EZCORP INC - Quarter Report: 2008 December (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended December 31, 2008		Commission File No. 000-19424

EZCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware		74-2540145
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1901 Capital Parkway
Austin, Texas 78746
(Address of principal executive offices)
Registrant’s telephone number: (512) 314-3400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

The only class of voting securities of the registrant issued and outstanding is the Class B Voting Common Stock, par value $.01 per share, all of which is owned by one record holder who is an affiliate of the registrant. There is no trading market for the Class B Voting Common Stock.

As of December 31, 2008, 45,447,188 shares of the registrant’s Class A Non-voting Common Stock, par value $.01 per share and 2,970,171 shares of the registrant’s Class B Voting Common Stock, par value $.01 per share were outstanding.

 

 

EZCORP, INC.
INDEX TO FORM 10-Q

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2008, December 31, 2007 and September 30, 2008 (audited)			1
Condensed Consolidated Statements of Operations for the Three Months Ended December 31, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2008 and 2007			3
Notes to Interim Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			30
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			33
SIGNATURE			34
EXHIBIT INDEX			35
CERTIFICATIONS
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I

Condensed Consolidated Balance Sheets

		December 31,				December 31,				September 30,
		2008				2007				2008
		(Unaudited)				(Unaudited)
		(In thousands)
Assets:
Current assets:
Cash and cash equivalents		$	41,595			$	13,651			$	27,444
Pawn loans			93,789				63,270				75,936
Payday loans, net			8,246				6,169				7,124
Auto title loans, net			1,174				—				1
Pawn service charges receivable, net			16,888				10,710				12,755
Signature loan fees receivable, net			5,968				7,217				5,406
Auto title loan fees receivable, net			92				—				—
Inventory, net			64,563				41,788				43,209
Deferred tax asset, net			15,773				9,005				10,926
Prepaid expenses and other assets			12,284				8,121				9,115
Total current assets			260,372				159,931				191,916
Investment in unconsolidated affiliate			37,873				37,294				38,439
Property and equipment, net			46,674				37,308				40,079
Deferred tax asset, non-current			7,754				5,023				8,139
Goodwill			98,300				24,591				24,376
Other assets, net			18,693				5,089				5,771
Total assets		$	469,666			$	269,236			$	308,720
Liabilities and stockholders’ equity:
Current liabilities:
Current maturities of long-term debt		$	10,000			$	—			$	—
Accounts payable and other accrued expenses			48,534				25,164				29,425
Customer layaway deposits			2,879				2,144				2,327
Federal income taxes payable			3,186				9,063				246
Total current liabilities			64,599				36,371				31,998
Long-term debt, less current maturities			30,337				—				—
Deferred gains and other long-term liabilities			3,566				3,096				3,672
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, par value $.01 per share; 5 million shares authorized in 2007, none authorized in 2008; none issued and outstanding in 2007 and 2008			—				—				—
Class A Non-voting Common Stock, par value $.01 per share; Authorized 54 million shares; 45,457,188 issued and 45,447,188 outstanding at December 31, 2008; 38,399,709 issued and 38,372,610 outstanding at December 31, 2007; 38,564,331 issued and 38,554,331 outstanding at September 30, 2008			451				384				386
Class B Voting Common Stock, convertible, par value $.01 per share; 3 million shares authorized; 2,970,171 issued and outstanding			30				30				30
Additional paid-in capital			224,914				132,103				135,895
Retained earnings			148,998				94,296				134,170
Treasury stock, at cost; 30,000 shares in 2007; 10,000 shares in 2008			(12	)			(35	)			(12	)
Accumulated other comprehensive income (loss)			(3,217	)			2,991				2,581
Total stockholders’ equity			371,164				229,769				273,050
Total liabilities and stockholders’ equity		$	469,666			$	269,236			$	308,720

See Notes to Interim Condensed Consolidated Financial Statements (unaudited).

Condensed Consolidated Statements of Operations (Unaudited)

		Three Months Ended
		December 31,
		2008				2007
		(In thousands, except per share amounts)
Revenues:
Sales		$	64,580			$	55,507
Pawn service charges			26,381				22,908
Signature loan fees			36,000				33,528
Auto title loan fees			221				—
Other			1,433				363
Total revenues			128,615				112,306
Cost of goods sold			40,425				33,541
Signature loan bad debt			9,484				9,670
Auto title loan bad debt			7				—
Net revenues			78,699				69,095
Operating expenses:
Operations			43,494				38,536
Administrative			10,411				8,440
Depreciation and amortization			3,066				2,827
(Gain) loss on sale/disposal of assets			(284	)			162
Total operating expenses			56,687				49,965
Operating income			22,012				19,130
Interest income			(126	)			(57	)
Interest expense			165				81
Equity in net income of unconsolidated affiliate			(941	)			(1,047	)
Other			25				—
Income before income taxes			22,889				20,153
Income tax expense			8,061				7,598
Net income		$	14,828			$	12,555
Net income per common share:
Basic		$	0.34			$	0.30
Diluted		$	0.33			$	0.29
Weighted average shares outstanding:
Basic			43,661				41,339
Diluted			44,692				43,273

See Notes to Interim Condensed Consolidated Financial Statements (unaudited).

Condensed Consolidated Statements of Cash Flows (Unaudited)

		Three Months Ended
		December 31,
		2008				2007
		(In thousands)
Operating Activities:
Net income		$	14,828			$	12,555
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,066				2,827
Payday loan loss provision			2,684				2,084
Auto title loan loss provision			7				—
Deferred taxes			1,239				(259	)
Net (gain)/ loss on sale or disposal of assets			(284	)			162
Share-based compensation			1,059				856
Income from investment in unconsolidated affiliate			(941	)			(1,047	)
Changes in operating assets and liabilities, net of business acquisitions:
Service charges and fees receivable, net			(84	)			(1,598	)
Inventory, net			(819	)			(467	)
Prepaid expenses, other current assets, and other assets, net			(995	)			(2,089	)
Accounts payable and accrued expenses			(389	)			(461	)
Customer layaway deposits			(435	)			91
Deferred gains and other long-term liabilities			(43	)			210
Excess tax benefit from stock-based compensation			(1,639	)			(67	)
Federal income taxes			4,606				4,229
Net cash provided by operating activities			21,860				17,026
Investing Activities:
Pawn loans made			(65,680	)			(60,251	)
Pawn loans repaid			35,488				31,049
Recovery of pawn loan principal through sale of forfeited collateral			32,732				27,442
Payday loans made			(26,800	)			(18,437	)
Payday loans repaid			23,049				14,998
Auto title loans made			(312	)			—
Auto title loans repaid			235				—
Acquisitions, net of cash acquired			(17,064	)			(15,344	)
Additions to property and equipment			(4,197	)			(5,500	)
Investment in unconsolidated affiliate			—				(15	)
Net cash used in investing activities			(22,549	)			(26,058	)
Financing Activities:
Proceeds from exercise of stock options and warrants			4,580				83
Stock issuance costs related to acquisitions			(273	)			—
Excess tax benefit from stock-based compensation			1,639				67
Debt issuance costs			(1,058	)			—
Proceeds from bank borrowings			40,000				—
Payments on bank borrowings			(30,048	)			—
Net cash provided by financing activities			14,840				150
Change in cash and equivalents			14,151				(8,882	)
Cash and equivalents at beginning of period			27,444				22,533
Cash and equivalents at end of period		$	41,595			$	13,651
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory		$	35,278			$	29,887
Foreign currency translation adjustment		$	5,798			$	(389	)
Cumulative effect of adopting a new accounting principle		$	—			$	106
Acquisition-related stock issuance		$	82,080			$	—

See Notes to Interim Condensed Consolidated Financial Statements (unaudited).

