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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 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 333-111473-02
DOLLAR FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2636866
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of October 31, 2004, 19,758 shares of the Registrants common stock, par value
$0.001 per share, were outstanding.
1
DOLLAR FINANCIAL CORP.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2004
and September 30, 2004 (unaudited).......................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three
Months Ended September 30, 2003 and 2004.................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2003 and 2004........................................................... 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 28
Item 4. Controls and Procedures..................................................................... 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 29
Item 6. Exhibits ................................................................................... 30
Signature ........................................................................................... 31
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DOLLAR FINANCIAL CORP.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
June 30, September 30,
2004 2004
----------------- -----------------
ASSETS (unaudited)
Cash and cash equivalents................................................ $ 69,270 $ 81,915
Loans receivable......................................................... 29,116 29,690
Less: Allowance for loan losses......................................... 2,315 2,396
----------------- -----------------
Loans receivable, net.................................................... 26,801 27,294
Other consumer lending receivables....................................... 7,404 6,617
Other receivables ....................................................... 3,787 3,492
Income taxes receivable.................................................. 6,125 5,551
Prepaid expenses......................................................... 9,161 9,720
Deferred tax asset, net of valuation allowance of $24,474 and $27,398.... - 150
Notes and interest receivable - officers................................. 5,054 5,158
Property and equipment, net of accumulated depreciation
of $49,540 and $52,947............................................... 27,965 28,232
Goodwill and other intangibles, net of accumulated
amortization of $22,449 and $22,855.................................. 149,118 151,647
Debt issuance costs, net of accumulated amortization of
$987 and $1,413...................................................... 11,428 11,033
Other.................................................................... 3,224 4,033
----------------- -----------------
$ 319,337 $ 334,842
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable......................................................... $ 15,863 $ 13,879
Foreign income taxes payable............................................. 5,979 4,630
Accrued expenses and other liabilities................................... 17,854 20,246
Accrued interest payable................................................. 5,525 14,066
Revolving credit facilities.............................................. - 3,600
9.75% Senior Notes due 2011.............................................. 241,176 241,136
16.0% Senior Notes due 2012.............................................. 42,070 42,070
13.95% Senior Subordinated Notes due 2012................................ 41,652 41,652
Other long-term debt..................................................... 105 73
Shareholders' equity:
Common stock, $1 par value: 100,000 shares authorized;
19,865 shares issued and outstanding at June 30, 2004 and
September 30, 2004................................................... - -
Additional paid-in capital........................................... 61,481 61,481
Accumulated deficit.................................................. (120,916) (121,007)
Accumulated other comprehensive income............................... 13,813 18,281
Treasury stock at cost; 107 shares at June 30, 2004 and
September 30, 2004.......................................... (956) (956)
Management equity loan............................................... (4,309) (4,309)
----------------- -----------------
Total shareholders' equity............................................... (50,887) (46,510)
----------------- -----------------
$ 319,337 $ 334,842
================= =================
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended
September 30,
------------------------------
2003 2004
-------------- ------------
Revenues:
Check cashing............................................. $ 28,122 $ 30,362
Consumer lending:
Fees from consumer lending.............................. 28,861 36,642
Provision for loan losses and adjustment to
servicing revenue..................................... (7,399) (9,437)
-------------- ------------
Consumer lending, net..................................... 21,462 27,205
Money transfer fees....................................... 3,081 3,508
Other 4,325 5,082
-------------- ------------
Total revenues............................................... 56,990 66,157
Store and regional expenses:
Salaries and benefits..................................... 18,777 19,837
Occupancy................................................. 4,864 5,391
Depreciation.............................................. 1,448 1,743
Returned checks, net and cash shortages................... 2,538 2,481
Telephone and telecommunication........................... 1,562 1,434
Advertising............................................... 1,618 2,823
Bank charges.............................................. 1,103 935
Armored carrier expenses.................................. 729 825
Other..................................................... 5,415 6,906
-------------- ------------
Total store and regional expenses............................ 38,054 42,375
Corporate expenses........................................... 7,241 9,544
Management fee ........................................... 250 277
Losses on store closings and sales .......................... 60 86
Other depreciation and amortization.......................... 958 943
Interest expense (net of interest income of $104 and $105)... 9,184 9,669
-------------- ------------
Income before income taxes................................... 1,243 3,263
Income tax provision......................................... 3,844 3,354
-------------- ------------
Net loss..................................................... $ (2,601) $ (91)
============== ============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
September 30,
------------------------------------
2003 2004
--------------- --------------
Cash flows from operating activities:
Net loss........................................................................ $ (2,601) $ (91)
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion of interest expense from 13% Senior Discount Notes............... 3,910 -
Depreciation and amortization.............................................. 2,947 3,071
Losses on store closings and sales......................................... 60 -
Deferred tax benefit....................................................... (197) (150)
Change in assets and liabilities (net of effect of acquisitions):
(Increase) decrease in loans and other receivables..................... (1,061) 1,087
Decrease in income taxes receivable.................................... 174 574
Increase in prepaid expenses and other................................. (13) (1,538)
Increase in accounts payable, income taxes payable,
accrued expenses and other liabilities and accrued
interest payable..................................................... 3,220 7,139
--------------- --------------
Net cash provided by operating activities....................................... 6,439 10,092
Cash flows from investing activities:
Acquisitions, net of cash acquired............................................ - (347)
Additions to property and equipment........................................... (1,415) (2,116)
--------------- --------------
Net cash used in investing activities........................................... (1,415) (2,463)
Cash flows from financing activities:
Other debt payments .......................................................... (63) (32)
Net (decrease) increase in revolving credit facilities........................ (13,751) 3,600
Payment of debt issuance costs................................................ (175) (31)
--------------- --------------
Net cash (used in) provided by financing activities............................. (13,989) 3,537
Effect of exchange rate changes on cash and cash equivalents.................... 1,075 1,479
--------------- --------------
Net (decrease) increase in cash and cash equivalents............................ (7,890) 12,645
Cash and cash equivalents at beginning of period................................ 71,809 69,270
--------------- --------------
Cash and cash equivalents at end of period...................................... $ 63,919 $ 81,915
=============== ==============
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements are of
Dollar Financial Corp. and its wholly owned subsidiaries (collectively, the
"Company"). Dollar Financial Corp. is the parent company of Dollar Financial
Group, Inc. ("OPCO"). The activities of Dollar Financial Corp. consist primarily
of its investment in OPCO. Dollar Financial Corp. has no employees or operating
activities. The Company's unaudited interim consolidated financial statements
have been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information, the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements and should be read in conjunction with the
Company's audited consolidated financial statements in its annual report on Form
10-K (File No. 333-111473-02) for the fiscal year ended June 30, 2004 filed with
the Securities and Exchange Commission. In the opinion of management, all
adjustments, (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results of interim periods
are not necessarily indicative of the results that may be expected for a full
fiscal year.
