NOTE 3: STRATEGIC INVESTMENTS
As of
June 30, 2017
, we owned
156,552,484
shares, or approximately
32%
, of our unconsolidated affiliate Cash Converters International Limited ("Cash Converters International"). The following tables present summary financial information for Cash Converters International’s most recently reported results as of
June 30, 2017
after translation to U.S. dollars:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2016
|
|
2015
|
|
|
|
|
|
(in thousands)
|
Current assets
|
$
|
158,235
|
|
|
$
|
176,105
|
|
Non-current assets
|
141,218
|
|
|
143,466
|
|
Total assets
|
$
|
299,453
|
|
|
$
|
319,571
|
|
|
|
|
|
Current liabilities
|
$
|
70,468
|
|
|
$
|
68,857
|
|
Non-current liabilities
|
48,181
|
|
|
48,263
|
|
Shareholders’ equity:
|
|
|
|
Equity attributable to owners of the parent
|
$
|
180,803
|
|
|
$
|
202,450
|
|
Noncontrolling interest
|
1
|
|
|
1
|
|
Total liabilities and shareholders’ equity
|
$
|
299,453
|
|
|
$
|
319,571
|
|
|
|
|
|
|
|
|
|
|
|
Half Year Ended December 31,
|
|
2016
|
|
2015
|
|
|
|
|
|
(in thousands)
|
Gross revenues*
|
$
|
108,161
|
|
|
$
|
110,219
|
|
Gross profit*
|
74,343
|
|
|
81,139
|
|
Net profit
|
8,633
|
|
|
11,483
|
|
|
|
*
|
Cash Converters International announced during its fiscal 2016 that certain of its United Kingdom operations would be discontinued, including a historical recasting of such operations as discontinued operations. We have recast the above information pertaining to the half year ended December 31, 2015 to reflect this historical recasting.
|
During the nine months ended June 30, 2017, the fair value of our investment in Cash Converters International declined below its carrying value. We considered the guidance in FASB Accounting Standards Codification ("ASC") 320-10-S99-1 in evaluating whether the impairment was other-than-temporary and whether to measure and recognize any other-than-temporary impairment. We noted the primary factors in determining that the decline in fair value was not other-than-temporary were the length of time and the extent to which the market value has been less than cost as well as our intent and ability to hold our investment in Cash Converters International for a period of time sufficient to allow for any anticipated recovery in market value. We do not believe the decline in fair value is other-than-temporary.
We continue to monitor the fair value of our investment in Cash Converters International for other-than-temporary impairments in future reporting periods and may record an impairment charge should the fair value of our investment in Cash Converters International remain below its carrying value for an extended period of time. We have previously recorded impairments on our investment in Cash Converters International in fiscal 2016 and 2015. See
Note 4
for the fair value and carrying value of our investment in Cash Converters International.
NOTE 4: FAIR VALUE MEASUREMENTS
In accordance with ASC 820-10, our assets and liabilities discussed below are classified in one of the following three categories based on the inputs used to develop their fair values: Level 1 — Quoted market prices in active markets for identical assets or liabilities; Level 2 — Other observable market-based inputs or unobservable inputs that are corroborated by market data; and Level 3 — Unobservable inputs that are not corroborated by market data.
Recurring Fair Value Measurements
The tables below present our financial assets (liabilities) that were carried and measured at fair value on a recurring basis, exclusive of amounts attributable to Prestaciones Finmart, S.A.P.I. de C.V., SOFOM, E.N.R. ("Grupo Finmart"), which we divested in September 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets (Liabilities)
|
|
Balance Sheet Location
|
|
June 30, 2017
|
|
June 30, 2016
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Guarantee asset — Level 3
|
|
Prepaid expenses and other current assets
|
|
$
|
298
|
|
|
$
|
—
|
|
|
$
|
1,209
|
|
Guarantee liability — Level 3
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
(310
|
)
|
|
—
|
|
|
(1,258
|
)
|
Cash Convertible Notes Hedges — Level 2
|
|
Other assets, net
|
|
5,900
|
|
|
16,200
|
|
|
37,692
|
|
Cash Convertible Notes Embedded Derivative — Level 2
|
|
Long-term debt, net
|
|
(5,900
|
)
|
|
(16,200
|
)
|
|
(37,692
|
)
|
Cash Convertible Notes Warrants — Level 3
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
(523
|
)
|
|
—
|
|
|
—
|
|
We initially measured the guarantee asset and liability at fair value and are subsequently amortizing the guarantees based upon the principal payments received on the associated notes receivable, which approximates the fair value of the guarantees on a recurring basis. See discussion of settlement subsequent to June 30, 2017 in
Note 10
.
We measured the fair value of the Cash Convertible Notes Hedges and the Cash Convertible Notes Embedded Derivative using the Black-Scholes-Merton
model based on observable Level 1 and Level 2 inputs such as conversion price of underlying shares, current share price, implied volatility, risk free interest rate and other factors. As of June 30, 2017 the volatility input was revised downward to
44%
based on observed market inputs. As of June 30, 2016 and September 30, 2016 these inputs included volatilities of
53%
to
55%
.
We executed agreements dated as of June 29, 2017 to cash settle a portion of the Cash Convertible Notes Hedges and Cash Convertible Notes Warrants pertaining to the partial repayment of the Cash Convertible Notes in July 2017. Based on the negotiated cash settlement amount with our counterparties in July 2017, we realized a volatility of approximately
32%
to
34%
, reducing the amount received on the amounts recorded above as of June 30, 2017. As of June 30, 2017, we reclassified the portion of Cash Convertible Notes Warrants which were cash settled in July 2017 from equity to a liability at its current fair value, including inputs for current share price and trading volume. See
Note 5
and
Note 10
for additional discussion.
There were no transfers in or out of Level 1 or Level 2 for financial assets or liabilities measured at fair value on a recurring basis during the periods presented.
Financial Assets and Liabilities Not Measured at Fair Value
The tables below present our financial assets and liabilities that were not measured at fair value (including those discussed below the following tables) on a recurring basis, exclusive of amounts attributable to Grupo Finmart:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
June 30, 2017
|
|
June 30, 2017
|
|
Fair Value Measurement Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
$
|
63,277
|
|
|
$
|
65,570
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65,570
|
|
Investment in unconsolidated affiliate
|
|
41,725
|
|
|
37,306
|
|
|
37,306
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Cash Convertible Notes
|
|
$
|
206,279
|
|
|
$
|
218,500
|
|
|
$
|
—
|
|
|
$
|
218,500
|
|
|
$
|
—
|
|
Term Loan Facility
|
|
48,235
|
|
|
48,159
|
|
|
—
|
|
|
—
|
|
|
48,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
June 30, 2016
|
|
June 30, 2016
|
|
Fair Value Measurement Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated affiliate
|
|
$
|
56,843
|
|
|
$
|
49,149
|
|
|
$
|
49,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Cash Convertible Notes
|
|
$
|
195,221
|
|
|
$
|
190,762
|
|
|
$
|
—
|
|
|
$
|
190,762
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
|
September 30, 2016
|
|
September 30, 2016
|
|
Fair Value Measurement Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, net
|
|
$
|
83,065
|
|
|
$
|
83,065
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,065
|
|
Investment in unconsolidated affiliate
|
|
37,128
|
|
|
37,128
|
|
|
37,128
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
Cash Convertible Notes
|
|
$
|
197,954
|
|
|
$
|
227,332
|
|
|
$
|
—
|
|
|
$
|
227,332
|
|
|
$
|
—
|
|
Term Loan Facility
|
|
47,965
|
|
|
48,688
|
|
|
—
|
|
|
—
|
|
|
48,688
|
|
Based on the short-term nature of cash and cash equivalents, pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable, we estimate that their carrying value approximates fair value. We consider our cash and cash equivalents to be measured using Level 1 inputs and our pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable to be measured using Level 3 inputs. Significant increases or decreases in the underlying assumptions used to value pawn loans, pawn service charges receivable and current consumer loans, fees and interest receivable could significantly increase or decrease these fair value estimates.
