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

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		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes 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 March 31, 2008, 38,427,776 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 March 31, 2008, March 31, 2007 and September 30, 2007			1
Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended March 31, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 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			14
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			33
Item 6. Exhibits			33
SIGNATURE			34
EXHIBIT INDEX			35
CERTIFICATIONS
Stock Purchase Agreement
Amendment No. 1 to Stock Purchase Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

		March 31,				March 31,				September 30,
		2008				2007				2007
		(Unaudited)				(Unaudited)
		(In thousands)
Assets:
Current assets:
Cash and cash equivalents		$	35,551			$	61,605			$	22,533
Pawn loans			56,701				43,109				60,742
Payday loans, net			5,290				3,314				4,814
Pawn service charges receivable, net			8,983				6,986				10,113
Signature loan fees receivable, net			4,781				4,334				5,992
Inventory, net			35,999				28,649				37,942
Deferred tax asset, net			9,006				7,150				8,964
Prepaid expenses and other assets			7,281				5,373				6,146
Total current assets			163,592				160,520				157,246
Investment in unconsolidated affiliate			36,904				20,955				35,746
Property and equipment, net			38,413				30,967				33,806
Deferred tax asset, non-current			5,346				4,249				4,765
Goodwill			24,422				768				16,211
Other assets, net			5,350				2,952				3,412
Total assets		$	274,027			$	220,411			$	251,186
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable and other accrued expenses		$	22,202			$	18,594			$	25,592
Customer layaway deposits			2,456				2,168				1,988
Federal income taxes payable			2,363				1,104				4,795
Total current liabilities			27,021				21,866				32,375
Deferred gains and other long-term liabilities			3,003				3,067				2,886
Commitments and contingencies
Stockholders’ equity:
Preferred Stock, par value $.01 per share; 5 million shares authorized; none issued and outstanding			—				—				—
Class A Non-voting Common Stock, par value $.01 per share; 50 million shares authorized; 38,454,875 issued and 38,427,776 outstanding at March 31, 2008; 38,304,741 issued and 38,277,642 outstanding at March 31, 2007; 38,363,176 issued and 38,336,077 outstanding at September 30, 2007			384				383				383
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			133,430				128,916				131,098
Cumulative effect of adopting a new accounting principle			(106	)			—				—
Retained earnings			107,418				63,930				81,847
			241,156				193,259				213,358
Treasury stock, at cost (27,099 shares)			(35	)			(35	)			(35	)
Accumulated other comprehensive income			2,882				2,254				2,602
Total stockholders’ equity			244,003				195,478				215,925
Total liabilities and stockholders’ equity		$	274,027			$	220,411			$	251,186

See Notes to Condensed Consolidated Financial Statements (unaudited).

Condensed Consolidated Statements of Operations (Unaudited)

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(In thousands, except per share amounts)
Revenues:
Sales		$	61,330			$	50,032			$	116,837			$	99,012
Pawn service charges			21,785				16,556				44,693				34,518
Signature loan fees			30,166				22,713				63,694				47,108
Other			344				342				707				692
Total revenues			113,625				89,643				225,931				181,330
Cost of goods sold			36,731				30,374				70,272				60,197
Net revenues			76,894				59,269				155,659				121,133
Operating expenses:
Operations			37,521				31,104				74,592				62,492
Signature loan bad debt			6,632				2,916				16,302				8,944
Administrative			9,829				7,968				19,734				15,495
Depreciation and amortization			3,119				2,401				5,946				4,699
Total operating expenses			57,101				44,389				116,574				91,630
Operating income			19,793				14,880				39,085				29,503
Interest income			(137	)			(567	)			(194	)			(881	)
Interest expense			75				83				156				147
Equity in net income of unconsolidated affiliate			(1,118	)			(820	)			(2,165	)			(1,465	)
Loss on sale / disposal of assets			81				—				243				24
Income before income taxes			20,892				16,184				41,045				31,678
Income tax expense			7,876				5,988				15,474				11,721
Net income		$	13,016			$	10,196			$	25,571			$	19,957
Net income per common share:
Basic		$	0.31			$	0.25			$	0.62			$	0.49
Diluted		$	0.30			$	0.23			$	0.59			$	0.46
Weighted average shares outstanding:
Basic			41,382				41,002				41,360				40,773
Diluted			43,228				43,445				43,241				43,347

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

Condensed Consolidated Statements of Cash Flows (Unaudited)