Use of Estimates
The preparation of financial statements in conformity with 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.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Operations
Dollar Financial Corp. was organized in 1990 under the laws of the State of
Delaware. The activities of Dollar Financial Corp. consist primarily of its
investment in OPCO. Dollar Financial Corp. has no employees or operating
activities as of September 30, 2004. The Company, through its subsidiaries,
provides retail financial services to the general public through a network of
1,122 locations (of which 650 are company-operated) operating as Money Mart(R),
The Money Shop, Loan Mart(R) and Insta-Cheques in 17 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 377 independent document transmitters in 15 states.
6
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION
OPCO'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 the Company and by OPCO'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 OPCO 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 OPCO's foreign subsidiaries ("Non-guarantors").
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 OPCO, including indebtedness
under OPCO'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 OPCO
have not been presented because they are not required to be provided herein and
management has determined that their presentation would not be material to
investors. The accompanying tables set forth the condensed consolidating balance
sheets at September 30, 2004 and June 30, 2004, and the condensed consolidating
statements of operations and cash flows for the three month periods ended
September 30, 2004 and 2003 of the Company, OPCO, the combined Guarantor
subsidiaries, the combined non-Guarantor subsidiaries and the consolidated
Company.
7
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING BALANCE SHEETS
September 30, 2004
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
Dollar and Subsidiary Non-
Financial Corp. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------
Assets
Cash and cash equivalents........................... $ 4 $ 31,182 $ 50,729 $ - $ 81,915
Loans receivable.................................... - 4,852 24,838 - 29,690
Less: Allowance for loan losses..................... - 601 1,795 - 2,396
-------------------------------------------------------------------------------
Loans receivable, net............................... - 4,251 23,043 - 27,294
Other consumer lending receivables.................. - 6,617 - - 6,617
Other receivables................................... - 3,002 2,207 (1,717) 3,492
Income taxes receivable............................. - 945 4,606 - 5,551
Prepaid expenses.................................... - 2,290 7,430 - 9,720
Deferred tax asset.................................. - - 150 - 150
Notes and interest receivable-officers.............. 1,496 3,662 - - 5,158
Due from affiliates................................. - 63,862 - (63,862) -
Due from parent..................................... - 6,103 - (6,103) -
Property and equipment, net......................... - 9,823 18,409 - 28,232
Goodwill and other intangibles, net................. - 56,506 95,141 - 151,647
Debt issuance costs, net............................ 260 10,773 - - 11,033
Investment in subsidiaries.......................... 45,856 282,295 6,705 (334,856) -
Other assets........................................ 1,785 470 1,778 - 4,033
-------------------------------------------------------------------------------
$ 49,401 $ 481,781 $ 210,198 $ (406,538) $ 334,842
================================================================ ===============
Liabilities and shareholders' equity
Accounts payable.................................... $ - $ 4,848 $ 9,031 $ - $ 13,879
Foreign income taxes payable........................ - - 4,630 - 4,630
Accrued expenses and other liabilities.............. 1,196 7,524 11,526 - 20,246
Accrued interest payable............................ 4,890 8,861 2,032 (1,717) 14,066
Due to affiliates................................... 6,103 - 63,862 (69,965) -
Revolving credit facilities......................... - 3,600 - - 3,600
9.75% Senior Notes due 2011......................... - 241,136 - - 241,136
16.0% Senior Notes due 2012......................... 42,070 - - - 42,070
13.95% Senior Subordinated Notes due 2012........... 41,652 - - - 41,652
Other long-term debt................................ - 67 6 - 73
-------------------------------------------------------------------------------
95,911 266,036 91,087 (71,682) 381,352
Shareholders' equity:
Common stock..................................... - - - - -
Additional paid-in capital....................... 50,384 104,926 27,304 (121,133) 61,481
(Accumulated deficit) retained earnings.......... (109,910) 87,755 79,183 (178,035) (121,007)
Accumulated other comprehensive income........... 18,281 23,064 12,624 (35,688) 18,281
Treasury stock................................... (956) - - - (956)
Management equity loan........................... (4,309) - - - (4,309)
-------------------------------------------------------------------------------
Total shareholders' (deficit) equity................ (46,510) 215,745 119,111 (334,856) (46,510)
-------------------------------------------------------------------------------
$ 49,401 $ 481,781 $ 210,198 $ (406,538) $ 334,842
===============================================================================
8
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2004
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
Dollar and Subsidiary Non-
Financial Corp. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------
Revenues:
Check cashing............................ $ - $ 10,721 $ 19,641 $ - $ 30,362
Consumer lending, net:
Fees from consumer lending............. - 19,694 16,948 - 36,642
Provision for loan losses and
adjustment to servicing revenue...... - (5,730) (3,707) - (9,437)
------------------------------------------------------------------------------------
Consumer lending, net.................... - 13,964 13,241 - 27,205
Money transfer fees...................... - 1,057 2,451 - 3,508
Other.................................... - 628 4,454 - 5,082
------------------------------------------------------------------------------------
Total revenue............................... - 26,370 39,787 - 66,157
Store and regional expenses:
Salaries and benefits.................... - 10,538 9,299 - 19,837
Occupancy................................ - 2,820 2,571 - 5,391
Depreciation............................. - 943 800 - 1,743
Returned checks, net and cash shortages.. - 1,138 1,343 - 2,481
Telephone and telecommunication.......... - 950 484 - 1,434
Advertising.............................. - 1,065 1,758 - 2,823
Bank charges............................. - 492 443 - 935
Armored carrier services................. - 369 456 - 825
Other.................................... - 3,329 3,577 - 6,906
------------------------------------------------------------------------------------
Total store and regional expenses........... - 21,644 20,731 - 42,375
Corporate expenses.......................... - 4,237 5,307 - 9,544
Management fee.............................. 277 (678) 678 - 277
Losses on store closings and sales.......... - 86 - - 86
Other depreciation and amortization......... - 585 358 - 943
Interest expense............................ 3,185 5,422 1,062 - 9,669
Equity in subsidiary........................ (3,371) - - 3,371 -
------------------------------------------------------------------------------------
(Loss) income before income taxes .......... (91) (4,926) 11,651 (3,371) 3,263
Income tax (benefit) provision.............. - (882) 4,236 - 3,354
------------------------------------------------------------------------------------
Net (loss) income ......................... $ (91) $ (4,044) $ 7,415 $ (3,371) $ (91)
====================================================================================
9
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2004
(In thousands)
Dollar Financial
Dollar Group, Inc. Subsidiary
Financial and Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income......................................... $ (91) $ (4,044) $ 7,415 $ (3,371) $ (91)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Undistributed income of subsidiaries................. (3,371) - - 3,371 -
Depreciation and amortization........................ 8 1,905 1,158 - 3,071
Deferred tax benefit................................. - - (150) - (150)
Changes in assets and liabilities:
(Increase) decrease in loans and other receivables. (65) (650) 369 1,433 1,087
(Increase) decrease in income taxes receivable..... - (510) 1,511 (427) 574
Increase in prepaid expenses and other............. (393) (537) (608) - (1,538)
Increase in accounts payable, income
taxes payable, accrued expenses and other
liabilities and accrued interest payable ........ 3,491 4,316 338 (1,006) 7,139
-------------------------------------------------------------------------
Net cash (used in) provided by operating activities....... (421) 480 10,033 - 10,092
Cash flows from investing activities:
Acquisitions, net of cash acquired........................ - - (347) - (347)
