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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 December 31, 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 000-50866
DOLLAR FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2636866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check |X| 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 January 31, 2005, 18,343,903 shares of the Registrants common stock, par
value $0.001 per share, were outstanding.
DOLLAR FINANCIAL CORP.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2004
and December 31, 2004 (unaudited) .......................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three and Six
Months Ended December 31, 2003 and 2004 .................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 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 ...................................................................... 23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .......................................................................... 33
Item 4. Controls and Procedures .................................................................... 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .......................................................................... 34
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds ................................. 35
Item 4. Submission to Matters to a Vote of Security Holders ........................................ 36
Item 6. Exhibits ................................................................................... 37
Signature ........................................................................................... 38
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, December 31,
---------- ------------
2004 2004
---------- ----------
Assets (unaudited)
Cash and cash equivalents ........................................................ $ 69,270 $ 88,116
Loans receivable
Loans receivable ............................................................... 32,902 39,346
Less: Allowance for loan losses ................................................ (2,315) (2,621)
---------- ----------
Loans receivable, net ............................................................ 30,587 36,725
Other consumer lending receivables ............................................... 7,404 8,705
Other receivables ................................................................ 3,787 4,280
Income taxes receivable .......................................................... 6,125 5,589
Prepaid expenses ................................................................. 4,380 5,176
Deferred tax asset, net of valuation allowance of $24,474 and $31,246 ............ -- 163
Notes and interest receivable--officers .......................................... 5,054 5,261
Property and equipment, net of accumulated
depreciation of $49,540 and $56,895 ............................................ 27,965 29,673
Goodwill and other intangibles, net of accumulated amortization of $22,449
and $23,322 .................................................................... 149,118 157,167
Debt issuance costs, net of accumulated amortization of $987 and $1,836 .......... 11,428 10,607
Other ............................................................................ 4,219 4,726
---------- ----------
$ 319,337 $ 356,188
========== ==========
Liabilities and shareholders' deficit
Accounts payable ................................................................. $ 15,863 $ 16,375
Foreign income taxes payable ..................................................... 5,979 5,294
Accrued expenses and other liabilities ........................................... 17,854 22,302
Accrued interest payable ......................................................... 5,525 5,172
Revolving credit facilities ...................................................... -- 11,000
Long term debt:
9.75% Senior Notes due 2011 .................................................... 241,176 241,096
16.0% Senior Notes due 2012 .................................................... 42,070 45,554
13.95% Senior Subordinated Notes due 2012 ...................................... 41,652 44,661
Other long term debt ............................................................. 105 55
Shareholders' deficit:
Common stock, $.001 par value: 55,500,000 shares authorized;
11,025,001 shares issued at June 30, 2004 and December 31, 2004 ................ 11 11
Additional paid-in capital ..................................................... 61,470 61,470
Accumulated deficit ............................................................ (120,916) (119,874)
Accumulated other comprehensive income ......................................... 13,813 28,337
Treasury stock at cost; 59,222 shares at June 30, 2004 and
December 31, 2004 .......................................................... (956) (956)
Management equity loan ......................................................... (4,309) (4,309)
---------- ----------
Total shareholders' deficit ...................................................... (50,887) (35,321)
---------- ----------
$ 319,337 $ 356,188
========== ==========
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------------ ------------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Revenues:
Check cashing ............................................. $ 29,419 $ 32,733 $ 57,541 $ 63,095
Consumer lending:
Fees from consumer lending .............................. 31,041 39,519 60,207 76,745
Provision for loan losses and adjustment to servicing
income ................................................ (7,023) (8,772) (14,422) (18,209)
------------ ------------ ------------ ------------
Consumer lending, net ..................................... 24,018 30,747 45,785 58,536
Money transfer fees ....................................... 3,248 3,685 6,329 7,193
Other ..................................................... 4,077 5,221 8,097 9,719
------------ ------------ ------------ ------------
Total revenues ............................................. 60,762 72,386 117,752 138,543
Store and regional expenses:
Salaries and benefits ..................................... 18,707 21,217 37,484 41,054
Occupancy ................................................. 4,885 5,603 9,749 10,994
Depreciation .............................................. 1,490 1,810 2,938 3,553
Returned checks, net and cash shortages ................... 2,347 2,736 4,885 5,217
Telephone and communications .............................. 1,431 1,434 2,993 2,868
Advertising ............................................... 1,924 2,272 3,542 5,095
Bank Charges .............................................. 787 977 1,890 1,912
Armored carrier expenses .................................. 751 889 1,480 1,714
Other ..................................................... 7,428 6,887 12,843 13,793
------------ ------------ ------------ ------------
Total store and regional expenses .......................... 39,750 43,825 77,804 86,200
Corporate expenses ......................................... 7,126 11,104 14,367 20,648
Management fee ............................................. 287 251 537 528
Losses (gain) on store closings and sales .................. 61 (142) 121 (56)
Other depreciation and amortization ........................ 914 1,159 1,872 2,102
Interest expense, net ...................................... 10,250 9,802 19,434 19,471
Loss on extinguishment of debt ............................. 8,855 -- 8,855 --
------------ ------------ ------------ ------------
(Loss) income before income taxes .......................... (6,481) 6,387 (5,238) 9,650
Income tax provision ....................................... 18,492 5,254 22,336 8,608
------------ ------------ ------------ ------------
Net (loss) income .......................................... $ (24,973) $ 1,133 $ (27,574) $ 1,042
============ ============ ============ ============
Net (loss) income per share:
Basic ..................................................... $ (2.28) $ 0.10 $ (2.51) $ 0.10
============ ============ ============ ============
Diluted ................................................... $ (2.28) $ 0.10 $ (2.51) $ 0.09
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ..................................................... 10,965,778 10,965,778 10,965,778 10,965,778
============ ============ ============ ============
Diluted ................................................... 10,965,778 11,367,574 10,965,778 11,367,574
============ ============ ============ ============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
-----------------------------
2003 2004
----------- -----------
Cash flows from operating activities:
Net (loss) income ............................................................ $ (27,574) $ 1,042
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Accretion of interest expense from 13.0% Senior Discount Notes .......... 5,827 --
Depreciation and amortization ........................................... 5,732 6,288
Loss on extinguishment of debt .......................................... 8,855 --
Losses (gain) on store closings and sales ............................... 121 (56)
Foreign currency (gain) loss on revaluation of
subordinated notes payable ............................................ (648) 181
Deferred tax provision (benefit) ........................................ 15,610 (164)
Change in assets and liabilities:
Increase in loans and other receivables ............................. (1,869) (5,820)
(Increase) decrease in income taxes receivable ...................... (6,189) 536
Increase in prepaid expenses and other .............................. (82) (852)
Increase in accounts payable, income taxes payable, accrued
expense, and other liabilities and accrued interest payable ....... 5,732 8,673
----------- -----------
Net cash provided by operating activities .................................... 5,515 9,828
Cash flows from investing activities:
Acquisitions, net of cash acquired ......................................... -- (658)
Gross proceeds from sale of fixed assets ................................... 41 --
Additions to property and equipment ........................................ (3,154) (5,589)
----------- -----------
Net cash used in investing activities ........................................ (3,113) (6,247)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated Notes due 2006 ................... (20,734) --
Redemption of 13.0% Senior Discount Notes due 2006 ......................... (22,962) --
Other debt borrowings (payments) ........................................... 134 (51)
Issuance of 9.75% Senior Notes due 2011 .................................... 220,000 --
Redemption of 10.875% Senior Notes due 2006 ................................ (111,170) --
Net (decrease) increase in revolving credit facilities ..................... (61,699) 11,000
Payment of debt issuance costs ............................................. (9,776) (103)
----------- -----------
Net cash (used in) provided by financing activities .......................... (6,207) 10,846
Effect of exchange rate changes on cash and cash equivalents ................. 2,851 4,419
----------- -----------
Net (decrease) increase in cash and cash equivalents ......................... (954) 18,846
Cash and cash equivalents at beginning of period ............................. 71,809 69,270
----------- -----------
Cash and cash equivalents at end of period ................................... $ 70,855 $ 88,116
=========== ===========
Non-cash transactions: On November 13, 2003, Dollar Financial Corp. exchanged
$49.4 million, or 50% of the accreted value of its 13% Senior Discount Note for
16.0% Senior Notes due 2012 and $49.4 million, or 50% of the accreted value of
its 13% Senior Discount Note for 13.95% Senior Notes due 2012. On November 15,
2004, Dollar Financial Corp. elected to capitalize $6.5 million of interest on
its 16.0% Senior Notes due 2012 and its 13.95% Senior Subordinated Notes due
2012.
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"). The Company is the parent company of Dollar Financial Group, Inc.
("OPCO") and its wholly owned subsidiaries. The activities of the Company
consist primarily of its investment in OPCO. 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 current period
presentation.
Operations
The Company was organized in 1990 under the laws of the State of Delaware. The
activities of the Company consist primarily of its investment in OPCO. Dollar
Financial Corp. has no employees or operating activities as of December 31,
2004. The Company, through its subsidiaries, provides retail financial services
to the general public through a network of 1,130 locations (of which 656 are
company-operated) operating as Money Mart(R), The Money Shop, Loan Mart(R) and
Insta-Cheques in 16 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, Money Mart Express(R)
services and originates short-term consumer loans through 215 independent
document transmitters in 10 states.
Stock Based Employee Compensation
At December 31, 2004, the Company offered a stock option plan, under which
shares of common stock may be awarded to employees or consultants of OPCO. The
Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the estimated market price
of the underlying stock on the grant date, no compensation expense is
recognized.
