UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to _____
Commission file number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-2997911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 3, 2003, 100 shares of the Registrant's common stock, par value
$1.00 per share, were outstanding.
1
DOLLAR FINANCIAL GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2003
and September 30, 2003 (unaudited).......................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three
Months Ended September 30, 2002 and 2003.................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2002 and 2003........................................................... 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 22
Item 4. Controls and Procedures..................................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 23
Item 2. Changes in Securities and Use of Proceeds................................................... 24
Item 3. Defaults Upon Senior Securities............................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders......................................... 24
Item 5. Other Information........................................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
Signature................................................................................... 25
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, September 30,
2003 2003
---------------- ----------------
ASSETS (unaudited)
Cash and cash equivalents..................................................... $ 71,805 $ 63,915
Loans and other receivables, net of reserve of $2,437 and $2,564.............. 22,677 22,838
Loans receivable pledged...................................................... 8,000 8,000
Prepaid expenses.............................................................. 6,358 6,340
Notes receivable - officers................................................... 2,756 2,756
Due from parent............................................................... 4,573 4,823
Property and equipment, net of accumulated depreciation
of $39,309 and $41,784.................................................... 29,209 28,319
Goodwill and other intangibles, net of accumulated
amortization of $21,308 and $22,094....................................... 144,125 143,789
Debt issuance costs, net of accumulated amortization of
$7,945 and $8,396........................................................ 5,200 4,925
Other......................................................................... 1,833 1,898
---------------- ----------------
$ 296,536 $ 287,603
================ ================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable ............................................................ $ 17,245 $ 15,657
Income taxes payable.......................................................... 11 90
Accrued expenses 9,419 10,793
Accrued interest payable...................................................... 1,656 5,322
Deferred tax liability........................................................ 838 1,259
Other collateralized borrowings............................................... 8,000 8,000
Revolving credit facilities................................................... 61,699 47,948
10-7/8 % Senior Notes due 2006................................................ 109,190 109,190
Subordinated notes payable and other.......................................... 20,081 20,066
Shareholder's equity:
Common stock, $1 par value: 20,000 shares
authorized; 100 shares issued and outstanding at
June 30, 2003 and September 30, 2003...................................... - -
Additional paid-in capital.................................................... 50,957 50,957
Retained earnings............................................................. 9,034 10,176
Accumulated other comprehensive income........................................ 8,406 8,145
---------------- ----------------
Total shareholder's equity................................................ 68,397 69,278
---------------- ----------------
$ 296,536 $ 287,603
================ ================
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended
September 30,
---------------------------------
2002 2003
-------------- -------------
Revenues .......................................................... $ 52,653 $ 56,990
Store and regional expenses:
Salaries and benefits........................................... 17,147 18,777
Occupancy....................................................... 4,799 4,864
Depreciation.................................................... 1,619 1,448
Other........................................................... 12,857 12,965
------------- -------------
Total store and regional expenses.................................. 36,422 38,054
Corporate expenses................................................. 7,248 7,241
Loss on store closings and sales................................... 488 60
Other depreciation and amortization................................ 843 958
Interest expense (net of interest income of $42 and $39).......... 4,931 5,247
------------- -------------
Income before income taxes........................................ 2,721 5,430
Income tax provision............................................... 1,910 4,288
------------- -------------
Net income ........................................................ $ 811 $ 1,142
============= =============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
September 30,
-----------------------------------
2002 2003
-------------- --------------
Cash flows from operating activities:
Net income...................................................................... $ 811 $ 1,142
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization............................................. 2,902 2,856
Loss on store closings and sales.......................................... 488 60
Deferred tax provision.................................................... 408 421
Change in assets and liabilities:
Increase in loans and other receivables and income
taxes receivable..................................................... (8,298) (672)
Decrease (Increase) in prepaid expenses and other...................... 411 (13)
Increase in accounts payable, income taxes payable,
accrued expenses and accrued interest payable........................ 576 2,895
-------------- --------------
Net cash (used in) provided by operating activities............................. (2,702) 6,689
Cash flows from investing activities:
Additions to property and equipment........................................... (1,092) (1,415)
-------------- --------------
Net cash used in investing activities........................................... (1,092) (1,415)
Cash flows from financing activities:
Other debt payments .......................................................... (45) (63)
Net decrease in revolving credit facilities................................... (4,482) (13,751)
Payment of debt issuance costs................................................ (64) (175)
Net increase in due from parent............................................... (280) (250)
-------------- --------------
Net cash used in financing activities........................................... (4,871) (14,239)
Effect of exchange rate changes on cash and cash equivalents.................... (680) 1,075
-------------- --------------
Net decrease in cash and cash equivalents....................................... (9,345) (7,890)
Cash and cash equivalents at beginning of period................................ 86,633 71,805
-------------- --------------
Cash and cash equivalents at end of period...................................... $ 77,288 $ 63,915
============== ==============
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Dollar
Financial Group, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements and should be read in conjunction with the
Company's audited consolidated financial statements in its Annual Report on Form
10-K for the fiscal year ended June 30, 2003 filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments, (consisting
of normal recurring adjustments), considered necessary for a fair presentation
have been included. Operating results of interim periods are not necessarily
indicative of the results that may be expected for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Operations
Dollar Financial Group, Inc., organized in 1979 under the laws of the State of
New York, is a wholly owned subsidiary of DFG Holdings, Inc. ("Holdings"). The
activities of Holdings consist primarily of its investment in the Company and
additional third party debt. Holdings has no employees or operating activities
as of September 30, 2003. The Company, through its subsidiaries, provides retail
financial services to the general public through a network of 1,080 locations
(of which 625 are Company owned) operating as Money Mart(R), The Money Shop,
Loan Mart(R) and Insta-Cheques in seventeen states, the District of Columbia,
Canada and the United Kingdom. The services provided at the Company's retail
locations include check cashing, short-term consumer loans, sale of money
orders, money transfer services and various other related services. Also, the
Company's subsidiary, Money Mart(R) Express (formerly known as
moneymart.com(TM)), services and originates short-term consumer loans through
450 independent document transmitters in 16 states.