Additions to property and equipment....................... - (385) (1,731) - (2,116)
Net decrease in due from affiliates....................... - 1,707 - (1,707) -
-------------------------------------------------------------------------
Net cash provided by (used in) investing activities....... - 1,322 (2,078) (1,707) (2,463)
Cash flows from financing activities:
Other debt payments....................................... - (26) (6) - (32)
Net increase in revolving credit facilities............... - 3,600 - - 3,600
Payment of debt issuance costs............................ - (31) - - (31)
Net increase (decrease) in due to affiliates and due
from parent.......................................... 421 (1,287) (841) 1,707 -
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities....... 421 2,256 (847) 1,707 3,537
Effect of exchange rate changes on cash and cash
equivalents - - 1,479 - 1,479
-------------------------------------------------------------------------
Net increase in cash and cash equivalents................. - 4,058 8,587 - 12,645
Cash and cash equivalents at beginning of period.......... 4 27,124 42,142 - 69,270
-------------------------------------------------------------------------
Cash and cash equivalents at end of period................ $ 4 $ 31,182 $ 50,729 $ - $ 81,915
=========================================================================
10
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING BALANCE SHEETS
June 30, 2004
(In thousands)
Dollar Financial
Dollar Group, Inc. and Subsidiary
Financial Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------
Assets
Cash and cash equivalents...................... $ 4 $ 27,124 $ 42,142 $ - $ 69,270
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............. - 7,404 - - 7,404
Other receivables.............................. - 1,711 2,360 (284) 3,787
Income taxes receivable........................ - 2,955 6,117 (2,947) 6,125
Prepaid expenses............................... - 1,772 7,389 - 9,161
Notes and interest receivable-officers......... 1,431 3,623 - - 5,054
Due from affiliates............................ - 63,791 - (63,791) -
Due from parent................................ - 5,682 - (5,682) -
Property and equipment, net.................... - 10,957 17,008 - 27,965
Goodwill and other intangibles, net............ - 56,514 92,604 - 149,118
Debt issuance costs, net....................... 268 11,160 - - 11,428
Investment in subsidiaries..................... 38,017 255,084 6,705 (299,806) -
Other assets................................... 1,392 451 1,381 - 3,224
------------------------------------------------------------------------------------
$ 41,112 $ 452,372 $ 198,363 $(372,510) $ 319,337
====================================================================================
Liabilities and shareholders' equity
Accounts payable............................... $ - $ 6,466 $ 9,397 $ - $ 15,863
Foreign income taxes payable................... - - 5,979 - 5,979
Income taxes payable........................... - 2,947 - (2,947) -
Accrued expenses and other liabilities......... 946 7,058 9,850 - 17,854
Accrued interest payable....................... 1,649 2,974 1,186 (284) 5,525
Due to affiliates.............................. 5,682 - 63,791 (69,473) -
9.75% Senior Notes due 2011.................... - 241,176 - - 241,176
16.0% Senior Notes due 2012.................... 42,070 - - - 42,070
13.95% Senior Subordinated Notes due 2012...... 41,652 - - - 41,652
Subordinated notes payable and other........... - 93 12 - 105
------------------------------------------------------------------------------------
91,999 260,714 90,215 (72,704) 370,224
Shareholders' (deficit) equity:
Common stock................................ - - - - -
Additional paid-in capital.................. 50,384 104,926 27,304 (121,133) 61,481
(Accumulated deficit) retained earnings..... (109,819) 81,996 71,767 (164,860) (120,916)
Accumulated other comprehensive income...... 13,813 4,736 9,077 (13,813) 13,813
Treasury stock.............................. (956) - - - (956)
Management equity loan...................... (4,309) - - - (4,309)
------------------------------------------------------------------------------------
Total shareholders' (deficit) equity........... (50,887) 191,658 108,148 (299,806) (50,887)
------------------------------------------------------------------------------------
$ 41,112 $ 452,372 $ 198,363 $(372,510) $ 319,337
====================================================================================
11
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF OPERATIONS
Three Months Ended September 30, 2003
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
Dollar and Subsidiary Non-
Financial Corp. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------------
Revenues:
Check cashing..............................$ - $ 11,363 $ 16,759 $ - $ 28,122
Consumer lending, net:
Fees from consumer lending................. - 18,172 10,689 - 28,861
Provision for loan losses and adjustment
to servicing revenue................... - (5,437) (1,962) - (7,399)
------------------------------------------------------------------------------------
Consumer lending, net...................... - 12,735 8,727 - 21,462
Money transfer fees........................ - 1,110 1,971 - 3,081
Other...................................... - 883 3,442 - 4,325
------------------------------------------------------------------------------------
Total revenue................................. - 26,091 30,899 - 56,990
Store and regional expenses:
Salaries and benefits...................... - 10,623 8,154 - 18,777
Occupancy.................................. - 2,840 2,024 - 4,864
Depreciation............................... - 794 654 - 1,448
Returned checks, net and cash shortages.... - 1,154 1,384 - 2,538
Telephone and telecommunication............ - 1,078 484 - 1,562
Advertising................................ - 832 786 - 1,618
Bank charges............................... - 700 403 - 1,103
Armored carrier services................... - 327 402 - 729
Other...................................... - 2,978 2,437 - 5,415
------------------------------------------------------------------------------------
Total store and regional expenses............. - 21,326 16,728 - 38,054
Corporate expenses............................ - 3,626 3,615 - 7,241
Management fee................................ 250 (542) 542 - 250
Losses on store closings and sales........... - 60 - - 60
Other depreciation and amortization........... - 557 401 - 958
Interest expense.............................. 3,937 3,462 1,785 - 9,184
Equity in subsidiary......................... (1,142) - - 1,142 -
------------------------------------------------------------------------------------
(Loss) income before income taxes ............ (3,045) (2,398) 7,828 (1,142) 1,243
Income tax (benefit) provision................ (444) 324 3,964 - 3,844
------------------------------------------------------------------------------------
Net (loss) income .......................... $ (2,601) $ (2,722) $ 3,864 $ (1,142) $ (2,601)
====================================================================================
12
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Three Months Ended September 30, 2003
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
Dollar and Subsidiary Non-
Financial Corp. Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income......................................... $ (2,601) $ (2,722) $ 3,864 $ (1,142) $ (2,601)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Undistributed income of subsidiaries................. (1,142) - - 1,142 -
Accretion of interest expense from 13.0% Senior
Discount Notes..................................... 3,910 - - - 3,910
Depreciation and amortization........................ 91 1,800 1,056 - 2,947
Losses on store closings and sales................... - 60 - - 60
Deferred tax (benefit) provision..................... (618) 421 - - (197)
Changes in assets and liabilities:
(Increase) decrease in loans and other
receivables................................... (65) 924 (2,108) 318 (931)
Decrease (increase) in income taxes receivable... 174 (2,619) (239) 2,213 (471)
Decrease (increase) in prepaid expenses and
other......................................... - 148 (161) - (13)
Increase (decrease) in accounts payable, income
taxes payable, accrued expenses and other
liabilities and accrued interest payable ..... 1 6,742 (477) (2,531) 3,735
--------------------------------------------------------------------------
Net cash (used in) provided by operating activities....... (250) 4,754 1,935 - 6,439
Cash flows from investing activities:
Additions to property and equipment....................... - (429) (986) - (1,415)
Net increase in due from affiliates....................... - (10,008) - 10,008 -
--------------------------------------------------------------------------
Net cash used in investing activities..................... - (10,437) (986) 10,008 (1,415)
Cash flows from financing activities:
Other debt payments....................................... - - (63) - (63)
Net increase in revolving credit facilities............... - (12,989) (762) - (13,751)
Payment of debt issuance costs............................ - (175) - - (175)
