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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 March 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____ to _____
Commission file number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-2997911
(State or Other Jurisdiction of (I.R.S. Employer 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)
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF DOLLAR FINANCIAL CORP., MEETS
THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q
AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTIONS H(2).
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 April 30, 2005, 100 shares of the Registrant's common stock, par value
$1.00 per share, were outstanding.
DOLLAR FINANCIAL GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2004
and March 31, 2005 (unaudited).............................................................. 3
Interim Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2004 and 2005........................................................ 4
Interim Unaudited Consolidated Statements of Cash Flows for the Three Months and Nine
Months Ended March 31, 2004 and 2005........................................................ 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.................................. 32
Item 4. Controls and Procedures..................................................................... 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 33
Item 6. Exhibits ................................................................................... 35
Signature ........................................................................................... 36
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
June 30, March 31,
2004 2005
---------------- -----------------
ASSETS (unaudited)
Cash and cash equivalents................................................. $ 69,266 $ 80,789
Loans receivable
Loans receivable..................................................... 32,902 38,513
Less: Allowance for loan losses..................................... (2,315) (3,078)
---------------- -----------------
Loans receivable, net..................................................... 30,587 35,435
Other consumer lending receivables........................................ 7,404 8,353
Other receivables......................................................... 4,056 6,216
Income taxes receivable................................................... 6,125 4,871
Prepaid expenses ......................................................... 4,380 6,921
Deferred tax asset, net of valuation allowance of $3,946 and $3,946....... - 174
Notes and interest receivable - officers.................................. 3,354 -
Due from parent ......................................................... 5,682 261
Property and equipment, net of accumulated depreciation
of $49,540 and $61,986............................................... 27,965 31,472
Goodwill and other intangibles, net of accumulated
amortization of $23,339 and $23,545 149,118 185,194
Debt issuance costs, net of accumulated amortization of
$967 and $2,213...................................................... 11,160 10,003
Other..................................................................... 2,827 2,413
---------------- -----------------
$ 321,924 $ 372,102
================ =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable ......................................................... $ 15,863 $ 20,866
Foreign income taxes payable.............................................. 5,979 5,489
Accrued expenses and other liabilities.................................... 16,908 21,743
Accrued interest payable.................................................. 3,876 9,532
Revolving credit facilities............................................... - 11,000
9.75% Senior Notes due 2011............................................... 241,176 241,056
Other long-term debt...................................................... 105 16
Shareholder's equity:
Common stock, $1 par value: 20,000 shares authorized;
100 shares issued and outstanding at June 30, 2004 and
March 31, 2005 - -
Additional paid-in capital........................................... 21,617 21,617
Retained earnings.................................................... 2,587 14,556
Accumulated other comprehensive income............................... 13,813 26,227
---------------- -----------------
Total shareholder's equity................................................ 38,017 62,400
---------------- -----------------
$ 321,924 $ 372,102
================ =================
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------ -----------------------------
2004 2005 2004 2005
-------------- ------------ ------------ ------------
Revenues:
Check cashing............................................. $ 30,398 $ 32,708 $ 87,939 $ 95,803
Consumer lending:
Fees from consumer lending.............................. 29,923 37,225 90,130 113,970
Provision for loan losses and adjustment to
servicing revenue..................................... (3,477) (4,308) (17,899) (22,517)
-------------- ------------ ------------ ------------
Consumer lending, net..................................... 26,446 32,917 72,231 91,453
Money transfer fees....................................... 3,245 3,722 9,574 10,915
Other 5,268 7,102 13,365 16,821
-------------- ------------ ------------ ------------
Total revenues............................................... 65,357 76,449 183,109 214,992
-------------- ------------ ------------ ------------
Store and regional expenses:
Salaries and benefits..................................... 19,397 22,365 56,881 63,419
Occupancy................................................. 5,019 5,820 14,768 16,814
Depreciation.............................................. 1,533 1,773 4,471 5,326
Returned checks, net and cash shortages................... 2,051 2,699 6,936 7,916
Telephone and telecommunication........................... 1,336 1,600 4,329 4,468
Advertising............................................... 1,736 1,983 5,278 7,078
Bank charges.............................................. 888 1,022 2,778 2,934
Armored carrier expenses.................................. 786 935 2,266 2,649
Other..................................................... 5,502 6,990 18,345 20,783
-------------- ------------ ------------ ------------
Total store and regional expenses............................ 38,248 45,187 116,052 131,387
-------------- ------------ ------------ ------------
Store and regional margin.................................... 27,109 31,262 67,057 83,605
-------------- ------------ ------------ ------------
Corporate and other expenses:
Corporate expenses........................................ 8,360 10,838 22,727 31,486
Other depreciation and amortization....................... 800 806 2,672 2,908
Interest expense, net..................................... 6,498 6,619 18,172 19,595
Loss on extinguishment of debt............................ - - 7,209 -
Other .................................................... 157 48 278 (8)
-------------- ------------ ------------ ------------
Income before income taxes................................... 11,294 12,951 15,999 29,624
Income tax provision......................................... 9,728 5,437 14,936 14,045
-------------- ------------ ------------ ------------
Net income .................................................. $ 1,566 $ 7,514 $ 1,063 $ 15,579
============== ============ ============ ============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
------------------------------------
2004 2005
--------------- --------------
Cash flows from operating activities:
Net income....................................................................... $ 1,063 $ 15,579
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............................................... 8,523 9,361
Loss on extinguishment of debt.............................................. 7,209 -
Losses (gains) on store closings and sales.................................. 278 (54)
Foreign currency (gain) loss on revaluation of subordinated borrowings...... (899) 183
Deferred tax provision (benefit)............................................ 841 (132)
Change in assets and liabilities (net of effect of acquisitions):
Increase in loans and other receivables................................. (4,978) (1,650)
(Increase) decrease in income taxes receivable.......................... (4,402) 1,254
Increase in prepaid expenses and other.................................. (350) (2,135)
Increase in accounts payable, income taxes payable,
accrued expenses and other liabilities and
accrued interest payable.............................................. 8,638 9,322
--------------- --------------
Net cash provided by operating activities........................................ 15,923 31,728
Cash flows from investing activities:
Acquisitions, net of cash acquired............................................. - (25,358)
Gross proceeds from sale of fixed assets....................................... 41 -
Additions to property and equipment............................................ (5,080) (9,324)
--------------- --------------
Net cash used in investing activities............................................ (5,039) (34,682)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated Notes due 2006 ...................... (20,734) -
Other debt borrowings (payments)............................................... 109 (93)
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................................................. (10,156) (164)
Net (increase) decrease in due from parent .................................... (2,034) 3,421
Dividend paid to parent ....................................................... (20,000) (3,610)
--------------- --------------
Net cash (used in) provided by financing activities.............................. (5,684) 10,554
Effect of exchange rate changes on cash and cash equivalents..................... 2,892 3,923
--------------- --------------
Net increase in cash and cash equivalents........................................ 8,092 11,523
Cash and cash equivalents at beginning of period................................. 71,805 69,266
--------------- --------------
Cash and cash equivalents at end of period....................................... $ 79,897 $ 80,789
=============== ==============
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Dollar
Financial Group, Inc. (the "Company") have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial information and
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all information and footnotes required by 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. 333-18221) for the fiscal year ended
June 30, 2004 filed with the Securities and Exchange Commission. In the opinion
of management, all adjustments, (consisting of normal recurring adjustments),
considered necessary for a fair presentation have been included. Operating
results of interim periods are not necessarily indicative of the results that
may be expected for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Operations
The Company, organized in 1979 under the laws of the State of New York, is a
wholly owned subsidiary of Dollar Financial Corp. ("Corp."), a Delaware
corporation. The Company, through its subsidiaries, provides retail financial
services to the general public through a network of 1,172 locations (of which
700 are company owned) 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(R) Express
services and originates short-term consumer loans through 192 independent
document transmitters in 11 states. In addition, the Company's newly acquired
business, We The People USA, Inc. offers retail based legal document preparation
services through a network of 170 franchised locations in 32 states.
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION
The Company's payment obligations under its 9.75% Senior Notes due 2011 are
jointly and severally guaranteed (such guarantees, the "Guarantees") on a full
and unconditional basis by Corp. and by the Company's existing and future
domestic subsidiaries (the "Guarantors"). Guarantees of the notes by Guarantors
directly owning, now or in the future, capital stock of foreign subsidiaries
will be secured by second priority liens on 65% of the capital stock of such
foreign subsidiaries. In the event the Company directly owns a foreign
subsidiary in the future, the notes will be secured by a second priority lien on
65% of the capital stock of any such foreign subsidiary (such capital stock of
foreign subsidiaries referenced in this paragraph collectively, the
"Collateral"). The non-guarantors consist of the Company's foreign subsidiaries
("Non-guarantors").
6
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION (continued)
The Guarantees of the notes:
o rank equal in right of payment with all existing and future
unsubordinated indebtedness of the Guarantors;
o rank senior in right of payment to all existing and future
subordinated indebtedness of the Guarantors; and
o are effectively junior to any indebtedness of the Company, including
indebtedness under the Company's senior secured reducing revolving
credit facility, that is either (1) secured by a lien on the
Collateral that is senior or prior to the second priority liens
securing the Guarantees of the notes or (2) secured by assets that are
not part of the Collateral to the extent of the value of the assets
securing such indebtedness.
