News Column

FIRST CASH FINANCIAL SERVICES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

July 28, 2014

The following discussion of financial condition, results of operations, liquidity and capital resources of First Cash Financial Services, Inc. and its wholly-owned subsidiaries (the "Company") should be read in conjunction with the Company's condensed consolidated financial statements and accompanying notes included under Part I, Item 1 of this quarterly report on Form 10-Q, as well as with Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's annual report on Form 10-K for the year ended December 31, 2013. References in this quarterly report on Form 10-Q to "year-to-date" refer to the six-month period from January 1, 2014, to June 30, 2014. GENERAL The Company is a leading operator of retail-based pawn stores in the United States and Mexico. The Company's pawn stores generate significant retail sales from the merchandise acquired through collateral forfeitures and over-the-counter purchases from customers. The Company's pawn stores are also a convenient source for small consumer loans to help customers meet their short-term cash needs. Personal property such as consumer electronics, jewelry, power tools, sporting goods and musical instruments are pledged as collateral for the loans. In addition, some of the Company's pawn stores offer consumer loans or credit services products. The Company's strategy is to focus on growing its retail-based pawn operations in the United States and Mexico through new store openings and acquisition opportunities as they arise. Pawn operations accounted for approximately 95% of the Company's consolidated revenue from continuing operations during the six months ended June 30, 2014 compared to 93% during the six months ended June 30, 2013. The Company's pawn revenue is derived primarily from merchandise sales of forfeited pawn collateral and used goods purchased directly from the general public. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn loan for all pawn loans that the Company deems collection to be probable based on historical redemption statistics. If a pawn loan is not repaid prior to the expiration of the loan term, including any automatic extension period, if applicable, the property is forfeited to the Company and transferred to inventory at a value equal to the principal amount of the loan, exclusive of accrued interest. The Company operates a small number of stand-alone consumer finance stores in Texas and Mexico. These stores provide consumer financial services products including credit services, consumer loans and check cashing. Certain of the Company's pawn stores also offer credit services and/or consumer loans as an ancillary product. Consumer loan and credit services revenue accounted for approximately 5% of consolidated revenue from continuing operations during the six months ended June 30, 2014 compared to 7% during the six months ended June 30, 2013, and was derived primarily from credit services fees. The Company recognizes service fee income on consumer loans and credit services transactions on a constant-yield basis over the life of the loan or credit extension, which is generally 180 days or less. The net defaults on consumer loans and credit services transactions and changes in the valuation reserve are charged to the consumer loan credit loss provision. The credit loss provision associated with the Company's credit services organization ("CSO Program") and consumer loans are based primarily upon historical credit loss experience, with consideration given to recent credit loss trends, delinquency rates, economic conditions and management's expectations of future credit losses. For an additional discussion of the credit loss provision and related allowances and accruals, see "-Results of Continuing Operations." Stores included in the same-store revenue calculations presented in this quarterly report are those stores that were opened prior to the beginning of the prior-year comparative period and remained open through the end of the measurement period. Also included are stores that were relocated during the year within a specified distance serving the same market where there is not a significant change in store size and where there is not a significant overlap or gap in timing between the opening of the new store and the closing of the existing store. Unless otherwise stated, non-retail sales of scrap jewelry are included in same-store revenue calculations. Operating expenses consist of all items directly related to the operation of the Company's stores, including salaries and related payroll costs, rent, utilities, equipment, advertising, property taxes, licenses, supplies and security. Administrative expenses consist of items relating to the operation of the corporate offices, including the compensation and benefit costs of corporate management, area supervisors and other operations management personnel, collections operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses. 19



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The Company's business is subject to seasonal variations and operating results for the current quarter and year-to-date periods are not necessarily indicative of the results of operations for the full year. Typically, the Company experiences seasonal growth of service fees in the third and fourth quarter of each year due to loan balance growth that occurs after the heavy repayment period of pawn loans in the fourth quarter in Mexico, which is associated with statutory year-end Christmas bonuses paid by employers, and in the first quarter in the United States, which is associated with tax refund proceeds received by customers. Retail sales are seasonally higher in the fourth quarter associated with holiday shopping. OPERATIONS AND LOCATIONS



The Company has operations in the United States and Mexico. For the three months ended June 30, 2014, approximately 56% of total revenue was generated from Mexico and 44% from the United States. Year-to-date, 53% of revenue was generated from Mexico and 47% from the United States.

As of June 30, 2014, the Company had 926 store locations in 12 U.S. states and 27 states in Mexico, which represents a net store-count increase of 7% over the trailing twelve months. The Company had net store growth of 11 locations, with a total of 13 new store locations added during the second quarter of 2014. Year-to-date, the Company had net store growth of 20 locations, with a total of 25 new store locations added. The following table details store openings for the three months ended June 30, 2014: Pawn Locations Consumer Large Small Loan Total Format (1) Format (2) Locations (3) Locations Domestic: Total locations, beginning of period 229 24 57 310 New locations opened 1 - - 1 Locations closed or consolidated - (1 ) - (1 ) Total locations, end of period 230 23 57 310



International:

Total locations, beginning of period 560 17 28 605 New locations opened 12 - - 12 Locations closed or consolidated (1 ) - - (1 ) Total locations, end of period 571 17 28 616



Total:

Total locations, beginning of period 789 41 85 915 New locations opened 13 - - 13 Locations closed or consolidated (1 ) (1 ) - (2 ) Total locations, end of period 801 40 85 926



(1) The large format locations include retail showrooms and accept a broad

array of pawn collateral including consumer electronics, appliances, power

tools, jewelry and other general merchandise items. At June 30, 2014, 122

of the U.S. large format pawn stores also offered consumer loans or credit

services products. (2) The small format locations typically have limited retail operations and



primarily accept jewelry and small electronic items as pawn collateral and

also offer consumer loans or credit services products.