		Six Months Ended
		March 31,
		2008				2007
		(In thousands)
Operating Activities:
Net income		$	25,571			$	19,957
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,946				4,699
Payday loan loss provision			3,612				1,338
Deferred taxes			(583	)			(500	)
Net loss on sale or disposal of assets			243				24
Share-based compensation			1,924				1,664
Income from investment in unconsolidated affiliate			(2,165	)			(1,465	)
Changes in operating assets and liabilities, net of business acquisitions:
Service charges and fees receivable, net			2,568				1,294
Inventory, net			618				1,053
Prepaid expenses, other current assets, and other assets, net			(1,214	)			(1,519	)
Accounts payable and accrued expenses			(3,392	)			(3,999	)
Customer layaway deposits			403				278
Deferred gains and other long-term liabilities			84				(182	)
Excess tax benefit from stock-based compensation			(261	)			(824	)
Federal income taxes			(2,277	)			2,534
Net cash provided by operating activities			31,077				24,352
Investing Activities:
Pawn loans made			(117,641	)			(92,358	)
Pawn loans repaid			70,063				55,464
Recovery of pawn loan principal through sale of forfeited collateral			57,160				50,003
Payday loans made			(36,304	)			(19,110	)
Payday loans repaid			32,216				16,903
Additions to property and equipment			(9,625	)			(6,248	)
Acquisitions, net of cash acquired			(15,439	)			—
Dividends from unconsolidated affiliate			1,103				826
Net cash provided by (used in) investing activities			(18,467	)			5,480
Financing Activities:
Proceeds from exercise of stock options and warrants			147				1,293
Excess tax benefit from stock-based compensation			261				824
Debt issuance costs			—				(283	)
Net cash provided by financing activities			408				1,834
Change in cash and equivalents			13,018				31,666
Cash and equivalents at beginning of period			22,533				29,939
Cash and equivalents at end of period		$	35,551			$	61,605
Non-cash Investing and Financing Activities:
Pawn loans forfeited and transferred to inventory		$	54,880			$	44,089
Foreign currency translation adjustment		$	(280	)		$	(1,029	)
Cumulative effect of adopting a new accounting principle		$	106			$	—

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. 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 an acquired business (described in Note C) and the adoption of a new accounting principle for uncertain tax positions (described in Note K). 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, 2007. The balance sheet at September 30, 2007 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 and six-month periods ended March 31, 2008 (the “current quarter” and “current year-to-date period”) 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 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.

CREDIT SERVICE REVENUE RECOGNITION: We earn credit service fees when we assist customers in obtaining a loan 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 it 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 sheet. At March 31, 2008, the allowance for Expected LOC Losses was $1.2 million. At that date, our maximum exposure for losses on letters of credit, if all brokered loans defaulted and none was collected, was $21.4 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 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. Loan terms are generally less than 30 days, averaging about 18 days.

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. 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 March 31, 2008, the inventory valuation allowance was $4.7 million, or 11.6% 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-to-date periods. We amortize intangible assets with definite lives over their estimated useful lives, using the straight-line method.

PROPERTY AND EQUIPMENT: Property and equipment is shown net of accumulated depreciation of $89.8 million at March 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-to-date periods.

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 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 must 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 unchanged from the prior year-to-date period at $0.4 million at March 31, 2008.

Effective October 1, 2007, we adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). See Note K for further discussion and related disclosures.

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.

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. Prior to October 1, 2007, we had two reportable segments. Effective October 1, 2007, we reorganized as three reportable segments. See Note L for further discussion and separate data for each segment.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS: In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” 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. We must adopt SFAS No. 157 in our fiscal year ending September 30, 2009. We are currently evaluating the impact, if any, of SFAS No. 157 on our financial position and results of operations. It will not impact our 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 $15.4 million cash and direct transaction costs. The estimated fair values of the assets acquired and liabilities assumed are preliminary, and may be refined within a year of the acquisition. The initial valuation of $15.3 million increased to $15.4 million in the current quarter due to additional professional fees related to the acquisition. The increase was recorded as an increase to goodwill. In the current quarter, 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 is preliminarily 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			8,128
Other assets, net			131
Total assets		$	15,534
Liabilities:
Accrued liabilities		$	(30	)
Customer deposits			(65	)
Total liabilities			(95	)
Net assets acquired		$	15,439

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.

