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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2004
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 19312-1288
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (610) 296-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
There is no market for the common stock of Dollar Financial Group, Inc. and all
of such stock is held by the registrant's parent, Dollar Financial Corp. See
"Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities".
1
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of August 31,
2004, 100 shares of the registrant's common stock, par value $1.00 per share,
were outstanding. As of August 31, 2004 19,864.87 shares of common stock, par
value $0.01 per share, of our parent company, Dollar Financial Corp., were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
2
DOLLAR FINANCIAL GROUP, INC.
Table of Contents
2004 Report on Form 10-K
PART I
Item 1. Business.................................................................................. 4
Item 2. Properties................................................................................ 21
Item 3. Legal Proceedings......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................................. 23
Item 6. Selected Financial Data................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 36
Item 8. Financial Statements and Supplementary Data............................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 70
Item 9A. Controls and Procedures................................................................... 70
Item 9B. Other Information......................................................................... 70
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 70
Item 11. Executive Compensation.................................................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 77
Item 13. Certain Relationships and Related Transactions............................................ 79
Item 14. Principal Accountant Fees and Services.................................................... 81
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 82
Signatures.......................................................................................... 89
3
Item 1. BUSINESS
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 1,110 stores, including 638 company-operated
stores, in 16 states, the District of Columbia, 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. 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 are a New York corporation formed in 1979. We are the wholly-owned
subsidiary of Dollar Financial Corp., a Delaware corporation incorporated in
April 1990. We operate our store network through our direct and indirect
wholly-owned foreign and domestic subsidiaries.
Our network includes the following platforms for delivering our financial
services to the consumer in our core markets:
United States
We operate a total of 319 stores, with 231 operating under the name
"Money Mart(R)" and 88 operating under the name "Loan Mart(R)." The Money
Mart stores typically offer our full range of products and services,
including check cashing and short-term consumer loans. The Loan Mart stores
offer short-term consumer loans and other ancillary services depending upon
location. By offering short-term lending services, we hope to attract a
customer who might not use check cashing services. We also have
relationships with 458 document transmitter locations, such as independent
mail stores and insurance offices, which assist in completing short-term
consumer loans we market through a direct-to-consumer lending operation.
Our U.S. business had revenues of $109.9 million for fiscal 2004 and
$110.5 for fiscal 2003.
Canada
There are 311 stores in our Canadian network, of which 194 are
operated by us and 117 are operated by franchisees. All stores in Canada
are operated under the name "Money Mart" except locations in the Province
of Quebec. The stores in Canada typically offer check cashing, short-term
consumer loans and other ancillary products and services.
Our Canadian business had revenues of $(USD)84.8 million for fiscal
2004 and $(USD)67.0 for fiscal 2003.
United Kingdom
There are 480 stores in our U.K. network, of which 125 are operated by
us and 355 are operated by franchisees. All stores in the United Kingdom
(with the exception of certain franchises operating under the name "Cash A
Cheque") are operated under the name "Money Shop." The stores in the United
Kingdom typically offer check cashing, short-term consumer loans and other
ancillary products and services.
Our U.K. business had revenues of $(USD)51.8 million for fiscal 2004
for $(USD)41.9 for fiscal 2003.
We have 472 franchised locations in Canada and the United Kingdom.
These franchised locations offer many of the same products and services
offered by company-operated stores using the same associated trade names,
trademarks and service marks within the standards and guidelines we have
established. Total franchise revenues were $6.3 million for fiscal 2003 and
$7.5 million for the fiscal year June 30, 2004. We also use independent
third-party businesses such as mail stores and insurance offices, which we
refer to as document transmitters, to assist in the transmission of
short-term consumer loan applications.
4
Our customers, many of whom receive income on an irregular basis or from
multiple employers, are drawn to our convenient neighborhood locations, extended
operating hours and high-quality customer service. Our products and services,
principally our check cashing and short-term consumer loan program, provide
immediate access to cash for living expenses or other needs. We principally cash
payroll checks, although our stores also cash government benefit, personal and
income-tax-refund checks. During fiscal 2004, we cashed 8.4 million checks with
a total face amount of $3.2 billion and an average face amount of $376 per
check. Acting both as a servicer and as a direct lender, we originated 3.0
million short-term consumer loans with an average principal amount of $288 and a
weighted average term of approximately 14 days In addition, we acted as a direct
lender originating 4,675 longer-term installment loans with an average principal
of $845 and a weighted average term of approximately 365 days. We also strive to
provide our customers with high-value ancillary services, including Western
Union money order and money transfer products, electronic tax filing, bill
payment, foreign currency exchange, photo ID and prepaid local and long-distance
phone services.
Industry Overview
We operate in a sector of the financial services industry that serves the
basic need of lower- and middle-income working-class individuals to have
convenient access to cash. This need is primarily evidenced by consumer demand
for check cashing and short-term loans, and consumers who use these services are
often underserved by banks and other financial institutions.
Lower- and middle-income individuals represent the largest part of the
population in each country in which we operate. Many of these individuals work
in the service sector, which in the U.S. is one of the fastest growing segments
of the workforce.
However, many of these individuals, particularly in the United States, do
not maintain regular banking relationships. They use services provided by our
industry for a variety of reasons, including that they often:
o do not have sufficient assets to meet minimum balance requirements or
to achieve the benefits of savings with banks;
o do not write enough checks to make a bank account beneficial;
o need to access financial services outside of normal banking hours;
o desire not to pay fees for banking services that they do not use;
o require immediate access to cash from their paychecks; and
o may have a dislike or distrust of banks.
In addition to check cashing services, under-banked consumers also require
short-term loans that provide cash for living and other expenses. They also may
not be able to or want to obtain loans from banks as a result of:
o their immediate need for cash;
o irregular receipt of payments from their employers;
o their desire for convenience and customer service; and
o the unavailability of bank loans in small denominations for short
terms.
Despite the demand for basic financial services, access to banks has become
more difficult over time for many consumers. Many banks have chosen to close
their less profitable or lower-traffic locations. Typically, these closings have
occurred in lower-income neighborhoods where the branches have failed to attract
a sufficient base of customer deposits. This trend has resulted in fewer
convenient alternatives for basic financial services in many neighborhoods. Many
banks have also reduced or eliminated some services that under-banked consumers
need.
As a result of these trends, a significant number of retailers have begun
to offer financial services to lower- and middle-income individuals. The
providers of these services are fragmented, and range from specialty finance
offices to retail stores in other industries that offer ancillary services.
5
We believe that the under-banked consumer market will continue to grow as a
result of a diminishing supply of competing banking services as well as
underlying demographic trends. These demographic trends include an overall
increase in the population and an increase in the number of service-sector jobs
as a percentage of the total workforce.
The demographics of the typical customers for non-banking financial
services vary slightly in each of the markets in which we operate, but the
trends driving the industry are generally the same. In addition, the type of
store and services that appeal to customers in each market vary based on
cultural, social, geographic and other factors. Finally, the composition of
providers of these services in each market results in part from the historical
development and regulatory environment in that market.
Growth Opportunities
We believe that significant opportunities for growth exist in our industry
as a result of:
o growth of the service-sector workforce;
o failure of commercial banks and other traditional financial service
providers to address adequately the needs of lower- and middle-income
individuals; and
o trends favoring larger operators in the industry.
We believe that, as the lower- and middle-income population segment
increases, and as trends within the retail banking industry make banking less
accessible to these consumers, the industry in which we operate will see a
significant increase in demand for their products and services. We also believe
that the industry will continue to consolidate as a result of a number of
factors, including:
o economies of scale available to larger operators;
o use of technology to serve customers better and to control large store
networks;
o inability of smaller operators to form the alliances necessary to
deliver new products; and
o increased licensing and regulatory burdens.
This consolidation process should provide us, as operator of one of the
largest store networks, with opportunities for continued growth.
Competitive Strengths
We believe that the following competitive strengths position us well for
continued growth:
Leading position in core markets. We have a leading position in core
markets, operating 319 stores in the United States, 194 stores in Canada and 125
stores in the United Kingdom as of June 30, 2004. We have 117 franchised
locations in Canada and 355 franchised locations in the United Kingdom.
Highlights of our competitive position in these core markets include the
following:
o Our domestic network is focused in rapidly growing markets in the
western United States, where we believe we have held leading market
positions for over 10 years.
o We believe that we are the industry leader in Canada, and that we hold
a dominant market share with a store in almost every city with a
population of over 50,000. Based on a public opinion study of three
major metropolitan markets in English speaking Canada, we have
achieved brand awareness of 85%.
o We are the largest check cashing company in the United Kingdom,
comprising nearly 25% of the market measured by number of stores,
although we believe that we account for 40% of all check cashing
transactions performed at check cashing stores.
6
High-quality Customer Service. We adhere to a strict set of market survey
and location guidelines when selecting store sites in order to ensure that our
stores are placed in desirable locations near our customers. We believe that our
customers appreciate this convenience, as well as the flexible and extended
operating hours that we typically offer, which are often more compatible with
our customers' work schedules. We provide our customers with a clean, attractive
and secure environment in which to transact their business. We believe that our
friendly and courteous customer service at both the store level and through our
centralized support centers is a competitive advantage.
Diversified Product and Geographic Mix. Our stores offer a wide range of
consumer financial products and services to meet the demands of their respective
locales, including check cashing, short-term consumer loans, money orders and
money transfers. We also provide high-value ancillary products and services,
including electronic tax filing, bill payment, foreign currency exchange, photo
ID and prepaid local and long-distance phone services. For fiscal 2004, the
revenue contribution by our check cashing operations was 47.6%, our consumer
lending operations was 39.1% and our other financial services was 13.3%. In
addition to our product diversification, our business is diversified
geographically. For fiscal 2004, our U.S. operations generated 44.6% of our
total revenue, our Canadian operations generated 34.4% of our total revenue and
our U.K. operations generated 21.0% of total revenue. Our product and geographic
mix provides a diverse stream of revenue growth opportunities.
Diversification and Management of Credit Risk. Our revenue is generated
through a high volume of small dollar financial transactions, and therefore our
exposure to loss from a single customer transaction is minimal. In addition, we
actively manage our customer risk profile and collection efforts in order to
maximize our consumer lending and check cashing revenues while maintaining
losses within a targeted range. We have instituted control mechanisms that have
been effective in managing risk. Such mechanisms, among others, includes the
daily monitoring of initial return rates on our consumer loan portfolio. As a
result, we believe that we are unlikely to sustain a material credit loss from a
single transaction or series of transactions. We have experienced relatively low
net write-offs as a percentage of the face amount of checks cashed. For fiscal
2004, in our check cashing business, net write-offs as a percentage of the face
amount of checks cashed were 0.2%. For the same period, with respect to loans
funded directly by us, net write-offs as a percentage of originations were 1.8%.
Management Expertise. We have a highly experienced and motivated management
team at both the corporate and operational levels. Our senior management team
has extensive experience in the financial services industry. Our Chairman and
Chief Executive, Jeffrey Weiss, and our President Donald Gayhardt, have been
with us since 1990 and have demonstrated the ability to grow our business
through their operational leadership, strategic vision and experience in making
selected acquisitions. Since 1990, Mr. Weiss and Mr. Gayhardt have assisted us
in completing 31 acquisitions that added 418 company-operated stores. In
addition, the management team is highly motivated to ensure continued business
success, as they collectively own approximately 16.9% of our parent company's
common stock.
Business Strategy
Our business strategy is designed to capitalize on our competitive
strengths and enhance our leading market positions. Key elements of our strategy
include:
Capitalizing on Our Enhanced Network and System Capabilities. With our
network of 1,110 stores, we are well positioned to capitalize on economies of
scale. Our centralized core support functions, including collections, call
center, field operations and service, loan processing and tax filing, enable us
to generate efficiencies by improving collections and purchasing power with our
vendors. Our proprietary systems are used to further improve our customer
relations and loan servicing activities, as well as to provide a highly
efficient means to manage our internal as well as regulatory compliance efforts.
We plan to continue to take advantage of these efficiencies to enhance network
and store-level profitability.
Growing Through Disciplined Network Expansion. We intend to continue to
grow our network through the addition of new stores and franchisees, while
adhering to a disciplined selection process. In order to optimize our expansion,
we carefully assess potential markets by analyzing demographic, competitive and
regulatory factors, site selection and availability and growth potential. We
seek to add locations that offer check cashing, consumer lending or a
combination of both. In addition, we will continue to grow our
direct-to-consumer lending services that enable us to access a broader customer
base without the capital expense of adding company stores.
7
Maintaining our Customer-driven Retail Philosophy. We strive to maintain
our customer-service-oriented approach and meet the basic financial service
needs of our working, lower- and middle-income customers. We believe our
approach differentiates us from many of our competitors and is a key tenet of
our employee training programs. We offer extended operating hours in clean,
attractive and secure store locations to enhance appeal and stimulate store
traffic. In certain markets, we operate stores that are open 24 hours a day. To
ensure customer satisfaction, we periodically send anonymous market researchers
posing as shoppers to our U.S. stores to measure customer service performance.
We plan to continue to develop ways to improve our performance, including
incentive programs to reward employees for exceptional customer service.
Introducing Related Products and Services. We offer our customers multiple
financial products and services. We believe that our check cashing and consumer
lending customers enjoy the convenience of other high value products and
services offered by us. These products and services enable our customers to
manage their personal finances more effectively. For example, in fiscal 2003, we
introduced reloadable debit cards and customer loyalty programs in many of our
stores. We also offered new tax-based products to our Canadian customers,
providing qualified individuals with cash advances against anticipated tax
refunds. We intend to continue to innovate and develop new products and services
for our customers.
Expansion of Our Franchising Strategy. We intend to expand the reach of our
business and our network through an extension of our existing franchising
strategy. In Canada and the United Kingdom, we have developed our leading market
positions in part through the use of a franchising strategy that allowed us to
expand without incurring additional capital expenditures. As of June 30, 2004,
we had 117 franchised locations in Canada and 355 franchised locations in the
United Kingdom.
Customers
Our core customer group generally lacks sufficient income to accumulate
assets or to build savings. These customers rely on their current income to
cover immediate living expenses and cannot afford to wait for checks to clear
through the commercial banking system. We believe that many of our customers use
our check cashing and short-term lending services in order to access cash
immediately without having to maintain a minimum balance in a checking account
and to borrow money to fund living expenses and other needs. We believe that
consumers value our affordability and attention to customer service, and their
choice of financial service provider is influenced by our convenient locations
and extended operating hours.
U.S. Customers
Based on our operating experience and information provided to us by our
customers, we believe that our core domestic check cashing customer group is
composed of individuals between the ages of 18 and 44. The majority of these
individuals rent their homes, are employed and have annual household incomes of
between $10,000 and $35,000, with a median income of $22,500. We believe that
many of our customers are workers or independent contractors who receive payment
on an irregular basis and generally in the form of a check. In addition, we
believe that although approximately 49% of our U.S. customers do have bank
accounts, these customers use check cashing stores because they find the
locations and extended business hours more convenient than those of banks and
because they value the ability to receive cash immediately, without waiting for
a check to clear.
Our operating experience and customer data also suggest that our short-term
consumer loan customers are mainly individuals between the ages of 18 and 49.
The majority of these individuals rent their homes and are employed in
professional/managerial positions. A survey conducted by the Credit Research
Center of Georgetown University found that 51.5% of short-term consumer loan
customers reported household incomes between $25,000 and $50,000 with 25.4%
greater than $50,000. The survey also found that these customers choose
short-term consumer loans because of easy and fast approval and convenient
location. Unlike many of our check cashing customers, short-term consumer loan
customers have a bank account but experience temporary shortages in cash from
time to time.
Canadian Customers
Based on recent market research surveys, we believe that the demographics
of our Canadian customers are somewhat different from those of our U.S.
customers. Our typical Canadian check cashing customer is approximately 32 years
8
old, employed in the trades/labor sector and earning $(USD)28,000 annually. Our
typical Canadian short-term loan customer is 25 to 44 years old, employed in the
services sector and earning $(USD)35,000 annually. Approximately 60% of our
Canadian customers are male and 40% are female. In contrast to the United
States, 66% of our Canadian check cashing customers have bank accounts. Our
research shows that these customers continue to use our services because of our
fast and courteous service, the stores' extended operating hours and convenient
locations.
U.K. Customers
Recent market research conducted on our behalf and our own customer data
have shown that 89% of our U.K. customers have annual incomes below
$(USD)30,000, and 58% are under the age of 35. According to market research,
approximately 85% of our customer base is employed, with equal numbers of males
and females. While 80% of our U.K. customers have bank accounts, they report a
high level of dissatisfaction with their current bank relationship. Market
research indicated customer service satisfaction levels for our U.K. customers
above 95% compared with 50% to 65% satisfaction for the major banks. Staff
friendliness and face-to-face contact are key drivers of customer satisfaction.
The need for immediate cash is the number one reason for using our services.
Products and Services
Customers typically use our stores to cash checks (payroll, government and
personal), obtain short-term consumer loans and use one or more of the
additional financial services available at most locations including Western
Union money order and money transfer products, electronic tax filing, bill
payment, foreign currency exchange, photo ID and prepaid local and long-distance
phone services.
Check Cashing
Customers may cash all types of checks at our check cashing locations,
including payroll checks, government checks and personal checks. In exchange for
a verified check, customers receive cash immediately and do not have to wait
several days for the check to clear. Before we distribute any cash, we verify
both the customer's identification and the validity of the check (occasionally
using multiple sources) as required by our standard verification procedures.
Customers are charged a fee for this service (typically a small percentage of
the face value of the check). The fee varies depending on the size and type of
check cashed as well as the customer's check cashing history at our stores. For
fiscal 2004, check cashing fees averaged approximately 3.70% of the face value
of checks cashed.
The following chart presents summaries of revenue from our check cashing
operations, broken down by consolidated operations, U.S. operations and Canadian
and U.K. operations for the periods indicated below:
Year ended June 30,
--------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------
Consolidated operations:
Face amount of checks cashed....... $2,743,765,000 $3,046,705,000 $2,969,455,000 $2,938,950,000 $3,169,350,000
Number of checks cashed............ 8,204,528 9,001,635 8,689,819 8,568,944 8,427,990
Average face amount per check...... $334.42 $338.46 $341.72 $342.98 $376.05
Average fee per check.............. $11.87 $11.74 $12.06 $12.65 $13.93
Average fee as a % of face amount.. 3.55% 3.47% 3.53% 3.69% 3.70%
U.S. operations:
Face amount of checks cashed....... $1,712,912,000 $1,728,504,000 $1,636,967,000 $1,384,958,000 $1,349,956,000
Number of checks cashed............ 4,654,747 4,485,393 4,317,534 3,855,664 3,621,174
Average face amount per check...... $367.99 $385.36 $379.14 $359.20 $372.80
Average fee per check.............. $12.17 $12.19 $12.41 $12.75 $13.18
Average fee as a % of face amount.. 3.31% 3.16% 3.27% 3.55% 3.54%
9
Year ended June 30,
--------------------------------------------------------------------------------------
Canadian and U.K. operations: 2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------
Face amount of checks cashed....... $1,030,853,000 $1,318,201,000 $1,332,488,000 $1,553,992,000 $1,819,394,000
Number of checks cashed............ 3,549,781 4,516,242 4,372,285 4,713,280 4,806,816
Average face amount per check...... $290.40 $291.88 $304.76 $329.71 $378.50
Average fee per check.............. $11.47 $11.30 $11.71 $12.58 $14.50
Average fee as a % of face amount.. 3.95% 3.87% 3.84% 3.82% 3.83%
If a check cashed by us is not paid for any reason, we record the full face
value of the check as a loss in the period when the check was returned unpaid.
We then send the check to our internal collections department, or occasionally
directly to the store, for collection. Our employees contact the maker and/or
payee of each returned check. In certain circumstances, we will take appropriate
legal action. Recoveries on returned items are credited in the period when the
recovery is received. During fiscal 2004, we collected 73.6% of the face value
of returned checks.
The following chart presents summaries of our returned check experience,
broken down by consolidated operations, U.S. operations and Canadian and U.K.
operations for the periods indicated below:
Year ended June 30,
-----------------------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------------------
Consolidated operations:
Face amount of returned checks............ $22,870,000 $27,938,000 $27,874,000 $26,164,000 $29,061,000
Collections on returned checks............ 17,100,000 19,752,000 20,812,000 19,426,000 21,399,000
Net write-offs of returned checks......... 5,770,000 8,186,000 7,062,000 6,738,000 7,662,000
Collections as a percentage of returned
checks................................. 74.7% 70.7% 74.7% 74.2% 73.6%
Net write-offs as a percentage of check
cashing revenues....................... 5.9% 7.7% 6.7% 6.2% 6.5%
Net write-offs as a percentage of face
amount of checks cashed................ 0.21% 0.27% 0.24% 0.22% 0.24%
U.S. operations:
Face amount of returned checks............ $12,023,000 $14,519,000 $15,411,000 $12,046,000 $13,761,000
Collections on returned checks............ 7,811,000 8,872,000 10,560,000 8,335,000 10,285,000
Net write-offs of returned checks......... 4,212,000 5,647,000 4,851,000 3,711,000 3,476,000
Collections as a percentage of returned
checks................................. 65.0% 61.1% 68.5% 69.2% 74.7%
Net write-offs as a percentage of check
cashing revenues....................... 7.4% 10.3% 9.1% 7.6% 7.3%
Net write-offs as a percentage of face
amount of checks cashed................ 0.25% 0.33% 0.30% 0.25% 0.26%
Canadian and U.K. operations:
Face amount of returned checks............ $10,847,000 $13,419,000 $12,463,000 $14,118,000 $15,300,000
Collections on returned checks............ 9,289,000 10,880,000 10,252,000 11,091,000 11,114,000
Net write-offs of returned checks......... 1,558,000 2,539,000 2,211,000 3,027,000 4,186,000
Collections as a percentage of returned
checks................................. 85.6% 81.1% 82.3% 78.6% 72.6%
Net write-offs as a percentage of check
cashing revenues....................... 3.8% 5.0% 4.3% 5.1% 6.0%
Net write-offs as a percentage of face
amount of checks cashed................ 0.15% 0.19% 0.17% 0.20% 0.23%
Consumer Lending
We originate short-term loans on behalf of two domestic banks and for our
own account.
The short-term consumer loans we originate are commonly referred to as
"payday" or "deferred deposit" loans. In a payday-loan transaction, at the time
the funds are advanced to the borrower, the borrower signs a note and provides
the lender with a post-dated check or a written authorization to initiate an
automated clearinghouse charge to the borrower's checking account for the loan
10
principal plus a finance charge; on the due date of the loan (which is generally
set at a date on or near the borrower's next payday), the check or automated
clearinghouse debit is presented for payment.
Since June 13, 2002, we have acted as a servicer for County Bank of
Rehoboth Beach, Delaware and since October 18, 2002, for First Bank of Delaware.
On behalf of these banks, we market unsecured short-term loans to customers with
established bank accounts and verifiable sources of income. Loans are made for
amounts up to $700, with terms of 7 to 23 days. Under these programs, we earn
servicing fees, which may be reduced if the related loans are not collected. We
maintain a reserve for estimated reductions. In addition, we maintain a reserve
for anticipated losses for loans we make directly. In order to estimate the
appropriate level of these reserves, we consider the amount of outstanding loans
owed to us, as well as loans owed to banks and serviced by us, the historical
loans charged-off, current collection patterns and current economic trends. As
these conditions change, additional allowances might be required in future
periods. During fiscal 2004, County Bank originated or extended approximately
$136.2 million of loans through our locations and document transmitters. First
Bank originated or extended approximately $249.1 million of loans through us
during this period. County Bank originated or extended approximately $277.9
million of loans through us during fiscal 2003 and First Bank originated or
extended approximately $92.5 million of loans through us for the same period.
We also originate unsecured short-term loans to customers on our own behalf
in Canada, the United Kingdom and certain U.S. markets. We bear the entire risk
of loss related to these loans. In the United States, these loans are made for
amounts up to $500, with terms of 7 to 37 days. In Canada, loans are issued to
qualified borrowers based on a percentage of the borrowers' income with terms of
1 to 35 days. We issue loans in the United Kingdom for up to (pound)600, with a
term of 28 days. We originated or extended approximately $491.4 million of the
short-term consumer loans through our locations and document transmitters during
fiscal 2004 and approximately $428.7 million through our locations and document
transmitters during 2003. In addition, beginning in fiscal 2003 we acted as a
direct lender originating 1,402 longer-term installment loans with an average
principal of $793 and a weighted average term of approximately 365 days. In
fiscal 2004, we originated 4,675 longer-term installment loans with an average
principal amount of $845 and a weighted average term of approximately 365 days.
We originated or extended installment loans through our locations in the United
Kingdom of approximately $1.1 million in fiscal 2003 and $3.9 million in fiscal
2004 and introduced this product in certain U.S. and Canadian markets late in
fiscal 2004.
We had approximately $29.1 million of consumer loans on our balance sheet
at June 30, 2004 and approximately $21.4 million on June 30, 2003. These amounts
are reflected in total loans receivable. Loans receivable, net at June 30, 2004
are reported net of a reserve of $2.3 million related to consumer lending. Loans
receivable at June 30, 2003 are reported net of a reserve of $1.3 million
related to consumer lending.
The following table presents a summary of our consumer lending
originations, which includes loan extensions, and revenues for the following
periods (dollars in thousands):
11
Year ended June 30,
--------------------------------------------
2002 2003 2004
--------------------------------------------
(in thousands)
U.S. company funded consumer loan originations(1)............. $ 19,723 $ 81,085 $ 65,868
Canadian company funded consumer loan originations(2)......... 188,632 248,149 309,016
U.K. company funded consumer loan originations(2)............. 76,344 99,499 116,532
--------------------------------------------
Total company funded consumer loan originations............... $ 284,699 $ 428,733 $ 491,416
============================================
Servicing revenues, net....................................... $ 44,765 $ 41,175 $ 47,144
U.S. company funded consumer loan revenues.................... 3,545 14,137 9,873
Canadian company funded consumer loan revenues................ 16,280 22,492 31,479
U.K. company funded consumer loan revenues.................... 10,763 13,725 17,750
Provision for loan losses on company funded loans............. (5,554) (9,967) (9,928)
--------------------------------------------
Total consumer lending revenues, net.......................... $ 69,799 $ 81,562 $ 96,318
Gross charge-offs of company funded consumer loans............ $ 23,684 $ 42,497 $ 45,074
Recoveries of company funded consumer loans................... 18,130 32,105 36,102
--------------------------------------------
Net charge-offs on company funded consumer loans.............. $ 5,554 $ 10,392 $ 8,972
============================================
Gross charge-offs of company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 8.4% 9.9% 9.2%
Recoveries of company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 6.4% 7.5% 7.4%
Net charge-offs on company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 2.0% 2.4% 1.8%
(1)Our company-operated stores in the United States originate company
funded and bank funded short-term consumer loans. Document transmitter locations
in the United States originate only bank funded loans.
(2)All consumer loans originated in Canada and the United Kingdom are
company funded.
Following are the number of company-operated U.S. stores at each period end
that originate company funded and bank funded loans.
Year ended June 30,
------------------------------------------
2002 2003 2004
------------ -------------- --------------
U.S. stores originating company funded loans................. 164 33 43
U.S. stores originating bank funded loans.................... 178 286 275
------------ -------------- --------------
Total U.S. stores originating short-term consumer loans...... 342 319 318
============ ============== ==============
The increase in total company funded originations of $59.9 million in fiscal
2004 over fiscal 2003, as well as in prior periods, was driven primarily by
increases in originations in Canada and the United Kingdom from newly opened
stores. Eagle National Bank discontinued the business of offering short-term
consumer loans through our stores pursuant to a December 18, 2001 consent order
entered into with the U.S. Comptroller of the Currency. Under the program with
Eagle National Bank, we earned marketing and servicing fees. Eagle originated or
extended approximately $402.7 million of loans through us during fiscal 2002.