EZCORP, Inc. and Subsidiaries

Note A: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Our management has included all adjustments it considers necessary for a fair presentation. These adjustments are of a normal, recurring nature except for those related to acquired businesses (described in Note C). The accompanying financial statements should be read with the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended September 30, 2008. The balance sheet at September 30, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Certain prior period balances have been reclassified to conform to the current presentation.

Our business is subject to seasonal variations, and operating results for the three-month period ended December 31, 2008 (the “current quarter”) are not necessarily indicative of the results of operations for the full fiscal year.

Note B: Significant Accounting Policies

CONSOLIDATION: The consolidated financial statements include the accounts of EZCORP, Inc. and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. We account for our interest in Albemarle & Bond Holdings, plc (“A&B”) 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 to three 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 (net realizable value) of the property. We record sales revenue and the related cost when this inventory is sold. 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 liabilities” on our balance sheets until remitted to the appropriate governmental authorities.

CREDIT SERVICE REVENUE RECOGNITION: We earn credit service fees when we assist customers in obtaining 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. Credit service revenue is included in “Signature loan fees” on our statements of operations.

CREDIT SERVICE BAD DEBT: We issue letters of credit to enhance the creditworthiness of our credit service customers seeking 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 them by the borrowers plus any insufficient funds fee. 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. We account for the sale of defaulted accounts in the same manner as internal collections of defaulted accounts.

The majority of our credit service customers obtain short-term loans with a single maturity date. These short-term loans, with maturity dates averaging about 18 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 five-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.

CREDIT SERVICE ALLOWANCE FOR LOSSES: We also provide an allowance for losses we expect to incur under letters of credit for 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 (“Expected LOC Losses”). Changes in the allowance are charged to signature loan bad debt expense. We include the balance of Expected LOC Losses in “Accounts payable and other accrued expenses” on our balance sheets. At December 31, 2008, the allowance for Expected LOC Losses was $2.0 million. At that date, our maximum exposure for losses on letters of credit, if all brokered loans defaulted and none was collected, was $26.9 million. This amount includes principal, interest, and insufficient funds fees. Based on the expected loss and collection percentages, we also provide an allowance for the credit service fees we expect not to collect, and charge changes in this allowance to signature loan fee revenue.

PAYDAY LOAN REVENUE RECOGNITION: We accrue fees in accordance with state laws on the percentage of payday loans we believe to be collectible. Accrued fees related to defaulted loans reduce fee revenue upon loan default, and increase fee revenue upon collection. Payday loan fee revenue is included in “Signature loan fees” on our statements of operations.

PAYDAY LOAN BAD DEBT: We consider a loan defaulted if it has not been repaid or renewed by the maturity date. 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. We account for the sale of defaulted accounts in the same manner as internal collections of defaulted accounts.

PAYDAY LOAN ALLOWANCE FOR LOSSES: We also provide an allowance for losses on payday 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.

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. In order to state inventory at the lower of cost (specific identification) or market (net realizable value), we record an allowance for shrinkage and excess, obsolete, or slow-moving inventory. The allowance is based on the type and age of merchandise and recent sales trends and margins. At December 31, 2008, the inventory valuation allowance was $5.2 million, or 7.5% of gross inventory. We record changes in the inventory valuation allowance as cost of goods sold.

INTANGIBLE ASSETS: Goodwill and other intangible assets having indefinite lives are not subject to amortization. They are tested for impairment each July 1^st, or more frequently if events or changes in circumstances indicate that they might be impaired. We recognized no impairment of our intangible assets in the current or prior year quarter. 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 8 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. Property and equipment is shown net of accumulated depreciation of $114.1 million at December 31, 2008.

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; or significant negative industry trends. 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. No impairment of tangible long-lived assets was recognized in the current or prior year quarter.

FOREIGN CURRENCY TRANSLATION: Our equity investment in A&B is translated from the U.K. pound into U.S. dollars at the exchange rate as of A&B’s balance sheet date. The related interest in A&B’s net income is translated at the average exchange rate for each six-month period reported by A&B. The functional currency of our wholly-owned Empeño Fácil Mexican pawn operations is the Mexican peso. Empeño Fácil’s balance sheet accounts are translated into U.S. dollars at the prevailing exchange rate at the end of each quarter, and its earnings are translated into U.S. dollars at the average exchange rate each quarter. We present resulting translation adjustments from A&B and Empeño Fácil 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.

INCOME TAXES: We calculate the provision for federal income taxes based on our estimate of the effective tax rate for the full fiscal year. As part of the process of preparing the consolidated financial statements, we estimate income taxes in each jurisdiction in which we operate. This involves estimating the actual current tax liability and assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets and liabilities that we include in our balance sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income. If we determined we would not be able to realize all or part of our net deferred tax assets in the future, an increase to the valuation allowance would be charged to the income tax provision in that period. Likewise, if we determined we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, a decrease to the valuation allowance would decrease the tax provision in that period. We assess the need for a deferred tax asset valuation allowance quarterly. Our valuation allowance was $0.2 million at December 31, 2008 and September 30, 2008, compared to $0.4 million at December 31, 2007. As a result of a taxable gain on the sale of property, we reduced the valuation allowance in the fourth quarter of fiscal 2008 due to the utilization of a capital loss carry-forward that we previously reserved. We account for uncertainty in income taxes in accordance with Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).

SHARE-BASED COMPENSATION: We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123(R), “Share-based Payment.” We 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 straight-line basis over the options’ vesting periods. 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.

SEGMENTS: We account for our operations in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” We manage our business operations and internal reporting as three reportable segments. See Note L for further discussion and separate data for each segment.

FAIR VALUE: We adopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” on October 1, 2008, resulting in no impact on our financial position, results of operations or cash flows. Among other requirements, SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosure about the use of fair value to measure assets and liabilities. SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”) and requires an entity to report in earnings at each subsequent reporting date those unrealized gains and losses on items for which the fair value option has been elected. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. Upon adoption of SFAS No. 159, we elected not to measure any eligible items at fair value.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In December 2007, FASB issued SFAS No. 141, “Business Combinations — Revised” (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination: (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in an acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase price, and (3) determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. Among other changes, SFAS No. 141(R) will require us to immediately expense transaction costs that have historically been included in the purchase price allocation under existing guidance. SFAS No. 141(R) will apply prospectively to any acquisitions we complete on or after October 1, 2009.