The following table reconciles the required disclosure under SFAS No. 148, which
summarizes the amount of stock-based compensation expense, net of related tax
effects, which would be included in the determination of net income if the
expense recognition provisions of SFAS No. 123 had been applied to all stock
option awards in periods presented (in thousands, except per share data):
6
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------
Net (loss) income--as reported $ (24,973) $ 1,133 $ (27,574) $ 1,042
Total stock-option expense determined under the fair value based
method, net of related tax benefits 31 113 62 226
---------- ---------- ---------- ----------
Net (loss) income--pro forma $ (25,004) $ 1,020 $ (27,636) $ 816
========== ========== ========== ==========
Net (loss) income per common share--basic--as reported $ (2.28) $ 0.10 $ (2.51) $ 0.10
Net (loss) income per common share--basic--pro forma $ (2.28) $ 0.09 $ (2.52) $ 0.07
Net (loss) income per common share--diluted--as reported $ (2.28) $ 0.10 $ (2.51) $ 0.09
Net (loss) income per common share--diluted--pro forma $ (2.28) $ 0.09 $ (2.52) $ 0.07
In determining the pro forma stock compensation expense, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for grants in
fiscal 2001 and fiscal 2004: expected volatility of 46% and 46%, respectively;
expected lives of 6.0 years and 6.0 years, respectively; risk-free interest rate
of 5.02% and 4.35%, respectively; fair value at date of grant of $6.68 per share
and $5.05 per share, respectively; and no expected dividends.
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 consists 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 management has determined that they would not be
material to investors. The accompanying tables set forth the condensed
consolidating balance sheet at December 31, 2004 and June 30, 2004, and the
condensed consolidating statements of operations and cash flows for the six
month period ended December 31, 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
CONSOLIDATING BALANCE SHEETS
December 31, 2004
(In thousands)
Dollar Financial
Dollar Group, Inc. Subsidiary
Financial and Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------
Assets
Cash and cash equivalents ...................... $ 4 $ 36,580 $ 51,532 $ -- $ 88,116
Loans receivable ............................... -- 4,414 34,932 -- 39,346
Less: Allowance for loan losses ................ -- (183) (2,438) -- (2,621)
-------------------------------------------------------------------------
Loans receivables, net ......................... -- 4,231 32,494 -- 36,725
Other consumer lending receivables ............. -- 8,705 -- -- 8,705
Other receivables .............................. -- 1,187 3,628 (535) 4,280
Income taxes receivable ........................ -- 984 4,605 -- 5,589
Prepaid expenses ............................... -- 2,245 2,931 -- 5,176
Deferred income taxes .......................... -- -- 163 -- 163
Notes and interest receivable--officers ........ 1,560 3,701 -- -- 5,261
Due from affiliates ............................ -- 62,264 -- (62,264) --
Due from parent ................................ -- 6,026 -- (6,026) --
Property and equipment, net .................... -- 9,402 20,271 -- 29,673
Goodwill and other intangibles, net ............ -- 56,498 100,669 -- 157,167
Debt issuance costs, net ....................... 254 10,353 -- -- 10,607
Investment in subsidiaries ..................... 60,606 300,491 6,705 (367,802) --
Other assets ................................... 1,789 532 2,405 -- 4,726
-------------------------------------------------------------------------
$ 64,213 $ 503,199 $ 225,403 $(436,627) $ 356,188
=========================================================================
Liabilities and shareholders' (deficit) equity
Accounts payable ............................... $ -- $ 7,487 $ 8,888 $ -- $ 16,375
Foreign income taxes payable ................... -- -- 5,294 -- 5,294
Accrued expenses and other liabilities ......... 1,528 8,635 12,139 -- 22,302
Accrued interest payable ....................... 1,765 3,054 888 (535) 5,172
Due to affiliates .............................. 6,026 -- 62,264 (68,290) --
Revolving credit facilities .................... -- 11,000 -- -- 11,000
9.75% Senior Notes due 2011 .................... -- 241,096 -- -- 241,096
16.0% Senior Notes due 2012 .................... 45,554 -- -- -- 45,554
13.95% Senior Subordinated Notes due 2012 ...... 44,661 -- -- -- 44,661
Other long-term debt ........................... -- 49 6 -- 55
-------------------------------------------------------------------------
99,534 271,321 89,479 (68,825) 391,509
Shareholders' (deficit) equity:
Common stock ................................. 11 -- -- -- 11
Additional paid-in capital ................... 50,373 104,926 27,304 (121,133) 61,470
(Accumulated deficit) retained earnings ...... (108,777) 90,718 89,471 (191,286) (119,874)
Accumulated other comprehensive income ....... 28,337 36,234 19,149 (55,383) 28,337
Treasury stock ............................... (956) -- -- -- (956)
Management equity loan ....................... (4,309) -- -- -- (4,309)
-------------------------------------------------------------------------
Total shareholders' (deficit) equity ........... (35,321) 231,878 135,924 (367,802) (35,321)
-------------------------------------------------------------------------
$ 64,213 $ 503,199 $ 225,403 $(436,627) $ 356,188
=========================================================================
8
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
June 30, 2004
(In thousands)
Dollar Financial
Dollar Group, Inc. Subsidiary
Financial and Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------------
Assets
Cash and cash equivalents .......................... $ 4 $ 27,124 $ 42,142 $ -- $ 69,270
Loans receivable ................................... -- 4,838 28,064 -- 32,902
Less: Allowance for loan losses .................... -- (694) (1,621) -- (2,315)
-------------------------------------------------------------------------
Loans receivable, net .............................. -- 4,144 26,443 -- 30,587
Other consumer lending receivables ................. -- 7,404 -- -- 7,404
Other receivables .................................. -- 1,711 2,360 (284) 3,787
Income taxes receivable ............................ -- 8 6,117 -- 6,125
Prepaid expenses ................................... -- 1,772 2,608 -- 4,380
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 .............................................. 1,392 451 2,376 -- 4,219
-------------------------------------------------------------------------
$ 41,112 $ 449,425 $ 198,363 $(369,563) $ 319,337
=========================================================================
Liabilities and shareholder's (deficit) equity
Accounts payable ................................... $ -- $ 6,466 $ 9,397 $ -- $ 15,863
Foreign income taxes payable ....................... -- -- 5,979 -- 5,979
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
-------------------------------------------------------------------------
91,999 257,767 90,215 (69,757) 370,224
Shareholder's (deficit) equity:
Common stock ..................................... 11 -- -- -- 11
Additional paid-in capital ....................... 50,373 104,926 27,304 (121,133) 61,470
(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 $ 449,425 $ 198,363 $(369,563) $ 319,337
=========================================================================
9
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2004
(In thousands)
Dollar Financial
Dollar Group, Inc. Subsidiary
Financial and Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Revenues:
Check cashing ................................... $ -- $ 21,765 $ 41,330 $ -- $ 63,095
Consumer lending:
Fees from consumer lending .................... -- 40,369 36,376 -- 76,745
Provision for loan losses and adjustment
to servicing income ........................... -- (11,282) (6,927) -- (18,209)
-------------------------------------------------------------------------
Consumer lending, net ........................... -- 29,087 29,449 -- 58,536
Money transfer fees ............................. -- 2,075 5,118 -- 7,193
Other ........................................... -- 1,533 8,186 -- 9,719
-------------------------------------------------------------------------
Total revenues ..................................... -- 54,460 84,083 -- 138,543
Store and regional expenses:
Salaries and benefits ........................... -- 21,295 19,759 -- 41,054
Occupancy ....................................... -- 5,617 5,377 -- 10,994
Depreciation .................................... -- 1,914 1,639 -- 3,553
Returned checks, net and cash shortages ......... -- 2,352 2,865 -- 5,217
Telephone and communications .................... -- 1,832 1,036 -- 2,868
Advertising ..................................... -- 2,317 2,778 -- 5,095
Bank charges .................................... -- 980 932 -- 1,912
Armored carrier expenses ........................ -- 715 999 -- 1,714
Other ........................................... -- 6,601 7,192 -- 13,793
-------------------------------------------------------------------------
Total store and regional expenses .................. -- 43,623 42,577 -- 86,200
Corporate expenses ................................. -- 9,652 10,996 -- 20,648
Management fee ..................................... 528 (252) 252 -- 528
Losses on store closings and sales ................. -- (175) 119 -- (56)
Other depreciation and amortization ................ -- 1,180 922 -- 2,102
Interest expense, net .............................. 6,495 10,900 2,076 -- 19,471
Equity in subsidiary ............................... (8,065) -- -- 8,065 --
-------------------------------------------------------------------------
Income (loss) before income taxes .................. 1,042 (10,468) 27,141 (8,065) 9,650
Income tax (benefit) provision ..................... -- (829) 9,437 -- 8,608
-------------------------------------------------------------------------
Net income (loss) .................................. $ 1,042 $ (9,639) $ 17,704 $ (8,065) $ 1,042
=========================================================================
10
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2003
(In thousands)
Dollar
Financial
Group, Inc
Dollar and Foreign
Financial Subsidiary Subsidiary
Corp. Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------------
Revenues:
Check cashing ...................................... $ -- $ 22,809 $ 34,732 $ -- $ 57,541
Consumer lending, net:
Fees from consumer lending .................... -- 36,720 23,487 -- 60,207
Provision for loan losses and adjustment to
servicing revenue ........................... -- (10,763) (3,659) -- (14,422)
-------------------------------------------------------------------------
Consumer lending, net ........................... -- 25,957 19,828 -- 45,785
Money transfer fees ............................. -- 2,215 4,114 -- 6,329
Other ........................................... -- 1,780 6,317 -- 8,097
-------------------------------------------------------------------------
Total revenues ..................................... -- 52,761 64,991 -- 117,752
Store and regional expenses:
Salaries and benefits ........................... -- 20,821 16,663 -- 37,484
Occupancy ....................................... -- 5,560 4,189 -- 9,749
Depreciation .................................... -- 1,589 1,349 -- 2,938
Returned checks, net and cash shortages ......... -- 2,350 2,535 -- 4,885
Telephone and telecommunication ................. -- 2,011 982 -- 2,993
