EZCORP INC - Annual Report: 2011 (Form 10-K)

			the result of the negative characterization of the industry by some consumer advocacy groups and some media reports that do not focus on the credit risk and high transaction costs of serving our segment. We can give no assurance that there will not be further negative characterizations of our industry or that legislative or regulatory efforts to eliminate or restrict the availability of certain short-term loan products, including payday loans and auto title loans, will not be successful despite significant customer demand for such products. Such efforts, if successful, could have a material adverse effect on our operations or financial performance.
	•		A significant or sudden decrease in gold values may have a material impact on our earnings and financial position. Gold jewelry comprises a significant portion of the collateral security for our pawn loans and our inventory, and gold scrapping accounts for a significant portion of our revenues and gross profit. Pawn service charges, sales proceeds and our ability to liquidate excess jewelry inventory at an acceptable margin are dependent upon gold values. The impact on our financial position and results of operations of a hypothetical decrease in gold values cannot be reasonably estimated because the market and competitive response to changes in gold values is not known; however, a significant decline in gold values could result in decreases in sales, sales margins, and pawn service charge revenues.
	•		A significant portion of our business is concentrated in Texas. Over half of our financial services stores and almost half of our domestic pawn stores are located in Texas, and those stores account for a significant portion of our revenues and profitability. The legislative, regulatory and general business environment in Texas has been, and continues to be, relatively favorable for our business activities. We have been successful in growing and expanding our businesses in areas outside Texas for the past several years, and we expect that our business in other areas (including Mexico and Canada) will continue to grow faster than our business in Texas. In the foreseeable future, however, a negative legislative or regulatory change in Texas could have a material adverse effect on our overall operations and financial performance.
	•		A significant change in foreign currency exchange rates could have a material adverse impact on our earnings and financial position. We have foreign operations in Mexico and Canada and equity investments in the United Kingdom and Australia. Our assets, investments in, earnings from and dividends from each of these must be translated to U.S. dollars from their respective functional currencies of the Mexican peso, Canadian dollar, British pound and the Australian dollar. A significant weakening of any of these foreign currencies could result in lower assets and earnings in U.S. dollars, resulting in a material adverse impact on our financial position, results of operations and cash flows.
	•		Prolonged periods of economic recession and unemployment could adversely affect our lending and retail businesses. All of our businesses, like other businesses, are subject to fluctuations based on varying economic conditions. Economic conditions and general consumer confidence affect the demand for our retail products and the ability and willingness of our customers to utilize our loan products and services. Our signature loan products and services require the customer to have a verifiable recurring source of income. Consequently, we may experience reduced demand for our signature loan products during prolonged periods of high unemployment. Weakened economic conditions may also result in an increase in loan defaults and loan losses. Even in the current economic environment, we have been able to efficiently manage our bad debt through our underwriting and collection efforts. There can be no assurance that we will be able to sustain our current bad debt rates or that we will not experience increasing difficulty in collecting defaulted loans.
	•		A significant portion of our short-term consumer loan revenues and profitability is dependent upon the ability and willingness of unaffiliated lenders to make loans to our customers. In Texas, where over half of our financial services stores are located, we do not make short-term consumer loans to customers, but assist customers in arranging loans with unaffiliated lenders. Our short-term consumer loan business could be adversely affected if (a) we were to lose our current relationships with unaffiliated lenders and were unable to establish a relationship with another unaffiliated lender who was willing and able to make short-term loans to our Texas customers or (b) the unaffiliated lenders are unable to obtain capital or other sources of funding at appropriate rates.