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION
The Company's payment obligations under the 10 7/8% Senior Notes due November
2006 ("Senior Notes") and Senior Subordinated Notes due 2006 ("Senior
Subordinated Notes") are jointly and severally guaranteed on a full and
unconditional basis by all of the Company's existing and future subsidiaries
(the "Guarantors"). The subsidiaries' guarantees of the Senior Notes rank pari
passu in right of payment with all existing and future indebtedness of the
Guarantors, including the obligations of the Guarantors under the Company's
Revolving Credit Facility and any successor credit facilities. The subsidiaries'
guarantees of the Senior Subordinated Notes are subordinated in right of payment
to the senior indebtedness of the Guarantors. Pursuant to the Senior Notes or
Senior Subordinated Notes, every direct and indirect wholly owned subsidiary of
the Company, each of which is wholly-owned, serves as a guarantor of the Senior
Notes and Senior Subordinated Notes.
Separate financial statements of each Guarantor have not been presented because
management has determined that they would not be material to investors. The
accompanying tables set forth the condensed consolidating balance sheet at
September 30, 2003, and the condensed consolidating statements of operations and
cash flows for the three month period ended September 30, 2003 of the Company
(on a parent-company basis), combined domestic Guarantors, combined foreign
subsidiaries and the consolidated Company.
6
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING BALANCE SHEETS
September 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Assets
Cash and cash equivalents............................ $ 9,639 $ 21,936 $ 32,340 $ - $ 63,915
Loans and other receivables, net..................... 8,991 1,959 12,206 (318) 22,838
Loans receivable pledged............................. - - 8,000 - 8,000
Income taxes receivable.............................. 22,036 - - (22,036) -
Prepaid expenses..................................... 755 977 4,608 - 6,340
Deferred income taxes................................ 1,064 - - (1,064) -
Notes receivable--officers........................... 2,756 - - - 2,756
Due from affiliates.................................. - 93,195 - (93,195) -
Due from parent...................................... 4,823 - - - 4,823
Property and equipment, net.......................... 5,429 7,838 15,052 - 28,319
Goodwill and other intangibles, net.................. 29 56,537 87,223 - 143,789
Debt issuance costs, net............................. 4,714 - 211 - 4,925
Investment in subsidiaries........................... 219,165 9,801 6,705 (235,671) -
Other................................................ 93 600 1,205 - 1,898
---------------------------------------------------------------------------
$ 279,494 $ 192,843 $ 167,550 $ (352,284) $ 287,603
===========================================================================
Liabilities and shareholder's equity
Accounts payable..................................... $ 1,503 $ 5,849 $ 8,305 $ - $ 15,657
Income taxes payable................................. - 20,542 1,584 (22,036) 90
Accrued expenses..................................... 2,554 3,401 4,838 - 10,793
Accrued interest payable............................. 4,984 88 568 (318) 5,322
Deferred tax liability............................... - 2,323 - (1,064) 1,259
Due to affiliates.................................... 32,831 - 60,364 (93,195) -
Other collateralized borrowings...................... - - 8,000 - 8,000
Revolving credit facilities.......................... 47,775 - 173 - 47,948
10 7/8% Senior Notes due 2006........................ 109,190 - - - 109,190
Subordinated notes payable and other................. 20,000 - 66 - 20,066
---------------------------------------------------------------------------
218,837 32,203 83,898 (116,613) 218,325
Shareholder's equity:
Common stock...................................... - - - - -
Additional paid-in capital........................ 50,957 85,524 27,304 (112,828) 50,957
Retained earnings ................................ 10,176 73,460 49,383 (122,843) 10,176
Accumulated other comprehensive (loss) income..... (476) 1,656 6,965 - 8,145
---------------------------------------------------------------------------
Total shareholder's equity........................... 60,657 160,640 83,652 (235,671) 69,278
---------------------------------------------------------------------------
$ 279,494 $ 192,843 $ 167,550 $ (352,284) $ 287,603
===========================================================================
7
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-----------------------------------------------------------------------------
Revenues $ - $ 26,091 $ 30,899 $ - $ 56,990
Store and regional expenses:
Salaries and benefits...................... - 10,623 8,154 - 18,777
Occupancy.................................. - 2,840 2,024 - 4,864
Depreciation............................... - 794 654 - 1,448
Other...................................... - 7,069 5,896 - 12,965
-----------------------------------------------------------------------------
Total store and regional expenses............. - 21,326 16,728 - 38,054
Corporate expenses............................ 3,626 - 3,615 - 7,241
Management fee................................ (542) - 542 - -
Loss on store closings and sales and other
restructuring.............................. 60 - - - 60
Other depreciation and amortization........... 542 15 401 - 958
Interest expense, net......................... 4,053 (591) 1,785 - 5,247
-----------------------------------------------------------------------------
(Loss) income before income taxes ............ (7,739) 5,341 7,828 - 5,430
Income tax (benefit) provision ............... (2,474) 2,798 3,964 - 4,288
-----------------------------------------------------------------------------
(Loss) income before equity in net
income of subsidiaries..................... (5,265) 2,543 3,864 - 1,142
Equity in net income of subsidiaries:
Domestic subsidiary guarantors............. 2,543 - - (2,543) -
Foreign subsidiary guarantors.............. 3,864 - - (3,864) -
-----------------------------------------------------------------------------
Net income .................................. $ 1,142 $ 2,543 $ 3,864 $ (6,407) $ 1,142
=============================================================================
8
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Cash flows from operating activities:
Net income ............................................... $ 1,142 $ 2,543 $ 3,864 $ (6,407) $ 1,142
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed income of subsidiaries................. (6,407) - - 6,407 -
Depreciation and amortization........................ 993 807 1,056 - 2,856
Loss on store closings and sales..................... 60 - - - 60
Deferred tax provision............................... - 421 - - 421
Changes in assets and liabilities (net of effect
of acquisitions):
Decrease (increase) in loans and other
receivables.................................... 1,856 (848) (1,998) 318 (672)
(Increase) decrease in income taxes receivable... (2,619) - - 2,619 -
Decrease (increase) in prepaid expenses and other 13 135 (161) - (13)
Increase (decrease) in accounts payable,
income taxes payable, accrued expenses and
accrued interest payable ...................... 4,456 2,092 (716) (2,937) 2,895