We measured the fair value of the notes receivable under a discounted cash flow approach considering the synthetic credit ratings for Grupo Finmart and Alpha Holding, S.A. de C.V. (“AlphaCredit”), as applicable and as determined with external consultation, with discount rates ranging primarily from
8%
to
15%
. Certain of the significant inputs used for the valuation were not observable in the market. Significant increases or decreases in the underlying assumptions used to value the notes receivable could significantly increase or decrease these fair value estimates.
The inputs used to generate the fair value of the investment in unconsolidated affiliate Cash Converters International were considered Level 1 inputs. These inputs are comprised of (a) the quoted stock price on the Australian Stock Exchange multiplied by (b) the number of shares we owned multiplied by (c) the applicable foreign currency exchange rate as of the end of our reporting period. We included no control premium for owning a large percentage of outstanding shares.
We measured the fair value of the Cash Convertible Notes using quoted price inputs from Bloomberg. The Cash Convertible Notes are not actively traded and thus the price inputs represent a Level 2 measurement. As the Cash Convertible Notes are not actively traded, the quoted price inputs obtained from Bloomberg are highly variable from day to day and thus the fair value estimates disclosed above could significantly increase or decrease.
We measured the fair value of the Term Loan Facility under a discounted cash flow approach considering our synthetic credit rating, including inputs that are not observable in the market, with discount rates up to approximately
9%
. A
50
basis point increase or decrease in the calculated credit spread based on our underlying synthetic credit rating would increase or decrease the fair value of our Term Loan Facility by approximately
$1.2 million
. The fair value of the Term Loan Facility approximated its carrying value, inclusive of issuance costs and exclusive of deferred financing costs, as of September 30, 2016. See
Note 5
and
Note 10
for additional discussion.
Notes Receivable from Grupo Finmart Divestiture
Subsequent to the sale of Grupo Finmart in September 2016, we determined that we retained a variable interest in Grupo Finmart, including notes receivable and a guarantee liability of the future cash outflows of certain Grupo Finmart foreign exchange forward contracts with a backup guarantee provided by AlphaCredit for any payments we make under the guarantee. We determined that we are not the primary beneficiary of Grupo Finmart subsequent to its disposition as we lack a controlling financial interest in Grupo Finmart. As of
June 30, 2017
, we had a total gross outstanding balance on our notes receivable of
$67.1 million
. We have collected
$8.2 million
and
$23.3 million
, respectively, in principal on these notes receivable during the three and nine months ended
June 30, 2017
.
The following table presents the carrying amount and classification of the assets and liabilities pertaining to our variable interest compared to the maximum exposure to loss for each asset and liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
September 30, 2016
|
Instrument
|
|
Balance Sheet Location
|
|
Asset (Liability) Recorded in Consolidated Balance Sheet
|
|
Maximum Exposure to Loss
|
|
Asset (Liability) Recorded in Consolidated Balance Sheet
|
|
Maximum Exposure to Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes receivable
|
|
Notes receivable, net (including discount of $3.8 million and $6.7 million as of June 30, 2017 and September 30, 2016, respectively)
|
|
$
|
63,277
|
|
|
$
|
63,277
|
|
|
$
|
83,065
|
|
|
$
|
83,065
|
|
Guarantee asset
|
|
Prepaid expenses and other current assets
|
|
298
|
|
|
—
|
|
|
1,209
|
|
|
—
|
|
Guarantee liability*
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
(310
|
)
|
|
—
|
|
|
(1,258
|
)
|
|
—
|
|
|
|
*
|
Maximum exposure to loss under the guarantee liability was
$6.2 million
and
$25.3 million
as of
June 30, 2017
and
September 30, 2016
, respectively. However such amount is included within the maximum exposure to loss for the notes receivable above, as the guarantee liability is a guarantee by us of Grupo Finmart’s repayment of our notes receivable owed by Grupo Finmart. See discussion of repayment subsequent to June 30, 2017 in
Note 10
.
|
NOTE 5: LONG-TERM DEBT
The following tables present our long-term debt instruments outstanding as well as future principal payments due, exclusive of amounts attributable to Grupo Finmart:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
September 30, 2016
|
|
Gross Amount
|
|
Debt Discount and Issuance Costs
|
|
Carrying Amount
|
|
Gross Amount
|
|
Debt Discount and Issuance Costs
|
|
Carrying Amount
|
|
Gross Amount
|
|
Debt Discount and Issuance Costs
|
|
Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2.125% Cash convertible senior notes due 2019
|
$
|
230,000
|
|
|
$
|
(23,721
|
)
|
|
$
|
206,279
|
|
|
$
|
230,000
|
|
|
$
|
(34,779
|
)
|
|
$
|
195,221
|
|
|
$
|
230,000
|
|
|
$
|
(32,046
|
)
|
|
$
|
197,954
|
|
Cash convertible senior notes due 2019 embedded derivative
|
5,900
|
|
|
—
|
|
|
5,900
|
|
|
16,200
|
|
|
—
|
|
|
16,200
|
|
|
37,692
|
|
|
—
|
|
|
37,692
|
|
Term loan facility
|
50,000
|
|
|
(1,765
|
)
|
|
48,235
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
(2,035
|
)
|
|
47,965
|
|
|
$
|
285,900
|
|
|
$
|
(25,486
|
)
|
|
$
|
260,414
|
|
|
$
|
246,200
|
|
|
$
|
(34,779
|
)
|
|
$
|
211,421
|
|
|
$
|
317,692
|
|
|
$
|
(34,081
|
)
|
|
$
|
283,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Payment Schedule
|
|
Total
|
|
Less Than 1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More Than 5 Years
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
2.125% Cash convertible senior notes due 2019 (a) (b)
|
$
|
230,000
|
|
|
$
|
—
|
|
|
$
|
230,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Term loan facility (b)
|
50,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,000
|
|
|
$
|
280,000
|
|
|
$
|
—
|
|
|
$
|
230,000
|
|
|
$
|
—
|
|
|
$
|
50,000
|
|
|
|
(a)
|
Excludes the potential impact of the embedded derivative.
|
|
|
(b)
|
See discussion of repayments subsequent to June 30, 2017 in
Note 10
.
|
Term Loan Facility up to $100 Million
On September 12, 2016 (the “Closing Date”), EZCORP, Inc. (as borrower) and certain of its subsidiaries (as guarantors) entered into a “Financing Agreement” with certain lenders (the “Lenders”) and Fortress Credit Co LLC (as collateral and administrative agent for the Lenders). The Financing Agreement provides for a senior secured credit facility in an aggregate principal amount of
$100 million
, subject to various terms and conditions contained in the Financing Agreement. The credit facility (“Term Loan Facility”) consists of an Initial Term Loan of
$50 million
that was drawn on the Closing Date and a Delayed Draw Term Loan of
$50 million
.
