn loan balance per pawn store at period end $ 61 $ 63 Average yield on pawn loan portfolio (a) 187 % 182 % Pawn loan redemption rate 73.5 % 75.2 %
(a) Average yield on pawn loan portfolio is calculated as pawn service charge
revenues for the period divided by the average pawn loan balance during the
period.
The average exchange rate used to translate Empeño Fácil's current year results from Mexican pesos to U.S. dollars was12.1 pesos to the dollar, 6% stronger than in the prior year. Store operating income increased 147% in U.S. dollars and 134% in peso terms. The 96% increase in net revenues was partially offset by higher costs from new stores. We expect new stores will be a drag on earnings until they become profitable in their second year of operation. Approximately 32% of the stores open atSeptember 30, 2011 had been open less than one year. We opened 57 new stores in the current year, 14 of which are EmpeñeSu Oro jewelry-only pawn stores. These jewelry- 34
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only stores are smaller and require less staff than our full-line pawn stores, but also carry smaller average loan balances per store. Empeño Fácil's total revenues increased$27.6 million , or 90%, in the current year to$58.3 million . Same store total revenues increased$10.5 million or 34%, and new and acquired stores contributed$17.1 million . The overall increase in total revenues comprised a$19.8 million increase in merchandise and jewelry scrapping sales, a$7.7 million increase in pawn service charges and a$0.1 million increase in other revenues. Empeño Fácil's pawn service charge revenues increased$7.7 million , or 84%, in the current year to$16.9 million . Same store pawn service charges increased approximately$3.4 million , or 37%, and new and acquired stores contributed$4.3 million . The same store increase was due to an improvement in the average pawn loan yield coupled with an increase in average loan balance during the period. The yield increased primarily due to an increase in pawn service charge rates in certain geographic areas compared to the prior year, partially offset by a lower loan redemption rate. Merchandise gross profit increased$5.0 million , or 90%, from the prior year to$10.6 million . This was due to a$4.2 million , or 30%, same store sales increase and$7.0 million in sales from new and acquired stores in addition to a 2.2 percentage point increase in gross margins to 41.9%. Gross profit on jewelry scrapping sales increased$2.5 million , or 203%, from the prior year to$3.8 million . Jewelry scrapping revenues increased$8.6 million , or 116%, due to 107% increase in gold volume and a 5% increase in proceeds realized per gram of gold jewelry scrapped. Same store jewelry scrapping sales increased$2.9 million , or 40%, and new and acquired stores contributed$5.7 million . The significant volume increase and the margin increase are due primarily to the continued maturation of our EmpeñeSu Oro jewelry-only stores. As a result of the greater volume, scrap cost of goods increased$6.1 million . Operations expense increased to$20.6 million (66% of net revenues) in the current year from$11.7 million (73% of net revenues) in the prior year. The increase was due primarily to the addition of 63 stores through greenfield and acquisitions. In the current year, the$15.4 million greater net revenues were partially offset by the$9.0 million higher operations expense, resulting in a$6.4 million increase in store operating income for the segment. Empeño Fácil contributed 4% of consolidated store operating income in the current year compared to 2% in the prior year. 35
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EZMONEY Operations Segment
The following table presents selected financial data for the EZMONEY Operations segment:
Fiscal Years Ended September 30,
2011 2010 (Dollars in thousands) Signature loan fees $ 147,749 $ 137,385 Auto title loan fees 20,162 16,048 Merchandise sales 203 - Jewelry scrapping sales 1,206 355 Other 913 21 Total revenues 170,233 153,809 Signature loan bad debt 35,405 31,068 Auto title loan bad debt 2,266 2,499 Merchandise cost of goods sold 149 - Jewelry scrapping cost of goods sold 588 170 Net revenues 131,825 120,072 Operations expense 69,225 63,861 Store operating income $
62,600 $ 56,211
Other data: Signature loan bad debt as a percent of signature loan fees 24.0 % 22.6 %
Auto title loan bad debt as a percent of auto title loan fees
11.2 % 15.6 %
Average signature loan balance per store offering signature loans at period end (a)
$ 63 $ 67
Average auto title loan balance per store offering auto title loans at period end (b)
$ 21 $ 23
(a) Signature loan balances include payday and installment loans (net of
valuation allowance) recorded on our balance sheet and the principal portion
of active signature loans outstanding from unaffiliated lenders, the balance
of which is not included on our balance sheet.
(b) Auto title loan balances include title loans (net of valuation allowance)
recorded on our balance sheet and the principal portion of active brokered
loans outstanding from unaffiliated lenders, the balance of which is not included on our balance sheet. The EZMONEY Operations segment total revenues increased$16.4 million , or 11%, to$170.2 million , compared to the prior year. This was due to a$13.1 million , or 9%, increase in same store total revenues and$3.3 million of total revenues at new stores net of closed or consolidated stores. The overall increase in total revenues comprised a$10.4 million increase in signature loan revenues, including installment loans and payday loans, a$4.1 million increase in auto title loan fees and smaller increases in other revenues. InAugust 2010 ,January 2011 andJuly 2011 we introduced installment loans as a replacement product for payday loans inColorado ,Wisconsin andMissouri , respectively following the introduction of new laws governing payday loans in those states. This contributed to the migration of some of our signature loan balances from payday loans to installment loans. In the current year, we opened 15 stores inCanada and closed two, bringing our total atSeptember 30, 2011 to 64. Also, in the current year, we closed 14 EZMONEY stores in the U.S., bringing our total there to 430. EZMONEY's total signature loan revenues increased$10.4 million or 8% and same store signature loan revenues increased$8.0 million , or 6% due to the growth in loan volume, particularly installment loans, which continue to mature following their introduction inColorado ,Wisconsin andMissouri as a replacement for payday loans. Signature loan net revenue increased$6.0 million , or 6%, compared to fiscal 2010 to$112.3 million due to increased loan volume offset by a 1.4 percentage point increase in bad debt expressed as a percentage of fees to 36
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24.0%. The increase in bad debt was in part due to the transition to a lower yielding product inColorado and in part due to operational changes, including underwriting changes, made during the year, which have since been addressed. The segment's net revenues from auto title loans increased$4.3 million or 32% to$17.9 million compared to$13.5 million in the prior year. Same store auto title loan fees increased$4.3 million or 28%. The same store increase resulted primarily from an increase in gross revenues as the product matures, partially offset by the regulatory elimination of auto tile loans inWisconsin fromJanuary 1, 2011 toJune 30, 2011 , and a 4.4 percentage point improvement in bad debt to 11.2% of related fees. The improvement in bad debt was due to improvements in execution, enhanced productivity and use of technology in our collections department. Following a favorable legislative change, auto title loans were re-introduced inWisconsin effectiveJuly 1, 2011 . The EZMONEY Operations segment began buying and scrapping gold jewelry in the prior year. The segment generated$0.6 million of jewelry scrapping profit in the current year, with a 51% gross margin compared to$0.2 million with a 52% gross margin in the prior year. InApril 2011 , we acquired the Cash Converters franchise rights forCanada , which allows us to open new stores and operate our Canadian stores asCash Converters stores. BySeptember 30, 2011 , we had 15 Canadian stores buying and selling second-hand goods, in addition to offering payday loans, under theCash Converters brand. We also began receiving franchise fees from franchisees, which made up the majority of the increase in the segment's other revenues. Merchandise sales in the current year-to-date period were nominal. We expect to rebrand most of our remaining Canadian stores as Cash Converters stores during fiscal year 2012. Operations expense increased to$69.2 million (53% of net revenues) from$63.9 million (53% of net revenues) in the prior year. The increase was mostly from additional labor, rent and other costs at new stores net of closed stores, as operating expenses in our stores opened less than one year, more than offset the decrease due to store closures. In the current year, the$6.0 million increase in net revenues from signature loans,$4.3 million increase in net revenues from auto title loans, the$0.6 million in scrap sales gross profit and$0.9 million in other revenues were partially offset by$5.4 million greater operations expense, resulting in a$6.4 million net increase in store operating income from the EZMONEY Operations segment. For the current year, EZMONEY Operations contributed 23% of consolidated store operating income compared to 27% in fiscal 2010. Other Items
The following table reconciles our consolidated store operating income discussed above to net income, including items that affect our consolidated financial results but are not allocated among segments:
Fiscal Years Ended September 30,
2011 2010 (Dollars in thousands) Consolidated store operating income $ 267,886 $ 210,815 Administrative expenses 75,270 52,740 Depreciation and amortization 18,344 14,661 (Gain) loss on sale / disposal of assets 309 1,528 Interest income (37 ) (186 ) Interest expense 1,690 1,385 Equity in net income of unconsolidated affiliates (16,237 ) (10,750 ) Other (164 ) (93 ) Consolidated income before income taxes 188,711 151,530 Income tax expense 66,552 54,236 Net income $ 122,159 $ 97,294 Administrative expenses in the current year were$75.3 million (14% of net revenues) compared to$52.7 million (12% of net revenues) in the prior year. This increase is primarily due to a pre-tax charge of$10.9 million related to the retirement of our former Chief Executive Officer. This charge included$3.4 million attributable to a cash 37
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payment and$7.5 million attributable to the accelerated vesting of restricted stock. Excluding this charge, administrative expense increased$11.6 million over the prior year and remained unchanged at 12% of net revenues. Depreciation and amortization expense was$18.3 million in the current year, compared to$14.7 million in the prior year. Depreciation on assets placed in service, primarily related to acquired pawn stores and new stores, was partially offset by assets that were retired or became fully depreciated during the year. In the current year, we recognized$0.3 million in losses on disposal of assets, as losses related to store closures were partially offset by gains on disposal of other assets. In the prior year we recognized a$1.5 million loss on store closures or consolidations including a charge for 11 store closures following the passage of legislation negative to the payday lending industry inColorado andWisconsin . Our$1.7 million net interest expense in the current year and$1.2 million in the prior year represent primarily interest on borrowed funds, the amortization of deferred financing costs and the commitment fee on our unused available revolving credit facility. AtSeptember 30, 2011 , we had$17.5 million in outstanding debt under our revolving credit agreement compared to$25.0 million of term debt outstanding at the end of the prior year. Our equity in the net income ofAlbemarle & Bond increased$0.5 million , or 7%, in the current year to$7.3 million as a result ofAlbemarle & Bond's higher earnings, and a slightly stronger British pound in relation to the U.S. dollar. OnNovember 6, 2009 , we acquired 108,218,000 newly issued shares, or approximately 30% of the capital stock ofCash Converters International Limited , a publicly traded company headquartered inPerth, Australia for approximately AUS$54.1 million (approximately U.S.$49.6 million ). We acquired 16,200,000 additional shares onMay 20, 2010 at a cost of AUS$9.7 million (approximately U.S.$8.2 million ), which increased our ownership level to approximately 33%. In the current year our equity in the net income of Cash Converters was$8.9 million compared to$3.9 million in the prior year. As we account for our earnings from Cash Converters on a 3-month lag, the prior year-to-date period included our pro rata share of their results of operations for the 237-day period from ourNovember 6, 2009 initial investment date to theJune 30, 2010 end of Cash Converters' period. The current year's income tax expense was$66.6 million (35.3% of pretax income) compared to$54.2 million (35.8% of pretax income) in the prior year. The decrease in the effective tax rates is primarily due to an increase in both domestic employment tax credits and the foreign tax credit on overseas earnings, partially offset by the valuation allowance established for operating losses in ourCanada operations during their start-up period. In fiscal year 2011, our net income increased$24.9 million , or 26%, to$122.2 million in fiscal 2011. Excluding the one-time$10.9 million charge related to the retirement of our former Chief Executive Officer and the related tax benefit, net income increased 33% to$129.3 million from$97.3 million in the prior year. 38
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Fiscal 2010 Compared to Fiscal 2009 The following discussion compares our results of operations for the year endedSeptember 30, 2010 to the year endedSeptember 30, 2009 . It should be read with the accompanying consolidated financial statements and related notes. U.S. Pawn Operations Segment
The following table presents selected financial data for the U.S. Pawn Operations segment:
Fiscal Years Ended September 30,
2010 2009 (Dollars in thousands) Merchandise sales $ 226,424 $ 202,250 Jewelry scrapping sales 163,667 117,013 Pawn service charges 154,505 124,396 Signature loan fees 1,930 2,293 Auto title loan fees 1,659 1,313 Other 442 431 Total revenues 548,627 447,696 Merchandise cost of goods sold 131,825 121,170 Jewelry scrapping cost of goods sold 104,531 75,744 Signature loan bad debt 641 828 Auto title loan bad debt 236 124 Net revenues 311,394 249,830 Operations expense 161,145 140,525 Store operating income $ 150,249 $ 109,305 Other data: Gross margin on merchandise sales 41.8 % 40.1 % Gross margin on jewelry scrapping sales 36.1 % 35.3 % Gross margin on total sales 39.4 % 38.3 % Average pawn loan balance per pawn store at period end $ 292 $ 266 Average yield on pawn loan portfolio (a) 156 % 150 % Pawn loan redemption rate 80.5 % 78.7 % (a) Average yield on pawn loan portfolio is calculated as annualized pawn service charge revenue for the period divided by the average pawn loan balance during the period. The U.S. Pawn Operations segment total revenues increased$100.9 million , or 23% from fiscal 2009 to$548.6 million . Same store total revenues increased$57.6 million , or 13%. The overall increase in total revenues comprised a$70.8 million increase in merchandise and jewelry scrapping sales and a$30.1 million increase in pawn service charges. In fiscal 2010, we acquired 16 U.S. pawn stores for$21.8 million , and opened seven new U.S. pawn stores. As part of these acquisitions, we began operations inIllinois , bringing the total number of states in which we had pawn operations to 13 as ofSeptember 30, 2010 . Our fiscal 2010 U.S. pawn service charge revenue increased 24%, or$30.1 million , from fiscal 2009 to$154.5 million . Same store pawn service charges increased$19.4 million , or 16%, with new and acquired stores net of closed stores contributing$10.7 million . The same store improvement was due to a higher average same store pawn loan balance coupled with a higher yield. The yield improved primarily due to a higher loan redemption rate as we focused on loan values and better qualifying customers to determine those that prefer to sell their merchandise rather than use it as collateral for a loan. Inventory purchases from customers increased 51% compared to fiscal 2009. 39
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Fiscal 2010 merchandise sales gross profit increased$13.5 million , or 17%, from fiscal 2009 to$94.6 million . This was due to a$17.8 million increase in sales from new and acquired stores net of closed stores, a 1.7 percentage point improvement in gross margin to 41.8%, and a$6.3 million or 3% increase in same store sales. Gross profit on jewelry scrapping sales increased$17.8 million , or 43%, from fiscal 2009 to$59.1 million on greater volume and a 0.8 percentage point improvement in gross margins to 36.1%. Including a$14.1 million increase from stores acquired late in the first fiscal quarter of 2009, scrapping revenues increased$46.7 million , or 40%, on 9% more volume, while proceeds realized per gram of jewelry scrapped increased 28%. In fiscal 2010 and fiscal 2009 respectively, jewelry scrapping sales include the sale of approximately$3.2 million and$1.2 million of loose diamonds removed from scrapped jewelry. As a result of the greater volume and a higher average cost per gram of jewelry scrapped, scrap cost of goods increased$28.8 million , or 38%. Operations expense increased to$161.1 million (52% of net revenues) in fiscal 2010 from$140.5 million (56% of net revenues) in fiscal 2009. The dollar increase in expense was primarily due to higher operating costs at new and acquired stores and higher incentive compensation. The improvement as a percent of net revenues is attributable to greater scale at same stores and expense management improvements made at acquired and existing stores. In fiscal 2010, the$61.5 million greater net revenue from U.S. pawn activities, the$20.6 million higher operations expense and offsetting changes in contributions from signature loans and auto title loans resulted in a$40.9 million overall increase in store operating income from the U.S. Pawn Operations segment. For fiscal 2010 and 2009, the segment comprised 71% of consolidated store operating income. Empeño Fácil Segment The following table presents selected financial data for the Empeño Fácil segment after translation to U.S. dollars from its functional currency of the Mexican peso: Fiscal Years Ended September 30, 2010 2009 (Dollars in thousands) Merchandise sales $ 14,030 $ 8,751 Jewelry scrapping sales 7,389 1,900 Pawn service charges 9,190 5,773 Other - - Total revenues 30,609 16,424 Merchandise cost of goods sold 8,459 5,392 Jewelry scrapping cost of goods sold 6,137 1,277 Net revenues 16,013 9,755 Operations expense 11,658 5,833 Store operating income $
4,355 $ 3,922
Other data: Gross margin on merchandise sales 39.7 % 38.4 % Gross margin on jewelry scrapping sales 16.9 % 32.8 % Gross margin on total sales 31.9 % 37.4 % Average pawn loan balance per pawn store at period end $ 63 $ 58 Average yield on pawn loan portfolio (a) 182 % 168 % Pawn loan redemption rate 75.2 % 82.3 %
(a) Average yield on pawn loan portfolio is calculated as pawn service charge
revenue for the period divided by the average pawn loan balance during the
period.
