Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - DFC GLOBAL CORP. | w76193exv32w2.htm |
EX-31.1 - EX-31.1 - DFC GLOBAL CORP. | w76193exv31w1.htm |
EX-10.1 - EX-10.1 - DFC GLOBAL CORP. | w76193exv10w1.htm |
EX-32.1 - EX-32.1 - DFC GLOBAL CORP. | w76193exv32w1.htm |
EX-32.3 - EX-32.3 - DFC GLOBAL CORP. | w76193exv32w3.htm |
EX-31.3 - EX-31.3 - DFC GLOBAL CORP. | w76193exv31w3.htm |
EX-31.2 - EX-31.2 - DFC GLOBAL CORP. | w76193exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-50866
DOLLAR FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 23-2636866 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check þ 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 þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company. See definition
of large accelerated filer, accelerated filer and smaller
reporting company in
Rule 12b-2 of the Exchange Act: (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by a check mark whether the registrant is a shell company (as defined) in Rule 12b-2 of
the Exchange Act) Yes o No þ
As of October 31, 2009, 24,130,015 shares of the registrants common stock, par value $0.001 per
share, were outstanding.
DOLLAR FINANCIAL CORP.
INDEX
INDEX
Exhibit
10.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13(a)-14(a)/15d-14a Certification of Executive Vice President and Chief Financial Officer
Rule 13a-14(a)/15d-14(a) Certification of Senior Vice President of Finance and Corporate Controller
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Executive Vice President and Chief Financial Officer
Section 1350 Certification of Senior Vice President of Finance and Corporate Controller
2
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DOLLAR FINANCIAL CORP.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, | September 30, | |||||||
2009 | 2009 | |||||||
(as adjusted, see Note 1) |
(unaudited) | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 209,602 | $ | 226,665 | ||||
Loans receivable, net: |
||||||||
Loans receivable |
126,826 | 137,398 | ||||||
Less: Allowance for loan losses |
(12,132 | ) | (13,393 | ) | ||||
Loans receivable, net |
114,694 | 124,005 | ||||||
Loans in default, net of an allowance of $17,000 and $18,021 |
6,436 | 6,831 | ||||||
Other receivables |
7,299 | 3,719 | ||||||
Prepaid expenses and other current assets |
22,794 | 21,490 | ||||||
Current deferred tax asset, net of valuation allowance of $4,816 and $4,816 |
39 | 310 | ||||||
Total current assets |
360,864 | 383,020 | ||||||
Deferred tax asset, net of valuation allowance of $84,972 and $87,223 |
27,062 | 25,724 | ||||||
Property and equipment, net of accumulated depreciation of $99,803 and $106,403 |
58,614 | 59,204 | ||||||
Goodwill and other intangibles |
454,347 | 467,255 | ||||||
Debt issuance costs, net of accumulated amortization of $6,815 and $7,792 |
9,869 | 9,556 | ||||||
Other |
10,709 | 11,547 | ||||||
Total Assets |
$ | 921,465 | $ | 956,306 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable |
$ | 36,298 | $ | 33,345 | ||||
Income taxes payable |
14,834 | 10,503 | ||||||
Accrued expenses and other liabilities |
70,588 | 81,570 | ||||||
Debt due within one year |
5,880 | 3,811 | ||||||
Current deferred tax liability |
71 | 1,180 | ||||||
Total current liabilities |
127,671 | 130,409 | ||||||
Fair value of derivatives |
10,223 | 36,239 | ||||||
Long-term deferred tax liability |
18,876 | 21,730 | ||||||
Long-term debt |
530,425 | 529,540 | ||||||
Other non-current liabilities |
25,192 | 18,520 | ||||||
Stockholders equity: |
||||||||
Common stock, $.001 par value: 55,500,000 shares authorized;
24,102,985 shares and 24,130,015 shares issued and outstanding at
June 30, 2009 and September 30, 2009, respectively |
24 | 24 | ||||||
Additional paid-in capital |
311,301 | 312,675 | ||||||
Accumulated deficit |
(110,581 | ) | (105,308 | ) | ||||
Accumulated other comprehensive income |
8,018 | 12,103 | ||||||
Total Dollar Financial Corp. stockholders equity |
208,762 | 219,494 | ||||||
Non-controlling interest |
316 | 374 | ||||||
Total stockholders equity |
209,078 | 219,868 | ||||||
Total Liabilities and Stockholders Equity |
$ | 921,465 | $ | 956,306 | ||||
See notes to interim unaudited consolidated financial statements
3
Table of Contents
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
(as adjusted, see Note 1) |
||||||||
Revenues: |
||||||||
Check cashing |
$ | 48,532 | $ | 37,802 | ||||
Fees from consumer lending |
81,498 | 78,989 | ||||||
Money transfer fees |
7,610 | 6,823 | ||||||
Franchise fees and royalties |
1,177 | 942 | ||||||
Other |
14,259 | 17,252 | ||||||
Total revenues |
153,076 | 141,808 | ||||||
Store and regional expenses: |
||||||||
Salaries and benefits |
40,803 | 36,736 | ||||||
Provision for loan losses |
15,251 | 11,696 | ||||||
Occupancy |
11,324 | 10,847 | ||||||
Depreciation |
3,592 | 3,374 | ||||||
Returned checks, net and cash shortages |
6,135 | 2,264 | ||||||
Telephone and communications |
2,079 | 1,838 | ||||||
Advertising |
2,812 | 3,447 | ||||||
Bank charges and armored carrier service |
3,633 | 3,466 | ||||||
Other |
13,637 | 12,244 | ||||||
Total store and regional expenses |
99,266 | 85,912 | ||||||
Store and regional margin |
53,810 | 55,896 | ||||||
Corporate and other expenses: |
||||||||
Corporate expenses |
19,521 | 20,351 | ||||||
Other depreciation and amortization |
1,040 | 1,052 | ||||||
Interest expense, net |
11,547 | 11,624 | ||||||
Unrealized foreign exchange loss |
| 7,827 | ||||||
Provision for litigation settlements |
509 | 1,267 | ||||||
Loss on store closings |
4,938 | 318 | ||||||
Other (income) expense, net |
(258 | ) | 160 | |||||
Income before income taxes |
16,513 | 13,297 | ||||||
Income tax provision |
5,226 | 7,966 | ||||||
Net income |
11,287 | 5,331 | ||||||
Less: Net income attributable to non-controlling interests |
| 58 | ||||||
Net income attributable to Dollar Financial Corp. |
$ | 11,287 | $ | 5,273 | ||||
Net income per share: |
||||||||
Basic |
$ | 0.47 | $ | 0.22 | ||||
Diluted |
$ | 0.46 | $ | 0.22 | ||||
Weighted average shares outstanding: |
||||||||
Basic |
24,178,350 | 23,998,357 | ||||||
Diluted |
24,371,126 | 24,480,544 |
See notes to interim unaudited consolidated financial statements.
4
Table of Contents
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||
Common Stock | Additional | Accumulated | Other | Total | ||||||||||||||||||||||||
Outstanding | Paid-in | Income | Non-Controlling | Comprehensive | Stockholders | |||||||||||||||||||||||
Shares | Amount | Capital | (Deficit) | Interest | Income (loss) | Equity | ||||||||||||||||||||||
Balance,
June 30, 2009 (audited) |
24,102,985 | $ | 24 | $ | 311,301 | $ | (110,581 | ) | $ | 316 | $ | 8,018 | $ | 209,078 | ||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Foreign currency translation |
4,522 | 4,522 | ||||||||||||||||||||||||||
Cash flow hedges |
(437 | ) | (437 | ) | ||||||||||||||||||||||||
Net income |
5,273 | 5,273 | ||||||||||||||||||||||||||
Total comprehensive income |
9,358 | |||||||||||||||||||||||||||
Restricted stock grants |
36,329 | |||||||||||||||||||||||||||
Stock options exercised |
1,042 | | 6 | 6 | ||||||||||||||||||||||||
Vested portion of granted
restricted stock and
restricted stock units |
543 | 543 | ||||||||||||||||||||||||||
Retirement of common stock |
(10,341 | ) | ||||||||||||||||||||||||||
Other stock compensation |
825 | 825 | ||||||||||||||||||||||||||
Net income attributable to
non-controlling interest |
58 | 58 | ||||||||||||||||||||||||||
Balance, September 30, 2009 (unaudited) |
24,130,015 | $ | 24 | $ | 312,675 | $ | (105,308 | ) | $ | 374 | $ | 12,103 | $ | 219,868 | ||||||||||||||
See notes to interim unaudited consolidated financial statements.
5
Table of Contents
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 11,287 | $ | 5,273 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||
Depreciation and amortization |
5,390 | 5,422 | ||||||
Provision for loan losses |
15,251 | 11,696 | ||||||
Non-cash stock compensation |
2,292 | 1,368 | ||||||
Minority interest |
| 58 | ||||||
Losses on store closings |
1,761 | 155 | ||||||
Unrealized
foreign exchange loss |
| 7,827 | ||||||
Deferred tax provision |
380 | 3,895 | ||||||
Non-cash interest |
2,182 | 2,394 | ||||||
Change in assets and liabilities (net of effect of acquisitions): |
||||||||
Increase in loans and other receivables |
(23,460 | ) | (14,670 | ) | ||||
(Increase) decrease in prepaid expenses and other |
(3,507 | ) | 606 | |||||
Decrease in accounts payable, accrued expenses and other liabilities |
(7,222 | ) | (5,191 | ) | ||||
Net cash provided by operating activities |
4,354 | 18,833 | ||||||
Cash flows from investing activities: |
||||||||
Additions to property and equipment |
(5,233 | ) | (5,514 | ) | ||||
Net cash used in investing activities |
(5,233 | ) | (5,514 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the exercise of stock options |
3,257 | 6 | ||||||
Purchase of company stock |
(3,469 | ) | | |||||
Other debt payments |
(990 | ) | (7,991 | ) | ||||
Net increase in revolving credit facilities |
8,611 | | ||||||
Payment of debt issuance and other costs |
(103 | ) | (122 | ) | ||||
Net cash provided by (used in) financing activities |
7,306 | (8,107 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
(11,446 | ) | 11,851 | |||||
Net (decrease) increase in cash and cash equivalents |
(5,019 | ) | 17,063 | |||||
Cash and cash equivalents at beginning of period |
209,714 | 209,602 | ||||||
Cash and cash equivalents at end of period |
$ | 204,695 | $ | 226,665 | ||||
See notes to interim unaudited consolidated financial statements.
6
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements are of Dollar Financial Corp.
and its wholly owned and majority owned subsidiaries (collectively the Company). Dollar Financial Corp. is the
parent company of Dollar Financial Group, Inc. (OPCO) and its wholly owned subsidiaries. The
activities of Dollar Financial Corp. consist primarily of its investment in OPCO. The Companys unaudited
interim consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (GAAP) for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and
footnotes required by GAAP for complete financial statements and should be read in conjunction with
the Companys audited consolidated financial statements in its annual report on Form 10-K (File No.