Borrowings under the facility bear interest at an annual rate initially equal to the London Interbank Offered Rate (“LIBOR”) plus
7.5%
or, at our election, a “Reference Rate” plus
6.5%
. The LIBOR is subject to a floor of
1%
and the Reference Rate is subject to a floor of
3%
. We pay a monthly fee of
2.75%
per annum on the average daily unused portion of the Delayed Draw Term Loan facility and a quarterly loan servicing fee of
$15,000
.
The Term Loan Facility was repaid in full and terminated subsequent to June 30, 2017. See
Note 10
.
2.125% Cash Convertible Senior Notes Due 2019
In June 2014 ("Original Issuance Date"), we issued
$200 million
aggregate principal amount of
2.125%
Cash Convertible
Notes, with an additional
$30 million
principal amount of Cash Convertible Notes issued in July 2014. All of the Cash Convertible Notes were issued
pursuant to an indenture dated June 23, 2014 (the "Indenture") by and between EZCORP and Wells Fargo Bank, National Association, as the trustee. The Cash Convertible Notes were issued in a private offering
and resold under Rule 144A under the Securities Act of 1933.
The Cash Convertible Notes pay interest semi-annually in arrears at a rate of
2.125%
per annum on June 15 and December 15 of each year and mature on June 15, 2019 (the "Maturity Date").
Prior to December 15, 2018, the Cash Convertible Notes will be convertible only upon the occurrence of certain events and during certain periods, and thereafter, at any time prior to the close of business on the second scheduled trading day immediately preceding the Maturity Date. At maturity, the holders of the Cash Convertible Notes will be entitled to receive
cash equal to the principal amount of the Cash Convertible Notes plus unpaid accrued interest.
See discussion of partial repayment subsequent to June 30, 2017 in
Note 10
.
Cash Convertible Notes Embedded Derivative
We account for the cash conversion feature of the Cash Convertible Notes as a separate derivative instrument (the “Cash Convertible Notes
Embedded Derivative
”). The Cash Convertible Notes are convertible into cash, subject to satisfaction of certain conditions and during the periods described below, based on an initial "Conversion Rate" of
62.2471
shares of Class A Common Stock per
$1,000
principal amount of Cash Convertible Notes (equivalent to an initial "Conversion Price" of approximately
$16.065
per share of our Class A Common Stock). Upon conversion of a note, we will pay cash based on a daily conversion value calculated on a proportionate basis for each trading day in the applicable
80
trading day observation period as described in the Indenture. The Conversion Rate will not be adjusted for any accrued and unpaid interest.
Holders may surrender their Cash Convertible Notes for conversion into cash prior to December 15, 2018 only under the following circumstances (the “Early Conversion Conditions”):
(1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2014 (and only during such fiscal quarter), if the last reported sale price of our Class A Common Stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price, as defined in the Indenture, per
$1,000
principal amount of notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our Class A Common Stock and the conversion rate on such trading day; or (3) upon the occurrence of specified corporate events, as defined in the Indenture.
On or after December 15, 2018 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, holders may convert their notes into cash at any time, regardless of the foregoing circumstances.
If a holder elects to convert its Cash Convertible Notes in connection with certain make-whole fundamental changes, as that term is defined in the Indenture, that occur prior to the Maturity Date, we will in certain circumstances increase the Conversion Rate for Cash Convertible Notes converted in connection with such make-whole fundamental changes by a specified number of shares of Class A Common Stock. In addition, the Conversion Rate is subject to customary anti-dilution adjustments
(for example, certain dividend distributions or tender or exchange offer of our Class A Common Stock).
Upon the occurrence of a fundamental change, as defined in the Indenture, holders may require us to repurchase for cash all or any portion of the then outstanding Cash Convertible Notes at a repurchase price equal to
100%
of the principal amount of the notes to be repurchased, plus accrued and unpaid interest.
As of
June 30, 2017
, no triggering events occurred for of the note holders to elect to convert their Cash Convertible Notes. Subsequent to June 30, 2017, we repurchased and retired
$35.0 million
aggregate principal amount of Cash Convertible Notes, leaving
$195.0 million
aggregate principal amount outstanding. See
Note 10
.
Cash Convertible Notes Hedges
In connection with the issuance of the Cash Convertible Notes, we purchased cash-settled call options (the “Cash Convertible Notes Hedges”) in privately negotiated transactions with certain of the initial purchasers or their affiliates (in this capacity, the “Option Counterparties”). The Cash Convertible Notes Hedges provide us with the option to acquire, on a net settlement basis, approximately
14.3 million
shares of our Class A Common Stock at a strike price of
$16.065
, which is equal to the number of shares of our Class A Common Stock that notionally underlie the Cash Convertible Notes and corresponds to the Conversion Price of the Cash Convertible Notes. The Cash Convertible Notes Hedges have
an expiration date that is the same as the Maturity Date of the Cash Convertible Notes, subject to earlier exercise
. The Cash Convertible Notes Hedges have customary anti-dilution provisions similar to the Cash Convertible Notes.
If we exercise the Cash Convertible Notes
Hedges
, the aggregate amount of cash we will receive from the Option Counterparties will cover the aggregate amount of cash that we would be required to pay to the holders of the converted Cash Convertible Notes, less the principal amount thereof.
As of
June 30, 2017
, we have not purchased any shares under the Cash Convertible Notes Hedges.
The aggregate cost of the Cash Convertible Notes Hedges was
$46.5 million
(or
$21.3 million
net of the total proceeds from the Warrants sold, as discussed below). The Cash Convertible Notes Hedges are accounted for as a derivative asset and are recorded in the condensed consolidated balance sheets at their estimated fair value. The Cash Convertible Notes Embedded Derivative liability and the Cash Convertible Notes Hedges asset will be adjusted to fair value each reporting period and unrealized gains and losses will be reflected in the condensed consolidated statements of operations. The Cash Convertible Notes Embedded Derivative and the Cash Convertible Notes Hedges are designed to have similar fair values. Accordingly, the changes in the fair values of these instruments are expected to offset and not have a net impact on the condensed consolidated
statements of operations. See
Note 4
for discussion of fair value of the Cash Convertible Notes Embedded Derivative liability and the Cash Convertible Notes Hedges asset.