Other Services and Products
In addition to check cashing and short-term loans, our customers may choose
from a variety of products and services when conducting business at our
locations. These services include Western Union money order and money transfer
products, electronic tax filing, bill payment, foreign currency exchange, photo
12
ID and prepaid local and long-distance phone services. A survey of our customers
by an independent third party revealed that over 50% of customers use other
services in addition to check cashing. We offer our customers multiple financial
products and services. We believe that our check cashing and consumer lending
customers enjoy the convenience of other high-value products and services
offered by us.
Among our most significant products and services other than check cashing
and short-term loans are the following:
o Money Transfers--Through a strategic alliance with Western Union, customers
can transfer funds to any location providing Western Union money transfer
services. Western Union currently has 170,000 agents in more than 190
countries throughout the world. We receive a percentage of the commission
charged by Western Union for the transfer. For fiscal 2004, we generated
total money transfer revenues of $13.1 million, primarily at our check
cashing stores.
o Money Orders--Our stores issue money orders for a minimal fee. Customers
who do not have checking accounts typically use money orders to pay rent
and utility bills. During fiscal 2004, money order transactions had an
average face amount of $160.1 and an average fee of $1.05. For fiscal 2004,
our customers purchased 2.3 million money orders, generating total money
order revenues of $2.4 million.
13
Store Operations
Locations
The following chart sets forth the number of stores in operation as of the
dates:
June 30,
------------------------------------------
Markets 2000 2001 2002 2003 2004
------- ------------------------------------------
CALIFORNIA
Southern................................. 44 47 47 47 47
Northern................................. 92 95 93 91 90
ARIZONA
Phoenix.................................. 34 40 45 43 43
Tucson................................... 7 13 16 16 16
OHIO
Cleveland................................ 21 19 19 18 18
Other Ohio cities (1).................... 7 5 4 4 4
PENNSYLVANIA
Philadelphia............................. 11 8 8 6 6
Pittsburgh............................... 10 11 11 11 11
OTHER UNITED STATES
Washington............................... 17 21 18 18 18
Virginia................................. 15 16 16 16 16
Oklahoma................................. 8 13 13 10 10
Nevada................................... 1 11 11 8 8
Colorado................................. 6 14 15 7 7
Oregon................................... 2 5 5 5 5
Louisiana................................ 3 4 4 4 4
Texas.................................... 3 3 4 4 4
Utah..................................... 7 5 5 4 4
New Mexico............................... 4 3 3 3 3
Hawaii................................... 3 3 3 3 3
Maryland/D.C............................. 4 11 10 2 1
Wisconsin................................ 1 1 1 1 1
CANADA
Company operated......................... 139 157 167 181 194
Franchised locations..................... 81 86 87 109 117
UNITED KINGDOM
Company operated......................... 107 126 123 122 125
Franchised locations..................... 264 261 290 351 355
------------------------------------------
Total stores............................. 891 978 1,018 1,084 1,110
==========================================
(1) These other cities include Akron, Canton, Youngstown and Cincinnati.
14
All of our company-operated stores are leased, generally under leases
providing for an initial multi-year term and renewal terms from one to five
years. We generally assume the responsibility for required leasehold
improvements, including signage, customer service representative partitions,
alarm systems, computers, time-delayed safes and other office equipment. We
adhere to a strict set of market survey and location guidelines when selecting
store sites in order to ensure that our stores are placed in desirable locations
near our customers.
Since fiscal 2001, the number of stores operated by us in the United States
has declined from 348 to 319. From fiscal 2001 through fiscal 2004, we did not
renew store leases, which were scheduled to expire, in various markets because
we determined that our operating margins in these locations were not
satisfactory. We expect the number of stores in the United States to remain
relatively stable in the foreseeable future, as we anticipate focusing our new
store and acquisition strategy in Canada and the United Kingdom.
Acquisitions
Since 1990, we have grown our store network domestically and
internationally in part through acquisitions. We have successfully targeted,
executed and closed over 31 acquisitions that added 418 company-owned stores.
In November 1996, we completed our first acquisition of Canadian stores,
adding 36 company operated locations and 107 franchised locations. We now
operate 194 stores in Canada and have 117 franchised locations. During fiscal
1998, we opened our first Loan Mart stores in the United States, offering only
short-term consumer loans. We have continued to build new Loan Mart stores in a
number of markets in the United States and today operate 88 of these stores. In
February 1999, we completed our first acquisition of stores in the United
Kingdom when we purchased 11 stores. Since entering the U.K. market, we have
completed five additional acquisitions of chains which added 74 company-operated
stores and 265 franchised locations, built 40 new company-operated stores and
added 90 new franchised locations, net. We now operate a total of 125 stores in
the United Kingdom and have 355 franchised locations.
Facilities and Hours of Operation
As part of our retail and customer-driven strategy, we present a clean and
attractive environment and an appealing format for our stores. Size varies by
location, but the stores are generally 1,000 to 1,400 square feet, with
approximately half of that space allocated to the teller and back office areas.
Operating hours vary by location, but are typically extended and designed
to cater to those customers who, due to work schedules, cannot make use of
"normal" banking hours. A typical store operates from 9:00 A.M. to 9:00 P.M.
during weekdays and on Saturdays, and from 10:00 A.M. to 5:00 P.M. on Sundays.
In certain locations, we operate stores 24 hours, seven days per week.
Operational Structure
Our senior management is located at our corporate headquarters in Berwyn,
Pennsylvania and is responsible for our overall direction. We also maintain
corporate offices in Victoria, British Columbia and Nottingham, England.
Management of our North American store operations is located in our Victoria
office while the Nottingham office provides support for our U.K. store
operations. This support includes centralized functions such as information
systems, treasury, accounting, human resources, loss prevention and marketing.
Our corporate staff also includes personnel dedicated to compliance functions,
including internal audit, risk management, privacy and general counsel
functions. We believe that our ongoing investment in and company-wide focus on
our compliance practices provides us with a competitive advantage relative to
most other companies in our industry.
Additionally, in each country in which we operate, we have a store
management organization that is responsible for the day to day operations of our
stores. District managers are directly responsible for the oversight of our
store managers and store operations. Typically, each district manager oversees
eight to ten stores. Each district manager reports to a market manager who
supervises approximately five district managers. The market managers report to
the head of operations in each of our corporate offices.
In addition, in fiscal 2001 we opened a centralized facility to support our
domestic consumer lending business. This call-center facility, located in Salt
Lake City, Utah, currently employs 141 full-time staff. Operating from 8:00 A.M.
to midnight, eastern time (including weekends), our staff performs inbound and
outbound customer service for current and prospective consumer loan customers as
well as collection and loan-servicing functions for all past-due domestic
15
consumer loans. Our management at this facility includes experienced call-center
operations, customer service, information technology and collection personnel.
We believe that this centralized facility has helped us to improve our loan
servicing significantly and has led to reduced credit losses on loans originated
by us in the United States and significantly enhances our ability to manage the
compliance responsibilities related to our domestic consumer lending operations.
Technology
We currently have an enterprise-wide transaction processing computer
network. We believe that this system has improved customer service by reducing
transaction time and has allowed us to manage returned-check losses and loan
collection efforts better and to comply with regulatory record keeping and
reporting requirements.
We continue to enhance our point-of-sale transaction processing system
composed of a networked hardware and software package with integrated database
and reporting capabilities. The point-of-sale system provides our stores with
instantaneous customer information, thereby reducing transaction time and
improving the efficiency of our credit verification process. Also, we have
deployed an enhanced centralized loan management and collections system that
provides improved customer service processing and management of loan
transactions. The loan-management system and collections system uses integrated
automated clearinghouse payment and returns processing, which facilitates faster
notification of returns and faster clearing of funds as well as utilizing fax
server document-processing technology, which has the effect of reducing both
processing and loan closing times. The point-of-sale system, together with the
enhanced loan-management and collections systems, has improved our ability to
offer new products and services and our customer service.
Security
The principal security risks to our operations are robbery and defalcation.
We have put in place extensive security systems, dedicated security personnel
and management information systems to address both areas of potential loss. We
believe that our systems are among the most effective in the industry. Net
security losses represented less than 0.6% of total revenues for fiscal 2004, a
decline from net security losses of 0.8% of total revenues for fiscal 2003.
To protect against robbery, most store employees work behind
bullet-resistant glass and steel partitions, and the back office, safe and
computer areas are locked and closed to customers. Each store's security
measures include safes, electronic alarm systems monitored by third parties,
control over entry to teller areas, detection of entry through perimeter
openings, walls, and ceilings and the tracking of all employee movement in and
out of secured areas. Employees use cellular phones to ensure safety and
security whenever they are outside the secure teller area. Additional security
measures include identical alarm systems in all stores, remote control over
alarm systems, arming/disarming and changing user codes and mechanically and
electronically controlled time-delay safes.
Since we handle high volumes of cash and negotiable instruments at our
locations, daily monitoring, unannounced audits and immediate responses to
irregularities are critical in combating defalcations. We have an internal
auditing program that includes periodic unannounced store audits and cash counts
at randomly selected locations.
Advertising and Marketing
We frequently survey and research customer trends and purchasing patterns
in order to place the most effective advertising for each market. Our marketing
promotions typically include in-store merchandising materials, advertising
support and instruction of store personnel in the use of the materials. Drawing
on statistical data from our transaction database, we use sophisticated direct
marketing strategies to communicate with existing customers and prospects with
demographic characteristics similar to those of existing customers. National
television advertising promotes our brand in Canada and our franchisees
contribute to fund this advertising. We also arrange cooperative advertising for
our products and services with strategic partners such as Western Union. We
provide our store managers with local marketing training that sets standards for
promotions and marketing programs for their stores. Local marketing includes
attendance and sponsorship of community events. A national classified telephone
directory company is used to place all Yellow Pages advertising as effectively
and prominently as possible. We research directory selection to assure effective
communication with our target customers.
16
Competition
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. The industry in which we operate in the United States is highly
fragmented. An independent industry report estimated the number of check cashing
outlets at 13,000 in March 2002, an increase from the approximately 2,200
national listings in 1986, according to a similar industry survey. We believe we
operate one of only seven U.S. check cashing store networks that have more than
100 locations, the remaining competitors being local chains and single-unit
operators. According to an industry survey, the seven largest check cashing
chains in the United States control fewer than 22% of the total number of U.S.
stores, reflecting the industry's fragmented nature. An independent report
estimated the number of stores offering short-term consumer loans as their
principal business at approximately 15,000 as of December 2002.
In Canada, we believe that we are the industry leader and that we hold a
dominant market share with exceptional brand awareness. In a recent public
opinion study of three major metropolitan markets in English speaking Canada, we
found that we have achieved brand awareness of 85%. We estimate that the number
of outlets offering check cashing and/or short-term consumer loans to be 1,100.
We believe there is only one other network of stores with over 100 locations and
only three chains with over 50 locations. While we believe that we enjoy almost
30% market share by outlet in Canada, our research estimates our market share by
volume of business to be closer to 50%.
Based on information from the British Cheque Cashers Association, we
believe that we have a U.K. market share of approximately 25%. In addition, we
believe that our 480 company-operated and franchised stores account for up to
40% of the total check cashing transactions performed at check cashing stores in
the United Kingdom. In the consumer lending market, recent research indicates
that the market for small, short-term loans is served by approximately 1,500
store locations, which include check cashers, pawn brokers and home-collected
credit companies.
In addition to other check cashing stores and consumer lending stores in
the United States, Canada and the United Kingdom, we compete with banks and
other financial services entities, as well as with retail businesses, such as
grocery and liquor stores, which often cash checks for their customers. Some
competitors, primarily grocery stores, do not charge a fee to cash a check.
However, these merchants provide this service to a limited number of customers
with superior credit ratings and will typically only cash "first party" checks,
or those written on the customer's account and made payable to the store.
We also compete with companies that offer automated check cashing machines,
and with franchised kiosk units that provide check-cashing and money order
services to customers, which can be located in places such as convenience
stores, bank lobbies, grocery stores, discount retailers and shopping malls.
We believe that convenience, hours of operations and other aspects of
customer service are the principal factors influencing customers' selection of a
financial services company in our industry, and that the pricing of products and
services is a secondary consideration.
Regulation
We are subject to regulation by foreign, federal and state governments that
affects the products and services we provide. In general, this regulation is
designed to protect consumers who deal with us and not to protect the holders of
our securities, including our common stock.
Regulation of Check Cashing
To date, regulation of check cashing fees has occurred on the state level.
We are currently subject to fee regulation in seven states: Arizona, California,
Hawaii, Louisiana, Maryland, Ohio, Pennsylvania and the District of Columbia
where regulations set maximum fees for cashing various types of checks. Our fees
comply with all state regulations.
Some states, including California, Ohio, Pennsylvania, Utah, Washington and
the District of Columbia have enacted licensing requirements for check cashing
stores. Other states, including Ohio, require the conspicuous posting of the
fees charged by each store. A number of states, including Ohio, also have
imposed recordkeeping requirements, while others require check cashing stores to
file fee schedules with the state.
17
In Canada, the federal government does not directly regulate our industry,
nor do provincial governments generally impose any regulations specific to the
industry. The exception is in the Province of Quebec, where check cashing stores
are not permitted to charge a fee to cash government checks.
In the United Kingdom, as a result of the Cheques Act of 1992, banks are
now liable to refund checks cleared by the bank that involved fraud or
dishonesty. For this reason, banks have invoked more stringent credit inspection
and indemnity criteria for all individuals and businesses wishing to operate a
check clearing facility such as ours. Additionally, in 2001 the Money Laundering
Act of 1993 was enhanced, required check cashing, money transfer and bureau de
change providers to be licensed. We currently comply with these more stringent
rules and regulations.
Regulation of Consumer Lending
In the majority of states where we engage in consumer lending, we act as a
servicer for County Bank or First Bank, federally insured financial institutions
both chartered under the laws of the state of Delaware. We provide County Bank
and First Bank with marketing, servicing and collections services for their
unsecured short-term loan products that are offered under our brand name Cash
'Til Payday(R).
County Bank and First Bank are subject to federal and state banking
regulations. Legislation has been introduced in the past at both the state and
federal levels that could affect our ability to generate origination fees as a
servicer for a bank, as well as our ability to offer consumer loans directly to
consumers. While we do not believe that any federal legislation will be passed,
if enacted we would not be able to market short-term loans as currently
structured. The FDIC has also proposed increasing the capital requirement for
banks involved in this business to as much as 100%. These capital requirements
could make it substantially more expensive for such banks to engage in consumer
lending.
We have determined, primarily for regulatory reasons, that we should make
consumer loans directly to consumers in seven states where advantageous enabling
legislation exists: California, Colorado, Louisiana, Oklahoma, Oregon, Virginia
and Wisconsin. We do not plan to open any company-operated stores to engage in
the consumer lending business in 13 other states where legislation is
unfavorable or the service is not likely to be profitable. We currently can
participate in the consumer lending business in all states where we have a
sizable presence, although there is no guarantee that this situation will
continue. We recently ceased offering short-term consumer loans in Georgia in
response to a law passed by the state legislature prohibiting these loans. Our
short-term consumer lending business in Georgia was immaterial financially,
generating revenues of $755,000 in fiscal 2004 and $500,000 in fiscal 2003, and
we had no company-operated stores in that state. We are not currently aware of
similar legislation that would require us to exit markets where we generate
significant revenues.
Our Canadian consumer lending activities are subject to provincial
licensing in Saskatchewan, Nova Scotia and Newfoundland but are subject only to
limited substantive regulation. A federal usury ceiling applies to loans we make
to Canadian consumers. Such borrowers contract to repay us in cash; if they
repay by check, we also collect, in addition to the maximum permissible finance
charge, our customary check-cashing fees.
In the United Kingdom, consumer lending is governed by the Consumer Credit
Act of 1974 and related rules and regulations. As required by the act, we have
obtained licenses from the Office of Fair Trading, which is responsible for
regulating competition policy and consumer protection. The act also contains
rules regarding the presentation, form and content of loan agreements, including
statutory warnings and the layout of financial information. To comply with these
rules, we use model credit agreements provided by the British Cheque Cashers
Association.
Our consumer lending activities are also subject to certain other state,
federal and U.K. regulations, including, but not limited to, regulations
governing lending practices and terms, such as truth in lending and usury laws,
and rules regarding advertising content.
Currency Reporting Regulation
Regulations promulgated by the United States Department of the Treasury
under the Bank Secrecy Act require reporting of transactions involving currency
in an amount greater than $10,000, or the purchase of monetary instruments for
cash in amounts from $3,000 to $10,000. In general, every financial institution
must report each deposit, withdrawal, exchange of currency or other payment or
transfer that involves currency in an amount greater than $10,000. In addition,
multiple currency transactions must be treated as a single transaction if the
financial institution has knowledge that the transactions are by, or on behalf
18
of, any one person and result in either cash in or cash out totaling more than
$10,000 during any one business day. We believe that our point-of-sale system
and employee training programs support our compliance with these regulatory
requirements.
Also, money services businesses are required by the Money Laundering Act of
1994 to register with the United States Department of the Treasury. Money
services businesses include check cashers and sellers of money orders. Money
services businesses must renew their registrations every two years, maintain a
list of their agents, update the agent list annually and make the agent list
available for examination. In addition, the Bank Secrecy Act requires money
services businesses to file a Suspicious Activity Report for any transaction
conducted or attempted involving amounts individually or in total equaling
$2,000 or greater, when the money services businesses knows or suspects that the
transaction involves funds derived from an illegal activity, the transaction is
designed to evade the requirements of the Bank Secrecy Act or the transaction is
considered so unusual that there appears to be no reasonable explanation for the
transaction. The USA PATRIOT Act includes a number of anti-money-laundering
measures designed to assist in the identification and seizure of terrorist
funds, including provisions that will directly impact check cashers and other
money services businesses. Specifically, the USA PATRIOT Act requires all check
cashers to establish certain programs designed to detect and report money
laundering activities to law enforcement. We believe we are in compliance with
the USA PATRIOT Act.
Privacy Regulation
We are subject to a variety of state, federal and foreign laws and
regulations restricting the use and seeking to protect the confidentiality of
identifying and other personal consumer information. We have systems in place
intended to safeguard such information as required.
Other Regulation
We operate a total of 137 stores in California. This state has enacted a
so-called "prompt remittance" statute. This statute specifies a maximum time for
the payment of proceeds from the sale of money orders to the issuer of the money
orders. In this way, the statute limits the number of days, known as the
"float," that we have use of the money from the sale of the money order.
In addition to fee regulations, licensing requirements and prompt
remittance statutes, certain jurisdictions have also placed limitations on the
commingling of money order proceeds and established minimum bonding or capital
requirements.
Proprietary Rights
We hold the rights to a variety of service marks relating to products or
services we provide in our stores. In addition, we maintain service marks
relating to the various names under which our stores operate.
Insurance Coverage
We maintain insurance coverage against losses, including theft, to protect
our earnings and properties. We also maintain insurance coverage against
criminal acts with a deductible of $50,000 per occurrence.
Employees
On June 30, 2004, we employed 3,343 persons worldwide, consisting of 320
persons in our accounting, management information systems, legal, human
resources, treasury, finance and administrative departments and 3,023 persons in
our stores, including customer service representatives, store managers, regional
supervisors, operations directors and store administrative personnel.
None of our employees is represented by a labor union, and we believe that
our relations with our employees are good.
19
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report may contain 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, consumer demand, regulatory factors and the success of
our strategies and other factors detailed from time to time in our annual and
other reports filed with the Securities and Exchange Commission. The words
"believe," "expect," "anticipate," "will" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. We undertake no obligation to update publicly or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from the forward-looking statement, including our goals referred to
herein, include but are not limited to our inability to:
o effectively compete in the financial services industry and maintain
our share of the market;
o manage risks inherent in an international operation, including foreign
currency fluctuation;
o maintain our key banking relationships;
o sustain demand for our products and services;
o manage changes in applicable laws and regulations governing consumer
protection and lending practices;
o manage our growth effectively;
o compete in light of technological advances; or
o safeguard against employee error and theft.
20
Item 2. PROPERTIES
All of our company-operated stores are leased, generally under leases
providing for an initial multi-year term and renewal terms from one to five
years. The leases may contain provisions for additional rental charges based on
revenue and payment of real estate taxes and common area charges. With respect
to leased locations open as of June 30, 2004, the following table shows the
total number of leases expiring during the periods indicated, assuming the
exercise of our renewal options:
Period Ending Number of
June 30, Leases Expiring
-------------- ---------------
2005 111
2006 - 2009 425
2010 - 2014 112
2015 - 2019 12
2020 - 2024 1
------
661
======
The following table reflects the change in the number of stores during
fiscal years 2002, 2003 and 2004:
2002 2003 2004
-------- -------- -------
Number of stores at beginning of period 978 1,018 1,084
New stores opened 25 14 14
Stores acquired 1 5 3
Stores closed (16) (36) (3)
Net change in franchise stores 30 83 12
-------- -------- -------
Number of stores at end of period 1,018 1,084 1,110
======== ======== =======
21
Item 3. LEGAL PROCEEDINGS
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 our 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.
Approximately 92% of these settlement offers have been accepted. Plaintiff's'
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 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. The court's decision denying that motion is presently
on appeal. We believe we have meritorious defenses to the action and intend to
defend it vigorously. We believe the outcome of such litigation will not
significantly affect our financial results.
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. On November 6, 2003, we learned of substantially similar claims
asserted on behalf of a purported class of Alberta borrowers by Gareth Young, a
former customer of our Canadian subsidiary. The Young action is pending in the
Court of Queens Bench of Alberta and seeks an unspecified amount of damages and
other relief. On December 23, 2003, we were served with the statement of claim
in an action brought in the Ontario Superior Court of Justice by another former
customer, Margaret Smith. A similar action was also filed in the Court of
Queen's Bench of Manitoba on April 26, 2004 by Nicole Blasko. The allegations
and putative class in the Smith and Blasko actions are substantially the same as
those in the Mortillaro action. Like the plaintiff in the MacKinnon action
referred to above, Mortillaro, Young, Smith and Blasko have agreed to arbitrate
all disputes with us. We believe that we have meritorious procedural and
substantive defenses to the claims of each of these plaintiffs, and we intend to
defend the claims vigorously. We believe 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for our common stock.
Dollar Financial Corp. (formerly known as DFG Holdings, Inc.) is the sole
record and beneficial owner of all of our outstanding common stock. For
information regarding certain of the beneficial owners of Dollar Financial
Corp.'s common stock, please see "Item 12 - Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters."
We did not pay any cash dividends in respect of our common stock during
fiscal 2003 and fiscal 2004. The Indenture dated November 13, 2003 between us
and U.S. Bank, National Association as trustee (the "Indenture"), relating to
our 9.75% Senior Notes due 2011, as well as our credit agreement, contain
restrictions on our declaration and payment of dividends. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to consolidated financial statements included
elsewhere in this report.
Item 6. SELECTED FINANCIAL DATA
We derived the following historical financial information from our audited
consolidated financial statements as of June 30, 2003 and June 30, 2004 and for
each of the years in the three-year period ended June 30, 2004, which are
included elsewhere in this report, and our audited consolidated financial
statements as of and for the years ended June 30, 2000, June 30, 2001 and June
30, 2002. This table should be read together with the information contained in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our audited consolidated financial statements and
related notes included in "Item 8 - Financial Statements of Supplementary Data."
23
Selected Financial Data: Year ended June 30,
--------------------------------------------------------------------------------------
2000(1) 2001(2) 2002 2003 2004
--------------------------------------------------------------------------------------
(dollars in thousands, except Check Cashing Data)
Statement of Operations Data:
Revenues:
Revenues from check cashing........ $ 97,350 $ 105,690 $ 104,792 $ 108,435 $ 117,397
Consumer lending:
Fees from consumer lending.... 44,974 77,854 97,712 106,557 120,807
Provision for loan losses and
adjustment to servicing
revenue................... (10,187) (19,487) (27,913) (24,995) (24,489)
--------------------------------------------------------------------------------------
Consumer lending, net.............. 34,787 58,367 69,799 81,562 96,318
Money transfer fees................ 7,881 9,444 10,098 11,652 13,052
Other revenues..................... 25,735 21,998 17,287 17,739 19,663
--------------------------------------------------------------------------------------
Total revenues........................ 165,753 195,499 201,976 219,388 246,430
Store and regional expenses:
Salaries and benefits.............. 47,058 57,453 65,295 69,799 76,008
Occupancy.......................... 12,800 16,881 18,087 18,856 19,805
Depreciation....................... 4,683 5,829 6,522 5,859 6,546
Other.............................. 36,503 45,321 46,238 47,766 53,321
--------------------------------------------------------------------------------------
Total store and regional expenses..... 101,044 125,484 136,142 142,280 155,680
Establishment of reserves for new
consumer lending arrangements...... - - 2,244 - -
Corporate expenses.................... 22,342 22,500 24,516 31,241 32,813
Losses on store closings and sales and
other restructuring................ 249 926 1,435 3,987 361
Goodwill amortization (3)............. 5,564 4,710 - - -
Other depreciation and amortization... 1,620 1,952 2,709 3,320 3,286
Interest expense, net of interest
income............................. 17,491 20,361 18,694 20,168 25,303
Loss on extinguishment of debt........ - - - - 7,486
Litigation settlement costs........... - - - 2,750 -
--------------------------------------------------------------------------------------
Income before income taxes............ 17,443 19,566 16,236 15,642 21,501
Income tax provision(4) .............. 12,043 12,876 10,199 13,511 16,589
--------------------------------------------------------------------------------------
Net income ........................... $ 5,400 $ 6,690 $ 6,037 $ 2,131 $ 4,912
======================================================================================
Operating and Other Data:
Net cash provided by (used in):
Operating activities............... $ 16,792 $ 16,442 $ 14,453 $ 3,832 $ 20,372
Investing activities............... (44,526) (32,365) (10,108) (10,679) (8,619)
Financing activities............... 35,306 15,602 9,409 (10,897) (16,468)
Stores in operation at end of period..
Company-owned...................... 546 631 641 624 638
Franchised stores and check cashing
merchants....................... 345 347 377 460 472
--------------------------------------------------------------------------------------
Total ................................ 891 978 1,018 1,084 1,110
======================================================================================
Check Cashing Data:
Face amount of checks cashed.......... $ 2,743,765,000 $ 3,046,705,000 $ 2,969,455,000 $ 2,938,950,000 $ 3,169,350,000
Number of checks cashed............... 8,204,528 9,001,635 8,689,819 8,568,944 8,427,990
Average face amount per check cashed.. $334.42 $338.46 $341.72 $342.98 $376.05
Average fee per check................. $11.87 $11.74 $12.06 $12.65 $13.93
Average fee as a % of face amount..... 3.55% 3.47% 3.53% 3.69% 3.70%
Balance Sheet Data (at end of period):
Cash.................................. $ 73,288 $ 72,452 $ 86,633 $ 71,805 $ 69,266
Total assets.......................... 259,714 276,544 292,480 298,289 321,034
Total indebtedness.................... 179,146 197,136 208,191 198,970 241,281
Shareholder's equity.................. 39,595 42,624 53,515 67,688 38,017
24
(1) On July 7, 1999, we acquired all of the outstanding shares of Cash A Cheque
Holdings Great Britain Limited , which operated 44 company owned stores in
the UK. The initial purchase price for this acquisition was $12.5 million
and was funded through excess internal cash, our revolving credit facility
and our 10 7/8% Senior Subordinated Notes Due 2006. The excess of the
purchase price over the fair value of the identifiable net assets acquired
was $8.2 million. Additional consideration of $9.7 million was subsequently
paid based under the profit-based earn-out agreement. On November 18, 1999,
we acquired all of the outstanding shares of Cheques R Us, Inc. and
Courtenay Money Mart Ltd., which operated six stores in British Columbia.