On March 17, 2008, we announced our agreement to acquire up to 100%, but not less than 70%, of the equity ownership of Value Financial Services, Inc., a pawn store chain based in Florida, for approximately $100 million, subject to our due diligence review. On April 28, 2008, we amended the agreement to extend the due diligence period to May 13, 2008 and the expected closing date to June 26, 2008, among other related changes.

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								Six Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
Net income (A)		$	13,016			$	10,196			$	25,571			$	19,957
Weighted average outstanding shares of common stock (B)			41,382				41,002				41,360				40,773
Dilutive effect of stock options, warrants, and restricted stock			1,846				2,443				1,881				2,574
Weighted average common stock and common stock equivalents (C)			43,228				43,445				43,241				43,347
Basic earnings per share (A/B)		$	0.31			$	0.25			$	0.62			$	0.49
Diluted earnings per share (A/C)		$	0.30			$	0.23			$	0.59			$	0.46

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.

Note E: Investment in Unconsolidated Affiliate

At March 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 current year-to-date period ended March 31, 2008 represents our percentage interest in the results of A&B’s operations from July 1, 2007 to December 31, 2007, including the results of 26 stores A&B acquired from a competitor on July 12, 2007.

On July 1, 2007, A&B discontinued use of U.K. GAAP and adopted International Financial Reporting Standards, or IFRS. The prior year figures shown below are restated on IFRS for comparability to the current year presentation. Below is summarized financial information for A&B’s most recently reported results (using average exchange rates for the periods indicated):

		Six Months Ended December 31,
		2007				2006
		(in thousands)
Turnover (gross revenues)		$	50,660			$	32,669
Gross profit			36,574				23,447
Profit after tax (net income)			7,230				5,239

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.

In May 2007, the State of Texas filed suit against EZCORP, Inc. and our Texas affiliates in state district court in Bexar County alleging violations of the Texas Identity Theft statute, Deceptive Trade Practices Act, and a provision of the Business and Commerce Code by allegedly failing to safeguard and properly dispose of customers’ sensitive personal information. In late May 2007, we voluntarily entered into an Agreed Temporary Injunction regarding the safeguarding and disposal of the information. We have reviewed and enhanced our information security polices to address the State’s concerns. We are currently in discussions with the State to reach an amicable resolution of this matter, but can give no assurance that an amicable resolution will be reached prior to the October 20, 2008 scheduled jury trial date.

The Florida Office of Financial Regulation has filed an administrative action against us alleging that our Florida credit service organization business model used in eleven stores adjoining EZPAWN locations violates state usury law. On March 25, 2008, an administrative law judge issued a Recommended Order finding against us and recommending that the Florida Office of Financial Regulation issue a cease and desist order against our ongoing credit services operations in Florida. We expect the Florida Office of Financial Regulation to issue a final order in this matter by May 31, 2008. We intend to appeal any decision and have filed a Motion for Stay Pending Appeal with the Florida Office of Financial Regulation. No ruling on the Motion for Stay has been issued. We cannot give any assurance as to the ultimate outcome of this matter.

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 current quarter and current year-to-date periods ended March 31, 2008 was $12.9 million and $25.9 million. For the comparable 2007 periods, comprehensive income was $10.8 million and $21.0 million, respectively. 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 March 31, 2008, the accumulated balance of foreign currency activity excluded from net income was $4.4 million, net of tax of $1.5 million. The net $2.9 million is presented as “Accumulated other comprehensive income” in the current quarter balance sheet.

Note H: Long-term Debt

While we had no debt at March 31, 2008 and 2007, we have a $40.0 million revolving credit facility secured by our assets, which matures October 1, 2009. For any borrowed funds, we may choose a Eurodollar rate plus 100 to 200 basis points (depending on the leverage ratio) or the agent bank’s base rate. On the unused amount of the revolving 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 agreement require, among other things, that we meet certain financial covenants. We were in compliance with all covenants at March 31, 2008. Payment of dividends and additional debt are allowed but restricted.