Advertising ..................................... -- 1,886 1,656 -- 3,542
Bank charges .................................... -- 1,089 801 -- 1,890
Armored carrier services ........................ -- 659 821 -- 1,480
Other ........................................... -- 6,516 6,327 -- 12,843
-------------------------------------------------------------------------
Total store and regional expenses .................. -- 42,481 35,323 -- 77,804
Corporate expenses ................................. -- 7,231 7,136 -- 14,367
Management fees .................................... 537 (1,135) 1,135 -- 537
Losses on store closings and sales ................. -- 120 1 -- 121
Other depreciation and amortization ................ -- 1,112 760 -- 1,872
Interest expense, net .............................. 7,760 8,535 3,139 -- 19,434
Loss on extinguishment of debt ..................... 1,646 7,209 -- -- 8,855
Equity in subsidiary ............................... 503 -- -- (503) --
-------------------------------------------------------------------------
(Loss) income before income taxes .................. (10,446) (12,792) 17,497 503 (5,238)
Income tax provision (benefit) ..................... 17,128 (2,656) 7,864 -- 22,336
-------------------------------------------------------------------------
Net (loss) income .................................. $ (27,574) $ (10,136) $ 9,633 $ 503 $ (27,574)
=========================================================================
11
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2004
(In thousands)
Dollar
Financial
Dollar Group, Inc. Subsidiary
Financial and Subsidiary Non-
Corp. Guarantors Guarantors Eliminations Consolidated
--------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) .......................................... $ 1,042 $ (9,639) $ 17,704 $ (8,065) $ 1,042
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Undistributed income of subsidiaries .................... (8,065) -- -- 8,065 --
Depreciation and amortization ........................... 17 3,844 2,427 -- 6,288
(Gain) losses on store closings and sales ............... -- (175) 119 -- (56)
Foreign currency loss on revaluation of
subordinated notes payable ........................... -- 181 -- -- 181
Deferred tax benefit .................................... -- -- (164) -- (164)
Changes in assets and liabilities:
Increase in loans and other receivables .............. (129) (730) (5,212) 251 (5,820)
(Increase) decrease in income taxes receivable ....... -- (2,523) 1,512 1,547 536
(Increase) decrease in prepaid expenses and other .... (397) (548) 93 -- (852)
Increase (decrease) in accounts payable, income
taxes payable, accrued expenses and other
liabilities, and accrued interest payable .......... 7,191 4,299 (1,019) (1,798) 8,673
--------------------------------------------------------------------
Net cash (used in) provided by operating activities ........ (341) (5,291) 15,460 -- 9,828
Cash flows from investing activities:
Gross proceeds from sale of fixed assets ................... -- -- (658) -- (658)
Additions to property and equipment ........................ -- (1,564) (4,025) -- (5,589)
Net decrease in due from affiliates activities ............. -- 2,438 -- (2,438) --
--------------------------------------------------------------------
Net cash provided by (used in) investing activities ........ -- 874 (4,683) (2,438) (6,247)
Cash flows from financing activities:
Other debt payments ........................................ -- (44) (7) -- (51)
Net increase in revolving credit facilities ................ -- 11,000 -- -- 11,000
Payment of debt issuance costs ............................. (3) (100) -- -- (103)
Net increase (decrease) in due to affiliates and due
from parent ............................................. 344 3,017 (5,799) 2,438 --
--------------------------------------------------------------------
Net cash provided by (used in) financing activities ........ 341 13,873 (5,806) 2,438 10,846
Effect of exchange rate changes on cash and cash equivalents -- -- 4,419 -- 4,419
--------------------------------------------------------------------
Net increase in cash and cash equivalents .................. -- 9,456 9,390 -- 18,846
Cash and cash equivalents at beginning of period ........... 4 27,124 42,142 -- 69,270
--------------------------------------------------------------------
Cash and cash equivalents at end of period ................. $ 4 $ 36,580 $ 51,532 $ -- $ 88,116
====================================================================
12
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2003
(In thousands)
Dollar
Financial
Dollar Group, Inc Foreign
Financial and Subsidiary Subsidiary
Corp. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income ....................................... $ (27,574) $ (10,136) $ 9,633 $ 503 $ (27,574)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Undistributed income of subsidiaries .............. 503 -- -- (503) --
Accretion of interest expense from 13.0% Senior
Discount Notes .................................. 5,827 -- -- -- 5,827
Depreciation and amortization ..................... 125 3,498 2,109 -- 5,732
Loss on extinguishment of debt .................... 1,646 7,209 -- -- 8,855
Losses on store closings and sales ................ -- 120 1 -- 121
Foreign currency gain on revaluation of
subordinated notes payable ...................... -- -- (648) -- (648)
Deferred tax provision ............................ 14,769 841 -- -- 15,610
Change in assets and liabilities (net of effect of
acquisitions):
(Increase) decrease in loans and other
receivables ................................. (128) 130 (2,086) 215 (1,869)
Decrease (increase) in income taxes receivable. 1,570 (8,444) (4,271) 4,956 (6,189)
(Increase) decrease in prepaid expenses
and other ................................... -- (378) 296 -- (82)
Increase (decrease) in accounts payable,
income taxes payable, accrued expenses
and other liabilities and accrued
interest payable ............................ 2,629 6,031 2,243 (5,171) 5,732
----------------------------------------------------------------------
Net cash (used in) provided by operating activities ..... (633) (1,129) 7,277 -- 5,515
Cash flows from investing activities:
Gross proceeds from sale of fixed assets ............ -- -- 41 -- 41
Additions to property and equipment ................. -- (976) (2,178) -- (3,154)
Net increase in due from affiliates ................. -- (5,998) -- 5,998 --
----------------------------------------------------------------------
Net cash used in investing activities ................... -- (6,974) (2,137) 5,998 (3,113)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated notes
due 2006 .......................................... -- (20,734) -- -- (20,734)
Redemption of 13.0% Senior Subordinated notes
due 2006 .......................................... (22,962) -- -- -- (22,962)
Other debt borrowings (payments) .................... -- 146 (12) -- 134
Issuance of 9.75% Senior Notes due 2011 ............. -- 220,000 -- -- 220,000
Redemption of 10.875% Senior Notes due 2006 ......... -- (111,170) -- -- (111,170)
Net decrease in revolving credit facilities ......... -- (60,764) (935) -- (61,699)
Payment of debt issuance costs ...................... (193) (9,583) -- -- (9,776)
Dividends paid to parent ............................ 20,000 (20,000) -- -- --
Net increase (decrease) in due to affiliates ........ 3,788 12,190 (9,980) (5,998) --
----------------------------------------------------------------------
Net cash provided by (used in) financing activities ..... 633 10,085 (10,927) (5,998) (6,207)
Effect of exchange rate changes on cash and cash
equivalents ........................................... -- -- 2,851 -- 2,851
----------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .... -- 1,982 (2,936) -- (954)
Cash and cash equivalents at beginning of period ........ 4 34,194 37,611 -- 71,809
----------------------------------------------------------------------
Cash and cash equivalents at end of period .............. $ 4 $ 36,176 $ 34,675 $ -- $ 70,855
======================================================================
13
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 covenants not to compete, which are deemed to have a
definite life and will continue to be amortized. Amortization for these
intangibles for the six months ended December 31, 2004 was $16,500. The
amortization expense for the covenant not to compete will be as follows:
Year Amount
------------------------------
(in thousands)
2005 19.2
The following table reflects the components of intangible assets (in thousands):
June 30, 2004 December 31, 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 $ 177,966 $ 20,802
Amortized intangible assets:
Covenants not to compete 2,452 2,433 2,523 2,520
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 cash flow hedges. The following shows
the comprehensive (loss) income for the periods stated (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
Net income (loss) $ (24,973) $ 1,133 $ (27,574) $ 1,042
Foreign currency translation adjustment 7,725 10,086 8,173 14,844
Fair value adjustments for cash flow hedges -- (30) -- (320)
----------- ----------- ----------- -----------
Total comprehensive (loss) income $ (17,248) $ 11,189 $ (19,401) $ 15,566
=========== =========== =========== ===========
14
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. LOSSES (GAINS) ON STORE CLOSINGS AND SALES AND OTHER RESTRUCTURING
During the fiscal year ended June 30, 2003, the Company closed 27 stores and
consolidated and relocated certain non-operating functions to reduce costs and
increase efficiencies. Costs incurred with that restructuring were comprised of
severance and other retention benefits to employees who were involuntarily
terminated and closure costs related to the locations the Company will no longer
utilize. The restructuring was completed by June 30, 2003. All of the locations
that were closed and for which the workforce was reduced are included in the
United States geographic segment. The Company, as required, adopted Financial
Accounting Standards Board Statement No. 146, Accounting for Costs Associated
with Disposal or Exit Activities, on January 1, 2003. During the first quarter
of fiscal 2004, charges previously accrued for severance and other retention
benefits were reclassed to store closure costs.
Following is a reconciliation of the beginning and ending balances of the
restructuring liability (in millions):
Severance and
Other Store Closure
Retention Benefits Costs Total
------------------ ----- -----
Balance at June 30, 2003 $ 1.2 $ 0.2 $ 1.4
Charge recorded in earnings -- -- --
Reclassification (0.7) (0.7) --
Amounts paid (0.5) (0.5) (1.0)
Non-cash charges -- -- --
----------- ----------- -----------
Balance at June 30, 2004 $ -- $ 0.4 $ 0.4
Charge recorded in earnings -- -- --
Reclassification -- -- --
Amounts paid -- (0.2) (0.2)
Non-cash charges -- -- --
----------- ----------- -----------
Balance at December 31, 2004 $ -- $ 0.2 $ 0.2
=========== =========== ===========
The Company also expenses costs related to the closure of stores in the normal
course of its business. Costs directly expensed net of gains on sales of stores
for the three months ended December 31, 2004 and 2003 were ($142,000) and
$61,000, respectively and for the six months ended December 31, 2004 and 2003
were ($56,000) and $121,000, respectively. The sale of five stores in Oregon
accounted for a gain of $245,000 for the three and six months ended December 31,
2004.