Separate financial statements of each Guarantor that is a subsidiary of the
Company have not been presented because they are not required to be presented
herein and management has determined that their presentation would not be
material to investors. The accompanying tables set forth the condensed
consolidating balance sheets at March 31, 2005 and June 30, 2004 and the
condensed consolidating statements of operations and cash flows for the nine
month periods ended March 31, 2005 and 2004 of the Company, the combined
Guarantor subsidiaries, the combined Non-Guarantor subsidiaries and the
consolidated Company.
7
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING BALANCE SHEETS
March 31, 2005
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
---------------------------------------------------------------------------------
Assets
Cash and cash equivalents........................$ 5,144 $ 25,526 $ 50,119 $ - $ 80,789
Loans receivable
Loans receivable.............................. - 4,615 33,898 - 38,513
Less: Allowance for loan losses.............. - (189) (2,889) - (3,078)
---------------------------------------------------------------------------------
Loans receivable, net............................ - 4,426 31,009 - 35,435
Other consumer lending receivables............... 8,353 - - - 8,353
Other receivables................................ 164 1,318 4,989 (255) 6,216
Income taxes receivable.......................... - - 4,921 (50) 4,871
Prepaid expenses................................. 2,899 865 3,157 - 6,921
Deferred tax asset............................... - - 174 - 174
Due from affiliates.............................. - 59,556 - (59,556) -
Due from parent.................................. 2,261 - - (2,000) 261
Property and equipment, net...................... 3,213 6,449 21,810 - 31,472
Goodwill and other intangibles, net.............. - 83,282 101,912 - 185,194
Debt issuance costs, net......................... 10,003 - - - 10,003
Investment in subsidiaries....................... 303,245 9,801 9,712 (322,758) -
Other............................................ 381 , 457 1,575 - 2,413
---------------------------------------------------------------------------------
$ 335,663 $ 191,680 $ 229,378 $ (384,619) $ 372,102
=================================================================================
Liabilities and shareholder's equity
Accounts payable.................................$ 208 $ 9,123 $ 11,535 $ - $ 20,866
Income taxes payable............................. - 50 - (50) -
Foreign income taxes payable..................... - - 5,489 - 5,489
Accrued expenses and other liabilities........... 4,410 5,385 11,948 - 21,743
Accrued interest payable......................... 8,823 - 964 (255) 9,532
Due to affiliates................................ 7,750 - 53,806 (61,556) -
Revolving credit facilities...................... 11,000 - - - 11,000
9.75% Senior Notes due 2011...................... 241,056 - - - 241,056
Other long-term debt............................. 16 - - - 16
---------------------------------------------------------------------------------
273,263 14,558 83,742 (61,861) 309,702
---------------------------------------------------------------------------------
Shareholder's equity:
Common stock.................................. - - - - -
Additional paid-in capital.................... 21,617 83,309 30,311 (113,620) 21,617
Retained earnings ............................ 14,556 86,697 97,415 (184,112) 14,556
Accumulated other comprehensive income........ 26,227 7,116 17,910 (25,026) 26,227
---------------------------------------------------------------------------------
Total shareholder's equity....................... 62,400 177,122 145,636 (322,758) 62,400
---------------------------------------------------------------------------------
$ 335,663 $ 191,680 $ 229,378 $ (384,619) $ 372,102
=================================================================================
8
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2005
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------
Revenues:
Check cashing.............................. $ - $ 35,262 $ 60,541 $ - $ 95,803
Consumer lending, net:
Fees from consumer lending............... - 59,339 54,631 - 113,970
Provision for loan losses and adjustment
to servicing revenue................... - (13,399) (9,118) - (22,517)
-------------------------------------------------------------------------------
Consumer lending, net...................... - 45,940 45,513 - 91,453
Money transfer fees........................ - 3,202 7,713 - 10,915
Other ..................................... - 3,329 13,492 - 16,821
-------------------------------------------------------------------------------
Total revenues................................ - 87,733 127,259 - 214,992
-------------------------------------------------------------------------------
Store and regional expenses:
Salaries and benefits...................... - 32,662 30,757 - 63,419
Occupancy.................................. - 8,407 8,407 - 16,814
Depreciation............................... - 2,756 2,570 - 5,326
Returned checks, net and cash shortages.... - 3,528 4,388 - 7,916
Telephone and telecommunication............ - 2,900 1,568 - 4,468
Advertising................................ - 3,172 3,906 - 7,078
Bank charges............................... - 1,453 1,481 - 2,934
Armored carrier services................... - 1,098 1,551 - 2,649
Other...................................... - 10,103 10,680 - 20,783
-------------------------------------------------------------------------------
Total store and regional expenses............. - 66,079 65,308 - 131,387
-------------------------------------------------------------------------------
Store and regional margin..................... - 21,654 61,951 - 83,605
-------------------------------------------------------------------------------
Corporate and other expenses:
Corporate expenses......................... 14,604 183 16,699 - 31,486
Management fee............................. (6,759) 5,825 934 - -
Other depreciation and amortization........ 1,656 63 1,189 - 2,908
Interest expense (income).................. 17,250 (635) 2,980 - 19,595
Other ..................................... (128) - 120 - (8)
-------------------------------------------------------------------------------
(Loss) income before income taxes ............ (26,623) 16,218 40,029 - 29,624
Income tax (benefit) provision ............... (9,263) 8,927 14,381 - 14,045
-------------------------------------------------------------------------------
(Loss) income before equity in net
income of subsidiaries..................... (17,360) 7,291 25,648 - 15,579
Equity in net income of subsidiaries:
Domestic subsidiary guarantors............. 7,291 - - (7,291) -
Foreign subsidiary guarantors.............. 25,648 - - (25,648) -
-------------------------------------------------------------------------------
Net income.................................... $ 15,579 $ 7,291 $ 25,648 $ (32,939) $ 15,579
===============================================================================
9
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2005
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Cash flows from operating activities:
Net income............................................... $ 15,579 $ 7,291 $ 25,648 $ (32,939) $ 15,579
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Undistributed income of subsidiaries.................. (32,939) - - 32,939 -
Depreciation and amortization......................... 2,784 2,816 3,761 - 9,361
(Gains) losses on store closings and sales............ - (175) 121 - (54)
Foreign currency loss on revaluation of
subordinated borrowings............................. - 183 - - 183
Deferred tax benefit.................................. - - (132) - (132)
Changes in assets and liabilities (net of effect
of acquisitions):
Decrease (increase) in loans and other
receivables..................................... 3,267 387 (5,275) (29) (1,650)
Decrease in income taxes receivable............... 40,858 - 1,196 (40,800) 1,254
(Increase) decrease in prepaid expenses and other. (2,210) (395) 470 - (2,135)
Increase (decrease) in accounts payable,
income taxes payable, accrued expenses and
other liabilities and accrued interest payable.. 6,852 (40,240) 1,881 40,829 9,322
-------------------------------------------------------------------------
Net cash provided by (used in) operating activities...... 34,191 (30,133) 27,670 - 31,728
Cash flows from investing activities:
Acquisitions, net of cash acquired....................... - (21,633) (3,725) - (25,358)
Additions to property and equipment...................... (169) (2,663) (6,492) - (9,324)
Net decrease in due from affiliates...................... - 57,773 - (57,773) -
-------------------------------------------------------------------------
Net cash (used in) provided by investing activities...... (169) 33,477 (10,217) (57,773) (34,682)
Cash flows from financing activities:
Other debt payments...................................... (77) - (16) - (93)
Net increase in revolving credit facilities.............. 11,000 - - - 11,000
Payment of debt issuance costs........................... (164) - - - (164)
Net decrease in due from parent ......................... 3,421 - - - 3,421
Net decrease in due to affiliates........................ (44,390) - (13,383) 57,773 -
Dividend paid to parent.................................. (3,610) - - - (3,610)
-------------------------------------------------------------------------
Net cash used in financing activities.................... (33,820) - (13,399) 57,773 10,554
Effect of exchange rate changes on cash and cash
equivalents.............................................. - - 3,923 - 3,923
-------------------------------------------------------------------------
Net increase in cash and cash equivalents................ 202 3,344 7,977 - 11,523
Cash and cash equivalents at beginning of period......... 4,942 22,182 42,142 - 69,266
-------------------------------------------------------------------------
Cash and cash equivalents at end of period............... $ 5,144 $ 25,526 $ 50,119 $ - $ 80,789
=========================================================================
10
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidating Balance Sheets
June 30, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------------
Assets
Cash and cash equivalents........................ $ 4,942 $ 22,182 $ 42,142 $ - $ 69,266
Loans receivable ............................. - 4,838 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............... 7,274 130 - - 7,404
Other receivables................................ 1,156 824 2,360 (284) 4,056
Income taxes receivable.......................... 40,858 - 6,117 (40,850) 6,125
Prepaid expenses................................. 1,041 731 2,608 - 4,380
Notes and interest receivable--officers.......... 3,354 - - - 3,354
Due from affiliates.............................. - 117,472 - (117,472) -
Due from parent.................................. 5,682 - - - 5,682
Property and equipment, net...................... 4,702 6,255 17,008 - 27,965
Goodwill and other intangibles, net.............. - 56,514 92,604 - 149,118
Debt issuance costs, net......................... 11,160 - - - 11,160
Investment in subsidiaries....................... 259,437 9,801 6,705 (275,943) -
Other............................................ 29 422 2,376 - 2,827
----------------------------------------------------------------------------------
$ 339,635 $ 218,475 $ 198,363 $ (434,549) $ 321,924