-------------------------------------------------------------------------
Net cash (used in) provided by operating activities....... (506) 5,150 2,045 - 6,689
Cash flows from investing activities:
Additions to property and equipment....................... (58) (371) (986) - (1,415)
Net increase in due from affiliates....................... - (9,056) - 9,056 -
-------------------------------------------------------------------------
Net cash used in investing activities..................... (58) (9,427) (986) 9,056 (1,415)
Cash flows from financing activities:
Other debt payments....................................... - - (63) - (63)
Net decrease in revolving credit facilities............... (12,989) - (762) - (13,751)
Payment of debt issuance costs............................ (175) - - - (175)
Net increase in due from parent........................... (250) - - - (250)
Net increase (decrease) in due to affiliates.............. 15,636 - (6,580) (9,056) -
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities....... 2,222 - (7,405) (9,056) (14,239)
Effect of exchange rate changes on cash and cash
equivalents............................................... - - 1,075 - 1,075
-------------------------------------------------------------------------
Net decrease (increase) in cash and cash equivalents...... 1,658 (4,277) (5,271) - (7,890)
Cash and cash equivalents at beginning of period.......... 7,981 26,213 37,611 - 71,805
-------------------------------------------------------------------------
Cash and cash equivalents at end of period................ $ 9,639 $ 21,936 $ 32,340 $ - $ 63,915
=========================================================================
9
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
3. GOODWILL AND OTHER INTANGIBLES
In accordance with the adoption provisions of SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis. The
Company performs it's annual impairment test as of June 30. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings. The Company has covenants not to compete, which are deemed to have a
definite life and will continue to be amortized. Amortization for these
intangibles for the three months ended September 30, 2003 was $43,000. The
estimated aggregate amortization expense for each of the five succeeding fiscal
years ending June 30, is:
Year Amount
---------------------------------------
2004 $ 95,000
2005 20,000
2006 -
2007 -
2008 -
The following table reflects the components of intangible assets (in thousands):
June 30, 2003 September 30, 2003
------------------------------------------ ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------ ----------------------------------------
Non-amortized intangible assets:
Cost in excess of net assets acquired $ 162,987 $ 18,977 $ 163,434 $ 19,717
Amortized intangible assets:
Covenants not to compete 2,446 2,331 2,445 2,377
4. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is the change in equity from transactions and other
events and circumstances from non-owner sources, which includes foreign currency
translation. The following shows the comprehensive (loss) income for the periods
stated:
Three Months Ended
September 30,
---------------------------------
2002 2003
-------------- ---------------
Net income $ 811 $ 1,142
Foreign currency translation adjustment (1,396) (261)
-------------- --------------
Total comprehensive (loss) income $ (585) $ 881
============== ==============
10
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
5. LOSS ON STORE CLOSINGS AND SALES AND OTHER RESTRUCTURING
During the fiscal year ended June 30, 2003, the Company closed 27 stores and
consolidated and relocated certain non-operating functions to reduce costs and
increase efficiencies. Costs incurred with that restructuring comprised
severance and other retention benefits to employees who were involuntarily
terminated and closure costs related to the locations the Company will no longer
utilize. The restructuring was completed by June 30, 2003. All of the locations
that were closed and for which the workforce was reduced are included in the
United States geographic segment. The Company, as required, adopted Financial
Accounting Standards Board Statement No. 146, Accounting for Costs Associated
with Disposal or Exit Activities, on January 1, 2003. During the first quarter
of fiscal 2004, charges previously accrued for severance and other retention
benefits were reclassed to store closure costs.
Following is a reconciliation of the beginning and ending balances of the
restructuring liability (in millions):
Severance and
Other Store Closure
Retention Benefits Costs Total
------------------ ----------------- -----------------
Balance at June 30, 2003 $ 1.2 $ 0.2 $ 1.4
Charge recorded in earnings - - -
Reclassification (0.7) 0.7 -
Amounts paid (0.3) (0.3) (0.6)
Non-cash charges - - -
------------------ ----------------- -----------------
Balance at September 30, 2003 $ 0.2 $ 0.6 $ 0.8
================== ================= =================
The Company also expenses costs related to the closure of stores in the normal
course of its business. Costs directly expensed for the three months ended
September 30, 2003 and 2002 were $60,000 and $488,000, respectively.
6. GEOGRAPHIC SEGMENT INFORMATION
All operations for which geographic data is presented below are in one
principal industry (check cashing and ancillary services) (in thousands):
United United
States Canada Kingdom Total
---------------- ------------- -------------- ---------------
As of and for the three months
ended September 30, 2002
Identifiable assets $ 143,340 $ 69,093 $ 74,621 $ 287,054
Goodwill and other intangibles, net 56,500 32,287 42,780 131,567
Sales to unaffiliated customers 26,080 16,374 10,199 52,653
(Loss) income before income taxes (8,831) 9,821 1,731 2,721
Income tax (benefit) provision (2,494) 3,882 522 1,910
Net (loss) income (6,337) 5,939 1,209 811
As of and for the three months
ended September 30, 2003
Identifiable assets $ 126,238 $ 84,082 $ 77,283 $ 287,603
Goodwill and other intangibles, net 56,566 38,535 48,688 143,789
Sales to unaffiliated customers 26,091 19,340 11,559 56,990
(Loss) income before income taxes (2,398) 5,729 2,099 5,430
Income tax (benefit) provision 324 2,827 1,137 4,288
Net (loss) income (2,722) 2,902 962 1,142
11
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Operations in the United Kingdom and Canada have exposed the Company to shifts
in currency valuations. From time to time, the Company may elect to purchase put
options in order to protect earnings in the United Kingdom and Canada against
foreign currency fluctuations. Out of the money put options may be purchased
because they cost less than completely averting risk, and the maximum downside
is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At September 30, 2003, the
Company held put options with an aggregate notional value of 3.0 million British
pounds to protect the currency exposure in the United Kingdom throughout the
remainder of the calendar year. The Company also held put options with an
aggregate notional value of $(CAN) 36.0 million to protect the currency exposure
in Canada throughout the remainder of the fiscal year. All put options for the
quarter ended September 30, 2003 expired out of the money at a cost of $13,000
which is included in corporate expenses in the consolidated statement of
earnings. There was no such hedging activity for the same period in fiscal 2003.