Net increase (decrease) in due to affiliates and due
from parent............................................ 250 16,228 (6,470) (10,008) -
--------------------------------------------------------------------------
Net cash provided by (used in) financing activities....... 250 3,064 (7,295) (10,008) (13,989)
Effect of exchange rate changes on cash and cash 1,075
equivalents - - - 1,075
--------------------------------------------------------------------------
Net decrease in cash and cash equivalents................. - (2,619) (5,271) - (7,890)
Cash and cash equivalents at beginning of period.......... 4 34,194 37,611 - 71,809
--------------------------------------------------------------------------
Cash and cash equivalents at end of period................ $ 4 $ 31,575 $ 32,340 $ - $ 63,919
==========================================================================
13
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
3. GOODWILL AND OTHER INTANGIBLES
In accordance with the adoption provisions of SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis. The
Company performs its annual impairment test as of June 30. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings. The Company has a covenant not to compete, which is deemed to have a
definite life of two years and will continue to be amortized through January
2005. Amortization for this covenant not to compete for the three months ended
September 30, 2004 was $8,000. The amortization expense for the covenant not to
compete will be as follows:
Year Amount
(in thousands)
--------------------------------------------
2005 $ 20.0
The following table reflects the components of intangible assets (in thousands):
June 30, 2004 September 30, 2004
------------------------------------------ ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------ ----------------------------------------
Non-amortized intangible assets:
Cost in excess of net assets acquired $ 169,115 $ 20,016 $ 172,012 $ 20,376
Amortized intangible assets:
Covenants not to compete 2,452 2,433 2,490 2,479
4. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is the change in equity from transactions and other
events and circumstances from non-owner sources, which includes foreign currency
translation and fair value adjustments for hedges. The following shows the
comprehensive (loss) income for the periods stated (in thousands):
Three Months Ended
September 30,
----------------------------------
2003 2004
-------------- ---------------
Net loss $ (2,601) $ (91)
Foreign currency translation adjustment (261) 4,758
Fair value adjustments for cash flow hedges - (290)
-------------- ---------------
Total comprehensive (loss) income $ (2,862) $ 4,377
============== ===============
14
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
5. Losses on Store Closings and Sales
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" 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, 2003 $ 1.2 $ 0.2 $ 1.4
Charge recorded in earnings - - -
Reclassification (0.7) 0.7 -
Amounts paid (0.5) (0.5) (1.0)
Non-cash charges - - -
--------------------------------------------------------------
Balance at June 30, 2004 $ - $ 0.4 $ 0.4
Charge recorded in earnings - - -
Reclassification - - -
Amounts paid - - -
Non-cash charges - - -
--------------------------------------------------------------
Balance at September 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 three months ended
September 30, 2004 and 2003 were $86,000 and $60,000, respectively.
15
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
6. GEOGRAPHIC SEGMENT INFORMATION
All operations for which geographic data is presented below are in one
principal industry (check cashing, consumer lending and ancillary services)
(in thousands):
As of and for the three months United
ended September 30, 2003 United States Canada Kingdom Total
----------------- ------------- -------------- ---------------
Identifiable assets $ 144,518 $ 84,082 $ 77,283 $ 305,883
Goodwill and other intangibles, net 56,566 38,535 48,688 143,789
Sales to unaffiliated customers
Check cashing 11,363 9,644 7,115 28,122
Consumer lending:
Fees from consumer lending 18,172 6,762 3,927 28,861
Provision for loan losses and adjustment to
servicing revenue (5,437) (1,003) (959) (7,399)
----------------- ------------- -------------- ---------------
Consumer lending, net 12,735 5,759 2,968 21,462
Money transfer fees 1,110 1,410 561 3,081
Other 883 2,527 915 4,325
----------------- ------------- -------------- ---------------
Total sales to unaffiliated customers 26,091 19,340 11,559 56,990
Interest revenue 104 - - 104
Interest expense 7,503 783 1,002 9,288
Depreciation and amortization 1,350 556 500 2,406
Losses on store closings and sales 60 - - 60
(Loss) income before income taxes (6,585) 5,729 2,099 1,243
Income tax (benefit) provision (120) 2,827 1,137 3,844
As of and for the three months
ended September 30, 2004
Identifiable assets $ 136,521 $ 99,068 $ 99,253 $ 334,842
Goodwill and other intangibles, net 56,506 41,173 53,968 151,647
Sales to unaffiliated customers
Check cashing 10,720 10,400 9,242 30,362
Consumer lending:
Fees from consumer lending 19,693 11,497 5,452 36,642
Provision for loan losses and adjustment to
servicing revenue (5,731) (1,917) (1,789) (9,437)
----------------- ------------- -------------- ---------------
Consumer lending, net 13,962 9,580 3,663 27,205
Money transfer fees 1,057 1,621 830 3,508
Other 630 3,120 1,332 5,082
----------------- ------------- -------------- ---------------
Total sales to unaffiliated customers 26,369 24,721 15,067 66,157
Interest revenue 105 - - 105
Interest expense 8,712 324 738 9,774
Depreciation and amortization 1,528 690 468 2,686
Losses on store closings and sales 86 - - 86
(Loss) income before income taxes (8,390) 8,463 3,190 3,263
Income tax (benefit) provision (882) 3,241 995 3,354
16
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Operations in the United Kingdom and Canada have exposed the Company to shifts
in currency valuations. From time to time, the Company may elect to purchase put
options in order to protect earnings in the United Kingdom and Canada against
foreign currency fluctuations. Out of the money put options may be purchased
because they cost less than completely averting risk, and the maximum downside
is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At September 30, 2004, the
Company held put options with an aggregate notional value of $(CAN) 36.0 million
and (pound)(GBP) 6.3 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 shareholders' 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 September 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 three months ended September 30, 2004. As of
September 30,2 004, amounts related to derivatives qualifying as cash flow
hedges amounted to a reduction of shareholders' equity of $290,000 all of which
is expected to be transferred to earnings in the next nine months along with the
earnings effects of the related forecasted transactions. The fair market value
at September 30, 2004 was $88,000 and is included in other assets on the balance
sheet. Although the Company's revolving credit facility and overdraft credit
facilities carry variable rates of interest, most of the average outstanding
indebtedness carries a fixed rate of interest. A change in interest rates is not
expected to have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
8. CONTINGENT LIABILITIES
On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an
action against the Company's Canadian subsidiary on behalf of a purported class
of Canadian borrowers (except those residing in British Columbia and Quebec)
who, Mortillaro claims, were subjected to usurious charges in payday-loan
transactions. The action, which is pending in the Ontario Superior Court of
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. 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 the Company's 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. The allegations and
putative class in the Smith action are substantially the same as those in the
Mortillaro action. Like the plaintiff in the MacKinnon action referred to below,
Mortillaro, Smith and Young have agreed to arbitrate all disputes with the
Company. 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, MacKinnon
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 February 3, 2004,
the Company's motion to stay the action and to compel arbitration of MacKinnon's
claims, as required by his agreement with the Company, was denied; the Company
appealed this ruling. On September 24, 2004, the Court of Appeal for British
Columbia reversed the lower court's ruling and remanded the matter to the lower
court for further proceedings consistent with the appellate decision. The
Company believes it has meritorious defenses to each of these actions and
intends to defend them vigorously. Similar class actions have been threatened
against the Company in other provinces of Canada, but the Company has not been
served with the statements of claim in any such actions to date. The Company
believes that any possible claims in these actions, if they are served, will
likely be substantially similar to those of the Ontario actions referred to
above.