6. LOSS ON EXTINGUISHMENT OF DEBT
On November 13, 2003, OPCO issued $220.0 million principal amount of 9.75%
Senior Notes due 2011. The proceeds from this offering were used to redeem all
of its outstanding senior notes and its outstanding senior subordinated notes,
to refinance our credit facility, to distribute a portion of the proceeds to the
Company to redeem an equal amount of the Company's senior discount notes and to
pay fees and expenses with respect to these transactions and a related note
exchange transaction involving the Company's senior discount notes.
The loss incurred on the extinguishment of debt was as follows ($ in millions):
Call Premium:
Dollar Financial Group, Inc. 10.875% Senior Notes $ 1.98
Dollar Financial Group, Inc. 10.875% Senior Subordinated Notes 0.73
Write-off of previously capitalized deferred issuance costs, net 6.14
--------
Loss on extinguishment of debt $ 8.85
========
15
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. 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 United
ended December 31, 2003 States Canada Kingdom Total
-------------------------------------------------------
Identifiable assets $ 136,835 $ 91,642 $ 85,146 $ 313,623
Goodwill and other intangibles, net 56,522 40,268 52,273 149,063
Sales to unaffiliated customers:
Check cashing 11,446 10,168 7,805 29,419
Consumer lending:
Fees from consumer lending 18,548 7,919 4,574 31,041
Provision for loan losses and adjustment to
servicing revenue (5,326) (888) (809) (7,023)
------------------------------------------------------
Consumer lending, net 13,222 7,031 3,765 24,018
Money transfer fees 1,105 1,455 688 3,248
Other 897 2,561 619 4,077
------------------------------------------------------
Total sales to unaffiliated customers 26,670 21,215 12,877 60,762
Interest expense, net 8,896 305 1,049 10,250
Depreciation and amortization 1,351 537 516 2,404
Losses on store closings and sales 60 1 -- 61
(Loss) income before income taxes (16,150) 6,147 3,522 (6,481)
Income tax provision 14,592 2,586 1,314 18,492
United United
For the six months ended December 31, 2003 States Canada Kingdom Total
-------------------------------------------------------
Sales to unaffiliated customers:
Check cashing $ 22,809 $ 19,812 $ 14,920 $ 57,541
Consumer lending:
Fees from consumer lending 36,720 14,681 8,806 60,207
Provision for loan losses and adjustment to
servicing revenue (10,763) (1,891) (1,768) (14,422)
------------------------------------------------------
Consumer lending, net 25,957 12,790 7,038 45,785
Money transfer fees 2,215 2,865 1,249 6,329
Other 1,780 5,088 1,229 8,097
------------------------------------------------------
Total sales to unaffiliated customers 52,761 40,555 24,436 117,752
Interest expense, net 16,295 1,088 2,051 19,434
Depreciation and amortization 2,701 1,093 1,016 4,810
Losses on store closings and sales 120 1 -- 121
(Loss) income before income taxes (22,735) 11,876 5,621 (5,238)
Income tax provision 14,472 5,413 2,451 22,336
16
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of and for the three months United United
ended December 31, 2004 States Canada Kingdom Total
----------------------------------------------------------
Identifiable assets $ 137,490 $ 108,784 $ 109,914 $ 356,188
Goodwill and other intangibles, net 56,498 43,234 57,435 157,167
Sales to unaffiliated customers:
Check cashing 11,045 11,745 9,943 32,733
Consumer lending:
Fees from consumer lending 20,676 12,520 6,323 39,519
Provision for loan losses and adjustment to
servicing revenue (5,551) (1,953) (1,268) (8,772)
----------------------------------------------------------
Consumer lending, net 15,125 10,567 5,055 30,747
Money transfer fees 1,018 1,736 931 3,685
Other 903 3,536 782 5,221
----------------------------------------------------------
Total sales to unaffiliated customers 28,091 27,584 16,711 72,386
Interest expense, net 8,788 268 746 9,802
Depreciation and amortization 1,566 800 603 2,969
(Gain) losses on store closings and sales (261) 119 -- (142)
(Loss) income before income taxes (9,101) 10,775 4,713 6,387
Income tax provision 53 3,848 1,353 5,254
United United
For the six months ended December 31, 2004 States Canada Kingdom Total
----------------------------------------------------------
Sales to unaffiliated customers:
Check cashing $ 21,765 $ 22,145 $ 19,185 $ 63,095
Consumer lending:
Fees from consumer lending 40,369 24,017 12,359 76,745
Provision for loan losses and adjustment to
servicing revenue (11,282) (3,870) (3,057) (18,209)
----------------------------------------------------------
Consumer lending, net 29,087 20,147 9,302 58,536
Money transfer fees 2,075 3,357 1,761 7,193
Other 1,533 6,656 1,530 9,719
----------------------------------------------------------
Total sales to unaffiliated customers 54,460 52,305 31,778 138,543
Interest expense, net 17,395 592 1,484 19,471
Depreciation and amortization 3,094 1,490 1,071 5,655
(Gain) losses on store closings and sales (175) 119 -- (56)
(Loss) income before income taxes (17,491) 19,238 7,903 9,650
Income tax (benefit) provision (829) 7,089 2,348 8,608
17
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. 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 December 31, 2004, the
Company held put options with an aggregate notional value of $(CAN) 24.0 million
and (pound)(GBP) 4.2 million to protect the currency exposure in Canada and the
United Kingdom throughout the remainder of 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 December 31, 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 and six months
ended December 31, 2004. As of December 31, 2004, amounts related to derivatives
qualifying as cash flow hedges amounted to a reduction of shareholders' equity
of $320,000 all of which is expected to be transferred to earnings in the next
six months along with the earnings effects of the related forecasted
transactions. The fair market value at December 31, 2004 was $48,000 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 Company's average outstanding
indebtedness carries a fixed rate of interest. A change in interest rates is not
expected to have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
9. 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,
18
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. CONTINGENT LIABILITIES (continued)
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
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.
10. DEFERRED OFFERING COSTS
Through December 31, 2004, the Company incurred approximately $1.8 million of
costs in connection with the initial public offering of its common stock. These
costs are included in other assets on the Company's balance sheet. In January,
2005 the Company completed the initial public offering of its common stock and,
as a result, the contribution to shareholders' equity will be reduced by these
costs in the third quarter (See Note 11).
11. SUBSEQUENT EVENTS
On January 4, 2005, we completed an acquisition of 17 competitor stores in the
United Kingdom for an aggregate of approximately $2.7 million.
Effective January 27, 2005, the Company executed an Amended and Restated
Certificate of Incorporation, which increased the authorized common stock to
55,500,000 shares and also authorized 10,000,000 shares of par value $0.001
preferred stock. The Company also took the following actions:
o Converted the par value of its common stock from $1 per common share
to $0.001 per common share;
o Declared a 555-to-1 stock split of the common stock;
o Authorized the adoption of the 2005 Stock Incentive Plan to selected
employees, directors and consultants which provides for issuance of up
to 1,718,695 shares of common stock or options to purchase shares of
common stock;
o Authorized the redemption of its 16.0% Senior Notes;
o Authorized the redemption of its 13.95% Senior Subordinated Notes; and
o Authorized $2.5 million to pay a fee to terminate a management
services agreement among the Company, OPCO and Leo nard Green &
Partners, L.P.
All common stock and per share amounts have been restated to reflect the effect
of the stock split.
On January 28, 2005, the Company announced the pricing of the initial public
offering of 7,500,000 shares of its common stock at $16.00 per share. The
Company has sold 7,378,125 shares of common stock and a selling stockholder has
sold 121,875 shares of common stock. The underwriters have a 30-day option to
purchase up to 1,125,000 additional shares of common stock from the selling
stockholders to cover over-allotments, if any. The Company will not receive any
proceeds from the sale of its shares by the selling stockholders. On February 2,
2005, the Company received $109.8 million in net proceeds in connection with
this offering. The following table summarizes the use of funds:
19
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. SUBSEQUENT EVENTS (continued)
Redeem in full the outstanding principal amount of 16.0% Senior Notes due 2012
at a redemption price of 110.0% of the current accretion amount:
Principal ..................................................................................................... $ 45.3
Accrued interest .............................................................................................. 1.6
Redemption premium ............................................................................................ 4.7
----------
Total cost of redemption of 16.0% Senior Notes due 2012 ............................................................ 51.6
Redeem in full the outstanding principal amount of 13.95% Senior Subordinated Notes due 2012 at a
redemption price of 100.0% of the current accretion amount:
Principal ..................................................................................................... 44.5
Accrued interest .............................................................................................. 1.3
Redemption premium ............................................................................................ --
----------
Total cost of redemption of 13.95% Senior Subordinated Notes due 2012 .............................................. 45.8
Terminate a management services agreement among the Company, OPCO and Leonard Green &
Partners, L.P. prior to the contractual date of termination ................................................... 2.5
Pay estimated fees and expenses with respect to the offering and the related transactions .......................... 3.0
Use the remaining proceeds for working capital and general corporate purposes ...................................... 6.9
----------
Total use of net proceeds .......................................................................................... $ 109.8
==========
On January 31, 2005, the Company, through a wholly-owned subsidiary, acquired
substantially all of the assets of Alexandria Financial Services, LLC,
Alexandria Acquisition, LLC, American Check Cashers of Lafayette, LLC, ACC of
Lake Charles, LLC and Southern Financial Services, LLC (collectively,
"American"). Assets acquired included, among others, real property leases,
inventory, accounts and notes receivable and intellectual property. The initial
purchase price was $9.9 million in cash. An additional $2.4 million is payable
to the sellers in the event that American achieves specified targets in the year
ending January 31, 2006. In determining the purchase price, the Company
considered, among other factors, comparable transactions and valuations and the
expected contribution to its earnings. The acquisition resulted in the addition
of 24 company-owned stores located in the State of Louisiana to the Company's
store network.
On February 2, 2005, the Company entered into a letter agreement with certain
members of management of the Company, relating to certain loans made by the
Company to certain members of management in an aggregate principal amount of
approximately $6.9 million. Pursuant to the letter agreement, among other
things, (i)the Company agreed to forgive an aggregate of approximately $2.5
million of accrued interest owed by certain members of management with respect
to the loans, and (ii) certain members of management paid cash or exchanged
shares of common stock of Corp. in full satisfaction of the outstanding
principal amount of such loans.