In March 2008, FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” SFAS No. 161 requires enhanced disclosures concerning (1) the manner in which an entity uses derivatives (and the reasons it uses them), (2) the manner in which derivatives and

related hedged items are accounted for under SFAS No. 133 and interpretations thereof, and (3) the effects that derivatives and related hedged items have on an entity’s financial position, financial performance, and cash flows. We must adopt SFAS No. 161 by January 1, 2009. We do not expect SFAS No. 161 to have a material effect on our financial position, results of operations, or cash flows, as we do not currently use any derivative financial instruments.

In April 2008, FASB issued FSP No. FAS 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The new guidance applies to (1) intangible assets that are acquired individually or with a group of other assets and (2) intangible assets acquired in both business combinations and asset acquisitions. Under FSP FAS 142-3, entities estimating the useful life of a recognized intangible asset must consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension. We must adopt FSP FAS 142-3 in our fiscal year ending September 30, 2010. We do not expect adoption of FSP FAS 142-3 to have a material effect on our financial position, results of operations, or cash flows.

Note C: Acquisitions

On October 22, 2007, we completed the acquisition of twenty Mexico pawnshops from MMFS Intl., S.A. de C.V, a subsidiary of Mister Money Holdings, Inc. for $15.5 million cash and direct transaction costs. The initial valuation of $15.3 million increased to $15.5 million in the year ended September 30, 2008 due to additional professional fees related to the acquisition. The increase was recorded as an increase to goodwill. In the quarter ended March 31, 2008, we also refined our estimated fair value of the non-compete agreement, which increased the non-compete agreement by $0.4 million, and decreased goodwill by an offsetting amount.

The purchase price was allocated as follows, including the adjustments discussed above (in thousands):

Current assets:
Pawn loans		$	3,230
Pawn service charges receivable, net			224
Inventory, net			940
Deferred tax asset			41
Prepaid expenses and other assets			40
Total current assets			4,475
Property and equipment			800
Non-compete agreement			2,000
Goodwill			8,156
Other assets, net			131
Total assets		$	15,562
Liabilities:
Accrued liabilities		$	(30	)
Customer deposits			(65	)
Total liabilities			(95	)
Net assets acquired		$	15,467

The results of the acquired stores have been consolidated with our results since their acquisition. Pro forma results of operations have not been presented because the acquisition was not material in relation to our consolidated financial position or results of operations. The goodwill noted above was recorded in the Empeño Fácil Mexico pawn segment and is expected to be fully deductible for tax purposes over the fifteen years following the acquisition. The total net assets acquired, as presented above, differs from the acquisition related cash flows presented on our prior year statement of cash flows due to acquisition-related cash flows that occurred after the end of the prior year quarter but before the purchase price allocation was finalized one year after the acquisition.

On November 13, 2008, we acquired the operating assets of 11 Las Vegas pawnshops that operate under the Pawn Plus, Pawn Place and ASAP Pawn brands for approximately $34.4 million. Of the total purchase price, $17.3

million was paid through the issuance of approximately 1.1 million shares of our Class A Non-voting Common Stock, and the remaining $17.1 million was paid in cash to the seller and for transaction costs. We estimated the fair value of the stock issued in the asset purchase at $15.45 per share, based on the closing market price of our stock the day before the acquisition. The estimated fair values of the assets acquired and liabilities assumed are preliminary. We are gathering information to finalize the valuation of assets and liabilities, have engaged external valuation specialists to value acquired intangible assets, and will complete the valuation within a year of the acquisition. Any subsequent adjustments to separately identified tangible or intangible assets will be recorded with an offsetting adjustment to goodwill. Other assets recorded include the estimated $6.7 million value of pawn licenses acquired. As these are considered indefinite lived intangible assets, they will not be amortized but will be tested at least annually for potential impairment.

The factors contributing to the recognition of goodwill are based on several strategic and synergistic benefits we expect to realize from the acquisition. These benefits include a greater presence in a prime pawn market, expected administrative savings, a meaningful entry into the auto title loan business, increased scale and the ability to implement certain processes and practices at the acquired company in our existing and planned other operations. The results of the acquired stores have been consolidated with our results since their acquisition. Pro forma results of operations have not been presented because the acquisition was not material in relation to our consolidated financial position or results of operations. The goodwill arising from this acquisition was recorded in the U.S. Pawn segment and is expected to be fully deductible for tax purposes over the fifteen years following the acquisition.

The purchase price was preliminarily allocated as follows (in thousands):

Current assets:
Pawn loans		$	5,443
Payday loans, net			55
Auto title loans, net			1,129
Pawn service charges receivable, net			1,080
Signature loan fees receivable, net			7
Auto title loan fees receivable, net			95
Inventory, net			2,851
Deferred tax asset, net			298
Prepaid expenses and other assets			75
Total current assets			11,033
Property and equipment, net			392
Goodwill			16,359
Other assets, net			6,772
Total assets		$	34,556
Liabilities:
Accounts payable and other accrued expenses		$	(34	)
Customer layaway deposits			(135	)
Total liabilities			(169	)
Net assets acquired		$	34,387

On December 31, 2008, we acquired through a merger all of the capital stock of Value Financial Services, Inc. (“VFS”) for a total estimated acquisition price of $77.4 million plus the assumption of VFS’s debt of $30.4 million, aggregating to approximately $107.8 million. In the merger, we acquired VFS’s 67 pawn stores, mostly in Florida. In the merger, VFS shareholders received, at each shareholder’s election, either (1) 0.75 shares of EZCORP Class A Non-voting Common Stock, rounded up to the nearest whole share, or (2) $11.00 cash for each share of VFS common stock owned by the shareholder at the effective time of the merger, or (3) a combination of both. The cash consideration was limited to 20% or less of the outstanding VFS common stock on a fully diluted basis. See our registration statement on Form S-4 (File number 333-153703), as amended and filed with the SEC on December 2, 2008, for a detailed description of the procedure for calculation and payment of the merger consideration to VFS shareholders.

Because VFS was acquired on the last day of the quarter ended December 31, 2008, VFS’s results of operations will be included in our consolidated results beginning January 1, 2009. The estimated fair value of the assets and

liabilities acquired are consolidated with our balances and are reflected in our balance sheet at December 31, 2008. The estimated fair values of the assets acquired and liabilities assumed are preliminary. We are gathering information to finalize the valuation of assets and liabilities, have engaged external valuation specialists to value acquired intangible assets, and will complete the valuation within a year of the acquisition. Any subsequent adjustments to separately identified tangible or intangible assets will be recorded with an offsetting adjustment to goodwill. Other assets recorded include the estimated $4.1 million fair value of the acquired trademark and tradenames and $1.8 million of favorable lease assets. As we expect to use the trademark and tradenames indefinitely, they will not be amortized but will be tested at least annually for potential impairment. The favorable lease assets will be amortized over the related lease terms used for straight-line rent purposes.

The factors contributing to the recognition of goodwill are 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 pawnshop operator in Florida, 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 goodwill arising from this acquisition was recorded in the U.S. Pawn segment and is not expected to be deductible for tax purposes due to the acquisition being a stock acquisition rather than an asset acquisition.