(3) The Company's U.S. free-standing, small format consumer loan locations

offer a credit services product and are all located in Texas. The Mexico

locations offer small, short-term consumer loans. The Company's credit

services operations also include an internet distribution channel for customers residing in the state of Texas. 20



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The following table details store openings for the six months ended June 30, 2014: Pawn Locations Consumer Large Small Loan Total Format (1) Format (2) Locations (3) Locations Domestic: Total locations, beginning of period 227 25 57 309 New locations opened 3 1 - 4 Locations acquired 1 - - 1 Store format conversions 1 (1 ) - - Locations closed or consolidated (2 ) (2 ) - (4 ) Total locations, end of period 230 23 57 310



International:

Total locations, beginning of period 552 17 28 597 New locations opened 20 - - 20 Locations closed or consolidated (1 ) - - (1 ) Total locations, end of period 571 17 28 616



Total:

Total locations, beginning of period 779 42 85 906 New locations opened 23 1 - 24 Locations acquired 1 - - 1 Store format conversions 1 (1 ) - - Locations closed or consolidated (3 ) (2 ) - (5 ) Total locations, end of period 801 40 85 926



(1) The large format locations include retail showrooms and accept a broad

array of pawn collateral including consumer electronics, appliances, power

tools, jewelry and other general merchandise items. At June 30, 2014, 122

of the U.S. large format pawn stores also offered consumer loans or credit

services products. (2) The small format locations typically have limited retail operations and



primarily accept jewelry and small electronic items as pawn collateral and

also offer consumer loans or credit services products.



(3) The Company's U.S. free-standing, small format consumer loan locations

offer a credit services product and are all located in Texas. The Mexico

locations offer small, short-term consumer loans. The Company's credit

services operations also include an internet distribution channel for customers residing in the state of Texas.



CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, related revenue and expenses, and disclosure of gain and loss contingencies at the date of the financial statements. Such estimates, assumptions and judgments are subject to a number of risks and uncertainties, which may cause actual results to differ materially from the Company's estimates. The significant accounting policies that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results have been reported in the Company's 2013 annual report on Form 10-K. There have been no changes to the Company's significant accounting policies for the six months ended June 30, 2014.



Recent Accounting Pronouncements

There were no recent accounting pronouncements that had a material effect on the Company's financial position, results of operations or financial statement disclosures.

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RESULTS OF CONTINUING OPERATIONS

Three Months Ended June 30, 2014 Compared To The Three Months Ended June 30, 2013

The following table details the components of the Company's revenue for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The average value of the Mexican peso to the U.S. dollar decreased 4%, from 12.5 to 1 during the second quarter of 2013 to 13.0 to 1 during the second quarter of 2014. The end-of-period value of the Mexican peso to the U.S. dollar was 13.0 to 1 at June 30, 2013 and June 30, 2014. As a result of these currency exchange movements, revenue from Mexican operations translated into fewer U.S. dollars relative to the prior-year period. While the weakening of the Mexican peso decreased the translated dollar-value of revenue, the cost of sales and operating expenses decreased as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which does not contribute to the Company's peso-denominated earnings stream. See "-Non-GAAP Financial Information-Constant Currency Results" below. Three Months Ended Increase/(Decrease) June 30, Constant Currency 2014 2013 Increase/(Decrease) Basis Domestic revenue: Retail merchandise sales $ 37,877$ 29,094$ 8,783 30 % 30 % Pawn loan fees 20,381 17,209 3,172 18 % 18 % Consumer loan and credit services fees 7,710 9,177 (1,467 ) (16 )% (16 )% Wholesale scrap jewelry revenue 6,865 1,556 5,309 341 % 341 % 72,833 57,036 15,797 28 % 28 % International revenue: Retail merchandise sales 59,311 54,806 4,505 8 % 13 % Pawn loan fees 27,174 25,843 1,331 5 % 10 % Consumer loan and credit services fees 706 908 (202 ) (22 )% (19 )% Wholesale scrap jewelry revenue 5,302 3,761 1,541 41 % 41 % 92,493 85,318 7,175 8 % 13 % Total revenue: Retail merchandise sales 97,188 83,900 13,288 16 % 19 % Pawn loan fees 47,555 43,052 4,503 10 % 13 % Consumer loan and credit services fees 8,416 10,085 (1,669 ) (17 )% (16 )% Wholesale scrap jewelry revenue 12,167 5,317 6,850 129 % 129 % $ 165,326$ 142,354$ 22,972 16 % 19 % Domestic revenue accounted for approximately 44% of the total revenue for the current quarter, while international revenue (from Mexico) accounted for 56% of total revenue for the same period. The following table details customer loans and inventories held by the Company and active CSO Program credit extensions from an independent third-party lender as of June 30, 2014 as compared to June 30, 2013 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year balances at the prior-year end-of-period exchange rate. 22



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Table of Contents Increase/(Decrease) Balance at June 30, Constant Currency 2014 2013 Increase/(Decrease) Basis Domestic: Pawn loans $ 63,000$ 58,887$ 4,113 7 % 7 % CSO credit extensions held by independent third-party (1) 10,258 11,055 (797 ) (7 )% (7 )% Other consumer loans 772 769 3 - % - % 74,030 70,711 3,319 5 % 5 % International: Pawn loans 60,901 53,325 7,576 14 % 14 % Other consumer loans 567 735 (168 ) (23 )% (23 )% 61,468 54,060 7,408 14 % 14 % Total: Pawn loans 123,901 112,212 11,689 10 % 10 % CSO credit extensions held by independent third-party (1) 10,258 11,055 (797 ) (7 )% (7 )% Other consumer loans 1,339 1,504 (165 ) (11 )% (11 )% $ 135,498$ 124,771$ 10,727 9 % 9 % Pawn inventories: Domestic pawn inventories $ 36,370$ 38,534$ (2,164 ) (6 )% (6 )% International pawn inventories 41,217 43,471 (2,254 ) (5 )% (5 )% $ 77,587$ 82,005$ (4,418 ) (5 )% (5 )% (1) CSO Program amounts outstanding are composed of the principal portion of active CSO Program extensions of credit by an independent third-party lender, which are not included on the Company's balance sheet, net of the Company's estimated fair value of its liability under the letters of credit guaranteeing the extensions of credit. The following table details the composition of pawn collateral and the average outstanding pawn loan receivable as of June 30, 2014 as compared to June 30, 2013 (unaudited). Balance at June 30, 2014 2013 Composition of pawn collateral: Domestic pawn loans: General merchandise 45 % 39 % Jewelry 55 % 61 % 100 % 100 % International pawn loans: General merchandise 88 % 87 % Jewelry 12 % 13 % 100 % 100 % Total pawn loans: General merchandise 66 % 64 % Jewelry 34 % 36 % 100 % 100 % Average outstanding pawn loan amount: Domestic pawn loans $ 162$ 169 International pawn loans 71 70 Total pawn loans 100 97 23



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Retail Merchandise Sales Operations