Subsequent to June 30, 2017, in connection with our repurchase and retirement of
$35.0 million
aggregate principal amount of Cash Convertible Notes, we settled and terminated the portion of the Cash Convertible Notes Hedges associated with the retired Cash Convertible Notes principal. See
Note 10
.
Cash Convertible Notes Warrants
In connection with the issuance of the Cash Convertible Notes, we also sold net-share-settled warrants (the “Cash Convertible Notes Warrants”) in privately negotiated transactions with the Option Counterparties for the purchase of up to approximately
14.3 million
shares of our Class A Common Stock at a strike price of
$20.83
per share, for total proceeds of
$25.1 million
, net of issuance costs, which was recorded as an increase in stockholders' equity. The Cash Convertible Notes Warrants have customary anti-dilution provisions similar to the Cash Convertible Notes. As a result of the Cash Convertible Notes Warrants, we will experience dilution to our diluted earnings per share if our average closing stock price exceeds
$20.83
for any fiscal quarter. The Cash Convertible Notes Warrants expire on various dates from September 2019 through February 2020 and must be settled in net shares of our Class A Common Stock. Therefore, upon expiration of the Cash Convertible Notes Warrants, we will issue shares of Class A Common Stock to the purchasers of the Cash Convertible Notes Warrants that represent the value by which the price of the Class A Common Stock exceeds the strike price stipulated within the particular warrant agreement. As of
June 30, 2017
, there were
12.1 million
Cash Convertible Notes Warrants outstanding. Subsequent to June 30, 2017, in connection with our repurchase and retirement of
$35.0 million
aggregate principal amount of Cash Convertible Notes, we settled and terminated the portion of the Cash Convertible Notes Warrants associated with the retired Cash Convertible Notes principal. See
Note 10
.
NOTE 6: STOCK COMPENSATION
On May 1, 2010 our Board of Directors approved the adoption of the EZCORP, Inc. 2010 Long-Term Incentive Plan (the “2010 Plan”). As of September 30, 2016, the 2010 Plan permitted grants of options, restricted stock awards and stock appreciation rights covering up to
3,485,649
shares of our Class A Common Stock. In December 2016, the Board of Directors and the voting stockholder approved the addition of
500,000
shares to the 2010 Plan.
In November and December 2016, we granted
919,898
restricted stock unit awards to employees and
72,500
restricted stock awards to non-employee directors with a grant date fair value of primarily
$9.60
per share. Our long-term incentive awards are generally granted based on our share price as of October 1 each year, which was
$11.06
for these fiscal 2017 awards. The awards granted to employees vest on September 30, 2019 subject to the achievement of certain performance targets. As of
June 30, 2017
, we considered the achievement of these performance targets probable. The awards granted to non-employee directors vest over
two
years,
50%
on September 30, 2017 and
50%
on September 30, 2018 and are subject only to service conditions.
NOTE 7: CONTINGENCIES
We are involved in various claims, suits, investigations and legal proceedings, including those described below. We are unable to determine the ultimate outcome of any current litigation or regulatory actions. An unfavorable outcome could have a material adverse effect on our financial condition, results of operations or liquidity. Except as noted below, we have not recorded a liability for any of these matters as of
June 30, 2017
because we do not believe at this time that any loss is probable or that the amount of any probable loss can be reasonably estimated. The following is a description of significant proceedings.
Shareholder derivative litigation
— On July 28, 2014, Lawrence Treppel, a purported holder of Class A Common Stock, filed a derivative action in the Court of Chancery of the State of Delaware styled
Treppel v. Cohen, et al.
(C.A. No. 9962-VCP). The complaint, as originally filed and as amended on September 23, 2014, names as defendants Phillip E. Cohen, the beneficial owner of all of our outstanding Class B Voting Common Stock; several current and former members of our Board of Directors (Joseph J. Beal, Sterling B. Brinkley, John Farrell, Pablo Lagos Espinosa, William C. Love, Thomas C. Roberts and Paul E. Rothamel);
three
entities controlled by Mr. Cohen (MS Pawn Limited Partnership, the record holder of our Class B Voting Common Stock; MS Pawn Corporation, the general partner of MS Pawn Limited Partnership; and Madison Park LLC); and EZCORP, Inc., as nominal defendant. The amended complaint asserts the following claims:
|
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•
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Claims against the current and former Board members for breach of fiduciary duties and waste of corporate assets in connection with the Board’s decision to enter into advisory services agreements with Madison Park from October 2004 to June 2014 (Counts I and II, respectively);
|
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|
•
|
Claims against Mr. Cohen and MS Pawn Limited Partnership for aiding and abetting the breaches of fiduciary duties relating to the advisory services agreements with Madison Park (Count III); and
|
|
|
•
|
Claims against Mr. Cohen and Madison Park for unjust enrichment for payments under the advisory services agreements (Count IV).
|
The plaintiff seeks (a) recovery for the Company in the amount of the damages the Company has sustained as a result of the alleged breach of fiduciary duties, waste of corporate assets and aiding and abetting, (b) disgorgement by Mr. Cohen and Madison Park of the benefits they received as a result of the related party transactions and (c) reimbursement of costs and expenses, including reasonable attorney’s fees.
On November 13, 2014, pursuant to the parties’ stipulation, the Court dismissed the action as to Mr. Brinkley, Mr. Rothamel and Mr. Lagos.
The remaining defendants filed motions to dismiss, and a hearing on those motions was held before the Court on September 8, 2015. Prior to that hearing, the plaintiff proposed a dismissal without prejudice for the claims against Mr. Beal, Mr. Love and Mr. Farrell. Those defendants continued to seek a dismissal with prejudice that would bind all potential plaintiffs. On January 15, 2016, the Court issued an opinion dismissing the action as to Mr. Beal, Mr. Love and Mr. Farrell with prejudice only as to the plaintiff.
On January 25, 2016, the Court issued a separate opinion granting in part and denying in part the motions to dismiss filed by the remaining defendants. Specifically, the Court granted the motion to dismiss Count IV (unjust enrichment) for failure to state a claim. The Court also dismissed Count III (aiding and abetting) as to Mr. Cohen, but interpreted Count I (breach of fiduciary duty) to state a claim against Mr. Cohen and MS Pawn, as well as Mr. Roberts. The Court otherwise denied the motions to dismiss, including the motion to dismiss Count III (aiding and abetting) against MS Pawn.
On February 4, 2016, the remaining defendants filed an Application for Certification of Interlocutory Appeal, which the plaintiff opposed on February 15, 2016, and the Court set a hearing on the application. On February 22, 2016, the Court denied the Application for Certification of Interlocutory Appeal and provided the plaintiff the opportunity to amend its complaint to add a fiduciary-duty claim as to Mr. Cohen and Madison Park, staying proceedings pending a ruling from the Delaware Supreme Court. After the Application for Certification of Interlocutory Appeal was denied, Mr. Roberts, MS Pawn Corporation and MS Pawn Limited Partnership filed notices of appeal from the interlocutory opinion and order denying the motions to dismiss. On March 10, 2016, the Delaware Supreme Court denied those petitions for an interlocutory appeal.