The aggregate purchase price for this acquisition was $1.2 million and was
funded through excess internal cash. The excess of the purchase price over
the fair value of identifiable net assets acquired was $1.1 million. On
December 15, 1999, we acquired all of the outstanding shares of Cash
Centres Corporation Limited, which operated five company owned stores and
238 franchises in the UK. The aggregate purchase price for this acquisition
was $8.4 million and was funded through our revolving credit facility. The
excess of the purchase price over the fair value of identifiable net assets
acquired was $7.7 million. Additional consideration of $2.7 million was
subsequently paid based under a profit-based earn-out agreement. On
February 10, 2000, we acquired substantially all of the assets of
CheckStop, Inc., which is a payday-loan business operating through 150
independent document transmitters in 17 states. The aggregate purchase
price for this acquisition was $2.6 million and was funded through our
revolving credit facility. The excess of the purchase price over the fair
value of identifiable net assets acquired was $2.4 million. Additional
consideration of $250,000 was subsequently paid based upon a future results
of operations earn-out agreement.
(2) On August 1, 2000, we purchased all of the outstanding shares of West Coast
Chequing Centres, Ltd, which operated six stores in British Columbia. The
aggregate purchase price for this acquisition was $1.5 million and was
funded through excess internal cash. The excess price over the fair value
of identifiable net assets acquired was $1.4 million. On August 7, 2000, we
purchased substantially all of the assets of Fast `n Friendly Check
Cashing, which operated 8 stores in Maryland. The aggregate purchase price
for this acquisition was $700,000 and was funded through our revolving
credit facility. The excess purchase price over fair value of identifiable
net assets acquired was $660,000. Additional consideration of $150,000 was
subsequently paid based on a revenue earn-out agreement. On August 28,
2000, we purchased primarily all of the assets of Ram-Dur Enterprises, Inc.
d/b/a AAA Check Cashing Centers, which operated five stores in Tucson,
Arizona. The aggregate purchase price for this acquisition was $1.3 million
and was funded through our revolving credit facility. The excess purchase
price over fair value of identifiable net assets acquired was $1.2 million.
On December 5, 2000, we purchased all of the outstanding shares of Fastcash
Ltd., which operated 13 company owned stores and 27 franchises in the UK.
The aggregate purchase price for this acquisition was $3.1 million and was
funded through our revolving credit facility. The excess of the purchase
price over the fair value of the identifiable assets acquired was $2.7
million. Additional consideration of $2.0 million was subsequently paid
during fiscal 2003 based upon a future results of operations earn-out
agreement.
(3) On July 1, 2001, we adopted Financial Accounting Standards Board Opinion
No. 142 "Goodwill and Other Intangible Assets". In accordance with the
provisions of SFAS No. 142 we ceased amortization of goodwill.
(4) As a result of our refinancing in November 2003, we do not expect to
continue to pay U.S. tax on our foreign earnings for the foreseeable
future. This will result in a substantial reduction in our effective tax
rate. The amount of such tax was as follows (dollars in thousands):
Year ended June 30,
---------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
1,745 $3,189 $2,370 $5,162 $2,349
25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Executive Summary
We have historically derived our revenues primarily from providing check
cashing services, consumer lending and other consumer financial products and
services, including money orders, money transfers and bill payment. For our
check cashing services, we charge our customers fees that are usually equal to a
percentage of the amount of the check being cashed and are deducted from the
cash provided to the customer. For our consumer loans, we receive origination
and servicing fees from the banks providing the loans or, if we fund the loans
directly, interest and fees on the loans.
We operate in a sector of the financial services industry that serves the
basic need of lower- and middle-income working-class individuals to have
convenient access to cash. This need is primarily evidenced by consumer demand
for check cashing and short-term loans, and consumers who use these services are
often underserved by banks and other financial institutions.
Our expenses primarily relate to the operations of our store network,
including salaries and benefits for our employees, occupancy expense for our
leased real estate, depreciation of our assets and corporate and other expenses,
including costs related to opening and closing stores. During fiscal 2003, we
took actions to reduce costs and make our operations more efficient, including
centralizing and consolidating our store support functions for our North
American operations.
In each foreign country in which we operate, local currency is used for
both revenue and expenses. Therefore, we record the impact of foreign currency
exchange rate fluctuations related to our foreign net income.
In our discussion of our financial condition and results of operations, we
refer to stores, franchises and document transmitters that were open for an
entire period and the comparable prior period as comparable stores, franchises
and document transmitters.
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 U.S.
generally accepted accounting principles. 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
With respect to company-operated stores, revenue from our check cashing,
money order sales, money transfer and bill payment services and other
miscellaneous services reported in other revenues on our statement of operations
are all recognized when the transactions are completed at the point-of-sale in
the store.
With respect to our franchised locations, we recognize initial franchise
fees upon fulfillment of all significant obligations to the franchisee. Royalty
payments from our franchisees are recognized as earned.
For short term consumer loans that we make directly, which have terms
ranging from 1 to 37 days, revenue is recognized using the interest method. Loan
origination fees are recognized as an adjustment to the yield on the related
loan. Our reserve policy regarding these loans is summarized below in "Company
Funded Consumer Loan Loss Reserves Policy."
In addition to the short-term consumer loans originated and funded by us,
we also have relationships with two banks, County Bank of Rehoboth Beach,
Delaware and First Bank of Delaware. Pursuant to these relationships, we market
and service short-term consumer loans, which have terms ranging from 7 to 23
days, that are funded by the banks. The banks are responsible for the
application review process and determining whether to approve an application and
26
fund a loan. As a result, the banks' loans are not reflected on our balance
sheet. We earn a marketing and servicing fee for each loan that is paid by
borrowers to the banks.
For loans funded by County Bank, we recognize net servicing fee income
ratably over the life of the related loan. In addition, each month County Bank
withholds certain servicing fees payable to us in order to maintain a cash
reserve. The amount of the reserve is equal to a fixed percentage of outstanding
loans at the beginning of the month plus a percentage of the finance charges
collected during the month. Each month, net credit losses are applied against
County Bank's cash reserve. Any excess reserve is then remitted to us as a
collection bonus. The remainder of the finance charges not applied to the
reserve are either used to pay costs incurred by County Bank related to the
short term loan program, retained by the bank as interest on the loan or
distributed to us as a servicing fee.
For loans funded by First Bank of Delaware, we recognize net servicing fee
income ratably over the life of the related loan. In addition, the bank has
established a target loss rate for the loans marketed and serviced by us.
Servicing fees payable to us are reduced if actual losses exceed this target
loss rate by the amount they exceed it. If actual losses are below the target
loss rate, the difference is paid to us as a servicing fee. The measurement of
the actual loss rate and settlement of servicing fees occurs twice every month.
Because our servicing fees are reduced by loan losses incurred by the
banks, we have established a reserve for servicing fee adjustments. To estimate
the appropriate reserve for servicing fee adjustments, we consider the amount of
outstanding loans owed to the banks, historical loans charged off, current
collections patterns and current economic trends. The reserve is then based on
net charge-offs, expressed as a percentage of loans originated on behalf of the
banks applied against the total amount of the banks' outstanding loans. This
reserve is reported in accrued expenses and other liabilities on our balance
sheet and was $1,093 at June 30, 2003 and $1,380 at June 30, 2004.
If one of the banks suffers a loss on a loan, we immediately record a
charge-off against the reserve for servicing fee adjustments for the entire
amount of the unpaid item. A recovery is credited to the reserve during the
period in which the recovery is made. Each month, we replenish the reserve in an
amount equal to the net losses charged to the reserve in that month. This
replenishment, as well as any additional provisions to the reserve for servicing
fees adjustments as a result of the calculations set forth above, is charged
against revenues. The total amount of outstanding loans owed to the banks did
not change significantly during the periods ended June 30, 2004 and June 30,
2003, and during these periods the loss rates on loans declined. As a result of
these factors, we did not increase our reserve for servicing fee adjustments. We
serviced $385 million loans for County Bank and First Bank during fiscal 2004
and $370 million during fiscal 2003. At June 30, 2004 and 2003 we serviced $15.2
million and $15.0 million, respectively, for County Bank and First Bank.
Company Funded Consumer Loan Loss Reserves Policy
We maintain a loan loss reserve for anticipated losses for loans we make
directly through some of our company-operated locations. To estimate the
appropriate level of loan loss reserves we consider the amount of outstanding
loans owed to us, historical loans charged off, current collection patterns and
current economic trends. Our current loan loss reserve is based on our net
charge-offs, expressed as a percentage of loan amounts originated for the last
twelve months applied against the total amount of outstanding loans that we make
directly. As these conditions change, we may need to make additional provisions
in future periods.
When a loan is originated, the customer receives the cash proceeds in
exchange for a post-dated check or a written authorization to initiate a charge
to the customer's bank account on the stated maturity date of the loan. If the
check or the debit to the customer's account is returned from the bank unpaid,
we immediately record a charge-off against the consumer loan loss reserve for
the entire amount of the unpaid item. A recovery is credited to the reserve
during the period in which the recovery is made. Each month, we replenish the
reserve in an amount equal to the net losses charged to the reserve in that
month. This replenishment, as well as any additional provisions to the loan loss
reserve as a result of the calculations in the preceding paragraph, is charged
against revenues. As a result of the increase in our installment loan portfolio,
we increased our loan loss reserve during fiscal 2004.
Check Cashing Returned Item Policy
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 during the period in which recovery is made. This direct
method for recording returned check losses and recoveries eliminates the need
for an allowance for returned checks. These net losses are charged to returned
checks, net and cash shortages in the consolidated statements of operations.
27
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 reporting units 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 our current tax exposure and
assessing the impact of differing treatment of items for tax and accounting
purposes. If an item is treated differently for tax and accounting purposes, we
report the difference as a deferred tax asset or liability, on our consolidated
balance sheet. When then assess the likelihood that any deferred tax assets will
be recovered from future taxable income. To the extent we believe that recovery
of a deferred tax asset is not likely, we establish a valuation allowance.
28
Results of Operations
The following table sets forth our results of operations as a percentage of
total consolidated revenues for the following periods:
Year ended June 30,
---------------------------
2002 2003 2004
---------------------------
Statement of Operations Data:
Total revenues:
Check cashing......................................................... 51.8% 49.4% 47.6%
Consumer lending, net................................................. 34.6 37.2 39.1
Money transfers....................................................... 5.0 5.3 5.3
Other ................................................................ 8.6 8.1 8.0
---------------------------
Total revenues............................................................ 100.0 100.0 100.0
U.S. revenues:
Check cashing......................................................... 26.5 22.4 19.4
Consumer lending, net................................................. 23.4 23.3 21.9
Money transfers....................................................... 2.2 2.2 1.8
Other ................................................................ 3.8 2.5 1.4
---------------------------
Total U.S. revenues....................................................... 55.9 50.4 44.5
Canada revenues:
Check cashing......................................................... 15.0 15.1 15.6
Consumer lending, net................................................. 6.6 8.8 11.6
Money transfers....................................................... 2.2 2.3 2.4
Other ................................................................ 3.7 4.3 4.9
---------------------------
Total Canada revenues..................................................... 27.5 30.5 34.5
United Kingdom revenues:
Check cashing......................................................... 10.3 11.9 12.6
Consumer lending, net................................................. 4.6 5.1 5.6
Money transfers....................................................... 0.6 0.8 1.1
Other ................................................................ 1.1 1.3 1.7
---------------------------
Total United Kingdom revenues............................................. 16.6 19.1 21.0
Store and regional expenses:
Salaries and benefits................................................. 32.3 31.8 30.8
Occupancy............................................................. 9.0 8.6 8.0
Depreciation.......................................................... 3.2 2.7 2.7
Other................................................................. 22.9 21.8 21.7
---------------------------
Total store and regional expenses......................................... 67.4 64.9 63.2
Establishment of reserves for new consumer lending arrangements............ 1.1 - -
Corporate expenses........................................................ 12.1 14.2 13.3
Losses on store closings and sales and other restructuring................ 0.8 1.8 0.1
Other depreciation and amortization....................................... 1.3 1.5 1.3
Interest expense, net of interest income.................................. 9.3 9.2 10.3
Loss on extinguishment of debt............................................ - - 3.0
Litigation settlement costs............................................... - 1.3 -
---------------------------
Income before income taxes................................................ 8.0 7.1 8.8
Income tax provision ..................................................... 5.0 6.1 6.8
---------------------------
Net income................................................................ 3.0% 1.0% 2.0%
===========================
Year Ended June 30, 2004 Compared to the Year Ended June 30, 2003
Revenues. Total revenues were $246.4 million for fiscal 2004 compared to
$219.4 million for fiscal 2003, an increase of $27.0 million or 12.3%.
Comparable store, franchised store and document transmitter sales for the entire
period increased $24.8 million or 11.5%. New store openings accounted for an
increase of $3.6 million while closed stores accounted for a decrease of $1.7
million. Favorable foreign currency rates attributed to $12.3 million of the
increase for the fiscal year. In addition to the currency benefit, revenues in
the United Kingdom for the fiscal year increased by $5.8 million primarily
related to revenues from check cashing and the impact of a new installment loan
product. Revenues in Canada for the fiscal year increased $9.6 million after
adjusting for favorable exchange rate. An increase in volume of short-term
29
consumer loans originated in Canada and higher consumer loan pricing contributed
to the increase in Canadian revenues . In addition, our Canadian subsidiary
introduced a new tax product in all of its stores offering refund anticipation
loans and electronic Canadian tax filing. This product, which was only tested in
a limited number of locations in the prior year period, added $1.0 million in
revenue for the fiscal year, which is included in other revenues. In the United
States, revenues declined $612,000 for the fiscal year, primarily due to the
decline in our distribution of government assistance food coupons. California,
the last state in which we offer food coupons, is implementing an electronic
benefits transfer system designed to disburse public assistance benefits
directly to individuals. Beginning in fiscal 2005, we do not expect to derive
any revenue from the distribution of government assistance food coupons.
Revenues from franchise fees and royalties accounted for $7.5 million, or 3.0%
of total revenues, for the fiscal year compared to $6.3 million, or 2.9% of
total revenues, for the same period in 2003, representing a $1.2 million, or
19.0%, increase. Stronger foreign currencies in both the United Kingdom and
Canada accounted for $721,000, or 60.1%, of the increase. The balance of the
increase resulted from the addition of a total of 12 franchised locations during
fiscal 2004 and an overall increase in revenues generated by existing
franchises.
Store and Regional Expenses. Store and regional expenses were $155.7
million for fiscal 2004 compared to $142.3 million for fiscal 2003, an increase
of $13.4 million or 9.4%. The impact of foreign currencies accounted for $6.4
million of this increase. New store openings accounted for an increase of $2.1
million while closed stores accounted for a decrease of $1.3 million. Comparable
retail store and franchised store expenses for the entire period increased $15.5
million. For the fiscal year ended June 30, 2004, total store and regional
expenses decreased to 63.2% of total revenues compared to 64.9% of total
revenues for the fiscal year ended June 30, 2003. After adjusting for the impact
of the changes in exchange rates, store and regional expenses increased $5.9
million in Canada, $2.2 million in the United Kingdom and declined $720,000 in
the United States. The increase in Canada was primarily due to increases of $1.2
million in salaries, $512,000 in returned checks, net and cash shortages,
$494,000 in advertising and $429,000 in occupancy costs. These costs, in
addition to the aggregate of other operating costs, are commensurate with the
overall growth in Canadian revenues. The increase in the United Kingdom is
almost entirely associated with increased salary expense, which is also
commensurate with the overall growth in U.K. revenues. The decline in store and
regional expenses in the United States is primarily due to the impact of stores
closed in the second quarter of fiscal 2003.
Corporate Expenses. Corporate expenses were $32.8 million for fiscal year
2004 compared to $31.2 million for fiscal year 2003, an increase of $1.6 million
or 5.1%. After adjusting for the impact of the changes in exchange rates,
corporate expenses declined $64,000. The decline reflects the cost reductions
related to the rationalization of our store support functions for our North
American operations offset in part by increased accrued expenses for incentive
compensation and legal and professional fees. For the fiscal year ended June 30,
2004, total corporate expenses decreased to 13.3% of total revenues compared to
14.2% for the fiscal year ended June 30, 2003.
Losses on Store Closings and Sales and other restructuring. Losses on store
closings and sales and other restructuring was $361,000 for the fiscal year
ended June 30, 2004 compared to $4.0 million for the fiscal year ended June 30,
2003, a decrease of $3.6 million. For fiscal year 2003, we provided $1.6 million
for the closure costs associated with the shutdown of 27 underperforming stores.
In addition, we provided $1.7 million, consisting primarily of severance and
retention bonus costs, for the consolidation and relocation of certain
non-operating functions.
Other Depreciation and Amortization. Other depreciation and amortization
expenses were $3.3 million for fiscal 2004, compared to $3.3 million for fiscal
2003.
Interest Expense. Interest expense was $25.3 million for the fiscal year
ended June 30, 2004 and was $20.2 million for the fiscal year ended June 30,
2003, an increase of $5.1 million or 25.2%. A portion of the increase is
attributable to $1.0 million of interest paid on our the old 10.875% senior
notes for the 30 day period subsequent to the issuance on November 13, 2003 of
$220.0 million principal amount of new 9.75% senior notes. We elected to effect
covenant defeasance on our the old notes by depositing with the trustee funds
sufficient to satisfy the old notes together with the call premium and accrued
interest to the December 13, 2003 redemption date. Additionally, the increased
interest on the incremental long-term debt outstanding after the refinancing on
November 13, 2003 and an additional offering of $20 million principal amount of
9.75% senior notes due 2011 on May 6, 2004 accounted for $6.2 million of the
increase in total interest expense. Offsetting these increases was a decline of
$2.1 million in interest on our revolving credit facility. This decline is a
result of the use of a portion of the proceeds from the issuance of the new
notes to repay the entire outstanding revolving credit balance on November 13,
2003.
Loss on Extinguishment of Debt. On November 13, 2003, we issued $220.0
million principal amount of 9.75% senior notes due 2011. The proceeds from this
offering were used to redeem all of our outstanding 10.875% senior notes and our
outstanding 10.875% senior subordinated notes, to refinance our credit facility,
to distribute a portion of the proceeds to our parent company to redeem an equal
amount of its senior discount notes and to pay fees and expenses with respect to
these transactions and a related note exchange transaction involving its senior
discount notes. On June 30, 2004, we terminated an agreement under which we sold
30
a participation interest in a portion of the short-term consumer loans
originated by us in the United Kingdom to a third party. Associated with the
termination of this agreement we paid $276,660 representing a prepayment
penalty.
The loss incurred on the extinguishment of debt is as follows (in
millions):
Call Premium
10.875% Senior Notes.................................................... $1.98
10.875% Senior Subordinated Notes....................................... 0.73
Write-off of previously capitalized deferred issuance costs, net............. 4.50
Prepayment penalty on the extinguishment of collateralized borrowings........ 0.28
----------
Loss on extinguishment of debt............................................... $7.49
==========
Litigation Settlement Costs. We accrued and paid $2.8 million during fiscal
2003 related to the California wage and hour litigation described in "Item 3 -
Legal Proceedings."
Income Taxes. The provision for income taxes was $16.6 million for the
fiscal year ended June 30, 2004 compared to $13.5 million for the fiscal year
ended June 30, 2003, an increase of $3.1 million. Our effective tax rate differs
from the federal statutory rate of 35% due to foreign taxes and a one-time
charge related to our election to discontinue to include Canadian income in
taxable income for U.S. tax filing purposes. Our effective income tax rate was
77.2% for the fiscal year ended June 30, 2004 and 86.4% for the fiscal year
ended June 30, 2003. Following our refinancing in November 2003, we no longer
accrue U.S. tax on our foreign earnings. The amount of such tax was $2.3 million
for fiscal 2004 and $5.2 million for fiscal 2003.
Year Ended June 30, 2003 Compared to the Year Ended June 30, 2002
Revenues. Total revenues were $219.4 million for fiscal 2003, compared to
$202.0 million for fiscal 2002, an increase of $17.4 million, or 8.6%.
Comparable retail store, franchised store and document transmitter revenues
increased $15.8 million, or 8.1%, which is primarily attributable to our foreign
operations as those markets continue to mature as well as the impact of
favorable foreign currency rates in fiscal 2003. New store openings accounted
for an increase of $4.5 million, which was partially offset by a decline of $2.9
million in revenues from closed stores. The increase in total revenues resulted
primarily from an increase of $11.7 million, or 16.8%, in consumer lending
revenues. The increase in consumer lending revenues was primarily a result of a
$7.8 million, or 34.2%, increase in revenues in Canada resulting from higher
lending volumes and increased finance charges, and an increase of $3.9 million,
or 8.3%, in domestic revenues primarily resulting from a decrease in net credit
losses which are charged against the reserve during the period in which the loss
occurred. The reserve for losses is then replenished through a charge to revenue
in the same period. In addition to the increase in consumer lending revenues,
our check cashing revenues increased by $3.6 million, or 3.5%. Foreign check
cashing revenues accounted for $8.1 million of this increase offset by a $4.5
million decline in domestic check cashing revenues due to an overall decline in
service sector employment. The balance of the increase in total revenues, $2.1
million, relates to other ancillary products, primarily revenues from money
transfer fees.
Store and Regional Expenses. Store and regional expenses were $142.3
million for fiscal 2003, compared to $136.1 million for fiscal 2002, an increase
of $6.2 million, or 4.5%. The effect of the new store openings in fiscal 2003
accounted for an increase of $1.5 million. Also, store and regional expenses
increased $4.0 million due to increased salaries and benefits attributable to
our foreign subsidiaries, commensurate with the growth in those operations.
Total store and regional expenses as a percentage of revenues decreased from
67.4% in fiscal 2002 to 64.9% in fiscal 2003. Store and regional expenses as a
percentage of revenues of our foreign subsidiaries were 55.7% for fiscal 2002
and 52.5% for fiscal 2003.
Salaries and Benefits Expense. Salaries and benefits expense was $69.8
million for fiscal 2003, compared to $65.3 million for fiscal 2002, an
increase of $4.5 million, or 6.9%. New store openings accounted for
$600,000 of the increase. Our foreign subsidiaries accounted for an
increase of $4.0 million in salaries and benefits. Salaries and benefits
expense as a percentage of revenues decreased from 32.3% for fiscal 2002 to
31.8% for fiscal 2003.
Occupancy Expense. Occupancy expense was $18.9 million for fiscal
2003, compared to $18.1 million for fiscal 2002, an increase of $800,000,
or 4.3%. New store openings accounted for $300,000 of the increase.
Occupancy expense as a percentage of revenues decreased from 9.0% for
fiscal 2002 to 8.6% for fiscal 2003.
31
Depreciation Expense. Depreciation expense was $5.9 million for fiscal
2003, compared to $6.5 million for fiscal 2002, a decrease of $600,000, or
10.2%. Depreciation expense as a percentage of revenues decreased from 3.2%
for fiscal 2002 to 2.7% for fiscal 2003.
Other. Other store and regional expenses were $47.8 million for fiscal
2003, compared to $46.2 million for fiscal 2002, an increase of $1.6
million, or 3.3%. New store openings accounted for an increase in other
store and regional expenses of $600,000. The closing of stores during the
fiscal year partially offset these increases. Other store and regional
expenses consist of bank charges, armored carrier services, returned
checks, net and cash shortages, telephone and telecommunication,
advertising and other costs incurred by the stores.
Establishment of Reserves for New Consumer Lending Arrangements. During
fiscal 2002 we ceased servicing loans for Eagle National Bank, entered into a
new servicing arrangement with County Bank and increased the number of
company-funded loans we originated. Because of this change in servicing
arrangement, and the corresponding changes in banking systems, procedures and
daily operations, we believed that the existing outstanding loan portfolio could
experience charge-offs greater than our historical charge-off levels. In
addition, County Bank imposed restrictions on loans marketed in the State of
California that we believed increased the likelihood of loan losses on the
existing portfolio of loans originated in California. Accordingly, we
established a reserve of $2.2 million in fiscal 2002 and no such amounts were
recorded in fiscal 2003 or fiscal 2004.
Corporate Expenses. Corporate expenses were $31.2 million for fiscal 2003,
compared to $24.5 million for fiscal 2002, an increase of $6.7 million, or
27.4%. Salaries and benefits increased $3.7 million associated with the growth
of foreign operations. There was an increase of $1.7 million in professional
fees that includes legal and consulting costs associated with the implementation
of enhanced transaction processing systems and systems development costs
associated with our new banking relationships with First Bank and County Bank.
During the fourth quarter of fiscal 2003, we transferred certain operational
support functions to our Canadian headquarters from our U.S. headquarters to
complete a process of rationalizing our North American corporate office
functions that had begun in October 2002. Corporate expenses as a percentage of
revenues increased from 12.1% for fiscal 2002 to 14.2% for fiscal 2003.
Losses on Store Closings and Sales and Other Restructuring. Losses on store
closings and sales and other restructuring was $4.0 million for fiscal 2003,
compared to $1.4 million for fiscal 2002. For fiscal 2003, we provided $1.6
million for the closure costs associated with the shutdown of 27 stores. These
costs consist primarily of lease obligations and leasehold improvement
write-offs. In addition, we provided $1.7 million, consisting primarily of
severance and retention bonus costs, for the consolidation and relocation of
certain non-operating functions.
Other Depreciation and Amortization. Other depreciation and amortization
expenses were $3.3 million for fiscal 2003, compared to $2.7 million for fiscal
2002, an increase of $600,000, or 22.6%. This increase is attributable to
additional investments in technology and the expansion of our Canadian corporate
office as a result of the relocation of certain operational support functions to
Canada from the U.S. headquarters. Other depreciation and amortization as a
percentage of revenues increased from 1.3% for fiscal 2002 to 1.5% for fiscal
2003.
Interest Expense. Interest expense was $20.2 million for fiscal 2003,
compared to $18.7 million for fiscal 2002, an increase of $1.5 million, or 8.0%.
This increase is attributable to the increase in the average borrowings under
our credit facilities and an increase in interest rates as a result of the
November 2002 amendment of our credit facility and the impact of the higher
effective interest rate on our collateralized borrowing.
Litigation Settlement Costs. We accrued and paid $2.8 million during fiscal
2003 related to the California wage and hour litigation described in "Item 3 -
Legal Proceedings."
Income Tax Provision. The provision for income taxes was $13.5 million in
2003 and $10.2 million in 2002. Our effective income tax rate for 2003 was
86.4%, compared to 62.8% for 2002. Our effective 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 on our prior credit
facility and senior notes by our foreign subsidiaries. Following our refinancing
in November 2003, we no longer accrue U.S. tax on our foreign earnings. The
amount of such tax was $5.2 million for fiscal 2003 and $2.4 million for fiscal
2002.
32
Quarterly Operating Results
The following table sets forth, for the periods indicated, our results of
operations and selected items in our consolidated statements of operations. The
information for each of these quarters is unaudited and has been prepared on the
same basis as our audited financial statements. In the opinion of our
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited consolidated financial
statements.
Three months ended
September 30 December 31 March 31 June 30
----------------- ---------------- ---------------- --------------
Fiscal 2004:
Revenues............................... $ 56,990 $ 60,762 $ 65,626 $ 63,052
Income (loss) before incomes taxes..... 5,430 (725) 11,294 5,502
Net income (loss)...................... 1,142 (1,645) 1,566 3,849
Fiscal 2003:
Revenues............................... $ 52,652 $ 53,290 $ 57,974 $ 55,472
Income (loss) before incomes taxes..... 2,721 (227) 8,375 4,773
Net income (loss)...................... 811 (250) 992 578
Balance Sheet Variations
June 30, 2004 Compared to June 30, 2003.
Total loans receivable increased $7.7 million from $21.4 million at June
30, 2003 to $29.1 million at June 30, 2004. The increase was primarily
attributable to higher foreign loan volumes of $5.4 million, increased domestic
volume of $1.3 million and a currency translation impact of $1.0 million. As a
result of the increase in our installment loan portfolio the allowance for loan
losses increased $1.0 million from $1.3 million at June 30, 2003 to $2.3 million
at June 30, 2004.