Total retail merchandise sales increased 16% (19% on a constant currency basis) to $97,188,000 during the second quarter of 2014 compared to $83,900,000 for the second quarter of 2013. The increased retail merchandise sales in the Company's pawn stores reflected store additions, maturation of existing stores and an increased mix of retail general merchandise inventories (primarily consumer electronics, appliances and power tools). The gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 39% for both the second quarter of 2014 and 2013. Pawn inventories decreased from $82,005,000 at June 30, 2013 to $77,587,000 at June 30, 2014, largely as a result of reduced scrap jewelry inventories and optimizing inventory levels at previously acquired stores. At June 30, 2014, the Company's pawn inventories, at cost, were composed of: 30% jewelry (primarily gold jewelry held for retail sale), 43% electronics and appliances, 10% tools and 17% other. At June 30, 2014 and 2013, 97% of total inventories, at cost, had been held for one year or less, while 3% had been held for more than one year. Pawn Lending Operations Pawn loan fees increased 10% (13% on a constant currency basis) to $47,555,000 during the second quarter of 2014 compared to $43,052,000 for the second quarter of 2013. The increase in pawn loan fees was consistent with the increase in total outstanding pawn receivables. Consolidated pawn receivables, as of June 30, 2014, increased 10% (on a reported and constant currency basis) compared to June 30, 2013, primarily from store additions, maturation of existing stores and a 2% increase in the average loan amount outstanding. Consolidated same-store pawn receivables (constant currency basis) increased 3% in total, declined 1% in the U.S. and increased 6% in Mexico from June 30, 2013 to June 30, 2014. Consumer Lending Operations Service fees from consumer loans and credit services transactions (collectively also known as payday loans) decreased 17% to $8,416,000 during the second quarter of 2014 compared to $10,085,000 for the second quarter of 2013. The Company attributes the decrease in part to increased competition in certain Texas markets coupled with the closing of certain consumer loan locations in Texas and Mexico. Consumer/payday loan-related products comprised 5% of total revenue for the second quarter of 2014. The Company's consumer loan and credit services credit loss provision of $2,214,000 was 27% of consumer loan and credit services fee revenue during the second quarter of 2014 compared to $2,487,000, or 25%, during the second quarter of 2013, respectively. The estimated fair value of liabilities under the CSO Program letters of credit, net of anticipated recoveries from customers, was $489,000, or 4.6% of the gross loan balance, at June 30, 2014 compared to $526,000, or 4.5% of the gross loan balance, at June 30, 2013, which is included as a component of the Company's accrued liabilities. The Company's loss reserve on consumer loans was $79,000, or 5.6% of the gross loan balance, at June 30, 2014 compared to $87,000, or 5.5% of the gross loan balance, at June 30, 2013.



Wholesale Scrap Jewelry Operations

Revenue from wholesale scrap jewelry operations increased 129% to $12,167,000 during the second quarter of 2014 compared to $5,317,000 for the second quarter of 2013. Wholesale scrap jewelry revenue during the three months ended June 30, 2014 consisted primarily of gold sales, of which approximately 8,000 ounces were sold at an average price of $1,318 per ounce, compared to approximately 2,100 ounces of gold sold at $1,561 per ounce in the prior-year period. The volume of liquidated scrap jewelry during the second quarter of 2014 increased compared to the second quarter of 2013, primarily due to the Company's election to sell 7,700 ounces of gold acquired during the second quarter of 2013 in the third quarter of 2013. If the 7,700 ounces of gold had been sold in the second quarter of 2013, the volume of liquidated scrap jewelry decreased 18%. The scrap gross profit margin was 17% compared to the prior-period margin of 13%. Scrap jewelry profits accounted for 2% of net revenue (gross profit) for the second quarter of 2014 compared to 1% in the second quarter of 2013. The average market price of gold during the second quarter of 2014 decreased 9% compared to the second quarter of 2013, while the ending price at June 30, 2014 increased 10% compared to June 30, 2013. The Company's exposure to gold price risk is described in detail in the Company's 2013 annual report on Form 10-K. 24



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Table of Contents Combined Revenue Results The increase in quarter-over-quarter total revenue of 16% (19% on a constant currency basis) reflected a 14% increase (17% on a constant currency basis) in combined retail sales and pawn fee revenue from new and existing pawn stores and an increase in wholesale scrap jewelry revenue, offset by a decrease in consumer loan fees. Second quarter revenue generated by the stores opened or acquired since April 1, 2013 increased by $5,906,000 in Mexico and $15,438,000 in the United States compared to the second quarter of 2013. Excluding wholesale scrap jewelry sales and consumer loan fees, the Company's same-store core revenue in pawn stores increased 1% on a consolidated, constant currency basis from the second quarter of 2013 to the second quarter of 2014. Same-store core sales in Mexico increased 5% (on a constant currency basis), offset by a 5% decrease in the U.S. as compared to the prior-year period. Same-store wholesale scrap jewelry revenue increased 104% in total, primarily due to the Company's election to sell 7,700 ounces of gold acquired during the second quarter of 2013 in the third quarter of 2013.



Store Operating Expenses

Store operating expenses increased by 13% to $48,934,000 during the second quarter of 2014 compared to $43,308,000 during the second quarter of 2013, primarily as a result of a 9% increase in the weighted-average store count, which included a number of larger, mature stores added through acquisitions during the prior year. Same-store operating expenses decreased 1% on a constant currency basis compared to the prior-year period.

The net store profit contribution from continuing operations for the second quarter of 2014 was $41,374,000, which equates to a store-level operating margin of 25% compared to $37,712,000 and 26% in the prior-year quarter, respectively. The decline in the store-level operating margin related primarily to the decrease in net revenue from jewelry scrapping.



Administrative Expenses, Interest, Taxes and Income

Administrative expenses increased 7% to $13,615,000 during the second quarter of 2014 compared to $12,764,000 during the second quarter of 2013. As a percentage of revenue, administrative expenses decreased from 9% during the second quarter of 2013 to 8% during the second quarter of 2014. Interest expense increased to $3,910,000 in the second quarter of 2014 compared to $633,000 for the second quarter of 2013, reflecting an increase in the amount of outstanding debt and the higher interest rate of the Company's 6.75% senior notes issued in March 2014 as compared to the revolving line of credit. See "-Liquidity and Capital Resources." For the second quarter of 2014 and 2013, the Company's effective federal income tax rates were 31.6% and 34.1%, respectively. The decrease in the tax rate for 2014 relates to the June 30, 2013 termination of its election to include foreign subsidiaries in its consolidated U.S. federal income tax return. The Company expects the effective rate for the second half of 2014 to be approximately 32%, reflecting the blended statutory federal tax rates of 35% in the U.S. and 30% in Mexico. Income from continuing operations increased 2% to $16,015,000 during the second quarter of 2014 compared to $15,654,000 during the second quarter of 2013. Net income was $16,015,000 during the second quarter of 2014 compared to $15,663,000 during the second quarter of 2013, which included the results of discontinued operations.



