General

Pawn operations accounted for approximately 91% of the Company's revenue from continuing operations during fiscal 2012. 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 pawns that the Company deems collection to be probable based on historical pawn redemption statistics. If a pawn loan is not repaid prior to the expiration of the 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's consumer loan and credit services revenue, which was approximately 9% of consolidated revenue from continuing operations for fiscal 2012, 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 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. See additional discussion of the credit loss provision and related allowances and accruals in the section titled "Results of Continuing Operations."

Stores included in the same-store revenue calculations are those stores that were opened prior to the beginning of the prior-year comparative fiscal 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.

While the Company has had significant increases in revenue due to new store openings and acquisitions, the Company has also incurred increases in operating expenses attributable to the additional locations. 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, collection operations and personnel, accounting and administrative costs, information technology costs, liability and casualty insurance, outside legal and accounting fees and stockholder-related expenses.

The following table details selected operating metrics regarding the Company's loan products, inventories, and store locations (1):

                                                          Year Ended December 31,
                                                     2012           2011           2010
Pawn loans at end of period, in thousands:
Large format pawn stores - U.S.                  $   54,765     $   40,877     $   35,220
Large format pawn stores - Mexico                    47,512         31,748         34,823
Small format pawn stores - Mexico                       629            418            346
Small format pawn stores - U.S.                         275            244             99

Average pawn loans per location at end of
period, in thousands:
Large format pawn stores - U.S.                  $      298     $      310     $      317
Large format pawn stores - Mexico                        98             81            105

Pawn store inventories at end of period, in
thousands:
U.S. stores                                      $   32,664     $   23,745     $   19,730
Mexico stores                                        32,681         20,667         27,676

Average inventories per location, in thousands:
Large format pawn stores - U.S.                  $      176     $      178     $      176
Large format pawn stores - Mexico                        66             52             82

Pawn store annualized inventory turnover               4.2x           4.2x           4.1x

Consumer loan balances and CSO extensions of
credit at end of period, in thousands (2):
Consumer loan stores - U.S.                      $    7,170     $    7,065     $    7,426
Pawn stores - U.S.                                    8,378          6,371          5,802
Cash & Go, Ltd. joint venture kiosks - U.S.           1,164          1,196          1,247
Internet operations - U.S.                              477            431            291

Average outstanding customer loan amount at end
of period:
Pawn loan receivables - U.S.                     $      185     $      178     $      172
Pawn loan receivables - Mexico                           75             66             74
CSO extensions of credit held by independent
third-party lender - U.S. (3)                           518            513            494
Consumer loan receivables - Mexico                       86             78             82

(1) Inventory and loan amounts for stores in Mexico are based on translating the Mexican peso to the U.S. dollar at the exchange rate as of each year end. The exchange rates used for December 31, 2012, 2011, and 2010 were 13.0 to 1, 14.0 to 1, and 12.4 to 1, respectively.

(2) Amounts shown represent the gross amount owed by customers before allowances. Active CSO extensions of credit outstanding from the independent third-party lender are not included on the Company's balance sheet.

(3) Amounts shown represent the gross amount owed by customers before allowances. Excludes title loan amounts.

                                                         Year Ended December 31,
                                                        2012         2011      2010
Income statement items as a percent of total revenue:
Revenue:
Merchandise sales                                       65.6 %       66.5 %   64.0 %
Pawn loan fees                                          25.5         23.6     24.2
Consumer loan and credit services fees                   8.7          9.7     11.5
Other revenue                                            0.2          0.2      0.3

Cost of revenue:
Cost of goods sold                                      41.0         41.2     38.5
Consumer loan and credit services loss provision         2.2          2.3      3.1
Other cost of revenue                                      -            -        -

Net revenues                                            56.8         56.5     58.4

Expenses and other income:
Store operating expenses                                25.4         24.9     27.3
Administrative expenses                                  8.4          8.7      9.6
Depreciation and amortization                            2.2          2.1      2.4
Interest expense, net                                    0.2            -      0.1

Income from continuing operations before income taxes   20.6         20.8     19.0
Provision for income taxes                               7.0          7.2      6.8
Income from continuing operations                       13.6         13.6     12.2