	•		Achievement of our growth objectives is dependent upon our ability to open and acquire new stores. Our expansion strategy includes opening new stores and acquiring existing stores. The success of this strategy is subject to numerous factors that cannot be predicted or controlled, such as the availability of acceptable locations, the ability to obtain required government permits and licenses, the availability of attractive acquisition candidates and our ability to attract, train and retain qualified associates. Failure to achieve our expansion goals would adversely affect our prospects and future results of operations.
	•		Changes in the business, regulatory or political climate in Mexico or Canada could adversely affect our operations in those countries, which could adversely affect our growth plans. Our growth plans include significant expansion in Mexico and Canada. Changes in the business, regulatory or political climate in either of those countries, or significant fluctuations in currency exchange rates could affect our ability to expand or continue our operations there, which could have a material adverse impact on our prospects, results of operations and cash flows.
	•		Drug related violence could adversely affect our operations and growth plans in Mexico. To date, the drug related violence in Mexico has been most prevalent along the United States border and other areas where we do not have a significant presence, and has had little effect on our operations. If the violence were to spread to other areas of Mexico, where we have a greater presence, it could affect our ability to expand or continue our operations there, which could have a material adverse impact on our prospects, results of operations, cash flows and assets.
	•		Fluctuations in our sales, pawn loan balances, sales margins, pawn redemption rates and loan default and collection rates could have a material adverse impact on our operating results. We regularly experience fluctuations in a variety of operating metrics. Changes in any of these metrics, as might be caused by changes in the economic environment, competitive pressures, changes in customers’ tastes and preferences or a significant decrease in gold prices could materially and adversely affect our profitability and ability to achieve our planned results of operations.
	•		Changes in our liquidity and capital requirements or in banks’ abilities or willingness to lend to us could limit our ability to achieve our plans. We require continued access to capital. A significant reduction in cash flows from operations or the availability of credit could materially and adversely affect our ability to achieve our planned growth and operating results. We currently have a credit agreement with a syndicate of banks. If one of those lenders is unable to provide funding in accordance with its commitment, our available credit could be reduced by the amount of that lender’s commitment.
	•		Changes in competition from various sources could have a material adverse impact on our ability to achieve our plans. We encounter significant competition from other pawn stores, cash advance companies, credit service organizations, online lenders, consumer finance companies and other forms of financial institutions and other retailers, many of which have significantly greater financial resources than we do. Significant increases in the number or size of competitors or other changes in competitive influences could adversely affect our operations through a decrease in the number or quality of loan products and services we are able to provide or our ability to liquidate forfeited collateral at acceptable margins.
	•		Infrastructure failures and breaches in data security could harm our business. We depend on our information technology infrastructure to achieve our business objectives. If a problem, such as a computer virus, intentional disruption by a third party, natural disaster, telecommunications system failure or lost connectivity impairs our infrastructure, we may be unable to process transactions or otherwise carry on our business. An infrastructure disruption could damage our reputation and cause us to lose customers and revenue, result in the unintentional disclosure of company or customer information, and require us to incur significant expense to eliminate these problems and address related data security concerns.
	•		We are beginning to implement an online short-term consumer lending business, which will be subject to additional risks. We recently announced the formation of an eCommerce and Card Services division, which among things, will be responsible for developing an online short-term consumer lending