On March 4, 2016, the plaintiff filed a Second Amended Derivative Complaint against Mr. Roberts, Mr. Cohen, Madison Park, MS Pawn Corporation and MS Pawn Limited Partnership with EZCORP, Inc., as nominal defendant. The case is now in the discovery stage.
We intend to continue to defend vigorously against the claims asserted in the lawsuit. Although the lawsuit does not seek relief against the Company, we have certain indemnification obligations to the other defendants (including Madison Park and Mr. Cohen), which obligations include the payment of attorney's fees in advance of the outcome. We cannot predict the outcome of this lawsuit, or the amount of time and expense that will be required to resolve it.
Federal securities litigation (SDNY)
— On August 22, 2014, Jason Close, a purported holder of Class A Common Stock, for himself and on behalf of other similarly situated holders of Class A Common Stock, filed a lawsuit in the United States District Court for the Southern District of New York styled
Close v. EZCORP, Inc., et al.
(Case No. 1:14-cv-06834-ALC). That lawsuit named as defendants EZCORP, Inc., Paul. E. Rothamel (the Company's former Chief Executive Officer) and Mark Kuchenrither (the Company's former Chief Financial Officer). That lawsuit was consolidated with a similar lawsuit filed in the same court on October 17, 2014 by the Automotive Machinists Pension Plan and styled
Automotive Machinists Pension Plan v. EZCORP, Inc., et al.
(Case No. 1:14-cv-8349-ALC). On November 18, 2014, the court consolidated the
two
lawsuits under the caption
In Re EZCORP, Inc. Securities Litigation
(Case No. 1:14-cv-06834-ALC).
The Consolidated Amended Class Action Complaint asserted certain violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 promulgated thereunder. On March 31, 2016, the Court, in response to the defendants' motions to dismiss, dismissed certain of the claims, but other claims survived the motions to dismiss.
On November 23, 2016, the parties agreed to a mediated settlement of all remaining claims. The settlement provides for the payment of
$5.9 million
by the defendants, which was covered by applicable directors’ and officers’ liability insurance. Following a Settlement Hearing on April 25, 2017, the Court entered an order to approve the settlement and dismiss the case.
Federal Securities Litigation (WDT)
— On July 20, 2015, Wu Winfred Huang, a purported holder of Class A Common Stock, for himself and on behalf of other similarly situated holders of Class A Common Stock, filed a lawsuit in the United States
District Court for the Western District of Texas styled
Huang v. EZCORP, Inc., et al.
(Case No. 1:15-cv-00608-SS). The complaint names as defendants EZCORP, Inc., Stuart I. Grimshaw (our chief executive officer) and Mark E. Kuchenrither (our former chief financial officer) and asserts violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The original complaint related to the Company’s announcement on July 17, 2015 that it will restate the financial statements for fiscal 2014 and the first quarter of fiscal 2015, and alleged generally that the Company issued materially false or misleading statements concerning the Company, its finances, business operations and prospects and that the Company misrepresented the financial performance of the Grupo Finmart business.
On August 14, 2015, a substantially identical lawsuit, styled
Rooney v. EZCORP, Inc., et al.
(Case No. 1:15-cv-00700-SS) was also filed in the United States District Court for the Western District of Texas. On September 28, 2015, the plaintiffs in these
two
lawsuits filed an agreed stipulation to be appointed co-lead plaintiffs and agreed that their two actions should be consolidated. On November 3, 2015, the Court entered an order consolidating the
two
actions under the caption
In re EZCORP, Inc. Securities Litigation
(Master File No. 1:15-cv-00608-SS), and appointed the
two
plaintiffs as co-lead plaintiffs, with their respective counsel appointed as co-lead counsel.
On January 11, 2016, the plaintiffs filed an Amended Class Action Complaint (the "Amended Complaint"). In the Amended Complaint, the plaintiffs seek to represent a class of purchasers of our Class A Common Stock between November 6, 2012 and October 20, 2015. The Amended Complaint asserts that the Company and Mr. Kuchenrither violated Section 10(b) of the Securities Exchange Act and Rule 10b-5, issued materially false or misleading statements throughout the proposed class period concerning the Company and its internal controls, specifically regarding the financial performance of Grupo Finmart. The plaintiffs also allege that Mr. Kuchenrither, as a controlling person of the Company, violated Section 20(a) of the Securities Exchange Act. The Amended Complaint does not assert any claims against Mr. Grimshaw. On February 25, 2016, defendants filed a motion to dismiss the lawsuit. The plaintiff filed an opposition to the motion to dismiss on April 11, 2016, and the defendants filed their reply on May 11, 2016. The Court held a hearing on the motion to dismiss on June 22, 2016.
On October 18, 2016, the Court granted the defendants’ motion to dismiss and dismissed the Amended Complaint without prejudice. The Court gave the plaintiffs 20 days (until November 7, 2016) to file a further amended complaint. On November 4, 2016, the plaintiffs filed a Second Amended Consolidated Class Action Complaint (“Second Amended Complaint”). The Second Amended Complaint raises the same claims dismissed by the Court on October 18, 2016, except plaintiffs now seek to represent a class of purchasers of EZCORP’s Class A Common Stock between November 7, 2013 and October 20, 2015 (instead of between November 6, 2012 and October 20, 2015). On December 5, 2016, defendants filed a motion to dismiss the Second Amended Compliant. The plaintiffs filed their opposition to the motion to dismiss on January 6, 2017, and the defendants filed their reply brief on January 20, 2017.
On May 8, 2017, the Court granted the defendants’ motion to dismiss with regard to claims related to accounting errors relating to Grupo Finmart’s bad debt reserve calculations for “nonperforming” loans, but denied the motion to dismiss with regard to claims relating to accounting errors related to certain sales of loan portfolios to third parties. The case is now in the discovery stage. We cannot predict the outcome of the litigation, but we intend to defend vigorously against all allegations and claims.
SEC Investigation
— On October 23, 2014, we received a notice from the Fort Worth Regional Office of the SEC that it was conducting an investigation into certain matters involving EZCORP, Inc. The notice was accompanied by a subpoena, directing us to produce a variety of documents, including all minutes and materials related to Board of Directors and Board committee meetings since January 1, 2009 and all documents and communications relating to our historical advisory services relationship with Madison Park (the business advisory firm owned by Mr. Cohen) and LPG Limited (a business advisory firm owned by Lachlan P. Given, our current Executive Chairman of the Board). The SEC has also issued subpoenas to current and former members of our Board of Directors requesting production of similar documents, as well as to certain third parties, and has conducted interviews with certain individuals. We continue to cooperate fully with the SEC in its investigation.
NOTE 8: SEGMENT INFORMATION
We currently report our segments as follows: U.S. Pawn — all pawn activities in the United States, Mexico Pawn — all pawn activities in Mexico and other parts of Latin America and Other International — primarily our equity interest in the net income of Cash Converters International and consumer finance activities in Canada. There are no inter-segment revenues, and the amounts below were determined in accordance with the same accounting principles used in our condensed consolidated financial statements.