The Company's revolving credit facility and overdraft credit facilities carry a
variable rate of interest. As most of the Company's average outstanding
indebtedness carries a fixed rate of interest, a change in interest rates is not
expected to have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
8. CONTINGENT LIABILITIES
On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an
action against the Company's Canadian subsidiary on behalf of a purported class
of Canadian borrowers (except those residing in British Columbia and Quebec)
who, Mortillaro claims, were subjected to usurious charges in payday-loan
transactions. The action, which is pending in the Ontario Superior Court of
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. Like the plaintiff in the MacKinnon action referred to below,
Mortillaro has agreed to arbitrate all disputes with the Company; and, assuming
the Company is served, it will seek to enforce the arbitration agreement. The
Company believes that it has meritorious procedural and substantive defenses to
Mortillaro's claims, and it intends to defend those claims vigorously.
The Company is a defendant in four putative class-action lawsuits, all of which
were commenced by the same plaintiffs' law firm, alleging violations of
California's wage-and-hour laws. The named plaintiffs in these suits, which are
pending in the Superior Court of the State of California, are the Company's
former employees Vernell Woods (commenced August 22, 2000), Juan Castillo
(commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth
Williams (commenced June 3, 2003). Each of these suits seeks an unspecified
amount of damages and other relief in connection with allegations that the
Company misclassified California store (Woods) and regional (Castillo) managers
as "exempt" from a state law requiring the payment of overtime compensation,
that the Company failed to provide employees with meal and rest breaks required
under a new state law (Chin) and that the Company computed bonuses payable to
store managers using an impermissible profit-sharing formula (Williams). In
January 2003, without admitting liability, the Company sought to settle the
Woods case, which the Company believes to be the most significant of these
suits, by offering each individual putative class member an amount intended in
good faith to settle his or her claim. As of September 30, 2003, 92% of these
settlement offers had been accepted. Plaintiffs' counsel is presently disputing
through arbitration the validity of the settlements accepted by the individual
putative class members. The Company believes that it has meritorious defenses to
the challenge and to the claims of the non-settling putative Woods class members
and plan to defend them vigorously. The Company believes that it has adequately
provided for the costs associated with this matter. The Company is vigorously
defending the Castillo, Chin and Williams lawsuits and believes it has
meritorious defenses to the claims asserted in those matters. The Company
believes the outcome of such litigation will not significantly affect its
financial results.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action
against the Company's Canadian subsidiary and 26 other Canadian lenders on
behalf of a purported class of British Columbia residents who, plaintiff claims,
were overcharged in payday-loan transactions. The action, which is pending in
the Supreme Court of British Columbia, alleges violations of laws proscribing
usury and unconscionable trade practices and seeks restitution and damages,
including punitive damages, in an unknown amount. On March 25, 2003, the Company
moved to stay the action as against it and to compel arbitration of plaintiff's
claims as required by his agreement with the Company. The Company is presently
awaiting a decision on that motion. The Company believes it has meritorious
defenses to the action and intends to defend it vigorously. The Company believes
the outcome of such litigation will not significantly affect its financial
results.
On October 30, 2002, the Oklahoma Administrator of Consumer Credit issued an
administrative order revoking the supervised-lending license of the Company's
Oklahoma subsidiary on the ground that certain loans marketed by the subsidiary
and made by County Bank did not conform with Oklahoma usury laws. The
Administrator's order also requires the subsidiary to refund certain purportedly
12
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
8. CONTINGENT LIABILITIES (continued)
excess finance charges collected by County Bank. The Administrator's order is
presently on appeal to the Oklahoma District Court. On August 20, 2003, that
court denied the Administrator's motion to require the subsidiary to desist from
further loan-origination activities pending appeal. The subsidiary is also
appealing a federal court's abstention from ruling on this matter to the United
States Court of Appeals for the Tenth Circuit. The Company is presently unable
to evaluate the likelihood of any particular outcome of this matter but, in the
Company's opinion, the outcome of such litigation will not significantly affect
the Company's financial results.
In addition to the litigation discussed above, the Company is involved in
routine litigation and administrative proceedings arising in the ordinary course
of business. In the opinion of management, the outcome of such litigation and
proceedings will not significantly affect the Company's consolidated financial
statements.
9. SUBSEQUENT EVENTS
On October 28, 2003 the Company announced that it intends to offer $200 million
principal amount of senior notes due 2011 under Rule 144A and Regulation S of
the Securities Act of 1933, as amended. The Company currently anticipates that
it will use the proceeds from this offering to redeem its outstanding senior
notes and its outstanding senior subordinated notes, to repay its existing
credit facility, which it anticipates will be replaced with a new credit
facility, and to pay fees and expenses with respect to these transactions and a
related note exchange transaction involving its parent company's senior discount
notes. The senior notes will not be registered under the Securities Act or any
state securities laws. Thus, the senior notes may not be offered or sold in the
United States absent registration or an applicable exemption from the
registration requirements of the Securities Act and any applicable state
securities laws.