000-50866) for the fiscal year ended June 30, 2009 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.
Dollar
Financial Corp. is a Delaware corporation incorporated in April 1990 as DFG Holdings, Inc. The Company
operates a store network through OPCO and its wholly owned and
majority owned subsidiaries. Through its subsidiaries, the Company provides retail
financial services and document processing services to the general public through a network of
1,188 locations (of which 1,032 are company owned) operating primarily as Money
Mart®, The Money Shop, Loan Mart®,
Insta-Cheques®, The Check Cashing Store, American Payday Loans, American Check
Casher, Cash Advance USA and We The People® in 19 states, Canada, the United
Kingdom and the Republic of Ireland. This network includes 1,149 locations (including 1,032
company-owned) in 15 states, Canada, the United Kingdom and the Republic of Ireland offering
financial services including check cashing, single-payment consumer loans, sale of money orders,
money transfer services and various other related services. Also, included in this network is the
Companys Poland operation acquired in June 2009 which provides financial services to the general
public through in-home servicing.
The Companys common shares are traded on the NASDAQ Global Select Market under the symbol DLLR.
Subsequent
Event
The
Company has evaluated all subsequent events through November 9, 2009,
which represents the filing date of this Form 10-Q with the
Securities and Exchange Commission, to ensure that this Form 10-Q
includes appropriate disclosure of events both recognized in the
financial statements as of September 30, 2009, and events which
occurred subsequent to September 30, 2009 but were not recognized in
the financial statements. As of November 9, 2009, there were no
subsequent events which required accounting recognition in the
financial statements. See Note 11 for a further discussion on
subsequent events.
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. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue recognition, loss
reserves, valuation allowance for income taxes and impairment assessment of goodwill and other
intangible assets. Management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation.
These reclassifications have no effect on net income or stockholders equity.
Fair Value of Financial Instruments
The fair value of the Term Loan Facilities is calculated as the sum of the present value of
all contractual cash flows. The fair value of the Companys 2.875% Senior Convertible Notes due
2027 (Convertible Notes) are based on broker quotations. The Companys financial instruments
consist of cash and cash equivalents, loan and other consumer lending receivables, which are
short-term in nature and their fair value approximates their carrying value.
7
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Fair Value of Financial Instruments (continued)
The total fair value of the Dollar Financial Corp. 2.875% Senior Convertible Notes due 2027 was
approximately $165.4 million at September 30, 2009. This fair value relates to the face value of
the Senior Convertible Notes and not the carrying value recorded on the Companys balance sheet.
The total fair value of the Canadian Term Facility was approximately
$248.4 million at September
30, 2009. The total fair value of the U.K. Term Facility was $73.2 million at September 30, 2009.
Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding, after adjusting for the dilutive effect of
stock options. The following table presents the reconciliation of the numerator and denominator
used in the calculation of basic and diluted earnings per share (in thousands):
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Net income
|
$ | 11,287 | $ | 5,273 | ||||
Reconciliation of denominator: |
||||||||
Weighted average of common shares outstanding basic 1
|
24,178 | 23,998 | ||||||
Effect of dilutive stock options 2
|
164 | 221 | ||||||
Effect of unvested restricted stock and restricted stock unit
grants
|
29 | 262 | ||||||
Weighted average of common shares outstanding diluted
|
24,371 | 24,481 | ||||||
(1) | Excludes 41 and 105 shares of unvested restricted stock, which are included in total outstanding common shares as of September 30, 2008 and 2009, respectively. The dilutive effect of restricted stock is included in the calculation of diluted earnings per share using the treasury stock method. | |
(2) | The effect of dilutive stock options was determined under the treasury stock method. |
Stock Based Employee Compensation
The Companys 2005 Stock Incentive Plan (the 2005 Plan) states that 1,718,695 shares of its
common stock may be awarded to employees or consultants of the Company. The awards, at the
discretion of the Companys Board of Directors, may be issued as nonqualified stock options,
incentive stock options or restricted stock awards. The number of shares issued under the 2005 Plan
is subject to adjustment as specified in the 2005 Plan provisions. No
options may be granted under the 2005 Plan after
January 24, 2015.
On November 15, 2007, the stockholders adopted the Companys 2007 Equity Incentive Plan (the 2007
Plan). The 2007 Plan provides for the grant of stock options, stock appreciation rights, stock
awards, restricted stock unit awards and performance awards (collectively, the Awards) to
officers, employees, non-employee members of the Board, independent consultants and contractors of
the Company and any parent or subsidiary of the Company. The maximum aggregate number of shares of
the Companys common stock that may be issued pursuant to Awards granted under the 2007 Plan is
2,500,000; provided, however, that no more than 1,250,000 shares may be awarded as restricted stock
or restricted stock unit awards. The shares that may be issued under the 2007 Plan may be
authorized, but unissued or reacquired shares of Common Stock. No grantee may receive an Award
relating to more than 500,000 shares in the aggregate per fiscal year under the 2007 Plan.
Stock options and stock appreciation rights granted under the aforementioned plans have an exercise
price equal to the closing price of the Companys common stock on the date of grant. To date no
stock appreciation rights have been granted.
8
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Stock Based Employee Compensation (continued)
Compensation expense related to share-based compensation included in the statement of operations
for the three months ended September 30, 2008 and 2009 was $0.7 million and $1.2 million,
respectively, net of related tax effects.
The weighted average fair value of each employee option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average assumptions used
for grants in the periods presented:
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Expected volatility |
43.9 | % | 55.0 | % | ||||
Expected life (years) |
6.0 | 6.0 | ||||||
Risk-free interest rate |
3.42 | % | 3.30 | % | ||||
Expected dividends |
None | None | ||||||
Weighted average fair value |
$ | 7.84 | $ | 8.72 |
A summary of the status of stock option activity for the three months ended September 30, 2009
follows:
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic Value | ||||||||||||||
Options | Price | Term (years) | ($ in millions) | |||||||||||||
Options outstanding at June 30,
2009 (911,623 shares exercisable) |
1,575,184 | $ | 14.56 | 7.8 | $ | 3.0 | ||||||||||
Granted |
196,246 | $ | 15.81 | |||||||||||||
Exercised |
(1,042 | ) | $ | 5.82 | ||||||||||||
Forfeited and expired |
(1,926 | ) | $ | 17.75 | ||||||||||||
Options outstanding at September 30,
2009 |
1,768,462 | $ | 14.70 | 8.1 | $ | 4.6 | ||||||||||
Exercisable at September 30, 2009 |
979,691 | $ | 16.25 | 7.0 | $ | 1.5 | ||||||||||
The aggregate intrinsic value in the above table reflects the total pre-tax intrinsic value (the
difference between the Companys closing stock price on the last trading day of the period and the
exercise price of the options, multiplied by the number of in-the-money stock options) that would
have been received by the option holders had all option holders exercised their options on
September 30, 2009. The intrinsic value of the Companys stock options changes based on the closing
price of the Companys stock. The total intrinsic value of options exercised for the three months
ended September 30, 2009 was $0.1 million and was $1.5 million for the three months ended September
30, 2008. As of September 30, 2009, the total unrecognized compensation cost over a
weighted-average period of 2.2 years, related to stock options, is expected to be $3.0 million.
Cash received from stock options exercised for the three months ended September 30, 2009 and 2008
was zero and $3.3 million, respectively.
Restricted stock awards granted under the 2005 Plan and 2007 Plan become vested (i) upon the
Company attaining certain annual pre-tax earnings targets (performance-based) and, (ii) after a
designated period of time (time-based), which is generally three years. Compensation expense is
recorded ratably over the requisite service period based upon an estimate of the likelihood of
achieving the performance goals. Compensation expense related to restricted stock awards is
measured based on the fair value using the closing market price of the Companys common stock on
the date of the grant.
9
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Stock Based Employee Compensation (continued)
Information concerning unvested restricted stock awards is as follows:
Weighted | ||||||||
Average | ||||||||
Restricted | Grant-Date | |||||||
Stock Awards | Fair-Value | |||||||
Outstanding at June 30, 2009 |
105,458 | $ | 11.03 | |||||
Vested |
(231 | ) | $ | 27.04 | ||||
Outstanding at September 30, 2009 |
105,227 | $ | 10.99 | |||||
Restricted Stock Unit awards (RSUs) granted under the 2005 Plan and 2007 Plan become vested after
a designated period of time (time-based), which is generally on a quarterly basis over three
years. Compensation expense is recorded ratably over the requisite service period. Compensation
expense related to RSUs is measured based on the fair value using the closing market price of the
Companys common stock on the date of the grant.
Information concerning unvested restricted stock unit awards is as follows:
Weighted | ||||||||
Restricted | Average | |||||||
Stock Unit | Grant-Date | |||||||
Awards | Fair-Value | |||||||
Outstanding at June 30, 2009 |
413,926 | $ | 11.25 | |||||
Granted |
200,829 | $ | 15.95 | |||||
Vested |
(36,896 | ) | $ | 18.80 | ||||
Forfeited |
(1,563 | ) | $ | 17.46 | ||||
Outstanding at September 30, 2009 |
576,296 | $ | 12.39 | |||||
As of September 30, 2009, there was $7.4 million of total unrecognized compensation cost related to
unvested restricted share-based compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted average period of 1.5 years. The total fair value of
shares vested during the three months ended September 30, 2009 was $0.7 million.
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (the FASB) issued Accounting
Standard Codification (ASC) 805-10 (formerly SFAS 141R, Business Combinations). This Statement
applies to all transactions or other events in which an entity obtains control of one or more
businesses, including those combinations achieved without the transfer of consideration. This
Statement retains the fundamental requirements that the acquisition method of accounting be used
for all business combinations. This Statement expands the scope to include all business
combinations and requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at their fair values as of the acquisition date.
Additionally, the Statement changes the way entities account for business combinations achieved in
stages by requiring the identifiable assets and liabilities to be measured at their full fair
values. The Company adopted the provisions of this Statement on July 1, 2009.
In December 2007, the FASB issued ASC 810-10 (formerly SFAS 160, Non-controlling Interests in
Consolidated Financial Statements). This Statement establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements.
Additionally, this Statement requires that consolidated net income include the amounts attributable
to both the parent and the non-controlling interest. The Company adopted the provisions of this
Statement on July 1, 2009. As a result of the adoption of this
standard, the Company restated all periods presented to retroactively
give effect to this change.
10
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements (continued)
In May 2008, the FASB issued ASC 470-20 (formerly FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled Upon Conversion (Including Partial
Cash Settlement)). The Statement
requires the initial proceeds from convertible debt that may be settled in cash to be bifurcated
between a liability component and an equity component. The objective of the guidance is to require
the liability and equity components of convertible debt to be separately accounted for in a manner
such that the interest expense recorded on the convertible debt would not equal the contractual
rate of interest on the convertible debt but instead would be recorded at a rate that would reflect
the issuers conventional debt borrowing rate. This is accomplished through the creation of a
discount on the debt that would be accreted using the effective interest method as additional
non-cash interest expense over the period the debt is expected to remain outstanding. The
Statement was adopted by the Company on July 1, 2009 and was applied retroactively to all periods
presented.