The average exchange rate used to translate Empeño Fácil's fiscal 2010 results from Mexican pesos to U.S. dollars was 5% stronger than in fiscal 2009, affecting all revenue and expense items. Store operating income improved
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11% in dollars and 5% in peso terms. The 64% increase in net revenues was mostly offset by higher costs from new stores that we expect will be a drag on earnings until they become profitable in their second year of operation. Approximately 46% of the stores open atSeptember 30, 2010 had been open less than a year. We opened 53 new stores in fiscal 2010, 34 of which are EmpeñeSu Oro jewelry-only pawn stores. These jewelry-only stores are much smaller and require less staff than our typical pawn stores, but also carry smaller average loan balances per store and immediately sell for scrap any forfeited loan collateral. Empeño Fácil's total revenues increased$14.2 million , or 86%, in fiscal 2010 to$30.6 million . Same store total revenues increased$6.4 million or 39%, and new stores contributed$7.8 million . The overall increase in total revenues comprised a$10.8 million increase in merchandise and jewelry scrapping sales and a$3.4 million increase in pawn service charges. Empeño Fácil's pawn service charge revenues increased$3.4 million , or 59%, in fiscal 2010 to$9.2 million . Same store pawn service charges increased approximately$1.9 million , or 34%, and new stores contributed$1.5 million . The same store increase was due to an improvement in the average pawn loan yield coupled with an increase in average loan balance during the period. The yield increased primarily due to an increase in pawn service charge rates in certain geographic areas compared to fiscal 2009, partially offset by a lower loan redemption rate. Fiscal 2010's merchandise gross profit increased$2.2 million , or 66%, from fiscal 2009 to$5.6 million . This was due to a$3.0 million , or 34%, same store sales increase,$2.3 million in sales from new stores and a 1.3 percentage point increase in gross margins to 39.7%. The gross profit on jewelry scrapping sales increased$0.6 million to$1.2 million . The$5.5 million increase in proceeds was mostly offset by a decrease in jewelry scrapping margins to 16.9%, compared to 32.8% in fiscal 2009. The significant volume increase and the margin decrease are due primarily to the introduction of our new EmpeñeSu Oro jewelry-only pawn stores. As these new jewelry-only stores open, the gold values employed are aggressive in the marketplace in order to establish both the new store and the brand. Operations expense increased to$11.7 million (73% of net revenues) in fiscal 2010 from$5.8 million (60% of net revenues) in fiscal 2009. The increase was due primarily to new stores which, typically produce a loss in their first several quarters of operation. In fiscal 2010, the$6.3 million greater net revenues were mostly offset by the$5.9 million higher operations expense, resulting in a$0.4 million increase in store operating income for the segment. Empeño Fácil made up 2% of consolidated store operating income in the fiscal 2010 compared to 3% in fiscal 2009. 41
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EZMONEY Operations Segment
The following table presents selected financial data for the EZMONEY Operations segment:
Fiscal Years Ended September 30,
2010 2009 (Dollars in thousands) Signature loan fees $ 137,385 $ 131,051 Auto title loan fees 16,048 2,276 Merchandise sales - - Jewelry scrapping sales 355 9 Other 21 - Total revenues 153,809 133,336 Signature loan bad debt 31,068 32,725 Auto title loan bad debt 2,499 256 Merchandise cost of goods sold - - Jewelry scrapping cost of goods sold 170 6 Net revenues 120,072 100,349 Operations expense 63,861 59,879 Store operating income $
56,211 $ 40,470
Other data: Signature loan bad debt as a percent of signature loan fees 22.6 % 25.0 %
Auto title loan bad debt as a percent of auto title loan fees
15.6 % 11.2 %
Average signature loan balance per store offering signature loans at period end (a)
$ 67 $ 65
Average auto title loan balance per store offering auto title loans at period end (b)
$ 23 $ 11 (a) Signature loan balances include payday and installment loans (net of valuation allowance) recorded on our balance sheets and the principal
portion of active signature loans outstanding from unaffiliated lenders, the
balance of which is not included on our balance sheet.
(b) Auto title loan balances include title loans (net of valuation allowance)
recorded on our balance sheets and the principal portion of active brokered
loans outstanding from unaffiliated lenders, the balance of which is not included on our balance sheet. The EZMONEY Operations segment total revenues increased$20.5 million , or 15%, to$153.8 million , compared to fiscal 2009. This was due to a$20.8 million , or 16%, increase in same store total revenues partially offset by a$0.3 million decrease due to closed or consolidated stores net of revenues from new stores. The overall increase in total revenues comprised a$13.8 million increase in auto title loan fees, a$6.3 million increase in signature loan fees, which include both installment loans and payday loans and a$0.4 million increase in jewelry scrapping sales and other revenues. InAugust 2010 , we introduced installment loans inColorado as a replacement product for payday loans. This contributed to the migration of some customers from payday loans to installment loans. In fiscal 2010, we opened 50 stores inCanada and closed one, bringing our total there to 51. AtSeptember 30, 2009 we had two Canadian stores. During fiscal 2010 we closed 28 EZMONEY stores in the U.S., bringing our total to 444. The segment's signature loan net revenues increased$8.0 million , or 8%, compared to fiscal 2009. The increase resulted primarily from the rapid growth in installment loans and a 2.4 percentage point improvement in bad debt to 22.6% of fees, net of the drag from new stores and closed or consolidated stores. The improvement in bad debt was due to continuing improvements in the store level execution of servicing the customer and the loan, as well as enhanced productivity measurement tools and enhanced use of technology in our collections department. 42
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The segment's net revenues from auto title loans increased to$13.5 million in fiscal 2010 with bad debt at 15.6% of related fees. This loan product had little volume in fiscal 2009. We expect continued growth in the contribution from auto title loans as the product continues to mature. The EZMONEY segment began buying and scrapping gold jewelry in fiscal 2010, generating$0.2 million of gross profit, with a 52% gross margin. Operations expense increased to$63.9 million (53% of net revenues) from$59.9 million (60% of net revenues) in the fiscal 2009. The increase was mostly from additional labor, rent and other costs at new stores net of closed stores. In fiscal 2010, the$8.0 million increase in net revenues from signature loans,$11.5 million increase in net revenues from auto title loans and$0.2 million in scrap sales gross profit were partially offset by$4.0 million greater operations expense, resulting in a$15.7 million net increase in store operating income from the EZMONEY Operations segment. For fiscal 2010 EZMONEY Operations comprised 27% of consolidated store operating income compared to 26% in fiscal 2009. Other Items
The following table reconciles our consolidated store operating income discussed above to net income, including items that affect our consolidated financial results but are not allocated among segments:
Fiscal Years Ended September 30,
2010 2009 (Dollars in thousands) Consolidated store operating income $ 210,815 $ 153,697 Administrative expenses 52,740 40,497 Depreciation and amortization 14,661 12,746 (Gain) loss on sale / disposal of assets 1,528 (1,024 ) Interest income (186 ) (281 ) Interest expense 1,385 1,425 Equity in net income of unconsolidated affiliates (10,750 ) (5,016 ) Other (93 ) 38 Consolidated income before income taxes 151,530 105,312 Income tax expense 54,236 36,840 Net income $ 97,294 $ 68,472 Administrative expenses in fiscal 2010 were$52.7 million (12% of net revenues) compared to$40.5 million (11% of net revenues) in the prior year. This increase was primarily due to an$8.9 million increase in administrative labor and benefits, a$2.1 million increase in professional fees and a$0.8 million increase in stock compensation. Included in the increased labor and benefits is a higher accrual for incentive compensation reflective of the year's strong earnings performance and additional investments made in infrastructure to support our growth. In the first fiscal quarter of fiscal 2009 administrative expense includes a$1.1 million bonus to two executives upon their exercise of employee stock options granted in 1998. Terms of the grants required us to pay a cash bonus to the two executives equal to the related tax savings realized by the company. We do not expect this to recur, as no other outstanding options contain similar terms. Depreciation and amortization expense was$14.7 million in fiscal 2010, compared to$12.7 million in fiscal 2009. Depreciation on assets placed in service, primarily related to acquired pawn stores and new stores, was partially offset by assets that were retired or became fully depreciated during the year. In fiscal 2010, we recognized a$1.5 million loss on the closure or consolidation of several stores, including the 11 EZMONEY stores in the states ofWisconsin andColorado , compared to a$1.0 million gain on disposal of assets in fiscal 2009. In fiscal 2009, insurance proceeds received for assets destroyed by Hurricane Ike exceeded the net book value of those assets, most of which were replaced. 43
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We borrowed$40 million onDecember 31, 2008 to complete the VFS acquisition, and repaid$15 million bySeptember 30, 2010 through quarterly installments of$2.5 million each. Our$1.2 million net interest expense in fiscal 2010 and$1.1 million in fiscal 2009 represent primarily interest on borrowed funds, the amortization of deferred financing costs and the commitment fee on our unused available credit facility, partially offset by interest income on our invested cash. Borrowings were outstanding for only three quarters of fiscal 2009 but were outstanding for the entire fiscal 2010. This was mostly offset by the quarterly amortization of loan principal and lower interest rates in fiscal 2010. Our equity in the net income ofAlbemarle & Bond increased$1.8 million , or 36%, in fiscal 2010 to$6.8 million as a result ofAlbemarle & Bond's higher earnings, partially offset by a weaker British pound in relation to the U.S. dollar. OnNovember 6, 2009 , we acquired 108,218,000 newly issued shares, or approximately 30% of the capital stock ofCash Converters International Limited , a publicly traded company headquartered inPerth, Australia for approximately AUS$54.1 million (approximately U.S.$49.6 million ). We acquired 16,200,000 additional shares onMay 20, 2010 at a cost of AUS$9.7 million (approximately U.S.$8.2 million ), which increased our ownership level to approximately 33%. In fiscal 2010 our equity in the net income of Cash Converters was$3.9 million , accounted for on a 3-month lag. Fiscal 2010's income tax expense was$54.2 million (35.8% of pretax income) compared to$36.8 million (35.0% of pretax income) in fiscal 2009. The increase in the effective tax rate is primarily due to an increase in the valuation allowance established for the operating losses in ourCanada operations during their start-up period in fiscal 2010. Consolidated operating income for fiscal 2010 improved$40.4 million , or 40%, over fiscal 2009 to$141.9 million . Contributing to this were the$40.9 million ,$15.7 million and$0.4 million increases in store operating income in our U.S. Pawn, EZMONEY and Empeño Fácil segments, respectively, partially offset by the$12.2 million increase in administrative expenses, the$1.9 million increase in depreciation and amortization and the$2.5 million increase in loss on disposal of assets. After a$5.7 million increase in our equity interest in the earnings of unconsolidated affiliates and a$17.4 million increase in income taxes and other smaller items, net income improved$28.8 million , or 42%, to$97.3 million in fiscal 2010. Liquidity and Capital Resources In fiscal 2011, our$148.5 million cash flow from operations consisted of (i) net income plus several non-cash items, aggregating to$166.5 million , net of (ii)$18.0 million of normal, recurring changes in operating assets and liabilities. In fiscal 2010, our$124.7 million cash flow from operations consisted of (i) net income plus several non-cash items, aggregating to$117.5 million , and (ii)$7.2 million of normal, recurring changes in operating assets and liabilities. The primary differences in cash flow from operations between the current and prior years were the contribution from acquisitions and organic growth throughout our other operations and revenue streams, net of higher taxes paid. The$136.6 million of net cash used in investing activities during the current year was funded by cash flow from operations, cash on hand and borrowings on our line of credit facility. In the current year, we received$3.2 million in dividends fromAlbemarle & Bond and$4.1 million from Cash Converters. We invested$67.9 million in cash to acquire 34 pawn stores in the U.S., six pawn stores inMexico and the trademark and licensing rights of Cash Converters inCanada . Other significant investments in the period were the$34.8 million in additions to property and equipment and the$41.1 million of loans made in excess of customer loan repayments and the recovery of principal through the sale of forfeited pawn loan collateral. In fiscal 2011, we incurred$2.4 million of debt issuance costs related to our new$175 million revolving credit facility. Net of related tax benefits and proceeds from option exercises, we also paid$3.9 million of withholding tax upon the net share settlement of restricted stock vesting. The net effect of these and other smaller cash flows was a$1.9 million decrease in cash on hand, providing a$24.0 million ending cash balance. 44