The total purchase price was comprised of the issuance of approximately 4.1 million shares of EZCORP’s Class A Non-voting Common Stock valued at $64.8 million, $13.4 million of cash paid to VFS shareholders, and transaction costs of $0.6 million, less $1.4 million of cash acquired. Of the $13.4 million paid to VFS shareholders, $0.8 million was paid in December 2008 and $12.6 million was paid in January 2009. The $12.6 million paid in January 2009 was included in Accounts payable and other accrued expenses in our December 2008 consolidated balance sheet. We estimated the fair value of the stock issued in the acquisition at $15.92 per share, 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.

The purchase price is preliminarily allocated as follows (in thousands):

Current assets:
Pawn loans		$	18,420
Pawn service charges receivable, net			3,595
Inventory, net			15,733
Deferred tax asset, net			4,557
Federal income taxes receivable			27
Prepaid expenses and other assets			1,181
Total current assets			43,513
Property and equipment, net			5,772
Deferred tax asset, non-current			855
Goodwill			59,221
Other assets, net			6,176
Total assets		$	115,537
Current Liabilities:
Current maturities of long-term debt		$	(4,000	)
Accounts payable and other accrued expenses			(6,853	)
Customer layaway deposits			(872	)
Total Current liabilities			(11,725	)
Long-term debt		$	(26,385	)
Total Liabilities		$	(38,110	)
Net assets acquired		$	77,427

The total purchase price presented above excludes any contingent consideration payable under the terms of the acquisition, which depends on the price at which VFS shareholders sell their EZCORP shares, should they choose to sell, in the 125 days following the acquisition. EZCORP will pay VFS shareholders the difference between $14.67 per share and the gross price per share the selling shareholder actually receives, if less than $14.67 per share, up to a maximum of $4.01 per share.  If their EZCORP shares are sold for more than $14.67 per share within 125 days of

the acquisition, EZCORP will pay the shareholders a premium ranging from $1.33 to $0.33 per share depending on the date of sale. Any contingent consideration paid will be recorded as a reduction of the additional paid-in capital recorded with the stock issuance and will not change the total recorded purchase price. See our registration statement on Form S-4 (File number 333-153703), as amended and filed with the SEC on December 2, 2008, for a detailed description of the procedure for calculation and payment of the contingent payments to VFS shareholders.

Separate audited historical financial statements of VFS for the year ended December 31, 2007 and unaudited interim financial statements for the nine months ended September 30, 2008 are presented in our registration statement on Form S-4 (File number 333-153703) filed with the SEC on December 2, 2008. The following table summarizes unaudited pro forma combined financial information assuming the merger had occurred on the first day of fiscal 2008. We have not finalized our preliminary purchase price allocation, and accordingly, this pro forma information does not include all potential adjustments to that allocation or costs related to the acquisition.

We expect to realize operating synergies and administrative savings. These will come primarily from using the best practices from EZCORP and VFS in each business, economies of scale, reduced administrative support staff and the termination of a lease on VFS’s corporate administrative offices. The pro forma condensed combined financial statements do not include any potential operating efficiencies or cost savings from expected synergies. The unaudited pro forma condensed combined financial statements are not necessarily an indication of the results that would have been achieved had the merger been completed as of the date indicated or that may be achieved in the future.

The following unaudited pro forma condensed combined statements of operations give effect to the merger as if it had taken place on October 1, 2007, the beginning of the earliest period presented, in accordance with SEC guidance. Although VFS’s historical fiscal year ends on a different date than that of EZCORP, all VFS information presented in the Pro Forma Combined Statements of Operations are actual amounts for the periods indicated.

		Three Months Ended
		December 31,
		2008				2007
		(Unaudited and Pro Forma)
		(In thousands, except per share amounts)
Revenues:
Sales		$	92,495			$	80,076
Pawn service charges			35,231				30,252
Signature loan fees			36,000				33,528
Auto title loan fees			221				—
Other			1,905				829
Total revenues			165,852				144,685
Cost of goods sold			57,576				48,780
Signature loan bad debt			9,484				9,670
Auto title loan bad debt			7				—
Net revenues			98,785				86,235
Operating expenses:
Operations			54,398				47,855
Administrative			15,768				12,492
Depreciation and amortization			3,339				3,310
(Gain) loss on sale/disposal of assets			(255	)			213
Total operating expenses			73,250				63,870
Operating income			25,535				22,365
Interest expense, net			447				432
Equity in net income of unconsolidated affiliate			(941	)			(1,047	)
Other			25				—
Income before income taxes			26,004				22,980
Income tax expense			9,260				8,527
Net income		$	16,744			$	14,453
Net income per common share:
Basic		$	0.35			$	0.32
Diluted		$	0.34			$	0.31
Weighted average shares outstanding:
Basic			47,689				45,411
Diluted			48,720				47,345

The table above excludes any pro forma loss of interest income from cash paid to former VFS shareholders for contingent consideration, as we do not yet know the amount of contingent consideration we will pay. This amount will be finalized within 125 days of the merger, as former VFS shareholders report their stock trades to us.

Included in pro forma administrative expense in the quarter ended December 31, 2007 is a non-recurring $1.2 million charge for the write-off of costs related to VFS’s previously planned initial public offering, which it abandoned to pursue the merger with EZCORP. Included in the pro forma administrative expense in the quarter ended December 31, 2008 is a non-recurring charge of $0.8 million for the write-off of VFS’s in-process development of a point of sale system that was abandoned and will be replaced by EZCORP’s point of sale system.

Note D: 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, warrants and restricted stock awards.

Components of basic and diluted earnings per share are as follows (in thousands, except per share amounts):

		Three Months Ended
		December 31,
		2008				2007
Net income (A)		$	14,828			$	12,555
Weighted average outstanding shares of common stock (B)			43,661				41,339
Dilutive effect of stock options, warrants, and restricted stock			1,031				1,934
Weighted average common stock and common stock equivalents (C)			44,692				43,273
Basic earnings per share (A/B)		$	0.34			$	0.30
Diluted earnings per share (A/C)		$	0.33			$	0.29

Anti-dilutive options, warrants and restricted stock grants have been excluded from the computation of diluted earnings per share because the assumed proceeds upon exercise, as defined by SFAS No. 123(R), were 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.

As described in Note C above, we issued approximately 1.1 million shares of our Class A Non-voting Common Stock on November 13, 2008 and approximately 4.1 million shares on December 31, 2008 in conjunction with the completion of two acquisitions on those dates. The additional shares have been included in our calculations of weighted average shares outstanding since the dates of the acquisitions. The full dilutive effect of the additional shares will be recognized in our second fiscal quarter and the year-to-date dilutive effect will increase in the remainder of fiscal 2009 as they are outstanding for a larger portion of the year.

Note E: Investment in Unconsolidated Affiliate

At December 31, 2008, we owned 16,298,875 common shares of Albemarle & Bond Holdings, plc (“A&B”), or approximately 29.95% of A&B’s total outstanding shares. The investment is accounted for using the equity method. Since A&B’s fiscal year ends three months prior to ours, we report the income from this investment on a three-month lag. A&B files interim and annual financial reports for its fiscal periods ending December 31 and June 30. The income reported for our quarter ended December 31, 2008 represents our percentage interest in the estimated results of A&B’s operations from July 1, 2008 to September 30, 2008.