13
SUPPLEMENTAL STATISTICAL DATA
September 30,
Company Operating Data: 2002 2003
------------- -------------
Number of stores:
Company-owned................................. 639 625
Franchised stores and check cashing merchants. 418 455
------------- -------------
Total............................................ 1,057 1,080
============= =============
- ------------------------------------------------------------------------------------------------------
Three Months Ended
September 30,
-----------------------------------
Operating Data: 2002 2003
------------- --------------
Face amount of checks cashed (in millions) $ 762 $ 791
Face amount of average check $ 360 $ 366
Face amount of average check (excluding Canada & UK) $ 402 $ 376
Average fee per check $ 12.51 $ 13.00
Number of checks cashed (in thousands) 2,115 2,164
- ------------------------------------------------------------------ -----------------------------------
Three Months Ended
September 30,
-----------------------------------
Collections Data: 2002 2003
------------- --------------
Face amount of returned checks (in thousands) $ 6,869 $ 7,635
Collections (in thousands) 4,943 5,496
------------- -------------
Net write-offs (in thousands) $ 1,926 $ 2,139
============= ==============
Collections as a percentage of returned checks 72.0% 72.0%
Net write-offs as a percentage of
check cashing revenues 7.3% 7.6%
Net write-offs as a percentage of the
face amount of checks cashed 0.25% 0.27%
14
The following chart presents a summary of our consumer lending originations,
which includes loan extensions and revenues for the following periods:
Three Months Ended
September 30,
----------------------------------------
2002 2003
----------------------------------------
(in thousands)
U.S. company funded originations.................... $ 25,988 $ 14,268
Canadian company funded originations................ 57,831 75,574
U.K. company funded originations.................... 23,758 26,508
----------------------------------------
Total company funded originations................ $ 107,577 $ 116,350
========================================
Servicing revenues, net............................. $ 10,576 $ 11,413
Company funded domestic loan revenues............... 4,656 2,155
Company funded foreign loan revenues................ 8,449 10,495
Net write-offs on company funded loans.............. (4,746) (2,666)
----------------------------------------
Total consumer lending revenues, net............. $ 18,935 $ 21,397
========================================
Net write-offs as a percentage of total company
funded originations................................. 4.4% 2.3%
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We are a leading international financial services company serving under-banked
consumers. Our customers are typically lower- and middle-income working-class
individuals who require basic financial services but, for reasons of convenience
and accessibility, purchase some or all of their financial services from us
rather than banks and other financial institutions. To serve this market, we
have a network of 1,080 stores, including 625 company-operated stores, in 17
states, the District of Columbia, Canada and the United Kingdom. Our store
network represents the second-largest network of its kind in the United States
and the largest network of its kind in each of Canada and the United Kingdom. We
provide a diverse range of consumer financial products and services primarily
consisting of check cashing, short-term consumer loans, money orders and money
transfers. For the three-months ended September 30, 2003, we generated revenue
of $57.0 million, an increase of 8.2% over the same period in the prior year.
In our opinion, we have included all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of our financial position
at September 30, 2003 and the results of operations for the three months ended
September 30, 2003 and 2002. The results for the three months ended September
30, 2003 are not necessarily indicative of the results for the full fiscal year
and should be read in conjunction with our unaudited financial statements and
our Annual Report on Form 10-K for the fiscal year ended June 30, 2003.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We evaluate these
estimates on an ongoing basis, including those related to revenue recognition,
loss reserves and intangible assets. We base these estimates on the information
currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition
Generally, we recognize revenue when services for the customer have been
provided which, in the case of check cashing and other retail products, is at
the time of sale. For our unsecured short-term loan service, all revenues are
recognized ratably over the life of the loan, offset by net write-offs.
Consumer Loan Loss Reserves and Check Cashing Returned Item Policy
We maintain a loan loss reserve for anticipated losses for loans we make
directly as well as for fee adjustments for losses on loans we originate and
service for others. To estimate the appropriate level of loan loss reserves, we
consider the amount of outstanding loans owed to us, as well as loans owed to
banks and serviced by us, historical loans charged off, current collection
patterns and current economic trends. As these conditions change, we may need to
make additional allowances in future periods.
A loss on consumer loans is charged against revenues during the period in which
the loss occurred. A recovery is credited to revenues during the period in which
the recovery is made. These net losses and changes in the loan loss reserve are
charged to revenues in the consolidated statements of operations.
We charge operating expense for losses on returned checks during the period in
which such checks are returned. Recoveries on returned checks are credited to
operating expense in the period during which recovery occurs. These net losses
are charged to other store and regional expenses in the consolidated statements
of operations.
16
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill for
impairment under established accounting guidelines also requires significant use
of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance.
RESULTS OF OPERATIONS
Revenue Analysis
Three Months Ended September 30,
- ----------------------------------------------------------------------------------------------------
(Percentage of
($ in thousands) total revenue)
---------------------------- -------------------------
2002 2003 2002 2003
------------ ------------ ---------- ----------
Check cashing......................... $ 26,454 $ 28,123 50.2% 49.3%
Consumer lending revenues, net........ 18,935 21,397 36.0 37.5
Money transfer fees................... 2,788 3,082 5.3 5.4
Other revenue......................... 4,476 4,388 8.5 7.8
------------ ------------ ---------- ----------
Total revenue......................... $ 52,653 $ 56,990 100.0% 100.0%
============ ============ ========== ==========
- ----------------------------------------------------------------------------------------------------
QUARTER COMPARISON
Total revenues were $57.0 million for the three months ended September 30, 2003
compared to $52.7 million for the three months ended September 30, 2002, an
increase of $4.3 million or 8.2%. Comparable retail store, franchised store and
document transmitter sales for the entire period increased $4.6 million or 8.9%.
New store openings accounted for an increase of $721,000, which was partially
offset by a decrease of $952,000 in revenues from closed stores.
The increase in total revenues resulted primarily from a $2.5 million, or 13.0%
increase in consumer lending revenues and a $1.7 million, or 6.3% increase in
check cashing revenues. A 31% increase in loans originated in our Canadian
locations accounted for approximately $1.3 million of the increase in consumer
lending revenues. The balance of the increase was primarily related to lower
U.S. net write-offs of company funded originations, partially offset by lower
company funded domestic loan revenues. The increase in check cashing fees is
primarily related to our Canadian locations as a result of an increase in the
face amount of checks cashed.
17
Store and Regional Expense Analysis
Three Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------
(Percentage of
($ in thousands) total revenue)
----------------------------- ---------------------------
2002 2003 2002 2003
------------ ------------ ----------- -----------
Salaries and benefits.................. $ 17,147 $ 18,777 32.6% 32.9%
Occupancy.............................. 4,799 4,864 9.1 8.6
Depreciation........................... 1,619 1,448 3.1 2.5
Other.................................. 12,857 12,965 24.4 22.8
------------ ------------ ----------- -----------
Total store and regional expenses...... $ 36,422 $ 38,054 69.2% 66.8%
============ ============ =========== ===========
- ----------------------------------------------------------------------------------------------------------
QUARTER COMPARISON
Store and regional expenses were $38.1 million for the three months ended
September 30, 2003 compared to $36.4 million for the three months ended
September 30, 2002, an increase of $1.7 million or 4.5%. New store openings
accounted for an increase of $500,000 while closed stores accounted for a
decrease of $900,000. Comparable retail store and franchised store expenses for
the entire period increased $2.0 million. For the three months ended September
30, 2003 total store and regional expenses decreased to 66.8% of total revenue
compared to 69.2% of total revenue for the three months ended September 30,
2002.