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:

		March 31, 2008				March 31, 2007				September 30, 2007
		(In thousands)
Pawn licenses		$	1,549			$	1,549			$	1,549
Goodwill			24,422				768				16,211
Total		$	25,971			$	2,317			$	17,760

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

		March 31, 2008								March 31, 2007								September 30, 2007
						Accumulated								Accumulated								Accumulated
		Carrying Amount				Amortization				Carrying Amount				Amortization				Carrying Amount				Amortization
		(In thousands)
License application fees		$	345			$	(304	)		$	345			$	(273	)		$	345			$	(288	)
Real estate finders’ fees			556				(336	)			556				(319	)			556				(327	)
Non-compete agreements			2,917				(569	)			398				(288	)			898				(324	)
Total		$	3,818			$	(1,209	)		$	1,299			$	(880	)		$	1,799			$	(939	)

Total amortization expense from definite-lived intangible assets for the current quarter and year-to-date periods ended March 31, 2008 was approximately $152,000 and $268,000. For the comparable 2007 periods, amortization expense was approximately $17,000 and $35,000. The following table presents our estimate of amortization expense for definite-lived intangible assets for each of the five succeeding fiscal years as of October 1, 2007 (in thousands):

Fiscal Year		Amortization Expense
2008		$555
2009		$563
2010		$548
2011		$541
2012		$509
Thereafter		$162

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								Six Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(in thousands)
Gross compensation cost		$	1,068			$	914			$	1,924			$	1,664
Income tax benefit			(331	)			(315	)			(599	)			(535	)
Share-based compensation cost, net of tax benefit		$	737			$	599			$	1,325			$	1,129

Stock option and warrant exercises resulted in the issuance of 55,166 shares of Class A Non-voting Common Stock in the current quarter for total proceeds of $64,000. For the current year-to-date period, 91,699 shares of Common Stock were issued for total proceeds of $147,000.

Note K: Adoption of a New Accounting Principle for Income Taxes

Effective October 1, 2007, we adopted Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). To be recognized in the financial statements, FIN 48 requires that a tax position is more-likely-than-not to be sustained upon examination, based on the technical merits of the position. In making the determination of sustainability, we must presume the appropriate taxing authority with full knowledge of all relevant information will examine tax positions. FIN 48 also prescribes how the benefit should be measured, including the consideration of any penalties and interest. It requires that the new standard be applied to the balances of tax assets and liabilities as of the beginning of the period of adoption and that a corresponding adjustment be made to the opening balance of equity. As a result of the adoption of FIN 48, we recognized a $106,000 liability, including $8,600 of penalties and interest, for unrecognized state income tax benefits net of federal taxes, and recorded this as a cumulative adjustment to our beginning equity at October 1, 2007. This balance has not been adjusted since adoption. We will record future changes in FIN 48 tax liabilities and related interest and penalties as federal income tax expense on our statement of operations and in federal income taxes payable on our balance sheet.

Below is a reconciliation of the beginning and ending unrecognized tax benefits for the current year-to-date period (in thousands):

Unrecognized tax benefits at September 30, 2007		$	—
Addition upon initial adoption of FIN 48 October 1, 2007			106
Additions based on current year tax positions			—
Reductions based on settlements with taxing authorities			—
Reductions due to lapse in statute of limitations			—
Unrecognized tax benefits at March 31, 2008		$	106

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 statutes of limitations related to our recorded liability expire between June 15, 2009 and June 15, 2011.

Note L: Operating Segment Information

We manage our business and internal reporting as three reportable segments with operating results reported separately for each segment. Prior to October 1, 2007, we had two reportable segments. Effective October 1, 2007, we broke our previously immaterial EZPAWN Mexico operations into a reportable segment separate from other pawn operations, and have restated prior year amounts on a comparable basis. The three reportable segments are:

	•		EZPAWN U.S. Operations: This segment offers pawn loans and related sales in our 294 U.S. EZPAWN stores and offers signature loans in six U.S. EZMONEY stores and 73 of our U.S. EZPAWN stores.
	•		EZPAWN Mexico Operations: This segment offers pawn loans and related sales in 26 pawn stores in Mexico.
	•		EZMONEY Operations: This segment operates only in the United States and offers signature loans in 456 of our EZMONEY stores.