Six Months Ended June 30, 2014 Compared To The Six Months Ended June 30, 2013

The following table details the components of the Company's revenue for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013 (unaudited, in thousands). Constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates. The average value of the Mexican peso to the U.S. dollar decreased 4%, from 12.6 to 1 during the six months ended June 30, 2013, to 13.1 to 1 during the six months ended June 30, 2014. The end-of-period value of the Mexican peso to the U.S. dollar was 13.0 to 1 at June 30, 2013 and June 30, 2014. As a result of these currency exchange movements, revenue of Mexican operations translated into fewer U.S. dollars relative to the prior-year period. While the weakening of the Mexican peso decreased the translated dollar-value of revenue, the cost of sales and operating expenses decreased as well. The scrap jewelry generated in Mexico is exported and sold in U.S. dollars, which does not contribute to the Company's peso-denominated earnings stream. See "-Non-GAAP Financial Information-Constant Currency Results" below. 25



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Table of Contents Six Months Ended Increase/(Decrease) June 30, Constant Currency 2014 2013 Increase/(Decrease) Basis Domestic revenue: Retail merchandise sales $ 83,452$ 62,806$ 20,646 33 % 33 % Pawn loan fees 43,283 36,048 7,235 20 % 20 % Consumer loan and credit services fees 16,822 20,065 (3,243 ) (16 )% (16 )% Wholesale scrap jewelry revenue 15,408 15,506 (98 ) (1 )% (1 )% 158,965 134,425 24,540 18 % 18 % International revenue: Retail merchandise sales 112,444 102,864 9,580 9 % 14 % Pawn loan fees 51,910 50,155 1,755 3 % 8 % Consumer loan and credit services fees 1,378 1,787 (409 ) (23 )% (19 )% Wholesale scrap jewelry revenue 10,406 13,035 (2,629 ) (20 )% (20 )% 176,138 167,841 8,297 5 % 9 % Total revenue: Retail merchandise sales 195,896 165,670 30,226 18 % 21 % Pawn loan fees 95,193 86,203 8,990 10 % 13 % Consumer loan and credit services fees 18,200 21,852 (3,652 ) (17 )% (16 )% Wholesale scrap jewelry revenue 25,814 28,541 (2,727 ) (10 )% (10 )% $ 335,103$ 302,266$ 32,837 11 % 13 %



Domestic revenue accounted for approximately 47% of the total revenue for the six months ended June 30, 2014, while international revenue (from Mexico) accounted for 53% of total revenue for the same period.

Retail Merchandise Sales Operations

Total retail merchandise sales increased 18% (21% on a constant currency basis) to $195,896,000 during the six months ended June 30, 2014 compared to $165,670,000 for the six months ended June 30, 2013. The increased retail merchandise sales in the Company's pawn stores reflected store additions, maturation of existing stores and an increased mix of retail general merchandise inventories (primarily consumer electronics, appliances and power tools). During the six months ended June 30, 2014, the gross profit margin on retail merchandise sales, which excludes scrap jewelry sales, was 39% compared to a margin of 40% on retail merchandise sales during the six months ended June 30, 2013. Pawn inventories decreased from $82,005,000 at June 30, 2013 to $77,587,000 at June 30, 2014, largely as a result of reduced scrap jewelry inventories and optimizing inventory levels at previously acquired stores. At June 30, 2014, the Company's pawn inventories, at cost, were composed of: 30% jewelry (primarily gold jewelry held for retail sale), 43% electronics and appliances, 10% tools and 17% other. At June 30, 2014 and 2013, 97% of total inventories, at cost, had been held for one year or less, while 3% had been held for more than one year. Pawn Lending Operations Pawn loan fees increased 10% (13% on a constant currency basis) to $95,193,000 during the six months ended June 30, 2014 compared to $86,203,000 for the six months ended June 30, 2013. The increase in pawn loan fees was consistent with the increase in total outstanding pawn receivables. Consolidated pawn receivables, as of June 30, 2014, increased 10% (on a reported and constant currency basis) compared to June 30, 2013, primarily from store additions, maturation of existing stores and a 2% increase in the average loan amount outstanding. Consolidated same-store pawn receivables (constant currency basis) increased 3% in total, declined 1% in the U.S. and increased 6% in Mexico from June 30, 2013 to June 30, 2014. 26



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Table of Contents Consumer Lending Operations Service fees from consumer loans and credit services transactions (collectively also known as payday loans) decreased 17% to $18,200,000 during the six months ended June 30, 2014 compared to $21,852,000 for the six months ended June 30, 2013. The Company attributes the decrease in part to increased competition in certain Texas markets coupled with the closing of certain consumer loan locations in Texas and Mexico. Consumer/payday loan-related products comprised 5% of total revenue during the six months ended June 30, 2014. The Company's consumer loan and credit services credit loss provision of $3,938,000 was 22% of consumer loan and credit services fee revenue during the six months ended June 30, 2014 compared to $4,581,000, or 21%, during the six months ended June 30, 2013, respectively. The estimated fair value of liabilities under the CSO letters of credit, net of anticipated recoveries from customers, was $489,000, or 4.6% of the gross loan balance, at June 30, 2014 compared to $526,000, or 4.5% of the gross loan balance, at June 30, 2013, which is included as a component of the Company's accrued liabilities. The Company's loss reserve on consumer loans was $79,000, or 5.6% of the gross loan balance, at June 30, 2014 compared to $87,000, or 5.5% of the gross loan balance, at June 30, 2013.