20
DOLLAR FINANCIAL CORP.
SUPPLEMENTAL STATISTICAL DATA
December 31,
Company Operating Data: 2003 2004
----- -----
Stores in operation:
Company-owned ................................................... 628 656
Franchised stores and check cashing merchants ................... 472 474
----- -----
Total .............................................................. 1,100 1,130
===== =====
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
Operating Data: 2003 2004 2003 2004
--------- --------- --------- ---------
Face amount of checks cashed (in millions) ......................... $ 804 $ 883 $ 1,574 $ 1,699
Face amount of average check ....................................... $ 372.07 $ 417.84 $ 369.68 $ 404.97
Face amount of average check (excluding Canada and the United
Kingdom) ........................................................ $ 357.07 $ 368.21 $ 355.46 $ 368.40
Average fee per check .............................................. $ 13.61 $ 15.49 $ 13.51 $ 15.04
Number of checks cashed (in thousands) ............................. 2,162 2,113 4,259 4,195
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
Collections Data: 2003 2004 2003 2004
--------- --------- --------- ---------
Face amount of returned checks (in thousands) ...................... $ 7,316 $ 7,895 $ 14,951 $ 15,496
Collections (in thousands) ......................................... (5,325) (5,481) (10,821) (10,856)
--------- --------- --------- ---------
Net write-offs (in thousands) ...................................... $ 1,991 $ 2,414 $ 4,130 $ 4,640
========= ========= ========= =========
Collections as a percentage of
returned checks ................................................. 72.8% 69.4% 72.4% 70.1%
Net write-offs as a percentage of
check cashing revenues ............................................ 6.8% 7.4% 7.2% 7.4%
Net write-offs as a percentage of the
face amount of checks cashed .................................... 0.24% 0.27% 0.26% 0.27%
21
The following chart presents a summary of our consumer lending originations,
which includes loan extensions and revenues for the following periods (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------- ---------------------------
2003 2004 2003 2004
--------------------------- ---------------------------
U.S. company funded consumer loan originations(1) .......... $ 15,928 $ 18,507 $ 30,196 $ 37,069
Canadian company funded consumer loan originations(2) ...... 80,364 118,027 155,938 225,168
U.K. company funded consumer loan originations(2) .......... 26,584 42,780 53,023 85,478
--------------------------- ---------------------------
Total company funded consumer loan originations ......... $ 122,876 $ 179,314 $ 239,157 $ 347,715
=========================== ===========================
Servicing revenues, net .................................... $ 11,905 $ 13,868 $ 23,318 $ 26,018
U.S. company funded consumer loan revenues ................. 2,316 2,708 4,472 5,484
Canadian company funded consumer loan revenues ............. 7,920 12,522 14,682 24,019
U.K. company funded consumer loan revenues ................. 4,574 6,323 8,806 12,359
Provision for loan losses on company funded loans .......... (2,697) (4,674) (5,493) (9,344)
--------------------------- ---------------------------
Total consumer lending revenues, net .................... $ 24,018 $ 30,747 $ 45,785 $ 58,536
=========================== ===========================
Gross charge-offs of company funded consumer loans ......... $ 11,005 $ 16,476 $ 22,190 $ 32,554
Recoveries of company funded consumer loans ................ (8,392) (11,912) (16,706) (23,380)
--------------------------- ---------------------------
Net charge-offs on company funded consumer loans ........... $ 2,613 $ 4,564 $ 5,484 $ 9,174
=========================== ===========================
Gross charge-offs of company funded consumer loans
as a percentage of total company funded consumer
loan originations ....................................... 9.0% 9.2% 9.3% 9.4%
Recoveries of company funded consumer loans as a
percentage of total company funded consumer
loan originations ....................................... 6.9% 6.7% 7.1% 6.8%
Net charge-offs on company funded consumer loans
as a percentage of total company funded consumer
loan originations ....................................... 2.1% 2.5% 2.2% 2.6%
(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.
Six Months Ended
December 31,
------------------------
2003 2004
------------------------
U.S. stores originating company funded loans ................................ 43 38
U.S. stores originating bank funded loans ................................... 275 277
------------------------
Total U.S. stores originating short-term consumer loans ..................... 318 315
========================
22
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 and six
month periods ended December 31, 2004 and 2003. References in this section to
"we," "our," "ours," or "us" are to Dollar Financial Corp. and it's 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 December 31, 2004.
Overview
Dollar Financial Corp. is the parent company of Dollar Financial Group, Inc. and
its wholly owned subsidiaries. We have historically derived our revenues
primarily from providing check cashing services, consumer lending and other
consumer financial products and services, including money orders, money
transfers and bill payment. For our check cashing services, we charge our
customers fees that are usually equal to a percentage of the amount of the check
being cashed and are deducted form the cash provided to the customer. For our
consumer loans, we receive origination and servicing fees from the banks
providing the loans or, if we fund the loans directly, interest and fees on the
loans.
We operate in a sector of the financial services industry that serves the basic
need of lower-and middle-income working-class individuals to have convenient
access to cash. This need is primarily evidenced by consumer demand for check
cashing and short-term loans, and consumers who use these services are often
underserved by banks and other financial institutions.
Our expenses primarily relate to the operations of our store network, including
salaries and benefits for our employees, occupancy expense for our leased real
estate, depreciation of our assets and corporate and other expenses, including
costs related to opening and closing stores.
In each foreign country in which we operate, local currency is used for both
revenues and expenses. Therefore, we record the impact of foreign currency
exchange rate fluctuations related to our foreign net income.
In our discussion of our financial condition and results of operations, we refer
to stores, franchises and document transmitters that were open for the entire
fiscal period and the comparable prior fiscal period as comparable stores,
franchises and document transmitters.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with U.S.
generally accepted accounting principles. We evaluate these estimates on an
ongoing basis, including those related to revenue recognition, loss reserves and
intangible assets. We base these estimates on the information currently
available to us and on various other assumptions that we believe are reasonable
under the circumstances. Actual results could vary from these estimates under
different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition
With respect to company-operated stores, revenues 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, revenues are 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."
23
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 $1.9 million at December 31, 2004 and $1.4 million at June 30,
2004.
If one of the banks suffers a loss on a loan, we immediately record a charge-off
against the reserve for servicing fee adjustments for the entire amount of the
unpaid item. A recovery is credited to the reserve during the period in which
the recovery is made. Each month, we replenish the reserve in an amount equal to
the net losses charged to the reserve in that month. This replenishment, as well
as any additional provisions to the reserve for servicing fees adjustments as a
result of the calculations set forth above, is charged against revenues. The
total amount of outstanding loans owed to the banks did not change significantly
during the periods ended December 31, 2004 and December 31, 2003, and during
these periods the loss rates on loans declined. We serviced $223 million loans
for County Bank and First Bank during the first six months of fiscal 2005 and
$204 million during the first six months of fiscal 2004. At December 31, 2004
and 2003 the amount of outstanding loans were $18.0 million and $16.2 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 other
store and regional expenses in the consolidated statements of operations.
24
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 December 31, 2004, we incurred approximately $1.8 million of costs in
connection with the public offering of our common stock. These costs are
included in other assets on our balance sheet. In January 2005, we completed the
public offering of our common stock and, as a result, the contribution to
shareholders' equity will be reduced by these costs in the third quarter.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we establish a valuation allowance.
Results of Operations
Revenue Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
-------------------- ----------------- -------------------- ---------------
2003 2004 2003 2004 2003 2004 2003 2004
-------- -------- ----- ----- -------- -------- ----- -----
Check cashing ........................ $ 29,419 $ 32,733 48.4% 45.2% $ 57,541 $ 63,095 48.9% 45.5%
Consumer lending revenues, net ....... 24,018 30,747 39.5 42.5 45,785 58,536 38.9 42.3
Money transfer fees .................. 3,248 3,685 5.4 5.1 6,329 7,193 5.3 5.2
Other revenue ........................ 4,077 5,221 6.7 7.2 8,097 9,719 6.9 7.0
-------- -------- ----- ----- -------- -------- ----- -----
Total revenue ........................ $ 60,762 $ 72,386 100.0% 100.0% $117,752 $138,543 100.0% 100.0%
======== ======== ===== ===== ======== ======== ===== =====
Comparison of the Three Months Ended December 31, 2004 to December 31, 2003
Total revenues were $72.4 million for the three months ended December 31, 2004
compared to $60.8 million for the three months ended December 31, 2003, an
increase of $11.6 million or 19.1%. Comparable retail store, franchised store
and document transmitter sales for the entire period increased $10.8 million or
17.8%. New store openings and acquisitions accounted for an increase of $1.4
million, which was partially offset by a decrease of $523,000 in revenues from
closed stores.
A stronger British pound and Canadian dollar positively impacted revenue by $2.9
million for the quarter. In addition to the currency benefit, revenues in the
United Kingdom for the quarter increased by $2.6 million primarily related to
revenues from check cashing and consumer loan products. Revenues from our
Canadian subsidiary for the quarter increased $4.7 million in addition to the
currency benefit. The growth in our Canadian subsidiary is primarily due to
pricing adjustments made to the short-term consumer loan product in late fiscal
2004 as well as higher loan amounts offered as a result of a criteria change
made in fiscal 2005. Revenues from franchise fees and royalties accounted for
$2.4 million, or 3.4% of total revenues for the three months ended December 31,
2004 compared to $1.9 million, or 3.2% of total revenues for the three months
ended December 31, 2003.
25
Comparison of the Six Months Ended December 31, 2004 to December 31, 2003
Total revenues were $138.5 million for the six months ended December 31, 2004
compared to $117.8 million for the six months ended December 31, 2003, an
increase of $20.7 million or 17.6%. Comparable store, franchised store and
document transmitter sales for the entire period increased $19.5 million or
16.6%. New store openings accounted for an increase of $2.4 million while closed
stores accounted for a decrease of $1.1 million.