Also the adoption of the Statement, reduced the Companys
debt balance by recording a debt discount of approximately $55.8 million, with an offsetting
increase to additional paid in capital. Such amount will be amortized over the remaining expected
life of the debt.
The Company recognized a cumulative-effect adjustment of $7,809 reducing the July 1, 2008 balance of retained
earnings and reducing the carrying amount of our convertible debt to the discounted value with the discount recorded
through additional paid-in capital. The retroactive application of ASC 470-20 resulted in the recognition of additional
pre-tax non-cash interest expense for the three months ended September 30, 2008 of $2,098, or $0.09 per diluted share.
The following table sets forth the effect of the retrospective application of ASC 470-20 on certain reported line items:
Three Months Ended September 30, 2008 | ||||||||||||
As Previously | ||||||||||||
Consolidated Statement of Operations | Reported | Adjustment | As Adjusted | |||||||||
Interest expense, net |
$ | 9,449 | $ | 2,098 | $ | 11,547 | ||||||
Net income |
13,385 | (2,098 | ) | 11,287 |
June 30, 2009 | ||||||||||||
As Previously | ||||||||||||
Consolidated Balance Sheet | Reported | Adjustment | As Adjusted | |||||||||
Debt issuance costs, net |
11,044 | (1,175 | ) | 9,869 | ||||||||
Long-term debt |
569,110 | (38,685 | ) | 530,425 | ||||||||
Additional paid-in capital |
257,385 | 53,916 | 311,301 | |||||||||
Accumulated deficit |
(94,175 | ) | (16,406 | ) | (110,581 | ) |
The restated debt and equity components recognized for the Companys convertible notes as of June 30, 2009 were as
follows:
Principal amount of convertible notes |
$ | 200,000 | ||
Unamortized discount (1) |
38,685 | |||
Net carrying amount |
161,315 |
(1) | Remaining recognition period of 3.5 years as of June 30, 2009 |
In April 2009, the FASB issued ASC 825-10 (formerly FSP SFAS 107-b Disclosures about Fair Value of
Financial Instruments). The Statement requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial statements. The Company
adopted the provisions of the Statement for the first quarter fiscal 2010.
In June, 2009, the FASB issued ASC 105-10 (formerly SFAS 168 Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles). The Statement establishes the FASB
Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with US GAAP. The Statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009, for most entities. On the effective date, all
non-SEC accounting and reporting standards will be superseded. The Company has adopted this
Statement for the quarterly period ended September 30, 2009, as required, and adoption has not had
a material impact on the Companys consolidated financial statements.
2. Acquisitions
The following acquisitions have been accounted for under the purchase method of accounting.
On October 17, 2008, the Company entered in a series of purchase agreements to acquire
substantially all of the assets of six franchised
stores from a franchisee of the Companys wholly owned United Kingdom subsidiary. The aggregate
purchase price for the acquisitions
11
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
was approximately $3.3 million in cash. The Company used excess cash to fund the acquisition. The
company allocated a portion of the purchase price to identifiable intangible assets, reacquired
franchise rights, in the amount of $2.6 million and other assets in the amount of $0.7 million.
There was no excess purchase price over the preliminary fair value of identifiable assets acquired.
On April 21, 2009, the Company entered into a purchase agreement to acquire all of the shares of
Express Finance Limited, a U.K. Internet-based consumer lending business. The aggregate purchase
price for the acquisition was approximately $6.8 million in cash. In addition, the agreement
provides for an earnings-related contingent consideration amount based on the results for the two
years following the date of acquisition. No amounts have been recorded for this contingent
consideration. The Company used excess cash to fund the acquisition. The Company allocated
approximately $0.8 million to net assets acquired, including $2.8 million in net loans receivable.
The excess purchase price over the preliminary fair value of the identifiable assets acquired was
$6.0 million and was recorded as goodwill.
On June 29, 2009, the Company entered into a purchase agreement to acquire substantially all of the
assets of 2 pawn shops located in Scotland from Robert Biggar Limited. The aggregate purchase price
for the acquisition was approximately $8.0 million in cash. The Company used excess cash to fund
the acquisition. The Company allocated approximately $3.4 million to net assets acquired. The
excess purchase price over the preliminary fair value of the identifiable assets acquired was $4.6
million and was recorded as goodwill.
On June 30, 2009, the Company entered into a purchase agreement to acquire 76% of the shares of
Optima, S.A., a consumer lending business in Poland. The aggregate purchase price for the
acquisition was approximately $5.8 million in cash and the assumption of approximately $6.3 million
in debt. The holders of the assumed debt are current shareholders of Optima. In addition, the
agreement provides for an earnings-related contingent consideration amount based on the cumulative
three year period following the date of acquisition. No amounts have been recorded for this
contingent consideration. The Company used excess cash to fund the acquisition. The Company
allocated approximately $1.3 million to net assets acquired, including $7.4 million in net loans
receivable. The excess purchase price over the preliminary fair value of the identifiable assets
acquired was $4.8 million and was recorded as goodwill.
During fiscal 2009, the Company completed various smaller acquisitions in the United States and the
United Kingdom for a purchase price of approximately $2.1 million that resulted in an aggregate
increase in goodwill of $1.5 million, calculated as the excess purchase price over the preliminary
fair value of the identifiable assets acquired.
During the first quarter of fiscal 2010, there were no acquisitions, however, $0.3 million and $0.3
million of purchase accounting adjustments were made to the Robert Biggar Limited and Optima, S.A.,
respectively.
One of the core strategies of the Company is to capitalize on its competitive strengths and enhance
its leading marketing positions. One of the key elements in the strategy is the intention to grow
our network through acquisitions. The Companys acquisitions provide it with increased market
penetration or in some cases the opportunity to enter new platforms and geographies. The purchase
price of each acquisition is primarily based on a multiple of historical earnings. The Companys
standard business model, and that of the industrys, is one that does not rely heavily on tangible
assets and therefore, it is common to have majority of the purchase price allocated to goodwill, or
in some cases, intangibles.
12
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
The following reflects the change in goodwill during the periods presented (in millions):
Balance at June 30, 2008 |
$ | 419.4 | ||
Acquisitions: |
||||
Express Finance Limited |
6.0 | |||
Robert Biggar Limited |
4.3 | |||
Optima, S.A. |
4.6 | |||
Various small acquisitions |
1.5 | |||
Foreign currency adjustment |
(29.3 | ) | ||
Balance at June 30, 2009 |
$ | 406.5 | ||
Purchase accounting adjustments: |
||||
Robert Biggar Limited |
0.3 | |||
Optima, S.A. |
0.3 | |||
Foreign currency adjustment |
9.0 | |||
Balance at September 30, 2009 |
$ | 416.1 | ||
The following pro forma information for the three months ended September 30, 2008 presents the results of operations as if the acquisitions had occurred as of the beginning of
the period presented. The pro forma operating results include the results of these acquisitions
for the indicated periods and reflect the increased interest expense on acquisition debt and the
income tax impact as of the respective purchase dates of the Express
Finance, Robert Biggar and Optima acquisitions.
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 | ||||
September 30, | ||||
2008 | ||||
(Unaudited in thousands | ||||
except per share amounts) | ||||
Revenue |
$ | 157,429 | ||
Net income |
$ | 12,028 | ||
Net income per common share basic |
$ | 0.50 | ||
Net income per common share diluted |
$ | 0.49 |
3. Goodwill and Other Intangibles
The changes in the carrying amount of goodwill by reportable segment for the three months ended September
30, 2009 are as follows (in thousands):
United | United | |||||||||||||||
States | Canada | Kingdom | Total | |||||||||||||
Balance at June 30, 2008 |
$ | 205,210 | $ | 141,843 | $ | 72,298 | $ | 419,351 | ||||||||
Acquisitions |
5,125 | 51 | 11,287 | 16,463 | ||||||||||||
Foreign currency translation adjustments |
| (17,441 | ) | (11,819 | ) | (29,260 | ) | |||||||||
Balance at June 30, 2009 |
$ | 210,335 | $ | 124,453 | $ | 71,766 | $ | 406,554 | ||||||||
Acquisitions and purchase accounting adjustments |
257 | | 264 | 521 | ||||||||||||
Foreign currency translation adjustments |
494 | 10,488 | (1,952 | ) | 9,030 | |||||||||||
Balance at September 30, 2009 |
$ | 211,086 | $ | 134,941 | $ | 70,078 | $ | 416,105 | ||||||||
13
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Goodwill and Other Intangibles (continued)
The following table reflects the components of intangible assets (in thousands):
June 30, | September 30, | |||||||
2009 | 2009 | |||||||
Gross | Gross | |||||||
Carrying | Carrying | |||||||
Amount | Amount | |||||||
Non-amortized intangible assets: |
||||||||
Goodwill |
$ | 406,554 | $ | 416,105 | ||||
Reacquired franchise rights |
47,793 | 51,150 | ||||||
$ | 454,347 | $ | 467,255 | |||||
Goodwill is the excess of cost over the fair value of the net assets of the business acquired.
Intangible assets consist of reacquired franchise rights, which are deemed to have an indefinite
useful life and are not amortized.
Goodwill is tested for impairment annually as of June 30, or whenever events or changes in business
circumstances indicate that an asset might be impaired. As of
June 30, 2009, there was no
impairment of goodwill. However, if market conditions continue to worsen or there is significant
regulatory action that negatively affects our business, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
Identified intangibles with indefinite lives are tested for impairment annually as of December 31,
or whenever events or changes in business circumstances indicate that an asset may be impaired. If
the estimated fair value is less than the carrying amount of the intangible assets with indefinite
lives, then an impairment charge would be recognized to reduce the asset to its estimated fair
value. As of December 31, 2008, there was no impairment of reacquired franchise rights. There can
be no assurance that future impairment tests will not result in a charge to earnings.
The fair value of the Companys goodwill and indefinite-lived intangible assets are estimated based
upon a present value technique using discounted future cash flows. The Company uses management
business plans and projections as the basis for expected future cash flows. Assumptions in
estimating future cash flows are subject to a high degree of judgment. The Company makes every
effort to forecast its future cash flows as accurately as possible at the time the forecast is
developed. However, changes in assumptions and estimates may affect the implied fair value of
goodwill and indefinite-lived intangible assets and could result in an additional impairment charge
in future periods.
4. Contingent Liabilities
Due to the uncertainty surrounding the litigation process, except for those matters where an
accrual has been provided for, the Company is unable to reasonably estimate the range of loss, if
any, at this time in connection with the legal proceedings discussed below. While the outcome of
many of these matters is currently not determinable, the Company believes it has meritorious
defenses and that the ultimate cost to resolve these matters will not have a material adverse
effect on the Companys consolidated financial position, results of operations or cash flows. In
addition to the legal proceedings discussed below, the Company is involved in routine litigation
and administrative proceedings arising in the ordinary course of business.