Wholesale Scrap Jewelry Operations

Revenue from wholesale scrap jewelry operations decreased 10% to $25,814,000 during the six months ended June 30, 2014 compared to $28,541,000 for the six months ended June 30, 2013. Wholesale scrap jewelry revenue during the six months ended June 30, 2014 consisted primarily of gold sales, of which approximately 16,900 ounces were sold at an average selling price of $1,311 per ounce compared to approximately 14,500 ounces of gold sold at $1,637 per ounce in the prior-year period. The volume of liquidated scrap jewelry during the six months ended June 30, 2014 increased compared to the six months ended June 30, 2013, primarily due to the Company's election to sell 7,700 ounces of gold acquired during the second quarter of 2013 in the third quarter of 2013. If the 7,700 ounces of gold had been sold in the second quarter of 2013, the volume of liquidated scrap jewelry decreased 24%. The scrap gross profit margin was 18% compared to the prior-period margin of 19%. Scrap jewelry profits accounted for 2% of net revenue (gross profit) for the six months ended June 30, 2014 compared to 3% in the six months ended June 30, 2013. The average market price of gold during the six months ended June 30, 2014 decreased 15% compared to the six months ended June 30, 2013, while the ending price at June 30, 2014 increased 10% compared to June 30, 2013. The Company's exposure to gold price risk is described in detail in the Company's 2013 annual report on Form 10-K.



Combined Revenue Results

The increase in year-to-date total revenue of 11% (13% on a constant currency basis) reflected a 16% increase (18% on a constant currency basis) in combined retail sales and pawn fee revenue from new and existing pawn stores, offset by a decrease in wholesale scrap jewelry revenue and consumer loan fees. Year-to-date revenue generated by the stores opened or acquired since January 1, 2013 increased by $13,007,000 in Mexico and $35,537,000 in the United States compared to the same period last year. Excluding wholesale scrap jewelry sales and consumer loan fees, the Company's same-store core revenue in pawn stores increased 1% on a consolidated, constant currency basis from the six months ended June 30, 2013 to the six months ended June 30, 2014. Same-store core sales in Mexico increased 4% (on a constant currency basis), offset by a 5% decrease in the U.S. as compared to the prior-year period. Same-store wholesale scrap jewelry revenue decreased 21% in total, reflecting lower gold prices and reduced volumes from customers selling gold to the Company, partially offset by the Company's election to sell 7,700 ounces of gold acquired during the second quarter of 2013 in the third quarter of 2013. Store Operating Expenses Store operating expenses increased by 13% to $97,426,000 during the six months ended June 30, 2014 compared to $86,113,000 during the six months ended June 30, 2013, primarily as a result of a 9% increase in the weighted-average store count, which included a number of large, mature stores added through acquisitions during the prior year. Same-store operating expenses decreased 2% on a constant currency basis compared to the prior-year period. The net store profit contribution from continuing operations for the six months ended June 30, 2014 was $85,795,000, which equates to a store-level operating margin of 26% compared to $83,157,000 and 28% in the prior year, respectively. The decline in the store-level operating margin related primarily to the decrease in net revenue from jewelry scrapping. 27



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Administrative Expenses, Interest, Taxes and Income

Administrative expenses increased 4% to $26,944,000 during the six months ended June 30, 2014 compared to $25,856,000 during the six months ended June 30, 2013. As a percentage of revenue, administrative expenses decreased from 9% during the six months ended June 30, 2013 to 8% during the six months ended June 30, 2014. Interest expense increased to $5,346,000 during the six months ended June 30, 2014 compared to $1,352,000 for the six months ended June 30, 2013, reflecting an increase in the amount of outstanding debt and the higher interest rate of the Company's 6.75% senior notes issued in March 2014 as compared to the revolving line of credit. See "-Liquidity and Capital Resources." For the six months ended June 30, 2014 and 2013, the Company's effective federal income tax rates were 25.6% and 34.8%, respectively. The Company recorded an additional benefit of $3,669,000 in March 2014 as the result of a change in its estimated U.S. federal liability associated with the 2013 termination of its election to include foreign subsidiaries in its consolidated U.S. federal income tax return. Excluding the non-recurring net benefit, the consolidated tax rate for the six months ended June 30, 2014 was 32.6% compared to an effective tax rate of 34.8% in the six months ended June 30, 2013. The Company expects the effective tax rate for the second half of 2014 to be approximately 32%, reflecting the blended statutory federal tax rates of 35% in the U.S. and 30% in Mexico. Income from continuing operations increased 9% to $38,969,000 during the six months ended June 30, 2014 compared to $35,834,000 during the six months ended June 30, 2013. Net income was $38,697,000 during the six months ended June 30, 2014 compared to $35,927,000 during the six months ended June 30, 2013, which included the results of discontinued operations.



LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2014, the Company's primary sources of liquidity were $84,055,000 in cash and cash equivalents, $160,000,000 of available and unused funds under the Company's long-term line of credit with its commercial lenders, $143,048,000 in customer loans and $77,587,000 in inventories. As of June 30, 2014, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $44,010,000. The Company had working capital of $269,362,000 as of June 30, 2014 and total equity exceeded liabilities by a ratio of 1.8 to 1. On March 24, 2014, the Company completed the private offering of $200,000,000 of 6.75% senior notes due on April 1, 2021 (the "Notes"). Interest on the Notes will be payable semi-annually in arrears on April 1 and October 1, commencing on October 1, 2014. The Notes were sold to the placement agents as initial purchasers for resale only to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States in accordance with Regulation S under the Securities Act. The net proceeds from the sale of the Notes were approximately $194,800,000. The Company used $153,411,000 of the net proceeds from the offering to repay all amounts outstanding under the 2014 Credit Facility (defined below) and to pay off the remaining balances on notes payable related to previous pawn store acquisitions. Approximately $41,389,000 of the net proceeds remain available for general corporate purposes. The Company capitalized approximately $5,200,000 in issuance costs, which consisted primarily of placement agent fees and legal and other professional expenses. The issuance costs are being amortized over the life of the Notes as a component of interest expense. The Notes are fully and unconditionally guaranteed on a senior unsecured basis jointly and severally by all of the Company's existing and future domestic subsidiaries that guarantee the 2014 Credit Facility. The Company may redeem the Notes at any time on or after April 1, 2017, at the redemption prices set forth in the indenture governing the Notes (the "Indenture"), plus accrued and unpaid interest, if any. In addition, prior to April 1, 2017, the Company may redeem some or all of the Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, plus the "make-whole" premium set forth in the Indenture. The Company may redeem up to 35% of the Notes prior to April 1, 2017, with the proceeds of certain equity offerings at a redemption price of 106.75% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any. In addition, upon a change of control, noteholders have the right to require the Company to purchase the Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. 28