Prepaid expenses increased $2.7 million from $6.5 million at June 30, 2003
to $9.2 million at June 30, 2004 due primarily to an increase in our pawn broker
business in the United Kingdom.
Income taxes receivable increased to $3.2 million at June 30, 2004 from
$1.4 million related primarily to the prepayment of taxes by our Canadian
subsidiary.
Goodwill and other intangibles increased $4.8 million from $143.4 million
at June 30, 2003 to $148.2 million at June 30, 2004 primarily due to foreign
currency translation adjustments.
Debt issuance costs increased from $5.2 million at June 30, 2003 to $11.2
million at June 30, 2004 due to the refinancing of our debt in November 2003 and
May 2004.
Accounts payable decreased $2.2 million from $17.2 million at June 30, 2003
to $15.0 million at June 30, 2004 due to the timing of settlements with third
party vendors and our franchisees.
Foreign income taxes payable increased from $1.4 million at June 30, 2003
to $6.0 million at June 30, 2004 due primarily to accrued foreign taxes for the
current fiscal year.
Accrued expenses and other liabilities increased to $16.9 million at June
30, 2004 from $10.5 million at June 30, 2003 due to increased professional fees
associated with legal matters associated with our Canadian subsidiary, incentive
accruals and the timing of monies due our franchisees.
Revolving credit facilities and long-term debt increased $42.3 million from
$199.0 million at June 30, 2003 to $241.3 million at June 30, 2004. On November
13, 2003, we issued $220.0 million principal amount of 9.75% senior notes due
2011 under Rule 144A and Regulation S of the Securities Act of 1933 and entered
into a new $55.0 million senior secured reducing revolving credit facility. The
proceeds from these transactions were used to repay, in full, all borrowings
outstanding under our prior credit facility, redeem the entire $109.2 million
principal amount of our 10.875% senior notes due 2006, redeem the entire $20.0
million principal amount of our 10.875% senior subordinated notes due 2006,
33
dividend $20 million to our parent company to redeem their 13.0% senior discount
notes due 2006, and pay all related fees, expenses and redemption premiums with
respect to these transactions. On May 6, 2004, we consummated an offering of
$20.0 million principal amount of 9.75% senior notes due 2011. The notes were
offered as additional debt securities under the indenture pursuant to which we
had issued $220.0 million of notes in November 2003. The notes issued in
November 2003 and the notes issued in May 2004 constitute a single class of
securities under the indenture. The net proceeds from the May 2004 note offering
were distributed to our parent company to redeem approximately $9.1 million
aggregate principal amount of its 16.0% senior notes due 2012 and approximately
$9.1 million aggregate principal amount of its 13.95% senior subordinated notes
due 2012.
Total shareholder's equity decreased $29.7 million to $38.0 million from
$67.7 million primarily due to our $40.7 million dividend payment to our parent
company offset in part by net income and foreign currency translation.
Liquidity and Capital Resources
On November 13, 2003, we issued $220.0 million principal amount of 9.75%
senior notes due 2011 and entered into a new $55.0 million senior secured
reducing revolving credit facility. The proceeds from these transactions were
used to repay, in full, all borrowings outstanding under our prior credit
facility, redeem the entire $109.2 million principal amount of our 10.875%
senior notes due 2006, redeem the entire $20.0 million principal amount of our
10.875% senior subordinated notes due 2006, redeem $20.0 million of our parent
company's 13.0% senior discount notes due 2006, and pay all related fees,
expenses and redemption premiums with respect to these transactions. On May 6,
2004, we consummated an additional offering of $20.0 million principal amount of
9.75% senior notes due 2011. The notes were offered as additional debt
securities under the indenture pursuant to which we had issued $220.0 million of
notes in November 2003. The notes issued in November 2003 and the notes issued
in May 2004 constitute a single class of securities under the indenture. The net
proceeds from the May 2004 note offering were distributed to our parent company
to redeem approximately $9.1 million aggregate principal amount of its 16.0%
senior notes due 2012 and approximately $9.1 million aggregate principal amount
of its 13.95% senior subordinated notes due 2012.
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, fund company originated short-term consumer loans and finance
store expansion.
Net cash provided by operating activities was $14.5 million in fiscal 2002,
$3.8 million in fiscal 2003 and $20.4 million in fiscal 2004. The decline in net
cash provided by operating activities from fiscal 2002 to fiscal 2003 was
primarily a result of increased working capital requirements related to the
timing of settlements associated with the consumer lending program. Our prior
relationship with Eagle National Bank provided for daily settlement of amounts
owed to us from consumer loan activity; our relationship with County Bank
provides for monthly settlement and our relationship with First Bank provides
for semi-monthly settlements. The increase in net cash provided by operating
activities was primarily the result of improved operating results and the impact
of the timing of settlements from fiscal 2003 to fiscal 2004 related to our loan
servicing arrangements with County Bank and First Bank.
Net cash used in investing activities was $10.1 million in fiscal 2002,
$10.7 million in fiscal 2003 and $8.6 million in fiscal 2004. Our investing
activities primarily relate to purchases of property and equipment for our
stores, investments in technology and acquisitions. During fiscal 2003, $3.3
million of this amount was attributable to earn-out payments on acquisitions
completed during previous years accounting for the decline from fiscal 2003 to
fiscal 2004. For the fiscal year ended June 30, 2004 we made capital
expenditures of $8.2 million. The actual amount of capital expenditures each
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 $10.0 million
during our fiscal year ending June 30, 2005, for remodeling and relocation of
certain existing stores and for opening new stores.
Net cash provided by (used in) financing activities was $9.4 million in
fiscal 2002, $(10.9) million in fiscal 2003 and $(16.5) million in fiscal 2004.
The decline during fiscal 2004 was primarily the result of a decrease in
borrowings under our bank facilities from $61.7 million as of June 30, 2003 to
$0 million as of June 30, 2004 offset somewhat by net cash from the refinancing
activities discussed above. The decline during fiscal 2003 was also the result
of a decrease in borrowings under our revolving credit facilities from $78.9
million as of June 30, 2002 to $61.7 million as of June 30, 2003.
As part of our growth strategy, we opened 14 new stores and acquired 3
stores during the fiscal year ended June 30, 2004, resulting in a net gain of
approximately 14 stores after store dispositions and closings. We expect to open
34
approximately 20 to 30 new stores in fiscal 2005, resulting in a net gain of
approximately 17 to 27 new stores after store dispositions and closings.
The capital cost of opening a new store is typically in the range of
$95,000 to $125,000 but varies depending on the size and type of store. This
capital cost includes leasehold improvements, signage, computer equipment and
security systems. In addition, the typical store requires working capital of
$40,000 to $60,000 to fund operations.
For the fiscal year ended June 30, 2004, we spent $8.2 million on capital
expenditures and $550,000 on store acquisitions.
Revolving Credit Facilities. During fiscal 2004, we had three revolving
credit facilities: a domestic revolving credit facility, a Canadian overdraft
facility and a United Kingdom overdraft facility.
Domestic Revolving Credit Facility. On November 13, 2003, we repaid in
full all borrowings outstanding under our previously existing credit
facility using a portion of the proceeds from the issuance of $220.0
million principal amount of 9.75% senior notes due 2011 and simultaneously
entered into a new $55.0 million senior secured reducing revolving credit
facility. Under the terms of the agreement governing the new facility, the
commitment under the new facility was reduced by $750,000 on January 2,
2004 and will be reduced on the first business day of each calendar quarter
thereafter, and is subject to additional reductions based on excess cash
flow up to a maximum reduction, including quarterly reductions, of $15.0
million. The commitment may be subject to further reductions in the event
we engage in certain issuances of securities or asset disposals. Under the
new facility, up to $20.0 million may be used in connection with letters of
credit. Our borrowing capacity under the new facility is limited to the
total commitment of $55.0 million less letters of credit totaling $13.0
million issued by Wells Fargo Bank, which guarantee the performance of
certain of our contractual obligations. At June 30, 2003 we had $16.7
million cash in excess of our short-term borrowing needs. As a consequence,
at June 30, 2004, the borrowing capacity was $40.5 million and there was
none outstanding.
Canadian Overdraft Facility. Our Canadian operating subsidiary has 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 $10.0 million, of which there was no
outstanding balance on June 30, 2004. Amounts outstanding under the
Canadian overdraft facility bear interest at a rate of Canadian prime and
are secured by a $10.0 million letter of credit issued by Wells Fargo Bank
under our domestic revolving credit facility.
United Kingdom Overdraft Facility. For our U.K. operations, our U.K.
operating subsidiary had an overdraft facility which provided for a
commitment of up to approximately $6.9 million, of which there was no
outstanding balance on June 30, 2004. The United Kingdom overdraft facility
was secured by a $6.0 million letter of credit issued by Wells Fargo Bank
under our domestic revolving credit facility. The United Kingdom overdraft
facility expired on March 31, 2004 and was not renewed.
Long-term Debt. As of June 30, 2004, long-term debt consisted of $240.0
million principal amount of our 9.75% senior notes due November 15, 2011 and
$105,000 of other long-term debt.
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
retained servicing responsibilities and earned servicing fees, which were
subject to reduction if the related loans were not collected. At June 30, 2003,
there were $8.0 million of loans receivable pledged under this agreement. On
June 30, 2004 we terminated this agreement and paid $8.0 million to repurchase
the participation interest, $104,000 of accrued interest and $277,000
representing a prepayment penalty. The entire amount was paid with available
cash on hand and no additional borrowing was required. In connection with the
repurchase of the participation interest, the liens on the loans receivable were
released.
35
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 June 30, 2004, excluding
periodic interest payments, included the following:
Payments Due by Period (in thousands)
---------------------------------------------------------------------------------
Less than 1 1 - 3 4 - 5 After 5
Total Year Years Years Years
------------- ------------- ------------ ------------- -------------
Long-term debt
9.75% senior notes due 2011..... $ 241,176 $ - $ - $ - $ 241,176
Operating leases..................... 61,462 17,143 23,822 13,196 7,301
Other................................ 105 105 - - -
------------- ------------- ------------ ------------- -------------
Total contractual cash obligations... $ 302,743 $ 17,248 $ 23,822 $ 13,196 $ 248,477
============= ============= ============ ============= =============
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.
Impact of Inflation
We do not believe that inflation has a material impact on our earnings from
operations.
Seasonality
Our business is seasonal due to the impact of several tax-related services,
including cashing tax refund checks. 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 of operations 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 the addition of new stores.
Item 7A. 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.
36
Interest Rates
Our outstanding indebtedness, and related interest rate risk, is managed
centrally by our treasury department by implementing the financing strategies
approved by our board of directors. Our debt consists of fixed-rate senior
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
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 June 30, 2004, we held put
options with an aggregate notional value of $(CAN) 44.0 million and (pound)(GBP)
7.7 million to protect the currency exposure in Canada and the United Kingdom
throughout fiscal year 2005. We use purchased options designated as cash flow
hedges to protect against the foreign currency exchange rate risks inherent in
our forecasted earnings denominated in currencies other than the U.S. dollar.
Our cash flow hedges have a duration of less than twelve months. For derivative
instruments that are designated and qualify as cash flow hedges, the effective
portions of the gain or loss on the derivative instrument are initially recorded
in accumulated other comprehensive income as a separate component of
shareholder's equity and subsequently reclassified into earnings in the period
during which the hedged transaction is recognized in earnings. The ineffective
portion of the gain or loss is reported in corporate expenses on the statement
of operations. For options designated as hedges, hedge effectiveness is measured
by comparing the cumulative change in the hedge contract with the cumulative
change in the hedged item, both of which are based on forward rates. As of June
30, 2004 no amounts were excluded from the assessment of hedge effectiveness.
There was no ineffectiveness in our cash flow hedges for the year ended June 30,
2004.
Canadian operations accounted for approximately 127.5% of consolidated
pre-tax earnings for the fiscal year ended June 30, 2004, and 166.6% of
consolidated pre-tax earnings for the fiscal year ended June 30, 2003. U.K.
operations accounted for approximately 55.3% of consolidated pre-tax earnings
for the fiscal year ended June 30, 2004 and approximately 52.9% of consolidated
pre-tax earnings for the fiscal year ended June 30, 2003. 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 $6.1
million. Our U.K. subsidiaries had $8.0 million of collateralized borrowings
denominated in U.S. dollars for all of fiscal 2003 and most of fiscal 2004. The
collateralized borrowings were 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 $3.9 million for fiscal 2004 and $3.4 million for 2003. This
impact represents nearly 18.1% of our consolidated pre-tax earnings for the
fiscal year ended June 30, 2004 and 21.7% of our consolidated pre-tax earnings
for the fiscal year ended June 30, 2003. The above figures do not reflect the
impact of hedging activities designed to mitigate foreign exchange currency
risks.
37
Item 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Dollar Financial Corp.
We have audited the accompanying consolidated balance sheets of Dollar Financial
Group, Inc. as of June 30, 2004 and 2003, and the related consolidated
statements of operations, shareholder's equity, and cash flows for each of the
three years in the period ended June 30, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Dollar Financial
Group, Inc. at June 30, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 2004, in conformity with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
August 27, 2004
38
DOLLAR FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30,
------------------------------------------
2003 2004
------------------- -------------------
Assets
Cash and cash equivalents.............................................. $ 71,805 $ 69,266
Loans receivable
Loans receivable................................................... 13,444 29,116
Loans receivable pledged........................................... 8,000 -
----------------- -------------------
Total loans receivable................................................. 21,444 29,116
Less: Allowance for loan losses....................................... 1,344 2,315
----------------- -------------------
Loans receivable, net.................................................. 20,100 26,801
Other consumer lending receivables..................................... 6,458 7,404
Other receivables...................................................... 4,500 3,787
Income taxes receivable................................................ 1,369 3,170
Prepaid expenses....................................................... 6,358 9,161
Notes and interest receivable--officers................................ 3,468 3,623
Due from parent........................................................ 4,573 8,637
Property and equipment, net of accumulated
depreciation of $39,309 and $49,540................................ 29,209 27,965
Goodwill and other intangibles, net of accumulated
amortization of $22,017 and $23,339................................ 143,416 148,228
Debt issuance costs, net of accumulated
amortization of $7,945 and $967 ................................... 5,200 11,160
Other.................................................................. 1,833 1,832
----------------- -------------------
$ 298,289 $ 321,034
================= ===================
Liabilities and shareholder's equity
Accounts payable....................................................... $ 17,245 $ 14,973
Foreign income taxes payable........................................... 1,380 5,979
Accrued expenses and other liabilities................................. 10,512 16,908
Accrued interest payable............................................... 1,656 3,876
Deferred tax liability................................................. 838 -
Other collateralized borrowings........................................ 8,000 -
Revolving credit facilities............................................ 61,699 -
10-7/8% Senior Notes due 2006.......................................... 109,190 -
9-3/4% Senior Notes due 2011........................................... - 241,176
Subordinated notes payable and other................................... 20,081 105
Shareholder's equity:
Common stock, $1 par value: 20,000 shares authorized;
100 shares issued at June 30, 2003 and 2004..................... - -
Additional paid-in capital......................................... 50,957 21,617
Retained earnings.................................................. 9,034 2,587
Accumulated other comprehensive income............................. 7,697 13,813
----------------- -------------------
Total shareholder's equity............................................. 67,688 38,017
----------------- -------------------
$ 298,289 $ 321,034
================= ===================
See accompanying notes.
39
DOLLAR FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Year ended June 30,
-----------------------------------------------
2002 2003 2004
-----------------------------------------------
Revenues.....................................................
Check cashing............................................ $ 104,792 $ 108,435 $ 117,397
Consumer lending:
Fees from consumer lending............................. 97,712 106,557 120,807
Provision for loan losses and adjustment to
servicing revenue..................................... (27,913) (24,995) (24,489)
-----------------------------------------------
Consumer lending, net.................................... 69,799 81,562 96,318
Money transfer fees...................................... 10,098 11,652 13,052
Other ................................................... 17,287 17,739 19,663
-----------------------------------------------
Total revenues............................................... 201,976 219,388 246,430
Store and regional expenses:
Salaries and benefits.................................... 65,295 69,799 76,008
Occupancy 18,087 18,856 19,805
Depreciation............................................. 6,522 5,859 6,546
Returned checks, net and cash shortages.................. 9,107 8,531 9,132
Telephone and telecommunication.......................... 5,587 5,538 5,665
Advertising.............................................. 4,949 5,899 6,943
Bank charges............................................. 4,240 3,138 3,744
Armored carrier services................................. 2,651 2,873 3,051
Other.................................................... 19,704 21,787 24,786
-----------------------------------------------
Total store and regional expenses............................ 136,142 142,280 155,680
Establishment of reserves for new consumer lending
arrangements............................................. 2,244 - -
Corporate expenses........................................... 24,516 31,241 32,813
Losses on store closings and sales and other restructuring... 1,435 3,987 361
Other depreciation and amortization.......................... 2,709 3,320 3,286
Interest expense, net of interest income of
$254, $173 and $179...................................... 18,694 20,168 25,303
Loss on extinguishment of debt............................... - - 7,486
Litigation settlement costs.................................. - 2,750 -
-----------------------------------------------
Income before income taxes................................... 16,236 15,642 21,501
Income tax provision......................................... 10,199 13,511 16,589
-----------------------------------------------
Net income................................................... $ 6,037 $ 2,131 $ 4,912
===============================================
See accompanying notes.
40
DOLLAR FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(In thousands, except share data)
Accumulated
Additional Other Total
Common Stock Paid-in Retained Comprehensive Shareholder's
-------------------
Shares Amount Capital Earnings (Loss) Income Equity
-----------------------------------------------------------------------------
Balance, June 30, 2001........ 100 $ - $ 50,957 $ 866 $ (9,199) $ 42,624
Comprehensive income
Translation adjustment
for the year ended
June 30, 2002........ 4,854 4,854
Net income for the year
ended June 30, 2002.. 6,037 6,037
---------------
Total comprehensive income.... 10,891
-----------------------------------------------------------------------------
Balance, June 30, 2002........ 100 - 50,957 6,903 (4,345) 53,515
=============================================================================
Comprehensive income
Translation adjustment
for the year ended
June 30, 2003........ 12,042 12,042
Net income for the year
ended June 30, 2003.. 2,131 2,131
---------------
Total comprehensive income.... 14,173
-----------------------------------------------------------------------------
Balance, June 30, 2003........ 100 - 50,957 9,034 7,697 67,688
=============================================================================
Comprehensive income
Translation adjustment
for the year ended
June 30, 2004........ 6,116 6,116
Net income for the year
ended June 30, 2004.. 4,912 4,912
---------------
Total comprehensive income.... 11,028
Dividends paid to parent...... (29,340) (11,359) (40,699)
-----------------------------------------------------------------------------
Balance, June 30, 2004........ 100 $ - $ 21,617 $ 2,587 $ 13,813 $ 38,017
=============================================================================
See accompanying notes.
41
DOLLAR FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended June 30,
------------------------------------------
2002 2003 2004
------------------------------------------
Cash flows from operating activities:
Net income............................................................... $ 6,037 $ 2,131 $ 4,912
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 10,740 10,971 11,570
Loss on extinguishment of debt.................................... - - 7,486
Losses on store closings and sales and other restructuring........ 1,154 3,987 187
Foreign currency gain on revaluation of collateralized borrowings - (398) (838)
Establishment of reserves for new consumer lending arrangements... 1,448 - -
Deferred tax (benefit) provision.................................. (873) 783 (838)
Change in assets and liabilities (net of effect of acquisitions):
Decrease (increase) in loans and other receivables............ 2,285 (9,118) (7,360)
Increase in income taxes receivable........................... (698) (1,626) (1,801)
Decrease (increase) in prepaid expenses and other............. 260 891 (2,387)
(Decrease) increase in accounts payable, income taxes payable,
accrued expenses and accrued interest payable............... (5,900) (3,789) 9,441
------------------------------------------
Net cash provided by operating activities................................ 14,453 3,832 20,372
Cash flows from investing activities:
Acquisitions, net of cash acquired....................................... (45) (3,251) (550)
Gross proceeds from sales of fixed assets................................ - - 81
Additions to property and equipment...................................... (10,063) (7,428) (8,150)
------------------------------------------
Net cash used in investing activities.................................... (10,108) (10,679) (8,619)
Cash flows from financing activities:
Redemption of subordinated notes......................................... - - (20,734)
Redemption of collateralized borrowings.................................. - - (8,277)
Other debt payments...................................................... (64) (3) (72)
Other collateralized borrowings.......................................... - 8,000 -
Issuance of 9-3/4% Senior Notes due 2011................................. - - 241,176
Redemption of 10-7/8% Senior Notes due 2006.............................. - - (111,170)
Net increase (decrease) in revolving credit facilities................... 11,112 (17,237) (61,699)
Payments of debt issuance costs.......................................... (571) (690) (10,929)
Net increase in due from parent.......................................... (1,068) (967) (4,064)
Dividend paid to parent.................................................. - - (40,699)
------------------------------------------
Net cash provided by (used in) financing activities...................... 9,409 (10,897) (16,468)
Effect of exchange rate changes on cash and cash equivalents............. 427 2,916 2,176
------------------------------------------
Net increase (decrease) in cash and cash equivalents..................... 14,181 (14,828) (2,539)
Cash and cash equivalents at beginning of year........................... 72,452 86,633 71,805
------------------------------------------
Cash and cash equivalents at end of year................................. $ 86,633 $ 71,805 $ 69,266
==========================================
Supplemental disclosures of cash flow information
Interest paid............................................................ $ 17,472 $ 18,432 $ 21,485
Income taxes paid........................................................ $ 16,035 $ 14,548 $ 13,858
See accompanying notes.
42
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
1. Organization and Business
The accompanying consolidated financial statements are those of Dollar Financial
Group, Inc. (the "Company") and its wholly-owned subsidiaries. The Company is a
wholly-owned subsidiary of Dollar Financial Corp. ("Corp."). The activities of
Corp. consist primarily of its investment in the Company. Dollar Financial Corp.
has no employees or operating activities.
The Company, through its subsidiaries, provides retail financial services
through a network of 1,110 locations (of which 638 are Company-operated)
operating as Money Mart, The Money Shop, Loan Mart and Insta-Cheques in sixteen
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 Express(R) services
and originates short-term consumer loans through 458 independent document
transmitter locations in 15 states.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles 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.
Reclassification
Certain prior year amounts have been reclassified to conform to current year
presentation.
Revenue recognition
With respect to company-operated stores, revenues from the Company's check
cashing, money order sales, money transfer and bill payment services and other
miscellaneous services reported in other revenues on its statement of operations
are all recognized when the transactions are completed at the point-of-sale in
the store.
With respect to the Company's franchised locations, it recognizes initial
franchise fees upon fulfillment of all significant obligations to the
franchisee. Royalty payments from its franchisees are recognized as earned.
For short term consumer loans that the Company makes directly, which have terms
ranging from 1 to 37 days, revenue is recognized using the interest method. Loan
origination fees are recognized as an adjustment to the yield on the related
loan.
In addition to the short-term consumer loans originated and funded by the
Company, the Company also has relationships with two banks, County Bank of
Rehoboth Beach, Delaware and First Bank of Delaware. Pursuant to these
relationships, the Company markets and services short-term consumer loans, which
have terms ranging from 7 to 23 days, that are funded by the banks. The banks
are responsible for the application review process and determining whether to
approve an application and fund a loan. As a result, the banks' loans are not
reflected on the Company's balance sheet. The Company earns a marketing and
servicing fee for each loan that is paid by borrowers to the banks.
43
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
For loans funded by County Bank, the Company recognizes net servicing fee income
ratably over the life of the related loan. In addition, each month County Bank
withholds certain servicing fees payable to the Company in order to maintain a
cash reserve. The amount of the reserve is equal to a fixed percentage of
outstanding loans at the beginning of the month plus a percentage of the finance
charges collected during the month. Each month, net credit losses are applied
against County Bank's cash reserve. Any excess reserve is then remitted to the
Company as a collection bonus. The remainder of the finance charges not applied
to the reserve are either used to pay costs incurred by County Bank related to
the short term loan program, retained by the bank as interest on the loan or
distributed to the Company as a servicing fee.
For loans funded by First Bank of Delaware, the Company recognizes net servicing
fee income ratably over the life of the related loan. In addition, the bank has
established a target loss rate for the loans marketed and serviced by the
Company. Servicing fees payable to the Company are reduced if actual losses
exceed this target loss rate by the amount they exceed it. If actual losses are
below the target loss rate, the difference is paid to the Company as a servicing
fee. The measurement of the actual loss rate and settlement of servicing fees
occurs twice every month.
Because the Company's servicing fees are reduced by loan losses incurred by the
banks, the Company has established a reserve for servicing fee adjustments. To
estimate the appropriate reserve for servicing fee adjustments, the Company
considers the amount of outstanding loans owed to the banks, historical loans
charged off, current collections patterns and current economic trends. The
reserve is then based on net write-offs, expressed as a percentage of loans
originated on behalf of the banks applied against the total amount of the banks'
outstanding loans. This reserve is reported in accrued expenses and other
liabilities on the Company's balance sheet and was $1,093 at June 30, 2003 and
$1,380 at June 30, 2004.
If one of the banks suffers a loss on a loan, the Company immediately records a
charge-off against the reserve for servicing fee adjustments for the entire
amount of the unpaid item. A recovery is credited to the reserve during the
period in which the recovery is made. Each month, the Company replenishes the
reserve in an amount equal to the net losses charged to the reserve in that
month. This replenishment, as well as any additional provisions to the reserve
for servicing fees adjustments as a result of the calculations set forth above,
is charged against revenues.
Cash and Cash Equivalents
Cash includes cash in stores and demand deposits with financial institutions.
Cash equivalents are defined as short-term, highly liquid investments both
readily convertible to known amounts of cash and so near maturity that there is
insignificant risk of changes in value because of changes in interest rates.
Loans Receivable, Net
Unsecured short-term and longer-term installment loans that the Company
originates on its own behalf are reflected on the balance sheet in loans
receivable, net. Loans receivable, net are reported net of a reserve related to
consumer lending as described below in the company funded consumer loan loss
reserves policy.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is computed using either the straight-line or double declining
balance method over the estimated useful lives of the assets, which vary from
three to five years.
44
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
Intangible Assets
Under the provisions of SFAS 142, "Goodwill and Other Intangible Assets"
intangible assets, including goodwill, that are not subject to amortization will
be tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired, using a two-step
impairment assessment. The first step of the goodwill impairment test, used to
identify potential impairment, compares the fair value of a reporting unit with
its carrying amount, including goodwill. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired, and the second step of the impairment test is not necessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss if any (see Note 10). The Company has completed the required impairment
tests and determined that goodwill was not impaired.
Debt Issuance Costs
Debt issuance costs are amortized using the effective yield method over the
remaining term of the related debt (see Note 5).
Store and Regional Expenses
The direct costs incurred in operating the Company's stores have been classified
as store expenses. Store expenses include salaries and benefits of store and
regional employees, rent and other occupancy costs, depreciation of property and
equipment, bank charges, armored carrier services, returned checks, net and cash
shortages, advertising, telephone and telecommunication and other costs incurred
by the stores. Excluded from store operations are the corporate expenses of the
Company, which include salaries and benefits of corporate employees,
professional fees and travel costs.
Company Funded Consumer Loan Loss Reserves Policy
The Company maintains a loan loss reserve for anticipated losses for loans the
Company makes directly through some of its company-operated locations. To
estimate the appropriate level of loan loss reserves, the Company considers the
amount of outstanding loans owed to the Company, historical loans charged off,
current collection patterns and current economic trends. The Company's current
loan loss reserve is based on its net charge-offs, expressed as a percentage of
loans originated for the last twelve months applied against the total amount of
outstanding loans that it makes directly. As these conditions change, the
Company may need to make additional provisions in future periods.