The Company is a defendant in four putative class-action lawsuits, all of which
were commenced by the same plaintiffs' law firm, alleging violations of
California's wage-and-hour laws. The named plaintiffs in these suits, which are
pending in the Superior Court of the State of California, are the Company's
former employees Vernell Woods (commenced August 22, 2000), Juan Castillo
(commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth
Williams (commenced June 3, 2003). Each of these suits seeks an unspecified
amount of damages and other relief in connection with allegations that the
Company misclassified California store (Woods) and regional (Castillo) managers
as "exempt" from a state law requiring the payment of overtime compensation,
that the Company failed to provide employees with meal and rest breaks required
under a new state law (Chin) and that the Company computed bonuses payable to
17
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
the Company's 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. These settlement offers have
been accepted by 92% of the members of the putative class. The Company recorded
a charge of $2.8 million related to this matter during fiscal 2003. Woods'
counsel is presently disputing through arbitration the validity of the
settlements accepted by the individual putative class members. The Company
believes it has meritorious defenses to the challenge and to the claims of the
non-settling putative Woods class members and plans to defend them vigorously.
The Company believes it has adequately provided for the costs associated with
this matter. The Company is vigorously defending the Castillo, Chin and Williams
lawsuits and believes it has meritorious defenses to the claims asserted in
those matters.
In addition to the litigation discussed above, the Company is involved in
routine litigation and administrative proceedings arising in the ordinary course
of business.
The Company does not believe that the outcome of any of the matters referred to
in the preceding paragraphs will materially affect its financial condition,
results of operations or cash flows in future periods.
9. DEFERRED OFFERING COSTS
Through September 30, 2004, the Company incurred approximately $1.8 million of
costs in connection with a proposed public offering of its common stock. These
costs are included in "Other Assets" on the Company's balance sheet. In August
2004, the Company announced that it had postponed its proposed public offering
due to market conditions. If the proposed offering were to be permanently
abandoned, the costs incurred would be charged to expense in the period the
decision is made. If the proposed offering is successful, the contribution to
shareholders' equity will be reduced by these costs.
18
DOLLAR FINANCIAL CORP.
SUPPLEMENTAL STATISTICAL DATA
September 30,
Company Operating Data: 2003 2004
------------- -------------
Stores in operation:
Company-owned............................................. 625 650
Franchised stores and check cashing merchants............. 455 472
----- -----
Total........................................................ 1,080 1,122
===== =====
- --------------------------------------------------------------------------------------------
Three Months Ended
September 30,
----------------------------
Operating Data: 2003 2004
------------ -----------
Face amount of checks cashed (in millions)................... $ 770 $ 816
Face amount of average check................................. $ 367 $ 392
Face amount of average check (excluding Canada and the United
Kingdom).................................................. $ 354 $ 369
Average fee per check........................................ $ 13.41 $ 14.58
Number of checks cashed (in thousands)....................... 2,097 2,083
- --------------------------------------------------------------------------------------------
Three Months Ended
September 30,
----------------------------
Collections Data: 2003 2004
------------ -----------
Face amount of returned checks (in thousands)................ $ 7,635 $ 7,601
Collections (in thousands)................................... 5,496 5,374
------------ -----------
Net write-offs (in thousands)................................ $ 2,139 $ 2,227
============ ===========
Collections as a percentage of
returned checks........................................... 72.0% 70.7%
Net write-offs as a percentage of
check cashing revenues.................................... 7.6% 7.3%
Net write-offs as a percentage of the
face amount of checks cashed.............................. 0.27% 0.27%
The following table presents a summary of the Company's consumer lending
originations, which includes loan extensions, and revenues for the following
periods (in thousands):
19
Three Months Ended
September 30,
-----------------------------------
2003 2004
-----------------------------------
U.S. company funded consumer loan originations(1)......... $ 14,268 $ 18,562
Canadian company funded consumer loan originations(2)..... 75,574 107,141
U.K. company funded consumer loan originations(2)......... 26,439 42,698
-----------------------------------
Total company funded consumer loan originations........ $ 116,281 $ 168,401
===================================
Servicing revenues, net................................... $ 11,413 $ 12,150
U.S. company funded consumer loan revenues................ 2,156 2,776
Canadian company funded consumer loan revenues............ 6,762 11,497
U.K. company funded consumer loan revenues................ 3,927 5,452
Provision for loan losses on company funded loans......... (2,796) (4,670)
-----------------------------------
Total consumer lending revenues, net................... $ 21,462 $ 27,205
===================================
Gross charge-offs of company funded consumer loans........ $ 10,790 $ 16,078
Recoveries of company funded consumer loans............... 8,314 11,468
-----------------------------------
Net charge-offs on company funded consumer loans.......... $ 2,476 $ 4,610
===================================
Gross charge-offs of company funded consumer loans
as a percentage of total company funded consumer
loan originations...................................... 9.3% 9.5%
Recoveries of company funded consumer loans as a
percentage of total company funded consumer
loan originations...................................... 7.1% 6.8%
Net charge-offs on company funded consumer loans
as a percentage of total company funded consumer
loan originations...................................... 2.1% 2.7%
(1) Our company operated stores and document transmitter locations in the
United States originate company funded and bank funded short-term consumer
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.
Three Months Ended
September 30,
----------------------------
2003 2004
----------------------------
U.S. stores originating company funded loans.................. 43 43
U.S. stores originating bank funded loans..................... 275 276
----------------------------
Total U.S. stores originating short-term consumer loans....... 318 319
============================
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of the financial condition and
results of operations for Dollar Financial Corp. for the three month periods
ended September 30, 2003 and 2004. References in this section to "we," "our,"
"ours," or "us" are to Dollar Financial Corp. and its wholly owned subsidiaries,
except as the context otherwise requires. References to "OPCO" are to our wholly
owned operating subsidiary Dollar Financial Group, Inc. For a separate
discussion and analysis of the financial condition and results of operations of
OPCO, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in OPCO's quarterly report on Form 10-Q (File
No. 333-18221) for the period ended September 30, 2004.