The Company assesses the materiality of litigation by reviewing a range of qualitative and
quantitative factors. These factors include the size of the potential claims, the merits of the
Companys defenses and the likelihood of plaintiffs success on the merits, the regulatory
environment that could impact such claims and the potential impact of the litigation on our
business. The Company evaluates the likelihood of an unfavorable outcome of the legal or
regulatory proceedings to which it is a party in accordance with the Contingencies Topic of the
FASB Codification. This assessment is subjective based on the status of the legal proceedings and
is based on consultation with in-house and external legal counsel. The actual outcomes of these
proceedings may differ from the Companys assessments.
14
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
Canadian Legal Proceedings
On August 19, 2003, a former customer in Ontario, Canada, Margaret Smith commenced an action
against OPCO and the Companys Canadian subsidiary, National
Money Mart Company (Money Mart), on behalf of a purported class of
Ontario borrowers who, Smith claims, were subjected to usurious charges in payday-loan
transactions (the Ontario Litigation). The action, alleged violations of a Canadian federal law proscribing usury, seeks
restitution and damages, including punitive damages, and seeks injunctive relief prohibiting
further alleged usurious charges. The plaintiffs motion for class certification was granted on
January 5, 2007. The trial of the common issues commenced on April 27, 2009 but was suspended when
the parties reached a settlement. During the fiscal quarter and fiscal year ended June 30, 2009,
our Canadian subsidiary, Money Mart, recorded a charge of USD 57.4 million in relation to the
pending Ontario settlement and for the potential settlement of certain of the similar class action
proceedings pending in other Canadian provinces described below. There is no assurance that the
Ontario settlement of a class action proceeding in the provinces of Canada will receive final Court
approval or that any of the other class action proceedings will be settled. Although we believe
that we have meritorious defenses to the claims in the proceedings and intend to vigorously defend
against such claims, the ultimate cost of resolution of such claims, either through settlements or
pursuant to litigation, may substantially exceed the amount accrued at June 30, 2009, and
additional accruals may be required in the future. As of
September 30, 2009, the remaining provision
of approximately $53.4 million is included in the Companys accrued expenses.
On November 6, 2003, Gareth Young, a former customer, commenced a purported class action in the
Court of Queens Bench of Alberta, Canada on behalf of a class of consumers who obtained short-term
loans from Money Mart in Alberta, alleging, among other things, that the charge to borrowers in
connection with such loans is usurious. The action seeks restitution and damages, including
punitive damages. On December 9, 2005, Money Mart settled this action, subject to court approval.
On March 3, 2006, just prior to the date scheduled for final court approval of the settlement, the
plaintiffs lawyers advised that they would not proceed with the settlement and indicated their
intention to join a purported national class action. No steps have been taken in the action since
March 2006. Subsequently, Money Mart commenced an action against the plaintiff and the plaintiffs
lawyer for breach of contract. This latter action has since been resolved.
On March 5, 2007, a former customer, H. Craig Day, commenced an action against OPCO, Money Mart and
several of the Companys franchisees in the Court of Queens Bench of Alberta, Canada on behalf of
a putative class of consumers who obtained short-term loans from Money Mart in Alberta. The
allegations, putative class and relief sought in the Day action are substantially the same as those
in the Young action but relate to a claim period that commences before and ends after the claim
period in the Young action and excludes the claim period described in that action.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against Money Mart 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. Following initial denial, MacKinnon obtained an order permitting him to re-apply for class
certification of the action against Money Mart alone, which was appealed. The Court of Appeal
granted MacKinnon the right to apply to the original judge to have her amend her order denying
class certification. On June 14, 2006, the original judge granted the requested order and Money
Marts request for leave to appeal the order was dismissed. The certification motion in this action
proceeded in conjunction with the certification motion in the Parsons action described below.
On April 15, 2005, the solicitor acting for MacKinnon commenced a proposed class action against
Money Mart on behalf of another former customer, Louise Parsons. Class certification of the
consolidated MacKinnon and Parsons actions was granted on March 14, 2007. In December 2007 the
plaintiffs filed a motion to add OPCO as a defendant in this action and in March 2008 an order was
granted adding OPCO as a defendant. On July 25, 2008, the plaintiffs motion to certify the action
against OPCO was granted. The action is presently in the discovery phase and a summary trial is
scheduled to commence in March 2010.
Similar purported class actions have been commenced against Money Mart in Manitoba, New Brunswick,
Nova Scotia and Newfoundland. OPCO is named as a defendant in the actions commenced in Nova Scotia
and Newfoundland. The claims in these additional actions are substantially similar to those of the
Ontario action referred to above.
15
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
Canadian Legal Proceedings (continued)
On April 26, and August 3, 2006, two former employees, Peggy White and Kelly Arseneau, commenced
companion actions against Money Mart and OPCO. The actions, which are pending in the Superior Court
of Ontario, allege negligence on the part of the defendants in security training procedures and
breach of fiduciary duty to employees in violation of applicable statutes. The companion lawsuits
seek combined damages of C$5.0 million plus interest and costs. These claims have been submitted to
the respective insurance carriers. The Company intends to defend these actions vigorously.
At this time, it is too early to determine the likelihood of an unfavorable outcome or the ultimate
liability, if any, resulting from these matters.
California Legal Proceedings
On September 11, 2006, Caren Bufil commenced a lawsuit against OPCO; the claims in Bufil are
substantially similar to the claims in a previously dismissed case. Bufil sought and obtained class
certification of the action alleging that OPCO failed to provide non-management employees with meal
and rest breaks required under California law. The suit sought an unspecified amount of damages and
other relief. In September 2009, the Company was successful in
settling the action, and has
recorded a charge of $1.3 million. The settlement is subject to court approval and although likely, there
is no assurance that such approval will occur.
On April 26, 2007, the San Francisco City Attorney (City Attorney) filed a complaint in the name
of the People of the State of California alleging that OPCOs subsidiaries engaged in unlawful and
deceptive business practices in violation of California Business and Professions Code Section 17200
by either themselves making installment loans under the guise of marketing and servicing for
co-defendant First Bank of Delaware (the Bank) or by brokering installment loans made by the Bank
in California in violation of the prohibition on usury contained in the California Constitution and
the California Finance Lenders Law and that they have otherwise violated the California Finance
Lenders Law and the California Deferred Deposit Transaction Law. The complaint seeks broad
injunctive relief as well as civil penalties. On January 5, 2009, the City Attorney filed a First
Amended Complaint, restating the claims in the original complaint, adding OPCO as a defendant and
adding a claim that short-term deferred deposit loans made by the Bank, which were marketed and
serviced by OPCO and/or its subsidiaries violated the California Deferred Deposit Transaction law.
OPCO
and its subsidiaries have denied the allegations of the First Amended Complaint. Discovery is
proceeding in state court and no trial date has been set. At this time, it is too early to
determine the likelihood of an unfavorable outcome or the ultimate liability, if any, resulting
from this case.
We The People Legal Proceedings
The Companys business model for its legal document processing services business is being
challenged in certain courts, as described below, which could result in the Companys
discontinuation of these services in any one or more jurisdictions. The company from which the
Company bought the assets of its WTP business, We The People Forms and Service Centers USA, Inc.
(the Former WTP), certain of its franchisees and/or WTP are defendants in various lawsuits. The
principal litigation for the WTP business unit is as follows:
In May 2007, WTP met with the New York State Attorney Generals Office, Consumer Affairs Division,
which had been investigating WTP operation in the New York City area for over three years. The
Attorney Generals Office alleged that WTP engaged in unfair business practices, including
deceptive advertising that harmed New York consumers. The Attorney Generals Office demanded that
WTP enter into an Agreed Order of Discontinuance (AOD) and demanded WTP pay a fine of
approximately $0.3 million, plus investigation costs. WTP denied the allegations and requested that
the Attorney Generals Office hold the former New York City WTP owners liable for the alleged
misconduct. The terms of the AOD are in negotiation.
In May 2007, WTP franchisee Roseann Pennisi and her company, We The People of Westchester Square,
New York, Inc., sued the Company, Ira and Linda Distenfield, IDLD Inc., and WTP in the Supreme Court of
the State of New York, Bronx County. The complaint alleges breach of franchise agreement, tortious
interference with franchise agreement, breach of the covenant of good faith and fair dealing,
unfair competition against defendants and breach of contract and deception and misrepresentation,
unjust enrichment, fraudulent concealment of material facts against the Distenfields and IDLD, Inc.
and seeks over $9.0 million in damages. Following a successful motion by WTP to compel arbitration
of the plaintiffs claims, in October 2008, the plaintiff filed a request to arbitrate with relief
requested in the amount of $0.4 million. In August 2009, plaintiff amended her petition to
arbitrate and increased it to $650,000.
16
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
We The People Legal Proceedings (continued)
The Company believes the material allegations in the complaint with respect to the Company and WTP
are without merit and intends to defend the matter vigorously.
In September 2007, Jacqueline Fitzgibbons, who claims to be a former customer of a WTP store,
commenced a lawsuit against the Company and others in California Superior Court for Alameda County.
The suit alleges on behalf of a putative class of consumers and senior citizens that, from 2003 to
2007, We The People violated California law by advertising and selling living trusts and wills to
certain California residents. Fitzgibbons claims, among other things, that the Company and others
improperly conspired to provide her with legal advice, misled her as to what, if any, legitimate
service We The People provided in preparing documents, and misled her regarding the supervising
attorneys role in preparing documents. The plaintiff is seeking class certification, prohibition
of the Companys alleged unlawful business practices, and damages on behalf of the class in the
form of disgorgement of all monies and profits obtained from unlawful business practices, general
and special damages, attorneys fees and costs of the suit, statutory and tremble damages pursuant
to various California business, elder abuse, and consumer protection codes. The complaint has been
amended several times to add new parties and additional claims. The Court granted, in part, the
Companys motion to dismiss certain claims alleged by the plaintiffs. In January 2009, an
individual named Robert Blau replaced Fitzgibbons as lead plaintiff. A motion to certify the class
was heard on October 19, 2009 and, in a tentative ruling, the court denied Plaintiffs motion for
class certification of claims for fraud, false advertising and violations of the Consumer Legal
Remedies Act. However, the Court tentatively granted class certification of the claim that alleges
that We The Peoples services and business model violate certain unfair competition laws in
California. The Court invited oral argument and a final ruling is expected to be issued shortly.
The Company is defending these allegations vigorously and believes that the claims and the
assertion of class status are without merit.