When a loan is originated, the customer receives the cash proceeds in exchange
for a post-dated check or a written authorization to initiate a charge to the
customer's bank account on the stated maturity date of the loan. If the check or
the debit to the customer's account is returned from the bank unpaid, The
Company immediately records a charge-off against the consumer loan loss reserve
for the entire amount of the unpaid item. A recovery is credited to the reserve
during the period in which the recovery is made. Each month, the Company
replenishes the reserve in an amount equal to the net losses charged to the
reserve in that month. This replenishment, as well as any additional provisions
to the loan loss reserve as a result of the calculations in the preceding
paragraph, is charged against revenues.
Check Cashing Returned Item Policy
The Company charges 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 is made. This
direct method for recording returned check losses and recoveries eliminates the
need for an allowance for returned checks. The net expense for bad checks
included in returned checks, net and cash shortages in the accompanying
consolidated statements of operations was $7,062,000, $6,738,000 and $7,662,000
for the years ended June 30, 2002, 2003 and 2004, respectively.
45
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
Income Taxes
The Company uses the liability method to account for income taxes. Accordingly,
deferred income taxes have been determined by applying current tax rates to
temporary differences between the amount of assets and liabilities determined
for income tax and financial reporting purposes.
The Company intends to reinvest its foreign earnings and as a result the
Company has not provided a deferred tax liability on foreign earnings.
Employees' Retirement Plan
Retirement benefits are provided to substantially all full-time employees who
have completed 1,000 hours of service through a defined contribution retirement
plan. The Company will match 50% of each employee's contribution, up to 8% of
the employee's compensation. In addition, a discretionary contribution may be
made if the Company meets its financial objectives. The amount of contributions
charged to expense was $614,000, $775,000 and $720,000 for the years ended June
30, 2002, 2003 and 2004, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs charged to
expense were $5,844,000, $6,922,000 and $7,406,000 for the years ended June 30,
2002, 2003 and 2004, respectively.
Fair Value of Financial Instruments
The carrying values of the revolving credit facilities approximate fair values,
as these obligations carry a variable interest rate. The fair value of the
Company's Senior Notes is based on quoted market prices (see Note 5). The
Company's other financial instruments consist of cash and cash equivalents, loan
and other consumer lending receivables, which are short-term in nature and their
fair value approximates their carrying value.
Operations in the United Kingdom and Canada have exposed us 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 June 30, 2004, the Company
held put options with an aggregate notional value of $(CAN) 44.0 million and
(pound)(GBP) 7.7 million to protect the currency exposure in Canada and the
United Kingdom throughout fiscal year 2005. The Company uses purchased options
designated as cash flow hedges to protect against the foreign currency exchange
rate risks inherent in its forecasted earnings denominated in currencies other
than the U.S. dollar. The Company's cash flow hedges have a duration of less
than twelve months. For derivative instruments that are designated and qualify
as cash flow hedges, the effective portions of the gain or loss on the
derivative instrument are initially recorded in accumulated other comprehensive
income as a separate component of shareholder's equity and subsequently
reclassified into earnings in the period during which the hedged transaction is
recognized in earnings. The ineffective portion of the gain or loss is reported
in corporate expenses on the statement of operations. For options designated as
hedges, hedge effectiveness is measured by comparing the cumulative change in
the hedge contract with the cumulative change in the hedged item, both of which
are based on forward rates. As of June 30, 2004 no amounts were excluded from
the assessment of hedge effectiveness. There was no ineffectiveness in the
Company's cash flow hedges for the year ended June 30, 2004. The fair market
value at June 30, 2004 was $561,000 and is included in other assets on the
balance sheet.
46
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Significant Accounting Policies (continued)
Foreign Currency Translation and Transactions
The Company operates check cashing and financial services outlets in Canada and
the United Kingdom. The financial statements of these foreign businesses have
been translated into U.S. dollars in accordance with U.S. generally accepted
accounting principles. All balance sheet accounts are translated at the current
exchange rate and income statement items are translated at the average exchange
rate for the period; resulting translation adjustments are made directly to a
separate component of shareholder's equity. Gains or losses resulting from
foreign currency transactions are included in corporate expenses.
Franchise Fees and Royalties
The Company recognizes initial franchise fees upon fulfillment of all
significant obligations to the franchisee. Royalties from franchisees are
accrued as earned. The standard franchise agreements grant to the franchisee the
right to develop and operate a store and use the associated trade names,
trademarks, and service marks within the standards and guidelines established by
the Company. As part of the franchise agreement, the Company provides certain
pre-opening assistance including site selection and evaluation, design plans,
operating manuals, software and training. After the franchised location has
opened, the Company must also provide updates to the software, samples of
certain advertising and promotional materials and other post-opening assistance
that the Company determines is necessary. Initial franchise fees included in
revenues were $59,000, $283,000 and $389,000 for the years ended June 30, 2002,
2003 and 2004, respectively. Total franchise revenues were $5.2 million, $6.3
million and $7.5 million for the years ended June 30, 2002, 2003 and 2004,
respectively.
3. Stock Option Plan
Corp.'s Stock Incentive Plan (the "Plan") states that 1,413.32 shares of Corp.'s
common stock may be awarded to employees or consultants of the Company. The
awards, at the discretion of Corp.'s Board of Directors, may be issued as
nonqualified stock options or incentive stock options. Stock appreciation rights
("SAR") may also be granted in tandem with the nonqualified stock options or the
incentive stock options. Exercise of the SARs cancels the option for an equal
number of shares and exercise of the nonqualified stock options or incentive
stock options cancels the SARs for an equal number of shares. The number of
shares issued under the Plan is subject to adjustment as specified in the Plan
provisions. No options may be granted after February 15, 2009. The options are
exercisable in 20% increments annually on the first, second, third, fourth and
fifth anniversary of the grant date and have a term of ten years from the date
of issuance.
During the year ended June 30, 2004, 544 nonqualified stock options were granted
under the Plan at an exercise price of $5,600, the estimated fair market value
of the common stock on the date of grant. The options are exercisable in 20%
increments annually on the first, second, third, fourth and fifth anniversary of
the grant date and have a term of ten years from the date of issuance.
47
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Stock Option Plan (continued)
The following table presents information on stock options:
Shares Price Per Share
Options outstanding at June 30, 2001
(416.83 shares exercisable) ................................ 1,152 $3,225/$7,250
Granted ............................................... - -
Exercised ............................................. - -
Forfeited ............................................. (46) $3,225/$7,250
---------------
Options outstanding at June 30, 2002
(652.03 shares exercisable) ................................ 1,106 $3,225/$7,250
Granted ............................................... - -
Exercised ............................................. - -
Forfeited ............................................. (134) $3,225/$7,250
---------------
Options outstanding at June 30, 2003
(784.03 shares exercisable) ................................ 972 $3,225/$7,250
Granted................................................ 544 $5,600
Exercised.............................................. - -
Forfeited.............................................. (108) $3,225/$7,250
---------------
Options outstanding at June 30, 2004
(840 shares exercisable).................................... 1,408 $3,225/$5,600/$7,250
===============
The following table presents information on stock options by exercise price:
Options Outstanding Options Exercisable
------------------------------------------------- -------------------------
Number Weighted Average Number
Exercise Outstanding at Remaining Contractual Exercisable at
Price June 30, 2004 Life (Years) June 30, 2004
------------------ -------------------- ------------------------- -------------------------
$ 3,225 804 4.6 804
$ 5,600 544 9.5 -
$ 7,250 60 6.4 36
-------------------- ------------------------- -------------------------
1,408 6.6 840
==================== ========================= =========================
4. Property and Equipment
Property and equipment at June 30, 2003 and 2004 consist of (in thousands):
June 30,
---------------------------------------
2003 2004
------------------ -----------------
Land $ 157 $ 172
Leasehold improvements................................ 20,871 24,982
Equipment and furniture............................... 47,490 52,351
------------------ -----------------
68,518 77,505
Less accumulated depreciation......................... 39,309 49,540
------------------ -----------------
Total property and equipment.......................... $ 29,209 $ 27,965
================== =================
Depreciation expense amounted to $8,835,000, $9,006,000 and $9,738,000 for
the years ended June 30, 2002, 2003 and 2004, respectively.
48
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Debt
The Company has debt obligations at June 30, 2003 and 2004 as follows (in
thousands):
June 30,
---------------------------
2003 2004
---------------------------
Revolving credit facility; interest at one-day Eurodollar, as defined, plus
4.00% at June 30, 2003 of the outstanding daily balances payable monthly;
weighted average interest rate of 5.36% for the year ended June 30, 2003
(facility terminated November 2003, see refinancing discussion)........... $ 60,764 $ -
United Kingdom overdraft facility; interest at the bank base rate, as
defined, plus 1.00% at June 30, 2003 4.75% of the outstanding daily
balances payable quarterly; weighted average interest rate of 4.90% for
the year ended June 30, 2003............................................. 935 -
9.75% Senior Notes due November 15, 2011; interest payable semi-annually on
May 15 and November 15 .................................................. - 241,176
Other collateralized borrowings; interest rate of 15.6% subject to loss
rates on the related UK loans pledged.................................... 8,000 -
10.875% Senior Notes due November 15, 2006; interest payable semiannually
on May 15 and November 15................................................ 109,190 -
10.875% Senior Subordinated Notes due December 31, 2006; interest payable
semiannually on June 30 and December 30.................................. 20,000 -
Other....................................................................... 81 105
---------------------------
$ 198,970 $ 241,281
===========================
Prior to November 13, 2003, the Company had $109.2 million of 10.875% Senior
Notes due 2006 (the "Old Senior Notes"), which were registered under the
Securities Act of 1933, as amended. The payment obligations under the Old Senior
Notes were jointly and severally guaranteed, on a full and unconditional basis,
by each of the Company's existing subsidiaries (the "Guarantors"). There were no
restrictions on the Company's and the guarantor subsidiaries' ability to obtain
funds from their subsidiaries by dividend or by loan. Also, the Company had $20
million aggregate principal amount of its 10.875% Senior Subordinated Notes due
2006 (the "Old Senior Subordinated Notes") outstanding.
On November 13, 2003, the Company issued $220.0 million principal amount of
9.75% Senior Notes due 2011 under Rule 144A and Regulation S of the Securities
Act of 1933 and entered into a new $55.0 million Senior Secured Reducing
Revolving Credit Facility ("New Credit Facility"). The proceeds from these
transactions were used to repay, in full, all borrowings outstanding under the
Company's existing credit facility, redeem the entire $109.2 million principal
amount of the Old Senior Notes, redeem the entire $20.0 million principal amount
of the Old Senior Subordinated Notes, distribute to Corp. $20.0 million to
redeem an equal amount of its 13.0% Senior Discount Notes due 2006, and pay all
related fees, expenses and redemption premiums with respect to these
transactions.
On May 6, 2004, the Company consummated an offering of $20.0 million principal
amount of 9.75% Senior Notes due 2011. The notes were offered as additional debt
securities under the indenture pursuant to which the Company had issued $220.0
million of notes in November 2003 (the "New Notes Indenture"). The notes issued
in November 2003 and the notes issued in May 2004 constitute a single class of
securities under the New Notes Indenture. The net proceeds from the May 2004
note offering were distributed to Corp. to redeem approximately $9.1 million
aggregate principal amount of its 16.0% Senior Notes due 2012 and approximately
$9.1 million aggregate principal amount of its 13.95% Senior Subordinated Notes
due 2012.
The 9.75% Senior Notes are redeemable, in whole or in part, at the Company's
option, at any time on or after November 15, 2007. If redeemed during the twelve
month period commencing November 15 of the years indicated below, the 9.75%
49
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Debt (continued)
Senior Notes will be redeemable at the following redemption prices, expressed as
percentages of the principal amount, plus accrued and unpaid interest and
liquidated damages, if any, to the date of redemption:
Year Percentage
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.875%
2008 . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . 102.438%
2009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 100.000%
Prior to November 15, 2006, the Company may redeem up to 35% of the aggregate
principal amount of the 9.75% Senior Notes with the net proceeds of certain
equity issuances at a redemption price equal to 109.75% of the principal amount
thereof, plus accrued an unpaid interest and liquidated damages, if any, to the
date of redemption.
The New Credit Facility consists of a $55.0 million senior secured reducing
revolving credit facility. The commitment under the New Credit Facility was
reduced by $750,000 on January 2, 2004 and on the first business day of each
calendar quarter thereafter, and is subject to additional reductions based on
excess cash flow up to a maximum reduction, including quarterly reductions, of
$15.0 million. The commitment may be subject to further reductions in the event
the Company engages in certain issuances of securities or asset disposals. Under
the New Credit Facility, up to $20.0 million may be used in connection with
letters of credit. Amounts outstanding under the New Credit Facility bear
interest at either (i) the higher of (a) the federal funds rate plus 0.50% per
annum or (b) the rate publicly announced by Wells Fargo, San Francisco, as its
"prime rate," plus 3.25% at June 30, 2004, (ii) the LIBOR Rate (as defined
therein) plus 4.50% at June 30, 2004, or (iii) the one day Eurodollar Rate (as
defined therein) plus 4.50% at June 30, 2004, determined at the Company's
option. At June 30, 2004, the borrowing capacity was $40.5 million and there was
none outstanding.
The New Notes Indenture and the New Credit Facility contain certain financial
and other restrictive covenants, which, among other things, require the company
to achieve certain financial ratios, limit capital expenditures, restrict
payment of dividends and require certain approvals in the event the Company
wants to increase the borrowings. At June 30, 2004, the Company is in compliance
with all covenants.
The Company has established a Canadian dollar overdraft credit facility to fund
peak working capital needs for its Canadian operations. The overdraft credit
facility, which has no stated maturity date, provides for a commitment of up to
approximately $10.0 million none of which was outstanding at June 30, 2003 and
2004. Amounts outstanding under the facility bear interest at Canadian prime and
are secured by $10.0 million letter of credit issued by Wells Fargo Bank under
the Revolving Credit Facility.
During fiscal 2004, the Company's United Kingdom operations also had a British
pound overdraft facility that bore interest at 1.00% for the year ended June 30,
2003 over the LIBOR Rate and which provided for a commitment of approximately
$6.2 million. The overdraft facility was secured by a $6.0 million letter of
credit issued by Wells Fargo Bank under the Revolving Credit Facility. This
overdraft facility expired on March 31, 2004.
The total fair market value of the Old Senior Notes and the Old Senior
Subordinated Notes at June 30, 2003 was approximately $122.7 million based on
quoted market prices.
The total fair market value of the Company's 9.75% Senior Notes due 2011 at June
30, 2004 was approximately $250.8 million.
Interest of $17,472,000, $18,432,000 and $21,485,000 was paid for the years
ended June 30, 2002, 2003 and 2004, respectively.
50
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Income Taxes
The provision for income taxes for the years ended June 30, 2002, 2003 and 2004
consists of the following (in thousands):
Year ended June 30,
---------------------------------------------------
2002 2003 2004
---------------------------------------------------
Federal:
Current......................... $ 1,136 $ (603) $ 2,196
Deferred........................ (872) 705 (968)
--------------------------------------------------
264 102 1,228
Foreign taxes:
Current......................... 9,550 13,088 15,232
Deferred........................ (74) - -
--------------------------------------------------
9,476 13,088 15,232
State:
Current......................... 386 243 -
Deferred........................ 73 78 129
--------------------------------------------------
459 321 129
--------------------------------------------------
$ 10,199 $ 13,511 $ 16,589
==================================================
The significant components of the Company's deferred tax assets and liabilities
at June 30, 2003 and 2004 are as follows (in thousands):
June 30,
-----------------------------------
2003 2004
------------------------------------
Deferred tax assets:
Loss reserves....................................... $ 834 $ 1,219
Foreign withholding taxes........................... 21 6
Depreciation........................................ 2,547 2,051
Accrued compensation................................ 573 1,130
Reserve for store closings.......................... 560 215
Foreign tax credits................................. 230 -
Other accrued expenses.............................. 405 268
Other............................................... 14 85
----------------------------------
Gross deferred tax assets.............................. 5,184 4,974
Valuation allowance.................................... - (3,946)
Deferred tax liabilities:
Amortization and other temporary differences........ 6,022 1,028
-----------------------------------
Net deferred tax liability............................. $ (838) $ -
===================================
51
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Income Taxes (continued)
A reconciliation of the provision for income taxes with amounts determined by
applying the federal statutory tax rate to income (loss) before income taxes is
as follows (in thousands):
Year ended June 30,
------------------------------------------
2002 2003 2004
------------------------------------------
Tax provision at federal statutory rate............... $ 5,682 $ 5,475 $ 7,523
Add (deduct):
State tax provision, net of federal tax benefit... 299 199 -
Foreign taxes..................................... 1,673 2,419 1,122
US tax on foreign earnings........................ 2,370 5,162 2,349
Canadian restructuring............................ - - 5,143
Other permanent differences....................... 175 256 452
------------------------------------------
Tax provision at effective tax rate................... $ 10,199 $ 13,511 $ 16,589
==========================================
The Company and its subsidiaries file a consolidated federal income tax return
with Corp. but the Company calculates its provision and prepares its income tax
note as if it were on a stand-alone basis.
After the refinancing of the Company's debt, the Company elected not to include
Canadian income in taxable income for US tax return filing purposes. As a result
of this election the Company provided a $3.9 million valuation allowance and
reversed any related deferred taxes. Because realization is not assured, the
Company has not recorded the benefit of the deferred tax asset.
Foreign, federal and state income taxes of approximately $16,035,000,
$14,548,000 and $13,858,000 were paid during the years ended June 30, 2002, 2003
and 2004, respectively.
52
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Losses on Store Closings and Sales and Other Restructuring
For the fiscal year ended June 30, 2003, the Company closed 27 underperforming
stores and consolidated and relocated certain non-operating functions to reduce
costs and increase efficiencies. Costs incurred with the restructuring are
comprised of severance and other retention benefits to employees who were
involuntarily terminated and store closure costs related to the locations the
Company will no longer utilize. During the fiscal year ended June 30, 2003, the
Company recorded costs for severance and other retention benefits of $1.7
million and store closure costs of $1.6 million consisting primarily of lease
obligations and leasehold improvement write-offs. These charges were expensed
within "Losses on store closings and sales and other restructuring" on the
Consolidated Statements of Operations. The restructuring was completed by the
fiscal year end. 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.
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, 2002................ $ - $ - $ -
Charge recorded in earnings............. 1.7 1.6 3.3
Amounts paid............................ (0.5) (0.8) (1.3)
Non-cash charges........................ - (0.6) (0.6)
--------------------------------------------------------
Balance at June 30, 2003................ 1.2 0.2 1.4
Reclassification ....................... (0.7) 0.7 -
Amounts paid............................ (0.5) (0.5) (1.0)
--------------------------------------------------------
Balance at June 30, 2004................ $ - $ 0.4 $ 0.4
========================================================
The Company also expenses costs related to the closure of stores in the normal
course of its business. Costs directly expensed for the years ended June 30,
2002, 2003 and 2004 were $1,435,000, $722,000 and $361,000, respectively.
8. Loss on Extinguishment of Debt
On November 13, 2003, the Company issued $220.0 million principal amount of
9.75% senior notes due 2011. The proceeds from this offering were used to redeem
all of the Company's outstanding 10.875% senior notes and the Company's
outstanding 10.875% senior subordinated notes, to refinance the Company's credit
facility, to distribute a portion of the proceeds to Corp. to redeem an equal
amount of Corp.'s senior discount notes and to pay fees and expenses with
respect to these transactions and a related note exchange transaction involving
Corp.'s senior discount notes. On June 30, 2004, the Company terminated an
agreement under which it sold a participation interest in a portion of the
short-term consumer loans originated by it in the United Kingdom to a third
party. Associated with the termination of this agreement the Company paid
$276,660 representing a prepayment penalty.
The loss incurred on the extinguishment of debt is as follows (in
millions):
Call Premium
10.875% Senior Notes.................................................... $1.98
10.875% Senior Subordinated Notes....................................... 0.73
Write-off of previously capitalized deferred issuance costs, net............. 4.50
Prepayment penalty on the extinguishment of collateralized borrowings........ 0.28
----------
Loss on extinguishment of debt............................................... $7.49
==========
53
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Commitments
The Company occupies office and retail space and uses certain equipment under
operating lease agreements. Rent expense amounted to $15,265,000, $16,067,000
and $16,881,000 for the years ended June 30, 2002, 2003 and 2004, respectively.
Most leases contain standard renewal clauses.
Minimum obligations under noncancelable operating leases for the year ended June
30 are as follows (in thousands):
Year Amount
---------------
2005............................. $ 17,143
2006............................. 13,458
2007............................. 10,364
2008............................. 7,640
2009............................. 5,556
Thereafter....................... 7,301
---------------
$ 61,462
===============
54
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Goodwill and Other Intangibles
In accordance with the provisions of SFAS No. 142, the Company is required to
perform goodwill impairment tests on at least an annual basis. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings. During fiscal 2003 the Company paid $2.0 million in additional
consideration based upon a future results of operations earn-out agreement
related to one of its United Kingdom acquisitions. This amount has been included
as goodwill on the Consolidated Balance Sheet. 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 years ended June 30, 2004,
2003 and 2002 was $95,000, $173,000 and $225,000, respectively. The estimated
aggregate amortization expense for each of the five succeeding fiscal years
ending June 30, is:
Fiscal year ending June 30, Amount
----------------------------------------------------------------------
(in thousands)
2005................................................. $ 19.2
The following table reflects the components of intangible assets (in thousands):
June 30, 2003 June 30, 2004
--------------------------------- -----------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
--------------------------------- -----------------------------------
Non-amortized intangible assets:
Cost in excess of net assets acquired $ 162,987 $ 19,686 $ 169,115 $ 20,906
Amortized intangible assets:
Covenants not to compete 2,446 2,331 2,452 2,433
The changes in the carrying amount of goodwill and other intangibles by
reportable segment for the fiscal years ended June 30, 2003 and 2004 are as
follows:
United United
States Canada Kingdom Total
------------------------------------------------------------
Balance at June 30, 2002 $ 56,544 $ 33,986 $ 41,734 $ 132,264
Amortization of other intangibles........... (173) - - (173)
Acquisitions................................ - - 3,251 3,251
Foreign currency translation adjustments.... - 4,103 3,428 7,531
Reclassification(1)......................... 238 305 - 543
------------------------------------------------------------
Balance at June 30, 2003 56,609 38,394 48,413 143,416
Amortization of other intangibles........... (95) - - (95)
Acquisition................................. - - 550 550
Foreign currency translation adjustments.... - 427 3,714 4,141
Reclassification(1)......................... - - 216 216
------------------------------------------------------------
Balance at June 30, 2004 $ 56,514 $ 38,821 $ 52,893 $ 148,228
============================================================
(1) Items represent brokers fees and other professional fees initially recorded
to accounts receivable when paid as part of the original post-acquisition
closing adjustments. The reclassification was made when it was determined
that payment for these items had been the responsibility of the purchaser.
55
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. Contingent Liabilities
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 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 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 our
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. Approximately 92% of these settlement
offers have been accepted. Plaintiff's' counsel is presently disputing through
arbitration the validity of the settlements accepted by the individual putative
class members. The Company believes that is 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 is 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 court's decision
denying that motion is presently on appeal. 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 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. On November 6, 2003, the Company learned of substantially similar
claims asserted on behalf of a purported class of Alberta borrowers by Gareth
Young, a former customer of its Canadian subsidiary. The Young action is pending
in the Court of Queens Bench of Alberta and seeks an unspecified amount of
damages and other relief. On December 23, 2003, the Company was served with the
statement of claim in an action brought in the Ontario Superior Court of Justice
by another former customer, Margaret Smith. A similar action was also filed in
the Court of Queen's Bench of Manitoba on April 26, 2004 by Nicole Blasko. The
allegations and putative class in the Smith and Blasko actions are substantially
the same as those in the Mortillaro action. Like the plaintiff in the MacKinnon
action referred to above, Mortillaro, Young, Smith and Blasko have agreed to
arbitrate all disputes with the Company. The Company believes that it has
meritorious procedural and substantive defenses to the claims of each of these
plaintiffs, and intends to defend the claims vigorously. The Company believes
the outcome of such litigation will not significantly affect its 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 Company's opinion, the outcome of such litigation and
proceedings will not significantly affect its financial results.
56
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Credit Risk
At June 30, 2003 and 2004, the Company had 19 and 11, respectively, bank
accounts in major U.S. financial institutions in the aggregate amount of
$10,873,000 and $4,640,000, respectively, which exceeded Federal Deposit
Insurance Corporation deposit protection limits. The Canadian Federal Banking
system provides customers with similar deposit insurance through the Canadian
Deposit Insurance Corporation ("CDIC"). At June 30, 2003 and 2004, the Company's
Canadian subsidiary had 13 bank accounts totaling $15,039,000 and $1,274,666,
respectively, which exceeded CDIC limits. At June 30, 2003 and 2004 the
Company's United Kingdom operations had 30 and 32 bank accounts, respectively,
totaling $6,085,000 and $11,698,000. These financial institutions have strong
credit ratings, and management believes credit risk relating to these deposits
is minimal.
Since June 13, 2002, the Company has acted as a servicer for County Bank of
Rehoboth Beach, Delaware and since October 18, 2002, for First Bank of Delaware.
On behalf of these banks, the Company markets unsecured short-term loans to
customers with established bank accounts and verifiable sources of income. Loans
are made for amounts up to $700, with terms of 7 to 23 days. Under these
programs, the Company earns servicing fees, which may be reduced if the related
loans are not collected. The Company maintains a reserve for estimated
reductions. In addition, the Company maintains a reserve for anticipated losses
for loans it makes directly. In order to estimate the appropriate level of these
reserves, the Company considers the amount of outstanding loans owed to them, as
well as loans owed to banks and serviced by them, the historical loans
charged-off, current collection patterns and current economic trends. As these
conditions change, additional provisions might be required in future periods.
During fiscal 2004, County Bank originated or extended approximately $136.2
million of loans through their locations and document transmitters. First Bank
originated or extended approximately $249.1 million of loans through the Company
during this period. County Bank originated or extended approximately $277.9
million of loans through the Company during fiscal 2003 and First Bank
originated or extended approximately $92.5 million of loans through the Company
for the same period.
The Company also originates unsecured short-term loans to customers on its own
behalf in Canada, the United Kingdom and certain U.S. markets. In the United
States, these loans are made for amounts up to $500, with terms of 7 to 37 days.
The Company bears the entire risk of loss related to these loans. In Canada,
loans are issued to qualified borrowers based on a percentage of the borrowers'
income with terms of 1 to 35 days. The Company issues loans in the United
Kingdom for up to (pound)600, with a term of 28 days. The Company originated or
extended approximately $491 million and $429 million of the loans through the
Company's locations and document transmitters during fiscal years ended June 30,
2004 and 2003, respectively. In addition, beginning in fiscal 2003 the Company
acted as a direct lender originating 1,402 longer-term installment loans with an
average principal amount of $793 and a weighted average term of approximately
365 days. In fiscal 2004, the Company originated 4,675 longer-term installment
loans with an average principal amount of $845 and a weighted average term of
approximately 365 days. The Company originated or extended installment loans
through its locations in the United Kingdom of approximately $1.1 million in
fiscal 2003 and $3.9 million in fiscal 2004 and introduced this product in
certain U.S. and Canadian markets late in fiscal 2004. On November 15, 2002, the
Company entered into an agreement with a third party to sell, without recourse,
subject to certain obligations, a participation interest in a portion of
short-term consumer loans originated by the Company in the United Kingdom. The
transfer of assets was treated as a financing under FAS 140 and is included in
Other Collateralized Borrowings on the balance sheet. The Agreement gave the
third party a first priority lien, charge, and security interest in the assets
pledged. The Agreement provided for collateralized borrowings up to $10.0
million against which $8.0 million of the loans receivable had been pledged at
June 30, 2003. Under the Agreement, the third party retained the right to reduce
the amount of borrowings to no less than $4.0 million. The Company paid an
annual interest rate of 15.6% on the amount borrowed, which was subject to loss
rates on the related loans. On June 30, 2004 the Company terminated the
agreement and paid $8.0 million to repurchase the participation interest,
$104,000 of accrued interest and $276,660 representing a prepayment penalty. In
connection with the repurchase of the participation interest, the liens on the
loans receivable were released.