==================================================================================
Liabilities and shareholder's equity
Accounts payable................................. $ 408 $ 6,058 $ 9,397 $ - $ 15,863
Income taxes payable............................. - 40,850 - (40,850) -
Foreign income taxes payable..................... - - 5,979 - 5,979
Accrued expenses and other liabilities........... 3,286 3,772 9,850 - 16,908
Accrued interest payable......................... 2,974 - 1,186 (284) 3,876
Due to affiliates................................ 53,681 - 63,791 (117,472) -
9 3/4% Senior Notes due 2011..................... 241,176 - - - 241,176
Subordinated notes payable and other............. 93 - 12 - 105
----------------------------------------------------------------------------------
301,618 50,680 90,215 (158,606) 283,907
----------------------------------------------------------------------------------
Shareholder's equity:
Common stock.................................. - - - - -
Additional paid-in capital.................... 21,617 83,309 27,304 (110,613) 21,617
Retained earnings ............................ 2,587 79,409 71,767 (151,176) 2,587
Accumulated other comprehensive income........ 13,813 5,077 9,077 (14,154) 13,813
----------------------------------------------------------------------------------
Total shareholder's equity....................... 38,017 167,795 108,148 (275,943) 38,017
----------------------------------------------------------------------------------
$ 339,635 $ 218,475 $ 198,363 $ (434,549) $ 321,924
==================================================================================
11
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2004
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------
Revenues:
Check cashing..................................... $ - $ 36,633 $ 51,306 $ - $ 87,939
Consumer lending, net:
Fees from consumer lending...................... - 53,701 36,429 - 90,130
Provision for loan losses and adjustment to
servicing revenue.............................. - (12,889) (5,010) - (17,899)
----------------------------------------------------------------------------
Consumer lending, net............................. - 40,812 31,419 - 72,231
Money transfer fees............................... - 3,360 6,214 - 9,574
Other............................................. - 2,852 10,513 - 13,365
----------------------------------------------------------------------------
Total revenues....................................... - 83,657 99,452 - 183,109
----------------------------------------------------------------------------
Store and regional expenses:
Salaries and benefits............................. - 31,320 25,561 - 56,881
Occupancy......................................... - 8,280 6,488 - 14,768
Depreciation...................................... - 2,382 2,089 - 4,471
Returned checks, net and cash shortages........... - 3,319 3,617 - 6,936
Telephone and telecommunication................... - 2,876 1,453 - 4,329
Advertising....................................... - 2,795 2,483 - 5,278
Bank charges...................................... - 1,590 1,188 - 2,778
Armored carrier services.......................... - 1,018 1,248 - 2,266
Other............................................. - 9,555 8,790 - 18,345
----------------------------------------------------------------------------
Total store and regional expenses.................... - 63,135 52,917 - 116,052
----------------------------------------------------------------------------
Store and regional margin............................ - 20,522 46,535 - 67,057
----------------------------------------------------------------------------
Corporate and other expenses:
Corporate expenses................................ 11,149 (6) 11,584 - 22,727
Management fees................................... (1,739) - 1,739 - -
Other depreciation and amortization............... 1,595 30 1,047 - 2,672
Interest expense (income) ........................ 14,796 (1,491) 4,867 - 18,172
Loss on extinguishment of debt.................... 7,209 - - - 7,209
Other............................................. 212 29 37 - 278
----------------------------------------------------------------------------
(Loss) income before income taxes ................... (33,222) 21,960 27,261 - 15,999
Income tax (benefit) provision ...................... (11,533) 16,208 10,261 - 14,936
----------------------------------------------------------------------------
(Loss) income before equity in net income
of subsidiaries................................. (21,689) 5,752 17,000 - 1,063
Equity in net income of subsidiaries:
Domestic subsidiary guarantors.................... 5,752 - - (5,752) -
Foreign subsidiary guarantors..................... 17,000 - - (17,000) -
----------------------------------------------------------------------------
Net income........................................... $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063
============================================================================
12
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Cash flows from operating activities:
Net income............................................... $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed income of subsidiaries.................. (22,752) - - 22,752 -
Depreciation and amortization......................... 2,745 2,410 3,368 - 8,523
Loss on extinguishment of debt ....................... 7,209 - - - 7,209
Losses on store closings and sales ................... 212 29 37 - 278
Foreign currency gain on revaluation of
subordinated borrowings.............................. - - (899) - (899)
Deferred tax provision................................ - 841 - - 841
Change in assets and liabilities (net of effect of
acquisitions):
Decrease (increase) in loans and other receivables.. 2,684 (3,115) (4,531) (16) (4,978)
Increase in income taxes receivable................. (11,677) - (5,924) 13,199 (4,402)
(Increase) decrease in prepaid expenses and other... (1,175) 307 518 - (350)
Increase in accounts payable, income taxes payable,
accrued expenses and other liabilities and
accrued interest payable.......................... 4,372 13,654 3,795 (13,183) 8,638
-------------------------------------------------------------------------
Net cash (used in) provided by operating activities...... (17,319) 19,878 13,364 - 15,923
Cash flows from investing activities:
Gross proceeds from sale of fixed assets................. - - 41 - 41
Additions to property and equipment...................... (368) (958) (3,754) - (5,080)
Net increase in due from affiliates...................... - (22,383) - 22,383 -
-------------------------------------------------------------------------
Net cash used in investing activities.................... (368) (23,341) (3,713) 22,383 (5,039)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated notes due 2006 (20,734) - - - (20,734)
Other debt borrowings (payments)......................... 128 - (19) - 109
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........................... (10,156) - - - (10,156)
Net increase in due from parent.......................... (2,034) - - - (2,034)
Net increase (decrease) in due to affiliates............. 33,096 - (10,713) (22,383) -
Dividends paid to parent................................. (20,000) - - - (20,000)
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities...... 28,366 - (11,667) (22,383) (5,684)
Effect of exchange rate changes on cash
and cash equivalents.................................. - - 2,892 - 2,892
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents..... 10,679 (3,463) 876 - 8,092
Cash and cash equivalents at beginning of period......... 7,981 26,213 37,611 - 71,805
-------------------------------------------------------------------------
Cash and cash equivalents at end of period............... $ 18,660 $ 22,750 $ 38,487 $ - $ 79,897
=========================================================================
13
DOLLAR FINANCIAL GROUP, INC.
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 a covenant not to compete and during the three months
ended March 31, 2005, paid $1.1 million in additional consideration related to
franchise agreements, which are deemed to have a definite life and will continue
to be amortized over the estimated useful lives of the agreements. This
identifiable intangible asset has been included as other intangibles on the
Consolidated Balance Sheet. Amortization for these intangibles for the three and
nine months ended March 31, 2005 was $44,400 and $60,900, respectively. The
amortization expense for the franchise agreements and the covenants not to
compete will be as follows:
Amount
Year (in thousands)
------------------- ---------------------
2005 $ 89.4
2006 114.7
2007 114.7
2008 114.7
2009 114.7
Thereafter 659.5
---------------------
1,207.7
=====================
The changes in the carrying amount of goodwill and other intangibles by
reportable segment for the fiscal year ended June 30, 2004 and the nine months
ended March 31, 2005 are as follows (in thousands):
United United
States Canada Kingdom Total
-------------------------------------------------------------
Balance at June 30, 2003 $ 56,609 $ 38,394 $ 48,413 $ 143,416
Amortization of other intangibles........... (95) - - (95)
Acquisition................................. - - 550 550
Foreign currency translation adjustments.... - 427 4,820 5,247
-------------------------------------------------------------
Balance at June 30, 2004 56,514 38,821 53,783 149,118
Amortization of other intangibles........... (61) - - (61)
Acquisitions................................ 26,829 - 3,241 30,070
Foreign currency translation adjustments.... - 3,913 2,154 6,067
-------------------------------------------------------------
Balance at March 31, 2005 $ 83,282 $ 42,734 $ 59,178 $ 185,194
=============================================================
The following table reflects the components of intangible assets (in thousands):
June 30, 2004 March 31, 2005
----------------------------------------- ----------------------------------------
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 $ 205,069 $ 21,022
Amortized intangible assets:
Covenants not to compete 2,452 2,433 2,523 2,523
Franchise agreements - - 1,147 -
------------------- ---------------- ------------------- ----------------
2,452 2,433 3,670 2,523
14
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. COMPREHENSIVE INCOME
Comprehensive 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 income for the periods stated (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
2004 2005 2004 2005
-------------- ---------------- ------------- -------------
Net income $ 1,566 $ 7,514 $ 1,063 $ 15,579
Foreign currency translation adjustment 1,017 (2,271) 9,184 12,573
Fair value adjustments for cash flow hedges - 161 - (159)
-------------- ---------------- ------------- -------------
Total comprehensive income $ 2,583 $ 5,404 $ 10,247 $ 27,993
============== ================ ============= =============
5. LOSS ON EXTINGUISHMENT OF DEBT
On November 13, 2003, the Company issued $220 million principal amount of 9.75%
Senior Notes due 2011. The proceeds from this offering were used to redeem all
of the Company's outstanding senior notes and the Company's outstanding senior
subordinated notes, to refinance its credit facility, to distribute a portion of
the proceeds to our parent company to redeem an equal amount of our parent
company's senior discount notes and to pay fees and expenses with respect to
these transactions and a related note exchange transaction involving our parent
company's senior discount notes.