In August 2008, a group of six former We The People customers commenced a lawsuit in St. Louis
County, Missouri against the Company, its subsidiary, We The People USA, Inc. and WTP franchisees
offering services to Missouri consumers. The plaintiffs allege, on behalf of a putative class of
over 1,000 consumers that, from 2002 to the present, defendants violated Missouri law by engaging
in:
(i) an unauthorized law business; (ii) the unauthorized practice of law; and (iii) unlawful
merchandising practices in the sale of its legal documents. The plaintiffs are seeking class
certification, prohibition of the defendants unlawful business practices, and damages on behalf of
the class in the form of disgorgement of all monies and profits obtained from unlawful business
practices, attorneys fees, statutory and treble damages pursuant to various Missouri consumer
protection codes. In November 2008, the original six plaintiffs were dismissed by plaintiffs
counsel and the initial complaint was also later dismissed. In January 2009, former WTP customers,
Philip Jones and Carol Martin, on behalf of a punitive class of Missouri customers, filed a lawsuit
in St. Louis County against the Company and its subsidiary, We The People USA, Inc., and a St.
Louis WTP franchisee entity alleging claims similar to the initial August 2008 suit. These new
plaintiffs also seek class certification. The Company intends to defend these allegations and
believes that the plaintiffs claims and allegations of class status are without merit.
On January 14, 2009, a demand for arbitration was made on behalf of Thomas Greene and Rebecca M.
Greene, We The People franchisees, against We The People USA, Inc., We The People LLC and the
Company. The demand alleged violations by We The People of certain state and federal franchise laws
relating to (1) failure to register the franchise as a business opportunity with the Utah Division
of Consumer Protection; (2) earnings claims representations and (3) failure to provide a disclosure
document meeting the substantive and timing requirements mandated by the Utah Business Opportunity
Act. The Greenes are demanding $425,000 for losses relating to the violations. WTP and the Company
believe the allegations are without merit and intend to defend the matter vigorously.
In June 2009, a demand for arbitration was filed by a current We The People franchisee, Frank
Murphy, Jr., against the Companys subsidiaries, We The People USA, Inc., and We The People LLC.
The demand alleges violations by We The People of certain obligations under the Franchise Agreement
and seeks $1.0 million for losses relating to these violations. WTP believes the allegations are
without merit and intends to defend the matter vigorously.
In January 2009, the Company learned that Ira and Linda Distenfield had filed a joint voluntary
petition under Chapter 7 of the U.S. Bankruptcy Code. In addition to delaying the ultimate
resolution of many of the foregoing matters, the economic effect of this filing and, in particular,
its effect on the Companys ability to seek contribution from its co-defendants in connection with
any of the foregoing matters, cannot presently be estimated.
17
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
We The People Legal Proceedings (continued)
It is the Companys opinion that many of the WTP related litigation matters relate to actions
undertaken by the Distenfields, IDLD, Inc. and the Former WTP during the period of time when they
owned or managed We The People Forms and Service Centers USA, Inc.; this period of time was prior
to the acquisition of the assets of the Former WTP by the Company. However, in many of these
actions, the Company and WTP have been included as defendants in these cases as well. At this time,
it is too early to determine the likelihood of an unfavorable outcome or the ultimate liability, if
any, of any of the aforementioned matters against WTP or the Company or any other Company
litigation as well.
In addition to the matters described above, the Company continues to respond to inquiries it
receives from state bar associations and state regulatory authorities from time to time as a
routine part of its business regarding its legal document processing services business and its WTP
franchisees.
5. Capital Stock
On July 21, 2008, the Company announced that its Board of Directors had approved a stock repurchase
plan, authorizing the Company to repurchase in the aggregate up to $7.5 million of its outstanding
common stock, which is the maximum amount of common stock the Company can repurchase pursuant to
the terms of its credit facility.
Under the plan authorized by its Board of Directors, the Company was permitted to repurchase shares
in open market purchases or through privately negotiated transactions as permitted under Securities
Exchange Act of 1934 Rule 10b-18. The extent to which the
Company repurchased its shares and the timing of such repurchases depended upon market conditions
and other corporate considerations, as determined by the Companys management. The purchases were
funded from existing cash balances.
By October 13, 2008, the Company had repurchased 535,799 shares of its common stock at a cost of
approximately $7.5 million, thus completing its stock repurchase plan.
6. Fair Value Measurements
The Fair Value Measurements and Disclosures Topic of the FASB Codification specifies a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. In general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets and inputs other than quoted prices that are observable for the asset or liability. Level
3 inputs are unobservable inputs for the asset or liability and include situations where there is
little, if any, market activity for the asset or liability. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy is based on the lowest level input that is significant to the
fair value measurement in its entirety. The Companys assessment of the significance of a
particular input to the fair value in its entirety requires judgment and considers factors specific
to the asset or liability.
Currently, the Company uses foreign currency options and cross currency interest rate swaps to
manage its interest rate and foreign currency risk. The valuation of these instruments is
determined using widely accepted valuation techniques including discounted cash flow analysis on
the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity and uses observable market-based inputs, including
interest rate curves, foreign exchange rates and implied volatilities. The Company incorporates
credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterpartys nonperformance risk in the fair value measurements. In adjusting the
fair value of its derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as collateral
postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the
majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of default by itself and its
counterparties. However, as of September 30, 2009, the Company has assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its derivative positions
and has determined that the credit valuation adjustments are not significant to the overall
valuation of its derivatives. As a result, the Company has determined that its derivative
valuations in their entirety are classified in
18
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Fair Value Measurements (continued)
Level 2 of the fair value hierarchy.
The table below presents the Companys assets and liabilities measured at fair value on a recurring
basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which
those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2009
( in thousands)
( in thousands)
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
for Identical | Other | Significant | Balance at | |||||||||||||
Assets and | Observable | Unobservable | September 30, | |||||||||||||
Liabilities (Level 1) | Inputs (Level 2) | Inputs (Level 3) | 2009 | |||||||||||||
Assets |
||||||||||||||||
Derivative
financial
instruments |
$ | | $ | 324 | $ | | $ | 324 | ||||||||
Liabilities |
||||||||||||||||
Derivative
financial
instruments |
$ | | $ | 36,239 | $ | | $ | 36,239 |
The Company does not have any fair value measurements using significant unobservable inputs (Level
3) as of September 30, 2009.
7. Segment Information
The Company categorizes its operations into three operating segments that have been identified
giving consideration to geographic area, product mix and regulatory environment. The primary
service offerings in all operating segments are check cashing, single-payment consumer loans, money
orders, money transfers and other ancillary services. As a result of the mix of service offerings
and diversity in the respective regulatory environments, there are differences in each operating
segments profit margins. The Companys operations in
Poland are included within the United States segment. Additionally, the United States operating segment includes all corporate
headquarters expenses that have not been charged out to the operating segments in the United
States, Canada and United Kingdom. This factor also contributes to the lower pre-tax results
reported in this segment. Those unallocated corporate headquarters expenses are $1.7 million for
the three months ended September 30, 2008 and $2.3 million for the three months ended September 30,
2009.
19
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information (continued)
All
operations for which segment data is presented below are principally in one industry (check cashing,
consumer lending and ancillary services) (in thousands):
United | United | |||||||||||||||
States | Canada | Kingdom | Total | |||||||||||||
As of and for the three months ended
September 30, 2008 |
||||||||||||||||
Total assets |
$ | 284,813 | $ | 461,286 | $ | 172,102 | $ | 918,201 | ||||||||
Goodwill and other intangibles, net |
205,509 | 182,058 | 67,781 | 455,348 | ||||||||||||
Sales to unaffiliated customers: |
||||||||||||||||
Check cashing |
14,437 | 20,543 | 13,552 | 48,532 | ||||||||||||
Fees from consumer lending |
22,803 | 37,197 | 21,498 | 81,498 | ||||||||||||
Money transfer fees |
1,592 | 4,409 | 1,609 | 7,610 | ||||||||||||
Franchise fees and royalties |
538 | 639 | | 1,177 | ||||||||||||
Other |
2,860 | 7,525 | 3,874 | 14,259 | ||||||||||||
Total sales to unaffiliated customers |
42,230 | 70,313 | 40,533 | 153,076 | ||||||||||||
Provision for loan losses |
6,978 | 5,895 | 2,378 | 15,251 | ||||||||||||
Interest expense, net |
6,362 | 3,267 | 1,918 | 11,547 | ||||||||||||
Depreciation and amortization |
1,457 | 1,716 | 1,459 | 4,632 | ||||||||||||
Provision for litigation settlements |
509 | | | 509 | ||||||||||||
Loss on store closings |
2,647 | 2,291 | | 4,938 | ||||||||||||
Other income, net |
| (182 | ) | (76 | ) | (258 | ) | |||||||||
Income before income taxes |
(10,965 | ) | 18,650 | 8,828 | 16,513 | |||||||||||
Income tax provision |
(51 | ) | 3,171 | 2,106 | 5,226 |
United | United | |||||||||||||||
States | Canada | Kingdom | Total | |||||||||||||
As of and for the three months ended
September 30, 2009 |
||||||||||||||||
Total assets |
$ | 276,685 | $ | 503,549 | $ | 176,072 | $ | 956,306 | ||||||||
Goodwill and other intangibles, net |
211,382 | 180,151 | 75,722 | 467,255 | ||||||||||||
Sales to unaffiliated customers: |
||||||||||||||||
Check cashing |
10,906 | 17,339 | 9,557 | 37,802 | ||||||||||||
Fees from consumer lending |
19,156 | 35,216 | 24,617 | 78,989 | ||||||||||||
Money transfer fees |
1,276 | 4,048 | 1,499 | 6,823 | ||||||||||||
Franchise fees and royalties |
355 | 587 | | 942 | ||||||||||||
Other |
2,502 | 6,932 | 7,818 | 17,252 | ||||||||||||
Total sales to unaffiliated customers |
34,195 | 64,122 | 43,491 | 141,808 | ||||||||||||
Provision for loan losses |
4,206 | 3,771 | 3,719 | 11,696 | ||||||||||||
Interest expense, net |
4,656 | 5,369 | 1,599 | 11,624 | ||||||||||||
Depreciation and amortization |
1,292 | 1,578 | 1,556 | 4,426 | ||||||||||||
Unrealized foreign exchange loss (gain) |
13 | (89 | ) | 7,903 | 7,827 | |||||||||||
Provision for litigation settlements |
1,267 | | | 1,267 |
20
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Segment Information (continued)
United | United | |||||||||||||||
States | Canada | Kingdom | Total | |||||||||||||
Loss on store closings |
174 | 208 | (64 | ) | 318 | |||||||||||
Other expense (income), net |
218 | (29 | ) | (29 | ) | 160 | ||||||||||
(Loss) income before income taxes |
(7,495 | ) | 18,259 | 2,533 | 13,297 | |||||||||||
Income tax provision |
1,334 | 5,755 | 877 | 7,966 |
8. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and by the use of derivative financial instruments.