57
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Credit Risk (continued)
The Company had approximately $29.1 million and $21.4 million of loans on its
balance sheet at June 30, 2004 and 2003, respectively, which is reflected in
loans receivable. Loans receivable, net at June 30, 2004 and 2003 are reported
net of a reserve of $2.3 million and $1.3 million, respectively, related to
consumer lending. Net charge-offs for the Company originated loans, which are
charged against the allowance for loan losses for the fiscal years ended June
30, 2004, 2003 and 2002 were $9.0 million, $10.4 million and $5.6 million,
respectively. For the years ended June 30, 2004, 2003 and 2002, total consumer
lending revenue, net earned by the Company was $96.3 million, $81.6 million and
$69.8 million, respectively.
Activity in the allowance for loan losses during the fiscal years ended 2002,
2003 and 2004 was as follows (in thousands):
Year ended June 30,
--------------------------------------------------
Allowance for Loan Losses 2002 2003 2004
--------------------------------------------------
(in thousands)
Balance at beginning of year........................ $ 228 $ 1,694 $ 1,344
Provision charged to expense........................ 1,448 - -
Provision charged to loan revenues.................. 5,554 9,967 9,928
Foreign currency translation........................ 18 75 15
Charge-offs......................................... (5,554) (10,392) (8,972)
--------------------------------------------------
Balance at end of year.............................. $ 1,694 $ 1,344 $ 2,315
==================================================
58
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. 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
2002 States Canada Kingdom Total
------------------------------------------------------------
Identifiable assets............................ $ 141,981 $ 82,860 $ 67,639 $ 292,480
Goodwill and other intangibles, net............ 56,544 33,986 41,734 132,264
Sales to unaffiliated customers:
Check cashing.............................. 53,597 30,344 20,851 104,792
Consumer lending:
Fees from consumer lending.............. 70,669 16,280 10,763 97,712
Provision for loan losses and adjustment
to servicing revenue................. (23,622) (2,919) (1,372) (27,913)
------------------------------------------------------------
Consumer lending, net...................... 47,047 13,361 9,391 69,799
Money transfers............................ 4,613 4,363 1,122 10,098
Other...................................... 7,677 7,401 2,209 17,287
------------------------------------------------------------
Total sales to unaffiliated customers.......... 112,934 55,469 33,573 201,976
Establishment of reserves for new consumer
lending arrangements....................... 2,244 - - 2,244
Interest revenue............................... 168 83 3 254
Interest expense............................... 13,808 2,552 2,588 18,948
Depreciation and amortization.................. 5,330 1,874 2,027 9,231
(Loss) income before income taxes.............. (6,537) 17,672 5,101 16,236
Losses on store closings and sales and
other restructuring........................ 281 - - 281
Income tax provision .......................... 353 8,105 1,741 10,199
2003
Identifiable assets............................ 131,819 89,365 77,105 298,289
Goodwill and other intangibles, net............ 56,609 38,394 48,413 143,416
Sales to unaffiliated customers:
Check cashing.............................. 49,147 33,301 25,987 108,435
Consumer lending:
Fees from consumer lending.............. 70,340 22,492 13,725 106,557
Provision for loan losses and adjustment
to servicing revenue................. (19,368) (3,247) (2,380) (24,995)
------------------------------------------------------------
Consumer lending, net...................... 50,972 19,245 11,345 81,562
Money transfers............................ 4,675 5,143 1,834 11,652
Other...................................... 5,678 9,334 2,727 17,739
------------------------------------------------------------
Total sales to unaffiliated customers.......... 110,472 67,023 41,893 219,388
Interest revenue............................... 155 18 - 173
Interest expense............................... 17,770 (899) 3,470 20,341
Depreciation and amortization.................. 5,377 1,837 1,965 9,179
Losses on store closings and sales and other
other restructuring........................ 3,987 - - 3,987
Litigation settlement costs.................... 2,750 - - 2,750
(Loss) income before income taxes ............. (18,688) 26,058 8,272 15,642
Income tax provision (benefit)................. (1,262) 12,069 2,704 13,511
59
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. Geographic Segment Information (continued)
United United
States Canada Kingdom Total
------------------------------------------------------
2004
Identifiable assets............................ $ 137,158 $ 88,513 $ 95,363 $ 321,034
Goodwill and other intangibles, net............ 56,514 38,821 52,893 148,228
Sales to unaffiliated customers:
Check cashing.............................. 47,716 38,483 31,198 117,397
Consumer lending:
Fees from consumer lending................. 71,577 31,479 17,751 120,807
Provision for loan losses and adjustment
to servicing revenue..................... (17,504) (3,001) (3,984) (24,489)
------------------------------------------------------
Consumer lending, net...................... 54,073 28,478 13,767 96,318
Money transfers............................ 4,525 5,795 2,732 13,052
Other...................................... 3,546 12,033 4,084 19,663
------------------------------------------------------
Total sales to unaffiliated customers.......... 109,860 84,789 51,781 246,430
Interest revenue............................... 160 19 - 179
Interest expense............................... 18,587 2,511 4,384 25,482
Depreciation and amortization.................. 5,220 2,476 2,136 9,832
Losses on store closings and sales and
other restructuring........................ 324 16 21 361
restructuring
Loss on extinguishment of debt................. 7,209 - 277 7,486
(Loss) income before income taxes.............. (17,801) 27,418 11,884 21,501
Income tax provision .......................... 3,534 10,111 2,944 16,589
14. Related Party Transactions
During fiscal 1999, certain members of management received loans aggregating
$2.9 million, of which $200,000 was repaid during the fiscal year ended June 30,
2001, which are secured by shares of the Corp.'s stock. All but of one of the
loans accrue interest at a rate of 6% per year and are due and payable in full
on December 18, 2004 and April 1, 2005. In addition, as part of an employment
agreement, the Chief Executive Officer was issued a loan in the amount of $4.3
million to purchase additional shares of Corp.'s stock. The loan accrues
interest at a rate of 6% per year and is due and payable in full on December 18,
2004. The loan is secured by a pledge of a portion of his shares of Corp.'s
stock.
During the fiscal year ended June 30, 2004, the Company paid Corp. dividends in
the amount of $40.7 million.
The Company maintains an account on its balance sheet that reflects the amounts
due from Corp. The balance of this account, entitled "Due from Parent", consists
of payments made by the Company on behalf of Corp. which include tax payments,
management fees and fees related to Corp.'s November 13, 2003 refinancing.
15. Subsidiary Guarantor Financial Information
The Company's payment obligations under its 9.75% Senior Notes due 2011 are
jointly and severally guaranteed (such guarantees, the "Guarantees") on a full
and unconditional basis by Corp. and by the Company's existing and future
domestic subsidiaries (the "Guarantors"). Guarantees of the notes by Guarantors
directly owning, now or in the future, capital stock of foreign subsidiaries
will be secured by second priority liens on 65% of the capital stock of such
foreign subsidiaries. In the event the Company directly owns a foreign
subsidiary in the future, the notes will be secured by a second priority lien on
65% of the capital stock of any such foreign subsidiary (such capital stock of
foreign subsidiaries referenced in this paragraph collectively, the
"Collateral"). The non-guarantors consist of the Company's foreign subsidiaries
("Non-guarantors").
60
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Subsidiary Guarantor Financial Information (continued)
The Guarantees of the notes:
o rank equal in right of payment with all existing and future
unsubordinated indebtedness of the Guarantors;
o rank senior in right of payment to all existing and future
subordinated indebtedness of the Guarantors; and
o are effectively junior to any indebtedness of the Company, including
indebtedness under the Company's senior secured reducing revolving
credit facility, that is either (1) secured by a lien on the
Collateral that is senior or prior to the second priority liens
securing the Guarantees of the notes or (2) secured by assets that are
not part of the Collateral to the extent of the value of the assets
securing such indebtedness.
Separate financial statements of each Guarantor that is a subsidiary of the
Company have not been presented because they are not required by securities laws
and management has determined that they would not be material to investors. The
accompanying tables set forth the condensed consolidating balance sheets at June
30, 2004 and 2003 and the condensed consolidating statements of operations and
cash flows for the twelve months ended June 30, 2004 2003 and 2001of the
Company, the combined Guarantor subsidiaries, the combined Non-Guarantor
subsidiaries and the consolidated Company.
61
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidating Balance Sheets
June 30, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------------
Assets
Cash and cash equivalents........................ $ 4,942 $ 22,182 $ 42,142 $ - $ 69,266
Loans receivable ................................ - 4,838 24,278 - 29,116
Less: Allowance for loan losses.................. - 694 1,621 - 2,315
----------------------------------------------------------------------------------
Loans receivable, net............................ - 4,144 22,657 - 26,801
Other consumer lending receivables............... 7,274 130 - - 7,404
Other receivables................................ 887 824 2,360 (284) 3,787
Income taxes receivable.......................... 37,903 - 6,117 (40,850) 3,170
Prepaid expenses................................. 1,041 731 7,389 - 9,161
Deferred income taxes............................ - - - - -
Notes and interest receivable--officers.......... 3,623 - - - 3,623
Due from affiliates.............................. - 117,472 - (117,472) -
Due from parent.................................. 8,637 - - - 8,637
Property and equipment, net...................... 4,702 6,255 17,008 - 27,965
Goodwill and other intangibles, net.............. - 56,514 91,714 - 148,228
Debt issuance costs, net......................... 11,160 - - - 11,160
Investment in subsidiaries....................... 259,437 9,801 6,705 (275,943) -
Other............................................ 29 422 1,381 - 1,832
----------------------------------------------------------------------------------
$ 339,635 $ 218,475 $ 197,473 $ (434,549) $ 321,034
==================================================================================
Liabilities and shareholder's equity
Accounts payable................................. $ 408 $ 6,058 $ 8,507 $ - $ 14,973
Income taxes payable............................. - 40,850 - (40,850) -
Foreign income taxes payable..................... - - 5,979 - 5,979
Accrued expenses and other liabilities........... 3,286 3,772 9,850 - 16,908
Accrued interest payable......................... 2,974 - 1,186 (284) 3,876
Deferred tax liability........................... - - - - -
Due to affiliates................................ 53,681 - 63,791 (117,472) -
Other collateralized borrowings.................. - - - - -
Revolving credit facilities...................... - - - - -
10 7/8% Senior Notes due 2006.................... - - - -
9 3/4% Senior Notes due 2011..................... 241,176 - - - 241,176
Subordinated notes payable and other............. 93 - 12 - 105
----------------------------------------------------------------------------------
301,618 50,680 89,325 (158,606) 283,017
Shareholder's equity:
Common stock.................................. - - - - -
Additional paid-in capital.................... 21,617 83,309 27,304 (110,613) 21,617
Retained earnings ............................ 2,587 79,409 71,767 (151,176) 2,587
Accumulated other comprehensive income........ 13,813 5,077 9,077 (14,154) 13,813
----------------------------------------------------------------------------------
Total shareholder's equity....................... 38,017 167,795 108,148 (275,943) 38,017
----------------------------------------------------------------------------------
$ 339,635 $ 218,475 $ 197,473 $ (434,549) $ 321,034
==================================================================================
62
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Operations
Year ended June 30, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------
Revenues:
Check cashing............................. $ - $ 47,717 $ 69,680 $ - $ 117,397
Consumer lending, net:
Fees from consumer lending.............. - 71,577 49,230 - 120,807
Provision for loan losses and adjustment
to servicing revenue.................. - (17,505) (6,984) - (24,489)
-------------------------------------------------------------------------------
Consumer lending, net..................... - 54,072 42,246 - 96,318
Money transfer fees....................... - 4,525 8,527 - 13,052
Other .................................... - 3,546 16,117 - 19,663
-------------------------------------------------------------------------------
Total revenues............................... - 109,860 136,570 - 246,430
Store and regional expenses:
Salaries and benefits...................... - 41,510 34,498 - 76,008
Occupancy.................................. - 10,988 8,817 - 19,805
Depreciation............................... - 3,458 3,088 - 6,546
Returned checks, net and cash shortages.... - 4,275 4,857 - 9,132
Telephone and communication................ - 3,756 1,909 - 5,665
Advertising................................ - 3,778 3,165 - 6,943
Bank charges............................... - 2,140 1,604 - 3,744
Armored carrier services................... - 1,381 1,670 - 3,051
Other...................................... - 12,739 12,047 - 24,786
-------------------------------------------------------------------------------
Total store and regional expenses............. - 84,025 71,655 - 155,680
Corporate expenses............................ 16,625 (2) 16,190 - 32,813
Management fees............................... (709) - 709 - -
Losses on store closings and sales and other
restructuring.............................. 296 29 36 - 361
Other depreciation and amortization........... 1,723 39 1,524 - 3,286
Interest expense (income)..................... 20,311 (1,883) 6,875 - 25,303
Loss on extinguishment of debt................ 7,209 - 277 - 7,486
-------------------------------------------------------------------------------
(Loss) income before income taxes ............ (45,455) 27,652 39,304 - 21,501
Income tax (benefit) provision ............... (17,279) 20,814 13,054 - 16,589
-------------------------------------------------------------------------------
(Loss) income before equity in net income
of subsidiaries........................... (28,176) 6,838 26,250 - 4,912
Equity in net income of subsidiaries
Domestic subsidiary guarantors............ 6,838 - - (6,838) -
Foreign subsidiary non-guarantors......... 26,250 - - (26,250) -
-------------------------------------------------------------------------------
Net income .................................. $ 4,912 $ 6,838 $ 26,250 $ (33,088) $ 4,912
===============================================================================
63
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Cash Flows
Year ended June 30, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------
Cash flows from operating activities:
Net income........................................... $ 4,912 $ 6,838 $ 26,250 $ (33,088) $ 4,912
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Undistributed income of subsidiaries............ (33,088) - - 33,088 -
Depreciation and amortization................... 3,272 3,502 4,796 - 11,570
Loss on extinguishment of debt.................. 7,209 - 277 - 7,486
Losses on store closings and sales.............. 120 30 37 - 187
Foreign currency gain on revaluation of
collateralized borrowings..................... - - (838) - (838)
Deferred tax provision.......................... 1,064 (1,902) - - (838)
Changes in assets and liabilities (net
of effect of acquisitions):
Decrease (increase) in loans
and other receivables .................... 977 (1,942) (6,355) (40) (7,360)
Increase in income taxes receivable......... (18,486) - (5,836) 22,521 (1,801)
(Increase) decrease in prepaid expenses
and other................................. (205) 557 (2,739) - (2,387)
Increase in accounts payable, income taxes
payable, accrued expenses and accrued
interest payable.......................... 736 21,792 9,394 (22,481) 9,441
----------------------------------------------------------------------------
Net cash (used in) provided by operating activities.. (33,489) 28,875 24,986 - 20,372
Cash flows from investing activities:
Acquisitions, net of cash acquired................... - - (550) - (550)
Gross proceeds from sale of fixed assets............. - - 81 - 81
Additions to property and equipment.................. (481) (1,490) (6,179) - (8,150)
Net increase in due from affiliates.................. - (31,416) - 31,416 -
----------------------------------------------------------------------------
Net cash used in investing activities................ (481) (32,906) (6,648) 31,416 (8,619)
Cash flows from financing activities:
Redemption of subordinated notes..................... (20,734) - - - (20,734)
Redemption of collateralized borrowings.............. - - (8,277) - (8,277)
Other debt borrowings (payments)..................... 93 - (165) - (72)
Issuance of 9 3/4% Senior Notes due 2011............. 241,176 - - - 241,176
Redemption of 10 7/8% Senior Notes due 2006.......... (111,170) - - - (111,170)
Net decrease in revolving credit facilities.......... (60,764) - (935) - (61,699)
Payment of debt issuance costs....................... (10,929) - - - (10,929)
Net increase in due from parent...................... (4,064) - - - (4,064)
Net increase (decrease) in due to affiliates......... 38,022 - (6,606) (31,416) -
Dividend paid to parent.............................. (40,699) - - - (40,699)
----------------------------------------------------------------------------
Net cash provided by (used in) financing activities.. 30,931 - (15,983) (31,416) (16,468)
Effect of exchange rate changes on cash
and cash equivalents.............................. - - 2,176 - 2,176
----------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents. (3,039) (4,031) 4,531 - (2,539)
Cash and cash equivalents at beginning of year....... 7,981 26,213 37,611 - 71,805
----------------------------------------------------------------------------
Cash and cash equivalents at end of year............. $ 4,942 $ 22,182 $ 42,142 $ - $ 69,266
============================================================================
64
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Balance Sheets
June 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------
Assets
Cash and cash equivalents............................ $ 7,981 $ 26,213 $ 37,611 $ - $ 71,805
Loans receivable:
Loans receivable.................................. - 3,508 9,936 - 13,444
Loans receivable pledged.......................... - - 8,000 - 8,000
------------------------------------------------------------------------------
Total loans receivable............................... - 3,508 17,936 - 21,444
Less: Allowance for loan losses..................... - 860 484 - 1,344
------------------------------------------------------------------------------
Loans receivable, net................................ - 2,648 17,452 - 20,100
Other consumer lending receivables................... 6,253 205 - - 6,458
Other receivables.................................... 3,042 303 1,479 (324) 4,500
Income taxes receivable.............................. 19,417 - 281 (18,329) 1,369
Prepaid expenses..................................... 804 1,111 4,443 - 6,358
Deferred income taxes................................ 1,064 - - (1,064) -
Notes and interest receivable--officers.............. 3,466 - 2 - 3,468
Due from affiliates.................................. - 82,786 - (82,786) -
Due from parent...................................... 4,573 - - - 4,573
Property and equipment, net.......................... 5,884 8,260 15,065 - 29,209
Goodwill and other intangibles, net.................. 58 56,551 86,807 - 143,416
Debt issuance costs, net............................. 4,990 - 210 - 5,200
Investment in subsidiaries........................... 220,950 9,801 6,705 (237,456) -
Other................................................ 58 599 1,176 - 1,833
------------------------------------------------------------------------------
$ 278,540 $ 188,477 $ 171,231 $ (339,959) $ 298,289
==============================================================================
Liabilities and shareholder's equity
Accounts payable..................................... $ 148 $ 7,225 $ 9,872 $ - $ 17,245
Income taxes payable................................. - 18,329 - (18,329) -
Foreign income taxes payable......................... - - 1,380 - 1,380
Accrued expenses..................................... 2,886 3,254 4,372 - 10,512
Accrued interest payable............................. 1,491 57 432 (324) 1,656
Deferred tax liability............................... - 1,902 - (1,064) 838
Due to affiliates.................................... 16,373 - 66,413 (82,786) -
Revolving credit facilities.......................... 60,764 - 935 - 61,699
10 7/8% Senior Notes due 2006........................ 109,190 - - - 109,190
Other collateralized borrowings...................... - - 8,000 - 8,000
Subordinated notes payable and other................. 20,000 - 81 - 20,081
------------------------------------------------------------------------------
210,852 30,767 91,485 (102,503) 230,601
Shareholder's equity:
Common stock...................................... - - - - -
Additional paid-in capital........................ 50,957 88,380 27,304 (115,684) 50,957
Retained earnings ................................ 9,034 68,059 45,520 (113,579) 9,034
Accumulated other comprehensive income 7,697 1,271 6,922 (8,193) 7,697
------------------------------------------------------------------------------
Total shareholder's equity........................... 67,688 157,710 79,746 (237,456) 67,688
------------------------------------------------------------------------------
$ 278,540 $ 188,477 $ 171,231 $ (339,959) $ 298,289
==============================================================================
65
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Operations
Year ended June 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------
Revenues...................................... $ - $ 110,472 $ 108,916 $ - $ 219,388
Store and regional expenses:
Salaries and benefits...................... - 41,520 28,279 - 69,799
Occupancy.................................. - 11,130 7,726 - 18,856
Depreciation............................... - 3,255 2,604 - 5,859
Other...................................... - 29,198 18,568 - 47,766
------------------------------------------------------------------------------
Total store and regional expenses............. - 85,103 57,177 - 142,280
Corporate expenses............................ 19,036 23 12,182 - 31,241
Management fee................................ (9,159) 7,779 1,380 - -
Losses on store closings and sales and other
restructuring.............................. 3,485 407 95 - 3,987
Other depreciation and amortization........... 2,062 60 1,198 - 3,320
Interest expense, net......................... 16,648 966 2,554 - 20,168
Litigation settlement costs................... - 2,750 - - 2,750
------------------------------------------------------------------------------
(Loss) income before income taxes ............ (32,072) 13,384 34,330 - 15,642
Income tax (benefit) provision ............... (11,100) 9,838 14,773 - 13,511
------------------------------------------------------------------------------
(Loss) income before equity in net
Income of subsidiaries..................... (20,972) 3,546 19,557 - 2,131
Equity in net income of subsidiaries:
Domestic subsidiary guarantors............. 3,546 - - (3,546) -
Foreign subsidiary guarantors.............. 19,557 - - (19,557) -
------------------------------------------------------------------------------
Net income .................................. $ 2,131 $ 3,546 $ 19,557 $ (23,103)$ 2,131
==============================================================================
66
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Cash Flows
Year ended June 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 2,131 $ 3,546 $ 19,557 $ (23,103) $ 2,131
Adjustments to reconcile net income
to net cash (used in) provided by
operating activities:
Undistributed income of subsidiaries............ (23,103) - - 23,103 -
Depreciation and amortization................... 3,853 3,316 3,802 - 10,971
Losses on store closings and sales.............. 3,485 407 95 - 3,987
Foreign currency gain on revaluation of
collateralized borrowings..................... - - (398) - (398)
Deferred tax provision.......................... 102 681 - - 783
Changes in assets and liabilities (net
of effect of acquisitions):
(Increase) decrease in loans
and other receivables .................... (7,106) 6,060 (3,823) (4,249) (9,118)
(Increase) decrease in income taxes
receivable............................. (10,961) 1 (281) 9,615 (1,626)
Decrease (increase) in prepaid expenses
and other................................. 96 800 (5) - 891
(Decrease) increase in accounts payable,
income taxes payable, accrued expenses
and other liabilities and accrued interest
payable................................... (5,469) 10,798 (3,752) (5,366) (3,789)
----------------------------------------------------------------------------
Net cash (used in) provided by operating
activities........................................ (36,972) 25,609 15,195 - 3,832
Cash flows from investing activities:
Acquisitions, net of cash acquired................... - - (3,251) - (3,251)
Additions to property and equipment.................. (874) (1,074) (5,480) - (7,428)
Net increase in due from affiliates.................. - (39,727) - 39,727 -
----------------------------------------------------------------------------
Net cash used in investing activities................ (874) (40,801) (8,731) 39,727 (10,679)
Cash flows from financing activities:
Other debt payments.................................. - - (3) - (3)
Other collateralized borrowings...................... - - 8,000 - 8,000
Net decrease in revolving credit facilities.......... (7,836) - (9,401) - (17,237)
Payment of debt issuance costs....................... (490) - (200) - (690)
Net increase in due from parent...................... (967) - - - (967)
Net increase (decrease) in due to affiliates......... 53,374 - (13,647) (39,727) -
----------------------------------------------------------------------------
Net cash provided by (used in) financing activities.. 44,081 - (15,251) (39,727) (10,897)
Effect of exchange rate changes on cash
and cash equivalents.............................. - - 2,916 - 2,916
----------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents. 6,235 (15,192) (5,871) - (14,828)
Cash and cash equivalents at beginning of year....... 1,746 41,405 43,482 - 86,633
----------------------------------------------------------------------------
Cash and cash equivalents at end of year............. $ 7,981 $ 26,213 $ 37,611 $ - $ 71,805
============================================================================
67
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Operations
Year ended June 30, 2002
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
Revenues...................................... $ - $ 112,934 $ 89,042 $ - $ 201,976
Store expenses:
Salaries and benefits...................... - 40,985 24,310 - 65,295
Occupancy.................................. - 11,540 6,547 - 18,087
Depreciation............................... - 3,431 3,091 - 6,522
Other...................................... - 30,549 15,689 - 46,238
---------------------------------------------------------------------------
Total store expenses.......................... - 86,505 49,637 - 136,142
Establishment of reserves for new consumer
lending arrangements....................... - 2,244 - - 2,244
Corporate expenses............................ 15,952 226 8,338 - 24,516
Management fee................................ (12,226) 9,855 2,371 - -
Losses on store closings and sales........... 406 970 59 - 1,435
Other depreciation and amortization........... 1,601 298 810 - 2,709
Interest expense (income)..................... 16,167 (2,527) 5,054 - 18,694
---------------------------------------------------------------------------
(Loss) income before income taxes............. (21,900) 15,363 22,773 - 16,236
Income tax (benefit) provision................ (7,846) 8,199 9,846 - 10,199
---------------------------------------------------------------------------
(Loss) income before equity in net
income of subsidiaries..................... (14,054) 7,164 12,927 - 6,037
Equity in net income of subsidiaries:
Domestic subsidiary guarantors............. 7,164 - - (7,164) -
Foreign subsidiary guarantors.............. 12,927 - - (12,927) -
---------------------------------------------------------------------------
Net income .................................. $ 6,037 $ 7,164 $ 12,927 $ (20,091)$ 6,037
===========================================================================
68
DOLLAR FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. Consolidating Financial Statements (continued)
Consolidating Statements of Cash Flows
Year ended June 30, 2002
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 6,037 $ 7,164 $ 12,927 $ (20,091) $ 6,037
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed income of subsidiaries................. (20,091) - - 20,091 -
Depreciation and amortization........................ 3,111 3,727 3,902 - 10,740
Losess on store closings and sales .................. 125 970 59 - 1,154
Establishment of reserves of new consumer
lending arrangements............................... - 1,448 - - 1,448
Deferred tax provision (benefit)..................... 413 (1,286) - - (873)
Changes in assets and liabilities (net of effect
of acquisitions):
Decrease (increase) in loans and other
receivables.................................... 5,356 2,790 (1,146) (4,715) 2,285
Increase in income taxes receivable.............. (698) - - - (698)
Decrease in prepaid expenses and other........... 87 108 65 - 260
(Increase) decrease in accounts payable, income
taxes payable, accrued expenses and
other liabilities and accrued interest payable 1,251 (5,656) (6,210) 4,715 (5,900)
------------------------------------------------------------------------
Net cash (used in) provided by operating activities....... (4,409) 9,265 9,597 - 14,453
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ - (59) 14 - (45)
Additions to property and equipment....................... (3,203) (2,499) (4,361) - (10,063)
Net decrease (increase) in due from affiliates............ 3,248 (1,650) - (1,598) -
------------------------------------------------------------------------
Net cash provided by (used in) investing activities....... 45 (4,208) (4,347) (1,598) (10,108)
Cash flows from financing activities:
Other debt payments....................................... - - (64) - (64)
Net increase in revolving credit facilities............... 6,300 - 4,812 - 11,112
Payment of debt issuance costs............................ (571) - - - (571)
Net increase in due from parent........................... (1,068) - - - (1,068)
Net increase in due to affiliates......................... - - (1,598) 1,598 -
------------------------------------------------------------------------
Net cash provided by financing activities................. 4,661 - 3,150 1,598 9,409
Effect of exchange rate changes on cash and
cash equivalents....................................... - - 427 - 427
------------------------------------------------------------------------
Net increase in cash and cash equivalents................. 297 5,057 8,827 - 14,181
Cash and cash equivalents at beginning of year............ 1,449 36,348 34,655 - 72,452
------------------------------------------------------------------------
Cash and cash equivalents at end of year.................. $ 1,746 $ 41,405 $ 43,482 $ - $ 86,633
========================================================================
69
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls 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 June 30, 2004, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. OTHER INFORMATION
N/A.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Officers
Our directors and officers and their respective ages and positions are set
forth below:
Name Age Position with Dollar Financial Group, Inc.