The loss incurred on the extinguishment of debt was as follows ($ in millions):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ---------------------------------
2004 2005 2004 2005
-------------- --------------- -------------- ---------------
Call Premium:
10.875% Senior notes $ - $ - $ 2.0 $ -
10.875% Senior Subordinated notes - - 0.7 -
Write-off of previously capitalized
deferred issuance costs, net - - 4.5 -
-------------- --------------- -------------- ---------------
Loss on extinguishment of debt $ - $ - $ 7.2 $ -
============== =============== ============== ===============
15
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. GEOGRAPHIC SEGMENT INFORMATION
All operations for which geographic data is presented below are in one
principal industry (check cashing, consumer lending and ancillary services)
(in thousands):
As of and for the three months United United
ended March 31, 2004 States Canada Kingdom Total
--------------------------------------------------------------
Identifiable assets $ 144,518 $ 93,426 $ 90,697 $ 328,641
Goodwill and other intangibles, net 56,522 39,711 53,825 150,058
Sales to unaffiliated customers:
Check cashing 13,823 8,914 7,661 30,398
Consumer lending:
Fees from consumer lending 16,981 7,895 5,047 29,923
Provision for loan losses and adjustment to
servicing revenue (2,126) (395) (956) (3,477)
--------------------------------------------------------------
Consumer lending, net 14,855 7,500 4,091 26,446
Money transfer fees 1,146 1,414 685 3,245
Other 1,072 3,649 547 5,268
--------------------------------------------------------------
Total sales to unaffiliated customers 30,896 21,477 12,984 65,357
Interest expense 4,771 445 1,282 6,498
Depreciation and amortization 1,306 463 564 2,333
Income before income taxes 1,530 7,117 2,647 11,294
Income tax provision 7,329 1,811 588 9,728
For the nine months United United
ended March 31, 2004 States Canada Kingdom Total
--------------------------------------------------------------
Sales to unaffiliated customers:
Check cashing $ 36,633 $ 28,725 $ 22,581 $ 87,939
Consumer lending:
Fees from consumer lending 53,701 22,576 13,853 90,130
Provision for loan losses and adjustment to
servicing revenue (12,889) (2,286) (2,724) (17,899)
--------------------------------------------------------------
Consumer lending, net 40,812 20,290 11,129 72,231
Money transfer fees 3,360 4,280 1,934 9,574
Other 2,852 8,736 1,777 13,365
--------------------------------------------------------------
Total sales to unaffiliated customers 83,657 62,031 37,421 183,109
Interest expense 13,305 1,534 3,333 18,172
Depreciation and amortization 4,007 1,556 1,580 7,143
(Loss) income before income taxes (11,262) 18,992 8,269 15,999
Income tax provision 4,675 7,222 3,039 14,936
16
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. GEOGRAPHIC SEGMENT INFORMATION (continued)
As of and for the three months United United
ended March 31, 2005 States Canada Kingdom Total
--------------------------------------------------------------
Identifiable assets $ 152,437 $ 107,917 $ 111,748 $ 372,102
Goodwill and other intangibles, net 83,282 42,734 59,178 185,194
Sales to unaffiliated customers:
Check cashing 13,497 10,140 9,071 32,708
Consumer lending:
Fees from consumer lending 18,970 11,581 6,674 37,225
Provision for loan losses and adjustment to
servicing revenue (2,117) (660) (1,531) (4,308)
--------------------------------------------------------------
Consumer lending, net 16,853 10,921 5,143 32,917
Money transfer fees 1,127 1,701 894 3,722
Other 1,796 4,608 698 7,102
--------------------------------------------------------------
Total sales to unaffiliated customers 33,273 27,370 15,806 76,449
Interest expense 5,714 135 770 6,619
Depreciation and amortization 1,380 789 410 2,579
Income before income taxes 68 9,117 3,766 12,951
Income tax provision 493 3,840 1,104 5,437
For the nine months United United
ended March 31, 2005 States Canada Kingdom Total
--------------------------------------------------------------
Sales to unaffiliated customers:
Check cashing $ 35,262 $ 32,285 $ 28,256 $ 95,803
Consumer lending:
Fees from consumer lending 59,339 35,598 19,033 113,970
Provision for loan losses and adjustment to
servicing revenue (13,399) (4,530) (4,588) (22,517)
--------------------------------------------------------------
Consumer lending, net 45,940 31,068 14,445 91,453
Money transfer fees 3,202 5,058 2,655 10,915
Other 3,329 11,264 2,228 16,821
--------------------------------------------------------------
Total sales to unaffiliated customers 87,733 79,675 47,584 214,992
Interest expense 16,615 726 2,254 19,595
Depreciation and amortization 4,474 2,279 1,481 8,234
(Loss) income before income taxes (10,406) 28,360 11,670 29,624
Income tax (benefit) provision (336) 10,929 3,452 14,045
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Operations in the United Kingdom and Canada have exposed the Company to shifts
in currency valuations. From time to time, the Company may elect to purchase put
options in order to protect earnings in the United Kingdom and Canada against
foreign currency fluctuations. Out of the money put options may be purchased
because they cost less than completely averting risk, and the maximum downside
is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At March 31, 2005, the Company
held put options with an aggregate notional value of $(CAN) 40.8 million and
(pound)(GBP) 8.7 million to protect the currency exposure in Canada and the
United Kingdom through December 31, 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
17
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)
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 March 31, 2005 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 nine months ended March 31, 2005.
As of March 31, 2005, amounts related to derivatives qualifying as cash flow
hedges amounted to a reduction of shareholders' equity of $159,000 all of which
is expected to be transferred to earnings in the next nine months along with the
earnings effects of the related forecasted transactions. The fair market value
at March 31, 2005 was $277,000 and is included in other assets on the balance
sheet.
Although the Company's revolving credit facility and Canadian overdraft credit
facility 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.
8. CONTINGENT LIABILITIES
On August 19, 2003 a former customer in Ontario, Canada, Margaret Smith,
commenced an action against the Company and the Company's Canadian subsidiary on
behalf of a purported class of Canadian borrowers (except those residing in
British Columbia) who, Smith 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 February 1 and 2, 2005, the Company brought a motion to stay the
action against it on jurisdictional grounds and the Company's Canadian
subsidiary brought a motion to stay the action against it based on its
arbitration clause. The judgments on those motions are under review. On October
21, 2003, another former customer, Kenneth D. Mortillaro, commenced a similar
action against the Company's Canadian subsidiary but this action has since been
stayed because it is a duplicate action. 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. 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
Canadian subsidiary's motion to stay the action and to compel arbitration of
MacKinnon's claims, as required by his agreement with the Company's Canadian
subsidiary, was denied; the Company's Canadian subsidiary 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. On March 1, 2005,
MacKinnon's application for certification of his action was dismissed. MacKinnon
has appealed that dismissal and brought a series of motions seeking to have the
motions judge reconsider her decision. The Company's Canadian subsidiary is
opposing these motions and has renewed its application to stay the action based
on its arbitration clause. On April 15, 2005 the solicitor acting for MacKinnon
commenced a further identical proposed class action against the Company's
Canadian subsidiary on behalf of another former customer, Louise Parsons. The
Company's Canadian subsidiary has brought a motion to stay the Parsons action as
a duplicate action. The Company believes it has meritorious defenses to each of
these actions and intends to defend them vigorously. Similar class actions have
been commenced against the Company's Canadian subsidiary in Manitoba, New
Brunswick Nova Scotia and Newfoundland. The Company is named as a defendant in
the actions commenced in Nova Scotia and Newfoundland but has not been served
with the statements of claim in these actions to date. The claims in these
additional actions are substantially similar to those of the Ontario actions
referred to above.