			business. In addition to being subject to the various federal, state and local regulations that are applicable to short-term consumer lending generally, this business will also be subject to other regulations and risks. For example, we will be dependent on third parties, referred to as lead providers, to provide us with prospective new customers. Generally, lead providers operate separate websites to attract prospective customers and then sell those “leads” to online lenders. As a result, the success of our online consumer lending business will depend substantially on the willingness and ability of lead providers to send us customer leads at prices acceptable to us. The loss or a reduction in leads from lead providers, or the failure of our lead providers to maintain quality and consistency in their programs or services, could reduce our customer prospects and could have a material adverse effect on the success of this line of business. Furthermore, the lead providers’ failure to comply with applicable laws or regulations, or any changes in laws or regulations applicable to lead providers, could have an adverse effect on our online consumer lending business.
	•		One person beneficially owns all of our voting stock and controls the outcome of all matters requiring a vote of stockholders, which may influence the value of our publicly traded non-voting stock. Phillip E. Cohen is the beneficial owner of all of our Class B Voting Common Stock and controls the outcome of all issues requiring a vote of stockholders. All of our publicly traded stock is non-voting stock. Consequently, stockholders other than Mr. Cohen have no vote with respect to the election of directors or any other matter requiring a vote of stockholders. This lack of voting rights may adversely affect the market value of the publicly traded Class A Non-voting Common Stock.
	•		We may be subject to litigation proceedings that could harm our business. 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, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or an injunction prohibiting us from conducting our business as we currently do. If we were to receive an unfavorable ruling in a matter, our business and results of operations could be materially harmed.
	•		We invest in companies for strategic reasons and may not realize a return on our investments. We currently have significant investments in Albemarle & Bond Holdings PLC and Cash Converters International Limited, both of which are publicly traded companies based outside the United States. We have made these investments, and may in the future make additional investments in these or other companies, to further our strategic objectives. The success of these strategic investments is dependent on a variety of factors, including the business performance of the companies in which we invest and the market’s assessment of that performance. If the business performance of any of these companies suffers, then the value of our investment may decline. If we determine that an other-than-temporary decline in the fair value exists for one of our equity investments, we will be required to write down that investment to its fair value and recognize the related write-down as an investment loss. Furthermore, there can be no assurance that we will be able to dispose of some or all of an investment on favorable terms, should we decide to do so in the future. Any realized investment loss would adversely affect our results of operations.
	•		We may incur property, casualty or other losses not covered by insurance. We maintain a program of insurance coverage for various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insurance basis. Losses not covered by insurance could be substantial and may increase our expenses, which could harm our results of operations and financial condition.
	•		Our acquisitions, investments and other transactions could disrupt our ongoing business and harm our results of operations. In pursuing our business strategy, we routinely conduct discussions, evaluate opportunities and enter into agreements regarding possible acquisitions, investments and other transactions. These transactions may involve significant challenges and risks, including risks that we may not realize the expected return on an acquisition or investment, that we may not be able to retain key personnel of an acquired business, or that we may experience difficulty in integrating acquired businesses into our business systems and processes. If we do enter into agreements with respect to acquisitions, investments or other

Item 2. Properties

Our typical pawn store is a freestanding building or part of a retail strip center with contiguous parking. Store interiors are designed to resemble small retail operations and attractively display merchandise by category. Distinctive exterior design and attractive in-store signage provide an appealing atmosphere to customers. The typical pawn store has approximately 1,800 square feet of retail space and approximately 3,200 square feet dedicated to collateral storage. Approximately 30% of our pawn stores in Mexico are gold jewelry-only pawn stores with no retail activities, which typically occupy 500 to 1,000 square feet. Financial services stores are designed to resemble a bank interior. The typical financial services store is approximately 1,000 to 1,500 square feet and is located in a retail strip center. Some of our financial services stores adjoin a pawn location and occupy approximately 300 to 500 square feet, with a different entrance, signage, décor, and staffing. From the customers’ perspective, these are viewed as a separate business, but they are covered by the same lease agreement. We maintain property and general liability insurance for each of our stores. Our stores are open six or seven days a week.

We lease substantially all of our locations, and generally lease facilities for a term of three to ten years with one or more renewal options. Our existing leases expire on dates ranging between December 31, 2011 and July 31, 2026, with a small number of leases on month-to-month terms. All leases provide for specified periodic rental payments at market rates. Most leases require us to maintain the property and pay the cost of insurance and taxes. We believe the termination of any one of our leases would not have a material adverse effect on our operations. Our strategy generally is to lease rather than own space for our stores unless we find what we believe is a superior location at an attractive price.

Below is a summary of changes in the number of store locations during fiscal 2011, 2010 and 2009

		Fiscal Years Ended September 30,
		2011				2010				2009
Store count at beginning of fiscal year			1,006				910				809
New stores opened			82				111				42
Acquired stores			40				16				78
Stores closed or consolidated			(17	)			(31	)			(19	)
Store count at end of fiscal year			1,111				1,006				910

In 2011, we opened 57 Empeño Fácil pawn stores in Mexico, 10 CASHMAX financial services stores and five Cash Converters financial and retail services stores in Canada and 10 U.S pawn stores. We also acquired 34 pawn stores in the U.S. and six pawn stores in Mexico during fiscal 2011.

On an ongoing basis, we may close or consolidate under-performing store locations. In fiscal 2011, we closed five U.S. financial services stores and two financial services stores in Canada, consolidated nine U.S. financial services stores into other existing U.S. financial services stores and consolidated one U.S. pawn store into an existing pawn store. In fiscal 2010, we closed 10 financial services stores and consolidated 19 financial services stores into other existing financial services stores and consolidated two U.S. pawn stores into existing pawn stores.