Favorable foreign currency rates attributed to $5.4 million of the increase for
the six months. In addition to the currency benefit, revenues in the United
Kingdom for the six months ended December 31, 2004 increased by $4.6 million
primarily related to revenues from check cashing and consumer loan products.
Revenues from our Canadian subsidiary for the six months ended December 31, 2004
increased $9.1 million in addition to the currency benefit. The growth in our
Canadian subsidiary is primarily due to pricing adjustments made to the
short-term consumer loan product in late fiscal 2004 as well as higher loan
amounts offered as a result of a criteria change made in fiscal 2005. Revenues
from franchise fees and royalties accounted for $4.5 million, or 3.2% of total
revenues for the six months ended December 31, 2004 compared to $3.6 million, or
3.1% of total revenues for the six months ended December 31, 2003.
Store and Regional Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
----------------- ------------------ ----------------- ------------------
2003 2004 2003 2004 2003 2004 2003 2004
------- ------- ------- ------- ------- ------- ------- -------
Salaries and benefits ....................... $18,707 $21,217 30.8% 29.3% $37,484 $41,054 31.8% 29.6%
Occupancy ................................... 4,885 5,603 8.0 7.7 9,749 10,994 8.3 7.9
Depreciation ................................ 1,490 1,810 2.5 2.5 2,938 3,553 2.5 2.6
Returned checks ............................. 2,347 2,736 3.9 3.8 4,885 5,217 4.2 3.8
Telephone and communications ................ 1,431 1,434 2.4 2.0 2,993 2,868 2.5 2.1
Advertising ................................. 1,924 2,272 3.1 3.1 3,542 5,095 3.0 3.7
Bank charges ................................ 787 977 1.3 1.4 1,890 1,912 1.6 1.3
Armored car services ........................ 751 889 1.2 1.2 1,480 1,714 1.3 1.2
Other ....................................... 7,428 6,887 12.2 9.5 12,843 13,793 10.9 10.0
------- ------- ------- ------- ------- ------- ------- -------
Total store and regional expenses ........... $39,750 $43,825 65.4% 60.5% $77,804 $86,200 66.1% 62.2%
======= ======= ======= ======= ======= ======= ======= =======
Comparison of the Three Months Ended December 31, 2004 to December 31, 2003
Store and regional expenses were $43.8 million for the three months ended
December 31, 2004 compared to $39.8 million for the three months ended December
31, 2003, an increase of $4.0 million or 10.3%. The impact of foreign currencies
accounted for $1.6 million of the increase. New store openings accounted for an
increase of $1.2 million while closed stores accounted for a decrease of
$308,000. Comparable retail store and franchised store expenses for the entire
period increased $3.5 million. For the three months ended December 31, 2004
total store and regional expenses decreased to 60.5% of total revenue compared
to 65.4% of total revenue for the three months ended December 31, 2003. After
adjusting for the impact of the changes in exchange rates, store and regional
expenses increased $624,000 in Canada, $1.1 million in the United Kingdom and
$826,000 in the U.S. The increase in Canada was primarily due to increases in
salaries and in occupancy expenses all of which are commensurate with the
overall growth in Canadian revenues. In the United Kingdom, the increase was
also primarily related to increases in salaries and occupancy costs commensurate
with the growth in that country. In the U.S., higher salaries and advertising
expenses associated with the revenue growth accounted for the operating expense
increase in this segment of the business.
Comparison of the Six Months Ended December 31, 2004 to December 31, 2003
Store and regional expenses were $86.2 million for the six months ended December
31, 2004 compared to $77.8 million for the six months ended December 31, 2003,
an increase of $8.4 million or 10.8%. The impact of foreign currencies accounted
for $2.9 million of the increase. New store openings accounted for an increase
of $2.0 million while closed stores accounted for a decrease of $308,000.
Comparable retail store and franchised store expenses for the entire period
increased $9.0 million. For the six months ended December 31, 2004 total store
26
and regional expenses decreased to 62.2% of total revenue compared to 66.1% of
total revenue for the six months ended December 31, 2003. After adjusting for
the impact of the changes in exchange rates, store and regional expenses
increased $2.3 million in Canada, $2.0 million in the United Kingdom and $1.1
million in the U.S. The increase in Canada was primarily due to increases of
$1.1 million in salaries, $474,000 in occupancy expenses, $411,000 in
advertising costs and $293,000 in various other operating expenses, all of which
are commensurate with the overall growth in Canadian revenues. In the United
Kingdom, the increase is primarily related to increases of $624,000 in salaries,
$353,000 in occupancy costs, $568,000 in advertising and $493,000 in other
various operating expenses commensurate with the growth in that country. In the
U.S., higher salaries and advertising expenses associated with the revenue
growth accounted for the operating expense increase in this segment of the
business.
Other Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------ ------------------- ------------------ -----------------
2003 2004 2003 2004 2003 2004 2003 2004
------- ------- ------- ------- ------- ------- ------- -------
Corporate expenses ...................... $ 7,126 $11,104 11.7% 15.3% $14,367 $20,648 12.2% 14.9%
Management fee .......................... 287 251 0.5 0.3 537 528 0.5 0.4
Losses (gain) on store closings and sales 61 (142) 0.1 (0.2) 121 (56) 0.1 --
Other depreciation and amortization ..... 914 1,159 1.5 1.6 1,872 2,102 1.6 1.5
Interest expense ........................ 10,250 9,802 16.9 13.5 19,434 19,471 16.5 14.1
Loss on extinguishment of debt .......... 8,855 -- 14.6 -- 8,855 -- 7.5 --
Income tax provision .................... 18,492 5,254 30.4 7.3 22,336 8,608 19.0 6.2
Comparison of the Three Months Ended December 31, 2004 to December 31, 2003
Corporate Expenses
Corporate expenses were $11.1 million for the three months ended December 31,
2004 compared to $7.1 million for the three months ended December 31, 2003. For
the three months ended December 31, 2004, corporate expenses increased to 15.3%
of total revenues compared to 11.7% of total revenues for the three months ended
December 31, 2003. The increase is primarily attributable to salaries, benefits,
and incentives attributable to growth of the Company's foreign operations as
well as the addition of "bench" strength positions to support the continuing
expansion of our store base and breadth of products and services. In addition,
foreign currency costs associated with the revaluation of U.S. dollar
denominated debt held by the Company's U.K. subsidiary resulted in a net benefit
to the fiscal 2004 second quarter of $650,000. Also, the Company expensed
$600,000 in the current quarter related to the termination of a deferred
compensation plan.
Management Fees
Management fees were $251,000 for the three months ended December 31, 2004,
compared to $287,000 for the three months ended December 31, 2003. In
conjunction with our initial public offering on January 28, 2005, we authorized
$2.5 million to pay a fee to terminate a management servicer agreement among the
Company, OPCO and Leonard Green & Partners L.P.
Losses (Gain) on Store Closings and Sales
Losses (gain) on store closings and sales was a gain of $142,000 for the three
months ended December 31, 2004 compared to a loss of $61,000 for the three
months ended December 31, 2003. The sale of five Oregon stores accounted for a
gain of $245,000 for the three months ended December 31, 2004.
Loss on Extinguishment of Debt
On November 13, 2003, OPCO issued $220 million principal amount of 9.75% senior
notes due 2011. The proceeds from this offering were used to redeem all of its
outstanding senior notes and its outstanding senior subordinated notes, to
refinance our credit facility, to distribute a portion of the proceeds to us to
redeem an equal amount of our senior discount notes and to pay fees and expenses
with respect to these transactions and a related note exchange transaction
involving our senior discount notes.
27
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Call Premium:
Dollar Financial Group, Inc. 10.875% Senior Notes $ 1.98
Dollar Financial Group, Inc. 10.875% Senior Subordinated Notes 0.73
Write-off of previously capitalized deferred issuance costs, net 6.14
-------
Loss on extinguishment of debt $ 8.85
=======
Interest Expense
Interest expense was $9.8 million for the three months ended December 31, 2004
compared to $10.3 million for the three months ended December 31, 2003, a
decrease of $500,000 or 4.4%. The decrease in interest was due to declines of
$253,000 in interest on our revolving credit facility, $300,000 in interest on
our collateralized borrowing that was in place in fiscal 2004 and $990,000 of
interest paid in the three months ended December 31, 2004 on OPCO's old 10.875%
senior notes for the 30 day period subsequent to its issuance on November 13,
2003 of $220 million principal amount of new 9.75% senior notes. OPCO elected to
effect covenant defeasance on the old notes by depositing with the trustee funds
sufficient to satisfy the old notes together with the call premium and accrued
interest to the December 13, 2003 redemption date. 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. Offsetting these aforementioned decreases was a $1.5 million
increase in interest on the incremental long-term debt outstanding after the
refinancing which is offset, in part, by a decline of approximately $200,000 due
to the reduction in the long-term fixed borrowing rate subsequent to the
refinancing.
Income Tax Provision
The provision for income taxes was $5.3 million for the three months ended
December 31, 2004 compared to a provision of $18.5 million for the three months
ended December 31, 2003. 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 82.2% for the three
months ended December 31, 2004 and (285.3)% for the three months ended December
31, 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 $31.2 million at December 31, 2004 of which
$3.8 million was provided for in the three months ended December 31, 2004.
Following our refinancing in November 2003, we no longer accrue U.S. tax on
foreign earnings. The amount of such tax was $431,000 for the three months ended
December 31, 2003.
Comparison of the Six Months Ended December 31, 2004 to December 31, 2003
Corporate Expenses
Corporate expenses were $20.6 million for the six months ended December 31, 2004
compared to $14.4 million for the six months ended December 31, 2003, an
increase of $6.2 million or 43.7%. The increase is primarily attributable to
salaries, benefits, and incentives attributable to growth of the Company's
foreign operations as well as the addition of "bench" strength positions to
support the continuing expansion of our store base and breadth of products and
services. In addition, foreign currency costs associated with the revaluation of
U.S. dollar denominated debt held by the Company's U.K. subsidiary resulted in a
net benefit to the fiscal 2004 second quarter of $650,000. Also, the Company
expensed $600,000 in the current quarter related to the termination of a
deferred compensation plan.