18
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. CONTINGENT LIABILITIES (continued)
The Company is a defendant in four putative class-action lawsuits, all of which
were commenced by the same plaintiffs' law firm, alleging violations of
California's wage-and-hour laws. The named plaintiffs in these suits, which are
pending in the Superior Court of the State of California, are the Company's
former employees Vernell Woods (commenced August 22, 2000), Juan Castillo
(commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth
Williams (commenced June 3, 2003). Each of these suits seeks an unspecified
amount of damages and other relief in connection with allegations that the
Company misclassified California store (Woods) and regional (Castillo) managers
as "exempt" from a state law requiring the payment of overtime compensation,
that the Company failed to provide employees with meal and rest breaks required
under a new state law (Chin) and that the Company computed bonuses payable to
the Company's store managers using an impermissible profit-sharing formula
(Williams). In January 2003, without admitting liability, the Company sought to
settle the Woods case, which the Company believes to be the most significant of
these suits, by offering each individual putative class member an amount
intended in good faith to settle his or her claim. These settlement offers have
been accepted by 92% of the members of the putative class. The Company recorded
a charge of $2.8 million related to this matter during fiscal 2003. Woods'
counsel is presently disputing through arbitration the validity of the
settlements accepted by the individual putative class members. The Company
believes it has meritorious defenses to the challenge and to the claims of the
non-settling putative Woods class members and plans to defend them vigorously.
The Company believes it has adequately provided for the costs associated with
this matter. The Company is vigorously defending the Castillo, Chin and Williams
lawsuits and believes it has meritorious defenses to the claims asserted in
those matters.
In addition to the litigation discussed above, the Company is involved in
routine litigation and administrative proceedings arising in the ordinary course
of business.
The Company does not believe that the outcome of any of the matters referred to
in the preceding paragraphs will materially affect its financial condition,
results of operations or cash flows in future periods.
9. ACQUISITIONS
The following acquisitions have been accounted for under the purchase method of
accounting.
On January 4, 2005, the Company entered into an agreement to acquire
substantially all of the outstanding shares of International Paper Converters
Limited, d/b/a Cheque Changer Limited ("IPC"). The aggregate purchase price for
this acquisition was $2.7 million and was funded through excess internal cash.
The excess of the purchase price over the fair value of identifiable assets
acquired was $2.5 million. The 17 company-owned stores and two franchised stores
acquired further strengthens the Company's market share by expanding its
customer base in the United Kingdom. The company believes that for these
reasons, along with the earnings potential for these stores, the allocation of a
portion of the purchase price to goodwill is appropriate.
On January 31, 2005, the Company entered into an agreement to acquire
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 of Louisiana, LLC
(collectively, "American"). The aggregate purchase price for this acquisition
was $9.9 million in cash. The agreement also includes a maximum revenue-based
earn out of up to $2.4 million which is payable on January 31, 2006. The
Company's revolving credit facility was used to fund the purchase. The excess of
the purchase price over the fair value of identifiable assets acquired was $8.8
million. The 24 stores acquired further strengthens the Company's market share
by expanding its customer base in the Louisiana market and for that reason,
along with the earnings potential for these stores, the Company believes the
allocation of a portion of the purchase price to goodwill is appropriate.
On March 7, 2005, the Company entered into an agreement to acquire substantially
all of the assets of We The People Forms and Service Centers USA, Inc. ("WTP")
relating to WTP's retail-based legal document preparation services business. The
aggregate purchase price for this acquisition was $14.0 million, consisting of
$10.5 million in cash, $2 million in unregistered shares of our parent company's
common stock and a $1.5 million escrow amount (25% of which is to be distributed
on each of December 31, 2005, March 31, 2006, June 30, 2006 and September 30,
2006) assuming no indemnification claims. In addition, the Company assumed
$750,000 in liabilities and assumed approximately $3.3 million in refundable
deposits related to certain franchise agreements. The Company allocated a
portion of the purchase price to purchased franchise agreements for $1.1 million
and other assets for $0.1 million. The agreement also includes a maximum
revenue-based earn out of up to $3.0 million which is payable over a two year
19
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. ACQUISITIONS (continued)
period. Although the Company completed the acquisition of WTP on March 7, 2005,
management is still finalizing the purchase price allocation based on its
analysis of the fair value of the assets acquired and liabilities assumed. The
Company's revolving credit facility and unregistered shares of our parent
company's common stock was used to fund the purchase. The excess of the purchase
price over the preliminary fair value of identifiable assets acquired was $16.8
million. The Company believes that due to the franchising revenues generated
from the network of 170 franchise locations and the potential to sell additional
franchises, the preliminary allocation of a portion of the purchase price to
goodwill is appropriate.
Following is the allocation of the purchase price for the three aforementioned
acquisitions (in millions):
IPC American WTP
------------ ----------- -----------
Purchase price $2.7 $9.9 $14.0
Net assets acquired:
Purchased franchise agreements (1.1)
Refundable deposits 3.3
Other (assets) and liabilities (0.2) (1.1) 0.6
------------ ----------- -----------
Goodwill $2.5 $8.8 $16.8
============ =========== ===========
The following unaudited pro forma information for the three and nine months
ended March 31, 2004 and 2005 presents the results of operations as if the
acquisitions had occurred as of the beginning of the periods presented. The pro
forma operating results include the results of these acquisitions for the
indicated periods and reflect the amortization of identifiable intangible assets
arising from the acquisitions, increased interest expense on acquisition debt
and the income tax impact as of the respective purchase dates of IPC, American
and WTP. Pro forma results of operations are not necessarily indicative of the
results of operations that would have occurred had the purchase been made on the
date above or the results which may occur in the future.
Three Months Ended Nine Months Ended
March 31, March 31,
(Unaudited) (Unaudited)
----------------------------- -------------------------------
2004 2005 2004 2005
------------ ------------- -------------- -------------
Revenues $ 69,101 $ 78,149 $ 197,243 $ 222,374
Net income $ 1,928 $ 7,636 $ 2,758 $ 17,011
10. RELATED PARTY TRANSACTIONS
During fiscal 1999, we issued loans to certain members of management. The funds
were used to pay personal income tax expense associated with the exercise of
certain options and grants of certain stock in connection with the purchase of
the Company's parent company by Green Equity Investors II, L.P. In conjunction
with the Company's parent company's initial public offering, the Company sold
the officers' notes and related interest receivable to the Company's parent
company.
20
DOLLAR FINANCIAL GROUP, INC.
SUPPLEMENTAL STATISTICAL DATA
March 31,
-----------------------------------
Company Operating Data: 2004 2005
------------- -------------
Stores in operation:
Company-owned................................................ 630 700
Franchised stores and check cashing merchants................ 476 642
----- -----
Total........................................................... 1,106 1,342
===== =====
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- --------------------------------
Check Cashing Data: 2004 2005 2004 2005
------------ ----------- ------------- ---------------
Face amount of checks cashed (in millions).................... $ 801 $ 843 $ 2,375 $ 2,542
Face amount of average check.................................. $ 404 $ 437 $ 383 $ 419
Face amount of average check (excluding Canada and the United
Kingdom)................................................... $ 414 $ 432 $ 375 $ 389
Average fee per check......................................... $ 15.33 $ 16.94 $ 14.17 $ 15.79
Number of checks cashed (in thousands)........................ 1,983 1,930 6,204 6,067
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- --------------------------------
Check Cashing Collections Data: 2004 2005 2004 2005
------------ ----------- ------------- ---------------
Face amount of returned checks (in thousands)................. $ 7,208 $ 7,981 $ 22,159 $ 23,477
Collections (in thousands).................................... (5,563) (5,770) (16,383) (16,626)
------------ ----------- ------------- ---------------
Net write-offs (in thousands)................................. $ 1,645 $ 2,211 $ 5,776 $ 6,851
============ =========== ============= ===============
Collections as a percentage of
returned checks............................................ 77.2% 72.3% 73.9% 70.8%
Net write-offs as a percentage of
check cashing revenues..................................... 5.4% 6.8% 6.6% 7.2%
Net write-offs as a percentage of the
face amount of checks cashed............................... 0.21% 0.26% 0.24% 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 Nine Months Ended
March 31, March 31,
----------------------------------- ----------------------------
2004 2005 2004 2005
----------------------------------- ----------------------------
U.S. company funded consumer loan originations(1)......... $ 17,443 $ 15,956 $ 47,638 $ 53,025
Canadian company funded consumer loan originations(2)..... 75,791 107,346 231,729 332,514
U.K. company funded consumer loan originations(2)......... 29,207 43,420 82,230 128,898
----------------------------------- ----------------------------
Total company funded consumer loan originations........ $ 122,441 $ 166,722 $ 361,597 $ 514,437
=================================== ============================
U.S. servicing revenues, net.............................. $ 12,093 $ 14,089 $ 35,411 $ 40,107
U.S. company funded consumer loan revenues................ 2,666 2,682 7,138 8,166
Canadian company funded consumer loan revenues............ 7,895 11,581 22,577 35,600
U.K. company funded consumer loan revenues................ 5,048 6,674 13,854 19,033
Provision for loan losses on company funded loans......... (1,256) (2,109) (6,749) (11,453)
----------------------------------- ----------------------------
Total consumer lending revenues, net................... $ 26,446 $ 32,917 $ 72,231 $ 91,453
=================================== ============================
Gross charge-offs of company funded consumer loans........ $ 11,662 $ 15,492 $ 33,852 $ 48,046
Recoveries of company funded consumer loans............... (10,634) (13,871) (27,340) (37,251)
----------------------------------- ----------------------------
Net charge-offs on company funded consumer loans.......... $ 1,028 $ 1,621 $ 6,512 $ 10,795
=================================== ============================
Gross charge-offs of company funded consumer loans
as a percentage of total company funded consumer
loan originations...................................... 9.5% 9.3% 9.4% 9.3%
Recoveries of company funded consumer loans as a
percentage of total company funded consumer
loan originations...................................... 8.7% 8.3% 7.6% 7.2%
Net charge-offs on company funded consumer loans
as a percentage of total company funded consumer
loan originations...................................... 0.8% 1.0% 1.8% 2.1%
(1) Our company operated stores and document transmitter locations in the
United States originate company funded and bank funded (for which we
receive servicing revenues) 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:
Nine Months Ended
March 31,
----------------------------
2004 2005
----------------------------
U.S. stores originating company funded loans 43 63
U.S. stores originating bank funded loans 275 274
----------------------------
Total U.S. stores originating short-term consumer loans 318 337
============================
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 Group, Inc. for the three and nine
month periods ended March 31, 2005 and 2004. References in this section to "we,"
"our," "ours," or "us" are to Dollar Financial Group, Inc. and its wholly owned
subsidiaries, except as the context otherwise requires. References to "Corp."