As a percent of revenues, other store and regional expenses were 22.8% for the
three months ended September 30, 2003 compared to 24.4% for the three months
ended September 30, 2002, a decrease of 1.6%. A decrease in direct costs
associated with short-term consumer loans we service through our
direct-to-customer operation accounted for 1.0% of the decline. In addition, a
continued decline in net security losses accounted for 0.3% of the decrease.
Other Expense Analysis
Three Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------
(Percentage of
($ in thousands) total revenue)
----------------------------- ---------------------------
2002 2003 2002 2003
------------ ------------ ----------- -----------
Corporate expenses..................... $ 7,248 $ 7,241 13.8% 12.7%
Loss on store closings and sales....... 488 60 0.9 0.1
Other depreciation and amortization.... 843 958 1.6 1.7
Interest expense....................... 4,931 5,247 9.4 9.2
Income tax provision................... 1,910 4,288 3.6 7.5
- ----------------------------------------------------------------------------------------------------------
QUARTER COMPARISON
Corporate Expenses
Corporate expenses were $7.2 million for the three months ended September 30,
2003 and for the three months ended September 30, 2002. For the three months
ended September 30, 2003, corporate expenses decreased to 12.7% of total revenue
compared to 13.8% of total revenue for the three months ended September 30,
2002. The decline reflects the first full quarter of cost reductions related to
the recent rationalization of our store support functions for our North American
operations.
18
Loss on Store Closings and Sales
Loss on store closings and sales was $60,000 for the three months ended
September 30, 2003 compared to $488,000 for the three months ended September 30,
2002. These costs consist primarily of lease obligations and leasehold
improvement write-offs.
Interest Expense
Interest expense was $5.2 million for the three months ended September 30, 2003
compared to $4.9 million for the three months ended September 30, 2002, an
increase of $316,000 or 6.4%. This increase is primarily attributable to the
increase in the average borrowing rates of our revolving credit facilities as a
result of a November 2002 amendment to our credit facility and the impact of the
higher effective interest rate on our collateralized borrowings.
Income Tax Provision
The provision for income taxes was $4.3 million for the three months ended
September 30, 2003 compared to $1.9 million for the three months ended September
30, 2002, an increase of $2.4 million. Our effective tax rate differs from the
federal statutory rate of 35% due to state taxes, foreign taxes and U.S. taxes
on foreign earnings primarily resulting from the guarantees of our credit
facility and Senior Notes by our foreign subsidiaries.
Changes in Financial Condition
Cash and cash equivalent balances and the revolving credit facilities balances
fluctuate significantly as a result of seasonal, monthly and day-to-day
requirements for funding check cashing and other operating activities. For the
three months ended September 30, 2003, cash and cash equivalents decreased $7.9
million as a result of a decrease in borrowings under our revolving credit
facilities. Net cash provided by operations was $6.7 million. The increase in
net cash provided by operations was primarily the result of increases in loans
and other receivables due to the timing of settlement payments related to our
consumer lending product and a decline in company funded unsecured short-term
loans in the first quarter of fiscal 2004.
Accrued interest increased due to the timing of the semi-annual interest payment
on the Senior and the Senior Subordinated Notes.
Liquidity and Capital Resources
Our principal sources of cash are from operations and borrowings under our
credit facilities. We anticipate that our primary uses of cash will be to
provide working capital, finance capital expenditures, meet debt service
requirements, finance acquisitions, and finance store expansion.
Net cash provided by operating activities was $6.7 million for the three months
ended September 30, 2003 compared to a usage of $2.7 million for the three
months ended September 30, 2002. The increase in net cash provided by operations
was primarily the result of increases in loans and other receivables due to the
timing of settlement payments related to our consumer lending product and a
decline in company funded unsecured short-term loans in the first quarter of
fiscal 2004. For the three months ended September 30, 2003, we made capital
expenditures of $1.4 million. The actual amount of capital expenditures for the
year will depend in part upon the number of new stores acquired or opened and
the number of stores remodeled. Our budgeted capital expenditures, excluding
acquisitions, are currently anticipated to aggregate approximately $7.0 million
during our fiscal year ending June 30, 2004, for remodeling and relocation of
certain existing stores and for opening new stores.
Revolving Credit Facilities. We have three revolving credit facilities: a
domestic revolving credit facility, a Canadian overdraft facility and a United
Kingdom overdraft facility.
Domestic Revolving Credit Facility. Our borrowing capacity under our
domestic revolving credit facility is limited to the total commitment of
$70.5 million less letters of credit totaling $9.0 million issued by Wells
Fargo Bank, which guarantee the performance of certain of our contractual
obligations. At September 30, 2003, our borrowing capacity was $61.5
million. The existing credit facility contains a provision for a reduction
of $1.5 million by December 31, 2003. Borrowings under the domestic
revolving credit facility as of September 30, 2003 were $47.8 million.
Canadian Overdraft Facility. We have a Canadian overdraft facility to fund
peak working capital needs for our Canadian operations. The Canadian
overdraft facility provides for a commitment of up to approximately $4.8
million, of which there was no outstanding balance
19
on September 30, 2003. Amounts outstanding under the Canadian overdraft
facility bear interest at a rate of Canadian prime plus 0.50% and are
secured by the pledge of a cash collateral account of an equivalent
balance.
United Kingdom Overdraft Facility. For our U.K. operations, we have a
United Kingdom overdraft facility which provides for a commitment of up to
approximately $6.2 million, of which $173,000 was outstanding on September
30, 2003. Amounts outstanding under the United Kingdom overdraft facility
bear interest at a rate of LIBOR plus 1.00%. The United Kingdom overdraft
facility is secured by a $6.0 million letter of credit issued by Wells
Fargo Bank under our domestic revolving credit facility.