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On March 24, 2014, the Company entered into a registration rights agreement with the initial purchasers of the Notes. Pursuant to the registration rights agreement, the Company agreed to use commercially reasonable efforts to issue in exchange for the Notes, generally no later than approximately 245 days following the closing date of the issuance and sale of the Notes, identical new notes that have been registered under the Securities Act. In certain circumstances, the Company may be required to file a shelf registration statement to cover resales of the Notes. If the Company does not comply with certain covenants set forth in the registration rights agreement, the Company may be required to pay liquidated damages to holders of the Notes. Pursuant to the registration rights agreement, the Company caused a registration statement on Form S-4 to be declared effective by the Securities and Exchange Commission ("SEC") in July 2014 and is currently conducting an offer to exchange the unregistered Notes with identical new notes registered under the Securities Act. During the period from January 1, 2014 through February 4, 2014, the Company maintained a revolving line of credit agreement with its lenders (the "2012 Credit Facility") in the amount of $205,000,000, which was scheduled to mature in February 2015. The 2012 Credit Facility charged interest at the prevailing 30-day London Interbank Offer Rate ("LIBOR") plus a fixed spread of 2.0%. On February 5, 2014, the Company entered into an agreement with a group of commercial lenders to establish a new revolving credit facility (the "2014 Credit Facility") in the amount of $160,000,000 with an accordion feature whereby the facility may be increased up to an additional $50,000,000 with the consent of any increasing or additional participating lenders. The Company used proceeds from the 2014 Credit Facility and available cash balances to retire and terminate the 2012 Credit Facility. The 2014 Credit Facility matures in February 2019 and bears interest, at the Company's option, at either (i) the prevailing LIBOR rate (with interest periods of 1, 2, 3 or 6 months at the Company's option) plus a fixed spread of 2.5% or (ii) the prevailing prime or base rate plus a fixed spread of 1.5%. The Company is required to maintain certain financial ratios and comply with certain financial covenants, including compliance with a leverage ratio of no greater than 2.5 times Consolidated EBITDA (as defined in the 2014 Credit Facility) and a fixed charge coverage ratio. The 2014 Credit Facility limits the Company's ability to incur additional indebtedness, subject to customary exceptions, including permitted additional unsecured debt so long as the aggregate principal amount of the loans and commitments under the 2014 Credit Facility plus such additional unsecured debt plus foreign third-party loans does not in the aggregate exceed $500,000,000. The 2014 Credit Facility is unsecured except for the pledge of 65% of the voting equity interests of the Company's foreign subsidiaries, and the Company is restricted from pledging any of its other assets as collateral against other indebtedness. The 2014 Credit Facility is guaranteed by the Company's material U.S. operating subsidiaries. The 2014 Credit Facility allows the Company to repurchase shares of its stock and to pay cash dividends within certain parameters. The Company is required to pay an annual commitment fee of 0.50% on the average daily unused portion of the 2014 Credit Facility commitment. During March 2014, the Company used $145,870,000 of the proceeds from the sale of the Notes to repay all amounts outstanding under the 2014 Credit Facility. At June 30, 2014, the Company had no amount outstanding under the 2014 Credit Facility and $160,000,000 available for borrowings. The Company believes it is in compliance with the requirements and covenants of the 2014 Credit Facility, and believes it has the capacity to borrow the full amount available under the 2014 Credit Facility under the most restrictive covenant. In general, revenue growth is dependent upon the Company's ability to fund growth of store locations, customer loan balances and inventories. In addition to these factors, changes in loan balances, collection of pawn fees, merchandise sales, inventory levels, operating expenses and the pace of new store expansions and acquisitions affect the Company's liquidity. Management believes that cash on hand, the borrowings available under the 2014 Credit Facility, anticipated cash generated from operations (including the normal seasonal increases in operating cash flows occurring in the first and fourth quarters) and other current working capital will be sufficient to meet the Company's anticipated capital requirements for its business for at least the next 12 months. Where appropriate or desirable, in connection with the Company's efficient management of its liquidity position, the Company could seek to raise additional funds from a variety of sources, including the sale of assets, reductions in capital spending, the issuance of debt or equity securities and/or changes to its management of current assets. The characteristics of the Company's current assets, specifically the ability to rapidly liquidate gold jewelry inventory and adjust outflows of cash in its lending practices, gives the Company flexibility to quickly modify its business strategy to increase cash flow from its business, if necessary. Regulatory developments affecting the Company's operations may also impact profitability and liquidity. See "-Regulatory Developments." 29



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The following tables set forth certain historical information with respect to the Company's sources and uses of cash and other key indicators of liquidity (unaudited, dollar amounts in thousands): Six Months Ended June 30, 2014



2013

Cash flow provided by operating activities $ 48,940 $



45,047

Cash flow used in investing activities $ (26,406 )$ (89,237 ) Cash flow provided by (used in) financing activities $ (9,075 )$ 25,857 Balance at June 30, 2014 2013 Working capital $ 269,362$ 213,119 Current ratio 7.35:1 7.00:1



Leverage ratio (trailing twelve months) 1.4:1 1.1:1 Liabilities to equity ratio

57 % 57 %



Inventory turns (trailing twelve months) 3.8x 3.7x

Net cash provided by operating activities increased $3,893,000, or 9%, from $45,047,000 for the six months ended June 30, 2013 to $48,940,000 for the six months ended June 30, 2014, primarily due to an increase in net income of $2,770,000 and net changes in certain operating assets and liabilities.