are to our parent company, Dollar Financial Corp. For a separate discussion and
analysis of the financial condition and results of operations of Corp., see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Corp.'s' quarterly report on Form 10-Q (File No.
000-50866) for the period ended March 31, 2005.
Overview
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.
On January 4, 2005, we acquired substantially all of the outstanding shares of
International Paper Converters Limited adding 17 company-owned stores and two
franchised stores in the United Kingdom.
On January 31, 2005, we acquired substantially all of the assets of Alexandria
Financial Services, LLC, Alexandria Acquisition, LLC, American Check Cashers of
Lafayette, LLC, ACC of Lakes Charles, LLC and Southern Financial Services of
Louisiana, LLC. This acquisition added 24 check cashing and short-term consumer
loan stores in the Louisiana market adding to our existing market share in that
area of the country.
On March 7, 2005 we acquired substantially all of the assets of We The People
Forms and Service Centers USA, Inc. ("WTP") relating to WTP's retail-based legal
document preparation services business. We now offer these services through our
wholly owned subsidiary We The People USA, Inc. through a network of 170
franchised locations in 32 states.
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,
income taxes 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:
23
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."
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,
which 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 and
expected 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 March 31, 2005 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 increased during the periods
ended March 31, 2005 and March 31, 2004, and during these periods the loss rates
on loans increased marginally. As a result, the Company increased its reserve
for servicing fee adjustments. We serviced $321 million loans for County Bank
and First Bank during the first nine months of fiscal 2005 and $291 million
during the first nine months of fiscal 2004. At March 31, 2005 and 2004 the
amounts of outstanding loans were $14.2 million and $12.4 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 and expected 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
24
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.
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill for
impairment under established accounting guidelines also requires significant use
of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we establish a valuation allowance.
Results of Operations
Revenue Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
-------------------------- ------------------ -------------------------- -------------------
2004 2005 2004 2005 2004 2005 2004 2005
----------- ----------- ------- ------ ----------- ----------- -------- --------
Check cashing............... $ 30,398 $ 32,708 46.5% 42.8% $ 87,939 $ 95,803 48.0% 44.6%
Consumer lending revenues,
net...................... 26,446 32,917 40.4 43.1 72,231 91,453 39.4 42.5
Money transfer fees......... 3,245 3,722 5.0 4.9 9,574 10,915 5.2 5.1
Other revenue............... 5,268 7,102 8.1 9.2 13,365 16,821 7.4 7.8
----------- ----------- ------- ------ ----------- ----------- -------- --------
Total revenue............... $ 65,357 $ 76,449 100.0% 100.0% $ 183,109 $ 214,992 100.0% 100.0%
=========== =========== ======= ====== =========== =========== ======== ========
The Three Months Ended March 31, 2005 compared to the Three Months Ended March
31, 2004
Total revenues were $76.4 million for the three months ended March 31, 2005
compared to $65.4 million for the three months ended March 31, 2004, an increase
of $11.0 million or 17.0%. Comparable retail store, franchised store and
document transmitter sales for the entire period increased $8.4 million or
13.1%. New store openings accounted for an increase of $1.4 million and new
store acquisitions accounted for an increase of $2.0 million. The increases were
partially offset by a decrease of $0.7 million in revenues from closed stores.
A stronger British pound and Canadian dollar positively impacted revenue by $2.0
million for the quarter. In addition to the currency benefit, revenues in the
United Kingdom for the quarter increased by $2.1 million primarily related to
revenues from check cashing and consumer loan products. Revenues from our
Canadian subsidiary for the quarter increased $4.3 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 lending criteria
change made in fiscal 2005. Revenues from franchise fees and royalties accounted
25
for $2.8 million, or 3.7% of total revenues for the three months ended March 31,
2005 compared to $1.9 million, or 2.9% of total revenues for the three months
ended March 31, 2004.
The Nine Months Ended March 31, 2005 compared to the Nine Months Ended March 31,
2004
Total revenues were $215.0 million for the nine months ended March 31, 2005
compared to $183.1 million for the nine months ended March 31, 2004, an increase
of $31.9 million or 17.4%. Comparable store, franchised store and document
transmitter sales for the entire period increased $27.8 million or 15.4%. New
store openings accounted for an increase of $3.5 million and new store
acquisitions accounted for an increase of $2.4 million while closed stores
accounted for a decrease of $1.9 million.
Favorable foreign currency rates attributed to $7.3 million of the increase for
the nine months. In addition to the currency benefit, revenues in the United
Kingdom for the nine months ended March 31, 2005 increased by $6.3 million
primarily related to revenues from check cashing and consumer loan products.
Revenues from our Canadian subsidiary for the nine months ended March 31, 2005
increased $13.4 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 lending criteria change made in fiscal 2005.
Revenues from franchise fees and royalties accounted for $7.3 million, or 3.4%
of total revenues for the nine months ended March 31, 2005 compared to $5.5
million, or 3.0% of total revenues for the nine months ended March 31, 2004.
Store and Regional Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
----------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------------ ------------------ ------------------------ -----------------
2004 2005 2004 2005 2004 2005 2004 2005
----------- ---------- ------- ------- ----------- ---------- ------- -------
Salaries and benefits.............$ 19,397 $ 22,365 29.7% 29.3% $ 56,881 $ 63,419 31.1% 29.5%
Occupancy......................... 5,019 5,820 7.7 7.6 14,768 16,814 8.1 7.8
Depreciation...................... 1,533 1,773 2.3 2.3 4,471 5,326 2.4 2.5
Returned checks, net and cash
shortages....................... 2,051 2,699 3.1 3.5 6,936 7,916 3.8 3.7
Telephone and communications...... 1,336 1,600 2.0 2.1 4,329 4,468 2.4 2.1
Advertising....................... 1,736 1,983 2.7 2.6 5,278 7,078 2.9 3.3
Bank charges...................... 888 1,022 1.4 1.3 2,778 2,934 1.5 1.4
Armored carrier expenses.......... 786 935 1.2 1.2 2,266 2,649 1.2 1.2
Other............................. 5,502 6,990 8.4 9.1 18,345 20,783 10.0 9.7
----------- ---------- ------- ------- ----------- ---------- ------- -------
Total store and regional expenses.$ 38,248 $ 45,187 58.5% 59.0% $ 116,052 $ 131,387 63.4% 61.2%
=========== ========== ======= ======= =========== ========== ======= =======
The Three Months Ended March 31, 2005 compared to the Three Months Ended March
31, 2004
Store and regional expenses was $45.2 million for the three months ended March
31, 2005 compared to $38.2 million for the three months ended March 31, 2004, an
increase of $7.0 million or 18.3%. The impact of foreign currencies accounted
for $1.0 million of the increase. New store openings accounted for an increase
of $1.1 million and new store acquisitions accounted for an increase of $1.1
million while closed stores accounted for a decrease of $0.8 million. Comparable
retail store and franchised store expenses for the entire period increased $5.5
million. For the three months ended March 31, 2005 total store and regional
expenses increased slightly to 59.0% of total revenue compared to 58.5% of total
revenue for the three months ended March 31, 2004. After adjusting for the
impact of the changes in exchange rates, store and regional expenses increased
$2.3 million in Canada, $1.8 million in the United Kingdom and $1.8 million in
the U.S. The increase in Canada was primarily due to increases in salaries,
returned checks and cash shortages and 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 returned checks and cash shortages associated with the
revenue growth accounted for the operating expense increase in this segment of
the business.