Specifically, certain of the Companys foreign operations in the United Kingdom and Canada expose
the Company to fluctuations in interest rates and foreign exchange rates. These fluctuations may
impact the value of the Companys cash receipts and payments in terms of the Companys functional
currency because the debt is denominated in a currency other than the
subsidiarys functional currency. The Company enters into derivative financial instruments to protect the value or fix the
amount of certain obligations in terms of its functional currency, the U.S. Dollar.
Cash Flow Hedges of Foreign Exchange Risk
Operations in the United Kingdom and Canada have exposed the Company to changes in the CAD-USD and
GBP-USD foreign exchange rates. From time to time, the Companys U.K. and Canadian subsidiaries
purchase investment securities denominated in a currency other than their functional currency. The
subsidiaries hedge the related foreign exchange risk typically with the use of out of the money put
options because they cost less than completely averting risk using at the money put options, and
the maximum loss is limited to the purchase price of the contracts.
The effective portion of changes in the fair value of derivatives designated and that qualify as
cash flow hedges of foreign exchange risk is recorded in other comprehensive income and
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. The ineffective portion of the change in fair value of the derivative, as well
as amounts excluded from the assessment of hedge effectiveness, is recognized directly in earnings.
As of September 30, 2009, the Company had the following outstanding foreign currency derivatives
that were used to hedge its foreign exchange risks for the months of October, November and
December:
Foreign Currency Derivates | Notional | Notional | ||||||
Sold | Purchased | |||||||
CAD Put/USD Call Options |
C$10,500,000 | $ | 9,705,825 | |||||
GBP Put/USD Call Options |
GBP3,900,000 | $ | 6,435,000 |
Cash Flow Hedges of Multiple Risks
The Company has foreign subsidiaries in the United Kingdom and Canada with variable-rate borrowings
denominated in currencies other than the foreign subsidiaries functional currencies. The foreign
subsidiaries are exposed to fluctuations in both the underlying variable borrowing rate and the
foreign currency of the borrowing against its functional currency. The foreign subsidiaries use
foreign currency derivatives including cross-currency interest rate swaps to manage its exposure to
fluctuations in the variable borrowing rate and the foreign exchange rate. Cross-currency interest
rate swaps involve both periodically (1) exchanging fixed rate interest payments for floating rate
interest receipts and (2) exchanging notional amounts which will occur at the forward exchange
rates in effect upon entering into the instrument. The derivatives are designated as cash flow
hedges of both interest rate and foreign exchange risks.
The effective portion of changes in the fair value of derivatives designated and that qualify as
cash flow hedges of both interest rate risk and foreign exchange risk is recorded in other
comprehensive income and is subsequently reclassified into earnings in the period that the
21
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Derivative Instruments and Hedging Activities (continued)
hedged forecasted transaction affects earnings. The ineffective portion of the change in fair
value of the derivative is recognized directly in earnings.
On May 7, 2009, the Company executed an early settlement of its two cross-currency interest rate
swaps hedging variable-rate borrowings at its foreign subsidiary in the United Kingdom. As a
result, the Company discontinued prospectively hedge accounting on these cross-currency swaps. In
accordance with the Derivatives and Hedging Topic of the FASB Codification, the Company will
continue to report the net gain or loss related to the discontinued cash flow hedge in other
comprehensive income included in shareholders equity and will subsequently reclassify such amounts
into earnings over the remaining original term of the derivative when the hedged forecasted
transactions are recognized in earnings.
As of September 30, 2009, the Company had the following outstanding derivatives that were used to
hedge both interest rate risk and foreign exchange risk:
Pay Fixed | Pay Fixed Strike | Receive Floating | Receive Floating | |||||||||||||
Foreign Currency Derivates | Notional | Rate | Notional | Index | ||||||||||||
USD-CAD Cross Currency Swap |
CAD184,029,651 | 7.135 | % | $ | 160,050,000 | 3 mo. LIBOR + 2.75% per annum | ||||||||||
USD-CAD Cross Currency Swap |
CAD61,614,448 | 7.130 | % | $ | 53,350,000 | 3 mo. LIBOR + 2.75% per annum | ||||||||||
USD-CAD Cross Currency Swap |
CAD84,055,350 | 7.070 | % | $ | 72,750,000 | 3 mo. LIBOR + 2.75% per annum |
Tabular Disclosures
The table below presents the fair values of the Companys derivative financial instruments on the
Consolidated Balance Sheet as of September 30, 2009 (in thousands).
Tabular Disclosure of Fair Values of Derivative Instruments(1) | ||||||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
As of September 30, 2009 | As of September 30, 2009 | |||||||||||||||
Balance Sheet | Balance Sheet | |||||||||||||||
Location | Fair Value | Location | Fair Value | |||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||
Foreign Exchange Contracts |
Prepaid Expenses | $ | 324 | Other Liabilities | $ | | ||||||||||
Cross Currency Swaps |
Derivatives | Derivatives | 36,239 | |||||||||||||
Total derivatives designated as hedging
instruments |
$ | 324 | $ | 36,239 | ||||||||||||
(1) | The fair values of derivative instruments are presented in the above table on a gross basis. Certain of the above derivative instruments are subject to master netting arrangements and qualify for net presentation in the Consolidated Balance Sheet. |
22
Table of Contents
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Derivative Instruments and Hedging Activities (continued)
The tables below present the effect of the Companys derivative financial instruments on the
Consolidated Statement of Operations for the period ending September 30, 2009 (in thousands).
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ending
September 30, 2009
Location of Gain or | Amount of Gain or | |||||||||||||||||||
(Loss) Recognized | (Loss) Recognized | |||||||||||||||||||
Amount of Gain or | in Income on | in Income on | ||||||||||||||||||
(Loss) Recognized | Derivative | Derivative | ||||||||||||||||||
in OCI on | Location of Gain or | Amount of Gain or | (Ineffective | (Ineffective | ||||||||||||||||
Derivative | (Loss) Reclassified | (Loss) Reclassified | Portion and Amount | Portion and Amount | ||||||||||||||||
Derivatives in SFAS 133 | (Effective | from Accumulated | from Accumulated | Excluded from | Excluded from | |||||||||||||||
Cash Flow Hedging | Portion), net of | OCI into Income | OCI into Income | Effectiveness | Effectiveness | |||||||||||||||
Relationships | tax | (Effective Portion) | (Effective Portion) | Testing) | Testing) | |||||||||||||||
Foreign Exchange Contracts |
$ | (46 | ) | Foreign currency gain / (loss) | $ | | Other income /(expense) | $ | | |||||||||||
Interest Expense | (364 | ) | Other income /(expense) | 9 | ||||||||||||||||
Cross Currency Swaps |
649 | Corporate Expenses | 102 | |||||||||||||||||
Total |
$ | 603 | $ | (262 | ) | $ | 9 | |||||||||||||
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ending September 30, 2008
Location of Gain or | Amount of Gain or | |||||||||||||||||||
(Loss) Recognized | (Loss) Recognized | |||||||||||||||||||
Amount of Gain or | in Income on | in Income on | ||||||||||||||||||
(Loss) Recognized | Derivative | Derivative | ||||||||||||||||||
in OCI on | Location of Gain or | Amount of Gain or | (Ineffective | (Ineffective | ||||||||||||||||
Derivative | (Loss) Reclassified | (Loss) Reclassified | Portion and Amount | Portion and Amount | ||||||||||||||||
Derivatives in SFAS 133 | (Effective | from Accumulated | from Accumulated | Excluded from | Excluded from | |||||||||||||||
Cash Flow Hedging | Portion), net of | OCI into Income | OCI into Income | Effectiveness | Effectiveness | |||||||||||||||
Relationships | tax | (Effective Portion) | (Effective Portion) | Testing) | Testing) | |||||||||||||||
Foreign Exchange Contracts |
$ | 579 | Foreign currency gain / (loss) | $ | | Other income / (expense) | $ | | ||||||||||||
Interest Expense | | Other income / (expense) | | |||||||||||||||||
Cross Currency Swaps |
5,122 | Corporate Expenses | | |||||||||||||||||
Total |
$ | 5,701 | $ | | $ | | ||||||||||||||
23
Table of Contents
DOLLAR
FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Derivative Instruments and Hedging Activities (continued)
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision
where if the Company defaults on any of its indebtedness, including default where repayment of the
indebtedness has not been accelerated by the lender, then the Company could also be declared in
default on its derivative obligations
The Companys agreements with its derivative counterparties also contain provisions requiring it to
maintain certain minimum financial covenant ratios related to its indebtedness. Failure to comply
with the covenant provisions would result in the Company being in default on any derivative
instrument obligations covered by the agreement.
As of
September 30, 2009, the fair value of derivatives is in a net
liability position of $48.4 million. This amount includes accrued
interest but excludes the adjustment for nonperformance risk related
to these agreements. As of September 30, 2009, the Company has not posted any collateral
related to the agreements. If the Company breached any of these provisions it would be required
to settle its obligations under the agreements at their termination value of $48.5 million.
9. 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 | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Net income |
$ | 11,287 | $ | 5,273 | ||||
Foreign currency translation adjustment(1) |
(11,196 | ) | 4,522 | |||||
Fair value adjustments for cash flow hedges, net(2)(3) |
3,341 | (437 | ) | |||||
Total comprehensive income |
$ | 3,432 | $ | 9,358 | ||||
(1) | The ending balance of the foreign currency translation adjustments included in accumulated other comprehensive income on the balance sheet were gains of $26.7 million and $24.1 million respectively as of September 30, 2008 and 2009. | |
(2) | Net of $1.7 million and $0.4 million of tax for the three months ended September 30, 2008 and 2009, respectively. | |
(3) | Net of $0.3 million and $0.5 million which were reclassified into earnings for the three months ended September 30, 2008 and 2009, respectively. |
Accumulated other comprehensive income, net of related tax, consisted of net unrealized losses
on put options designated as cash flow hedges of $8 thousand, $10.1 million of net unrealized
losses on cross-currency interest rate swaps designated as cash flow hedging transactions and
unrealized losses on terminated cross-currency interest rate swaps of $1.9 million at September 30,
2009, compared to net unrealized losses on put options designated as cash flow hedges of $0.4
million and net unrealized losses on cross-currency interest rate swaps designated as cash flow
hedging transactions of $0.9 million at September 30, 2008.