Management Fees
Management fees were $528,000 for the six months ended December 31, 2004,
compared to $537,000 for the six months ended December 31, 2003.
Losses (Gain) on Store Closings and Sales
Losses (gain) on store closings and sales was a gain of $56,000 for the six
months ended December 31, 2004 compared to a loss of $121,000 for the three
months ended December 31, 2003. The sale of 5 Oregon stores accounted for a gain
of $245,000 for the six months ended December 31, 2004.
28
Loss on Extinguishment of Debt
On November 13, 2003, OPCO issued $220.0 million principal amount of 9.75%
senior notes due 2011. The proceeds from this offering were used to redeem all
of its outstanding senior notes and its outstanding senior subordinated notes,
to refinance our credit facility, to distribute a portion of the proceeds to us
to redeem an equal amount of our senior discount notes and to pay fees and
expenses with respect to these transactions and a related note exchange
transaction involving our senior discount notes.
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Call Premium:
Dollar Financial Group, Inc. 10.875% Senior Notes $ 1.98
Dollar Financial Group, Inc. 10.875% Senior Subordinated Notes 0.73
Write-off of previously capitalized deferred issuance costs, net 6.14
-------
Loss on extinguishment of debt $ 8.85
=======
Interest Expense
Interest expense was $19.5 million for the six months ended December 31, 2004
compared to $19.4 million for the six months ended December 31, 2003, an
increase of $100,000 or 0.2%. The increased interest on the incremental
long-term debt outstanding after the refinancing accounted for $4.2 million
offset, in part, by a decline of approximately $500,000 due to the reduction in
the long-term fixed borrowing rate subsequent to the refinancing. Offsetting the
aforementioned net increase were declines of $784,000 in interest on our
revolving credit facility, $600,000 in interest on our collateralized borrowing
that was in place in fiscal 2004 and $1.2 million due to the May 2004 redemption
of approximately $9.1 million aggregate principal amount of our 16% senior notes
due 2012 and approximately $9.1 million aggregate principal amount of our 13.95%
senior subordinated notes due 2012. In addition to these declines, $990,000 of
interest paid in the three months ended December 31, 2004 on OPCO's old 10.875%
senior notes for the 30 day period subsequent to OPCO's issuance on November 13,
2003 of $220.0 million principal amount of new 9.75% senior notes. OPCO elected
to effect covenant defeasance on the old notes by depositing with the trustee
funds sufficient to satisfy the old notes together with the call premium and
accrued interest to the December 13, 2003 redemption date. 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 Taxes
The provision for income taxes was $8.6 million for the six months ended
December 31, 2004 compared to a provision of $22.3 million for the three months
ended December 31, 2003. 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 89.2% for the six months
ended December 31, 2004 and (426.4)% for the six months ended December 31, 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 $31.2 million at December 31, 2004 of which $6.8
million was provided for in the six months ended December 31, 2004. Following
our refinancing in November, 2003, we no longer accrue U.S. tax on foreign
earnings. The amount of such tax was $1.9 million for the six months ended
December 31, 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
six months ended December 31, 2004, cash and cash equivalents increased $18.8
million. Net cash provided by operations was $9.8 million. The increase in net
cash provided by operations was primarily the result of improved operating
results and the impact of the timing of settlements from fiscal 2003 to fiscal
2004 related to our loan servicing arrangements with County Bank and First Bank.
29
Liquidity and Capital Resources
On November 13, 2003, OPCO 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 its 10.875%
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.
On January 28, 2005, we announced the pricing of the initial public offering of
7,500,000 shares of our common stock at $16.00 per share. We sold 7,378,125
shares of common stock and a selling stockholder sold 121,875 shares of common
stock. The underwriters have a 30-day option to purchase up to 1,125,000
additional shares of common stock from the selling stockholders to cover
over-allotments, if any. We will not receive any proceeds from the sale of
shares by the selling stockholders. On February 2, 2005, we received $109.8
million in net proceeds in connection with the offering. The following table
summarizes the use of funds:
Redeem in full the outstanding principal amount of 16.0% Senior Notes due 2012
at a redemption price of 110.0% of the current accretion amount:
Principal ..................................................................................... $ 45.3
Accrued interest .............................................................................. 1.6
Redemption premium ............................................................................ 4.7
-------
Total cost of redemption of 16.0% Senior Notes due 2012 ............................................ 51.6
Redeem in full the outstanding principal amount of 13.95% Senior Subordinated Notes due 2012 at a
redemption price of 100.0% of the current accretion amount:
Principal ..................................................................................... 44.5
Accrued interest .............................................................................. 1.3
Redemption premium ............................................................................ --
-------
Total cost of redemption of 13.95% Senior Subordinated Notes due 2012 .............................. 45.8
Terminate a management services agreement among Dollar Financial Corp., Dollar Financial Group, Inc.
and Leonard Green & Partners, L.P. prior to the contractual date of termination ............... 2.5
Pay estimated fees and expenses with respect to the offering and the related transactions .......... 3.0
Use the remaining proceeds for working capital and general corporate purposes ...................... 6.9
-------
Total use of net proceeds .......................................................................... $ 109.8
=======
Our principal sources of cash are from operations and borrowings under our
credit facilities. We anticipate that our primary uses of cash will be to
provide working capital, finance capital expenditures, meet debt service
requirements, fund company originated short-term consumer loans, finance
acquisitions and new store expansion, and finance the expansion of our products
and services.
Net cash provided by operating activities was $9.8 million for the six months
ended December 31, 2004 compared to cash provided of $5.5 million for the six
months ended December 31, 2003. The increase in net cash provided by operations
was primarily the result of improved operating results and the impact of the
timing of settlements from fiscal 2003 to fiscal 2004 related to our loan
servicing arrangements with County Bank and First Bank.
Net cash used in investing activities for the six months ended December 31, 2004
was $6.2 million compared to a usage of $3.1 million for the six months ended
December 31, 2003. For the six months ended December 31, 2004 we made capital
expenditures of $5.6 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 capital expenditures, excluding
acquisitions, are currently anticipated to aggregate approximately $13.0 million
during our fiscal year ending June 30, 2005, for remodeling and relocation of
certain existing stores and for opening 50 to 55 new stores.
30
Net cash provided by financing activities for the six months ended December 31,
2004 was $10.8 million compared to a usage of $6.2 million for the six months
ended December 31, 2003. The cash provided in the six months ended December 31,
2004 was a result of an increase in the borrowings under our bank facilities.
The use of cash in the six months ended December 31, 2003 was a result of a
decrease in the borrowings under our bank facilities offset somewhat by net cash
from the refinancing activities discussed above.
At December 31, 2004 we had $1.1 million in excess of our short-term borrowing
needs.
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, OPCO repaid in
full all borrowings outstanding under its previously existing credit
facility using a portion of the proceeds from the issuance of $220.0
million principal amount of OPCO's 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. OPCO's borrowing capacity under the new
facility is limited to the total commitment of $55.0 million less letters
of credit totaling $13.3 million issued by Wells Fargo Bank, which
guarantee the performance of certain of its contractual obligations. At
December 31, 2004, the borrowing capacity was $38.8 million and there was
$11.0 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 December 31, 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 December 31, 2004, long term debt consisted of $241.1
million principal amount of OPCO's 9.75% senior notes due November 15, 2011,
$45.6 million principal amount of our 16.0% senior notes due May 15, 2012 and
$44.7 million principal amount of our 13.95% senior subordinated notes due May
15, 2012 and $55,000 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.
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 December 31, 2004, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
----------------------------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Total 1 Year Years Years Years
-------- --------- -------- -------- --------
Long-term debt:
9.75% Senior Notes due 2011(1) ........... $241,096 $ -- $ -- $ -- $241,096
16.0% Senior Notes due 2012 .............. 45,554 -- -- -- 45,554
13.95% Senior Subordinated Notes
due 2012 ............................... 44,661 -- -- -- 44,661
Operating leases .............................. 67,511 17,362 25,941 14,883 9,325
Other ......................................... 55 55 -- -- --
-------- -------- -------- -------- --------
Total contractual cash obligations ............ $398,877 $ 17,417 $ 25,941 $ 14,883 $340,636
======== ======== ======== ======== ========
- --------------------------------------------------------------------------------
(1) $1,096 is the unamortized premium on the 9.75% Senior Notes due 2011.
31
We are a leveraged company, 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
December 31, 2004 compared to June 30, 2004
Cash and cash equivalents increased to $88.1 million at December 31, 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.
Loans receivable increased to $39.3 million at December 31, 2004 from $32.9
million at June 30, 2004 due primarily to increases in installment loans of $4.4
million and pawn of $1.0 million.
Income taxes receivable decreased to $5.6 million at December 31, 2004 from $6.1
million at June 30, 2004 related primarily to the timing of receipts.
Goodwill and other intangibles increased $8.1 million from $149.1 million at
June 30, 2004 to $157.2 million at December 31, 2004 due to foreign currency
translation adjustments of $7.4 million and an acquisition of $700,000.
Foreign income taxes payable decreased from $6.0 million at June 30, 2004 to
$5.3 million at December 31, 2004 due primarily to the timing of payments.
Accrued expenses increased to $22.3 million at December 31, 2004 from $17.9
million at June 30, 2004 due primarily to the timing of accrued payroll,
increased accrued professional fees, accrued management fees and other operating
expense accruals.
Revolving credit facilities and long-term debt increased $17.4 million from
$325.0 million at June 30, 2004 to $342.4 million at December 31, 2004. The
increase is due to an $11.0 million draw down on the U.S. bank facility and the
election to capitalize $6.5 million of interest on our 16% senior notes due 2012
and our 13.95% senior subordinated notes due 2012.