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
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Three Months Ended June 30, 2017
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|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
82,714
|
|
|
$
|
15,207
|
|
|
$
|
—
|
|
|
$
|
97,921
|
|
|
$
|
—
|
|
|
$
|
97,921
|
|
Jewelry scrapping sales
|
17,257
|
|
|
384
|
|
|
—
|
|
|
17,641
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|
|
—
|
|
|
17,641
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|
Pawn service charges
|
56,774
|
|
|
9,104
|
|
|
—
|
|
|
65,878
|
|
|
—
|
|
|
65,878
|
|
Other revenues
|
50
|
|
|
179
|
|
|
1,964
|
|
|
2,193
|
|
|
—
|
|
|
2,193
|
|
Total revenues
|
156,795
|
|
|
24,874
|
|
|
1,964
|
|
|
183,633
|
|
|
—
|
|
|
183,633
|
|
Merchandise cost of goods sold
|
52,488
|
|
|
10,127
|
|
|
—
|
|
|
62,615
|
|
|
—
|
|
|
62,615
|
|
Jewelry scrapping cost of goods sold
|
14,674
|
|
|
336
|
|
|
—
|
|
|
15,010
|
|
|
—
|
|
|
15,010
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
453
|
|
|
453
|
|
|
—
|
|
|
453
|
|
Net revenues
|
89,633
|
|
|
14,411
|
|
|
1,511
|
|
|
105,555
|
|
|
—
|
|
|
105,555
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|
Segment and corporate expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
63,593
|
|
|
8,898
|
|
|
1,755
|
|
|
74,246
|
|
|
—
|
|
|
74,246
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,095
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|
|
14,095
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|
Depreciation and amortization
|
2,210
|
|
|
619
|
|
|
44
|
|
|
2,873
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|
|
2,970
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|
|
5,843
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Loss (gain) on sale or disposal of assets
|
20
|
|
|
(3
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)
|
|
—
|
|
|
17
|
|
|
—
|
|
|
17
|
|
Interest expense
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
5,652
|
|
|
5,654
|
|
Interest income
|
—
|
|
|
(480
|
)
|
|
—
|
|
|
(480
|
)
|
|
(1,573
|
)
|
|
(2,053
|
)
|
Equity in net income of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(1,047
|
)
|
|
(1,047
|
)
|
|
—
|
|
|
(1,047
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)
|
Other income
|
(5
|
)
|
|
(24
|
)
|
|
(68
|
)
|
|
(97
|
)
|
|
(2
|
)
|
|
(99
|
)
|
Segment contribution
|
$
|
23,815
|
|
|
$
|
5,399
|
|
|
$
|
827
|
|
|
$
|
30,041
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
30,041
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|
|
$
|
(21,142
|
)
|
|
$
|
8,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
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|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
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Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
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(in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
79,826
|
|
|
$
|
14,187
|
|
|
$
|
1
|
|
|
$
|
94,014
|
|
|
$
|
—
|
|
|
$
|
94,014
|
|
Jewelry scrapping sales
|
10,918
|
|
|
312
|
|
|
—
|
|
|
11,230
|
|
|
—
|
|
|
11,230
|
|
Pawn service charges
|
54,395
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|
|
8,078
|
|
|
—
|
|
|
62,473
|
|
|
—
|
|
|
62,473
|
|
Other revenues
|
39
|
|
|
157
|
|
|
2,237
|
|
|
2,433
|
|
|
—
|
|
|
2,433
|
|
Total revenues
|
145,178
|
|
|
22,734
|
|
|
2,238
|
|
|
170,150
|
|
|
—
|
|
|
170,150
|
|
Merchandise cost of goods sold
|
50,586
|
|
|
9,554
|
|
|
—
|
|
|
60,140
|
|
|
—
|
|
|
60,140
|
|
Jewelry scrapping cost of goods sold
|
8,845
|
|
|
265
|
|
|
—
|
|
|
9,110
|
|
|
—
|
|
|
9,110
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
506
|
|
|
506
|
|
|
—
|
|
|
506
|
|
Net revenues
|
85,747
|
|
|
12,915
|
|
|
1,732
|
|
|
100,394
|
|
|
—
|
|
|
100,394
|
|
Segment and corporate expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
62,733
|
|
|
8,744
|
|
|
1,695
|
|
|
73,172
|
|
|
—
|
|
|
73,172
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,481
|
|
|
14,481
|
|
Depreciation and amortization
|
2,888
|
|
|
720
|
|
|
56
|
|
|
3,664
|
|
|
2,610
|
|
|
6,274
|
|
Loss on sale or disposal of assets
|
(51
|
)
|
|
(13
|
)
|
|
—
|
|
|
(64
|
)
|
|
23
|
|
|
(41
|
)
|
Interest expense
|
—
|
|
|
25
|
|
|
—
|
|
|
25
|
|
|
3,911
|
|
|
3,936
|
|
Interest income
|
(1
|
)
|
|
(23
|
)
|
|
—
|
|
|
(24
|
)
|
|
(26
|
)
|
|
(50
|
)
|
Equity in net income of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(1,694
|
)
|
|
(1,694
|
)
|
|
—
|
|
|
(1,694
|
)
|
Other expense (income)
|
—
|
|
|
759
|
|
|
—
|
|
|
759
|
|
|
(259
|
)
|
|
500
|
|
Segment contribution
|
$
|
20,178
|
|
|
$
|
2,703
|
|
|
$
|
1,675
|
|
|
$
|
24,556
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
24,556
|
|
|
$
|
(20,740
|
)
|
|
$
|
3,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2017
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
273,125
|
|
|
$
|
46,547
|
|
|
$
|
—
|
|
|
$
|
319,672
|
|
|
$
|
—
|
|
|
$
|
319,672
|
|
Jewelry scrapping sales
|
35,158
|
|
|
2,500
|
|
|
—
|
|
|
37,658
|
|
|
—
|
|
|
37,658
|
|
Pawn service charges
|
177,480
|
|
|
24,503
|
|
|
—
|
|
|
201,983