General
Dollar Financial Corp. is the parent company of Dollar Financial Group, Inc. and
its wholly owned subsidiaries. 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 1,122 stores, including 650
company-operated stores, in 17 states, the District of Columbia, Canada and the
United Kingdom. Our store network represents the second-largest network of its
kind in the United States and the largest network of its kind in each of Canada
and the United Kingdom. We provide a diverse range of consumer financial
products and services primarily consisting of check cashing, short-term consumer
loans, money orders and money transfers. For the three-months ended September
30, 2004, we generated revenue of $66.2 million, an increase of 16.1% over the
same period in the prior year.
In our opinion, we have included all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of our financial position
at September 30, 2004 and the results of operations for the three months ended
September 30, 2004 and 2003. The results for the three months ended September
30, 2004 are not necessarily indicative of the results for the full fiscal year
and should be read in conjunction with our unaudited financial statements
included in this filing and our audited consolidated financial statements
included in our Annual Report on Form 10-K (File No. 333-111473-02) for the
fiscal year ended June 30, 2004.
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission for a proposed initial public offering of common stock. This
Form 10-Q shall not constitute an offer to sell or a solicitation of an offer to
buy, and there shall not be any sale of these securities in any state or
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state or
jurisdiction.
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."
21
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 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 $1.3 million at September 30, 2003 and $1.5 million at September
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 September 30, 2004 and September 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 $106
million loans for County Bank and First Bank during the first three months of
fiscal 2005 and $102 million during the first three months of fiscal 2004. At
September 30, 2004 and 2003 the amount of outstanding loans were $15.9 million
and $15.2 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.
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.
22
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill for
impairment under established accounting guidelines also requires significant use
of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Deferred Offering Cost
Through September 30, 2004, the Company incurred approximately $1.8 million of
costs in connection with a proposed public offering of its common stock. These
costs are included in "Other Assets" on the Company's balance sheet. In August
2004, the Company announced that it had postponed its proposed public offering
due to market conditions. If the proposed offering were to be permanently
abandoned, the costs incurred would be charged to expense in the period the
decision is made. If the proposed offering is successful, the contribution to
shareholders' equity will be reduced by these costs.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance.
Results of Operations
Revenue Analysis
Three Months Ended September 30,
------------------------------------------------
(Percentage of
($ in thousands) total revenue)
-------------------------- ------------------
2003 2004 2003 2004
----------- ----------- ------- -------
Check cashing.............. $ 28,122 $ 30,362 49.3% 45.9%
Consumer lending revenues, net 21,462 27,205 37.7 41.1
Money transfer fees........ 3,081 3,508
5.4 5.3
Other revenue.............. 4,325 5,082 7.6 7.7
----------- ------------ ------- -------
Total revenue.............. $ 56,990 $ 66,157 100.0% 100.0%
=========== ============ ======= =======
QUARTERLY COMPARISON
Total revenues were $66.2 million for the three months ended September 30, 2004
compared to $57.0 million for the three months ended September 30, 2003, an
increase of $9.2 million or 16.1%. Comparable retail store, franchised store and
document transmitter sales for the entire period increased $9.0 million or
15.9%. New store openings accounted for an increase of $748,000 while closed
stores accounted for a decrease of $629,000.
A stronger British pound and Canadian dollar positively impacted revenue by $2.6
million for the quarter as compared to the same period in the prior year. In
addition to the currency benefit, revenues in the United Kingdom for the quarter
increased by $2.0 million primarily related to revenues from check cashing and
consumer loan products. Revenues from our Canadian subsidiary for the quarter
increased $4.3 million after adjusting for the favorable exchange rate. In
addition to pricing adjustments made to the short-term consumer loan product in
late fiscal 2004, this increase is also a result of higher loan amounts offered
in the first quarter of fiscal 2005 due to a criteria change in the short-term
consumer loan product.
23
Store and Regional Expense Analysis
Three Months Ended September 30,
------------------------------------------------
(Percentage of
($ in thousands) total revenue)
--------------------------- -----------------
2003 2004 2003 2004
----------- ------------ ------- -------
Salaries and benefits...... $ 18,777 $ 19,837 33.0% 30.0%
Occupancy.................. 4,864 5,391 8.5 8.2
Depreciation............... 1,448 1,743 2.5 2.6
Returned checks, net and
cash shortages.......... 2,538 2,481 4.5 3.8
Telephone and
telecommunications...... 1,562 1,434 2.7 2.2
Advertising................ 1,618 2,823 2.9 4.3
Bank charges............... 1,103 935 1.9 1.4
Armored carrier service.... 729 825 1.3 1.2
Other...................... 5,415 6,906 9.5 10.4
----------- ------------ ------- -------
Total store and regional
expenses ............... $ 38,054 $ 42,375 66.8% 64.1%
=========== ============ ======= =======
QUARTERLY COMPARISON
Store and regional expenses were $42.4 million for the three months ended
September 30, 2004 compared to $38.1 million for the three months ended
September 30, 2003, an increase of $4.3 million or 11.4%. The impact of foreign
currencies accounted for $1.4 million of this increase. New store openings
accounted for an increase of $696,000 while closed stores accounted for a
decrease of $46,000. Comparable retail store and franchised store expenses for
the entire period increased $3.5 million. For the three months ended September
30, 2004 total store and regional expenses decreased to 64.1% of total revenue
compared to 66.8% of total revenue for the three months ended September 30,
2003. After adjusting for the impact of the changes in exchange rates, store and
regional expenses increased $1.6 million in Canada, $956,000 in the United
Kingdom and $318,000 in the U.S. The increase in Canada was primarily due to
increases of $414,000 in salaries, $211,000 in occupancy expenses, $305,000 in
advertising and $700,000 in various other operating expenses, all of which are
commensurate with the overall growth in Canadian revenues. In the United
Kingdom, the increase was primarily related to increases of $594,000 in
advertising and $159,000 in occupancy costs. The advertising increase is
primarily associated with a television ad campaign.
Other Expense Analysis
Three Months Ended September 30,
---------------------------------------------
(Percentage of
($ in thousands) total revenue)
---------------------- -------------------
2003 2004 2003 2004
-------- --------- ------- --------
Corporate expenses................... $ 7,241 $ 9,544 12.7% 14.4%
Management fee....................... 250 277 0.4 0.4
Loss on store closings and sales..... 60 86 0.1 0.1
Other depreciation and amortization.. 958 943 1.7 1.4
Interest expense, net................ 9,184 9,669 16.1 14.6
Income tax provision................. 3,844 3,354 6.7 5.1
QUARTERLY COMPARISON
Corporate Expenses
Corporate expenses were $9.5 million for the three months ended September 30,
2004 compared to $7.2 million for the three months ended September 30, 2003. For
the three months ended September 30, 2004, corporate expenses increased to 14.4%
of total revenue compared to 12.7% of total revenue for the three months ended
September 30, 2003. A further weakening of the U.S. dollar in the current
quarter compared to the same period in the prior year negatively impacted
corporate expenses by $328,000. In addition, increased accrued expenses for
incentive compensation related to a strong year to date earnings performance and
legal and professional fees related to the class action lawsuits (see Note 8)
contributed to the increase in corporate expenses over the prior year.