Total shareholders' deficit decreased $15.6 million to $35.3 million from $50.9
million due to foreign translation adjustments and our net income for the six
months ended December 31, 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.
Sarbanes-Oxley Act of 2002: Section 404 Compliance
We are evaluating our internal controls systems in order to allow management to
report on, and our registered independent public accounting firm to attest to,
our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We
are performing the system and process evaluation and testing required in an
effort to comply with the management certification and auditor attestation
requirements of Section 404. As a result, we are incurring additional expense.
While we anticipate being able to fully comply with the requirements relating to
internal controls and all other aspects of Section 404 in a timely fashion, we
cannot be certain as to the timing of completion of our evaluation, testing and
any needed remediation actions or the impact of the same on our operations
because there is no precedent available by which to measure compliance adequacy.
32
If we are not able to implement the requirements of Section 404 in a timely
manner or with adequate compliance, we might be subject to sanctions or
investigation by regulatory authorities, such as the Securities and Exchange
Commission or NASDAQ. Any such action could adversely affect our financial
results and the market price of our common shares.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement 123 (revised) "Share-Based Payment,"
which will be effective in the first quarter of fiscal year 2006. This statement
will eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25 (Accounting for Stock Issued to Employees) and will
require instead that compensation expense be recognized based on the fair value
on the date of the grant. Additional footnote disclosures will be required and
may have a material impact on our statement of operations.
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 includes forward-looking statements regarding, among other things,
our plans, earnings estimates, strategies and prospects, both business and
financial. All statements other than statements of current or historical fact
contained in this prospectus are forward-looking statements. The words
"believe," "expect," "anticipate," "should," "plan," "will," "may," "intend,"
"estimate," "potential," "continue" and similar expressions, as they relate to
us, are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current
expectations and projections about future events and financial trends that we
believe may affect our financial condition, results of operations, business
strategy and financial needs. They can be affected by inaccurate assumptions,
including the risks, uncertainties and assumptions. In light of these risks,
uncertainties and assumptions, the forward-looking statements in this report may
not occur and actual results could differ materially from those anticipated or
implied in the forward-looking statements. When you consider these
forward-looking statements, you should keep in mind these risk factors and other
cautionary statements in this report.
Our forward-looking statements speak only as of the date made. We undertake no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
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.
33
Foreign Exchange Rates
Operations in the United Kingdom and Canada have exposed us to shifts in
currency valuations. From time to time, we may elect to purchase put options in
order to protect earnings in the United Kingdom and Canada against foreign
currency fluctuations. Out of the money put options may be purchased because
they cost less than completely averting risk, and the maximum downside is
limited to the difference between the strike price and exchange rate at the date
of purchase and the price of the contracts. At December 31, 2004, we held put
options with an aggregate notional value of $(CAN) 24.0 million and (pound)(GBP)
4.2 million to protect the currency exposure in Canada and the United Kingdom
throughout the remainder of fiscal year 2005. We use purchased options
designated as cash flow hedges to protect against the foreign currency exchange
rate risks inherent in our forecasted earnings denominated in currencies other
than the U.S. dollar. Our cash flow hedges have a duration of less than twelve
months. For derivative instruments that are designated and qualify as cash flow
hedges, the effective portions of the gain or loss on the derivative instrument
are initially recorded in accumulated other comprehensive income as a separate
component of 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 December 31, 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 and six months ended December 31, 2004. As of December 31, 2004,
amounts related to derivatives qualifying as cash flow hedges amounted to a
reduction of shareholders' equity of $320,000 all of which is expected to be
transferred to earnings in the next six months along with the earnings effects
of the related forecasted transactions. The fair market value at December 31,
2004 was $48,000 and is included in other assets on the balance sheet.
Canadian operations accounted for approximately 199.4% of consolidated
pre-tax earnings for the six months ended December 31, 2004, and 226.7% of
consolidated pre-tax earnings for the six months ended December 31, 2003. U.K.
operations accounted for approximately 81.9% of consolidated pre-tax earnings
for the six months ended December 31, 2004 and approximately 107.3% of
consolidated pre-tax earnings for the six months ended December 31, 2003. As
currency exchange rates change, translation of the financial results of the
Canadian and U.K. operations into U.S. dollars will be impacted. Changes in
exchange rates have resulted in cumulative translation adjustments increasing
our net assets by $28.7 million. These gains and losses are included in
corporate expenses.
We estimate that a 10.0% change in foreign exchange rates by itself would
have impacted reported pre-tax earnings from continuing operations by
approximately $2.7 million for the six months ended December 31, 2004 and $1.8
million for the six months ended December 31, 2003. This impact represents
nearly 28.1% of our consolidated pre-tax earnings for the six months ended
December 31, 2004 and 33.4% of our consolidated pre-tax earnings for the six
months ended December 31, 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,
president 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, president 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 December 31, 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,
34
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
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 2. Unregistered Sale of Equity Securities and Use of Proceeds
On January 27, 2005, the Securities and Exchange Commission declared
effective our registration statement on Form S-1 (File No. 333-113570) relating
to the initial public offering of an aggregate of 7,500,000 shares of our common
stock, par value $0.0001 per share. Piper Jaffray & Co. and Jefferies & Company,
Inc. acted as joint bookrunning managers of the offering and as representatives
of the following underwriters: Ferris, Baker Watts,Incorporated, Keefe, Bruyette
& Woods, Inc., JMP Securities LLC, Roth Capital Partners, LLC and ABN AMRO
Rothschild LLC.
The offering commenced February 2, 2005 at an initial public offering price
of $16.00 per share. Pursuant to the offering, we sold 7,378,125 shares to the
public for an aggregate offering price of $118,050,000 and the selling
stockholder sold 121,875 shares to the public for an aggregate offering price of
$1,813,500.
35
The following table summarizes the expenses incurred by us and by the
selling stockholder in connection with the offering as of February 2, 2005, none
of which were paid to our directors, officers, general partners or their
associates, persons owning 10% or more of our equity securities, or our
affiliates:
- -----------------------------------------------------------------------------------------------------------------
Underwriting Expenses Paid to
Discounts and or for the
Commissions Underwriters Other Expenses Total Expenses
- -----------------------------------------------------------------------------------------------------------------
Dollar Financial Corp. $8,263,500 -- $3,000,000(1) $11,263,500(1)
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Selling Stockholder 136,500 -- -- 136,500
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(1) Estimated expenses.
The net proceeds of the offering to us, after deducting the total expenses
disclosed in the foregoing table, were approximately $106.8 million. On February
2, 2005, we paid an aggregate of $51.6 million to redeem in full the outstanding
principal amount of our 16.0% senior notes due 2012 at a redemption price of
110.0% of the current accretion amount plus accrued interest thereon, and we
paid an aggregate of $45.8 million to redeem in full the outstanding principal
amount of our 13.95% senior subordinated notes due 2012 at a redemption price of
100.0% of the current accretion amount plus accrued interest thereon.
On February 2, 2005, we also paid an aggregate of $3,719,444.45 to Leonard
Green & Partners, L.P., representing accrued fees under a management services
agreement among Leonard Green & Partners, L.P., Dollar Financial Group, Inc.,
and us, and a fee to terminate the agreement prior to the contractual date of
termination. Leonard Green & Partners, L.P. manages Green Equity Investors II,
L.P., a limited partnership that owns 7,223,290 shares, or approximately 35.6%,
of our outstanding common stock. Jonathan Seiffer, one of our directors, is a
partner of Leonard Green & Partners, L.P. Jonathan Sokoloff, another of our
directors, is an executive officer of Leonard Green & Partners, L.P. and a
partner of a private equity firm affiliated with Leonard Green & Partners, L.P.
We have not made any specific plans with respect to the use of the
remaining net proceeds of the offering. We will use the remaining net proceeds
from the offering for working capital and general corporate purposes.
Item 4. Submission of Matters to a Vote of Security Holders
On January 24, 2005, holders of a majority of the then-outstanding shares
of our common stock executed a written consent to approve our amended and
restated certificate of incorporation and our 2005 stock incentive plan
effective upon pricing of the initial public offering of our common stock.
Our amended and restated certificate of incorporation, among other things,
(a) increases the total number of shares which we are authorized to issue to
65,500,000 shares, of which 55,500,000 shares are common stock, par value $0.001
per share and 10,000,000 shares are preferred stock, (b) provides that our board
of directors is authorized to provide for the issuance of shares of preferred
stock in one or more series and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications, limitations or
restrictions thereof, (c) provides for the creation of a classified board
consisting of three classes, such classes to serve initial terms of one, two and
three years, respectively, followed by three year terms thereafter, (d) provides
for the subdivision and split of each then-issued and outstanding share of our
common stock into 555 shares of common stock, (e) eliminates the ability of our
stockholders to consent in writing to the taking of any action, and (f)
eliminates cumulative voting for the election of the our board of directors.
Our 2005 stock incentive plan provides, among other things, for the grant
and issuance of up to 1,718,695 shares of our common stock to selected
employees, directors, and consultants.
Our amended and restated certificate of incorporation and 2005 stock
incentive plan are attached as exhibits hereto and incorporated herein by this
reference.
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Item 6. Exhibits
(a) Exhibits
Exhibit No. Description of Document
3.1(i) Amended and Restated Articles of Incorporation of Dollar
Financial Corp.*
3.1(ii) Amended and Restated Bylaws of Dollar Financial Corp.*
10.1 Dollar Financial Corp. 2005 Stock Incentive Plan*
10.2 Form of Stock Option Agreement for 2005 Stock Incentive Plan
10.3 Form of Stock Option Grant Notice for 2005 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 President
31.3 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 President
32.3 Section 1350 Certification of Chief Financial Officer
* Incorporated by reference to Dollar Financial Corp.'s Registration Statement
on Form S-1 (File No. 333-113570), initially filed with the Securities and
Exchange Commission on March 12, 2005, as subsequently amended.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL CORP.
Date: February 11, 2005 By: /s/ RANDY UNDERWOOD
-------------------------------------
Name: Randy 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.
38