Of our 436 U.S. financial services stores, 158 adjoin a pawn store, but they are covered by the same lease agreement. The lease agreements at approximately 94% of the remaining 278 free-standing U.S. financial services stores contain provisions that limit our exposure for additional rent at these stores to only a few months if laws were enacted that had a significant negative effect on our operations at these stores. If such laws were passed, the space currently utilized by stores adjoining pawn stores could be re-incorporated into the pawn operations. Following the passage of such laws in fiscal 2010, we closed or consolidated 11 signature loan stores in Colorado and Wisconsin, resulting in a total rent exposure of approximately $0.2 million.

The following table presents the number of pawn and financial services store locations by state or province as of September 30, 2011:

		Pawn				Financial Services				Total
		Locations				Locations				Locations
United States:
Texas			186				286				472
Florida			93				—				93
Colorado			38				28				66
Wisconsin			3				35				38
Oklahoma			21				6				27
Idaho			—				20				20
Utah			7				14				21
Alabama			7				9				16
Nevada			16				—				16
Indiana			15				—				15
Iowa			11				—				11
Kansas			—				13				13
Missouri			—				13				13
South Dakota			—				7				7
Tennessee			7				—				7
Nebraska			—				5				5
Illinois			15				—				15
Georgia			7				—				7
Louisiana			3				—				3
Mississippi			3				—				3
Arkansas			1				—				1
Total United States Locations			433				436				869
Mexico:
Guanajuato			24				—				24
Veracruz			25				—				25
Jalisco			16				—				16
Puebla			18				—				18
Mexico			30				—				30
Tamaulipas			12				—				12
Michoacán			10				—				10
Querétaro			6				—				6
Oaxaca			8				—				8
Aguascalientes			5				—				5
Tabasco			10				—				10
San Luis Potosí			4				—				4
Hidalgo			4				—				4
Tlaxcala			3				—				3
Chiapas			2				—				2
Campeche			1				—				1
Total Mexico Locations			178				—				178
Canada:
Ontario			—				64				64
Total Canada Locations			—				64				64
Total Company			611				500				1,111

In addition to our store locations, we lease our corporate office space in Austin, Texas (68,900 square feet), Dallas Texas (2,900 square feet), Querétaro, Mexico (6,700 square feet), and Ontario, Canada (4,200 square feet).

The following table presents store data by segment as of September 30, 2011:

		Company-owned Stores
		U.S. Pawn				Empeño				EZMONEY
		Operations				Fácil				Operations				Consolidated				Franchises
Pawn stores			433				178				—				611				—
Financial services stores adjoining U.S. pawn stores			6				—				152				158				—
Financial services stores — free standing			—				—				342				342				13
Total stores in operation			439				178				494				1,111				13

Item 3. Legal Proceedings

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.

Item 4. Removed and Reserved

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our Class A Non-voting Common Stock (“Class A Common Stock”) is traded on The NASDAQ Stock Market (NASDAQ Global Select Market) under the symbol “EZPW.” As of October 31, 2011, there were 100 stockholders of record of our Class A Common Stock. There is no trading market for our Class B Voting Common Stock (“Class B Common Stock”), which was held by one stockholder as of October 31, 2011.

The high and low per share sales price for our Class A Common Stock for the past two fiscal years, as reported by The NASDAQ Stock Market, were as follows:

		High				Low
Fiscal 2011:
Fourth quarter ended September 30, 2011		$	38.66			$	27.10
Third quarter ended June 30, 2011			35.98				27.78
Second quarter ended March 31, 2011			31.80				25.56
First quarter ended December 31, 2010			28.75				19.23
Fiscal 2010:
Fourth quarter ended September 30, 2010		$	20.80			$	17.88
Third quarter ended June 30, 2010			23.75				10.07
Second quarter ended March 31, 2010			22.19				16.43
First quarter ended December 31, 2009			17.72				12.75

On September 30, 2011, the closing sales price of our Class A Common Stock, as reported by the NASDAQ Stock Market, was $28.54 per share.