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Below is a summary of our cash needs to meet future aggregate contractual obligations (in millions): Payments due by Period Less than More than Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years Long-term debt obligations $ 17.5 $ - $ - $ 17.5 $ - Interest on long-term debt obligations 5.5 1.5 3.1 0.9 - Operating lease obligations 170.2 45.2 69.2 36.1 19.7 Total $ 193.2 $ 46.7 $ 72.3 $ 54.5 $ 19.7 In addition to the contractual obligations in the table above, we are obligated under letters of credit issued to unaffiliated lenders as part of our credit service operations. AtSeptember 30, 2011 , our maximum exposure for losses on letters of credit, if all brokered loans defaulted and none was collected, was$30.3 million . Of that total,$6.4 million was secured by titles to customers' automobiles. These amounts include principal, interest, insufficient funds fees and late fees. In addition to the operating lease obligations in the table above, we are responsible for the maintenance, property taxes and insurance at most of our locations. In the fiscal year endedSeptember 30, 2011 , these collectively amounted to$17.4 million . The operating lease obligations in the table above include expected rent for all our store locations through the end of their current lease terms. Of the 436 U.S. EZMONEY financial services stores, 158 adjoin an EZPAWN store. The lease agreements at approximately 94% of the remaining 278 free-standing U.S. EZMONEY stores contain provisions that limit our exposure for additional rent to only a few months if laws were enacted that had a significant negative effect on our operations at these stores. In fiscal 2012, we plan to open approximately 90 new stores for an aggregate investment of$15.3 million of capital expenditures plus the funding of working capital and start-up losses related to these store openings. We believe new stores will create a drag on earnings and liquidity until their second year of operations. OnMay 10, 2011 , we entered into a new senior secured credit agreement with a syndication of five banks, replacing our previous credit agreement. Among other things, the new credit agreement provides for a four year$175 million revolving credit facility that we may, under the terms of the agreement, request to be increased to a total of$225 million . Upon entering the new credit agreement, we repaid and retired all other outstanding debt. The new credit facility increases our available credit and provides greater flexibility to make investments and acquisitions both domestically and internationally. Terms of the credit agreement require, among other things, that we meet certain financial covenants. We were in compliance with all covenants atSeptember 30, 2011 and expect to remain in compliance based on our expected future performance. AtSeptember 30, 2011 , bank letters of credit totaling$5 million were outstanding and we had borrowed$17.5 million , leaving$152.5 million available on the facility. We anticipate that cash flow from operations, cash on hand and availability under our revolving credit facility will be adequate to fund our contractual obligations, planned store growth, capital expenditures and working capital requirements during the coming year. We have an effective "shelf" Registration Statement on Form S-4 covering an aggregate of 2 million shares of our Class A Common Stock that we may offer from time to time in connection with future acquisitions of businesses, assets or securities. During fiscal 2011, we issued an aggregate of approximately 209,000 shares of Class A Common Stock in connection with several acquisitions of pawn stores, leaving approximately 1.8 million shares covered by the registration statement and available for issuance in future acquisitions as ofSeptember 30, 2011 . Off-Balance Sheet Arrangements We issue letters of credit ("LOCs") to enhance the creditworthiness of our credit service customers seeking signature loans and auto title loans from unaffiliated lenders. The LOCs assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, the principal and accrued interest owed them by the borrowers 45
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plus any insufficient funds fee or late fee. We do not record on our balance sheet the loans related to our credit services as the loans are made by unaffiliated lenders. We do not consolidate the unaffiliated lenders' results with our results as we do not have any ownership interest in the lenders, do not exercise control over them and do not otherwise meet the criteria for consolidation as prescribed by FASB ASC 810-10-25 regarding variable interest entities. We include an allowance for Expected LOC Losses in "Accounts payable and other accrued expenses" on our balance sheet. AtSeptember 30, 2011 , the allowance for Expected LOC Losses was$1.8 million . At that date, our maximum exposure for losses on letters of credit, if all brokered loans defaulted and none was collected, was$30.3 million . This amount includes principal, interest, insufficient funds fees and late fees. We have no other off-balance sheet arrangements. Seasonality Historically, pawn service charges are highest in our fourth fiscal quarter (July through September) due to a higher average loan balance during the summer lending season. Merchandise sales are highest in the first and second fiscal quarters (October through March) due to the holiday season, jewelry sales surroundingValentine's Day and the impact of tax refunds inthe United States . Jewelry scrapping sales are heavily influenced by the timing of decisions to scrap excess jewelry inventory. Jewelry scrapping sales generally are greatest during our fourth fiscal quarter (July through September). This results from relatively low jewelry merchandise sales in that quarter and the higher loan balance, leading to a higher dollar amount of loan forfeitures in the summer lending season providing more inventory available for sale. Signature loan fees are generally highest in our third and fourth fiscal quarters (April through September) due to a higher average loan balance during the summer lending season. Signature loan bad debt, both in dollar terms and as a percentage of related fees, is highest in the third and fourth quarters and lowest in the second quarter due primarily to the impact of tax refunds. The net effect of these factors is that net revenues and net income typically are strongest in the fourth fiscal quarter and weakest in the third fiscal quarter. Our cash flow typically is greatest in the second fiscal quarter due to a high level of loan redemptions and sales in the U.S. income tax refund season. Cautionary Statement Regarding Risks and Uncertainties That May Affect Future Results Forward-Looking Information This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend that all forward-looking statements be subject to the safe harbors created by these laws. All statements, other than statements of historical facts, regarding our strategy, future operations, financial position, future revenues, projected costs, prospects, plans and objectives are forward-looking statements. These statements are often, but not always, made with words or phrases like "may," "should," "could," "will," "predict," "anticipate," "believe," "estimate," "expect," "intend," "plan," "projection" and similar expressions. Such statements are only predictions of the outcome and timing of future events based on our current expectations and currently available information and, accordingly, are subject to substantial risks, uncertainties and assumptions. Actual results could differ materially from those expressed in the forward-looking statements due to a number of risks and uncertainties, many of which are beyond our control. In addition, we cannot predict all of the risks and uncertainties that could cause our actual results to differ from those expressed in the forward-looking statements. Accordingly, you should not regard any forward-looking statements as a representation that the expected results will be achieved. Important risk factors that could cause results or events to differ from current expectations are identified and described in "Part I, Item 1A - Risk Factors" of this report. 46
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We specifically disclaim any responsibility to publicly update any information contained in a forward-looking statement except as required by law. All forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary statement. Item 7A. Quantitative and Qualitative Disclosures about Market Risk Market Risk Disclosures We are exposed to market risk related to interest rates, gold values and changes in foreign currency exchange rates. We do not use derivative financial instruments. Our earnings are affected by changes in interest rates as our debt has a variable rate. If interest rates average 50 basis points more than our current rate in the fiscal year endingSeptember 30, 2012 , our interest expense during the year would increase by approximately$88,000 . This amount is determined by considering the impact of the hypothetical interest rate change on our variable-rate debt atSeptember 30, 2011 . Our earnings and financial position are affected by changes in gold values and the resulting impact on pawn lending, jewelry sales and jewelry cost of goods sold. The proceeds of scrap sales and our ability to sell jewelry inventory at an acceptable margin depend on gold values. The impact on our financial position and results of operations of a hypothetical change in gold values cannot be reasonably estimated. For further discussion, you should read "Part I, Item 1A - Risk Factors" of this report. Our earnings and financial position are affected by foreign exchange rate fluctuations related to our equity investments in Albemarle &Bond andCash Converters International , our Empeño Fácil pawn operations inMexico , and our operations inCanada .Albemarle & Bond's functional currency is the British pound,Cash Converters' International functional currency is the Australian dollar, Empeño Fácil's functional currency is the Mexican peso and ourCanada operations' functional currency is the Canadian dollar. The impact on our results of operations and financial position of hypothetical changes in foreign currency exchange rates cannot be reasonably estimated due to the interrelationship of operating results and exchange rates. The translation adjustment fromAlbemarle & Bond representing the strengthening in the British pound during the year endedJune 30, 2011 (included in ourSeptember 30, 2011 results on a three-month lag) was a$1.1 million increase to stockholders' equity. OnSeptember 30, 2011 , the British pound weakened to £1.00 to$1.5625 U.S. from$1.6018 atJune 30, 2011 . The translation adjustment fromCash Converters International representing the strengthening in the Australian dollar from our investment dates toJune 30, 2011 (included in ourSeptember 30, 2011 results on a three-month lag) was an$8.9 million increase to stockholders' equity. OnSeptember 30, 2011 , the Australian dollar weakened to$1.00 Australian dollar to $0.97910 U.S. from$1.0595 atJune 30, 2011 . The translation adjustment from Empeño Fácil representing the weakening of the Mexican peso during the year endedSeptember 30, 2011 was a$4.6 million decrease to stockholders' equity. We have currently assumed permanent reinvestment of earnings and capital inMexico . Accumulated translation gains or losses related to any future repatriation of earnings or capital would impact our earnings in the period of repatriation. OnSeptember 30, 2011 , the peso further weakened to$1.00 Mexican peso to$0.0745 U.S. from$0.0845 atJune 30, 2011 . The translation adjustment from our Canadian operations representing the weakening of the Canadian dollar during the year endedSeptember 30, 2011 was a$0.4 million decrease to stockholders' equity. OnSeptember 30, 2011 , the Canadian dollar weakened to$1.00 Canadian dollar to $0.9682 U.S. from$1.0238 atJune 30, 2011 . We cannot predict the future valuation of foreign currencies or how further movements in them could affect our future earnings or financial position. 47 --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements Page Report of Independent Registered Public Accounting Firm 49 Consolidated Financial Statements: Consolidated Balance Sheets as ofSeptember 30, 2011 and 2010 50
Consolidated Statements of Operations for each of the Three Years Ended
51
Consolidated Statements of Comprehensive Income for each of the Three Years Ended
52
Consolidated Statements of Cash Flows for each of the Three Years Ended
53
Consolidated Statements of Stockholders' Equity for each of the Three Years Ended
54 Notes to Consolidated Financial Statements 55 48
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Report of Independent Registered Public Accounting Firm Board of Directors and StockholdersEZCORP, Inc. Austin, Texas We have audited the accompanying consolidated balance sheets ofEZCORP, Inc. (the Company) as ofSeptember 30, 2011 and 2010 and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period endedSeptember 30, 2011 . These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of thePublic Company Accounting Oversight Board (United States ). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position ofEZCORP, Inc. atSeptember 30, 2011 and 2010, and the results of its operations and its cash flows for each of the three years in the period endedSeptember 30, 2011 , in conformity with accounting principles generally accepted inthe United States of America . We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ), the effectiveness ofEZCORP, Inc.'s internal control over financial reporting as ofSeptember 30, 2011 , based on criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (COSO) and our report datedNovember 23, 2011 expressed an unqualified opinion thereon. /s/ BDOUSA , LLPDallas, Texas November 23, 2011 49
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Table of Contents EZCORP, Inc. Consolidated Balance Sheets September 30, 2011 2010 (In thousands) Assets: Current assets: Cash and cash equivalents $ 23,969 $ 25,854 Pawn loans 145,318 121,201 Signature loans, net 11,389 10,775 Auto title loans, net 3,222 3,145 Pawn service charges receivable, net 26,455
21,626
Signature loan fees receivable, net 5,348 5,818 Auto title loan fees receivable, net 1,427 1,616 Inventory, net 90,373 71,502 Deferred tax asset 18,125 23,208 Prepaid expenses and other assets 30,611 17,427 Total current assets 356,237 302,172 Investments in unconsolidated affiliates 120,319
101,386
Property and equipment, net 78,498
62,293
Deferred tax asset, non-current - 60 Goodwill 173,206 117,305 Intangible assets, net 19,790 16,454 Other assets, net 8,400 6,742 Total assets $ 756,450 $ 606,412 Liabilities and stockholders' equity: Current liabilities: Current maturities of long-term debt $ - $ 10,000 Accounts payable and other accrued expenses 57,400 49,663 Customer layaway deposits 6,176 6,109 Income taxes payable 693 3,687 Total current liabilities 64,269 69,459 Long-term debt, less current maturities 17,500
15,000
Deferred tax liability 8,331 - Deferred gains and other long-term liabilities 2,102 2,525 Total liabilities 92,202 86,984 Commitments and contingencies Stockholders' equity: Class A Non-voting Common Stock, par value$.01 per share; authorized 54 million shares; 47,228,610 issued and outstanding in 2011; 46,256,051 issued and outstanding in 2010 471 463 Class B Voting Common Stock, convertible, par value$.01 per share; 3 million shares authorized; issued and outstanding: 2,970,171 30 30 Additional paid-in capital 242,398 225,374 Retained earnings 422,095 299,936 Accumulated other comprehensive income (loss) (746 ) (6,375 ) Total stockholders' equity 664,248 519,428 Total liabilities and stockholders' equity $ 756,450
See accompanying notes to consolidated financial statements.
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Table of ContentsEZCORP, Inc. Consolidated Statements of Operations Fiscal
Years Ended September 30,
2011 2010 2009 (In thousands, except per share amounts) Revenues: Sales $ 494,562 $ 411,865 $ 329,923 Pawn service charges 201,135 163,695 130,169 Signature loan fees 150,250 139,315 133,344 Auto title loan fees 21,701 17,707 3,589 Other 1,669 463 431 Total revenues 869,317 733,045 597,456 Cost of goods sold 295,620 251,122 203,589 Signature loan bad debt 36,328 31,709 33,553 Auto title loan bad debt 2,431 2,735 380 Net revenues 534,938 447,479 359,934 Operating expenses: Operations 267,052 236,664 206,237 Administrative 75,270 52,740 40,497 Depreciation and amortization 18,344 14,661 12,746 (Gain) / loss on sale or disposal of assets 309 1,528 (1,024 ) Total operating expenses 360,975 305,593 258,456 Operating income 173,963 141,886 101,478 Interest income (37 ) (186 ) (281 ) Interest expense 1,690 1,385 1,425 Equity in net income of unconsolidated affiliates (16,237 ) (10,750 ) (5,016 ) Other (164 ) (93 ) 38 Income before income taxes 188,711 151,530 105,312 Income tax expense 66,552 54,236 36,840 Net income $ 122,159 $ 97,294 $ 68,472 Net income per common share: Basic $ 2.45 $ 1.98 $ 1.45 Diluted $ 2.43 $ 1.96 $ 1.42 Weighted average shares outstanding: Basic 49,917 49,033 47,372 Diluted 50,369 49,576 48,076
See accompanying notes to consolidated financial statements.
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Table of ContentsEZCORP, Inc. Consolidated Statements of Comprehensive income Fiscal
Years Ended September 30,
2011 2010 2009 (In thousands) Net Income $ 122,159 $ 97,294 $ 68,472 Other comprehensive income (loss): Foreign currency translation adjustments 10,393 (3,673 ) (8,799 ) Unrealized holding gains arising during period 930 - - Income tax benefit (provision) (5,694 ) 1,918 1,598 Other comprehensive income, net of tax 5,629 (1,755 ) (7,201 ) Comprehensive income $ 127,788 $ 95,539 $ 61,271
See accompanying notes to consolidated financial statements.