- ---- --- ------------------------------------------
Jeffrey Weiss ..................... 61 Chairman of the Board of Directors and Chief Executive Officer
Donald Gayhardt.................... 40 President and Director
Randall Underwood ................. 54 Executive Vice President and Chief Financial Officer
Sydney Franchuk ................... 52 Senior Vice President and President--Canadian Operations
Cameron Hetherington............... 39 Senior Vice President--International Operations
Gillian Wilmot .................... 43 Senior Vice President and President--U.K. Operations
Peter Sokolowski .................. 43 Vice President, Chief Credit Officer
Cyril Means........................ 37 Vice President, General Counsel
Melissa Soper...................... 38 Vice President, Human Resources
William Athas ..................... 42 Vice President, Finance
70
The directors and officers of our parent company, Dollar Financial Corp.,
and their respective ages and positions are set forth below:
Name Age Position with Dollar Financial Group, Inc.
- ---- --- ------------------------------------------
Jeffrey Weiss ..................... 61 Chairman of the Board of Directors and Chief Executive
Officer
Donald Gayhardt.................... 40 President and Director
Randall Underwood ................. 54 Executive Vice President and Chief Financial Officer
Sydney Franchuk ................... 52 Senior Vice President and President--Canadian
Operations
Cameron Hetherington............... 39 Senior Vice President--International Operations
Gillian Wilmot .................... 43 Senior Vice President and President--U.K. Operations
Peter Sokolowski .................. 43 Vice President, Chief Credit Officer
Cyril Means........................ 37 Vice President, General Counsel
Melissa Soper...................... 38 Vice President, Human Resources
William Athas ..................... 42 Vice President, Finance
Michael Koester.................... 32 Director
Muneer Satter...................... 43 Director
Jonathan Seiffer................... 32 Director
Jonathan Sokoloff.................. 47 Director
Michael Solomon.................... 29 Director
Jeffrey Weiss has served as our Chairman and Chief Executive Officer since
an affiliate of Bear Stearns & Co. Inc. acquired us in May 1990. Until June
1992, Mr. Weiss was also a Managing Director at Bear Stearns with primary
responsibility for the firm's investments in small to mid-sized companies, in
addition to serving as Chairman and Chief Executive Officer for several of these
companies. Mr. Weiss is the author of several popular financial guides.
Donald Gayhardt has served as our President since December 1998. Mr.
Gayhardt also served as our Chief Financial Officer from April 2001 to June
2004. He served as our Executive Vice President and Chief Financial Officer from
1993 to 1997. In addition, he joined our board as a director in 1990. Prior to
joining us, Mr. Gayhardt was employed by Bear Stearns from 1988 to 1993, most
recently as an Associate Director in the Principal Activities Group, where he
had oversight responsibility for the financial and accounting functions at a
number of manufacturing, distribution and retailing firms, including our
company. Prior to joining Bear Stearns, Mr. Gayhardt held positions in the
mergers and acquisitions advisory and accounting fields.
Randall Underwood joined us as our Executive Vice President and Chief
Financial Officer in June 2004. Previously, Mr. Underwood served for three years
as Senior Vice President, Global Finance and Administration and Chief Financial
Officer for The Coleman Company, Inc. Prior to his tenure at The Coleman
Company, Mr. Underwood held senior executive positions with Strategic
Development Partners, Inc. from 1999 through 2000 and Thorn Americas, Inc. from
1988 through 1998. Earlier in his career, he practiced as a Certified Public
Accountant with the firm of Peat, Marwick, Mitchell and Co.
Sydney Franchuk, our Senior Vice President and President--Canadian
Operations, has served as President of our Canadian operations since November
1997. Previously, Mr. Franchuk held the position of Vice President of Finance
and Administration for National Money Mart Co. and Check Mart, an affiliated
company in the United States. Prior to joining us in 1985, Mr. Franchuk was a
public accountant with Woods & Company and Ernst & Young LLP Chartered
Accountants and is a Certified Management Accountant.
Cameron Hetherington became our Senior Vice President--International
Operations in May 2004. He served as our Senior Vice President and President--UK
Operations, as well as Managing Director of Dollar Financial UK Limited from
March 1999 to May 2004. From July 1993 to September 1998, Mr. Hetherington was
employed at our Canadian operations in a variety of senior management positions,
including National Operations Manager. From June 1983 to November 1992, Mr.
Hetherington served as a commissioned officer within the Australian Defence
Force in a variety of operational, training and administrative roles both
domestically and overseas.
71
Gillian Wilmot joined us as our Senior Vice President and President--U.K.
Operations in May 2004. Prior to joining us, Ms. Wilmot worked as a strategic
consultant beginning in January 2003. She was Managing Director for the Mail
Markets Division of the Royal Mail from January 2001 through January 2003 and
the Brand and Strategy Director for Littlewoods PLC from April 1999 through
November 2000. Additionally, Ms. Wilmot is currently a director of Blackwells
Retail and a member of the U.K. Committee of Advertising Practice.
Peter Sokolowski has served as our Vice President--Chief Credit Officer
since October 2002 and has overall responsibility for the oversight of
underwriting, analysis and performance monitoring for our credit products. He
also served as our Vice President--Finance from 1991 to 2002. Prior to joining
us, Mr. Sokolowski worked in various financial positions in the commercial
banking industry.
Cyril Means has served as our Vice President and General Counsel since May
1999. Prior to joining us, Mr. Means served as Vice President and Corporate
Counsel to The Aegis Consumer Funding Group, Inc. from 1995 to 1997, and as
Executive Vice President and General Counsel of Aegis from 1997 to 1999, where
he was primarily responsible for the company's securitization facility and
credit lines. Prior to joining Aegis, Mr. Means held in-house legal positions in
the insurance, commercial real estate and entertainment fields.
Melissa Soper has served as our Vice President--Human Resources since
October 1996 and has overall responsibility for our human resources compliance
to state and federal labor laws. Prior to joining us, Ms. Soper served as a
Director of Human Resources for a national hotel chain.
William Athas, our Vice President--Finance, had formerly served as our
Director of Finance since January 2000, and has since had overall responsibility
for accounting oversight. Prior to joining us, he was the divisional controller
of Timet, a titanium metals company, from December 1998 to January 2000. Mr.
Athas worked at Asarco, Inc., a non-ferrous metals company, from August 1987 to
December 1998, where he became the assistant corporate controller in 1997. He
attained his CPA certification in 1989.
Michael Koester has served as a director since November 2003. He has been a
vice president of Goldman Sachs & Co.'s Principal Investment Area since December
2002. From August 1999 to December 2002, he was an associate of Goldman Sachs.
Muneer Satter has served as a director since December 1998. He is a
Managing Director in Goldman Sachs' Principal Investment Area in New York. Prior
to this assignment, he was head of Goldman Sachs' Principal Investment Area in
Europe and was based in London. He joined the firm in 1988 and became a managing
director in 1996. He also serves on the boards of directors of Atkins
Nutritional, Inc., Diveo Broadband Networks and Grupo Clarin S.A.
Jonathan Seiffer has served as a director since October 2001. He has been a
partner of Leonard Green & Partners, L.P. since January 1999 and joined Leonard
Green & Partners, L.P. as an associate in October 1994. Prior to his arrival at
Leonard Green & Partners, Mr. Seiffer was a member of the corporate finance
department of Donaldson, Lufkin & Jenrette Securities Corporation. He is also a
director of Diamond Triumph Auto Glass, Inc., Liberty Group Publishing, Inc. and
several private companies.
Jonathan Sokoloff has served as a director since December 1998. Mr.
Sokoloff has been an executive officer of Leonard Green & Partners, L.P. since
its formation in 1994. Since 1990, Mr. Sokoloff has been a partner in a private
equity firm affiliated with Leonard Green & Partners, L.P. Mr. Sokoloff was
previously a Managing Director at Drexel Burnham Lambert Incorporated. Mr.
Sokoloff is also a director of The Sports Authority, Rite Aid Corporation,
Diamond Triumph Auto Glass, Inc. and several private companies.
Michael Solomon has served as a director since October 2002. He has been a
vice president of Leonard Green & Partners, L.P. since April 2002 and joined
Leonard Green & Partners, L.P. as an associate in May 2000. From June 1996 to
May 2000, Mr. Solomon was an associate with the Financial Sponsors Group of
Deutsche Banc Alex Brown.
72
Audit Committee Financial Expert
Our parent company's board of directors has not determined that any of the
current members of its audit committee is an "audit committee financial expert,"
as that term is defined in Item 401(h) of Regulation S-K under the Securities
Exchange Act of 1934, as amended. Our parent company believes that the members
of its audit committee are financially literate and appropriately experienced in
business, accounting and financial matters for a company, such as ours, that
does not have equity securities listed on a national exchange or association.
Although they may not have obtained these attributes through the experience
specified in the definition of "audit committee financial expert," our parent
company believes the members of its audit committee are able to effectively
serve and carry out the duties and responsibilities of the audit committee.
Code of Ethics
Our parent company has adopted a code of ethics applicable to our principal
executive officer, principal financial officer and principal accounting officer
or controller, as well as other senior officers. The code of ethics is available
on our website at http://www.dfg.com.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information with respect to the compensation
of our Chief Executive Officer and each of our named executive officers whose
annual total salary and bonus in fiscal 2004 exceeded $100,000:
Annual Compensation
------------------------------------------------
Name and Other Annual All Other
Principal Position Year Salary ($) Bonus ($) Compensation ($) Compensation ($)
-----------------------------------------------------------------------------------------------------------
Jeffrey Weiss.............. 2004 675,000 1,052,000 99,217(1) 7,741(3)
Chairman and 2003 650,000 - 60,290(1) 8,414(3)
Chief Executive Officer 2002 650,000 - 122,417(1) 5,625(3)
Donald Gayhardt............. 2004 400,000 603,000 - 2,103(3)
President 2003 350,000 - - 3,264(3)
2002 350,000 - - 3,990(3)
Sydney Franchuk............. 2004 148,980 157,325 - 11,332(3)
Senior Vice President and 2003 132,840 84,353 - -
President - Canadian 2002 127,560 79,725 - -
Operations
Cameron Hetherington........ 2004 204,880 243,668 69,628(2) 14,342(3)
Senior Vice President and 2003 186,695 56,008 64,458(2) 13,067(3)
President - U.K. Operations 2002 128,980 46,985 53,907(2) 2,971(3)
(1) Amounts include $28,840 paid in fiscal 2004, $30,635 paid in fiscal 2003
and $62,314 paid in fiscal 2002 for life insurance premiums on policies
where we were not the named beneficiary. Amounts include $48,853 paid in
fiscal 2004 for employee memberships. Perquisites and other personal
benefits provided to each other named executive officer did not exceed the
lesser of $50,000 or 10% of the total salary and bonus for the officer.
(2) Amounts represent housing and other living costs.
(3) Amounts represent payments relating to retirement plans.
73
Option/SAR Grants in Last Fiscal Year
Individual Grants Potential Realizable
Value at Asumed
Annual Rates of Stock
Price Appreciation
for Option Term
- ---------------------------------------------------------------------------------------------------------------
Securities Percent of Exercise
Name underlying total of base
option/SARs Options/SARs price Expiration
Granted granted ($/Sh) date 5% 10%
(#) to ($) ($)
employees $ $
in fiscal
year
- ---------------------------------------------------------------------------------------------------------------
Don Gayhardt 544(1) 100% $5,600 1/6/14 $152,320 $304,640
(1) Represents the number of shares of the common stock of our parent company,
Dollar Financial Corp., underlying options granted in January 2004 under
our parent company's 1999 Stock Incentive Plan.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options at
Name on Exercise Realized Options at Fiscal Year End Fiscal Year End(1)
- -----------------------------------------------------------------------------------------------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
Jeffrey Weiss........ - $ - 0/0 $0/$0
Donald Gayhardt...... - - 399/544 $947,625/$0
Sydney Franchuk...... - - 100/20 $237,500/$0
Cameron Hetherington. - - 100/20 $237,500/$0
(1) An assumed fair market value of $5,600 per share was used to calculate the
value of the options. As the shares are not traded in an established public
market, the value assigned is based on the strike price of the most recent
options to be granted.
1999 Stock Incentive Plan
Our parent company's 1999 stock incentive plan is intended to secure for us
the benefits arising from stock ownership by selected key employees, directors,
consultants and advisors as our parent company's board of directors may from
time to time determine. The following are the material terms of the 1999 plan:
Shares Subject to Plan
The aggregate number of shares of our parent company's stock reserved and
available for issuance under the 1999 plan is 1,413.32 of which 1,408.00 were
underlying outstanding stock options as of June 30, 2004. Our parent company
does not intend to grant any additional stock options under the 1999 plan. The
number of shares reserved for issuance is generally subject to equitable
adjustment upon the occurrence of any reorganization, merger, consolidation,
recapitalization, reclassification, stock split-up, combination or exchange of
shares, stock dividend or other similar corporate transaction or event.
Administration
The plan is administered by our parent company's board of directors. Our
parent company's board of directors has authority to construe and interpret the
1999 plan and any awards made thereunder, to grant and determine the terms of
awards and to make any necessary rules and regulations for the administration of
the 1999 plan.
74
Eligibility
All of our employees and directors, and in specified circumstances, our
consultants and advisors are eligible to participate in the 1999 plan.
Type of Awards
Nonqualified stock options or incentive stock options may be granted under
the 1999 plan. Stock appreciation rights may also be granted in tandem with
nonqualified stock options or incentive stock options granted under the 1999
plan.
Amendment and Termination
The 1999 plan may be amended by our parent company's board of directors, at
any time, subject to stockholder approval to increase the shares of stock
reserved for issuance under the 1999 plan or modify eligibility requirements.
Exercisability, Vesting and Price of Awards
The stock options will vest at the times and upon the conditions that the
committee may determine. The price at which shares subject to any stock options
may be purchased are reflected in each particular stock option agreement.
Employment Agreement with Jeffrey Weiss
Effective December 19, 2003, we entered into a new employment agreement
with Jeffrey Weiss. The agreement provides for Mr. Weiss to serve as our Chief
Executive Officer for a term of three years. The term shall be automatically
renewed for subsequent additional terms of one year unless either party provides
notice of its intention not to renew the term.
The employment agreement provides for Mr. Weiss to receive an annual base
salary of $675,000, subject to biannual increase by our board of directors or a
committee thereof, and to receive specified annual cash bonuses determined based
on our achievement of annual performance targets. Mr. Weiss is also entitled to
specified perquisites. In addition, as long as Mr. Weiss serves as our Chief
Executive Officer, we will use our commercially reasonable efforts to ensure
that he continues to serve on our board of directors.
If Mr. Weiss' employment is terminated other than for cause in relation to
a change of control, the employment agreement provides that we will pay Mr.
Weiss his unpaid base salary for the remainder of the term, discounted to
present value, without mitigation. In such circumstances, the employment
agreement also provides for the continuation of specified benefits during the
remaining scheduled term of the employment agreement.
If Mr. Weiss' employment is terminated other than for cause under any
circumstances not related to a change of control, or if Mr. Weiss terminates his
employment for good reason, the employment agreement provides that we will pay
Mr. Weiss his remaining base salary during the remaining scheduled term of the
employment agreement, subject to offset for compensation earned pursuant to new
employment. In such circumstances, the employment agreement also provides for
the continuation of specified benefits during the remaining scheduled term of
the employment agreement.
Employment Agreement with Donald Gayhardt
Effective December 19, 2003, we entered into a new employment agreement
with Donald Gayhardt. The agreement provides for Mr. Gayhardt to serve as our
President for a term of three years. The term shall be automatically renewed for
subsequent additional terms of one year unless either party provides notice of
its intention not to renew the term.
The employment agreement provides for Mr. Gayhardt to receive an annual
base salary of $400,000, subject to biannual increase by our board of directors
or a committee thereof, and to receive specified annual cash bonuses determined
based on our achievement of annual performance targets. Mr. Gayhardt is also
entitled to specified perquisites. In addition, as long as Mr. Gayhardt serves
as our President, we will use our commercially reasonable efforts to ensure that
he continues to serve on our board of directors.
75
If Mr. Gayhardt's employment is terminated other than for cause in relation
to a change of control, the employment agreement provides that we will pay Mr.
Gayhardt his unpaid base salary for the remainder of the term, discounted to
present value, without mitigation. In such circumstances, the employment
agreement also provides for the continuation of specified benefits during the
remaining scheduled term of the employment agreement.
If Mr. Gayhardt's employment is terminated other than for cause under any
circumstances not related to a change of control, or if Mr. Gayhardt terminates
his employment for good reason, the employment agreement provides that we will
pay Mr. Gayhardt his remaining base salary during the remaining scheduled term
of the employment agreement, subject to offset for compensation earned pursuant
to new employment. In such circumstances, the employment agreement also provides
for the continuation of specified benefits during the remaining scheduled term
of the employment agreement.
Effective January 2004, our parent company granted Mr. Gayhardt an option
to purchase 544 shares of its common stock pursuant to our 1999 stock incentive
plan at an exercise price of $5,600 per share.
Employment Agreement with Randall Underwood
Effective June 30, 2004, we entered into an employment agreement for
Randall Underwood to serve as our Chief Financial Officer. The employment
agreement provides for Mr. Underwood to receive an annual base salary of
$275,000, subject to annual review by our board of directors or a committee
thereof, and to receive specified annual cash bonuses determined based on our
achievement of annual performance targets. Mr. Underwood is also entitled to
specified perquisites.
If Mr. Underwood's employment is terminated in relation to a change of
control, the employment agreement provides that we will continue to pay Mr.
Underwood his base salary for eighteen months following the date of termination.
If Mr. Underwood's employment is terminated other than for cause, the employment
agreement provides that we will continue to pay Mr. Underwood his base salary
for six months following the date of termination and will pay Mr. Underwood at a
rate equal to 50% of his base salary for twelve months thereafter.
Employment Agreement with Cameron Hetherington
Effective April 1, 2002, we entered into an employment agreement with
Cameron Hetherington. The agreement provides for Mr. Hetherington to serve as
our President--U.K. Operations through June 30, 2004. The employment agreement
provides for Mr. Hetherington to receive an annual base salary of
(pound)(GPB)117,700 and specified annual cash bonuses determined based on our
achievement of annual performance targets. Mr. Hetherington is also entitled to
specified perquisites. If Mr. Hetherington's employment is terminated other than
for cause after April 1, 2003, the employment agreement provides that we will
pay Mr. Hetherington moving expenses and fifty percent of one year's base
salary, subject to offset for compensation earned pursuant to new employment.
Director Compensation
Our and our parent company's directors are not currently entitled to any
compensation for serving as a director.
Compensation Committee Interlocks and Insider Participation
Our parent company's board of directors as a whole performed the functions
of a compensation committee, and all of the members of our parent company's
board of directors participated in deliberations concerning executive
compensation, including Jeffrey Weiss, our Chairman and Chief Executive Officer,
and Donald Gayhardt, our President. No interlocking relationship exists between
our parent company's board of directors and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past.
76
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our issued and outstanding shares of capital stock are owned by our
parent company, Dollar Financial Corp.
The following table sets forth the number of shares of our parent company's
common stock owned beneficially on June 30, 2004, by:
o each person that is the beneficial owner of more than 5% of our parent
company's common stock;
o all directors and nominees;
o the named executive officers; and
o all directors and executive officers as a group.
The address of each officer and director is c/o Dollar Financial Group,
Inc., 1436 Lancaster Avenue, Berwyn, Pennsylvania 19312, unless otherwise
indicated. On June 30, 2004, there were a total of 19,864.87 shares of our
parent company's common stock issued (106.71 shares were held in treasury).
Amount of
Name and Address of Beneficial Owner Beneficial Percent of
of Dollar Financial Corp. Shares Ownership Class
- -----------------------------------------------------------------------------------------------
Green Equity Investors II, L.P.(1) .......................... 13,014.94 65.87%
Jonathan Seiffer(1).......................................... 13,014.94(3) 65.87
Jonathan Sokoloff(1) 13,014.94(3) 65.87
Jeffrey Weiss................................................ 3,058.99 15.48
The Goldman Sachs Group, Inc.(2)............................. 2,150.46(4) 10.88
Michael Koester(2)........................................... 2,150.46(5) 10.88
Muneer Satter(2)............................................. 2,150.46(5) 10.88
Donald Gayhardt(2)........................................... 563.56(6) 2.80
Sydney Franchuk.............................................. 141.24(7) *
Cameron Hetherington......................................... 100.00(8) *
Michael Solomon(1)........................................... - *
Randall Underwood............................................ - *
All directors and officers as a group (14 persons)........... 19,151.01(9) 93.88
* Less than 1% of the class
(1) The address of Green Equity Investors II, L.P. Jonathan Seiffer, Jonathan
Sokoloff and Michael Solomon is 11111 Santa Monica Boulevard, Los Angeles,
California 90025.
(2) The address of The Goldman Sachs Group, Inc., Michael Koester and Muneer
Satter is 85 Broad Street, New York, New York 10004.
(3) Green Equity Investors II, L.P. is a Delaware limited partnership managed by
Leonard Green & Partners, L.P. Each of Messrs. Seiffer and Sokoloff, either
directly or indirectly (whether through ownership interest or position) or
through one or more intermediaries, may be deemed to control Leonard Green &
Partners, L.P. As such, Messrs. Seiffer and Sokoloff may be deemed to have
shared voting and investment power with respect to shares held by Green
Equity Investors II, L.P. These individuals disclaim beneficial ownership of
the securities held by Green Equity Investors II, L.P.
(4) Represents the aggregate number of shares of our parent company's common
stock that are owned by certain investment funds affiliated with the
Goldman Sachs Group, Inc. Consists of 1,350.19 shares beneficially owned by
GS Mezzanine Partners, L.P., 725.03 shares beneficially owned by GS
Mezzanine Partners Offshore, L.P., 17.44 shares beneficially owned by
Bridge Street Fund 1998, L.P. and 57.80 shares beneficially owned by Stone
Street Fund 1998, L.P. The Goldman Sachs Group, Inc. disclaims beneficial
ownership of the 2,150.46 shares owned by such investment funds to the
extent attributable to equity interests therein held by persons other than
The Goldman Sachs Group, Inc. and its affiliates. Each of such funds shares
voting and investment power with certain of its respective affiliates.
77
(5) Mr. Satter is a managing director and Mr. Koester is a vice president of
Goldman Sachs & Co., a wholly owned subsidiary of The Goldman Sachs Group,
Inc. As such, Messrs. Satter and Koester may be deemed to have shared
voting and investment power with respect to shares held by investment funds
managed by affiliates of The Goldman Sachs Group, Inc. These individuals
disclaim beneficial ownership of the securities held by such investment
funds, except to the extent of their respective pecuniary interests
therein, if any.
(6) Includes options to purchase 399.00 shares of our parent company's common
stock which are currently exercisable.
(7) Includes options to purchase 100.00 shares of our parent company's common
stock which are currently exercisable.
(8) Includes options to purchase 100.00 shares of our parent company's common
stock which are currently exercisable.
(9) Includes options to purchase 641.00 shares of our parent company's common
stock which are currently exercisable.
Securities Authorized for Issuance Under Equity Compensation Plans
Number of Number of securities
securities to be issued Weighted-average remaining available
upon exercise of exercise price of for future issuance
outstanding options, outstanding options, under equity compensation
warrants and rights warrants and rights plans
(excluding securities
Plan category reflected in column (a)
- ----------------------------- ------------------------- ------------------------ ------------------------------
Equity compensation
plans approved by
security holders 1,408(1) $4,314 5
Equity compensation plans
not approved by security
holders - - -
(1) Represents the number of shares of the common stock of our parent
company, Dollar Financial Corp. issuable upon exercise of options
outstanding under its 1999 Stock Incentive Plan.
78
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stockholders' Agreement
Our parent company is a party to an amended and restated stockholders
agreement with certain stockholders, including GS Mezzanine Partners, L.P.,
Bridge Street Fund 1998, L.P., Stone Street Fund 1998, L.P. and GS Mezzanine
Partners Offshore, L.P. (collectively, "GS "), Ares Leveraged Investment Fund,
L.P. and Ares Leveraged Investment Fund II, L.P. (together, "Ares "), Green
Equity Investors II, L.P., Jeffrey Weiss, Donald Gayhardt and C.L. and Sheila
Jeffrey. The stockholders agreement will terminate on November 13, 2013, though
certain provisions may terminate before then if there is a public offering of
our parent company's common stock.
Transfer Restrictions
The stockholders agreement provides, among other things, for certain
restrictions on the disposition of our parent company's common stock. Common
stock of our parent company that is subject to the agreement may only be
transferred in accordance with the terms and conditions of the agreement. Any
other transfers of our parent company's common stock will be void and of no
force or effect. Any shares of our parent company's common stock that are
subsequently transferred to a third party will remain subject to the terms and
conditions of the stockholders agreement.
Tag-Along and First Option Rights
If, at any time, Green Equity Investors II, L.P. proposes to enter into an
agreement to sell or otherwise dispose of for value more than twenty percent
(20%) of the outstanding shares of our parent company's common stock owned by it
as of the date of the stockholders agreement, then the other stockholders party
to the stockholders agreement will be given the opportunity to participate
proportionately in (in other words, "tag along" with) the sale. These tag-along
provisions do not apply to certain transactions specified in the stockholders
agreement.
If, at any time, an executive who is party to the stockholders agreement
desires to sell for cash all or any part of his or her shares, he or she must
provide notice to Green Equity Investors II, L.P., GS, Ares and our parent
company. Upon receiving notice, such parties will have the option to purchase
all, but not less than all, of such shares on the same terms and conditions. If
more than one of such parties exercises their option, our parent company will
have first priority with Green Equity Investors II, L.P., GS and Ares having the
right to purchase on a pro rata basis any remaining shares. Similar first option
rights in favor of Green Equity Investors II, L.P. exist with respect to
proposed sales by GS and Ares. Each of those parties and certain of our
executives also have preemptive rights if our parent company issues or grants
additional shares of its common stock or other equity interests.
Repurchase of Shares
If the employment of an executive who is party to the stockholders
agreement is terminated, including by reason of his or her death or permanent
disability, our parent company, Green Equity Investors II, L.P., GS and Ares
(with priority to our parent company and then to Green Equity Investors II,
L.P., GS and Ares on a pro rata basis) will have the right and option to
repurchase all of the shares then owned by the executive. The price will be the
fair market value of the shares at the time the executive's employment is
terminated as determined under the stockholders agreement.
Registration Rights
Under the stockholders agreement, Green Equity Investors II, L.P. has the
right to demand, on three occasions, that our parent company file a registration
statement under the Securities Act covering all or a portion of the 13,014.94
shares of our parent company's common stock that it holds. On two occasions, GS
has the right to demand such registration covering all or a portion of the
2,998.15 shares of our common stock that it and Ares hold.
In addition, if our parent company proposes to register any common stock
under the Securities Act (pursuant to a demand or otherwise) other than on a
registration statement on Form S-4 or S-8, or in connection with an exchange
offer, each stockholder that is party to the stockholders agreement, including
Green Equity Investors II, L.P. and GS, may elect to include in, or "piggyback"
on, the registration all or a portion of the shares of our parent company's
common stock that it holds. Currently 19,864.87 shares of our parent company's
79
common stock are subject to piggyback registration rights. However, the managing
underwriter, if any, of the offering pursuant to the registration has the right
to limit the number of securities to be included by these holders. If the
managing underwriter limits the number of securities to be included by these
holders, our parent company will include in the registration, first, the
securities it proposes to sell, second, up to $1.75 million in aggregate net
proceeds of securities proposed to be sold by Jeffrey Weiss, and third, the
securities the holders propose to sell, allocated pro rata among them. Our
parent company would bear all registration expenses incurred in connection with
these registrations. The stockholders would pay all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of their
securities.