The Nine Months Ended March 31, 2005 compared to the Nine Months Ended March 31,
2004
Store and regional expenses was $131.4 million for the nine months ended March
31, 2005 compared to $116.1 million for the nine months ended March 31, 2004, an
increase of $15.3 million or 13.2%. The impact of foreign currencies accounted
for $3.9 million of the increase. New store openings accounted for an increase
of $2.9 million and acquired stores accounted for an increase of $1.4 million
while closed stores accounted for a decrease of $1.0 million. Comparable retail
store and franchised store expenses for the entire period increased $12.1
million. For the nine months ended March 31, 2005 total store and regional
26
expenses decreased to 61.2% of total revenue compared to 63.4% of total revenue
for the nine months ended March 31, 2004. After adjusting for the impact of the
changes in exchange rates, store and regional expenses increased $4.6 million in
Canada, $3.9 million in the United Kingdom and $2.9 million in the U.S. The
increase in Canada was primarily due to increases of $1.6 million in salaries,
$0.8 million in occupancy expenses, $0.6 million in advertising costs, $0.5
million in depreciation and $1.0 million 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 $1.7
million in salaries, $0.7 million in occupancy costs, $0.7 million in
advertising and $0.8 million in other various operating expenses commensurate
with the growth in that country. In the U.S., higher salaries and advertising
expenses associated with the revenue growth accounted for the operating expense
increase in this segment of the business.
Corporate and Other Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
---------------------- ------------------- ---------------------- ------------------
2004 2005 2004 2005 2004 2005 2004 2005
-------- --------- ------- -------- --------- --------- ------- -------
Corporate expenses.................. $ 8,360 $ 10,838 12.8% 14.2% $ 22,727 $ 31,486 12.4% 14.6%
Other depreciation and amortization. 800 806 1.2 1.1 2,672 2,908 1.5 1.4
Interest expense, net............... 6,498 6,619 9.9 8.7 18,172 19,595 9.9 9.1
Loss on extinguishment of debt...... - - 0.0 0.0 7,209 - 3.9 0.0
Other............................... 157 48 0.2 0.1 278 (8) 0.2 0.0
Income tax provision................ 9,728 5,437 14.8 7.1 14,936 14,045 8.2 6.5
The Three Months Ended March 31, 2005 compared to the Three Months Ended March
31, 2004
Corporate Expenses
Corporate expenses were $10.8 million for the three months ended March 31, 2005
compared to $8.4 million for the three months ended March 31, 2004. For the
three months ended March 31, 2005, corporate expenses increased to 14.2% of
total revenues compared to 12.8% of total revenues for the three months ended
March 31, 2004. The increase is primarily attributable to compensation costs
related to significant growth of the Company's foreign operations as well as the
addition of corporate personnel to support the continuing rapid expansion of our
store network and new product additions. Additionally, in the fiscal 2005 third
quarter, the Company incurred significant costs associated with becoming a
public company, as well as increased insurance, legal costs and other
professional fees. 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 third quarter of
$250,000. Finally, the Company expensed $190,000 in the current quarter related
to the termination of a deferred compensation plan.
Interest Expense
Interest expense was $6.6 million for the three months ended March 31, 2005
compared to $6.5 million for the three months ended March 31, 2004, an increase
of $0.1 million or 1.5%. The increased interest on the incremental long-term
debt outstanding after the refinancing accounted for $0.5 million partially
offset by a decline of $0.3 million related to collateralized borrowings that
were in place in fiscal 2004.
Income Tax Provision
The provision for income taxes was $5.4 million for the three months ended March
31, 2005 compared to a provision of $9.7 million for the three months ended
March 31, 2004. Our effective tax rate differs from the federal statutory rate
of 35.0% due to foreign taxes and a valuation allowance on U.S. deferred tax
assets. Our effective income tax rate was 42.0% for the three months ended March
31, 2005 and 86.1% for the three months ended March 31, 2004. 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 $3.9 million at March 31, 2005 of which none was provided for in
the three months ended March 31, 2005. Following our refinancing in November,
2003, we no longer accrue U.S. tax on foreign earnings.
27
The Nine Months Ended March 31, 2005 compared to the Nine Months Ended March 31,
2004
Corporate Expenses
Corporate expenses were $31.5 million for the nine months ended March 31, 2005
compared to $22.7 million for the nine months ended March 31, 2004, an increase
of $8.8 million or 38.8%. The increase is primarily attributable to compensation
costs related to significant growth of the Company's foreign operations as well
as the addition of corporate personnel to support the continuing rapid expansion
of our store network and new product additions. Additionally, in the fiscal 2005
third quarter, the Company incurred significant costs associated with becoming a
public company, as well as increased insurance, legal costs and other
professional fees. In addition, foreign currency costs associated with the
revaluation of U.S. dollar denominated debt held by our U.K. subsidiary resulted
in a net benefit for the nine months ended March 31, 2004 of $0.9 million.
Finally, we expensed $0.8 million during the nine months ended March 31, 2005
related to the termination of a deferred compensation plan.
Loss on Extinguishment of Debt
On November 13, 2003, we issued $220.0 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of our
outstanding senior notes and our outstanding senior subordinated notes, to
refinance our credit facility, to distribute a portion of the proceeds to Corp.
to redeem an equal amount of its senior discount notes and to pay fees and
expenses with respect to these transactions and a related note exchange
transaction involving Corp.'s senior discount notes.
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Nine Months Ended
March 31,
--------------------------
2004 2005
----------- ----------
Call Premium:
10.875% Senior Notes $ 2.0 $ -
10.875% Senior Subordinated Notes 0.7 -
Write-off of previously capitalized
deferred issuance costs, net 4.5 -
--------------------------
Loss on extinguishment of debt $ 7.2 $ -
==========================
Interest Expense
Interest expense was $19.6 million for the nine months ended March 31, 2005
compared to $18.2 million for the nine months ended March 31, 2004, an increase
of $1.4 million or 7.7%. The increased interest on the incremental long-term
debt outstanding after the refinancing accounted for $4.7 million increase
offset, in part, by a decline of approximately $0.5 million due to the reduction
in the long-term fixed borrowing rate subsequent to the refinancing. Offsetting
the aforementioned net increase were declines of $0.7 million in interest on our
revolving credit facility, $0.9 million in interest on our collateralized
borrowing that was in place in fiscal 2004 and $1.0 million of interest paid in
the second quarter of fiscal 2004 on our old 10.875% senior notes for the 30 day
period subsequent to our issuance on November 13, 2003 of $220.0 million
principal amount of new 9.75% senior notes. We elected to affect 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.
Income Tax Provision
The provision for income taxes was $14.0 million for the nine months ended March
31, 2005 compared to a provision of $14.9 million for the nine months ended
March 31, 2004, respectively. Our effective tax rate differs from the federal
statutory rate of 35.0% due to foreign taxes and a valuation allowance. Our
effective income tax rate was 47.4% for the nine months ended March 31, 2005 and
93.4% for the nine months ended March 31, 2004. 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 $3.9
million at March 31, 2005 of which none was provided for in the nine months
ended March 31, 2005. 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 nine months ended March 31, 2004.
28
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
nine months ended March 31, 2005, cash and cash equivalents increased $11.5
million. Net cash provided by operations was $31.7 million compared to cash
provided of $15.9 million for the nine months ended March 31, 2004. The increase
in net cash provided by operations was primarily the result of improved
operating results.
Liquidity and Capital Resources
On November 13, 2003, we issued $220.0 million principal amount of 9.75% senior
notes due 2011 and entered into a new $55.0 million senior secured reducing
revolving credit facility. The proceeds from these transactions were used to
repay, in full, all borrowings outstanding under our prior credit facility,
redeem the entire $109.2 million principal amount of our 10.875% senior notes
due 2006, redeem the entire $20.0 million principal amount of our 10.875% senior
subordinated notes due 2006, distribute to Corp. $20.0 million to redeem an
equal amount of its 13.0% senior discount notes due 2006, and pay all related
fees, expenses and redemption premiums with respect to these transactions. On
May 6, 2004, we consummated an additional offering of $20.0 million principal
amount of 9.75% senior notes due 2011. The notes were offered as additional debt
securities under the indenture pursuant to which we had issued $220.0 million of
notes in November 2003. The notes issued in November 2003 and the notes issued
in May 2004 constitute a single class of securities under the indenture. The net
proceeds from the May 2004 note offering were distributed to Corp. to redeem
approximately $9.1 million aggregate principal amount of its 16.0% senior notes
due 2012 and approximately $9.1 million aggregate principal amount of its 13.95%
senior subordinated notes due 2012.
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 $31.7 million for the nine months
ended March 31, 2005 compared to cash provided of $15.9 million for the nine
months ended March 31, 2004. The increase in net cash provided by operations was
primarily the result of improved operating results.
Net cash used for investing activities for the nine months ended March 31, 2005
was $34.7 million compared to a usage of $5.0 million for the nine months ended
March 31, 2004. For the nine months ended March 31, 2005 we made capital
expenditures of $9.3 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 additional new stores.
Net cash provided by financing activities for the nine months ended March 31,
2005 was $10.6 million compared to a usage of $5.7 million for the nine months
ended March 31, 2004. The cash provided in the nine months ended March 31, 2005
was a result of an increase in the borrowings under our bank facilities. The use
of cash in the nine months ended March 31, 2004 was a result of a decrease in
the borrowings under our bank facilities offset somewhat by net cash from the
refinancing activities discussed above.
Revolving Credit Facilities. We have two revolving credit facilities: a domestic
revolving credit facility and a Canadian overdraft facility.