Long-Term Debt. Long-term debt consists of our Senior Notes that mature on
November 15, 2006, and our Senior Subordinated Notes that mature on December 31,
2006.
Subsequent Event. On October 28, 2003 we announced that we intend to offer $200
million principal amount of senior notes due 2011 under Rule 144A and Regulation
S of the Securities Act of 1933, as amended. We currently anticipate that we
will use the proceeds from this offering to redeem our outstanding Senior Notes
and our outstanding Senior Subordinated Notes, to repay our existing credit
facility, which we anticipate will be replaced with a new credit facility, and
to pay fees and expenses with respect to these transactions and a related note
exchange transaction involving our parent company's senior discount notes.
Operating Leases. Operating leases are scheduled payments on existing store and
other administrative leases. These leases typically have initial terms of 5
years and may contain provisions for renewal options, additional rental charges
based on revenue and payment of real estate taxes and common area charges.
Other Collateralized Borrowings. On November 15, 2002, we entered into an
agreement with a third party to sell, without recourse subject to certain
obligations, a participation interest in a portion of the short-term consumer
loans originated by us in the United Kingdom. Pursuant to the agreement, we will
retain servicing responsibilities and earn servicing fees, which are subject to
reduction if the related loans are not collected. At September 30, 2003, we had
$8.0 million of loans receivable pledged under this agreement.
We entered into the commitments described above and other contractual
obligations in the normal course of business as a source of funds for asset
growth and asset/liability management and to meet required capital needs. Our
principal future obligations and commitments as of September 30, 2003, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
-------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 Year Years Years Years
-------------- ------------- ------------ ------------ ------------
Domestic revolving credit facility... $ 47,775 $ 47,775 $ - $ - $ -
United Kingdom overdraft facility.... 173 173 - - -
Long-term debt
Senior notes.................... 109,190 - - 109,190 -
Senior subordinated notes........ 20,000 - - 20,000 -
Operating leases..................... 46,314 15,060 18,169 8,027 5,058
Other collateralized borrowings...... 8,000 8,000 - - -
Other................................ 66 66 - - -
------------- ------------- ------------ ------------ ------------
Total contractual cash obligations... $ 231,518 $ 71,074 $ 18,169 $ 137,217 $ 5,058
============= ============= ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------
We are highly leveraged, and borrowings under the credit facilities will
increase our debt service requirements. We believe that, based on current levels
of operations and anticipated improvements in operating results, cash flows from
operations and borrowings available under our credit facilities will allow us to
fund our liquidity and capital expenditure requirements for the foreseeable
future, including payment of interest and principal on our indebtedness. This
belief is based upon our historical growth rate and the anticipated benefits we
expect from operating efficiencies. We expect additional revenue growth to be
generated by increased check cashing revenues, growth in the consumer lending
business, the maturity of recently opened stores and the continued expansion of
new stores. We also expect operating expenses to increase, although the rate of
increase is expected to be less than the rate of revenue growth. Furthermore, we
do not believe that additional acquisitions or expansion are necessary to cover
our fixed expenses, including debt service. However, we cannot assure you that
we will generate sufficient cash flow from operations or that future borrowings
will be available under our credit facilities in an amount sufficient to meet
our debt service requirements or to make anticipated capital expenditures. We
may need to refinance all or a portion of our indebtedness on or prior to
maturity, under certain circumstances, and we cannot assure you that we will be
able to effect such refinancing on commercially reasonable terms or at all.
20
Seasonality and Quarterly Fluctuations
Our business is seasonal due to the impact of tax-related services, including
cashing tax refund checks, making electronic tax filings and processing
applications for refund anticipation loans. Historically, we have generally
experienced our highest revenues and earnings during our third fiscal quarter
ending March 31, when revenues from these tax-related services peak. Due to the
seasonality of our business, results of operations for any fiscal quarter are
not necessarily indicative of the results that may be achieved for the full
fiscal year. In addition, quarterly results of operations depend significantly
upon the timing and amount of revenues and expenses associated with acquisitions
and the addition of new stores.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements regarding our expected
performance for future periods, and actual results for such periods may
materially differ. Such forward-looking statements involve risks and
uncertainties, including risks of changing market conditions in the overall
economy and the industry in which we operate, weakening consumer demand and
other factors detailed from time to time in our annual and other reports filed
with the Securities and Exchange Commission.
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Generally
In the operations of our subsidiaries and the reporting of our
consolidated financial results, we are affected by changes in interest rates and
currency exchange rates. The principal risks of loss arising from adverse
changes in market rates and prices to which we and our subsidiaries are exposed
relate to:
o interest rates on debt; and
o foreign exchange rates generating translation gains and losses.
We and our subsidiaries have no market risk sensitive instruments
entered into for trading purposes, as defined by GAAP. Information contained in
this section relates only to instruments entered into for purposes other than
trading.
Interest Rates
Our outstanding indebtedness, and related interest rate risk, is
managed centrally by our finance department by implementing the financing
strategies approved by our board of directors. Our debt consists of fixed-rate
Senior Notes and Senior Subordinated Notes. Our revolving credit facilities
carry variable rates of interest. As most of our average outstanding
indebtedness carries a fixed rate of interest, a change in interest rates is not
expected to have a significant impact on our consolidated financial position,
results of operations or cash flows.
Foreign Exchange Rates
Operations in the United Kingdom and Canada have exposed us to shifts in
currency valuations. From time to time we may elect to purchase put options in
order to protect earnings in the United Kingdom and Canada against foreign
exchange fluctuations. Out of the money put options may be purchased because
they cost less than completely averting risk, and the maximum downside is
limited to the difference between the strike price and exchange rate at the date
of purchase and the price of the contracts. At September 30, 2003 we held put
options with an aggregate notional value of 3.0 million British pounds to
protect the currency exposure in the United Kingdom throughout the remainder of
the calendar year. We also held put options with an aggregate notional value of
$(CAN) 36.0 million to protect the currency exposure in Canada throughout the
remainder of the fiscal year. All put options for the quarter ended September
30, 2003 expired out of the money at a cost of $13,000 which is included in
corporate expenses in the consolidated statement of earnings. There was no such
hedging activity for the same period in fiscal 2003.