24
Table of Contents
DOLLAR
FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
Income Tax Provision
The provision for income taxes was $8.0 million for the three months ended September 30, 2009
compared to a provision of $5.2 million for the three months ended September 30, 2008. The
Companys effective tax rate was 59.9% for the three months ended September 30, 2009 and was 31.6%
for the three months ended September 30, 2008. The effective
tax rate for the three months ended September 30, 2008 was reduced
as a result of the impact of a favorable settlement granted in a
competent authority tax proceeding between the United States and Canadian tax authorities related
to transfer pricing matters for years 2000 through 2003 combined with an adjustment to the
Companys reserve for uncertain tax benefits related to years for which a settlement has not yet
been received. The impact to the Companys three months fiscal 2009 provision for income taxes related to these two items was a tax benefit of $3.5
million. The Companys effective tax rate differs from the federal statutory rate of 35% due to
foreign taxes, permanent differences and a valuation allowance on U.S. and foreign deferred tax
assets and the aforementioned changes to the Companys reserve for uncertain tax positions. Prior
to the global debt restructuring in the Companys fiscal year ended June 30, 2007, interest expense
in the U.S. resulted in U.S. tax losses, thus generating deferred tax assets. At September 30, 2009
the Company maintained deferred tax assets of $118.0 million which is offset by a valuation
allowance of $92.0 million of which $2.2 million was provided for in the period. The change for the
period in the Companys deferred tax assets and valuation allowances is presented in the table
below and more fully described in the paragraphs that follow.
Change in Deferred Tax Assets and Valuation Allowances (in millions):
Deferred | Valuation | Net Deferred | ||||||||||
Tax Asset | Allowance | Tax Asset | ||||||||||
Balance at June 30, 2009 |
$ | 116.9 | $ | 89.8 | $ | 27.1 | ||||||
U.S. increase/(decrease) |
2.0 | 2.1 | (0.1 | ) | ||||||||
Foreign increase/(decrease) |
(0.9 | ) | 0.1 | (1.0 | ) | |||||||
Balance at September 30, 2009 |
$ | 118.0 | $ | 92.0 | $ | 26.0 | ||||||
The
$118.0 million in deferred tax assets consists of $45.1 million related to net operating
losses and the reversal of temporary differences, $45.4 million related to foreign tax credits and
$27.5 million in foreign deferred tax assets. At September 30, 2009, U.S. deferred tax assets
related to net operating losses and the reversal of temporary differences were reduced by a
valuation allowance of $45.1 million, which reflects an increase
of $2.0 million during the period.
The net operating loss carry forward at September 30, 2009 was $105.9 million. The Company believes
that its ability to utilize net operating losses in a given year will be limited to $9.0 million
under Section 382 of the Internal Revenue Code (the Code) because of changes of ownership
resulting from the Companys June 2006 follow-on equity offering. In addition, any future debt or
equity transactions may reduce the Companys net operating losses or further limit its ability to
utilize the net operating losses under the Code. The deferred tax asset related to excess foreign
tax credits is also fully offset by a valuation allowance of $45.4 million. Additionally, the
Company maintains foreign deferred tax assets in the amount of $27.5 million. Of this amount $1.4
million was recorded by the Companys Canadian affiliate during fiscal 2008 related to a foreign
currency loss sustained in connection with the hedge of its term loan. This deferred tax asset was
offset by a full valuation allowance of $1.4 million since the foreign currency loss is capital in
nature and at this time the Company has not identified any potential for capital gains against
which to offset the loss.
As described in Note 1 to this financial statement, the Company restated its historical financial
statements in connection with the adoption of ASC 470-20 (formerly
FSP APB 14-1). The adoption of this standard
required the Company to establish an initial deferred tax liability related to its 2.875% convertible notes (the Notes),
which represents the tax effect of the book/tax basis difference created at adoption. The deferred tax liability will
reverse as the Note discount accretes to zero over the expected life of the Notes. The deferred tax liability associated
with the Notes serves as a source of recovery of the Companys deferred tax assets, and therefore the restatement
also required the reduction of the previously recorded valuation allowance on the deferred tax asset. Because the Company
historically has recorded and continues to record a valuation allowance on the tax benefits associated with its US
subsidiary losses, the reversal of the deferred tax liability associated with the Notes, which is recorded as a benefit
in the deferred income tax provision, is offset by an increase in the valuation allowance. At September 30, 2009, the deferred
tax liability associated with the Notes was $12.7 million.
At June 30, 2009, the Company had unrecognized tax benefit reserves related to uncertain tax
positions of $7.8 million which, if recognized, would decrease the effective tax rate. At September
30, 2009, the Company had $8.7 million of unrecognized tax benefits primarily related to transfer
pricing matters, which if recognized, would decrease its effective tax rate.
The tax years ending June 30, 2005 through 2009 remain open to examination by the taxing
authorities in the United States, United Kingdom and Canada.
25
Table of Contents
DOLLAR
FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes (continued)
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of September 30, 2009, the Company had approximately $0.6 million of accrued interest
related to uncertain tax positions which represents a minimal increase during the three months
ended September 30, 2009. The provision for unrecognized tax benefits including accrued interest is
included in income taxes payable.
11. Subsequent Events
On October 2, 2009 the Company entered into an agreement to acquire a merchant cash advance business
in the United Kingdom. The acquired company primarily provides working capital needs to small retail
businesses by providing cash advances against a percentage of future credit card sales. The purchase price
for the acquired company, which currently manages a receivable portfolio of approximately $3.0 million, was
$4.9 million.
On October 28, 2009 the Company entered into an
agreement to acquire Military Financial
Services, LLC (MFS). MFS is an established business that
provides services to active military personnel
to obtain auto loans in the United States made by a third-party
national bank. The third-party national bank approves
the loan application, funds and services the loans and bears the credit risks. The purchase price
payable by the Company is approximately $118 million, as adjusted to reflect the working capital of
MFS and its subsidiaries as of the closing date as provided in the purchase agreement. The consummation of the acquisition is subject
to the consent of the Companys lenders under its current senior credit facility, the procurement by the
Company and its subsidiaries of sufficient financing and the
satisfaction of other customary closing
conditions. The Company expects to complete the acquisition in December 2009, however there
is no assurance that the acquisition will be consummated at that time or thereafter. The purchase
agreement may be terminated by the Company or the sellers at any time after December 31, 2009 due
to a failure to satisfy any of the closing conditions.
26
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of the financial condition and results of operations for
Dollar Financial Corp. for the three months ended September 30, 2009 and 2008. References in this
section to we, our, ours, or us are to Dollar Financial Corp. and its wholly owned
subsidiaries, except as the context otherwise requires. References to OPCO are to our wholly
owned operating subsidiary, Dollar Financial Group, Inc.
Executive Summary
We are the parent company of Dollar Financial Group, Inc., which, together with its wholly
owned subsidiaries, is collectively referred to as OPCO. Historically, we have derived our
revenues primarily from providing check cashing services, consumer lending and other consumer
financial products and services, including money orders, money transfers, foreign currency
exchange, branded debit cards, pawn lending, gold buying and bill payment. For our check cashing
services, we charge our customers fees that are usually equal to a percentage of the amount of the
check being cashed and are deducted from the cash provided to the customer. For our consumer
loans, we receive interest and fees on the loans.
Most of our retail financial service locations issue single-payment consumer loans on the
company-funded consumer loan model. In August 2007, we launched an internet single-payment loan
site for residents of California and, in February 2008, for Arizona residents. During fiscal 2009, we acquired an established profitable
U.K. Internet-based consumer lending business which was immediately accretive to earnings. The
acquired company is competitively positioned in a rapidly growing market and further expands our
expertise within the Internet lending arena. We believe we can export and leverage this expertise
to other European countries as well as our Canadian business operations.
On June 30, 2008, as part of a process to rationalize our United States markets, we made a
determination to close 24 of our unprofitable stores in various United States markets. In August
2008, we identified another 30 stores in the United States and 17 stores in Canada that were
under-performing and which were closed or merged into a geographically proximate store. The
primary cease-use date for these stores was in September 2008. Customers from these stores were
transitioned to our other stores in close proximity to the stores affected. We recorded costs for
severance and other retention benefits of $0.6 million and store closure costs of $4.9 million
consisting primarily of lease obligations and leasehold improvement write-offs. Subsequent to the
initial expense amounts recorded, we have recorded an additional $0.9 million of additional lease
obligation expense for these locations. During the fourth quarter of fiscal 2009 we announced the
closing of an additional 60 under-performing U.S. store locations. We recorded costs for severance
and other retention benefits of approximately $0.4 million and store closure related costs of
approximately $3.2 million consisting primarily of lease obligations and leasehold improvement
write-offs. During the first quarter of fiscal 2010 we recorded an additional $0.3 million of
store closure related costs. The closure of stores in the United States and Canada did not result
in any impairment of goodwill since the store closures will be accretive to cash flow.
On July 21, 2008, we announced that our Board of Directors had approved a stock repurchase plan,
authorizing us to repurchase in the aggregate up to $7.5 million of our outstanding common stock,
which is the maximum amount of common stock we can repurchase pursuant to the terms of our credit
facility. By October 13, 2008, we had repurchased 535,799 shares of our common stock at a cost of
approximately $7.5 million, thus completing our stock repurchase plan.
On April 21, 2009 we completed the acquisition of an established profitable U.K. internet-based
consumer lending business which is immediately accretive. The acquired company is competitively
positioned in a rapidly growing market and further expands our expertise within the internet
lending arena. Moreover, we believe we can export and leverage this expertise to other European
countries as well as our Canadian business unit.
On June 30, 2009, we completed the acquisition of four stores in Northern Ireland. Three of the
stores reside in central Belfast with the fourth store situated in the town of Lisburn, the third
largest city in Northern Ireland. The acquired stores are multi-product locations offering check
cashing, payday lending, and pawn broking services.
On June 30, 2009, we completed the acquisition of two market leading traditional pawn shops located
in Edinburgh and Glasgow, Scotland. The two stores were established in the year 1830 and primarily
deal in loans securitized by gold jewelry and fine watches, while offering traditional secured pawn
lending for an array of other items. Both stores are located in prominent locations on major
thoroughfares and high pedestrian traffic zones.
27
Table of Contents
On
June 30, 2009, we completed the acquisition of 76% of the
outstanding equity of an established consumer lending business in
Poland. The acquired company, Optima,
S.A., founded in 1999 and headquartered in Gdansk, offers unsecured loans of generally 40 50
week durations with an average loan amount of $250 to $500. The loan transaction includes a
convenient in-home servicing feature, whereby loan disbursement and collection activities take
place in the customers home according to a mutually agreed upon and pre-arranged schedule. The
in-home loan servicing concept is well accepted within Poland and Eastern Europe, and was initially
established in the U.K. approximately 100 years ago. Customer sales and service activities are managed
through an extensive network of local commission based representatives across five provinces in
northwestern Poland.
During the fiscal quarter and fiscal year ended June 30, 2009, our Canadian subsidiary, Money Mart,
recorded a charge of US$57.4 million in relation to the pending settlement of a class action
proceeding in the province of Ontario, Canada and for the potential settlement of certain of the
similar class action proceedings pending in other Canadian provinces. There is no assurance that
the settlement of a class action proceeding in the provinces of Canada will receive final Court
approval or that any of the other class action proceedings will be settled. Although we believe
that we have meritorious defenses to the claims in the proceedings and intend to vigorously defend
against such claims, the ultimate cost of resolution of such claims, either through settlements or
pursuant to litigation, may substantially exceed the amount accrued, and additional accruals may be
required in the future. As of September 30, 2009, the remaining provision of approximately $53.4
million is included in our accrued expenses.