|
|
|
—
|
|
|
201,983
|
|
Other revenues
|
157
|
|
|
457
|
|
|
5,958
|
|
|
6,572
|
|
|
—
|
|
|
6,572
|
|
Total revenues
|
485,920
|
|
|
74,007
|
|
|
5,958
|
|
|
565,885
|
|
|
—
|
|
|
565,885
|
|
Merchandise cost of goods sold
|
173,235
|
|
|
31,605
|
|
|
—
|
|
|
204,840
|
|
|
—
|
|
|
204,840
|
|
Jewelry scrapping cost of goods sold
|
30,114
|
|
|
2,081
|
|
|
—
|
|
|
32,195
|
|
|
—
|
|
|
32,195
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
1,433
|
|
|
1,433
|
|
|
—
|
|
|
1,433
|
|
Net revenues
|
282,571
|
|
|
40,321
|
|
|
4,525
|
|
|
327,417
|
|
|
—
|
|
|
327,417
|
|
Segment and corporate expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
194,499
|
|
|
26,439
|
|
|
5,414
|
|
|
226,352
|
|
|
—
|
|
|
226,352
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,305
|
|
|
41,305
|
|
Depreciation and amortization
|
7,487
|
|
|
1,910
|
|
|
144
|
|
|
9,541
|
|
|
8,705
|
|
|
18,246
|
|
Loss (gain) on sale or disposal of assets
|
(54
|
)
|
|
65
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
Interest expense
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
16,840
|
|
|
16,847
|
|
Interest income
|
—
|
|
|
(889
|
)
|
|
—
|
|
|
(889
|
)
|
|
(6,020
|
)
|
|
(6,909
|
)
|
Equity in net income of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(3,768
|
)
|
|
(3,768
|
)
|
|
—
|
|
|
(3,768
|
)
|
Other income
|
(14
|
)
|
|
(61
|
)
|
|
(28
|
)
|
|
(103
|
)
|
|
(191
|
)
|
|
(294
|
)
|
Segment contribution
|
$
|
80,653
|
|
|
$
|
12,850
|
|
|
$
|
2,763
|
|
|
$
|
96,266
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
96,266
|
|
|
$
|
(60,639
|
)
|
|
$
|
35,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended June 30, 2016
|
|
U.S. Pawn
|
|
Mexico Pawn
|
|
Other
International
|
|
Total Segments
|
|
Corporate Items
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise sales
|
$
|
266,560
|
|
|
$
|
45,376
|
|
|
$
|
5
|
|
|
$
|
311,941
|
|
|
$
|
—
|
|
|
$
|
311,941
|
|
Jewelry scrapping sales
|
32,117
|
|
|
1,493
|
|
|
21
|
|
|
33,631
|
|
|
—
|
|
|
33,631
|
|
Pawn service charges
|
169,630
|
|
|
23,567
|
|
|
—
|
|
|
193,197
|
|
|
—
|
|
|
193,197
|
|
Other revenues
|
281
|
|
|
231
|
|
|
6,639
|
|
|
7,151
|
|
|
—
|
|
|
7,151
|
|
Total revenues
|
468,588
|
|
|
70,667
|
|
|
6,665
|
|
|
545,920
|
|
|
—
|
|
|
545,920
|
|
Merchandise cost of goods sold
|
164,288
|
|
|
30,442
|
|
|
1
|
|
|
194,731
|
|
|
—
|
|
|
194,731
|
|
Jewelry scrapping cost of goods sold
|
27,033
|
|
|
1,222
|
|
|
16
|
|
|
28,271
|
|
|
—
|
|
|
28,271
|
|
Other cost of revenues
|
—
|
|
|
—
|
|
|
1,549
|
|
|
1,549
|
|
|
—
|
|
|
1,549
|
|
Net revenues
|
277,267
|
|
|
39,003
|
|
|
5,099
|
|
|
321,369
|
|
|
—
|
|
|
321,369
|
|
Segment and corporate expenses (income):
|
|
|
|
|
|
|
|
|
|
|
|
Operations
|
187,518
|
|
|
28,961
|
|
|
4,967
|
|
|
221,446
|
|
|
—
|
|
|
221,446
|
|
Administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,085
|
|
|
50,085
|
|
Depreciation and amortization
|
9,489
|
|
|
2,285
|
|
|
163
|
|
|
11,937
|
|
|
8,485
|
|
|
20,422
|
|
Loss on sale or disposal of assets
|
502
|
|
|
116
|
|
|
—
|
|
|
618
|
|
|
23
|
|
|
641
|
|
Restructuring
|
982
|
|
|
543
|
|
|
202
|
|
|
1,727
|
|
|
183
|
|
|
1,910
|
|
Interest expense
|
125
|
|
|
103
|
|
|
—
|
|
|
228
|
|
|
11,786
|
|
|
12,014
|
|
Interest income
|
(2
|
)
|
|
(23
|
)
|
|
—
|
|
|
(25
|
)
|
|
(41
|
)
|
|
(66
|
)
|
Equity in net income of unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(5,626
|
)
|
|
(5,626
|
)
|
|
—
|
|
|
(5,626
|
)
|
Other expense
|
—
|
|
|
808
|
|
|
3
|
|
|
811
|
|
|
4
|
|
|
815
|
|
Segment contribution
|
$
|
78,653
|
|
|
$
|
6,210
|
|
|
$
|
5,390
|
|
|
$
|
90,253
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
90,253
|
|
|
$
|
(70,525
|
)
|
|
$
|
19,728
|
|
NOTE 9: SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION AND DISCONTINUED OPERATIONS
Supplemental Consolidated Financial Information
The following table provides supplemental information on net amounts included in our condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
June 30, 2016
|
|
September 30, 2016
|
|
|
|
|
|
|
|
(in thousands)
|
Gross pawn service charges receivable
|
$
|
41,533
|
|
|
$
|
39,688
|
|
|
$
|
41,458
|
|
Allowance for uncollectible pawn service charges receivable
|
(10,948
|
)
|
|
(10,045
|
)
|
|
(10,396
|
)
|
Pawn service charges receivable, net
|
$
|
30,585
|
|
|
$
|
29,643
|
|
|
$
|
31,062
|
|
|
|
|
|
|
|
Gross inventory
|
$
|
141,510
|
|
|
$
|
135,807
|
|
|
$
|
146,367
|
|
Inventory reserves
|
(6,457
|
)
|
|
(5,439
|
)
|
|
(6,143
|
)
|
Inventory, net
|
$
|
135,053
|
|
|
$
|
130,368
|
|
|
$
|
140,224
|
|
|
|
|
|
|
|
Property and equipment, gross
|
$
|
215,823
|
|
|
$
|
210,005
|
|
|
$
|
210,309
|
|
Accumulated depreciation
|
(162,801
|
)
|
|
(148,804
|
)
|
|
(151,854
|
)
|
Property and equipment, net
|
$
|
53,022
|
|
|
$
|
61,201
|
|
|
$
|
58,455
|
|
Discontinued Operations
In September 2016 we completed the previously announced sale of all of our interests in Grupo Finmart to AlphaCredit. The information presented below includes the assets, liabilities, revenues and expenses of variable interest entities which were deconsolidated as a result of the sale of Grupo Finmart.