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Table of Contents EZCORP, Inc. Consolidated Statements of Cash Flows Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Operating Activities: Net income $ 122,159 $ 97,294 $ 68,472 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 18,344 14,661 12,746 Signature loan and auto title loan loss provisions 15,052 11,588 9,023 Deferred taxes 13,647 (1,287 ) 2,493 (Gain) / loss on sale or disposal of assets 309 1,528 (1,024 ) Stock compensation 13,208 4,512 3,701 Income from investments in unconsolidated affiliates (16,237 ) (10,750 ) (5,016 ) Changes in operating assets and liabilities, net of business acquisitions: Service charges and fees receivable, net (2,998 ) (4,312 ) (1,408 ) Inventory, net (5,422 ) (2,144 ) (783 ) Prepaid expenses, other current assets, and other assets, net (12,759 ) (6,277 ) (4,767 ) Accounts payable and accrued expenses 6,881 15,592 (3,649 ) Customer layaway deposits (70 ) 1,824 861 Deferred gains and other long-term liabilities (345 ) (736 ) (363 ) Excess tax benefit from stock compensation (3,230 ) (1,861 ) (1,789 ) Income taxes (98 ) 5,093 2,120 Net cash provided by operating activities 148,441 124,725 80,617 Investing Activities: Loans made (652,403 ) (545,579 ) (446,023 ) Loans repaid 405,594 335,832 276,255 Recovery of pawn loan principal through sale of forfeited collateral 205,662 174,224 154,235 Additions to property and equipment (34,776 ) (25,741 ) (19,264 ) Acquisitions, net of cash acquired (67,919 ) (21,837 ) (40,922 ) Investments in unconsolidated affiliates - (59,188 ) - Dividends from unconsolidated affiliates 7,274 3,841 1,634 Proceeds on disposal of assets - 1,347 1,062 Net cash used in investing activities (136,568 )
(137,101 ) (73,023 )
Financing Activities: Proceeds from exercise of stock options 397 1,602 4,943 Stock issuance costs related to acquisitions - - (442 ) Excess tax benefit from stock compensation 3,230 1,861 1,789 Debt issuance costs (2,397 ) 3 (1,179 ) Taxes paid related to net share settlement of equity awards (7,484 ) - - Proceeds on revolving line of credit 164,500 63,050 - Payments on revolving line of credit (147,000 ) (63,050 ) - Proceeds from bank borrowings - - 40,000 Payments on bank borrowings (25,004 )
(10,000 ) (35,385 )
Net cash provided by (used in) financing activities (13,758 ) (6,534 ) 9,726 Change in cash and equivalents (1,885 ) (18,910 ) 17,320 Cash and equivalents at beginning of period 25,854 44,764 27,444 Cash and equivalents at end of period $ 23,969
Cash paid during the period for: Interest $ 1,147 $ 913 $ 1,181 Income taxes $ 55,124 $ 50,631 $ 32,231 Non-cash Investing and Financing Activities: Pawn loans forfeited and transferred to inventory $ 215,188 $ 177,821 $ 155,690 Foreign currency translation adjustment $ (5,024 ) $ 1,755 $ 7,201 Acquisition-related stock issuance $ 7,304 $ (31 ) $ 71,197 Issuance of common stock to 401(k) plan $ 377
$ 260 $ 178
See accompanying notes to consolidated financial statements.
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Table of Contents EZCORP, Inc. Consolidated Statements of Stockholders' Equity Accumulated Common Stock Additional Other Par Paid In Retained Treasury Comprehensive Shares Value Capital Earnings Stock Income (Loss) Total (In thousands) Balances at September 30, 2008 41,535 $ 416 $ 135,895 $ 134,170 $ (12 ) $ 2,581 $ 273,050 Issuance of Common Stock to 401(k) plan 17 - 178 - - - 178 Stock compensation - - 3,701 - - - 3,701 Stock options and warrants exercised 1,517 16 4,915 - 12 - 4,943 Issuance of Common Stock due to acquisitions 5,175 51 70,702 - - - 70,753 Release of Restricted Stock 459 4 (4 ) - - - - Excess tax benefit from stock compensation - - 1,789 - - - 1,789 Unrealized gain (loss) on available-for-sale securities - - - - - - - Foreign currency translation adjustment - - - - - (7,201 ) (7,201 ) Net income - - - 68,472 - - 68,472 Total comprehensive income - - - - - - 61,271 Balances at September 30, 2009 48,703 487 217,176 202,642 - (4,620 ) 415,685 Issuance of Common Stock to 401(k) plan 13 - 260 - - - 260 Stock compensation - - 4,512 - - - 4,512 Stock options exercised 494 6 1,596 - - - 1,602 Issuance of Common Stock due to acquisitions - - (31 ) - - - (31 ) Release of Restricted Stock 16 - - - - - - Excess tax benefit from stock compensation - - 1,861 - - - 1,861 Unrealized gain (loss) on available-for-sale securities - - - - - - - Foreign currency translation adjustment - - - - - (1,755 ) (1,755 ) Net income - - - 97,294 - - 97,294 Total comprehensive income - - - - - - 95,539 Balances at September 30, 2010 49,226 493 225,374 299,936 - (6,375 ) 519,428 Issuance of Common Stock to 401(k) plan 12 - 377 - - - 377 Stock compensation - - 13,208 - - - 13,208 Stock options exercised 62 1 396 - - - 397 Issuance of Common Stock due to acquisitions 209 2 7,302 - - - 7,304 Release of Restricted Stock 690 - - - - - - Excess tax benefit from stock compensation - 5 3,225 - - - 3,230 Taxes paid related to net share settlement of equity awards - - (7,484 ) - - - (7,484 ) Unrealized gain (loss) on available-for-sale securities - - - - - 605 605 Foreign currency translation adjustment - - - - - 5,024 5,024 Net income - - - 122,159 - - 122,159 Total comprehensive income - - - - - - 127,788
Balances at
See accompanying notes to consolidated financial statements.
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EZCORP, Inc. Notes to Consolidated Financial Statements Note A: Organization and Summary ofSignificant Accounting Policies Organization : We are a leading provider of specialty consumer financial services. We provide collateralized, non-recourse loans, commonly known as pawn loans, and a variety of short-term consumer loans including payday loans, installment loans and auto title loans, or fee-based credit services to customers seeking loans. AtSeptember 30, 2011 , we operated a total of 1,111 locations, consisting of 433 U.S. pawn stores (operating as EZPAWN or Value Pawn), 178 pawn stores inMexico (operating as Empeño Fácil or EmpeñeSu Oro ), 436 U.S. financial services stores (operating primarily as EZMONEY), 49 financial services stores inCanada (operating as CASHMAX) and 15 financial and retail services stores inCanada (operating as Cash Converters). In addition, we are the franchisor for 13 franchised stores inCanada pursuant to our acquisition of the Cash Converters master franchise in that country. We also own almost 30% ofAlbemarle & Bond Holdings PLC , one of theU.K.'s largest pawnbroking businesses with over 150 stores, and almost 33% ofCash Converters International Limited , which franchises and operates a worldwide network of over 600 financial services and second-hand retail stores. Consolidation: The consolidated financial statements include the accounts ofEZCORP, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. We account for our investments inAlbemarle & Bond Holdings, PLC andCash Converters International Limited using the equity method. Pawn Loan and Sales Revenue Recognition: We record pawn service charges using the interest method for all pawn loans we believe to be collectible. We base our estimate of collectible loans on several factors, including recent redemption rates, historical trends in redemption rates and the amount of loans due in the following two months. Unexpected variations in any of these factors could change our estimate of collectible loans, affecting our earnings and financial condition. If a pawn loan is not repaid, we value the forfeited collateral (inventory) at the lower of cost (pawn loan principal) or market value of the property. We record sales revenue and the related cost when this inventory is sold, or when we receive the final payment on a layaway sale. Sales tax collected upon the sale of inventory is excluded from the amount recognized as sales and instead recorded as a liability in "Accounts payable and other accrued expenses" on our balance sheets until remitted to the appropriate governmental authorities. Signature Loan Credit Service Fee Revenue Recognition: We earn credit service fees when we assist customers in obtaining signature loans from unaffiliated lenders. We initially defer recognition of the fees we expect to collect, net of direct expenses, and recognize that deferred net amount over the life of the related loans. We reserve the percentage of credit service fees we expect not to collect. Accrued fees related to defaulted loans reduce credit service fee revenue upon loan default, and increase credit service fee revenue upon collection. Signature loan credit service fee revenue is included in "Signature loan fees" on our statements of operations. Signature Loan Credit Service Bad Debt: We issue letters of credit to enhance the creditworthiness of our customers seeking signature loans from unaffiliated lenders. The letters of credit assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, the principal and accrued interest owed to the lenders by the borrowers plus any insufficient funds fees. Although amounts paid under letters of credit may be collected later, we charge those amounts to signature loan bad debt upon default. We record recoveries under the letters of credit as a reduction of bad debt at the time of collection. After attempting collection of bad debts internally, we occasionally sell them to an unaffiliated company as another method of recovery, and record the proceeds from such sales as a reduction of bad debt at the time of the sale. The majority of our credit service customers obtain short-term signature loans with a single maturity date. These short-term loans, with terms averaging about 16 days, are considered defaulted if they have not been repaid or renewed by the maturity date. Other credit service customers obtain installment loans with a series of payments due over as much as a seven-month period. If one payment of an installment loan is delinquent, that one payment is considered defaulted. If more than one installment payment is delinquent at any time, the entire loan is considered defaulted. Allowance for Losses on Signature Loan Credit Services: We provide an allowance for losses we expect to incur under letters of credit for brokered signature loans that have not yet matured. The allowance is based on recent loan default 55
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experience adjusted for seasonal variations. It includes all amounts we expect to pay to the unaffiliated lenders upon loan default, including loan principal, accrued interest, insufficient funds fees, and late fees, net of the amounts we expect to collect from borrowers (collectively, "Expected LOC Losses"). Changes in the allowance are charged to signature loan bad debt. We include the balance of Expected LOC Losses in "Accounts payable and other accrued expenses" on our balance sheets. Based on the expected loss and collection percentages, we also provide an allowance for the signature loan credit service fees we expect not to collect, and charge changes in this allowance to signature loan fee revenue. Signature Loan Revenue Recognition: We accrue fees in accordance with state and provincial laws on the percentage of signature loans (payday loans and installment loans) we have made that we believe to be collectible. Accrued fees related to defaulted loans reduce fee revenue upon loan default, and increase fee revenue upon collection. Signature Loan Bad Debt: We consider a payday loan defaulted if it has not been repaid or renewed by the maturity date. If one payment of an installment loan is delinquent, that one payment is considered defaulted. If more than one installment payment is delinquent at any time, the entire installment loan is considered defaulted. Although defaulted loans may be collected later, we charge the loan principal to signature loan bad debt upon default, leaving only active loans in the reported balance. We record collections of principal as a reduction of signature loan bad debt when collected. After attempting collection of bad debts internally, we occasionally sell them to an unaffiliated company as another method of recovery and record the proceeds from such sales as a reduction of bad debt at the time of sale. Signature Loan Allowance for Losses: We provide an allowance for losses on signature loans that have not yet matured and related fees receivable, based on recent loan default experience adjusted for seasonal variations. We charge any changes in the principal valuation allowance to signature loan bad debt. We record changes in the fee receivable valuation allowance to signature loan fee revenue. Auto Title Loan Credit Service Fee Revenue Recognition: We earn auto title credit service fees when we assist customers in obtaining auto title loans from unaffiliated lenders. We recognize the fee revenue ratably over the life of the loan, and reserve the percentage of fees we expect not to collect. Auto title loan credit service fee revenue is included in "Auto title loan fees" on our statements of operations. Bad Debt and Allowance for Losses on Auto Title Loan Credit Services: We issue letters of credit to enhance the creditworthiness of our customers seeking auto title loans from unaffiliated lenders. The letters of credit assure the lenders that if borrowers default on the loans, we will pay the lenders, upon demand, all amounts owed to the lenders by the borrowers plus any late fees. Through a charge to auto title loan bad debt, we provide an allowance for losses we expect to incur under letters of credit for brokered auto title loans, and record actual charge-offs against this allowance. The allowance includes all amounts we expect to pay to the unaffiliated lenders upon loan default, including principal, accrued interest and late fees, net of the amounts we expect to collect from borrowers or through the sale of repossessed vehicles. We include the allowance for expected losses in "Accounts payable and other accrued expenses" on our balance sheets. Auto Title Loan Revenue Recognition: We accrue fees in accordance with state laws on the percentage of auto title loans we have made that we believe to be collectible. We recognize the fee revenue ratably over the life of the loan. Auto Title Loan Bad Debt and Allowance for Losses: Based on historical collection experience, the age of past-due loans and amounts we expect to receive through the sale of repossessed vehicles, we provide an allowance for losses on auto title loans and related fees receivable. We charge any increases in the principal valuation allowance to auto title loan bad debt and charge uncollectable loans against this allowance. We record changes in the fee receivable valuation allowance to auto title loan fee revenue.Cash and Cash Equivalents and Cash Concentrations:Cash and cash equivalents consist primarily of cash on deposit or highly liquid investments or mutual funds with original contractual maturities of three months or less. We hold cash at major financial institutions that often exceedFDIC insured limits. We manage our credit risk associated with cash and cash equivalents and cash concentrations by investing in high quality instruments or funds, concentrating our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the primary financial institutions issuing investments or holding such deposits. Historically, we have not experienced any losses due to such cash concentrations. Inventory: If a pawn loan is not redeemed, we record the forfeited collateral at cost (the principal amount of the pawn loan). We do not record loan loss allowances or charge-offs on the principal portion of pawn loans, as they are fully collateralized. 56