There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our consolidated financial statements. The following tables present operating segment information:

		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
		(in thousands)
Three Months Ended March 31, 2008:
Revenues:
Sales		$	59,747			$	1,583			$	—			$	61,330
Pawn service charges			20,720				1,065				—				21,785
Signature loan fees			672				—				29,494				30,166
Other			341				3				—				344
Total revenues			81,480				2,651				29,494				113,625
Cost of goods sold			35,784				947				—				36,731
Net revenues			45,696				1,704				29,494				76,894
Operating expenses:
Operations expense			23,521				889				13,111				37,521
Signature loan bad debt			167				—				6,465				6,632
Total direct expenses			23,688				889				19,576				44,153
Store operating income		$	22,008			$	815			$	9,918			$	32,741
Three Months Ended March 31, 2007:
Revenues:
Sales		$	50,019			$	13			$	—			$	50,032
Pawn service charges			16,548				8				—				16,556
Signature loan fees			792				—				21,921				22,713
Other			342				—				—				342
Total revenues			67,701				21				21,921				89,643
Cost of goods sold			30,367				7				—				30,374
Net revenues			37,334				14				21,921				59,269
Operating expenses:
Operations expense			21,501				58				9,545				31,104
Signature loan bad debt			148				—				2,768				2,916
Total direct expenses			21,649				58				12,313				34,020
Store operating income		$	15,685			$	(44	)		$	9,608			$	25,249

		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
		(in thousands)
Six Months Ended March 31, 2008:
Revenues:
Sales		$	113,948			$	2,889			$	—			$	116,837
Pawn service charges			42,710				1,983				—				44,693
Signature loan fees			1,481				—				62,213				63,694
Other			703				4				—				707
Total revenues			158,842				4,876				62,213				225,931
Cost of goods sold			68,552				1,720				—				70,272
Net revenues			90,290				3,156				62,213				155,659
Operating expenses:
Operations expense			47,029				1,721				25,842				74,592
Signature loan bad debt			539				—				15,763				16,302
Total direct expenses			47,568				1,721				41,605				90,894
Store operating income		$	42,722			$	1,435			$	20,608			$	64,765
Six Months Ended March 31, 2007:
Revenues:
Sales		$	98,998			$	14			$	—			$	99,012
Pawn service charges			34,508				10				—				34,518
Signature loan fees			1,704				—				45,404				47,108
Other			692				—				—				692
Total revenues			135,902				24				45,404				181,330
Cost of goods sold			60,188				9				—				60,197
Net revenues			75,714				15				45,404				121,133
Operating expenses:
Operations expense			43,166				120				19,206				62,492
Signature loan bad debt			484				—				8,460				8,944
Total direct expenses			43,650				120				27,666				71,436
Store operating income		$	32,064			$	(105	)		$	17,738			$	49,697

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

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
		(in thousands)
Consolidated store operating income		$	32,741			$	25,249			$	64,765			$	49,697
Administrative expenses			9,829				7,968				19,734				15,495
Depreciation and amortization			3,119				2,401				5,946				4,699
Interest income			(137	)			(567	)			(194	)			(881	)
Interest expense			75				83				156				147
Equity in net income of unconsolidated affiliate			(1,118	)			(820	)			(2,165	)			(1,465	)
Loss on sale / disposal of assets			81				—				243				24
Consolidated income before income taxes		$	20,892			$	16,184			$	41,045			$	31,678

The following table presents separately identified segment assets:

		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
		(in thousands)
Assets at March 31, 2008:
Pawn loans		$	53,243			$	3,458			$	—			$	56,701
Payday loans, net			392				—				4,898				5,290
Inventory, net			34,484				1,515				—				35,999
Total separately identified recorded segment assets		$	88,119			$	4,973			$	4,898			$	97,990
Brokered loans outstanding from unaffiliated lenders		$	339			$	—			$	19,877			$	20,216
Assets at March 31, 2007:
Pawn loans		$	43,074			$	35			$	—			$	43,109
Payday loans, net			436				—				2,878				3,314
Inventory, net			28,566				83				—				28,649
Total separately identified recorded segment assets		$	72,076			$	118			$	2,878			$	75,072
Brokered loans outstanding from unaffiliated lenders		$	411			$	—			$	16,490			$	16,901
Assets at September 30, 2007:
Pawn loans		$	60,602			$	140			$	—			$	60,742
Payday loans, net			457				—				4,357				4,814
Inventory, net			37,749				193				—				37,942
Total separately identified recorded segment assets		$	98,808			$	333			$	4,357			$	103,498
Brokered loans outstanding from unaffiliated lenders		$	477			$	—			$	22,834			$	23,311

Brokered loans are not recorded as an asset on our balance sheet, 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 balance shown above is the gross principal balance of the loans outstanding.

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.

