NOTE 3: DISCONTINUED OPERATIONS AND RESTRUCTURING

Fiscal 2016

On February 8, 2016 in conjunction with ongoing evaluation of our strategic direction, we announced that we were conducting a comprehensive review of strategic options for Grupo Finmart to be completed by the end of the third quarter of fiscal 2016. In April 2016, a special committee of our board of directors comprised entirely of independent directors, after reviewing a variety of strategic alternatives with management and our financial advisors, concluded that a sale of the business was the preferred alternative and authorized management to proceed with a process to solicit proposals from interested buyers. Effective July 1, 2016 we entered into a definitive agreement (the “Purchase Agreement”) with Alpha Holding, S.A. de C.V. (“AlphaCredit”), pursuant to which AlphaCredit agreed to acquire Grupo Finmart.

On September 27, 2016, we completed the previously announced sale of all of our interests in Grupo Finmart to AlphaCredit. The sale was completed substantially in accordance with the terms set forth in the Purchase Agreement. Pursuant to the Purchase Agreement, AlphaCredit purchased all of our equity interests in Grupo Finmart, representing 93.78% of the issued and outstanding equity interests of Grupo Finmart, as well as a portion of the remaining interests held by the minority shareholders. The aggregate base price for 100% of Grupo Finmart was $50.0 million, subject to certain adjustments specified in the Purchase Agreement. Certain of the minority shareholders retained their equity interests in Grupo Finmart by entering into a shareholder agreement negotiated with AlphaCredit, and the portion of the purchase price attributable to such equity interests has been retained by AlphaCredit. Taking into consideration the $2.7 million attributable to the interests of the minority shareholders and following application of the purchase price adjustments (principally, working capital and non-operating debt adjustments), the purchase price payable to EZCORP was $40.9 million and, subject to the escrow amount described below, was paid in cash at closing. The purchase price is subject to final balance sheet adjustments within 90 days of closing.

An amount equal to 10% of the adjusted purchase price ($4.1 million) is subject to indemnification claims and is held in escrow for up to 18 months. AlphaCredit may also elect to withdraw funds from the escrow account to recover any amounts owed to it by reason of any post-closing purchase price adjustment. An additional $11.5 million was placed in a separate escrow account for tax purposes and was released to us on September 29, 2016 upon the filing and delivery of certain required tax documentation.

The amount of intercompany indebtedness owed by Grupo Finmart to EZCORP at the time of closing ($60.2 million) was restructured into two notes issued by Grupo Finmart and guaranteed by AlphaCredit. Each note provides for quarterly interest payments and principal repayments in installments over three years on the anniversary dates of the closing (30% on the first anniversary, 40% on the second anniversary and 30% on the third anniversary). The note governing the Mexican Peso denominated debt (principal amount of $8.2 million) is payable in Mexican Pesos at a 7.5% per annum interest rate, and the note governing the U.S. Dollar denominated debt (principal amount of $52.0 million) is payable in U.S. Dollars at a 4% per annum interest rate. These notes receivable were recorded at fair market value as further discussed in Note 7.

The Purchase Agreement provides for certain indemnification obligations of both EZCORP and AlphaCredit, subject to certain limitations. Generally, the maximum amount of our indemnification obligations is (1) 15% of the adjusted purchase price for general representations and warranties, (2) 25% of the adjusted purchase price for Special Representations (as defined in the Purchase Agreement) and (3) 100% of the proceeds received from AlphaCredit for all other indemnification obligations, including Fundamental Representations (as defined in the Purchase Agreement).

In addition, in connection with the closing, we paid a total of $31.1 million, including future interest payments and penalties, to existing Grupo Finmart lenders and stepped into the position of those lenders, including related collateral, and assumed the receivable from Grupo Finmart with no change in terms. All of this debt is scheduled to be repaid to EZCORP through December 2017. These notes receivable were recorded at fair market value as further discussed in Note 7.