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In order to state inventory at the lower of cost (specific identification) or market value, we record an allowance for excess, obsolete or slow moving inventory based on the type and age of merchandise. We record changes in the inventory valuation allowance as cost of goods sold. Software Development Costs: We capitalize certain costs incurred in connection with developing or obtaining software for internal use, and amortize the costs by the straight-line method over the estimated useful lives of each system, typically five years. Customer Layaway Deposits: Customer layaway deposits are recorded as deferred revenue until we collect the entire related sales price and deliver the related merchandise to the customer. Intangible Assets: Goodwill and other intangible assets having indefinite lives are not subject to amortization. They are tested for impairment eachJuly 1st , or more frequently if events or changes in circumstances indicate that they might be impaired, based on cash flows and other market valuation methods. We amortize intangible assets with definite lives over their estimated useful lives using the straight-line method. Property and Equipment: We record property and equipment at cost. We depreciate these assets on a straight-line basis using estimated useful lives of 30 years for buildings and 2 to 7 years for furniture, equipment, and software development costs. We depreciate leasehold improvements over the shorter of their estimated useful life (typically 10 years) or the reasonably assured lease term at the inception of the lease. Valuation of Tangible Long-Lived Assets: We assess the impairment of tangible long-lived assets whenever events or changes in circumstances indicate that the net recorded amount may not be recoverable. The following factors could trigger an impairment review: significant underperformance relative to historical or projected future cash flows, significant changes in the manner of use of the assets or the strategy for the overall business, significant negative industry trends or legislative changes prohibiting us from offering our loan products. When we determine that the net recorded amount of tangible long-lived assets may not be recoverable, we measure impairment based on the excess of the assets' net recorded amount over the estimated fair value. Fair Value of Financial Instruments: We have elected not to measure at fair value any eligible items for which fair value measurement is optional. We determine the fair value of financial instruments by reference to various market data and other valuation techniques, as appropriate. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded values, due primarily to their short-term nature. The recorded value of our outstanding debt is assumed to estimate its fair value, as it has no prepayment penalty and a floating interest rate based on market rates. Acquisitions: We adoptedFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805-10-65 (Business Combinations - Revised) onOctober 1, 2009 , and have applied it prospectively to all business acquisitions completed since that date. In accordance with FASB ASC 805-10-65, we allocate the total acquisition price to the fair value of assets and liabilities acquired and now immediately expense transaction costs that would have been included in the purchase price allocation under previous accounting standards. Foreign Currency Translation: Our equity investments in Albemarle &Bond andCash Converters International are translated from British pounds and Australian dollars, respectively, into U.S. dollars at the exchange rates as of the investees' balance sheet date ofJune 30 . The related interest in the investees' net income is translated at the average exchange rates for each six-month period reported by the investees. The functional currency of our wholly-owned Empeño Fácil pawn segment is the Mexican peso and the functional currency of our wholly-owned foreign subsidiary inCanada is the Canadian dollar. Empeño Fácil's and our Canadian subsidiary's balance sheet accounts are translated from their respective functional currencies into U.S. dollars at the exchange rate at the end of each quarter, and their earnings are translated into U.S. dollars at the average exchange rate each quarter. We present resulting translation adjustments fromAlbemarle & Bond ,Cash Converters International , Empeño Fácil and our Canadian subsidiary as a separate component of stockholders' equity. Foreign currency transaction gains and losses have not been significant, and are reported as "Other" expense in our statements of operations. Cost of Goods Sold: We include in cost of goods sold the historical cost of inventory sold, inventory shrinkage and any change in the allowance for inventory shrinkage and valuation. We also include the cost of operating our central jewelry processing unit, as it relates directly to sales of precious metals to refiners. 57
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Operations Expense: Included in operations expense are costs related to operating our stores. These costs include labor, other direct expenses such as utilities, supplies and banking fees, and indirect expenses such as store rent, building repairs and maintenance, advertising, store property taxes and insurance, regional and area management expenses and the costs of our bad debt collection center. Administrative Expense: Included in administrative expense are costs related to our executive and administrative offices. This includes executive and administrative salaries, wages, stock and incentive compensation, professional fees, license fees and costs related to the operation of our administrative offices such as rent, property taxes, insurance, and information technology. Advertising: We expense advertising costs as incurred. Income Taxes: We account for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value of assets and liabilities and their tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the related temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized when the rate change is enacted. Stock Compensation: We account for stock compensation in accordance with the fair value recognition provisions of FASB ASC 718-10-25 (Compensation - Stock Compensation). The fair value of restricted shares is measured as the closing market price of our stock on the date of grant, which is amortized over the vesting period for each grant. When granted, our policy is to estimate the grant-date fair value of options using the Black-Scholes-Merton option-pricing model and amortize that fair value to compensation expense on a ratable basis over the options' vesting periods. Use of Estimates: Generally accepted accounting principles require us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Reclassifications: Certain prior year balances have been reclassified to conform to the current year presentation. Recently Issued Accounting Pronouncements: InJune 2009 , FASB amended ASC 810-10-65 (Consolidation). Amended ASC 810-10-65 relates to the consolidation of variable interest entities. It eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance also requires additional disclosures about an enterprise's involvement in variable interest entities. We adopted this amended standardOctober 1, 2010 , resulting in no effect on our financial position, results of operations or cash flows. InJuly 2010 , FASB issued Accounting Standards Update ("ASU") 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." This update amends FASB ASC 310 (Receivables) to improve the disclosures that an entity provides about the credit quality of its financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate by portfolio segment or class certain existing disclosures and provide new disclosures about its financing receivables and related allowance for credit losses. We adopted this amended standard onOctober 1, 2010 , resulting in no effect on our financial position, results of operations or cash flows. The additional required disclosures are included in Note S. InJune 2011 , FASB issued ASU 2011-05, "Presentation of Comprehensive Income." This update amends FASB ASC 220 (Comprehensive Income) and eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. We early adopted this amended standard in our fiscal year beginningOctober 1, 2010 with no effect on our financial position, results of operations or cash flows other than the presentation of our results of operations. 58
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Note B: Acquisitions OnDecember 31, 2008 , we acquired through a merger all of the capital stock ofValue Financial Services, Inc. ("VFS"). The following table provides information related to the acquisition: Fiscal Year Ended September 30, 2009 (In thousands except store counts) Pawn stores acquired 67 Consideration: Cash $ 13,590
Equity instruments (4.1 million shares of Class A Non-voting stock at
64,609 Fair value of total consideration transferred 78,199 Capitalized acquisition costs 894 Cash acquired (1,410 ) Total purchase price 77,683 Assumed debt 30,385 Total acquisition costs $ 108,068 Current assets: Pawn loans $ 17,886 Pawn service charges receivable 3,491 Inventory 16,265 Deferred tax asset 4,394 Prepaid expenses and other assets 1,438 Total current assets 43,474 Property and equipment 5,584 Deferred tax asset, non-current 690 Goodwill 61,877 Other assets 5,719 Total assets $ 117,344 Current liabilities: Current maturities of long-term debt $ (4,000 ) Accounts payable and other accrued expenses (8,404 ) Customer layaway deposits (872 ) Total current liabilities (13,276 ) Long-term debt (26,385 ) Total liabilities (39,661 ) Net assets acquired $ 77,683 Goodwill recorded in U.S. Pawn segment $ 61,877 Goodwill deductible for tax purposes - Indefinite lived intangible assets acquired: Trademark and trade names $ 4,870 Definite lived intangible assets acquired: Favorable lease asset $ 644 We estimated the fair value of the stock issued in the acquisition based on the average daily closing market price of our stock from two days before to two days after the announcement of the merger agreement. Since the date of acquisition, the total purchase price increased approximately$0.3 million due to additional transaction related costs identified after the point of acquisition. 59
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As we expect to use the trademark and trade names indefinitely, they are not amortized but are tested at least annually for potential impairment. We are amortizing the favorable lease assets over the related lease terms used for straight-line rent purposes. The factors contributing to the recognition of goodwill were based on several strategic and synergistic benefits we expect to realize from the acquisition. These benefits include a greater presence in prime pawn markets including making us the largest pawn store operator inFlorida , expected administrative savings, increased scale and the ability to implement certain processes and practices at the acquired company in our existing and future operations. The total purchase price presented above excludes contingent consideration paid under the terms of the acquisition, which depended on the price at which VFS shareholders sold theirEZCORP shares. After the closing of the acquisition, we paid$10.7 million of contingent consideration to VFS shareholders related to the sale of approximately 3.9 millionEZCORP shares. In accordance with accounting rules for contingent payments based on the acquirer's stock price, all contingent consideration paid was recorded as a reduction of the additional paid-in capital recorded with the stock issuance and did not change the total recorded purchase price. The results of the acquired stores have been consolidated with our results since their acquisition. The following table summarizes unaudited pro forma condensed combined statements of operations assuming the acquisition had occurred on the first day of fiscal 2009. Although VFS's historical fiscal year ended on a different date than that ofEZCORP , all VFS data included in the pro forma information are actual amounts for the periods indicated. We have realized operating synergies and administrative savings. These come primarily from using the best practices fromEZCORP and VFS in each business, economies of scale, reduced administrative support staff and the closure of VFS's corporate offices. The pro forma information does not include any potential operating efficiencies or cost savings from expected synergies. The pro forma information is not necessarily an indication of the results that would have been achieved had the acquisition been completed as of the date indicated or that may be achieved in the future. The following table presents unaudited consolidated pro forma information as if the VFS acquisition had occurred onOctober 1, 2009 : Fiscal Year Ended September 30, 2009 (In thousands) Total revenues $ 634,693 Net revenues 380,020 Net income 70,358 60
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The following table provides information related to the acquisitions of domestic and foreign pawn lending locations made during the years endedSeptember 30, 2011 , 2010 and 2009 (excluding locations acquired in connection with the acquisition described above related toValue Financial Services ): Fiscal Years Ended September 30, 2011 2010 2009 (In thousands except store counts) Number of asset purchase acquisitions 9 5 1 Number of stock purchase acquisitions 3 - - U.S. pawn stores acquired 34 16 11 Mexico pawn stores acquired 6 - - Total pawn stores acquired 40 16 11 Consideration: Cash $ 69,977 $ 22,507 $ 17,124 Equity instruments 7,304 - 17,250 Fair value of total consideration transferred 77,281
22,507 34,374
Capitalized acquisition costs - - 178 Acquisition related costs included in administrative expenses (920 ) (643 ) - Cash acquired (1,138 )
(58 ) (117 )
Total purchase price $ 75,223 $ 21,806 $ 34,435 Current assets: Pawn loans $ 8,572 $ 2,700 $ 5,442 Signature loans 710 - 55 Auto title loans - - 1,105 Service charges and fees receivable 1,270 379 1,322 Inventory 4,838 1,542 2,860 Deferred tax asset 461 223 334 Prepaid expenses and other assets 728 66 79 Total current assets 16,579 4,910 11,197 Property and equipment 1,051 387 392 Goodwill 56,703 15,870 16,297 Other assets 2,558 1,057 6,711 Total assets $ 76,891 $ 22,224 $ 34,597 Current liabilities: Accounts payable and other accrued expenses $ (1,176 ) $ (93 ) $ (27 ) Customer layaway deposits (182 ) (102 ) (135 ) Other current liabilities (26 ) - - Total current liabilities (1,384 ) (195 ) (162 ) Deferred tax liability (284 ) (223 ) - Total liabilities (1,668 ) (418 ) (162 ) Net assets acquired $ 75,223
Goodwill deductible for tax purposes $ 34,376 $ 15,870 $ 16,297 Goodwill recorded in U.S. Pawn Segment 53,555 15,870 16,297 Goodwill recorded in Empeño Fácil segment 3,148 - - Indefinite lived intangible assets acquired: Pawn licenses $ - $ 607 $ 6,680 Definite lived intangible assets acquired: Favorable lease asset $ 111 $ - $ - Non-compete agreements 769 420 - The fiscal year 2011 acquisitions in the table above include an acquisition of the trademark and licensing rights for Cash Converters inCanada , in which no goodwill was acquired. The factors contributing to the recognition of goodwill were 61
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based on several strategic and synergistic benefits we expect to realize from the acquisitions. These benefits include our initial entry intoChicago ,Iowa ,Wisconsin ,Utah ,Hidalgo andTlaxcala in addition to a greater presence in the prime pawn market ofFlorida and the ability to further leverage our expense structure through increased scale. All stores were acquired as part of our continuing strategy to acquire pawn stores to enhance and diversify our earnings. Transaction related expenses were not material and were expensed as incurred. The results of all acquired stores have been consolidated with our results since their acquisition. The purchase price allocation of stores acquired in the most recent twelve months is preliminary as we continue to receive information regarding the acquired assets. Pro forma results of operations have not been presented because the acquisitions were not significant on either an individual or an aggregate basis, and it is not practicable to do so, as historical audited financial statements are not readily available. Note C: Earnings Per Share We compute basic earnings per share on the basis of the weighted average number of shares of common stock outstanding during the period. We compute diluted earnings per share on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and restricted stock awards. Potential common shares are required to be excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vest, as defined by FASB ASC 718-10-25, are greater than the cost to re-acquire the same number of shares at the average market price, and therefore the effect would be anti-dilutive. Components of basic and diluted earnings per share and excluded anti-dilutive potential common shares are as follows: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands, except per share amounts) Net income (A) $ 122,159
Weighted average outstanding shares of common stock (B) 49,917 49,033 47,372 Dilutive effect of stock options and restricted stock 452 543 704 Weighted average common stock and common stock equivalents (C) 50,369 49,576 48,076 Basic earnings per share (A/B) $ 2.45
$ 1.98
Diluted earnings per share (A/C) $ 2.43
$ 1.96
Potential common shares excluded from the calculation of diluted earnings per share 2 15 124 Note D: Strategic Investments and Fair Value of Financial Instruments AtSeptember 30, 2011 , we owned 16,644,640 ordinary shares ofAlbemarle & Bond Holdings, PLC , representing almost 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 theUnited Kingdom . We account for the investment using the equity method. SinceAlbemarle & 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 endingDecember 31 andJune 30 . The income reported for our fiscal year endedSeptember 30, 2011 represents our percentage interest in the results ofAlbemarle & Bond's operations fromJuly 1, 2010 toJune 30, 2011 . In fiscal 2011, 2010 and 2009, we received dividends fromAlbemarle & Bond of$3.2 million ,$2.3 million and$1.6 million .Albemarle & Bond's accumulated undistributed after-tax earnings included in our consolidated retained earnings were$23.5 million atSeptember 30, 2011 . Conversion ofAlbemarle & Bond's financial statements into US Generally Accepted Accounting Principles ("GAAP") resulted in no material differences from those reported byAlbemarle & Bond following International Financial Reporting Standards ("IFRS"). 62