Drag-Along Rights
If Green Equity Investors II, L.P. agrees to sell all or substantially all
of its shares to a third party, then it may demand that the other stockholders
who are party to the stockholders agreement sell all, but not less than all, of
their shares at the same price and on the same terms and conditions.
Grant of Proxy
Each stockholder who is party to the stockholders agreement (other than GS)
has agreed to vote its shares so that (1) so long as Jeffrey Weiss is the Chief
Executive Officer of our parent company, he will be elected to the board of
directors of our parent company and (2) so long as Green Equity Investors II,
L.P. owns, directly or indirectly, twenty percent (20%) or more of the then
outstanding stock of our parent company, it will be entitled to elect the
remaining members of the board of directors. GS Mezzanine Partners, L.P. is
entitled to nominate two members of our parent company's board of directors so
long as GS owns any of our parent company's notes or shares of common stock.
Investor Put/Sale Rights
Beginning September 30, 2008, each of GS and Ares, during a prescribed time
period, will have the right to require our parent company to repurchase all or a
portion of the shares of common stock then owned by them for an amount
calculated in accordance with the stockholders agreement. In the event our
parent company is unable to purchase such shares, then any party holding a
majority of the shares of common stock included in such notice will have the
right to require our parent company to seek to sell itself. If such right is
exercised, our parent company and such holders will mutually select an
investment banking firm to seek a sale transaction, and will mutually agree upon
a sale process. If, upon the conclusion of such sale process, such holders wish
to sell, then the other stockholder parties to the stockholders agreement have
agreed to cause our parent company to complete the sale. Alternatively, if such
holders do not wish to sell or the sale process otherwise does not result in the
sale of our parent company, then, beginning September 30, 2010, each of GS and
Ares will again have a right to require the repurchase of their shares, on
substantially identical terms and conditions; and, similarly, their repurchase
rights will be reinstated, on substantially identical terms and conditions, on
each two-year anniversary thereafter. The sole right of GS and Ares, in the
event that our parent company is unable to repurchase their shares following a
repurchase election by them, is to seek a sale of our parent company as
described in this paragraph.
Indebtedness of Management
During fiscal 1999, we issued loans to certain members of management. The
funds were used to pay personal income tax expense associated with the exercise
of certain options and grants of certain stock in connection with the purchase
of our parent company by Green Equity Investors II, L.P. The loans are secured
by shares of our parent company's common stock. As of June 30, 2004, the
following members of management owed outstanding principal on these loans in
excess of $60,000:
Outstanding Principal Accrued
Name Rate Maturity Date Amount Interest
- ---------------------------------------------------------------------------------------------------
Jeffrey Weiss 6.00% 12/18/2004 $2,000,000 $665,000
Donald Gayhardt 6.00 12/18/2004 96,525 32,095
Sydney Franchuk 0.00 4/1/2005 69,258 -
Peter Sokolowski 6.00 12/18/2004 70,695 23,506
80
In addition, as part of his prior employment agreement, Jeffrey Weiss was
issued a loan in the amount of $4.3 million to purchase additional shares of our
parent company's common stock. The loan accrues interest at a rate of 6% per
year and is due and payable in full on December 18, 2004. The loan is secured by
a pledge of shares of our parent company's common stock.
Management Agreement
Under an amended and restated management services agreement among Leonard
Green & Partners, L.P., Dollar Financial Corp. and us, our parent company agreed
to pay Leonard Green & Partners, L.P. an annual fee equal to $1.0 million for
ongoing management, consulting and financial planning services, as well as
reimbursement of any out-of-pocket expenses incurred. The agreement is scheduled
to terminate on November 13, 2008.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
Ernst & Young LLP, an independent registered public accounting firm, is the
principal independent accountant of our parent company, Dollar Financial Corp.,
and its subsidiaries. Ernst & Young LLP is retained solely to provide audit and
audit related services and advice with respect to tax matters, and has not
provided or billed for any other type of non-audit services to our parent
company or its subsidiaries. Ernst & Young LLP billed our parent company and its
subsidiaries aggregate fees of approximately $1.4 million and $435,000 and were
paid such amounts for fiscal years 2004 and 2003, respectively, for the
following services: (i) audit of the annual consolidated financial statements of
Dollar Financial Group, Inc. for the fiscal years ended June 30, 2004 and 2003;
(ii) review of the interim financial statements of our parent company and its
subsidiaries included in quarterly reports on Form 10-Q for the periods ended
September 30, December 31, and March 31, 2004 and 2003; and (iii) the issuance
of comfort letters, review of registration statements and issuance of consents.
Audit Related Fees
Ernst & Young LLP billed our parent company and its subsidiaries for other
audit-related fees of approximately $17,000 and $11,000 and were paid such
amounts for 2004 and 2003, respectively, for the audit of the Dollar Financial
Group Retirement Plan (401(k)).
Tax Fees
Ernst & Young LLP billed our parent company and its subsidiaries fees of
approximately $6,000 and $9,000 and were paid such amounts for 2004 and 2003,
respectively, for the following tax services: (i) tax compliance; and (ii) tax
planning.
All Other Fees
None.
Audit Committee Pre-approval Policies and Procedures
At its regularly scheduled and special meetings, the Audit Committee of the
Board of Directors of our parent company considers and pre-approves any audit
and non-audit services to be performed by the Company's independent accountants.
The Audit Committee of Dollar Financial Corp. continues to monitor legislative
and regulatory developments concerning auditor independence and services that
may be provided by independent auditors to an audit client, including those
developments under the Sarbanes-Oxley Act of 2002 and related rules issued by
the SEC.
81
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) List of Financial Statements and Schedules
The following consolidated financial statements are submitted in response
to Item 14(a)(1) and (2):
Dollar Financial Group, Inc. Page
---------
Report of Independent Registered Public Accounting Firm................................. 38
Consolidated Balance Sheets, June 30, 2003 and 2004........................................... 39
Consolidated Statements of Operations, years ended June 30, 2002, 2003 and 2004............... 40
Consolidated Statements of Shareholder's Equity, years ended June 30, 2002, 2003 and 2004..... 41
Consolidated Statements of Cash Flows, years ended June 30, 2002, 2003 and 2004............... 42
Notes to Consolidated Financial Statements.................................................... 43
All other Financial Statement Schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are
omitted because such schedules are not required under the related instructions,
are inapplicable, or the required information is given in the financial
statements.
[The remainder of this page intentionally left blank.]
82
(a)(3) Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.1(a) Certificate of Incorporation of Dollar Financial Group, Inc.(1)
3.1(b) Certificate of Amendment of the Certificate of Incorporation of
Dollar Financial Group, Inc.(1)
3.2 Amended and Restated Bylaws of Dollar Financial Group, Inc.(6)
3.3 Amended and Restated Certificate of Incorporation of Dollar
Financial Corp.(6)
3.4 Bylaws of Dollar Financial Corp.(6)
3.5(a) Articles of Incorporation of Any Kind Check Cashing Centers,
Inc.(1)
3.5(b) Articles of Amendment to the Articles of Incorporation of Any
Kind Check Cashing Centers, Inc.(1) ,
3.6 Bylaws of Any Kind Check Cashing Centers, Inc.(1)
3.7(a) Articles of Incorporation of Cash Unlimited of Arizona, Inc.(6)
3.8 Bylaws of Cash Unlimited of Arizona, Inc.(6)
3.9 Articles of Incorporation of Check Mark of Louisiana, Inc.(1)
3.10 Bylaws of Check Mart of Louisiana, Inc.(1)
3.11(a) Articles of Incorporation of Check Mart of New Mexico, Inc.(1)
3.11(b) Articles of Amendment to the Articles of Incorporation of Check
Mart of New Mexico, Inc.(1)
3.12 Bylaws of Check Mart of New Mexico, Inc.(1)
3.13 Articles of Incorporation of Check Mart of Pennsylvania,
Inc.(1)
3.14 Bylaws of Check Mart of Pennsylvania, Inc.(1)
3.15 Articles of Incorporation of Check Mart of Texas, Inc.(1)
3.16 Bylaws of Check Mart of Texas, Inc.(1)
3.17 Articles of Incorporation of Check Mart of Wisconsin, Inc.(1)
3.18 Bylaws of Check Mart of Wisconsin, Inc.(1)
3.19 Certificate of Incorporation of DFG International, Inc.(6)
3.20 Bylaws of DFG International, Inc.(6)
3.21 Certificate of Incorporation of DFG World, Inc.(6)
3.22 Bylaws of DFG World, Inc.(6)
3.23 [Intentionally omitted.]
3.24 [Intentionally omitted.]
3.25(a) Articles of Incorporation of Financial Exchange Company of
Ohio, Inc.(1)
3.25(b) Certificate of Amendment by Incorporator to the Articles of
Incorporation of Financial
Exchange Company of Ohio, Inc.(1)
3.25(c) Certificate of Amendment (by Shareholders) to the Articles of
Incorporation of Financial Exchange Company of Ohio, Inc.(1)
3.26 Code of Regulations of Financial Exchange Company of Ohio,
Inc.(1)
3.27(a) Articles of Incorporation of Financial Exchange Company of
Pennsylvania, Inc.(1)
3.27(b) Certificate of Amendment to the Articles of Incorporation of
Financial Exchange Company of Pennsylvania, Inc.(1)
3.27(c) Certificate of Amendment to the Articles of Incorporation of
Financial Exchange Company of Pennsylvania, Inc.(I)
3.28 Bylaws of Financial Exchange Company of Pennsylvania, Inc.(1)
3.29 Certificate of Incorporation of Financial Exchange Company of
Pittsburgh, Inc.(1)
3.30 Bylaws of Financial Exchange Company of Pittsburgh, Inc.(1)
3.31 Certificate of Incorporation of Financial Exchange Company of
Virginia, Inc.(1)
3.32 Bylaws of Financial Exchange Company of Virginia, Inc.(1)
3.33 Certificate of Incorporation of Loan Mart of Oklahoma, Inc.(6)
3.34 Bylaws of Loan Mart of Oklahoma, Inc.(6)
3.35 Certificate of Incorporation of Monetary Management Corporation
of Pennsylvania(1)
3.36 Bylaws of Monetary Management Corporation of Pennsylvania(1)
3.37(a) Certificate of Incorporation of Monetary Management of
California, Inc.(1)
3.37(b) Certificate of Ownership and Merger of Monetary Management of
California, Inc.(6)
3.38 Bylaws of Monetary Management of California, Inc.(1)
3.39 Articles of Incorporation of Monetary Management of Maryland,
Inc.(1)
3.40 Amended and Restated Bylaws of Monetary Management of Maryland,
Inc.(1)
83
(a)(3) Exhibits
Exhibit No. Description of Document
----------- -----------------------
3.41(a) Certificate of Incorporation of Monetary Management of New
York, Inc.(1)
3.41(b) Certificate of Change of Monetary Management of New York,
Inc.(6)
3.42 Bylaws of Monetary Management of New York, Inc.(1)
3.43(x) Articles of Incorporation of Money Mart Express, Inc.(6)
3.43(b) Articles of Amendment of Money Mart Express, Inc.(6)
3.44 Bylaws of Money Mart Express, Inc.(6)
3.45(a) Certificate of Incorporation of Moneymart, Inc.(6)
3.45(b) Certificate of Ownership and Merger of Moneymart, Inc.(6)
3.46 Bylaws of Moneymart, Inc.(6)
3.47 Articles of Incorporation of Pacific Ring Enterprises, Inc.(1)
3.48 Amended and Restated Bylaws of Pacific Ring Enterprises,
Inc.(6)
3.49 Articles of Incorporation of PD Recovery, Inc.(1)
3.50 Bylaws of PD Recovery, Inc.(1)
4.1 Indenture, dated as of November 13, 2003, among the Company,
the Guarantors (as defined therein), and U.S. Bank National
Association, as Trustee (6)
4.2 Form of 9.75% Senior Notes due 2011 with Guarantees endorsed
thereon (included in Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of May 6, 2004, by and
among the Company, the Guarantors (as defined therein), and the
Initial Purchaser (as defined therein)(7)
4.4 Indenture, dated as of November 13, 2003, by and between Dollar
Financial Corp. and U.S. Bank National Association, as Trustee,
with respect to Dollar Financial Corp.'s 16% Senior Notes due
2012(6)
4.5 Indenture, dated as of November 13, 2003, by and between Dollar
Financial Corp. and U.S. Bank National Association, as Trustee,
with respect to Dollar Financial Corp.'s 13.95% Senior
Subordinated Notes due 2012(7)
4.6 Form of Dollar Financial Corp.'s 16% Senior Notes due 2012
(included in Exhibit 4.4)
4.7 Form of Dollar Financial Corp.'s 13.95% Senior Subordinated
Notes due 2012 (included in Exhibit 4.5)
10.1 Dollar Financial Corp. 1999 Stock Incentive Plan(2)
10.2 [Intentionally omitted.]
10.3(a) Second Amended and Restated Credit Agreement, dated as of the
November 13, 2003, by and among Dollar Financial Group, Inc.,
Dollar Financial Corp., the lenders from time to time party
thereto, Wells Fargo Bank, National Association, as
administrative agent, U.S. Bank National Association, as
syndication agent, and Citicorp North America, Inc., as
documentation agent (the "Second Amended and Restated Credit
Agreement")(6)
10.3(b) First Amendment to Second Amended and Restated Credit
Agreement, dated as of April 12, 2004, by and among Dollar
Financial Group, Inc., Dollar Financial Corp., the lenders
currently party to the Second Amended and Restated Credit
Agreement and Wells Fargo Bank, National Association, as
administrative agent(9)
10.3(c) Form of Letter Agreement amending the Second Amended and
Restated Credit Agreement, by and among Dollar Financial Group,
Inc., Dollar Financial Corp., the lenders currently party to
the Second Amended and Restated Credit Agreement and Wells
Fargo Bank, National Association, as administrative agent(9)
10.4 Form of Pledge and Security Agreement, dated as of November 13,
2003, by and between the Guarantor (as defined therein) and
Wells Fargo Bank, National Association, as administrative agent
for itself and the lenders under the Second Amended and
Restated Credit Agreement(6)
10.5 Pledge and Security Agreement, dated as of November 13, 2003,
by and between Dollar Financial Group, Inc, and Wells Fargo
Bank, National Association, as administrative agent for itself
and the lenders under the Second Amended and Restated Credit
Agreement(6)
10.6 Form of Guarantor Subordination Agreement, dated as of November
13, 2003 by and among Dollar Financial Group, Inc., Wells Fargo
Bank, National Association, as administrative agent for the
Lenders under the Second Amended and Restated Credit Agreement,
and the Creditor (as defined therein)(6)
84
(a)(3) Exhibits
Exhibit No. Description of Document
----------- -----------------------
10.7 Form of Foreign Subsidiary Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative agent
for the Lenders under the Second Amended and Restated Credit
Agreement, and the Creditor (as defined therein)(6)
10.8 Foreign Subsidiary Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative agent
for the Lenders under the Second Amended and Restated Credit
Agreement, and National Money Mart Company(6)
10.9 Foreign Subsidiary Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative agent
for the Lenders under the Second Amended and Restated Credit
Agreement, and Dollar Financial UK Limited(6)
10.10 Supplemental Security Agreement (Trademarks), dated November
13, 2003 by and between Dollar Financial Group, Inc and Wells
Fargo Bank, National Association, as administrative agent for
itself and the lenders under the Second Amended and Restated
Credit Agreement(6)
10.11 Supplemental Security Agreement (Copyrights), dated November
13, 2003 by and between Dollar Financial Group, Inc and Wells
Fargo Bank, National Association, as administrative agent for
itself and the lenders under the Second Amended and Restated
Credit Agreement(6)
10.12 Supplemental Security Agreement (Patents), dated November 13,
2003 by and between Dollar Financial Group, Inc and Wells Fargo
Bank, National Association, as administrative agent for itself
and the lenders under the Second Amended and Restated Credit
Agreement(6)
10.13 First Bank Overdraft Lending Agreement, dated as of March 1,
2001, between National Money Mart Company and Bank of
Montreal(6)
10.14 Multi Line Facility Agreement, dated January 20, 2003, by and
between Dollar Financial U.K. Limited and National Westminster
Bank Plc(6)
10.15 Form of Letter Agreement, dated October 10, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Plc, as agent for National Westminster Bank Plc,
extending Multi Line Facility Agreement(6)
10.16 Form of Letter Agreement, dated October 24, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Plc, as agent for National Westminster Bank Plc,
extending Multi Line Facility Agreement(6)
10.17 Form of Letter Agreement, dated November 21, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Pic, as agent for National Westminster Bank Plc(6)
10.18(a) Participation and Servicing Agreement, dated November 15, 2002,
among Archbrook Holdings International, LLC, Instant Cash Loans
Limited and Dollar Financial Group, Inc.(6)
10.18(b) Termination Letter, dated June 30, 2004, among Archbrook
Holding's International, LLC, Instant Cash Loans Limited and
Dollar Financial Group, Inc.(7)
10.19(a) Intercreditor Agreement, dated as of November 13, 2003, by and
between Wells Fargo Bank, National Association, as
administrative agent, and U.S. Bank National Association, a
national banking association, as trustee for the holders of the
Notes (as defined therein) under the Indenture (as defined
therein)(6)
10.19(b) First Amendment to Intercreditor Agreement, dated as of April
12, 2004, by and between Wells Fargo Bank, National
Association, as administrative agent, and U.S. Bank National
Association, a national banking association, as trustee for the
holders of the Notes (as defined therein) under the Indenture
(as defined therein)(9)
10.20 Exchange Agreement, dated as of November 13, 2003, among Dollar
Financial Corp., GS Mezzanine Partners, L.P., GS Mezzanine
Partners Offshore, L.P, Stone Street Fund 1998, L.P, Bridge
Street Fund 1998, L.P, Ares Leveraged Investment Fund, L.P, and
Ares Leveraged Investment Fund II, L.P., with respect to Dollar
Financial Corp.'s 16% Senior Notes Due 2012(6)
10.21 Exchange Agreement, dated as of November 13, 2003, among Dollar
Financial Corp., GS Mezzanine Partners, L.P, GS Mezzanine
Partners Offshore, L.P, Stone Street Fund 1998, L.P., Bridge
Street Fund 1998, L.P., Ares Leveraged Investment Fund, L.P and
Ares Leveraged Investment Fund II, L.P, with respect to Dollar
Financial Corp.'s 13.95% Senior Subordinated Notes Due 2012(6)
85
(a)(3) Exhibits
Exhibit No. Description of Document
----------- -----------------------
10.22 Exchange and Registration Rights Agreement, dated as of
November 13, 2003, by and among Dollar Financial Corp. and GS
Mezzanine Partners, L.P. GS Mezzanine Partners Offshore, L.P.,
Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P.,
Ares Leveraged Investment Fund, L.P., and Ares Leveraged
Investment Fund II, L.P., as the purchasers of Dollar Financial
Corp.'s 16% Senior Notes Due 2012(6)
10.23 Exchange and Registration Rights Agreement, dated as of
November 13, 2003, by and among Dollar Financial Corp. and GS
Mezzanine Partners, L.P. GS Mezzanine Partners Offshore, L.P,
Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P,
Ares Leveraged Investment Fund, L.P., and Ares Leveraged
Investment Fund II, L.P., as the purchasers of DFG Holdings
Inc.'s 13.95% Senior Subordinated Notes Due 2012(6)
10.24(a) Amended and Restated Management Services Agreement, dated as of
November 13, 2003, by and among Dollar Financial Corp., Dollar
Financial Group, Inc. and Leonard Green & Partners, L.P(6)
10.24(b) Termination Agreement, dated as of May 26, 2004, by and among
Dollar Financial Corp., Dollar Financial Group, Inc. and
Leonard, Green & Partners, L.P(9)
10.25 Second Amended and Restated Stockholders Agreement, dated as of
November 13, 2003, by and among Green Equity Investors II,
L.P., Stone Street Fund 1998, L.P Bridge Street Fund 1998,
L.P., GS Mezzanine Partners, L.P., GS Mezzanine Partners
Offshore, L.P., Ares Leveraged Investment Fund, L.P., a
Delaware limited partnership, Ares Leveraged Investment Fund
II, L.P., a Delaware limited partnership, C.L. Jeffrey, Sheila
Jeffrey, certain stockholders signatories thereto and Dollar
Financial Corp.(6)
10.26 Amendment No. 1 to Second Amended and Restated Stockholders
Agreement, dated as of March 11, 2004, by and among Dollar
Financial Corp., Green Equity Investors 11, L.P., GS Mezzanine
Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., Ares
Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund
II, L.P. and Jeffrey Weiss(10)
10.27 Amendment No. 2 to Second Amended and Restated Stockholders
Agreement, dated as of April 14, 2004, by and among Dollar
Financial Corp., Green Equity Investors 11, L.P., GS Mezzanine
Partners, L.P, GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P, Bridge Street Fund 1998, L.P, Ares
Leveraged Investment Fund, L.P., Ares Leveraged Investment Fund
II, L.P and Jeffrey Weiss(9)
10.28 Amendment No. 3 to Second Amended and Restated Stockholders
Agreement, dated as of July 6, 2004, by and among Dollar
Financial Corp., Green Equity Investors II, L.P, GS Mezzanine
Partners, L.P, GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., Ares
Leveraged Investment Fund, L.P, Ares Leveraged Investment Fund
II, L.P, and Jeffrey Weiss(9)
10.29 Employment Agreement, dated as of December 19, 2003, by and
among Dollar Financial Group, Inc., Dollar Financial Corp. and
Jeffrey Weiss(9)
10.30 Employment Agreement, dated as of December 19, 2003, by and
among Dollar Financial Group, Inc., Dollar Financial Corp. and
Donald Gayhardt(9)
10.31 Employment Agreement, dated April 30, 2002, by and between
Dollar Financial Group, Inc. and Cameron Hetherington(10)
10.32 Employment Agreement, dated as of May 7, 2004, by and between
Dollar Financial UK Limited and Gillian Wilmot(9)
10.33 Employment Letter, dated June 30, 2004, by and between Dollar
Financial Corp. and Randall Underwood(7)
10.34 Secured Note, dated December 18, 1998, made by Jeffrey Weiss in
favor of Dollar Financial Group, Inc.(3)
10.35 Pledge Agreement, dated December 18, 1998, between Dollar
Financial Group, Inc. and Jeffrey Weiss(3)
10.36 Amended and Restated Nonexclusive Servicing and Indemnification
Agreement, dated June 14, 2002, between County Bank and Dollar
Financial Group, Inc.(5)
10.37 Marketing and Servicing Agreement, dated October 18, 2002,
between First Bank of Delaware and Dollar Financial Group,
Inc.(4)
86
(a)(3) Exhibits
Exhibit No. Description of Document
----------- -----------------------
10.38 Acknowledgment, dated as of November 13, 2003, to the Exchange
and Registration Rights Agreement by and among Dollar Financial
Corp. GS Mezzanine Partners, L.P., GS Mezzanine Partners
Offshore, L.P., Stone Street Fund 1998, L.P., Bridge Street
Fund 1998, L.P., Ares Leveraged Investment Fund, L.P. and Ares
Leveraged Investment Fund 11, LT with respect to Dollar
Financial Corp.'s 16% Senior Notes due 2012(6)
10.39 Acknowledgment, dated as of November 13, 2003, to the Exchange
and Registration Rights Agreement by and among Dollar Financial
Corp. GS Mezzanine Partners, L.P, GS Mezzanine Partners
Offshore, L.P, Stone Street Fund 1998, L.P, Bridge Street Fund
1998, L.P., Ares Leveraged Investment Fund, L.P. and Ares
Leveraged Investment Fund II, LT with respect to Dollar
Financial Corp.'s 13.95% Senior Subordinated Notes due 2012(6)
10.40 Amendment, dated as of November 13, 2003, to the Exchange
Agreement by and among Dollar Financial Corp. GS Mezzanine
Partners, L.P, GS Mezzanine Partners Offshore, L.P, Stone
Street Fund 1998, L.P., Bridge Street Fund 1998, L.P, Ares
Leveraged Investment Fund, L.P. and Ares Leveraged Investment
Fund II, L.P, with respect to Dollar Financial Corp.'s 16%
Senior Notes due 2012(6)
10.41 Amendment, dated as of November 13, 2003, to the Exchange
Agreement by and among Dollar Financial Corp. GS Mezzanine
Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P, Bridge Street Fund 1998, L.P, Ares
Leveraged Investment Fund, L.P. and Ares Leveraged Investment
Fund II, L.P., with respect to Dollar Financial Corp.'s 13.95%
Senior Subordinated Notes due 2012(6)
10.42 Form of Director Indemnification Agreement(9)
21.1 Subsidiaries of the Registrant(7)
23.1 Consent of Ernst & Young LLP(8)
31.1 Certification of Principal Executive Officer Pursuant to Title
17, Code of Federal Regulations, Section 240.13a - 14(a) or
Section 240.15d - 14(a).
31.2 Certification of Principal Financial Officer Pursuant to Title
17, Code of Federal Regulations, Section 240.13a - 14(a) or
Section 240.15d - 14(a).
32.1 Certification of Principal Executive Officer Pursuant to Title
18, United States Code, Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Pursuant to Title
18, United States Code, Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Form of Letter of Transmittal(8)
99.2 Form of Notice of Guaranteed Delivery(8)
99.3 Form of Letter to Brokers(8)
99.4 Form of Letter to Holders and DTC Participants(8)
(1) Incorporated by reference to the Registration Statement on Form S-4 filed by
Dollar Financial Group, Inc. on December 19, 1996 (File No. 333-18221).
(2) Incorporated by reference to the Annual Report on Form 10-K filed by Dollar
Financial Group, Inc. on September 29, 1997 (File No. 333-18221).
(3) Incorporated by reference to the Quarterly Report on Form 10-Q filed by
Dollar Financial Group, Inc. on February 16, 1999 (File No. 333-18221).
(4) Incorporated by reference to the Quarterly Report on Form 10-Q filed by
Dollar Financial Group, Inc. on February 14, 2002 (File No. 333- 18221).
(5) Incorporated by reference to the Annual Report on Form 10-K filed by Dollar
Financial Group, Inc. on October 1, 2002 (File No. 333-18221).
(6) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 filed by Dollar Financial Group, Inc. on January 14, 2004 (File No.
333-111473).
(7) Incorporated by reference to Amendment No. 1 to the Registration Statement
on Form S-4 filed by Dollar Financial Group, Inc. on September 1, 2004 (File No.
333-117179)
(8) Filed herewith.
(9) Incorporated by reference to Amendment No. 6 to the Registration Statement
on Form S-1 filed by Dollar Financial Corp. on July 26, 2004 (File No.
333-113570).
(10) Incorporated by reference to the Quarterly Report on Form 10-Q filed by
Dollar Financial Corp. on April 23, 2004 (File No. 333-111473-02).
87
(b) Reports on Form 8-K
On April 28, 2004, we filed a Form 8-K attaching a press release dated April
23, 2004 announcing our earnings for the three months ended March 31, 2004.
On April 28, 2004, we filed a Form 8-K attaching a transcript of an investor
conference call held on April 26, 2004, discussing our operating results for the
three months ended March 31, 2004.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant named below has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Berwyn, Commonwealth of Pennsylvania on September 15, 2004.
DOLLAR FINANCIAL GROUP, INC.
By: /s/ DONALD GAYHARDT
---------------------------------------------
Donald Gayhardt
President
DOLLAR FINANCIAL GROUP, INC.
Signature Title Date
--------- ----- ----
/s/ JEFFREY A. WEISS Chairman of the Board of Directors September 15, 2004
- -------------------------------------
Jeffrey A. Weiss and Chief Executive Officer
(principal executive officer)
/s/ DONALD GAYHARDT President September 15, 2004
- -------------------------------------
Donald Gayhardt (principal financial and accounting officer)
SUPPLMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
The registrant has not sent (1) any annual report to security holders
covering the registrant's last fiscal year or (2) any proxy statement, form of
proxy or other proxy soliciting material to more than 10 of the registrant's
security holders with respect to any annual or other meeting of security
holders.
89