This debt includes $25.3 million in total future payments pertaining to consolidated VIE debt supported by certain foreign currency hedge obligations of Grupo Finmart. We had previously guaranteed Grupo Finmart’s obligations under those hedge contracts, and our guarantee was unaffected by the sale. However, because our guarantee relates to underlying debt that is now owed to us, we do not anticipate any losses arising from the guarantee. Further, AlphaCredit, subject to certain exceptions, has agreed to reimburse us for any amounts we are required to pay under the guarantee. Although these guarantees offset each other, each is shown separately on our consolidated balance sheet at September 30, 2016 (our guarantee as a liability and the AlphaCredit backup guarantee as an asset).

During the fourth quarter of fiscal 2016 as a result of the Grupo Finmart disposition, we recorded a gain of $34.2 million and a $2.1 million loss on assumption of existing Grupo Finmart debt, before taxes. The gain, which is recorded in our consolidated statement of operations under “Loss from discontinued operations, net of tax,” does not take into consideration the total costs associated with the transaction. Those costs were $9.8 million, approximately $8.0 million of which were recorded in fiscal 2016 and the remaining $1.8 million of which will be recorded in future periods due to ongoing employee service requirements.

The amount of gain recorded, in thousands, as a result of the disposition of Grupo Finmart was calculated under FASB ASC 810-10-40-5 as follows:



Fair value of consideration received	$	123,949
Carrying amount of noncontrolling interest in Grupo Finmart at the date of deconsolidation	(3,014		)
Carrying amount of Grupo Finmart’s assets and liabilities at the date of deconsolidation	(61,525		)
Accumulated other comprehensive loss reclassified into income	(25,173		)
	$	34,237

As a result of the decision to sell the Grupo Finmart business, we classified Grupo Finmart as held for sale as of June 30, 2016 and recast all segment operations of Grupo Finmart as discontinued operations. We recognized no loss on classification as held for sale during the three-months ended June 30, 2016. All historical assets and liabilities of Grupo Finmart have been presented as current or non-current based on their historical presentation.

As of the completion of the disposition transaction as described above, Grupo Finmart is no longer a subsidiary of EZCORP and neither Grupo Finmart nor AlphaCredit is considered to be a related party to EZCORP. See Note 7 for additional information regarding our continuing involvement with 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 consolidated statements of operations:



	Fiscal Year Ended September 30,
	2016			2015			2014

	(in thousands)
Revenues	$	45,256		$	68,369		$	54,522
Consumer loan bad debt	(30,081		)	(26,446		)	(19,605		)
Operations expense	(38,740		)	(32,664		)	(32,184		)
Impairment of goodwill	(73,244		)	—			—
Interest expense, net	(16,464		)	(24,487		)	(19,479		)
Depreciation, amortization and other	(12,732		)	(7,008		)	(2,382		)
Gain on disposition	34,237			—			—
Loss from discontinued operations before income taxes of Grupo Finmart	(91,768		)	(22,236		)	(19,128		)
Income tax benefit	12,896			7,508			7,741
Loss from discontinued operations, net of tax of operations discontinued prior to the adoption of ASU 2014-08	(560		)	(27,317		)	(66,087		)
Loss from discontinued operations, net of tax	$	(79,432	)	$	(42,045	)	$	(77,474	)

Loss from discontinued operations, net of tax of Grupo Finmart	$	(78,872	)	$	(14,728	)	$	(11,387	)
Loss from discontinued operations, net of tax of Grupo Finmart attributable to noncontrolling interest	6,661			4,150			5,281
Loss from discontinued operations, net of tax of Grupo Finmart attributable to EZCORP, Inc.	$	(72,211	)	$	(10,578	)	$	(6,106	)

Cash flows from Grupo Finmart operating activities for the years ended September 30, 2016, 2015 and 2014 were $2.2 million, $11.1 million and $(7.4) million, respectively. Cash flows from Grupo Finmart investing activities for the years ended September 30, 2016, 2015 and 2014 were $42.7 million, $(41.1) million and $(33.5) million, respectively.