We have not declared or paid any dividends during the past two fiscal years, and currently do not anticipate paying any cash dividends in the immediate future. Under the terms of our credit agreement, which expires December 31, 2015, payment of dividends is restricted. Should we pay dividends in the future, our certificate of incorporation provides that cash dividends on common stock, when declared, must be declared and paid at the same per share amounts on both classes of stock. Any future determination to pay cash dividends will be at the discretion of our Board of Directors.

Stock Performance Graph

The following table compares cumulative total stockholder returns for our Class A Common Stock for the last five fiscal years, with the cumulative total return on the NASDAQ Composite Index (ticker symbol IXIC) and the NASDAQ Other Financial Index (ticker symbol IXFN) over the same period. The graph shows the value, at the end of each of the last five fiscal years, of $100 invested in our Class A Common Stock or the indices on September 30, 2006. The graph depicts the change in the value of our Class A Common Stock relative to the indices at the end of each fiscal year and not for any interim period. Historical stock price performance is not necessarily indicative of future stock price performance.

     

Item 6. Selected Financial Data

The following selected financial information should be read in conjunction with, and is qualified in its entirety by the accompanying consolidated financial statements and related notes:

Selected Financial Data

		Fiscal Years Ended September 30,
		2011				2010				2009				2008				2007
						(In thousands, except per share and store figures)
Operating Data:
Sales		$	494,562			$	411,865			$	329,923			$	234,679			$	194,305
Pawn service charges			201,135				163,695				130,169				94,244				73,551
Signature loan fees			150,250				139,315				133,344				128,478				104,347
Auto title loan fees			21,701				17,707				3,589				—				—
Other			1,669				463				431				2				12
Total revenues			869,317				733,045				597,456				457,403				372,215
Cost of goods sold			295,620				251,122				203,589				139,402				118,007
Signature loan bad debt			36,328				31,709				33,553				37,150				28,508
Auto title loan bad debt			2,431				2,735				380				—				—
Net revenues			534,938				447,479				359,934				280,851				225,700
Store operating expenses			267,052				236,664				206,237				158,927				133,180
Administrative expenses			75,270				52,740				40,497				34,951				27,171
Depreciation and amortization			18,344				14,661				12,746				12,354				9,812
(Gain) loss on disposal of assets			309				1,528				(1,024	)			939				(72	)
Interest expense (income), net			1,653				1,199				1,144				(57	)			(1,373	)
Equity in net income of unconsolidated affiliates			(16,237	)			(10,750	)			(5,016	)			(4,342	)			(2,945	)
Other			(164	)			(93	)			38				8				—
Income before income taxes			188,711				151,530				105,312				78,071				59,927
Income tax expense			66,552				54,236				36,840				25,642				22,053
Net income		$	122,159			$	97,294			$	68,472			$	52,429			$	37,874
Earnings per common share, diluted		$	2.43			$	1.96			$	1.42			$	1.21			$	0.88
Cash dividends per common share		$	—			$	—			$	—			$	—			$	—
Weighted average common shares and share equivalents, diluted			50,369				49,576				48,076				43,327				43,230
Stores operated at end of period			1,111				1,006				910				809				731

		September 30,
		2011				2010				2009				2008				2007
										(In thousands)
Balance Sheet Data:
Pawn loans		$	145,318			$	121,201			$	101,684			$	75,936			$	60,742
Signature loans			11,389				10,775				8,357				7,124				4,814
Auto title loans			3,222				3,145				1,663				1				—
Inventory			90,373				71,502				64,001				43,209				37,942
Working capital			291,968				232,713				228,796				159,918				124,871
Total assets			756,450				606,412				492,517				308,720				251,186
Long-term debt			17,500				25,000				35,000				—				—
Stockholders’ equity			664,248				519,428				415,685				273,050				215,925

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 ended September 30, 2011 (“current year” or “fiscal 2011”), September 30, 2010 (“prior year” or “fiscal 2010”) and September 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 in Texas only, fee-based credit services to customers seeking loans.

At September 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 in Mexico (operating as Empeño Fácil or Empeñe Su Oro), 436 U.S. financial services stores (operating primarily as EZMONEY), 49 financial services stores in Canada (operating as CASHMAX) and 15 financial and retail services stores (operating as Cash Converters). In addition, we are the franchisor for 13 franchised Cash Converters stores in Canada. We also own almost 30% of Albemarle & Bond Holdings PLC, one of the U.K.’s largest pawnbroking businesses with over 150 stores, and almost 33% of Cash 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.