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In its functional currency of British pounds,Albemarle & Bond's total assets increased 19% fromJune 30, 2010 toJune 30, 2011 and its net income improved 6% for the year endedJune 30, 2011 . Below is summarized financial information forAlbemarle & Bond's most recently reported results after translation to U.S. dollars (using the exchange rate as ofJune 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, 2011 2010 (In thousands) Current assets $ 125,862 $ 97,476 Non-current assets 64,325 52,325 Total assets $ 190,187 $ 149,801 Current liabilities $ 18,620 $ 17,898 Non-current liabilities 57,016 42,078 Shareholders' equity 114,551 89,825 Total liabilities and shareholders' equity $ 190,187 $ 149,801 Years ended June 30, 2011 2010 2009 (In thousands) Gross revenues $ 162,002 $ 129,794 $ 89,712 Gross profit 97,197 84,850 68,572 Profit for the year (net income) 24,324 22,792 17,239 AtSeptember 30, 2011 , the recorded balance of our investment inAlbemarle & Bond , accounted for on the equity method, was$48.4 million . BecauseAlbemarle & Bond publicly reports its financial results only semi-annually as ofJune 30 andDecember 31 , the latestAlbemarle & Bond figures available are as ofJune 30, 2011 , at which point our equity in net assets ofAlbemarle & Bond was$34.4 million . The difference between the recorded balance and our equity inAlbemarle & Bond's net assets represents the$10.0 million of unamortized goodwill, plus the cumulative difference resulting fromAlbemarle & Bond's earnings, dividend payments and translation gains and losses since the dates of investment. AtSeptember 30, 2011 , we owned 124,418,000 shares, or approximately 33% of the total ordinary shares ofCash Converters International Limited , which is a publicly traded company headquartered inPerth, Australia . We acquired the shares betweenNovember 2009 andMay 2010 for approximately$57.8 million .Cash Converters franchises and operates a worldwide network of approximately 600 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. Cash Converters has significant store concentrations inAustralia and theUnited Kingdom . We account for our investment in Cash Converters using the equity method. Since Cash Converters' fiscal year ends three months prior to ours, we report the income from this investment on a three-month lag. Cash Converters files semi-annual financial reports for its fiscal periods endingDecember 31 andJune 30 . Due to the three-month lag, income reported for our fiscal year endedSeptember 30, 2011 represents our percentage interest in the results of cash Converters' operations fromJuly 1, 2010 toJune 30, 2011 . Our results for the twelve-month period endedSeptember 30, 2010 include our percentage interest in Cash Converters' 237 days of earnings fromNovember 6, 2009 toJune 30, 2010 . This amount was estimated through daily proration of Cash Converters' reported results for the twelve months endedJune 30, 2010 . In fiscal 2011 and 2010, we received dividends from Cash Converters of$4.1 and$1.5 million .Cash Converters' accumulated undistributed after-tax earnings included in our consolidated retained earnings were$7.3 million atSeptember 30, 2011 . Conversion of Cash Converters' financial statements into US GAAP resulted in no material differences from those reported by Cash Converters following IFRS. In its functional currency of Australian dollars, Cash Converters' total assets increased 18% fromJune 30, 2010 toJune 30, 2011 and its net income improved 27% for the year endedJune 30, 2011 . Below is summarized financial information for 63
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Cash Converters' most recently reported results after translation to U.S. dollars (using the exchange rate as ofJune 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, 2011 2010 (In thousands) Current assets $ 119,633 $ 96,489 Non-current assets 126,811 72,408 Total assets $ 246,444 $ 168,897 Current liabilities $ 38,235 $ 19,179 Non-current liabilities 22,528 10,199 Shareholders' equity 185,681 139,519 Total liabilities and shareholders' equity $ 246,444 $ 168,897 Years Ended June 30, 2011 2010 (In thousands) Gross revenues $ 184,011 $ 111,218 Gross profit 138,997 84,296 Profit for the year (net income) 27,328 19,122 AtSeptember 30, 2011 , the recorded balance of our investment inCash Converters, accounted for on the equity method, was$72.0 million . BecauseCash Converters publicly reports its financial results only semi-annually as ofJune 30 andDecember 31 , the latest Cash Converters figures available are as ofJune 30, 2011 , at which point our equity in net assets of Cash Converters was$60.8 million . The difference between the recorded balance and our equity in Cash Converters' net assets represents the$15.0 million of unamortized goodwill, plus the cumulative difference resulting from Cash Converters' earnings, dividend payments and translation gains and losses since the dates of investment. The table below summarizes the recorded value and fair value of each of these strategic investments at the dates indicated. These fair values are considered level one 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 for owning a large percentage of outstanding shares. September 30, 2011 2010 (In thousands of U.S. dollars) Albemarle & Bond: Recorded value $ 48,361 $ 43,127 Fair value 91,741 75,520 Cash Converters: Recorded value 71,958 58,259 Fair value 53,600 70,005 InAugust 2011 , legislation was proposed inAustralia that would, among other things, limit the interest charged on certain consumer loans and prohibit loan extensions and refinancings. If this legislation is enacted in its currently proposed form, Cash Converters' consumer loan business inAustralia may be adversely affected, which could have the effect of decreasing Cash Converters' revenues and earnings. Cash Converters has announced that it is considering a wide range of steps which it can implement to reduce the potential adverse impact if the proposed legislation is enacted and that it believes it may be able to substantially reduce the adverse effects. As ofSeptember 30, 2011 , the fair value of our investment in Cash Converters (based on the market price of Cash Converters stock as of that date) was below our recorded value. In light of Cash Converters' statements regarding its ability to mitigate the potential impact of the proposed legislation, we consider this loss in value to be temporary. 64
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Included in "Other Assets, net" on our balance sheets are available for sale securities with a fair value of$5.4 million atSeptember 30, 2011 and$4.9 million atSeptember 30, 2010 . This is considered to be a level one measurement of fair value as it is based on the ending market price for the securities at that date, as quoted on an active public securities exchange. Note E: Property and Equipment Major classifications of property and equipment were as follows: September 30, 2011 2010 Carrying Accumulated Net Book Carrying Accumulated Net Book Amount Depreciation Value Amount Depreciation Value (In thousands) Land $ 4 $ - $ 4 $ - $ - $ - Buildings and improvements 88,263 (53,094 ) 35,169 78,997 (47,851 ) 31,146 Furniture and equipment 85,654 (52,562 ) 33,092 70,419 (44,209 ) 26,210 Software 28,653 (23,238 ) 5,415 25,128 (21,871 ) 3,257 Construction in progress 4,818 - 4,818 1,680 - 1,680 Total $ 207,392 $ (128,894 ) $ 78,498 $ 176,224 $ (113,931 ) $ 62,293 Depreciation expense for fiscal 2011, 2010 and 2009 was$17.5 million ,$14.0 million and$12.3 million . Included in these amounts for fiscal 2011, 2010 and 2009 is$1.4 million ,$0.9 million and$1.0 million of depreciation expense related to capitalized computer software. Note F: Goodwill and Other Intangible Assets The following table presents the balance of each major class of indefinite-lived intangible asset at the specified dates: September 30, 2011 2010 (In thousands) Pawn licenses $ 8,836 $ 8,836 Trade name 4,870 4,870 Goodwill 173,206 117,305 Total $ 186,912 $ 131,011
The following table presents the changes in the carrying value of goodwill, by segment, for the fiscal years ended
U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated (In thousands) Balance at September 30, 2009 $ 94,192 $ 6,527 $ - $ 100,719 Acquisitions 15,871 - - 15,871 Post-closing purchase price allocation adjustments for prior year acquisitions 192 - - 192 Effect of foreign currency translation changes - 523 - 523 Balance at September 30, 2010 110,255 7,050 - 117,305 Acquisitions 53,642 3,148 - 56,790 Effect of foreign currency translation changes - (889 ) - (889 ) Balance at September 30, 2011 $ 163,897 $ 9,309 $ - $ 173,206 65
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The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible asset at the specified dates: September 30, 2011 2010 Carrying Accumulated Net Book Carrying Accumulated Net Book Amount Amortization Value Amount Amortization Value (In thousands) Real estate finders' fees $ 1,157 $ (479 ) $ 678 $ 948 $ (401 ) $ 547 Non-compete agreements 3,722 (2,459 ) 1,263 3,081 (1,834 ) 1,247 Favorable lease 755 (322 ) 433 644 (219 ) 425 Franchise Rights 1,547 (32 ) 1,515 - - - Deferred financing costs 2,411 (262 ) 2,149 1,469 (982 ) 487 Other 58 (12 ) 46 48 (6 ) 42 Total $ 9,650 $ (3,566 ) $ 6,084 $ 6,190 $ (3,442 ) $ 2,748 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 our credit agreement. The following table presents the amount and classification of amortization recognized as expense in each of the periods presented: Fiscal
Years Ended September 30,
2011 2010 2009 (In thousands) Amortization expense $ 855 $ 631 $ 485 Operations expense 111 129 95 Interest expense 615 403 296 Total expense from the amortization of definite-lived intangible assets $ 1,581
$ 1,163
The following table presents our estimate of amortization expense for definite-lived intangible assets:
Fiscal Years Ended September 30, Amortization Expense Operations Expense Interest Expense (In thousands) 2012 $ 784 $ 92 $ 599 2013 346 76 599 2014 271 62 599 2015 234 51 352 2016 193 48 - As acquisitions and dispositions occur in the future, amortization expense may vary from these estimates. Note G: Accounts Payable and Other Accrued Expenses Accounts payable and other accrued expenses consisted of the following: September 30, 2011 2010 (In thousands) Trade accounts payable $ 9,949 $ 9,135 Accrued payroll and related expenses 22,326
20,838
Accrued interest 13 94 Accrued rent and property taxes 10,728
9,121
Accrual for expected losses on credit service letters of credit
1,795
1,699
Collected funds payable to unaffiliated lenders under credit service programs 1,705 823 Other accrued expenses 10,884 7,953 $ 57,400 $ 49,663 66
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Note H: Long-Term Debt OnMay 10, 2011 , we entered into a new senior secured credit agreement with a syndicate of five banks, replacing our previous credit agreement. Among other things, the new credit agreement provides for a four year$175 million revolving credit facility that we may, under the terms of the agreement, request to be increased to a total of$225 million . Upon entering the new credit agreement, we repaid and retired our$17.5 million outstanding debt. The new credit facility increases our available credit and provides greater flexibility to make investments and acquisitions both domestically and internationally. Pursuant to the credit agreement, we may choose to pay interest to the lenders for outstanding borrowings atLIBOR plus 200 to 275 basis points or the bank's base rate plus 100 to 175 basis points, depending on our leverage ratio computed at the end of each calendar quarter. On the unused amount of the credit facility, we pay a commitment fee of 37.5 to 50 basis points depending on our leverage ratio calculated at the end of each quarter. From the closing date to approximatelyOctober 31, 2011 , we paid a minimum interest rate ofLIBOR plus 250 basis points or the bank's base rate plus 150 basis points, at our option, and a commitment fee of 50 basis points on the unused portion of the credit line. Terms of the credit agreement require, among other things, that we meet certain financial covenants. AtSeptember 30, 2011 , we were in compliance with all covenants. We expect the recorded value of our debt to approximate its fair value as it is all variable rate debt and carries no pre-payment penalty. AtSeptember 30, 2011 ,$17.5 million was outstanding under our revolving credit agreement. We also issued$5.0 million of bank letters of credit, leaving$152.5 million available on our revolving credit facility. The outstanding bank letters of credit secure our obligations under letters of credit we issue to unaffiliated lenders as part of our credit service operations. In connection with the credit agreement we expensed$0.1 million of unamortized deferred financing costs related to our former credit agreement and recorded approximately$2.3 million deferred financing costs related to our new facility. These costs are included in intangible assets, net on the balance sheet and are being amortized to interest expense over their four-year estimated useful life. Note I: Common Stock, Options, and Stock Compensation Our capital stock consists of two classes of common stock designated as Class A Non-voting Common Stock ("Class A Common Stock") and Class B Voting Common Stock ("Class B Common Stock"). The rights, preferences and privileges of the Class A and Class B Common Stock are similar except that each share of ClassB Common Stock has one vote and each share of Class A Common Stock has no voting privileges. All Class A Common Stock is publicly held. Holders of ClassB Common Stock may, individually or as a class, convert some or all of their shares into Class A Common Stock on a one-to-one basis. Class A Common Stock becomes voting common stock upon the conversion of all Class B Common Stock to Class A Common Stock. We are required to reserve the number of authorized but unissued shares of Class A Common Stock that would be issuable upon conversion of all outstanding shares of Class B Common Stock. The following table presents information on newly registered shares of our Class A Common Stock issued as acquisition consideration: Fiscal Years Ended September
30,
2011 2010
2009
Shares issued due to acquisitions 208,763 -
5,174,900
We account for stock compensation in accordance with the fair value recognition and measurement provisions of FASB ASC 718-10-25 (Compensation-Stock Compensation). Compensation cost recognized includes compensation cost for all unvested stock compensation payments, based on the closing market price of our stock on the date of grant. We amortize the fair value of grants to compensation expense on a ratable basis over the vesting period for both cliff vesting and pro-rata vesting grants. We have not granted any stock options since fiscal 2007. 67
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Our net income includes the following compensation costs related to our stock compensation arrangements: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Gross compensation costs Stock options $ - $ 4 $ 63 Restricted stock 13,208 4,508 3,638 Total gross compensation costs 13,208 4,512 3,701 Income tax benefits Stock options (1 ) (56 ) (32 ) Restricted stock (4,508 ) (1,517 ) (1,208 ) Total income tax benefits (4,509 ) (1,573 )
(1,240 )
Net compensation expense
2,461
All options and restricted stock relate to our Class A Common Stock. Our non-employee directors have been granted restricted stock awards and non-qualified stock options that vest in one to two years from grant, with the options expiring in ten years. Restricted stock awards, non-qualified options and incentive stock options have been granted to our officers and employees under our 1998, 2003, 2006 and 2010 Incentive Plans. Most options have a contractual life of ten years and provide for pro-rata vesting over five years, but some provide for cliff vesting. Outstanding options have been granted with strike prices ranging from$0.86 per share to$4.05 per share. These were granted at or above the market price at the time of grant, and had no intrinsic value on the grant date. OnMay 1, 2010 our Board of Directors approved the adoption of theEZCORP, Inc. 2010 Long-Term Incentive Plan (the "2010 Plan"). The 2010 Plan permits grants of options, restricted stock awards ("RSAs") and stock appreciation rights covering up to 1,575,750 shares of our Class A Common Stock, including 75,750 shares that remained available for issuance under the previous plan. Awards that expire or are canceled without delivery of shares under the 2010 Incentive Plan generally become available for issuance in new grants. We generally issue new shares to satisfy stock option exercises, but used 10,000 treasury shares to satisfy one option exercise in fiscal 2009. We no longer hold any treasury shares. AtSeptember 30, 2011 , 779,750 shares were available for grant under the 2010 Plan. We measure the fair value of RSAs based upon the closing market price of our common stock as of the grant date. A summary of the RSA activity as follows: Fiscal Year EndedSeptember 30, 2011 Weighted AverageGrant Date Shares Fair Value
13.50 Granted 868,500 20.34 Released (1,035,250 ) 13.08 Forfeited (79,500 ) 16.61Outstanding at end of year 1,535,000 $17.49 Fiscal Years Ended September 30, 2011 2010 2009 (In millions except per share amounts) Weighted average grant-date fair value per share of RSAs granted $ 20.34 $ 14.64 $ 17.51 Total grant -date fair value of RSAs vested $ 13.5 $ 0.2 $ 4.8 68--------------------------------------------------------------------------------
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AtSeptember 30, 2011 , the unamortized fair value of RSAs to be amortized over their remaining vesting periods was approximately$20.8 million and the fair value of all options had been fully amortized to expense. The weighted average period over which these costs will be amortized is four years. A summary of the option activity for the current fiscal year follows: Weighted Average Weighted Remaining Aggregate Average Contractual Intrinsic Exercise Term Value Shares Price (In years) (In thousands) Outstanding at September 30, 2010 293,398 $ 3.81 Granted - - Forfeited - - Expired (8,400 ) 1.48 Exercised (62,600 ) 6.57 Outstanding at September 30, 2011 222,398 $ 3.12 2.37 $ 5,652 Vested and expected to vest 222,398 $ 3.12 2.37 $ 5,652 Vested at September 30, 2011 222,398 $ 3.12 2.37 $ 5,652 Fiscal Years Ended September 30, 2011 2010 2009 (In millions except share amounts)Shares issued due to stock option exercises 62,173 494,202
1,528,048
Proceeds due to stock option exercises $ 0.4
$ 1.6 $ 4.9 Tax benefit from stock option exercises $ 0.2 $ 2.1 $ 1.4 Intrinsic value of stock options exercised $ 1.5 $ 7.7$ 15.5
Note J: Income Taxes Significant components of the income tax provision are as follows: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Current Federal $ 50,148 $ 54,931 $ 38,898 State and foreign 2,728 2,172 1,519 52,876 57,103 40,417 Deferred Federal 13,408 (2,811 ) (3,516 ) State and foreign 268 (56 ) (61 ) 13,676 (2,867 ) (3,577 ) $ 66,552 $ 54,236 $ 36,840 69--------------------------------------------------------------------------------