Merchandise sales gross profit margin                   37.6 %       38.1 %   40.0 %
Store operating profit margin                           29.6         29.8     29.0

Discontinued Operations

In September 2012, the Company closed seven of its consumer loan stores located in the Texas cities of Austin and Dallas due in part to city ordinances enacted during 2012 in these cities, which significantly restricted the Company's ability to provide credit services products. The Company recorded a loss on disposal of $628,000, net of tax, or $0.03 per share, from these stores. The after-tax operating results from operations for these Texas stores were immaterial in 2012, 2011 and 2010.

The Company sold all ten of its Illinois consumer loan stores in March 2011. The Company recorded a gain of $5,979,000, net of tax, or $0.19 per share, during fiscal 2011 from the sale of these stores. The after-tax earnings from operations for the Illinois stores were an additional $514,000, or $0.02 per share in fiscal 2011. Comparable after-tax earnings were $2,881,000, or $0.10 per share in fiscal 2010.

In September 2010, the Company discontinued its internet-based credit services product offered in Maryland due to a change in state law which significantly restricts the offering of such products. The after-tax earnings from operations for the Maryland credit services operation were $887,000, or $0.03 per share in fiscal 2010.

All revenue, expenses and income reported in these financial statements have been adjusted to reflect reclassification of these discontinued operations.

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 and assumptions 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 and assumptions 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 include the following:

Principles of consolidation - The accompanying consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. During fiscal 2012, 75 pawn stores were acquired in eight acquisitions. During fiscal 2011, eleven pawn stores were acquired in two acquisitions. All significant intercompany accounts and transactions have been eliminated. The results of operations for these acquired stores have been consolidated with the Company's results of operations since the acquisitions.

Customer loans and revenue recognition - Receivables on the balance sheet consist of pawn loans and consumer loans. Pawn loans are collateralized by pledged tangible personal property. The Company accrues pawn loan fee revenue on a constant-yield basis over the life of the pawn for all pawns that the Company deems collection to be probable based on historical pawn redemption statistics. The typical pawn loan has an initial term of 30 days, which, depending on state law, can generally be extended from 15 to 60 days. If the pawn is not repaid, the principal amount loaned becomes the carrying value of the forfeited collateral, which is recovered through sales to other customers at prices above the carrying value.

The Company's pawn merchandise sales are primarily retail sales to the general public in its pawn stores. The Company acquires pawn merchandise inventory through forfeited pawns and through purchases of used goods directly from the general public. The Company records sales revenue at the time of the sale. The Company presents merchandise sales net of any sales or value-added taxes collected. The Company does not provide financing to customers for the purchase of its merchandise, but does permit its customers to purchase merchandise on an interest-free layaway plan. Should the customer fail to make a required payment, the previous payments are forfeited to the Company. Interim payments from customers on layaway sales are recorded as deferred revenue and subsequently recorded as income during the period in which final payment is received or when previous payments are forfeited to the Company. The Company melts some jewelry and sells the precious metal content at either prevailing market commodity prices or a previously agreed upon price with a commodity buyer. The Company records revenue from these transactions when a price has been agreed upon and the Company ships the jewelry to the buyer.

The Company recognizes credit services fees ratably over the life of the extension of credit made by the Independent Lender. The extensions of credit made by the Independent Lender to credit services customers have terms of 7 to 35 days. The Company records a liability for any collected, but unearned, credit services fees received from its customers. The Company accrues consumer loan service fees on a constant-yield basis over the term of the consumer loan. Consumer loans have terms that range from 7 to 365 days.