Below is summarized financial information for A&B’s most recently reported results (using average exchange rates for the periods indicated):

		Years ended June 30,
		2008				2007
		(in thousands)
Turnover (gross revenues)		$	93,914			$	63,618
Gross profit			72,996				47,615
Profit after tax (net income)			14,503				10,203

Note F: Contingencies

Currently and from time to time, we are defendants in legal and regulatory actions. While we cannot determine the ultimate outcome of these actions, after consultation with counsel, 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 G: Comprehensive Income

Comprehensive income includes net income and other revenues, expenses, gains and losses that are excluded from net income but are included as a component of total stockholders’ equity. Comprehensive income for the quarters ended December 31, 2008 and 2007 was $9.0 million and $12.9 million. The difference between comprehensive income and net income results primarily from the effect of foreign currency translation adjustments determined in accordance with SFAS No. 52, “Foreign Currency Translation.” At December 31, 2008, the accumulated balance of foreign currency activity excluded from net income was $5.0 million, net of tax of $1.8 million. The net $ (3.2) million is presented as “Accumulated other comprehensive income (loss)” in the balance sheet at December 31, 2008.

Note H: Long-term Debt

On December 31, 2008, we entered into our Fifth Amended and Restated Credit Agreement with a syndication of five banks. The new credit agreement provides for, among other things, (i) an $80 million revolving credit facility maturing December 31, 2011 that we may request, under the terms of the credit agreement, to be increased to a total of $110 million and (ii) a $40 million term loan maturing December 31, 2012. The term loan requires quarterly principal payments of $2.5 million plus accrued interest. At December 31, 2008, we borrowed the full $40 million under the term loan, but the $80 million revolving credit facility remained unused.

Pursuant to the credit agreement, we may choose either a Eurodollar rate or the base rate. From December 31, 2008 through the date we report to the lenders our interim results for the period ending June 30, 2009, we may choose to pay interest to the lenders for outstanding borrowings at the Eurodollar rate plus 250 basis points or the base rate plus 50 basis points, regardless of the leverage ratio during that period. After this initial period, interest accrues at the Eurodollar rate plus 175 to 250 basis points or the base rate plus 0 to 50 basis points, depending upon the leverage ratio computed at the end of each calendar quarter. On the unused amount of the revolving credit facility, we pay a commitment fee of 25 to 30 basis points depending on the leverage ratio calculated at the end of each quarter. Terms of the credit agreement require, among other things, that we meet certain financial covenants. We were in compliance with all covenants at December 31, 2008 and believe that we will remain compliant based on our current and anticipated performance. The payment of dividends is prohibited and additional debt is restricted.

Upon closing of the merger with VFS, we acquired VFS’s outstanding debt of $30.4 million. Immediately after the merger, on December 31, 2008, we repaid and terminated VFS’s outstanding bank debt of $30.1 million plus accrued interest. The remaining $0.3 million of VFS’s debt we assumed in the merger was comprised of outstanding debentures that we repaid and retired in early January 2009 with no prepayment penalty.

Deferred financing costs of $1.1 million related to the new credit agreement are included in Other assets, net in our December 31, 2008 balance sheet. These costs will be amortized to interest expense over their three-year estimated useful life.

Note I: Goodwill and Other Intangible Assets

The following table presents the balance of each major class of indefinite-lived intangible asset at the specified dates:

		December 31, 2008				December 31, 2007				September 30, 2008
		(In thousands)
Pawn licenses		$	8,289			$	1,549			$	1,549
Trade Name			4,060				—				—
Goodwill			98,300				24,591				24,376
Total		$	110,649			$	26,140			$	25,925

The following table presents the gross carrying amount and accumulated amortization for each major class of definite-lived intangible asset at the specified dates:

		December 31, 2008								December 31, 2007								September 30, 2008
		Carrying				Accumulated				Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization				Amount				Amortization
		(In thousands)
License application fees		$	345			$	(324	)		$	345			$	(296	)		$	345			$	(318	)
Real estate finders’ fees			556				(349	)			556				(332	)			556				(345	)
Non-compete agreements			2,493				(861	)			2,506				(420	)			2,899				(829	)
Favorable lease asset			1,800				—				—				—				—				—
Total		$	5,194			$	(1,534	)		$	3,407			$	(1,048	)		$	3,800			$	(1,492	)

Total amortization expense from definite-lived intangible assets was approximately $124,000 and $116,000 in the quarters ended December 31, 2008 and 2007. The following table presents our estimate of amortization expense for definite-lived intangible assets for each of the five succeeding full fiscal years as of October 1, 2008, including the effect of acquisitions in the quarter ended December 31, 2008 (in thousands):

Fiscal Year		Amortization Expense
2009		$	658
2010		$	644
2011		$	637
2012		$	605
2013		$	209

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

Note J: Common Stock, Warrants, Options, and Share-based Compensation

Our income includes the following share-based compensation expense, determined in accordance with the fair value provisions of SFAS No. 123(R):

		Three Months Ended December 31,
		2008				2007
		(in thousands)
Gross compensation cost		$	1,059			$	856
Income tax benefit			(319	)			(268	)
Share-based compensation cost, net of tax benefit		$	740			$	588

Stock option and warrant exercises resulted in the issuance of 1,380,100 shares of Class A Non-voting Common Stock in the current quarter for total proceeds of $4.6 million. Also on October 2, 2008, restrictions lapsed on 324,000 restricted shares granted in October 2006 to our Chief Executive Officer and the Chairman of our Board of Directors, resulting in an increase in the shares of Class A Non-voting Common Stock outstanding.

Effective October 1, 2008, the Compensation Committee of the Board of Directors approved an award of restricted stock to 54 key employees and the Board of Directors approved an award of restricted stock to our independent directors. In total, we awarded 143,500 shares of restricted stock. The key employees’ awards will vest October 1, 2011 and the independent directors’ awards will vest 50% per year for the next two years. The aggregate market value of the restricted stock on the award date was $2.6 million.

In conjunction with the November 13, 2008 acquisition of 11 Las Vegas pawn stores, we issued approximately 1.1 million shares of our Class A Non-voting Common Stock valued at $17.3 million. In conjunction with the December 31, 2008 acquisition of 67 pawn stores through the merger with VFS, we issued approximately 4.1 million shares of our Class A Non-voting Common Stock valued at $64.8 million. Both of these acquisitions and the total consideration issued are described more fully in Note C, “Acquisitions.”

Note K: Income Taxes

Upon adoption of FIN 48 in October 2007, we recorded a liability for an uncertain state tax position of $0.1 million. The statutes of limitation related to this recorded liability expire between June 15, 2009 and June 15, 2011. In the fourth quarter of fiscal 2008, we recorded an additional liability for potential interest on an uncertain federal tax position of $0.4 million. In the quarter ended December 31, 2008, we filed a tax accounting method change with the IRS, absolving us of the exposure to this interest, and adjusted our effective tax rate to remove the $0.4 million additional liability recorded at September 30, 2008. The remaining FIN 48 liability at December 31, 2008 is $0.1 million recorded upon adoption of FIN 48.

We are subject to U.S. and Mexican income taxes as well as various other state and local jurisdictions. With few exceptions, we are no longer subject to examinations by tax authorities for years before the tax year ended September 30, 2003.