24
Management Fees
Management fees accrued for Leonard Green & Partners, L.P. under a management
services agreement were $277,000 for the three months ended September 30, 2004
and $250,000 for the three months ended September 30, 2003.
Losses on Store Closings and Sales
Losses on store closings and sales was $86,000 for the three months ended
September 30, 2004 compared to $60,000 for the three months ended September 30,
2003.
Interest Expense
Interest expense was $9.7 million for the three months ended September 30, 2004
compared to $9.2 million for the three months ended September 30, 2003, an
increase of $500,000 or 5.2%. The increased interest on the incremental
long-term debt outstanding after the refinancing accounted for $2.7 million of
the increase in total interest expense. Offsetting these increases were declines
of $600,000 in interest on our revolving credit facility and $300,000 on the
collateralized borrowing that was in place in fiscal 2004. The decline in our
revolving credit facility is a result of using a portion of the proceeds from
the issuance of the new notes to pay down the entire outstanding revolving
credit balance on November 13, 2003.
Income Tax Provision
The provision for income taxes was $3.4 million for the three months ended
September 30, 2004 compared to a provision of $3.8 million for the three months
ended September 30, 2003, respectively. Our effective tax rate differs from the
federal statutory rate of 35% due to foreign taxes and a valuation allowance on
U.S. deferred tax assets. Our effective income tax rate was 102.8% for the three
months ended September 30, 2004 and 309.3% for the three months ended September
30, 2003. Due to the restructuring of our debt in fiscal 2004, significant
deferred tax assets were generated and recorded in accordance with SFAS 109.
Because realization is not assured all U.S. deferred tax assets recorded were
reduced by a valuation allowance of $27.4 million at September 30, 2004 of which
$2.9 million was provided for the three months ended September 30, 2004.
Following our refinancing in November, 2003, we no longer accrue U.S. tax on
foreign earnings. The amount of such tax was $1.5 million for the three months
ended September 30, 2003.
Changes in Financial Condition
Cash and cash equivalent balances and the revolving credit facilities balances
fluctuate significantly as a result of seasonal, monthly and day-to-day
requirements for funding check cashing and other operating activities. For the
three months ended September 30, 2004, cash and cash equivalents increased $12.6
million. Net cash provided by operations was $10.1 million compared to cash
provided of $6.4 million for the three months ended September 30, 2003. The
increase in net cash provided by operations was primarily the result of improved
operating results.
Accrued interest increased due to the timing of the semi-annual interest
payments on OPCO's 9.75% Senior Notes due 2011, our 16.0% Senior notes due 2012
and our 13.95% Senior Subordinated Notes due 2012.
Liquidity and Capital Resources
On November 13, 2003, OPCO, Inc. 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 its prior credit
facility, redeem the entire $109.2 million principal amount of its10.875% senior
notes due 2006, redeem the entire $20.0 million principal amount of its 10.875%
senior subordinated notes due 2006, distribute to us $20.0 million to redeem an
equal amount of our 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, OPCO 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 it 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 us to redeem
approximately $9.1 million aggregate principal amount of our 16.0% senior notes
due 2012 and approximately $9.1 million aggregate principal amount of our 13.95%
senior subordinated notes due 2012.
25
Our principal sources of cash are from operations and borrowings under our
credit facilities. We anticipate that our primary uses of cash will be to
provide working capital, finance capital expenditures, meet debt service
requirements, finance acquisitions, and finance store expansion.
Net cash provided by operating activities was $10.1 million for the three months
ended September 30, 2004 compared to cash provided of $6.4 million for the three
months ended September 30, 2003. The increase in net cash provided by operations
was primarily the result of improved operating results.
Net cash used for investing activities for the three months ended September 30,
2004 was $2.5 million compared to a usage of $1.4 million for the three months
ended September 30, 2003. The increase of $1.1 million is primarily attributable
to higher capital spending in the current fiscal quarter compared to the same
period in the previous year. For the three months ended September 30, 2004 we
made capital expenditures of $2.1 million. The actual amount of capital
expenditures for the year will depend in part upon the number of new stores
acquired or opened and the number of stores remodeled. Our budgeted capital
expenditures, excluding acquisitions, are currently anticipated to aggregate
approximately $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 financing activities for the three months ended September
30, 2004 was $3.5 million compared to a usage of $14.0 million for the three
months ended September 30, 2003. The increase in the three months ended
September 30, 2004 was a result of an increase in the borrowings under our bank
facilities of $3.6 million from $0 at June 30, 2004 compared to a $13.7 million
decrease in our borrowings under our bank facilities.
Revolving Credit Facilities. We have two revolving credit facilities: a domestic
revolving credit facility and a Canadian 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 $13.25 million
issued by Wells Fargo Bank, which guarantee the performance of certain of
our contractual obligations. At September 30, 2004 we had $7.4 million cash
in excess of our short-term borrowing needs. At September 30, 2004, our
borrowing capacity was $39.5 million and there was $3.6 million outstanding
under the facility.
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 September 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.
Long-Term Debt. As of September 30, 2004, long term debt consisted of $240
million principal amount of OPCO's 9.75% Senior Notes due November 15, 2011,
$42.1 million of our 16.0% Senior Notes due 2012, $41.7 million of our 13.95%
Senior Subordinated Notes due 2012 and $73,000 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.
26
We entered into the commitments described above and other contractual
obligations in the ordinary course of business as a source of funds for asset
growth and asset/liability management and to meet required capital needs. Our
principal future obligations and commitments as of September 30, 2004, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
----------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 Year Years Years Years
-------------- ------------- ------------ ------------- --------------
Long-term debt:
9.75% Senior Notes due 2011(1).. $ 241,136 $ - $ - $ - $ 241,136
16.0% Senior Notes due 2012..... 42,070 - - - 42,070
13.95% Senior Subordinated
Notes due 2012............. 41,652 - - - 41,652
Operating leases..................... 61,051 16,928 23,973 13,310 6,840
Other................................ 73 73 - - -
-------------- ------------- ------------ ------------- --------------
Total contractual cash obligations... $ 385,982 $ 17,001 $ 23,973 $ 13,310 $ 331,698
============== ============= ============ ============= ==============
- ---------------------------------------------------------------------------------------------------------------------------
(1) $1,136 is the unamortized premium on the 9.75% Senior Notes due 2011.
We are highly leveraged, and borrowings under the credit facilities will
increase our debt service requirements. We believe that, based on current levels
of operations and anticipated improvements in operating results, cash flows from
operations and borrowings available under our credit facilities will allow us to
fund our liquidity and capital expenditure requirements for the foreseeable
future, including payment of interest and principal on our indebtedness. This
belief is based upon our historical growth rate and the anticipated benefits we
expect from operating efficiencies. We expect additional revenue growth to be
generated by increased check cashing revenues, growth in the consumer lending
business, the maturity of recently opened stores and the continued expansion of
new stores. We also expect operating expenses to increase, although the rate of
increase is expected to be less than the rate of revenue growth. Furthermore, we
do not believe that additional acquisitions or expansion are necessary to cover
our fixed expenses, including debt service. However, we cannot assure you that
we will generate sufficient cash flow from operations or that future borrowings
will be available under our credit facilities in an amount sufficient to meet
our debt service requirements or to make anticipated capital expenditures. We
may need to refinance all or a portion of our indebtedness on or prior to
maturity, under certain circumstances, and we cannot assure you that we will be
able to effect such refinancing on commercially reasonable terms or at all.