Second Quarter Ended March 31, 2008 vs. Second Quarter Ended March 31, 2007

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

		Three Months Ended March 31,								Percentage
		2008				2007				Change
		(in thousands)
Net revenues:
Sales		$	61,330			$	50,032				22.6	%
Pawn service charges			21,785				16,556				31.6	%
Signature loan fees			30,166				22,713				32.8	%
Other			344				342				0.6	%
Total revenues			113,625				89,643				26.8	%
Cost of goods sold			36,731				30,374				20.9	%
Net revenues		$	76,894			$	59,269				29.7	%
Net income		$	13,016			$	10,196				27.7	%

Six Months Ended March 31, 2008 vs. Six Months Ended March 31, 2007

The following table presents selected, unaudited, consolidated financial data for our six-month periods ended March 31, 2008 and 2007 (the current and prior year-to-date periods):

		Six Months Ended March 31,								Percentage
		2008				2007				Change
		(in thousands)
Net revenues:
Sales		$	116,837			$	99,012				18.0	%
Pawn service charges			44,693				34,518				29.5	%
Signature loan fees			63,694				47,108				35.2	%
Other			707				692				2.2	%
Total revenues			225,931				181,330				24.6	%
Cost of goods sold			70,272				60,197				16.7	%
Net revenues		$	155,659			$	121,133				28.5	%
Net income		$	25,571			$	19,957				28.1	%

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

		Three Months Ended								Six Months Ended
		March 31,								March 31,
		2008				2007				2008				2007
						(Dollars in thousands)
Fee revenue		$	30,166			$	22,713			$	63,694			$	47,108
Bad debt:
Net defaults, including interest on brokered loans			6,489				3,260				15,524				8,660
Insufficient funds fees, net of collections			235				172				595				457
Change in valuation allowance			(123	)			(599	)			14				(300	)
Other related costs			31				83				169				127
Net bad debt			6,632				2,916				16,302				8,944
Fee revenue less bad debt		$	23,534			$	19,797			$	47,392			$	38,164
Average signature loan balance outstanding during period (a)		$	28,417			$	21,079			$	28,365			$	21,045
Signature loan balance at end of period (a)		$	25,506			$	20,215			$	25,506			$	20,215
Participating stores at end of period			535				449				535				449
Signature loan bad debt, as a percent of fee revenue			22.0	%			12.8	%			25.6	%			19.0	%
Net default rate (a) (b)			4.2	%			2.9	%			4.8	%			3.7	%

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. As of March 31, 2008, we offer pawn loans in our 294 domestic pawn stores and 26 Mexico pawn stores. 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 462 EZMONEY stores and 73 of our domestic EZPAWN stores open March 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”).

We manage our business as three segments. The EZPAWN U.S. Operations segment offers pawn related activities in all 294 domestic EZPAWN stores, and offers signature loans in 73 of our domestic EZPAWN stores and six EZMONEY stores. The EZPAWN Mexico Operations segment offers pawn related activities in 26 Mexico pawn stores. The EZMONEY Operations segment offers signature loans in 456 EZMONEY stores, and accounts for approximately 98% of our signature loan revenues. The following tables present store data by operating segment:

		Three Months Ended March 31, 2008
		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
Stores in operation:
Beginning of period			300				25				442				767
New openings			—				1				17				18
Acquired			—				—				—				—
Sold, combined, or closed			—				—				(3	)			(3	)
End of period			300				26				456				782
Average number of stores during the period			300				25				448				773

		Six Months Ended March 31, 2008
		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
Stores in operation:
Beginning of period			300				4				427				731
New openings			—				2				34				36
Acquired			—				20				—				20
Sold, combined, or closed			—				—				(5	)			(5	)
End of period			300				26				456				782
Average number of stores during the period			300				22				440				761
Composition of ending stores:
EZPAWN — United States			294				—				—				294
EZPAWN — Mexico			—				26				—				26
EZMONEY signature loan stores adjoining EZPAWNs			6				—				163				169
EZMONEY signature loan stores — free standing			—				—				293				293
Total stores in operation			300				26				456				782
Total stores offering signature loans			79				—				456				535

		Three Months Ended March 31, 2007
		EZPAWN				EZPAWN
		U.S.				Mexico				EZMONEY
		Operations				Operations				Operations				Consolidated
Stores in operation:
Beginning of period			286				1				334				621
New openings			—				1				30				31
Acquired			—				—				—				—
Sold, combined, or closed			—				—				(1	)			(1	)
End of period			286				2				363				651
Average number of stores during the period			286				2				345				633