The following table presents the reconciliation of the carrying amounts of major classes of assets and liabilities of Grupo Finmart that are classified as held for sale presented in the consolidated balance sheet as of September 30, 2015:



	September 30, 2015

	(in thousands)
Cash and cash equivalents	$	2,880
Restricted cash (1) (3)	14,993
Consumer loans, net (1) (3)	31,824
Consumer loan fees and interest receivable, net (1) (3)	19,105
Prepaid expenses, income taxes and other current assets	4,047
Restricted cash, non-current (3)	2,883
Goodwill, intangible assets, and property and equipment, net	91,272
Non-current consumer loans, net (1) (3)	75,824
Deferred tax and other assets, net	47,254
Total assets classified as held for sale	$	290,082

Current maturities of long-term debt (2)	$	74,345
Accounts payable, accrued expenses and other current liabilities (2)	12,984
Long-term debt, less current maturities, net and other long-term liabilities (2) (4)	101,644
Total liabilities classified as held for sale	$	188,973

(1) These amounts include the following assets of our previously consolidated VIEs:



	September 30, 2015

	(in thousands)
Restricted cash	$	1,361
Consumer loans, net	5,846
Consumer loan fees and interest receivable, net	6,399
Non-current consumer loans, net	27,162
Total assets of consolidated VIEs	$	40,768

(2) These amounts include the following liabilities of our previously consolidated VIEs:



	September 30, 2015

	(in thousands)
Current maturities of long-term debt	$	42,017
Accounts payable, accrued expenses and other current liabilities	4,313
Long-term debt, less current maturities	31,247
Total liabilities of consolidated VIEs	$	77,577

(3) These amounts include the following assets of Grupo Finmart's securitization trust that can only be used to settle its liabilities:



	September 30, 2015

	(in thousands)
Restricted cash	$	12,033
Consumer loans*	36,845
Consumer loan fees and interest receivable, net	6,067
Restricted cash, non-current	197
Total assets of Grupo Finmart's securitization trust	$	55,142

These amounts include the current and non-current portions of active consumer loans considered to be performing under the terms of the Grupo Finmart securitization trust. These balances, which represent the total collateral that can be used to settle the liabilities of the securitization trust, exclude loan loss allowances as described in Note 19, and are presented on a net basis in the consolidated balance sheets including allowances.

(4) This amount includes the following liabilities for which the creditors of Grupo Finmart's securitization trust do not have recourse to the general credit of EZCORP, Inc.:



	September 30, 2015

	(in thousands)
Long-term debt, less current maturities	$	40,493

Assets and liabilities classified as held for sale and presented above are exclusive of net intercompany liabilities totaling $19.7 million as of September 30, 2015.

During fiscal 2014 and the first quarter of fiscal 2015, Grupo Finmart completed six transfers of consumer loans to various securitization trusts. Prior to the sale of Grupo Finmart as discussed above, we consolidated those securitization trusts under the VIE model as we had the power to direct the activities that significantly affect each VIE’s economic performance and had the right to receive benefits or the obligation to absorb losses that could potentially be significant to each VIE. Each VIE issued its notes to third party investors and used the related net proceeds to purchase the loans from Grupo Finmart at a premium over their principal amount. We have de-consolidated these VIEs in conjunction with the disposition of Grupo Finmart. Income (principally interest and fees on loans) earned by our consolidated VIEs was $12.6 million and $34.4 million for the years ended September 30, 2016 and 2015. Related expenses, consisting primarily of interest expense, foreign exchange losses and consumer loan bad debt expense, were $9.7 million and $30.4 million for the years ended September 30, 2016 and 2015, respectfully. These amounts do not include intercompany transactions which were eliminated in our consolidated financial statements.

Fiscal 2015 and 2014

During the fourth quarter of fiscal 2015, in the context of a transformational change in strategy following an intensive six-month review of all Company activities, we implemented a plan that included:


•	Exiting our USFS business and ceasing the employment of the employees related to that business; and


•	Streamlining our structure and operating model to improve overall efficiency and reduce costs, which includes additional store closures, consolidations and relocations; additional headcount reductions in the remaining business and in the corporate support center; termination of various real property leases; and write-down and write-offs of various assets no longer to be used in the business.