The current quarter’s effective tax rate is 35.2% of pretax income compared to 37.7% for the prior year quarter. The decrease in effective tax rate between these periods is due primarily to a larger expected foreign tax credit related to Albemarle & Bond in the current quarter than expected in the prior year quarter and a lower Texas margins tax than expected in the prior year quarter. Also decreasing the effective tax rate in the current quarter was the $0.4 million reduction of the FIN 48 liability discussed above.

Note L: Operating Segment Information

We manage our business and internal reporting as three reportable segments with operating results reported separately for each segment. The three reportable segments are:

	•		U.S. Pawn Operations: This segment offers pawn loans and related sales in our 371 U.S. pawn stores, offers signature loans in six U.S. EZMONEY stores and 77 of our U.S. pawn stores and offers auto title loans in 11 of our U.S. pawn stores.
	•		Empeño Fácil: This segment offers pawn loans and related sales in 41 Empeño Fácil pawn stores in Mexico.
	•		EZMONEY Operations: This segment operates only in the United States and offers signature loans in 471 of our EZMONEY stores and offers auto title loans in 30 of our EZMONEY stores.

Our Empeño Fácil segment operates only in Mexico and, as a result, has a risk concentration in that market. 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)
Three Months Ended December 31, 2008:
Revenues:
Sales		$	62,167			$	2,413			$	—			$	64,580
Pawn service charges			24,884				1,497				—				26,381
Signature loan fees			686				—				35,314				36,000
Auto title loan fees			210				—				11				221
Other			1,433				—				—				1,433
Total revenues			89,380				3,910				35,325				128,615
Cost of goods sold			38,938				1,487				—				40,425
Signature loan bad debt			236				—				9,248				9,484
Auto title loan bad debt			6				—				1				7
Net revenues			50,200				2,423				26,076				78,699
Operations expense			26,678				1,284				15,532				43,494
Store operating income		$	23,522			$	1,139			$	10,544			$	35,205
Three Months Ended December 31, 2007:
Revenues:
Sales		$	54,200			$	1,307			$	—			$	55,507
Pawn service charges			21,990				918				—				22,908
Signature loan fees			809				—				32,719				33,528
Auto title loan fees			—				—				—				—
Other			361				2				—				363
Total revenues			77,360				2,227				32,719				112,306
Cost of goods sold			32,768				773				—				33,541
Signature loan bad debt			372				—				9,298				9,670
Auto title loan bad debt			—				—				—				—
Net revenues			44,220				1,454				23,421				69,095
Operations expense			24,019				844				13,673				38,536
Store operating income		$	20,201			$	610			$	9,748			$	30,559

The following table reconciles store operating income, as shown above, to our consolidated income before income taxes:

		Three Months Ended December 31,
		2008				2007
		(in thousands)
Consolidated store operating income		$	35,205			$	30,559
Administrative expenses			10,411				8,440
Depreciation and amortization			3,066				2,827
(Gain) / loss on sale / disposal of assets			(284	)			162
Interest income			(126	)			(57	)
Interest expense			165				81
Equity in net income of unconsolidated affiliate			(941	)			(1,047	)
Other			25				—
Consolidated income before income taxes		$	22,889			$	20,153

The following table presents separately identified segment assets:

		U.S. Pawn				Empeño				EZMONEY
		Operations				Fácil				Operations				Consolidated
		(in thousands)
Assets at December 31, 2008:
Pawn loans		$	90,682			$	3,107			$	—			$	93,789
Payday loans, net			514				—				7,732				8,246
Auto title loans, net			1,123				—				51				1,174
Inventory, net			61,801				2,762				—				64,563
Total separately identified recorded segment assets		$	154,120			$	5,869			$	7,783			$	167,772
Brokered loans outstanding from unaffiliated lenders		$	370			$	—			$	24,968			$	25,338
Assets at December 31, 2007:
Pawn loans		$	60,380			$	2,890			$	—			$	63,270
Payday loans, net			480				—				5,689				6,169
Auto title loans, net			—				—				—				—
Inventory, net			40,456				1,332				—				41,788
Total separately identified recorded segment assets		$	101,316			$	4,222			$	5,689			$	111,227
Brokered loans outstanding from unaffiliated lenders		$	487			$	—			$	27,068			$	27,555
Assets at September 30, 2008:
Pawn loans		$	71,393			$	4,543			$	—			$	75,936
Payday loans, net			472				—				6,652				7,124
Auto title loans, net			—				—				—				—
Inventory, net			40,357				2,852				—				43,209
Total separately identified recorded segment assets		$	112,222			$	7,395			$	6,652			$	126,269
Brokered loans outstanding from unaffiliated lenders		$	384			$	—			$	23,169			$	23,553

Brokered loans are not recorded as an asset on our balance sheets, as we do not own a participation in the loans made by independent 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 balances shown above are the gross principal balances of the loans outstanding at the specified dates.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion in this section contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed in this section and throughout this report.

First Quarter Ended December 31, 2008 vs. First Quarter Ended December 31, 2007

The following table presents selected, unaudited, consolidated financial data for our three-month periods ended December 31, 2008 and 2007 (the “current quarter” and “prior year quarter”):

		Three Months Ended December 31,								Percentage
		2008				2007				Change
		(in thousands)
Net revenues:
Sales		$	64,580			$	55,507				16.3	%
Pawn service charges			26,381				22,908				15.2	%
Signature loan fees			36,000				33,528				7.4	%
Auto title loan fees			221				—				N/A
Other			1,433				363				294.8	%
Total revenues			128,615				112,306				14.5	%
Cost of goods sold			40,425				33,541				20.5	%
Signature loan bad debt			9,484				9,670				(1.9	)%
Auto title loan bad debt			7				—				N/A
Net revenues		$	78,699			$	69,095				13.9	%
Net income		$	14,828			$	12,555				18.1	%

Consolidated signature loan data (combined payday loan and credit service activities) are as follows:

		Three Months Ended December 31,
		2008				2007
		(Dollars in thousands)
Fee revenue		$	36,000			$	33,528
Bad debt:
Net defaults, including interest on brokered loans			9,385				9,035
Insufficient funds fees, net of collections			293				360
Change in valuation allowance			(254	)			137
Other related costs			60				138
Net bad debt			9,484				9,670
Fee revenue less bad debt		$	26,516			$	23,858
Average signature loan balance outstanding during period (a)		$	30,785			$	29,654
Signature loan balance at end of period (a)		$	33,584			$	33,724
Participating stores at end of period			554				522
Signature loan bad debt, as a percent of fee revenue			26.3	%			28.8	%
Net default rate (a) (b)			5.2	%			5.3	%

Overview

We lend or provide credit services to individuals who do not have cash resources or access to credit to meet their short-term cash needs. We offer pawn loans in 371 domestic pawn stores (including 11 acquired November 13, 2008 and 66 acquired December 31, 2008) and 41 Empeño Fácil Mexico pawn stores open at December 31, 2008 (including one acquired December 31, 2008). Pawn loans are non-recourse loans collateralized by tangible personal property. At these stores, we also sell merchandise, primarily collateral forfeited from our pawn lending operations, to customers looking for good value. In 477 EZMONEY stores, six of which are managed by our U.S. Pawn operations, and 77 of our domestic pawn stores open December 31, 2008, we offer short-term non-collateralized loans, often called payday loans, or fee-based credit services to customers seeking loans (collectively, “signature loans”). In 30 EZMONEY stores and 11 of our domestic pawn stores open December 31, 2008, we offer short-term loans collateralized by the titles to borrower’s automobiles, often called auto title loans.