The following table presents the reconciliation of the major line items constituting "Loss from discontinued operations, net of tax" of Grupo Finmart and other operations discontinued prior to the adoption of ASU 2014-08 that are presented in the condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Nine Months Ended June 30, 2016
|
|
|
|
|
|
(in thousands)
|
Revenues
|
$
|
11,761
|
|
|
$
|
36,345
|
|
Consumer loan bad debt
|
(6,201
|
)
|
|
(26,444
|
)
|
Operations expense
|
(9,489
|
)
|
|
(100,347
|
)
|
Interest expense, net
|
(3,943
|
)
|
|
(13,255
|
)
|
Depreciation, amortization and other expenses
|
(4,597
|
)
|
|
(6,234
|
)
|
Loss from discontinued operations before income taxes of Grupo Finmart
|
(12,469
|
)
|
|
(109,935
|
)
|
Income tax benefit
|
2,746
|
|
|
11,609
|
|
Income (loss) from discontinued operations, net of tax of operations discontinued prior to the adoption of ASU 2014-08*
|
590
|
|
|
(742
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(9,133
|
)
|
|
$
|
(99,068
|
)
|
|
|
|
|
Loss from discontinued operations, net of tax of Grupo Finmart
|
$
|
(9,723
|
)
|
|
$
|
(98,326
|
)
|
Loss from discontinued operations, net of tax of Grupo Finmart attributable to noncontrolling interest
|
540
|
|
|
6,140
|
|
Loss from discontinued operations, net of tax of Grupo Finmart attributable to EZCORP, Inc.
|
$
|
(9,183
|
)
|
|
$
|
(92,186
|
)
|
|
|
*
|
Includes revenues of
$2.1 million
for the three and nine months ended
June 30, 2016
.
|
Cash flows from Grupo Finmart operating and investing activities for the three months ended
June 30, 2016
were
$2.3 million
and
$4.4 million
, respectively, and
$9.4 million
and
$4.6 million
, respectively for the nine months ended
June 30, 2016
, with immaterial cash flows from Grupo Finmart operating and investing activities for the three and nine months ended
June 30, 2017
.
The following table presents the reconciliation of the carrying amounts of major classes of assets and liabilities, net of intercompany liabilities, of Grupo Finmart that are classified as held for sale presented in the condensed consolidated balance sheets as of June 30, 2016, in thousands:
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,728
|
|
Consumer loans and non-current consumer loans, net
|
71,409
|
|
Consumer loan fees and interest receivable, net
|
11,390
|
|
Goodwill, intangible assets and property and equipment, net
|
10,285
|
|
Prepaid expenses, other current assets, deferred tax assets and other assets, net
|
62,742
|
|
Total assets classified as held for sale
|
$
|
157,554
|
|
|
|
Current maturities of long-term debt
|
$
|
80,248
|
|
Accounts payable, accrued expenses and other current liabilities
|
13,732
|
|
Long-term debt, less current maturities, net and other long-term liabilities
|
36,281
|
|
Total liabilities classified as held for sale
|
$
|
130,261
|
|
NOTE 10: SUBSEQUENT EVENTS
2.875% Convertible Senior Notes Due 2024
In July 2017, we issued
$143.75 million
aggregate principal amount of
2.875%
Convertible Senior Notes Due 2024 (the “Convertible Notes”). All of the Convertible Notes were issued pursuant to an indenture dated July 5, 2017 (the "2017 Indenture") by and between us and Wells Fargo Bank, National Association, as the trustee. The Convertible Notes were issued in a private offering under Rule 144A under the Securities Act of 1933. The Convertible Notes pay interest semi-annually in arrears at a rate of
2.875%
per annum on January 1 and July 1 of each year, commencing on January 1, 2018, and will mature on July 1, 2024 (the "2024 Maturity Date"), unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. At maturity, the holders of the Convertible Notes will be entitled to receive cash equal to the principal amount of the Convertible Notes plus unpaid accrued interest.
The Convertible Notes are convertible into cash or shares of Class A Common Stock, or any combination thereof, at our option subject to satisfaction of certain conditions and during the periods described below, based on an initial conversion rate of
100
shares of Class A Common Stock per
$1,000
principal amount of Convertible Notes (equivalent to an initial conversion price of
$10.00
per share of our Class A Common Stock). The conversion rate will not be adjusted for any accrued and unpaid interest. The Convertible Notes contain certain make-whole fundamental change premiums and customary anti-dilution adjustments.
Prior to January 1, 2024, the Convertible Notes will be convertible only under the following circumstances: (1) during any fiscal quarter commencing after the fiscal quarter ending on September 30, 2017 (and only during such fiscal quarter), if the last reported sale price of our Class A Common Stock for at least
20
trading days (whether or not consecutive) during a period of
30
consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to
130%
of the conversion price on each applicable trading day; (2) during the
five
business day period after any
five
consecutive trading day period (the “measurement period”) in which the trading price, as defined in the 2017 Indenture, per
$1,000
principal amount of notes for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of our Class A Common Stock and the conversion rate on such trading day; (3) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events, as defined in the 2017 Indenture. On or after January 1, 2024 until the close of business on the business day immediately preceding the 2024 Maturity Date, holders of Convertible Notes may, at their option, convert their Convertible Notes at any time, regardless of the foregoing circumstances.
We may not redeem the Convertible Notes prior to July 6, 2021. At our option, we may redeem for cash all or any portion of the Convertible Notes on or after July 6, 2021, if the last reported sale price of the Class A Common Stock has been at least
130%
of the conversion price then in effect for at least
20
trading days (whether or not consecutive), including the trading day immediately preceding the date on which we provide notice of redemption, during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption. The redemption price will be equal to
100%
of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Repayment of Term Loan Facility and Partial Repayment of Cash Convertible Notes
In July 2017, we used approximately
$51.6 million
of net proceeds from the Convertible Notes offering, described above, to repay all outstanding borrowings under the Term Loan Facility (described in
Note 5
) and terminated that facility, including the undrawn Delayed Draw Term Loan commitment. In connection with the termination of the Term Loan Facility, the lenders have released, or are in the process of releasing, all related security interests in our assets.
Further, we used approximately
$34.4 million
of net proceeds from the Convertible Notes offering to repurchase and retire
$35.0 million
aggregate principal amount of Cash Convertible Notes. In connection with the repurchase and retirement of Cash Convertible Notes, we entered into agreements dated as of June 29, 2017 to cash settle a proportionate amount of Cash Convertible Notes Hedges and Cash Convertible Notes Warrants corresponding to the repurchased and retired Cash Convertible Notes. In July 2017 we received
$0.6 million
in connection with the partial settlement of the Cash Convertible Notes Hedges and paid
$0.5 million
in connection with the settlement of
2.2 million
of the outstanding Cash Convertible Notes Warrants. The remaining net proceeds of approximately
$54.0 million
from the Convertible Notes offering after the repayments discussed above will increase our general cash reserves and provide additional capital to potentially add to our earnings capacity as we consider attractive acquisition opportunities. We expect to record one-time charges of approximately
$5 million
in the fourth quarter of fiscal 2017 related to these transactions.
Early Repayment of Notes Receivable
In July 2017, we received
$6.2 million
, including interest, for repayment of certain of our notes receivable that we received in connection with our sale of Grupo Finmart to Alpha Credit in September 2016. The repaid promissory notes were originally scheduled to be repaid July 2017 through December 2017, including early repayment of principal of
$5.3 million
. As a result of the early repayment, we will write-off the remaining associated guarantee asset and liability resulting in a
nil
impact to our condensed consolidated statements of operations in the fourth quarter of fiscal 2017.