Credit loss provisions - The Company has determined no allowance related to credit losses on pawn loans is required, as the fair value of the collateral is significantly in excess of the pawn loan amount. Under the CSO Program, letters of credit issued by the Company to the Independent Lender constitute a guarantee for which the Company is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken by issuing the letters of credit. The Independent Lender may present the letter of credit to the Company for payment if the customer fails to repay the full amount of the extension of credit and accrued interest after the due date of the extension of credit. Each letter of credit expires approximately 30 days after the due date of the extension of credit. The Company's maximum loss exposure under all of the outstanding letters of credit issued on behalf of its customers to the Independent Lender as of December 31, 2012, was $17,464,000. According to the letter of credit, if the borrower defaults on the extension of credit, the Company will pay the Independent Lender the principal, accrued interest, insufficient funds fees, and late fees, all of which the Company records in the consumer loan and credit services loss provision. The Company is entitled to seek recovery directly from its customers for amounts it pays the Independent Lender in performing under the letters of credit. The Company records the estimated fair value of the liability under the letters of credit in accrued liabilities.

An allowance is provided for losses on active consumer loans and service fees receivable based upon expected default rates, net of estimated future recoveries of previously defaulted consumer loans and service fees receivable. The Company considers consumer loans to be in default if they are not repaid on the due date and writes off the principal amount and service fees receivable as of the default date, leaving only active advances in the reported balance. Net defaults and changes in the consumer loan allowance are charged to the consumer loan loss provision.

Inventories - Inventories represent merchandise acquired from forfeited pawns and merchandise purchased directly from the public. Inventories from forfeited pawns are recorded at the amount of the pawn principal on the unredeemed goods, exclusive of accrued interest. Inventories purchased directly from customers are recorded at cost. The cost of inventories is determined on the specific identification method. Inventories are stated at the lower of cost or market; accordingly, inventory valuation allowances are established, if necessary, when inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. Management has evaluated inventories and determined that a valuation allowance is not necessary.

Goodwill - Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination. The Company performs its goodwill impairment assessment annually as of December 31, and between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's reporting units, which are tested for impairment, are U.S. Pawn Operations, U.S. Consumer Loan Operations and Mexico Operations. The Company assesses goodwill for impairment at a reporting unit level by first assessing a range of qualitative factors, including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and overall financial performance. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company proceeds to the two-step impairment testing methodology.

Long-lived assets - Property and equipment and non-current assets are reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. Generally, the amount of the impairment loss is measured as the difference between the net book value of the asset and the estimated fair value of the related asset. The Company has not recorded any impairment loss for the fiscal years ended December 31, 2012, 2011 and 2010.

Stock-based compensation - All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on the grant-date fair value. The Company recognizes compensation cost net of estimated forfeitures and recognizes the compensation cost for only those awards expected to vest on a straight-line basis over the requisite service period of the award, which is generally the vesting term.

Guarantees - The Company has determined that the letters of credit issued by the Company to the Independent Lender as part of the CSO Program constitute a guarantee for which the Company is required to recognize a liability for the fair value of the obligation undertaken by issuing the letters of credit. Each letter of credit is issued at the time that the Company's credit services customer enters into an extension of credit agreement with the Independent Lender. The Independent Lender may present the letter of credit to the Company for payment if the customer fails to repay the full amount of the loan and accrued interest after the due date of the extension of credit. Each letter of credit expires approximately 30 days after the due date of the extension of credit. The Company is entitled to seek recovery directly from its customers for amounts it pays the Independent Lender in performing under the letters of credit. The Company records the estimated fair value of the liability under the letters of credit as a component of accrued liabilities.

The Independent Lender is considered a variable interest entity of the Company. The net loans outstanding represent less than 50% of the Independent Lender's total assets. In addition, the Company does not have any ownership interest in the Independent Lender, does not exercise control over it and is not the primary beneficiary and, therefore, does not consolidate the Independent Lender's results with its results.

Foreign Currency Transactions - The Company has significant operations in Mexico, where the functional currency for the Company's Mexican subsidiaries is the Mexican peso. The assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders' equity. Revenue and expenses are translated at the monthly average exchange rates occurring during each month. Prior to translation, any U.S. dollar-denominated transactions of the Mexican-based subsidiaries are remeasured into Mexican pesos using current rates of exchange for monetary assets and liabilities and historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement of dollar-denominated monetary assets and liabilities in Mexico are included in store operating expenses.