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A reconciliation of income taxes calculated at the statutory rate and the provision for income taxes attributable to continuing operations is as follows: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Income taxes at the federal statutory rate $ 66,049 $ 53,035 $ 36,859 Non-deductible expense related to incentive stock options - 1 112 State income tax, net of federal benefit 2,728 2,172 1,519 Change in valuation allowance 1,425 1,273 157 Federal tax credits (167 ) (134 ) (181 ) Foreign tax credit (4,356 ) (2,849 ) (1,228 ) Other 873 738 (398 ) Total provision $ 66,552 $ 54,236 $ 36,840 Effective Tax Rate 35.3 % 35.8 % 35.0 % The decrease in the fiscal 2011 effective tax rate is due primarily to an increase in foreign tax credits, partly offset by a valuation allowance established on our foreign net operating losses during the start-up phase of operations inCanada . If we are able to generate taxable income inCanada in future years, this valuation allowance may then be reversed and the related deferred tax assets realized. Taking into account all the above factors and our expectations, we estimate our effective tax rate in the year endingSeptember 30, 2012 will be approximately 35.2%. Significant components of our deferred tax assets and liabilities as ofSeptember 30 are as follows (in thousands): September 30, 2011 2010 (In thousands) Deferred tax assets:Book over tax depreciation $ 1,001 $3,894 Tax over book inventory 3,457 9,836 Accrued liabilities 12,220 11,041Pawn service charges receivable 3,7753,552
Stock compensation -2,838
Net operating loss carry-forward on foreign operations 1,425
1,273
Total deferred tax assets 21,87832,434
Deferred tax liabilities:
Tax over book amortization 6,6055,122
Foreign income and dividends 2,932 2,163 Stock compensation 194 Prepaid expenses 928 608 Total deferred tax liabilities 10,6597,893 Net deferred tax asset 11,219 24,541 Valuation allowance (1,425 ) (1,273 ) Net deferred tax asset $ 9,794 $ 23,268 Substantially all of our operating income was generated from U.S. operations during 2010 and 2011, and we have elected to have our Mexican operations treated as a foreign branch of a U.S. subsidiary for U.S. income tax purposes. AtSeptember 30, 2011 and 2010, we provided deferred income taxes on all undistributed earnings fromAlbemarle & Bond , and received dividends of approximately$3.2 million and$2.3 million . AtSeptember 30, 2011 and 2010, we provided deferred income taxes on all undistributed earnings from Cash Converters, and received dividends of approximately$4.1 million and$1.5 million . Any taxes paid to foreign governments on these earnings may be used in whole or in part as credits against the U.S. tax on any dividends distributed from such earnings. 70--------------------------------------------------------------------------------
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Under FASB ASC 740-10-25 ("Accounting for Uncertainty in Income Taxes"), a tax position must be more-likely-than-not to be sustained upon examination, based on the technical merits of the position to be recognized in the financial statements. In making the determination of sustainability, we must presume the appropriate taxing authority with full knowledge of all relevant information will examine tax positions. FASB ASC 740-10-25 also prescribes how the benefit should be measured, including the consideration of any penalties and interest. It requires that the standard be applied to the balances of tax assets and liabilities as of the beginning of the period of adoption and that a corresponding adjustment be made to the opening balance of equity. As a result of the adoption of FASB ASC 740-10-25, we recognized a$106,000 liability, including$8,600 of penalties and interest, for unrecognized state income tax benefits net of federal taxes, and recorded this as a cumulative adjustment to our beginning retained earnings atOctober 1, 2007 . We recorded an additional$380,000 uncertain tax position in fiscal 2008, and reversed it in fiscal 2009 due to a change in accounting method for tax purposes. We recognize interest and penalties related to unrecognized tax benefits as federal income tax expense on our statement of operations. Below is a reconciliation of the beginning and ending unrecognized tax benefits for the periods since adoption of FASB ASC 740-10-25 (in thousands): Unrecognized tax benefits at September 30, 2008 $ 486 Reduction based on prior year tax positions (380 ) Additions based on current year tax positions - Reductions based on settlements with taxing authorities - Reductions due to lapse in statute of limitations - Unrecognized tax benefits at September 30, 2009 106 Reduction based on prior year tax positions - Additions based on current year tax positions - Reductions based on settlements with taxing authorities - Reductions due to lapse in statute of limitations (55 ) Unrecognized tax benefits at September 30, 2010 51 Reduction based on prior year tax positions - Additions based on current year tax positions - Reductions based on settlements with taxing authorities - Reductions due to lapse in statute of limitations (51 ) Unrecognized tax benefits at September 30, 2011 $ - We are subject to U.S., Mexican, and Canadian income taxes as well as to income taxes levied by various state and local jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years before the tax year endedSeptember 30, 2007 . Note K: Related Party Transactions EffectiveOctober 1, 2010 , 2009 and 2008, we entered one-year financial advisory services agreements withMadison Park, LLC , a business and financial advisory firm wholly-owned byPhillip E. Cohen , the beneficial owner of all of our outstanding Class B Common Stock. Either party could terminate the agreements at any time on thirty days written notice, but neither party elected to do so. The agreements required Madison Park to provide advice on our business and long-term strategic plan, including acquisitions and strategic alliances, operating and strategic objectives, investor relations, relations with investment bankers and other members of the financial services industry, international business development and strategic investment opportunities, and financial matters. The monthly fee for the services was$400,000 in fiscal 2011,$300,000 in fiscal 2010 and$200,000 in fiscal 2009. Total payments to Madison Park were$4.8 million in fiscal 2011,$3.6 million in fiscal 2010 and$2.4 million in fiscal 2009. EffectiveOctober 1, 2011 , we entered into a new financial advisory services agreement with Madison Park with a one-year term that expiresSeptember 30, 2012 . The terms of the agreement are substantially the same as those in the fiscal 2011 agreement described above, except the monthly fee is$500,000 . Prior to approval of the Madison Park agreement and pursuant to our Policy for Review and Evaluation of Related Party Transactions, the Audit Committee of our Board of Directors implemented measures designed to ensure that the advisory services agreement with Madison Park was considered, analyzed, negotiated and approved objectively. Those measures 71--------------------------------------------------------------------------------
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included the engagement of an independent financial advisory firm to counsel and advise the committee in the course of its consideration and evaluation of the Madison Park relationship and the proposed terms of the new advisory services agreement and the receipt of a fairness opinion with respect to the fee to be paid to Madison Park. After consideration and discussion of a number of factors, the information and fairness opinion provided by its independent financial advisory firm, and the relationships and the interests ofMr. Cohen , the Audit Committee concluded that the advisory services agreement was fair to, and in the best interests of, the company and its stockholders and, on that basis, approved the engagement of Madison Park pursuant to the advisory services agreement. Note L: Leases We lease various facilities and certain equipment under operating leases. We also sublease some of the above facilities. Future minimum rentals due under non-cancelable leases and annual future minimum rentals expected under subleases are as follows: Fiscal Years Ended September 30, Lease Sublease Payments Revenue (In thousands) 2012 $ 45,181 $ 226 2013 39,243 161 2014 30,001 111 2015 22,171 12 2016 13,874 - Thereafter 19,731 - $ 170,201 $ 510 After an initial lease term of generally three to ten years, our lease agreements typically allow renewals in three to five-year increments. Our lease agreements generally include rent escalations throughout the initial lease term. Rent escalations are included in the above numbers. For financial reporting purposes, the aggregate rentals over the lease term, including lease renewal options that are reasonably assured, are expensed on a straight-line basis. Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Gross rent expense $ 46,710 $ 39,394 $ 35,005 Sublease rent revenue (141 ) (132 ) (81 ) Net rent expense $ 46,569 $ 39,262 $ 34,924 Prior to fiscal 2008, we completed several sale-leaseback transactions of previously owned facilities. Losses on sales were recognized immediately, and gains were deferred and are being amortized as a reduction of lease expense over the terms of the related leases. The remaining unamortized long-term portion of these deferred gains, amounting to$2.1 million atSeptember 30, 2011 , is included in "Deferred gains and other long-term liabilities" in our consolidated balance sheet. The short-term portion, included in "Accounts payable and other accrued expenses" was$0.4 million atSeptember 30, 2011 . Future rentals on these sale-leasebacks are included in the above schedule of future minimum rentals. Terms of these leases are consistent with the terms on our other lease agreements. Note M: Employment Agreements EffectiveJanuary 1, 2009 , we entered into an Employment and Compensation Agreement withJoseph L. Rotunda , who was our Chief Executive Officer at the time. That agreement expired onOctober 8, 2010 , andMr. Rotunda retired from his positions as Chief Executive Officer and a member of the Board of Directors onOctober 31, 2010 . The agreement providedMr. Rotunda with certain severance and termination benefits if he served the full term of the agreement (throughOctober 8, 2010 ). These benefits included (1) a cash payment in an amount equal to one year's base salary plus his most recent annual incentive bonus award (total of approximately$3.4 million , payable onJanuary 7, 2011 ) and (2) a five-year consulting 72--------------------------------------------------------------------------------
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agreement that provides for the following: an annual consulting fee of$500,000 ; an annual incentive bonus with a target amount equal to 50% of the annual fee and a maximum amount equal to 100% of the annual fee; and reimbursement of reasonable business expenses. The company has also agreed to continue the healthcare benefits forMr. Rotunda during the term of the consulting agreement. If the consulting agreement is terminated by reason ofMr. Rotunda's death or disability, he will be entitled to payment of an amount equal to one year's annual consulting fee plus one year of incentive bonus (calculated at the target amount) and continuation of healthcare benefits forMr. Rotunda and/or his spouse (as applicable) for one year. In addition, if the company terminates the consulting agreement (other than due to a material breach byMr. Rotunda ) orMr. Rotunda terminates the consulting agreement because of a material breach by the company, then the company will payMr. Rotunda an amount of cash equal to all annual consulting fees that would have been payable toMr. Rotunda had the agreement continued until the expiration of the five-year term, plus an additional$500,000 in lieu of subsequent annual incentive bonuses, and shall continue to provide the healthcare benefits forMr. Rotunda until the expiration of the five-year term. OnOctober 8, 2010 , the Board of Directors, acting pursuant to the terms of the applicable restricted stock award agreement and with the recommendation of the Compensation Committee, determined thatMr. Rotunda had satisfied the specified conditions for the accelerated vesting of all his unvested restricted stock (having served the full term of his employment agreement and successfully implemented a transition plan to a new Chief Executive Officer) and approved the vesting of the remaining 756,000 unvested shares onOctober 31, 2010 , the effective date ofMr. Rotunda's retirement. OnAugust 3, 2009 , we entered into an employment agreement withPaul E. Rothamel , who became President inFebruary 2010 and Chief Executive Officer onNovember 1, 2010 . The agreement provides for certain benefits (principally, a payment equal to one year of then-current base salary) if (a)Mr. Rothamel terminates his employment for good reason (including a change in control), (b) we terminateMr. Rothamel's employment without cause, or (c) Mr. Rothamel dies or becomes totally and permanently disabled during his active employment.Mr. Rothamel is subject to confidentiality obligations and, for a period of two years following the termination of his employment, is prohibited from competing with us, soliciting our customers or soliciting our employees. The agreement had an initial term of two years, which expired onAugust 3, 2011 , but under its terms, has been renewed for an additional one-year term and will continue to be renewed for successive one-year terms unless either party gives 90-days' notice to terminate. The company provides the following additional severance or change-in-control benefits to its executive officers: • The terms of employment for certain of our executive officers provide that theexecutive officer will receive salary continuation for one year if his or her
employment is terminated by the company without cause.
•
Sterling B. Brinkley , Chairman of the Board, received a restricted stock awardon
October 2, 2006 that provides for accelerated vesting of some or all of theunvested shares under certain circumstances, including death or disability,
failure to be re-elected to his current position or termination of employment
without cause.
• Generally, restricted stock awards, including those granted to the executive
officers, provide for accelerated vesting of some or all of the unvested
shares in the event of the holder's death or disability.
Note N: Retirement Plans We sponsor a 401(k) retirement savings plan under which eligible employees may contribute a portion of pre-tax earnings. In our sole discretion, we may match employee contributions in the form of our Class A Common Stock. A participant vests in the matching contributions pro rata over their first four years of service and is 100% vested in all matching contributions after four years of service. The following table presents matching contribution information to our 401(k) Plan: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Matching contributions to EZCORP 401(k) Plan $ 377 $ 260 $ 178 Matching contributions toValue Financial Services 401(k) Plan - - 97 Total Matching contributions $ 377 $ 260 $ 275 73--------------------------------------------------------------------------------
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We also provide a non-qualified Supplemental Executive Retirement Plan for selected executives. Funds in the Supplemental Executive Retirement Plan vest over three years from the grant date, with one-third vesting each year. All of a participant's Supplemental Executive Retirement Plan funds from all grants vest 100% in the event of the participant's death or disability or the termination of the plan due to a change in control. In addition, the Supplemental Executive Retirement Plan funds are 100% vested when a participant attains his or her normal retirement age (60 years old and five years of active service) while actively employed by us. Expense of contributions to the Supplemental Executive Retirement Plan is recognized based on the vesting schedule. The following table provides contribution and amortized expense amounts related to the Supplemental Executive Retirement Plan: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Contributions to the Supplemental Executive Retirement Plan $ 701 $ 746 $ 579 Amortized expense due to Supplemental Executive Retirement Plan $ 526 $ 562 $ 463 Note O: Contingencies Currently and from time to time, we are defendants in various legal and regulatory actions. While we cannot determine the ultimate outcome of these actions, we believe their resolution will not have a material adverse effect on our financial condition, results of operations or liquidity. However, we cannot give any assurance as to their ultimate outcome. Note P: Quarterly Information (Unaudited) First QuarterSecond Quarter Third Quarter Fourth Quarter
(In thousands, except per share amounts) Year EndedSeptember 30, 2011 Total revenues $ 218,826 $ 213,254 $ 203,152 $ 234,085 Net revenues 134,232 130,950 122,997 146,759 Net income 27,429 31,838 26,527 36,365 Earnings per common share: Basic $ 0.55 $ 0.64 $ 0.53 $ 0.73 Diluted $ 0.55 $ 0.63 $ 0.53 $ 0.72 Year EndedSeptember 30, 2010 Total revenues $ 184,751 $ 176,584 $ 173,542 $ 198,168 Net revenues 112,931 109,705 104,804 120,039 Net income 25,707 23,773 19,962 27,852 Earnings per common share: Basic $ 0.53 $ 0.49 $ 0.41 $ 0.57 Diluted $ 0.52 $ 0.48 $ 0.40 $ 0.56 Note Q: Comprehensive Income The table below presents the tax benefit (provision) of each component of comprehensive income: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Foreign currency translation tax benefit / (provision) $ (5,369 ) $ 1,918 $ 1,598 Available for sale securities tax benefit / (provision) (325 ) - - Total tax benefit / (provision) $ (5,694 ) $ 1,918 $ 1,598 74--------------------------------------------------------------------------------
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Note R: Operating Segment Information We manage our business and internal reporting as three reportable segments with operating results reported separately for each segment.• The U.S. Pawn Operations segment offers pawn related activities in our 433
U.S. pawn stores, offers signature loans in 43 pawn stores and six EZMONEY
stores and offers auto title loans in 44 pawn stores.
• The Empeño Fácil segment offers pawn related activities in 178 Mexico pawn
stores.