Domestic Revolving Credit Facility. On November 13, 2003, we repaid in full
all borrowings outstanding under our previously existing credit facility
using a portion of the proceeds from the issuance of $220.0 million
principal amount of 9.75% senior notes due 2011 and simultaneously entered
into a new $55.0 million senior secured reducing revolving credit facility.
Under the terms of the agreement governing this facility, the commitment
under this 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 this facility, up
to $20.0 million may be used in connection with letters of credit. Our
borrowing capacity under this 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 our
contractual obligations. At March 31, 2005, our borrowing capacity was
$38.0 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
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commitment of up to approximately $10.0 million, of which there was no
outstanding balance on March 31, 2005. 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 March 31, 2005, long term debt consisted of $241.1 million
principal amount of our 9.75% senior notes due November 15, 2011 and $16,000 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 March 31, 2005, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
---------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 Year Years Years Years
-------------- ------------ ------------ ------------ --------------
Revolving credit facilities................ $ 11,000 $ 11,000 $ - $ - $ -
Long-term debt:
9.75% Senior Notes due 2011(1)....... 241,056 - - - 241,056
Operating leases........................... 71,728 17,890 27,399 15,699 10,740
Other...................................... 16 16 - - -
-------------- ------------ ------------ ------------ --------------
Total contractual cash obligations........ $ 323,800 $ 28,906 $ 27,399 $ 15,699 $ 251,796
============== ============ ============ ============ ==============
- ------------------------------------------------------------------------------------------------------------------------------------
(1) $1,056 is the unamortized premium on the 9.75% Senior Notes due 2011.
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
provide sufficient liquidity to fund 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 growth in the consumer lending business, the
maturity of recently opened stores, the continued expansion of new stores and
sale of franchises as a result of our recent acquisition of We The People USA,
Inc. 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
March 31, 2005 compared to June 30, 2004
Cash and cash equivalents increased to $80.8 million at March 31, 2005 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 $38.5 million at March 31, 2005 from $32.9 million
at June 30, 2004 due primarily to increases in installment loans of $3.7 million
and pawn of $1.8 million.
Income taxes receivable decreased to $4.9 million at March 31, 2005 from $6.1
million at June 30, 2004 related primarily to the timing of receipts. Goodwill
30
and other intangibles increased $36.1 million from $149.1 million at June 30,
2004 to $185.2 million at March 31, 2005 due to foreign currency translation
adjustments of $6.1 million and acquisitions of $30.1 million.
Foreign income taxes payable decreased from $6.0 million at June 30, 2004 to
$5.5 million at March 31, 2005 due primarily to the timing of payments.
Accrued expenses increased to $21.7 million at March 31, 2005 from $16.9 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 $10.8 million from
$241.3 million at June 30, 2004 to $252.1 million at March 31, 2005. The
variance is primarily due to an $11.0 million increase in the outstanding
balance under our credit facility.
Total shareholder's equity increased $24.4 million to $62.4 million from $38.0
million due to our net income for the nine months ended March 31, 2005 and
foreign translation adjustments.
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.
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
instead require that compensation expense be recognized based on the fair value
on the date of the grant. The statement 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,
anticipated improvements in operations, our plans, earnings, cash flow and
expense 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.
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We have based these forward-looking statements largely on our current
expectations and projections about future events, financial trends and industry
regulations that we believe may affect our financial condition, results of
operations, business strategy and financial needs. They can be affected by
inaccurate assumptions, including, without limitation, with respect to risks,
uncertainties, anticipated operating efficiencies, new business prospects and
the rate of expense increases. 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 as well as those risk factors set forth in the section entitled
"Risk Factors" set forth in our parent company's statement on Form S-1 which was
effective on January 27, 2005.
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.
Payday Lending
On March 2, 2005, the Federal Deposit Insurance Corporation ("FDIC") issued a
release revising payday lending guidance to FDIC-supervised institutions that
offer payday loans. We are an international financial services company with a
diversified product portfolio in 1,342 stores in operation as of March 31, 2005
including 170 We The People franchised locations in the United States offering
retail-based legal document preparation services and 700 company-operated
stores, in 35 states, the District of Columbia, Canada and the United Kingdom.
The operations in the United Kingdom and Canada are not impacted by this recent
Guidance. Dollar has relationships with two FDIC-supervised banks, First Bank of
Delaware and County Bank of Rehoboth Beach, Delaware, pursuant to which the
Company markets and services payday loans in the U.S. For the nine months ended
March 31, 2005, Dollar realized $40.1 million of net servicing revenue from
these two relationships, which represents 18.7% of Dollar's total revenue of
$215.0 million for the nine months ended March 31, 2005.
Our long-term strategy has been and continues to be built around having a strong
product mix in a diversified set of international markets. This strategy
provides us with a diverse base of revenue growth opportunities. We expect that
the impact, if any, of the Guidance on our store operations will be manageable
and we are confident in the sustainability of our business model. Any potential
impact cannot be determined until the uncertainties surrounding the timing and
effect of the Guidance are ultimately resolved by the FDIC. The Guidance is in
large measure similar to the FDIC's original examination guidance issued in July
2003, with the added provision that limits the period a customer may have payday
loans outstanding from any lender to three months during the previous twelve
month period. The Guidance also reiterates that Federal law authorizes Federal
and state-chartered insured depository institutions to export their home state's
interest rates to other states in which they do business and acknowledges that
these institutions may do so through arrangements with third parties.
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. 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.
32
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 March 31, 2005, we held put
options with an aggregate notional value of $(CAN) 40.8 million and (pound)(GBP)
8.7 million to protect the currency exposure in Canada and the United Kingdom
through December 31, 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 March
31, 2005 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
nine months ended March 31, 2005. As of March 31, 2005, amounts related to
derivatives qualifying as cash flow hedges amounted to a reduction of
shareholders' equity of $159,000 all of which is expected to be transferred to
earnings in the next nine months along with the earnings effects of the related
forecasted transactions. The fair market value at March 31, 2005 was $277,000
and is included in other assets on the balance sheet.
Canadian operations accounted for approximately 95.7% of consolidated pre-tax
earnings for the nine months ended March 31, 2005, and 118.7% of consolidated
pre-tax earnings for the nine months ended March 31, 2004. U.K. operations
accounted for approximately 39.4% of consolidated pre-tax earnings for the nine
months ended March 31, 2005 and approximately 51.7% of consolidated pre-tax
earnings for the nine months ended March 31, 2004. 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 $26.4 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
$4.0 million for the nine months ended March 31, 2005 and $2.7 million for the
nine months ended March 31, 2004. This impact represents nearly 13.5% of our
consolidated pre-tax earnings for the nine months ended March 31, 2005 and 17.0%
of our consolidated pre-tax earnings for the nine months ended March 31, 2004.
Item 4. Controls and Procedures
Evaluation of Disclosure Control and Procedures
As of the end of the period covered by this report, our management conducted an
evaluation, with the participation of our chief executive officer and chief
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our chief
executive officer, president 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 March 31, 2005 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 August 19, 2003 a former customer in Ontario, Canada, Margaret Smith,
commenced an action against the us and our Canadian subsidiary on behalf of a
purported class of Canadian borrowers (except those residing in British
Columbia) who, Smith claims, were subjected to usurious charges in payday-loan
transactions. The action, which is pending in the Ontario Superior Court of
33
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. On February 1 and 2, 2005, we brought a motion to stay the action
against it on jurisdictional grounds and our Canadian subsidiary brought a
motion to stay the action against it based on its arbitration clause. The
judgments on those motions are under review. On October 21, 2003, another former
customer, Kenneth D. Mortillaro, commenced a similar action against our Canadian
subsidiary but this action has since been stayed because it is a duplicate
action. 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. 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 Canadian
subsidiary's motion to stay the action and to compel arbitration of MacKinnon's
claims, as required by his agreement with our Canadian subsidiary, was denied;
our Canadian subsidiary 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. On March 1, 2005, MacKinnon's application for certification
of his action was dismissed. MacKinnon has appealed that dismissal and brought a
series of motions seeking to have the motions judge reconsider her decision. Our
Canadian subsidiary is opposing these motions and has renewed its application to
stay the action based on its arbitration clause. On April 15, 2005 the solicitor
acting for MacKinnon commenced a further identical proposed class action against
our Canadian subsidiary on behalf of another former customer, Louise Parsons.
Our Canadian subsidiary has brought a motion to stay the Parsons action as a
duplicate action. We believe we have meritorious defenses to each of these
actions and intend to defend them vigorously. Similar class actions have been
commenced against the Company's Canadian subsidiary in Manitoba, New Brunswick
Nova Scotia and Newfoundland. The Company is named as a defendant in the actions
commenced in Nova Scotia and Newfoundland but has not been served with the
statements of claim in these actions to date. The claims in these additional
actions are 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.
34
Item 6. Exhibits
(a) Exhibits
Exhibit
No. Description of Document
3.1(i)Amended and Restated Articles of Incorporation of Dollar Financial
Corp.*
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.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL GROUP, INC.
Date: May 9, 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.
36