Under that new strategy, we (a) focused on growing our core pawn operations in the United States and Mexico and our Grupo Finmart business in Mexico and (b) simplified our operating structure by moving from a divisional to a functional business model. The costs of exiting of our USFS business are included under “Loss from discontinued operations, net of tax” and the cost of streamlining of our structure and operating model are included under “Restructuring” expenses in our consolidated statements of operations. Accrued charges are included under "Accounts payable, accrued expenses and other current liabilities" in our consolidated balance sheets.

During the fourth quarter of fiscal 2014, as part of a strategy to concentrate on an integrated, customer-centric financial services model focused on our core businesses of pawn and unsecured payroll lending, we implemented a plan to exit our online lending businesses in the United States and the United Kingdom. As a result of this plan, our online lending operations in the United States (EZOnline) and in the United Kingdom (Cash Genie) have been included as discontinued operations.

Discontinued Operations

The following table summarizes the pre-tax charges (gains) pertaining to the above discontinued operations:



	Fiscal Year Ended September 30,
	2015		2014

	(in thousands)
Goodwill impairment	$	10,550	$	84,158
Long-lived assets impairment	1,685		11,795
Other (a)	21,045		7,590
Asset disposals	7,443		2,882
Lease termination costs	1,720		1,504
Reversal of contingent consideration payable	—		(4,792		)
	$	42,443	$	103,137

(a)

Includes estimated costs related to regulatory compliance, employee severance and accelerated amortization of prepaid expenses and other assets. The amount shown for fiscal 2015 includes a $10.5 million one-time charge associated with the settlement of outstanding issues with the U.S. Consumer Financial Protection Bureau and a $4.0 million charge related to the resolution of regulatory compliance issues in our Cash Genie U.K online lending business, which is a part of fiscal 2014 discontinued operations.

Total revenue included in “Loss from discontinued operations, net of tax” was $2.1 million, $124.7 million and $188.8 million during fiscal 2016, 2015 and 2014, respectively, exclusive of Grupo Finmart revenue presented in our fiscal 2016 action above.

Restructuring

During the fourth quarter of fiscal 2015 we streamlined our structure and operating model to improve overall efficiency and reduce costs included in our transformational change in strategy as discussed above. Restructuring charges related to this action are allocated to certain of our segments. See Note 18. The following table summarizes the pre-tax charges, inclusive of the charges presented in the changes in the balance of restructuring costs rollforward below, which have been recorded under “Restructuring” expense in our consolidated statements of operations:



	Fiscal Year Ended September 30,
	2016		2015

	(in thousands)
Long-lived assets impairment	$	—	$	2,346
Other (a)	779		3,447
Asset disposals	323		3,650
Lease termination costs	819		7,637
	$	1,921	$	17,080


(a)	Includes costs related to employee severance and other.

Changes in the balance of these restructuring costs are summarized as follows:



	Fiscal Year Ended September 30,
	2016			2015

	(in thousands)
Beginning balance	$	8,076		$	—
Charged to expense	1,594			9,469
Cash payments	(5,577		)	(1,393		)
Other (a)	1,024			—
Ending balance (b)	$	5,117		$	8,076


(a)	Includes other individually immaterial adjustments as well as adjustments to our estimate of lease termination costs.


(b)	Ending balance as of September 30, 2016 is comprised of accrued lease termination costs that we expect to be partially offset by future sublease payments through 2029. We consider future changes in this accrual to be attributable to continuing operations.

Fiscal 2014

During the fourth quarter of fiscal 2014, we conducted a company-wide operational review to realign our organization to streamline operations and create synergies and efficiencies. Restructuring charges related to this action are considered corporate costs and therefore are not allocated to a specific segment. Changes in the balance of these restructuring costs are summarized as follows:



	Fiscal Year Ended September 30,
	2016			2015

	(in thousands)
Beginning balance	$	2,901		$	6,121
Charged to expense	—			763
Cash payments	(2,901		)	(3,983		)
Ending balance	$	—		$	2,901