• The EZMONEY Operations segment offers signature loans in 430 U.S. and 64
Canadian financial services stores. The segment offers auto title loans in
397 of its U.S. stores and buys and sells second-hand goods 15 of its Canadian stores. There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our consolidated financial statements. The following tables present operating segment information: U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated (In thousands) Year EndedSeptember 30, 2011 : Revenues: Merchandise Sales $ 256,643 $ 25,237 $ 203 $ 282,083 Jewelry Scrapping Sales 195,276 15,997 1,206 212,479 Pawn service charges 184,234 16,901 - 201,135 Signature loan fees 2,501 - 147,749 150,250 Auto title loan fees 1,539 - 20,162 21,701 Other 634 122 913 1,669 Total revenues 640,827 58,257 170,233 869,317 Merchandise cost of goods sold 147,239 14,672 149 162,060 Jewelry scrapping cost of goods sold 120,767 12,205 588 133,560 Signature loan bad debt 923 - 35,405 36,328 Auto title loan bad debt 165 - 2,266 2,431 Net revenues 371,733 31,380 131,825 534,938 Operations expense 177,191 20,636 69,225 267,052 Store operating income $ 194,542 $ 10,744 $ 62,600 $ 267,886 75--------------------------------------------------------------------------------
Table of Contents U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated (In thousands) Year EndedSeptember 30, 2010 : Revenues: Merchandise Sales $ 226,424 $ 14,030 $ - $ 240,454 Jewelry scrapping Sales 163,667 7,389 355 171,411 Pawn service charges 154,505 9,190 - 163,695 Signature loan fees 1,930 - 137,385 139,315 Auto title loan fees 1,659 - 16,048 17,707 Other 442 - 21 463 Total revenues 548,627 30,609 153,809 733,045 Merchandise cost of goods sold 131,825 8,459 - 140,284 Jewelry scrapping cost of goods sold 104,531 6,137 170 110,838 Signature loan bad debt 641 - 31,068 31,709 Auto title loan bad debt 236 - 2,499 2,735 Net revenues 311,394 16,013 120,072 447,479 Operations expense 161,145 11,658 63,861 236,664 Store operating income $ 150,249 $ 4,355 $ 56,211 $ 210,815 Year EndedSeptember 30, 2009 : Revenues: Merchandise Sales $ 202,250 $ 8,751 $ - $ 211,001 Jewelry scrap Sales 117,013 1,900 9 118,922 Pawn service charges 124,396 5,773 - 130,169 Signature loan fees 2,293 - 131,051 133,344 Auto title loan fees 1,313 - 2,276 3,589 Other 431 - - 431 Total revenues 447,696 16,424 133,336 597,456 Merchandise cost of goods sold 121,170 5,392 - 126,562 Jewelry scraping cost of goods sold 75,744 1,277 6 77,027 Signature loan bad debt 828 - 32,725 33,553 Auto title loan bad debt 124 - 256 380 Net revenues 249,830 9,755 100,349 359,934 Operations expense 140,525 5,833 59,879 206,237 Store operating income $ 109,305 $ 3,922 $ 40,470 $ 153,697The following table reconciles store operating income, as shown above, to our consolidated income before income taxes:
FiscalYears Ended September 30,
2011 2010 2009 (In thousands) Consolidated store operating income $ 267,886 $ 210,815 $ 153,697 Administrative expenses 75,270 52,740 40,497 Depreciation and amortization 18,344 14,661 12,746 (Gain) / loss on sale or disposal of assets 309 1,528 (1,024 ) Interest income (37 ) (186 ) (281 ) Interest expense 1,690 1,385 1,425 Equity in net income of unconsolidated affiliates (16,237 ) (10,750 ) (5,016 ) Other (164 ) (93 ) 38 Consolidated income before income taxes $ 188,711 $ 151,530 $ 105,312 76--------------------------------------------------------------------------------
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The following table presents separately identified segment assets:
U.S. Pawn Empeño EZMONEY Operations Fácil Operations Consolidated (In thousands) Assets atSeptember 30, 2011 : Pawn loans $ 134,457 $ 10,861 $ - $ 145,318 Signature loans, net 990 - 10,399 11,389 Auto title loans, net 930 - 2,292 3,222 Service charges and fees receivable, net 25,148 1,663 6,419 33,230 Inventory, net 81,257 8,514 602 90,373 Goodwill 163,897 9,309 - 173,206 Total separately identified recorded segment assets $ 406,679 $ 30,347
$ 19,712 $ 456,738Brokered signature loans outstanding from unaffiliated lenders $ 206 $ - $ 20,767 $ 20,973 Brokered auto title loans outstanding from unaffiliated lenders $ 175 $ - $ 5,892 $ 6,067 Assets atSeptember 30, 2010 : Pawn loans $ 113,944 $ 7,257 $ - $ 121,201 Signature loans, net 456 - 10,319 10,775 Auto title loans, net 651 - 2,494 3,145 Service charges and fees receivable, net 20,830 1,053 7,177 29,060 Inventory, net 66,542 4,935 25 71,502 Goodwill 110,255 7,050 - 117,305 Total separately identified recorded segment assets $ 312,678 $ 20,295
$ 20,015 $ 352,988Brokered signature loans outstanding from unaffiliated lenders $ 231 $ - $ 22,709 $ 22,940 Brokered auto title loans outstanding from unaffiliated lenders $ 236 $ - $ 6,589 $ 6,825 Assets atSeptember 30, 2009 : Pawn loans $ 98,099 $ 3,585 $ - $ 101,684 Signature loans, net 453 - 7,904 8,357 Auto title loans, net 685 - 978 1,663 Service charges and fees receivable, net 17,910 513 5,892 24,315 Inventory, net 61,196 2,804 1 64,001 Goodwill 94,192 6,527 - 100,719 Total separately identified recorded segment assets $ 272,535 $ 13,429
$ 14,775 $ 300,739Brokered signature loans outstanding from unaffiliated lenders $ 278 $ - $ 22,706 $ 22,984 Brokered auto title loans outstanding from unaffiliated lenders $ 276 $ -$ 1,910 $ 2,186
Brokered loans are not recorded as an asset on our balance sheet, as we do not own a participation in the loans made by unaffiliated lenders. We monitor the principal balance of these loans, as our credit service fees and bad debt are directly related to their volume due to the letters of credit we issue on these loans. The balance shown above is the gross principal balance of the loans outstanding. The following table reconciles separately identified recorded segment assets, as shown above, to our consolidated total assets: September 30, 2011 2010 2009 (In thousands) Total separately identified recorded segment assets $ 456,738 $ 352,988 $ 300,739 Corporate assets 299,712 253,424 191,778 Total assets $ 756,450 $ 606,412 $ 492,517 77--------------------------------------------------------------------------------
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Note S: Allowance for Losses and Credit Quality of Financing Receivables We offer a variety of loan products and credit services to customers who do not have cash resources or access to credit to meet their short-term cash needs. Our customers are considered to be in a higher risk pool with regard to creditworthiness when compared to those of typical financial institutions. As a result, our receivables do not have a credit risk profile that can easily be measured by the normal credit quality indicators used by the financial markets. We manage the risk through closely monitoring the performance of the portfolio and through our underwriting process. This process includes review of customer information, such as making a credit reporting agency inquiry, evaluating and verifying income sources and levels, verifying employment and verifying a telephone number where customers may be contacted. For auto title loans, we additionally inspect the automobile, title and reference to market values of used automobiles. As described in Note A, "Significant Accounting Policies," we consider a signature loan defaulted if it has not been repaid or renewed by the maturity date. If one payment of an installment loan is delinquent, that one payment is considered defaulted. If more than one installment payment is delinquent at any time, the entire installment loan is considered defaulted. Although defaulted loans may be collected later, we charge the loan principal to signature loan bad debt upon default, leaving only active loans in the reported balance. Accrued fees related to defaulted loans reduce fee revenue upon loan default, and increase fee revenue upon collection. Based on historical collection experience, the age of past-due loans and amounts we expect to receive through the sale of repossessed vehicles, we provide an allowance for losses on auto title loans. The accuracy of our allowance estimates is dependent upon several factors, including our ability to predict future default rates based on historical trends and expected future events. We base our estimates on observable trends and various other assumptions that we believe to be reasonable under the circumstances. The following table presents changes in the allowance for credit losses as well as the recorded investment in our financing receivables by portfolio segment for the periods presented (in thousands): Allowance Allowance Financing Balance at Balance at Receivable Beginning End of End of Description of Period Charge-offsRecoveries Provision Period Period Allowance for losses on signature loans: Year ended
September 30, 2011 $ 750 $ (18,043 )$ 6,349
$ 12,671 $ 1,727 $ 13,116 Year endedSeptember 30, 2010 532 (14,807 ) 5,757 9,268 750 11,525 Year ended September 30, 2009 580 (14,456 ) 5,571 8,837 532 8,889 Allowance for losses on auto title loans: Year ended September 30, 2011 $ 1,137 $ (12,616 )
$ 10,074 $ 1,943 $ 538$ 3,760 Year endedSeptember 30, 2010 291 (9,240 ) 7,425 2,661 1,137 4,282 Year ended September 30, 2009 - (2,478 ) 2,387 382 291 1,954 The provision presented in the table above includes only principal and excludes items such as NSF fees, late fees, repossession fees, auction fees and interest. In addition, all credit service expenses and fees related to loans made by our unaffiliated lenders are excluded, as we do not own the loans made in connection with our credit services and they are not recorded as assets on our balance sheet. Expected losses on credit services are accrued and reported in "Accounts payable and other accrued expenses" on our balance sheets. Auto title loans are our only loans that remain as recorded investments when in delinquent/nonaccrual status. We consider an auto title loan past due if it has not been repaid or renewed by the maturity date. Based on experience, we establish a reserve on all auto title loans. On auto title loans more than 90 days past due, we reserve the percentage we estimate will not be recoverable through auction and reserve 100% of loans for which we have not yet repossessed the underlying collateral. No fees are accrued on any auto title loans more than 90 days past due. 78--------------------------------------------------------------------------------
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The following table presents an aging analysis of past due financing receivables by portfolio segment: Recorded Investment Days Past Due Current Total Financing > 90 Days & 1-30 31-60 61-90 >90 Total Past Due Receivable Receivable AccruingSeptember 30, 2011 Auto title loans $ 840 $ 479 $ 283 $ 219 $ 1,821 $ 1,939 $ 3,760 $ - Reserve $ 117 $ 114 $ 67 $ 172 $ 470 $ 68 $ 538 $ - Reserve % 14 % 24 % 24 % 79 % 26 % 4 % 14 % - September 30, 2010 Auto title loans $ 796 $ 552 $ 432 $ 532 $ 2,312 $ 1,970 $ 4,282 $ - Reserve $ 188 $ 229 $ 256 $ 367 $ 1,040 $ 97 $ 1,137 $ - Reserve % 24 % 41 % 59 % 69 % 45 % 5 % 27 % -Note T: Supplemental Consolidated Financial Information Supplemental Consolidated Statements of Financial Position Information The following table provides information on amounts included in accounts receivable, net and inventories, net:
September 30, 2011 2010 (In thousands)Pawn service charges receivable:
Gross pawn service charges receivable$ 37,175
$ 31,575 Allowance for uncollectible pawn service charges receivable (10,720 )
(9,949 )
Pawn service charges receivable, net$ 26,455
$ 21,626 Signature loan fees receivable:
Gross signature loan fees receivable $ 5,839$ 6,144
Allowance for uncollectible signature loan fees receivable (491 )
(326 )
Signature loan fees receivable, net $ 5,348
$ 5,818 Auto title loan fees receivable:
Gross auto title loan fees receivable $ 1,507
$ 1,721 Allowance for uncollectible auto title loan fees receivable (80 )
(105 )
Auto title loan fees receivable, net $ 1,427 $ 1,616 Inventory: Inventory, gross Inventory reserves $ 99,854 $ 77,211 Inventory, net (9,481 ) (5,709 ) $ 90,373 $ 71,502 Supplemental Consolidated Statements of Income The table below provides advertising expense for periods presented. Advertising costs are included in administrative expenses in the Consolidated Statements of Income: Fiscal Years Ended September 30, 2011 2010 2009 (In thousands) Advertising Expense $ 3,577 $ 2,205 $ 2,033 79--------------------------------------------------------------------------------
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Other Supplemental Information
September 30, 2011 2010 (In thousands) Signature Loans: Expected LOC losses $ 1,562 $ 1,337 Maximum exposure for LOC losses $ 23,845 $ 24,449 Auto title loans: Expected LOC losses $ 233 $ 362 Maximum exposure for LOC losses $ 6,423 $ 7,197Valuation and Qualifying Accounts
Balance at Additions Balance at Beginning Charged to Charged to End Description of Period Expense Other Accts Deductions of Period (In thousands) Allowance for valuation of inventory: Year ended September 30, 2011 $ 5,709 $ 3,772 $ - $ - $ 9,481 Year ended September 30, 2010 $ 5,719 $ - $ - $ 10 $ 5,709 Year ended September 30, 2009 $ 4,028 $ 1,691 $ - $ - $ 5,719 Allowance for uncollectible pawn service charges receivable: Year ended September 30, 2011 $ 9,949 $ - $ 771 $ - $ 10,720 Year ended September 30, 2010 $ 8,521 $ - $ 1,428 $ - $ 9,949 Year ended September 30, 2009 $ 5,315 $ - $ 3,206 $ - $ 8,521 Allowance for uncollectible signature loan fees receivable: Year ended September 30, 2011 $ 326 $ -$ 165 $ - $ 491
Year ended
September 30, 2010 $ 461 $ -$ (135 ) $ - $ 326
Year ended
September 30, 2009 $ 581 $ -$ (120 ) $ - $ 461 Allowance for valuation of deferred tax assets: Year ended September 30, 2011 $ 1,273 $ 152$ - $ - $ 1,425
Year ended
September 30, 2010 $ - $ 1,273$ - $ - $ 1,273
Year ended
September 30, 2009 $ 233 $ -$ - $ 233 $ - Allowance for uncollectible auto title loan fees receivable: Year ended September 30, 2011 $ 105 $ -$ (25 ) $ - $ 80
Year ended
September 30, 2010 $ 21 $ -$ 84 $ - $ 105
Year ended
September 30, 2009 $ - $ -$ 21 $ - $ 21 Note U: Subsequent Events Acquisitions Since the end of our fiscal year, we acquired 17 pawn stores located inFlorida and the greaterSan Antonio, Texas metropolitan area and eight Cash Converters locations located inPennsylvania ,Virginia andOntario, Canada , for consideration of approximately$49.2 million . The consideration was comprised of$48.2 million cash and approximately$1.0 million related to the issuance of 33,011 shares of EZCORP Class A Non-voting Common Stock. The purchase price allocation for these acquisitions is incomplete as we continue to receive information regarding the acquired assets. As a result, we are unable to provide at this time a breakout between net tangible assets, intangible assets and goodwill. 80--------------------------------------------------------------------------------
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PROTECTIVE LIFE INSURANCE CO FILES (8-K) Disclosing Entry into a Material Definitive Agreement, Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant
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