Balance Sheet Variations
September 30, 2004 compared to June 30, 2004
Cash and cash equivalents increased to $81.9 million at September 30, 2004 from
$69.3 million at June 30, 2004. Cash and cash equivalent balances fluctuate
significantly as a result of seasonal, monthly and day-to-day requirements for
funding check cashing and other operating activities.
Income taxes receivable decreased to $5.6 million at September 30, 2004 from
$6.1 million at June 30, 2004 related primarily to the timing of receipts.
Goodwill and other intangibles increased $3.4 million from $148.2 million at
June 30, 2004 to $151.6 million at September 30, 2004 due primarily to foreign
currency translation adjustments.
Foreign income taxes payable decreased from $6.0 million at June 30, 2004 to
$4.6 million at September 30, 2004 due primarily to the timing of payments.
Accrued expenses increased to $20.2 million at September 30, 2004 from $17.9
million at June 30, 2004 due primarily to the timing of accrued payroll,
increased professional fees due to the class action lawsuits and other operating
expense accruals.
Revolving credit facilities and long-term debt increased $3.5 million from
$241.3 million at June 30, 2004 to $244.8 million at September 30, 2004. The
increase is primarily related to a $3.6 million draw down on the U.S. bank
facility.
27
Total shareholders' deficit decreased $4.4 million to $46.5 million from $50.9
million due to foreign translation adjustments offset in part by our net loss
for the three months ended September 30, 2004.
Seasonality and Quarterly Fluctuations
Our business is seasonal due to the impact of tax-related services, including
cashing tax refund checks, making electronic tax filings and processing
applications for refund anticipation loans. Historically, we have generally
experienced our highest revenues and earnings during our third fiscal quarter
ending March 31, when revenues from these tax-related services peak. Due to the
seasonality of our business, results of operations for any fiscal quarter are
not necessarily indicative of the results that may be achieved for the full
fiscal year. In addition, quarterly results of operations depend significantly
upon the timing and amount of revenues and expenses associated with acquisitions
and the addition of new stores.
Recent Tax Developments
We are currently assessing the implications of the recently passed American Jobs
Creation Act of 2004 recently signed into law as we have significant foreign
earnings.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report contains certain forward-looking statements regarding our expected
performance for future periods, and actual results for such periods may
materially differ. Such forward-looking statements involve risks and
uncertainties, including risks of changing market conditions in the overall
economy and the industry in which we operate, weakening consumer demand and
other factors detailed from time to time in our annual and other reports filed
with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Generally
In the operations of our subsidiaries and the reporting of our consolidated
financial results, we are affected by changes in interest rates and currency
exchange rates. The principal risks of loss arising from adverse changes in
market rates and prices to which we and our subsidiaries are exposed relate to:
o interest rates on debt; and
o foreign exchange rates generating translation gains and losses.
We and our subsidiaries have no market risk sensitive instruments entered
into for trading purposes, as defined by GAAP. Information contained in this
section relates only to instruments entered into for purposes other than
trading.
Interest Rates
Our outstanding indebtedness, and related interest rate risk, is managed
centrally by our finance department by implementing the financing strategies
approved by our board of directors. Although our revolving credit facilities
carry variable rates of interest, our debt consists primarily of fixed-rate
senior notes and senior subordinated notes. Because 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, the Company may elect to purchase put
options in order to protect earnings in the United Kingdom and Canada against
foreign currency fluctuations. Out of the money put options may be purchased
because they cost less than completely averting risk, and the maximum downside
is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At September 30, 2004, the
Company held put options with an aggregate notional value of $(CAN) 36.0 million
and (pound)(GBP) 6.3 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
28
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 shareholders' 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 September 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 three months ended September 30, 2004. As of
September 30, 2004, amounts related to derivatives qualifying as cash flow
hedges amounted to a reduction of shareholders' equity of $290,000 all of which
is expected to be transferred to earnings in the next nine months along with the
earnings effects of the related forecasted transactions. The fair market value
at September 30, 2004 was $88,000 and is included in other assets on the balance
sheet.
Canadian operations accounted for approximately 259.4% of consolidated
pre-tax earnings for the three months ended September 30, 2004. U.K. operations
accounted for approximately 97.8% of consolidated pre-tax earnings for the three
months ended September 30, 2004. For the three months ended September 30, 2003,
Canadian operations accounted for approximately 460.9% of our pre-tax earnings
and U.K operations accounted for 168.9% of our pre-tax earnings. 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
$18.6 million.
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 $3.3 million for the three months ended September 30, 2004 and
$1.2 million for the three months ended September 30, 2003. This impact
represents nearly 35.7% of our consolidated pre-tax earnings for the three
months ended September 30, 2004 and 63.0% of our consolidated pre-tax earnings
for the three months ended September 30, 2003.
Item 4. Controls and procedures
Evaluation of Disclosure Control and Procedures
As of the end of the period covered by this report, our management
conducted an evaluation, with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during
our fiscal quarter ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an
action against our Canadian subsidiary on behalf of a purported class of
Canadian borrowers (except those residing in British Columbia and Quebec) who,
Mortillaro claims, were subjected to usurious charges in payday-loan
transactions. The action, which is pending in the Ontario Superior Court of
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. 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. The allegations and putative class in the Smith action
are substantially the same as those in the Mortillaro action. Like the plaintiff
in the MacKinnon action referred to below, Mortillaro, Smith and Young have
agreed to arbitrate all disputes with us. 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
29
residents who, MacKinnon 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 February 3, 2004, our motion to stay the action and to compel arbitration of
MacKinnon's claims, as required by his agreement with us, was denied; we
appealed this ruling. On September 24, 2004, the Court of Appeal for British
Columbia reversed the lower court's ruling and remanded the matter to the lower
court for further proceedings consistent with the appellate decision. We believe
we have meritorious defenses to each of these actions and intend to defend them
vigorously. Similar class actions have been threatened against us in other
provinces of Canada, but we have not been served with the statements of claim in
any such actions to date. We believe that any possible claims in these actions,
if they are served, will likely be substantially similar to those of the Ontario
actions referred to above.
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. These
settlement offers have been accepted by 92% of the members of the putative
class. We recorded a charge of $2.8 million related to this matter during fiscal
2003. Woods' 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.
In addition to the litigation discussed above, we are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business.
We do not believe that the outcome of any of the matters referred to in the
preceding paragraphs will materially affect our financial condition, results of
operations or cash flows in future periods.
Item 6. Exhibits
Exhibits
Exhibit No. Description of Document
10.43 Form of Non-Qualified Stock Option Agreement under the Comapny's
2004 Stock Incentive Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL CORP.
Date: November 5, 2004 By: /s/ RANDY L. UNDERWOOD
-------------------------------------
Name: Randy L. Underwood
Title: Executive Vice President and
Chief Financial Officer
(principal financial and
chief accounting officer)
* The signatory hereto is the principal financial and chief accounting
officer and has been duly authorized to sign on behalf of the registrant.
31