Canadian operations accounted for approximately 105.3% of consolidated
pre-tax earnings for the three months ended September 30, 2003, and U.K.
operations accounted for approximately 38.7% of consolidated pre-tax earnings
for the three months ended September 30, 2003. Canadian operations accounted for
approximately 360.9% of consolidated pre-tax earnings for the three months ended
September 30, 2002, and U.K. operations accounted for approximately 63.6% of
consolidated pre-tax earnings for the three months ended September 30, 2002. As
currency exchange rates change, translation of the financial results of the
Canadian and U.K. operations into U.S. dollars will be impacted. Changes in
exchange rates have resulted in cumulative translation adjustments increasing
our net assets by $8.1 million. Our U.K. subsidiaries have collateralized
borrowings denominated in U.S. dollars that are subject to foreign currency
transaction gains and losses. These gains and losses are included in corporate
expenses.
We estimate that a 10.0% change in foreign exchange rates by itself
would have impacted reported pre-tax earnings from continuing operations by
approximately $800,000 for the three months ended September 30, 2003 and $1.2
million for the three months ended September 30, 2002. This impact represents
nearly 14.4% of our consolidated pre-tax earnings for the three months ended
September 30, 2003 and 42.5% of our consolidated pre-tax earnings for the three
months ended September 30, 2002.
22
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Control and Procedures
As of the end of the period covered by this report, our management
conducted an evaluation, with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting during our fiscal quarter ended September 30, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an
action against our Canadian subsidiary on behalf of a purported class of
Canadian borrowers (except those residing in British Columbia and Quebec) who,
Mortillaro claims, were subjected to usurious charges in payday-loan
transactions. The action, which is pending in the Ontario Superior Court of
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. Like the plaintiff in the MacKinnon action referred to below,
Mortillaro has agreed to arbitrate all disputes with us. We believe that we have
meritorious procedural and substantive defenses to Mortillaro's claims, and we
intend to defend those claims vigorously.
We are a defendant in four putative class-action lawsuits, all of which were
commenced by the same plaintiffs' law firm, alleging violations of California's
wage-and-hour laws. The named plaintiffs in these suits, which are pending in
the Superior Court of the State of California, are our former employees Vernell
Woods (commenced August 22, 2000), Juan Castillo (commenced May 1, 2003),
Stanley Chin (commenced May 7, 2003) and Kenneth Williams (commenced June 3,
2003). Each of these suits seeks an unspecified amount of damages and other
relief in connection with allegations that we misclassified California store
(Woods) and regional (Castillo) managers as "exempt" from a state law requiring
the payment of overtime compensation, that we failed to provide employees with
meal and rest breaks required under a new state law (Chin) and that we computed
bonuses payable to store managers using an impermissible profit-sharing formula
(Williams). In January 2003, without admitting liability, we sought to settle
the Woods case, which we believe to be the most significant of these suits, by
offering each individual putative class member an amount intended in good faith
to settle his or her claim. As of September 30, 2003, 92% of these settlement
offers had been accepted. Plaintiffs' counsel is presently disputing through
arbitration the validity of the settlements accepted by the individual putative
class members. We believe we have meritorious defenses to the challenge and to
the claims of the non-settling putative Woods class members and plan to defend
them vigorously. We believe we have adequately provided for the costs associated
with this matter. We are vigorously defending the Castillo, Chin and Williams
lawsuits and believe we have meritorious defenses to the claims asserted in
those matters. We believe the outcome of such litigation will not significantly
affect our financial results.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action
against the our Canadian subsidiary and 26 other Canadian lenders on behalf of a
purported class of British Columbia residents who, plaintiff claims, were
overcharged in payday-loan transactions. The action, which is pending in the
Supreme Court of British Columbia, alleges violations of laws proscribing usury
and unconscionable trade practices and seeks restitution and damages, including
punitive damages, in an unknown amount. On March 25, 2003, we moved to stay the
action as against us and to compel arbitration of plaintiff's claims as required
by his agreement with us. We are presently awaiting a decision on that motion.
We believe we have meritorious defenses to the action and intends to defend it
vigorously. We believe the outcome of such litigation will not significantly
affect our financial results.
On October 30, 2002, the Oklahoma Administrator of Consumer Credit issued an
administrative order revoking the supervised-lending license of our Oklahoma
subsidiary on the ground that certain loans we marketed that were made by County
Bank did not conform with Oklahoma usury laws. The Administrator's order also
requires us to refund certain purportedly excess finance charges collected by
County Bank. The Administrator's order is presently on appeal to the Oklahoma
District Court. On August 20, 2003, that court denied the Administrator's motion
23
to require us to desist from further loan-origination activities pending appeal.
We are also appealing a federal court's abstention from ruling on this matter to
the United States Court of Appeals for the Tenth Circuit. We are presently
unable to evaluate the likelihood of any particular outcome of this matter but,
in our opinion, the outcome of such litigation will not significantly affect our
financial results.
In addition to the litigation discussed above, we are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business. In our opinion, the outcome of such litigation and proceedings will
not significantly affect our financial results.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
On October 28, 2003 we announced that we intend to offer $200 million
principal amount of senior notes due 2011 under Rule 144A and
Regulation S of the Securities Act of 1933, as amended. We currently
anticipate that we will use the proceeds from this offering to redeem
our outstanding senior notes and our outstanding senior subordinated
notes, to repay our existing credit facility, which we anticipate will
be replaced with a new credit facility, and to pay fees and expenses
with respect to these transactions and a related note exchange
transaction involving our parent company's senior discount notes. The
senior notes will not be registered under the Securities Act or any
state securities laws. Thus, the senior notes may not be offered or
sold in the United States absent registration or an applicable
exemption from the registration requirements of the Securities Act and
any applicable state securities laws.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL GROUP, INC.
Date: November 4, 2003 *By: /s/ DONALD GAYHARDT
--------------------------
Name: Donald Gayhardt
Title: President and Chief Financial Officer
(principal financial and
chief accounting officer)
* The signatory hereto is the principal financial and chief accounting
officer and has been duly authorized to sign on behalf of the registrant.
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