We manage our business as three segments. The U.S. Pawn Operations segment offers pawn related activities in all 371 domestic pawn stores, and offers signature loans in 77 pawn stores and six EZMONEY stores. The Empeño Fácil segment offers pawn related activities in all 41 Mexico pawn stores. The EZMONEY Operations segment offers signature loans in 471 EZMONEY stores in the United States, and accounts for approximately 98% of our consolidated signature loan revenues. The following tables present store data by operating segment:

		Three Months Ended December 31, 2008
		U.S. Pawn				Empeño				EZMONEY
		Operations				Fácil				Operations				Consolidated
Stores in operation:
Beginning of period			300				38				471				809
New openings			—				2				6				8
Acquired			77				1				—				78
Sold, combined, or closed			—				—				(6	)			(6	)
End of period			377				41				471				889
Average number of stores during the period			322				39				471				832
Composition of ending stores:
Pawn			371				41				—				412
Signature loan stores adjoining pawn stores			6				—				152				158
Signature loan stores — free standing			—				—				319				319
Total stores in operation			377				41				471				889
Total stores offering signature loans			83				—				471				554
Total stores offering auto title loans			11				—				30				41

		Three Months Ended December 31, 2007
		U.S. Pawn				Empeño				EZMONEY
		Operations				Fácil				Operations				Consolidated
Stores in operation:
Beginning of period			300				4				427				731
New openings			—				1				17				18
Acquired			—				20				—				20
Sold, combined, or closed			—				—				(2	)			(2	)
End of period			300				25				442				767
Average number of stores during the period			300				19				432				752
Composition of ending stores:
Pawn			294				25				—				319
Signature loan stores adjoining pawn stores			6				—				164				170
Signature loan stores — free standing			—				—				278				278
Total stores in operation			300				25				442				767
Total stores offering signature loans			80				—				442				522
Total stores offering auto title loans			—				—				—				—

We earn pawn service charge revenue 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, or 240% annually. Our average U.S. pawn loan amount typically ranges between $80 and $100 but varies depending on the valuation of each item pawned. The total U.S. loan term, consisting of the primary term and grace period, ranges between 60 and 120 days. In Mexico, pawn service charges range from 10% to 20%, but a majority of our pawn loans earn pawn service charges of 13% to 14% net of applicable taxes. The Mexico pawn loan term is 40 days.

In our pawnshops, we acquire inventory for retail sales through pawn loan forfeitures and, to a lesser extent, through purchases of customers’ merchandise. 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. Improper value assessment in the lending or purchasing process can result in lower margins or reduced marketability of the merchandise.

At December 31, 2008, 292 of our 477 EZMONEY stores and 44 of our 371 domestic pawn stores offered credit services to customers seeking 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. We also offer a free service to all credit service customers to improve or establish their credit histories by reporting their payments to an external credit-reporting agency.

In connection with our credit services, the unaffiliated lenders offer customers two types of loans. In all 292 EZMONEY stores and 44 domestic pawn stores offering credit services, customers can obtain short-term loans, with principal amounts up to $1,500 but averaging about $570. Terms of these short-term loans are generally less than 30 days, averaging about 18 days, with due dates corresponding with the customers’ next payday. We typically earn a fee of 20% of the loan amount for our short-term loan credit services. In 91 EZMONEY stores offering credit services, customers can obtain longer-term installment loans from the unaffiliated lenders. The installment loans typically carry terms of about five months with ten equal installment payments due on customers’ paydays. Installment loan principal amounts range from $1,525 to $3,000, but average about $2,000. With each semi-monthly or bi-weekly installment payment, we earn a fee of 10% of the initial loan amount. At December 31, 2008, short-term loans comprised 98% of the balance of loans brokered through our credit services, and installment loans comprised the remaining 2%.

We earn payday loan fee revenue on our payday loans. In 33 domestic pawn stores and 185 EZMONEY stores, we make payday loans subject to state law. The average payday loan amount is approximately $440 and the term is generally less than 30 days, averaging about 18 days. We typically charge a fee of 15% to 22% of the loan amount for a 7 to 23-day period.

On October 22, 2007, we acquired twenty Mexico pawnshops from MMFS Intl., S.A. de C.V., a subsidiary of Mister Money Holdings, Inc. for $15.5 million cash and direct transaction costs. Results of the acquired stores are included in our results from the date of acquisition, which includes most of the prior year quarter.

On November 13, 2008, we acquired 11 pawnshops located in the Las Vegas, Nevada area that operated under the Pawn Plus, Pawn Place and ASAP Pawn brands for total consideration of approximately $34.4 million plus direct transaction costs. Approximately half the purchase consideration was funded with the issuance of EZCORP Class A Non-voting Common Stock and the remaining half was funded in cash. Results of the acquired stores are included in our results from the date of acquisition.

On December 31, 2008, we completed the previously announced merger with Value Financial Services, Inc. (“VFS”). In the merger, we acquired VFS’s 67 pawn stores, mostly in Florida, for a total estimated acquisition price of $77.4 million, plus the assumption of VFS’s debt of $30.4 million, for an aggregate cost of approximately $107.8 million. The total amount paid may increase upon the payment of contingent consideration depending on the price at which the sellers sell, within 125 days of the merger, the EZCORP shares they acquired as part of the merger consideration. The current quarter includes no earnings from this acquisition as it occurred on the last day of the quarter. Results of the acquired stores will be included in our results of operations beginning January 1, 2009.

For the current quarter, total revenues increased 15%, or $16.3 million to $128.6 million, compared to the prior year quarter. Same store total revenues increased 10%, with the remainder of the increase at new and acquired stores. The overall increase in total revenues was comprised of a $9.1 million increase in merchandise and jewelry scrapping sales, a $3.5 million increase in pawn service charges, a $2.5 million increase in signature loan fees, and a $1.2 million increase in other revenues.

In the current quarter, the U.S. Pawn Operations segment contributed $3.3 million greater store operating income compared to the prior year quarter, primarily from a $2.9 million increase in pawn service charges and a $1.8 million increase in sales gross profit, including the contribution from 11 Las Vegas pawn stores acquired in November 2008, partially offset by higher operating costs. Empeño Fácil improved its store operating income by $0.5 million, primarily due to the opening of 15 new stores and the continued maturation of existing stores. Our EZMONEY Operations segment contributed $0.8 million greater store operating income, comprised of higher fees net of bad debt, somewhat offset by higher operating costs at new and existing stores. After a $2.0 million increase in administrative expenses, a $0.2 million increase in depreciation and a $0.3 million gain on the disposal of assets compared to a small loss on disposal in the prior year quarter, operating income increased $2.9 million to $22.0 million. After a $0.5 million increase in income taxes and other smaller items, our consolidated net income improved to $14.8 million in the current quarter from $12.6 million in the prior year quarter.