The Company's management reviews and analyzes certain operating results, in Mexico, on a constant currency basis because the Company believes this better represents the Company's underlying business trends. Amounts presented on a constant currency basis will be denoted as such. See additional discussion of constant currency operating results provided in the section titled "Non-GAAP Financial Information."

Results of Continuing Operations

Twelve Months Ended December 31, 2012, Compared to Twelve Months Ended December 31, 2011.

The following table details the components of revenue for the fiscal year ended December 31, 2012, as compared to the fiscal year ended December 31, 2011 (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 from 12.4 to 1 in fiscal 2011 to 13.2 to 1 in fiscal 2012. The end-of-period value of the Mexican peso to the U.S. dollar increased from 14.0 to 1 at December 31, 2011, to 13.0 to 1 at December 31, 2012. As a result of these currency exchange movements, revenue from Mexican operations translated into fewer U.S. dollars relative to the prior year, while net assets from Mexican operations as of year end translated into more U.S. dollars relative to the prior year end. While the weakening of the Mexican peso negatively affected the translated dollar-value of revenue, the cost of sales and operating expenses were reduced 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.

                                                                                                     Increase/(Decrease)
                                       Year Ended December 31,                                        Constant Currency
                                         2012               2011          Increase/(Decrease)               Basis
Domestic revenue:
Retail merchandise sales         $     104,289          $   82,497     $     21,792        26  %              26  %
Scrap jewelry sales                     57,551              56,091            1,460         3  %               3  %
Pawn loan fees                          63,640              52,085           11,555        22  %              22  %
Consumer loan and credit
services fees                           47,779              45,516            2,263         5  %               5  %
Other revenue                              938               1,020              (82 )      (8 )%              (8 )%
                                       274,197             237,209           36,988        16  %              16  %
International revenue:
Retail merchandise sales               183,167             154,300           28,867        19  %              26  %
Scrap jewelry sales                     46,155              51,913           (5,758 )     (11 )%             (11 )%
Pawn loan fees                          88,597              70,235           18,362        26  %              34  %
Consumer loan and credit
services fees                            3,823               4,685             (862 )     (18 )%             (14 )%
Other revenue                                7                   2                5       250  %             271  %
                                       321,749             281,135           40,614        14  %              20  %
Total revenue:
Retail merchandise sales               287,456             236,797           50,659        21  %              26  %
Scrap jewelry sales                    103,706             108,004           (4,298 )      (4 )%              (4 )%
Pawn loan fees                         152,237             122,320           29,917        24  %              29  %
Consumer loan and credit
services fees                           51,602              50,201            1,401         3  %               3  %
Other revenue                              945               1,022              (77 )      (8 )%              (7 )%
                                 $     595,946          $  518,344     $     77,602        15  %              18  %

Domestic revenue accounted for approximately 46% of the total revenue for fiscal 2012, while international revenue (from Mexico) accounted for 54% of the total.

The following table details customer loans and inventories held by the Company and active CSO credit extensions from an independent third-party lender as of December 31, 2012, as compared to December 31, 2011 (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.

                                                                                              Increase/(Decrease)
                                 Balance at December 31,                                       Constant Currency
                                   2012             2011          Increase/(Decrease)                Basis
Domestic:
Pawn loans                   $       55,040     $    41,121     $    13,919        34  %                34  %
CSO credit extensions held
by independent third-party
(1)                                  15,234          14,167           1,067         8  %                 8  %
Other consumer loans                  1,149              63           1,086     1,724  %             1,724  %
                                     71,423          55,351          16,072        29  %                29  %
International:
Pawn loans                           48,141          32,166          15,975        50  %                39  %
Other consumer loans                    730             795             (65 )      (8 )%               (15 )%
                                     48,871          32,961          15,910        48  %                38  %
Total:
Pawn loans                          103,181          73,287          29,894        41  %                36  %
CSO credit extensions held
by independent third-party
(1)                                  15,234          14,167           1,067         8  %                 8  %
Other consumer loans                  1,879             858           1,021       119  %               113  %
                             $      120,294     $    88,312     $    31,982        36  %                32  %
Pawn inventories:
Domestic pawn inventories    $       32,664     $    23,745     $     8,919        38  %                38  %
International pawn
. . .