Net cash used in investing activities decreased $62,831,000, or 70%, from $89,237,000 during the six months ended June 30, 2013 to $26,406,000 for the six months ended June 30, 2014. Cash flows from investing activities are utilized primarily to fund pawn store acquisitions, growth of pawn loans and purchases of property and equipment. The Company paid $6,389,000 in cash related to acquisitions in the six months ended June 30, 2014 compared to $71,501,000 in the prior-year period. Net cash used in financing activities increased $34,932,000, or 135%, from net cash provided by financing activities of $25,857,000 for the six months ended June 30, 2013 to net cash used in financing activities of $9,075,000 for the six months ended June 30, 2014. While net payments on the 2012 Credit Facility and the 2014 Credit Facility increased $232,500,000 compared to the prior-year period, the Company had net proceeds from the offering of Notes of approximately $194,800,000 during the six months ended June 30, 2014. The Company repurchased less of its common stock ($13,314,000 during the first six months of 2014 compared to $38,692,000 during the first six months of 2013), and realized proceeds from the exercise of stock options and the related tax benefit of $15,640,000 during the first six months of 2013 compared to $1,389,000 during the six months ended June 30, 2014. During the six months ended June 30, 2014, the Company added 24 new pawn stores, acquired one pawn store and converted one small format store into a large format pawn store. The purchase price of the January 2014 U.S. store acquisition, net of cash acquired, was $4,481,000 and was composed of $4,381,000 in cash paid at closing and an additional $100,000 payable in January 2015. During the six months ended June 30, 2014, the Company paid $2,008,000 of amounts payable related to previous acquisitions. The Company funded $12,059,000 in capital expenditures, primarily for new stores, during the six months ended June 30, 2014, and expects to fund capital expenditures at a similar annualized rate in the remainder of 2014. Acquisition purchase prices, capital expenditures, working capital requirements and start-up losses related to this expansion have been primarily funded through cash balances, operating cash flows and credit facilities. The Company's cash flow and liquidity available to fund expansion in 2014 includes net cash flow from operating activities of $48,940,000 for the six months ended June 30, 2014. The Company intends to continue expansion primarily through new store openings. During 2014, the Company expects to add approximately 75 to 85 new stores. It anticipates that most of the additions will continue to be large format pawn stores in Mexico, but also includes 10 to 15 new builds and small acquisitions in strategic markets, which could further increase store additions for 2014. Management believes that cash on hand, the amounts available to be drawn under the 2014 Credit Facility and cash generated from operations will be sufficient to accommodate the Company's current operations and store expansion plans for the remainder of 2014. 30



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The Company continually looks for, and is presented with, potential acquisition opportunities. The Company currently has no contractual commitments for materially significant future acquisitions or other capital commitments. The Company will evaluate potential acquisitions based upon growth potential, purchase price, available liquidity, strategic fit and quality of management personnel, among other factors. If the Company encounters an attractive opportunity to acquire new stores in the near future, the Company may seek additional financing, the terms of which will be negotiated on a case-by-case basis. In January 2013, the Company's Board of Directors authorized a repurchase program for up to 1,500,000 shares of the Company's outstanding common stock. During the six months ended June 30, 2014, the Company repurchased 235,000 shares of its common stock at an aggregate cost of $13,314,000 at an average price of $56.56 per share and 536,000 shares remain available for repurchase under the repurchase program. Under its share repurchase program, the Company can purchase common stock in open market transactions, block purchases or privately negotiated transactions, and may from time to time purchase shares pursuant to a trading plan in accordance with Rule 10b5-1 and Rule 10b-18 under the Exchange Act, or by any combination of such methods. The number of shares to be purchased and the timing of the purchases are based on a variety of factors, including, but not limited to, the level of cash balances, credit availability, general business conditions, regulatory requirements, the market price of the Company's stock and the availability of alternative investment opportunities. No time limit was set for completion of repurchases and the program may be suspended or discontinued at any time.



Non-GAAP Financial Information

The Company uses certain financial calculations such as EBITDA from continuing operations, free cash flow and constant currency results (as defined or explained below) as factors in the measurement and evaluation of the Company's operating performance and period-over-period growth. The Company derives these financial calculations on the basis of methodologies other than GAAP, primarily by excluding from a comparable GAAP measure certain items that the Company does not consider to be representative of its actual operating performance. These financial calculations are "non-GAAP financial measures" as defined in SEC rules. The Company uses these financial calculations in operating its business because management believes they are less susceptible to variances in actual operating performance that can result from the excluded items and other infrequent charges. The Company presents these financial measures to investors because management believes they are useful to investors in evaluating the primary factors that drive the Company's operating performance and because management believes they provide greater transparency into the Company's results of operations. However, items that are excluded and other adjustments and assumptions that are made in calculating EBITDA from continuing operations, free cash flow and constant currency results are significant components in understanding and assessing the Company's financial performance. These non-GAAP financial measures should be evaluated in conjunction with, and are not a substitute for, the Company's GAAP financial measures. Further, because these non-GAAP financial measures are not determined in accordance with GAAP and are thus susceptible to varying calculations, EBITDA from continuing operations, free cash flow and constant currency results as presented may not be comparable to other similarly titled measures of other companies.



Earnings from Continuing Operations Before Interest, Taxes, Depreciation and Amortization

The Company defines EBITDA from continuing operations as net income (loss) before income (loss) from discontinued operations net of tax, income taxes, depreciation and amortization, interest expense and interest income. EBITDA from continuing operations is commonly used by investors to assess a company's leverage capacity, liquidity and financial performance. However, EBITDA from continuing operations has limitations as an analytical tool and should not be considered in isolation or as a substitute for net income (loss) or other statement of income data prepared in accordance with GAAP. The following table provides a reconciliation of net income to EBITDA from continuing operations (unaudited, in thousands): 31



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Table of Contents Trailing Twelve Three Months Ended Six Months Ended Months Ended June 30, June 30, June 30, 2014 2013 2014 2013 2014 2013 Net income $ 16,015$ 15,663$ 38,697$ 35,927$ 86,616$ 82,425 (Income) loss from discontinued operations, net of tax - (9 ) 272 (93 ) 998 599 Income from continuing operations 16,015 15,654 38,969 35,834 87,614 83,024 Adjustments: Income taxes 7,384 8,106 13,438 19,092 30,059 42,731 Depreciation and amortization 4,325 3,733 8,597 7,358 16,600 14,168 Interest expense 3,910 633 5,346 1,352 7,486 2,587 Interest income (262 ) (51 ) (343 ) (198 ) (467 ) (297 ) Earnings from continuing operations before interest, taxes, depreciation and amortization $ 31,372$ 28,075$ 66,007$ 63,438$ 141,292$ 142,213 EBITDA from continuing operations margin calculated as follows: Total revenue from continuing operations $ 165,326$ 142,354$ 335,103$ 302,266$ 693,685$ 629,223 Earnings from continuing operations before interest, taxes, depreciation and amortization 31,372 28,075 66,007 63,438 141,292 142,213 EBITDA from continuing operations as a percentage of revenue 19 % 20 % 20 % 21 % 20 % 23 % Leverage ratio (indebtedness divided by EBITDA from continuing operations): Indebtedness $ 200,000$ 162,972 Earnings from continuing operations before interest, taxes, depreciation and amortization 141,292 142,213 Leverage ratio 1.4:1 1.1:1 Free Cash Flow For purposes of its internal liquidity assessments, the Company considers free cash flow, which is defined as cash flow from the operating activities of continuing and discontinued operations reduced by purchases of property and equipment and net cash outflow from loan receivables. Free cash flow is commonly used by investors as a measure of cash generated by business operations that will be used to repay scheduled debt maturities and can be used to invest in future growth through new business development activities or acquisitions, repurchase stock, or repay debt obligations prior to their maturities. These metrics can also be used to evaluate the Company's ability to generate cash flow from business operations and the impact that this cash flow has on the Company's liquidity. However, free cash flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for cash flow from operating activities, including discontinued operations, or other income statement data prepared in accordance with GAAP. The following table provides a reconciliation of cash flow from operating activities to free cash flow (unaudited, in thousands): 32