Results of Operations

First Quarter Ended December 31, 2008 vs. First Quarter Ended December 31, 2007

The following discussion compares our results of operations for the current quarter ended December 31, 2008 to the prior year quarter ended December 31, 2007. It should be read with the accompanying consolidated financial statements and related notes.

Included in the current quarter’s results, from the date of acquisition, is the impact of the 11 Las Vegas pawn stores acquired November 13, 2008. The results of the 67 pawn stores acquired on December 31, 2008 will first be included in our results of operations in the quarter beginning January 1, 2009.

U.S. Pawn Operations Segment

The following table presents selected financial data for the U.S. Pawn Operations segment:

		Three Months Ended December 31,
		2008				2007
		(Dollars in thousands)
Sales		$	62,167			$	54,200
Pawn service charges			24,884				21,990
Signature loan fees			686				809
Auto title loan fees			210				—
Other			1,433				361
Total revenues			89,380				77,360
Cost of goods sold			38,938				32,768
Signature loan bad debt			236				372
Auto title loan bad debt			6				—
Net revenues			50,200				42,220
Operations expense			26,678				24,019
Store operating income		$	23,522			$	20,201
Other data:
Gross margin on sales			37	%			40	%
Annualized inventory turnover (a)			3.4	x			3.2	x
Average pawn loan balance per pawn store at quarter end		$	244			$	205
Average inventory per pawn store at quarter end		$	167			$	138
Average yield on pawn loan portfolio (b)			140	%			146	%
Pawn loan redemption rate			78	%			78	%
Average signature loan balance per store offering signature loans at quarter end (c)		$	11			$	12
Average Auto title loan balance per store offering auto title loans at quarter end		$	102			$	—

The U.S. Pawn segment total revenues increased 16%, or $12.0 million in the current quarter to $89.4 million, compared to the prior year quarter. Same store total revenues increased 12%, with the remainder of the increase at acquired stores. The overall increase in total revenues was comprised of a $8.0 million increase in merchandise and jewelry scrapping sales, a $2.9 million increase in pawn service charges, and a $1.3 million increase in other revenues, offset by a $0.1 million decrease in signature loan revenues. The U.S. Pawn segment accounted for 70% of our consolidated total revenues.

Our current quarter U.S. pawn service charge revenue increased 13% from the prior year quarter to $24.9 million. This increase was due to a 10%, or $2.2 million increase in same store pawn service charges and a $0.7 million increase from acquired stores. The same store improvement was due primarily to a 13% higher average same store pawn loan balance, partially offset by a six percentage point lower average yield. In the last two years, we have periodically adjusted our loan values on gold jewelry in response to changes in gold market values and similar changes by our competitors. This contributed about $1.2 million to the increase in U.S. pawn service charges in the current quarter.

The table below summarizes our sales volume, gross profit, and gross margins in the U.S. Pawn Operations segment:

		Three Months Ended December 31,
		2008				2007
		(Dollars in millions)
Merchandise sales		$	42.8			$	39.4
Jewelry scrapping sales			19.4				14.8
Total sales		$	62.2			$	54.2
Gross profit on merchandise sales		$	16.9			$	15.8
Gross profit on jewelry scrapping sales		$	6.3			$	5.6
Gross margin on merchandise sales			39.4	%			40.1	%
Gross margin on jewelry scrapping sales			32.9	%			38.1	%
Overall gross margin			37.4	%			39.5	%

The current quarter’s merchandise sales gross profit increased $1.1 million from the prior year quarter to $16.9 million. This was due to a $2.3 million, or 6% same store sales increase and sales from the 11 pawn stores acquired in November 2008, partially offset by a decrease of 0.7 of a percentage point in gross margins to 39.4%.

The current quarter's gross profit on jewelry scrapping sales increased $0.7 million from the prior year quarter to $6.3 million. Scrapping revenues increased $4.5 million, or 31%, on 28% more volume and a 3% increase in proceeds realized per gram of jewelry scrapped. Included in scrapping revenues are sales of approximately $0.1 million of loose diamonds compared to approximately $0.3 million in the prior year quarter. Generally, we forward contract the price we will receive from the refiner 30 to 90 days in advance of the delivery of specified quantities. In the last twelve months, we have increased the amount we lend on jewelry and pay to purchase jewelry from customers, increasing the cost of these items. As a result of the greater volume and a higher average cost per gram of jewelry scrapped, scrap cost of goods increased approximately $3.8 million.

Merchandise and jewelry scrapping sales volume is heavily dependent on inventory available for sale, or beginning inventory on hand plus pawn loan forfeitures and inventory purchases. Same store inventory available for sale in the current quarter was 7.9% higher than in the prior year quarter, with same store ending inventory 8.1% higher. Including the 77 acquired U.S. pawn stores, our total U.S. pawn ending inventory increased 53%. We expect this higher inventory balance, combined with forfeitures from the 50% higher ending pawn loan balance to fuel an increase in sales in the quarter ending March 31, 2009 and the remainder of fiscal 2009 compared to the same periods of fiscal 2008.

The segment’s signature loan contribution, or fee revenue less bad debt, increased slightly compared to the prior year quarter to $0.5 million due to an improvement in bad debt to 34.4% of fees compared to 46.0% in the prior year quarter, partially offset by lower fee revenues on a lower average loan balance.

The U.S. pawn segment began offering auto title loans with its acquisition of 11 Las Vegas pawn stores in mid-November 2008. Since the acquisition date, the segments’ auto title loan contribution, or fees less bad debt, was $0.2 million, with bad debt at 2.9% of fees.

Operations expense improved to 53% ($26.7 million) of net revenues in the current quarter from 54% ($24.0 million) of net revenues in the prior year quarter as operating expenses grew at a slower pace than the segment’s net revenues. Many of our store level operating expenses are fixed, providing operating leverage with same store net revenue growth.

In the current quarter, the $5.8 million greater net revenue from U.S. pawn activities and the $0.2 million in auto title loan contribution, partially offset by the $2.7 million higher operations expense resulted in a $3.3 million overall increase in store operating income from the U.S. Pawn Operations segment compared to the prior year quarter. For the current quarter, the U.S. Pawn Operations segment made up 67% of consolidated store operating income compared to 66% in the prior year quarter. We anticipate this segment will comprise a greater portion of consolidated store operating income in future periods with the full effect of the recent acquisitions in the segment.

Empeño Fácil Segment

The following table presents selected financial data for the Empeño Fácil segment:

		Three Months Ended December 31,
		2008				2007
		(Dollars in thousands)
Sales		$	2,413			$	1,307
Pawn service charges			1,497				918
Other			—				2
Total revenues			3,910				2,227
Cost of goods sold			1,487				773
Net revenues			2,423				1,454
Operations expense			1,284				844
Store operating income		$	1,139			$	610
Other data:
Gross margin on sales			38	%			41	%
Annualized inventory turnover (a)			2.2	x			3.1	x
Average pawn loan balance per pawn store at quarter end		$	76			$	116
Average inventory per pawn store at quarter end		$	67			$	53
Average yield on pawn loan portfolio (b)			158	%			148	%