Our business consists of three reportable segments: The U.S. Pawn Operations, which operates only in the United States; Empeño Fácil, which operates only in Mexico; and EZMONEY Operations which operates 430 stores in the United States and 64 stores in Canada. 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. In Mexico, pawn service charges range from 15% to 21% per month, including applicable taxes, with the majority of loans earning 21%. The total Mexico 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

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. At September 30, 2011 our total allowance was 9.5% of gross inventory compared to 7.4% at September 30, 2010. Changes in the valuation allowance are charged to merchandise cost of goods sold.

Signature Loan and Auto Title Loan Activities

At September 30, 2011, 286 of our U.S. financial services stores and 25 of our U.S. pawn stores in Texas 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. At September 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 of Texas, 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 in Colorado in August 2010, in Wisconsin in January 2011 and in Missouri in June 2011. Installment loan principal amounts range from $100 to $3,000, but average approximately $530.

At September 30, 2011, 397 of our U.S. financial services stores and 44 of our U.S. pawn stores offered auto title loans or, in Texas, 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 ended September 30, 2010, we acquired 16 pawn stores located in the Chicago metropolitan area, Central and South Florida, Corpus Christi, Texas and Las Vegas, Nevada for approximately $21.8 million in cash. In the year ended September 30, 2011, we acquired 40 pawn stores located in the Chicago metropolitan area, Georgia, Central and South Florida, Iowa, Wisconsin, Utah and the Mexican states of Hidalgo and Tlaxcala for approximately $66.2 million in cash and the issuance of approximately 0.2 million shares of EZCORP 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. In April 2011 we also acquired the trademark and licensing rights of Cash Converters in Canada, including rights to receive fees from 13 stores operated by franchisees in Canada.

Other

Included in the current year-to-date period results is a pre-tax administrative expense charge of $10.9 million related to the October 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 in the 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

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.

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 adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 805-10-65 (Business Combinations — Revised) on October 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 ended September 30, 2011 to the year ended September 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.

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	%

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 and Wisconsin, bringing the total number of states in which we have pawn operations to 16 at September 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.

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	%

The average exchange rate used to translate Empeño Fácil’s current year results from Mexican pesos to U.S. dollars was 12.1 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 at September 30, 2011 had been open less than one year. We opened 57 new stores in the current year, 14 of which are Empeñe Su Oro jewelry-only pawn stores. These jewelry-

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 Empeñe Su 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.

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

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. In August 2010, January 2011 and July 2011 we introduced installment loans as a replacement product for payday loans in Colorado, Wisconsin and Missouri, 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 in Canada and closed two, bringing our total at September 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 in Colorado, Wisconsin and Missouri 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

24.0%. The increase in bad debt was in part due to the transition to a lower yielding product in Colorado 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 in Wisconsin from January 1, 2011 to June 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 in Wisconsin effective July 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.

In April 2011, we acquired the Cash Converters franchise rights for Canada, which allows us to open new stores and operate our Canadian stores as Cash Converters stores. By September 30, 2011, we had 15 Canadian stores buying and selling second-hand goods, in addition to offering payday loans, under the Cash 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

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 in Colorado and Wisconsin.

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. At September 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 of Albemarle & Bond increased $0.5 million, or 7%, in the current year to $7.3 million as a result of Albemarle & Bond’s higher earnings, and a slightly stronger British pound in relation to the U.S. dollar. On November 6, 2009, we acquired 108,218,000 newly issued shares, or approximately 30% of the capital stock of Cash Converters International Limited, a publicly traded company headquartered in Perth, Australia for approximately AUS $54.1 million (approximately U.S. $49.6 million). We acquired 16,200,000 additional shares on May 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 our November 6, 2009 initial investment date to the June 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 our Canada 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.

Fiscal 2010 Compared to Fiscal 2009

The following discussion compares our results of operations for the year ended September 30, 2010 to the year ended September 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	%

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 in Illinois, bringing the total number of states in which we had pawn operations to 13 as of September 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.

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	%