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Table of Contents Trailing Twelve Months Ended June 30, 2014 2013 Cash flow from operating activities, including discontinued operations $ 110,611$ 94,102 Cash flow from investing activities: Loan receivables (1,007 ) (14,109 ) Purchases of property and equipment (28,357 ) (22,464 ) Free cash flow $ 81,247$ 57,529 Constant Currency Results The Company's reporting currency is the U.S. dollar. However, certain performance metrics discussed in this report are presented on a "constant currency" basis, which may be considered a non-GAAP measurement of financial performance under GAAP. The Company's management uses constant currency results to evaluate operating results of certain business operations in Mexico, which are transacted in Mexican pesos. Pawn scrap jewelry in Mexico is sold in U.S. dollars and, accordingly, does not require a constant currency adjustment. Constant currency results reported herein are calculated by translating certain balance sheet and income statement items denominated in Mexican pesos using the exchange rate from the prior-year comparable period, as opposed to the current comparable period, in order to exclude the effects of foreign currency rate fluctuations for purposes of evaluating period-over-period comparisons. For balance sheet items, the end-of-period exchange rate of 13.0 to 1 at June 30, 2013 was used. The exchange rate at June 30, 2014 was also 13.0 to 1. For income statement items, the average closing daily exchange rate for the appropriate period was used. The average exchange rate for the prior-year quarter ended June 30, 2013 was 12.5 to 1 compared to the current quarter rate of 13.0 to 1. The average exchange rate for the prior-year six-month period ended June 30, 2013 was 12.6 to 1 compared to the current year-to-date rate of 13.1 to 1.



Regulatory Developments

The Company is subject to regulation of its pawn stores, credit services, consumer loan and check cashing operations in all of the jurisdictions in which it operates. These regulations are provided through numerous laws, ordinances and regulatory pronouncements from various federal, state and local governmental entities in the United States and Mexico. These regulatory agencies have broad discretionary authority. Many statutes and regulations prescribe, among other things, the general terms of the Company's pawn and consumer loan agreements, including maximum service and/or interest rates that may be charged. In many jurisdictions, in both the United States and Mexico, the Company must obtain and maintain regulatory operating licenses and comply with regular or frequent regulatory reporting requirements, including reporting and recording of firearm transactions (U.S. only), receiving of pawn collateral, purchasing of merchandise, sales, export, import and transfer of merchandise, and currency transactions, among other things. In both the United States and Mexico, governmental action to further restrict or even prohibit pawn loans and transactions or small consumer loans, such as payday advances and credit services products, has been advocated over the past few years by elected officials, regulators, consumer advocacy groups and by media reports and stories. The consumer groups and media stories typically focus on the cost to a consumer for pawn and consumer loans, which is higher than the interest generally charged by banks, credit unions and credit card issuers to a more creditworthy consumer. The consumer groups and media stories often characterize pawn and especially payday loan activities as abusive toward consumers. During the last few years, in both the United States and Mexico, legislation or ordinances (on federal, state and local levels) have been introduced or enacted to prohibit, restrict or further regulate pawn loans and related transactions, including acceptance of pawn collateral, sale of merchandise, payday loans, consumer loans, credit services and related service fees. In addition, regulatory authorities in various levels of government in the United States and Mexico have proposed or publicly addressed, from time to time, the possibility of proposing new or expanded regulations that would prohibit or further restrict pawn loans and other pawn store transactions or consumer loans. Existing regulations and recent regulatory developments are described in greater detail in the Company's annual report on Form 10-K for the year ended December 31, 2013. This information is supplemented with the discussion provided in the following paragraphs. As described in greater detail in the Company's annual report on Form 10-K for the year ended December 31, 2013, the U.S. federal Consumer Financial Protection Bureau ("CFPB") continues to study the small consumer loan market and could propose or adopt rules making certain short-term lending products and services materially less profitable or even impractical to offer. The rulemaking process, which should begin with an "Advanced Notice of Proposed Rulemaking" ("ANPR"), is now expected by the end of September. The CFPB previously issued a public report on payday lending in March 2014 outlining its concerns regarding rollover transactions and introducing the concept of "loan sequences" as a measure of sustained usage, which is a more stringent 33



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measure than the simple counting of rollovers. The CFPB also raised concerns in the report that payday loans do not typically amortize over a loan sequence and payday loan payments are unaffordable to many borrowers. There can be no assurance that the CFPB will not propose or adopt rules making short-term lending products, such as payday and credit services products, materially less profitable or even impractical to offer. Local ordinances increasing the regulation of and potentially restricting customer access to credit services products offered in the Texas cities of Bryan and Garland, where the Company currently has six consumer loan and pawn stores offering credit services products, were recently enacted and will become effective later in 2014. The Company cannot currently estimate the impact of such ordinances on revenues and profitability of its credit services operations in Bryan and Garland. There can be no assurance that additional local, state or federal statutes or regulations in either the United States or Mexico will not be enacted or that existing laws and regulations will not be amended at some future date that could outlaw or inhibit the ability of the Company to profitably offer pawn loans, consumer loans and credit services, significantly decrease the service fees for lending money, or prohibit or more stringently regulate the acceptance of collateral, sale, exportation or importation of pawn merchandise, any of which could have a material adverse effect on the Company's operations and financial condition. If legislative or regulatory actions that had negative effects on the pawn, consumer loan or credit services industries were taken at a federal, state or local level in the United States or Mexico, where the Company has a significant number of stores, those actions could have a material adverse effect on the Company's acceptance of collateral, lending, credit services and retail buy/sell operations. There can be no assurance that additional federal, state or local legislation in the United States or Mexico will not be enacted, or that existing laws and regulations will not be amended, which could have a material adverse effect on the Company's operations and financial condition.


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