Our expenses primarily relate to the operations of our store network, including the provision for
loan losses, 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.
Subsequent Events
On October 2, 2009 the Company entered into an agreement to acquire a merchant cash advance business
in the United Kingdom. The acquired company primarily provides working capital needs to small retail
businesses by providing cash advances against a percentage of future credit card sales. The purchase price
for the acquired company, which currently manages a receivable portfolio of approximately $3.0 million, was
$4.9 million.
On October 28, 2009, the Company entered into an agreement to acquire Military Financial Services, LLC,
which we refer to as MFS. MFS is an established business that provides services to active military personnel
to obtain auto loans in the United States made by a third party national bank. The third party national bank approves
the loan application, funds and services the loans and bears the credit risks. The purchase price payable by the
Company is approximately $118 million, as adjusted to reflect the working capital of MFS and its subsidiaries as of
the closing date as provided in the purchase agreement. The consummation of the acquisition is subject to the consent
of the Companys lenders under its current senior credit facility, the procurement by the Company and its subsidiaries of
sufficient financing and the satisfaction of other customary closing conditions. The Company expects to complete the
acquisition in December 2009, however there is no assurance that the acquisition will be consummated at that time
or thereafter. The purchase agreement may be terminated by the Company or the sellers at any time after December 31, 2009
due to a failure to satisfy any of the closing conditions.
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, loan
loss reserves and goodwill and intangible assets. We base these estimates on the information
currently available to us and on various other assumptions that we believe are reasonable under the
circumstances. Actual results could vary from these estimates under different assumptions or
conditions.
We believe that the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
With respect to company-operated stores, revenues from our check cashing, money order sales,
money transfer, foreign currency exchange, 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. Royalties from franchisees are recognized as earned.
The standard franchise agreements grant to the franchisee the right to develop and operate a store
and use the associated trade names, trademarks, and service marks within the standards and
guidelines that we established. As part of the franchise agreement, we provide certain pre-opening
assistance including site selection and evaluation, design plans, operating manuals, software and
training. After the franchised location has opened, we provide updates to the software, samples of
certain advertising and promotional materials and other post-opening assistance that we determine
is necessary. Franchise/agent revenues for the three months ended September 30, 2009 and 2008 were
$0.9 million and $1.2 million, respectively.
For single-payment consumer loans that we make directly (company-funded loans), which have terms
ranging from 1 to 45 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.
28
Table of Contents
Company-Funded Consumer Loan Loss Reserves Policy
We maintain a loan loss reserve for probable losses inherent in the outstanding loan portfolio
for single-payment and other consumer loans we make directly through our company-operated
locations. To estimate the appropriate level of loan loss reserves, we consider known and relevant
internal and external factors that affect loan collectability, including the amount of outstanding
loans owed to us, historical loans charged off, current collection patterns and current economic
trends. Our current loan loss reserve is based on our net charge-offs, typically 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 allowances in future periods. Despite the economic downturn in the U.S. and the foreign
markets in which we operate, we have not experienced any material increase in the defaults on
outstanding loans, however we have tightened lending criteria. Accordingly, we have not modified
our approach to determining our loan loss reserves.
When a loan is originated, the customer receives the cash proceeds in exchange for a post-dated
customer check or a written authorization to initiate a charge to the customers bank account on
the stated maturity date of the loan. If the check or the debit to the customers account is
returned from the bank unpaid, the loan is placed in default status and an additional reserve for
this defaulted loan receivable is established and charged to store and regional expenses in the
period that the loan is placed in default status. This reserve is reviewed monthly and any
additional provision to the loan loss reserve as a result of historical loan performance, current
collection patterns and current economic trends is charged to store and regional expenses. If the
loans remain in defaulted status for 180 days, a reserve for the entire amount of the loan is
recorded and the receivable and corresponding reserve is ultimately removed from the balance sheet.
The receivable for defaulted single-payment loans, net of the allowance of $18.0 million at
September 30, 2009 and $17.0 million at June 30, 2009, is reported on our balance sheet in loans in
default, net, and was $6.8 million at September 30, 2009 and $6.4 million at June 30, 2009.
Check Cashing Returned Item Policy
We charge operating expense for losses on returned checks during the period in which such
checks are returned, which generally is three to five business days after the check is cashed in
our store. 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 and Indefinite-Lived Intangible Assets
Goodwill is the excess of cost over the fair value of the net assets of the business acquired. In
accordance with the Intangibles Topic of the FASB Codification, goodwill is assigned to reporting
units, which we have determined to be our reportable operating segments of the United States,
Canada and the United Kingdom. The Company also has a corporate reporting unit which consists of
costs related to corporate infrastructure, investor relations and other governance activities.
Because of the limited activities of the corporate reporting unit, no goodwill has been assigned.
Goodwill is assigned to the reporting unit that benefit from the synergies arising from each
particular business combination. The determination of the operating segments being equivalent to
the reporting units for goodwill allocation purposes is based upon our overall approach to managing
our business along operating segment lines, and the consistency of the operations within each
operating segment. Goodwill is evaluated for impairment on an annual basis on June 30 or between
annual tests if events occur or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. To accomplish this, we are required to
determine the carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units. We are then
required to determine the fair value of each reporting unit and compare it to the carrying amount
of the reporting unit. To the extent the carrying amount of a reporting unit exceeded the fair
value of the reporting unit; we would be required to perform a second step to the impairment test,
as this is an indication that the reporting unit goodwill may be impaired. If after the second
step of testing, the carrying amount of a reporting unit exceeds the fair value of the individual
tangible and identifiable intangible assets, an impairment loss would be recognized in an amount
equal to the excess of the implied fair value of the reporting units goodwill over its carrying
value.
For the U.S. reporting unit, the amount of goodwill has increased significantly since June 30, 2007
primarily due to the acquisitions of APL and CCS during fiscal 2008. During 2009, the overall fair
value of the U.S. reporting unit has declined based on the Companys internal models; however, the
performance of the two aforementioned acquisitions has continued to perform above initial
expectations and the recent closure of unprofitable U.S. stores has improved store margins.
Therefore, the fair value of the U.S. reporting unit, taken
29
Table of Contents
as a whole, continues to exceed its carrying value. The impact of the continued economic downturn,
along with any federal or state regulatory restrictions on our
short-term consumer lending product,
could reduce the fair value of the U.S. goodwill below its carrying value at which time we would be
required to perform the second step of the transitional impairment test, as this is an indication
that the reporting unit goodwill may be impaired.
Indefinite-lived intangible assets consist of reacquired franchise rights, which are deemed to have
an indefinite useful life and are not amortized. Non-amortizable intangibles with indefinite lives
are tested for impairment annually as of December 31, or whenever events or changes in business
circumstances indicate that an asset may be impaired. If the estimated fair value is less than the
carrying amount of the intangible assets with indefinite lives, then an impairment charge would be
recognized to reduce the asset to its estimated fair value.
We
consider this to be one of the significant accounting estimates used in the preparation of our
consolidated financial statements. We estimate the fair value of our reporting units using a
discounted cash flow analysis. This analysis requires us to make various judgmental assumptions
about revenues, operating margins, growth rates, and discount rates. These assumptions are based on
our budgets, business plans, economic projections, anticipated future cash flows and marketplace
data. Assumptions are also made for perpetual growth rates for periods beyond our long term
business plan period. We perform our goodwill impairment test annually as of June 30, and our
reacquired franchise rights impairment test annually as of December 31. At the date of our last
evaluations, there was no impairment of goodwill or reacquired franchise rights. However, we may
be required to evaluate the recoverability of goodwill and other intangible assets prior to the
required annual assessment if we experience a significant disruption to our business, unexpected
significant declines in our operating results, divestiture of a significant component of our
business, a sustained decline in market capitalization, particularly if it falls below our book
value, or a significant change to the regulatory environment in which we operate. While we believe
we have made reasonable estimates and assumptions to calculate the fair value of goodwill and
indefinite-lived intangible assets, it is possible a material change could occur, including if
actual experience differs from the assumptions and considerations used in our analyses. These
differences could have a material adverse impact on the consolidated results of operations, and
cause us to perform the second step impairment test, which could result in a material impairment of
our goodwill. We will continue to monitor our actual cash flows and other factors that may trigger
a future impairment in the light of the current global recession.
Derivative Instruments and Hedging Activities
The Derivative and Hedging Topic of the FASB Codification requires companies to provide users
of financial statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are accounted for,
and (c) how derivative instruments and related hedged items affect an entitys financial position,
financial performance, and cash flows. This Topic also requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about the fair value of
and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
As required by the Derivative and Hedging Topic of the FASB Codification, we record all derivatives
on the balance sheet at fair value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, whether we have elected to designate a derivative in
a hedging relationship and apply hedge accounting and whether the hedging relationship has
satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying
as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future
cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives
may also be designated as hedges of the foreign currency exposure of a net investment in a foreign
operation. Hedge accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into
derivative contracts that are intended to economically hedge certain of its risk, even though hedge
accounting does not apply or we elect not to apply hedge accounting.
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 liability 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 our consolidated balance sheet. An
assessment is then made of the likelihood that the deferred
30
Table of Contents
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.
The income taxes topic of the FASB Codification requires that a more-likely-than-not threshold be
met before the benefit of a tax position may be recognized in the financial statements and
prescribes how such benefit should be measured. As of
September 30, 2009, this requirement did not
result in any adjustment in our liability for unrecognized income tax benefits.
Results of Operations
Constant Currency Analysis
We maintain operations primarily in the United States, Canada and United Kingdom. Approximately
70% of our revenues are originated in currencies other than the US Dollar, principally the Canadian
Dollar and British Pound Sterling. As a result, changes in our reported revenues and profits
include the impacts of changes in foreign currency exchange rates. As additional information to
the reader, we provide constant currency assessments in the following discussion and analysis to
facilitate the comparability of performance between periods and to quantify the impact of the fluctuation in foreign
exchange rates. We also utilize constant
currency results in our analysis of segment performance. Our constant currency assessment assumes
foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal year
periods. For the three months ended September 30, 2009, the actual average exchange rates used to
translate the Canadian and United Kingdoms results were $0.9114 and $1.6399, respectively. For
our constant currency reporting for the same period, the average exchange rates used to translate
the Canadian and United Kingdoms results were $0.9610 and $1.8911, respectively. Note all
conversion rates are based on the US Dollar equivalent to one Canadian Dollar and one British
Pound Sterling.
We believe that our constant currency assessments
are a useful measure, indicating the actual
growth and profitability of our operations. Earnings from our subsidiaries are not generally
repatriated to the U.S.; therefore, we do not incur significant gains or losses on foreign currency
transactions with our subsidiaries. As such, changes in foreign currency exchange rates primarily
impact reported earnings and generally not our actual cash flow.
Revenue Analysis
Three Months Ended September 30, | ||||||||||||||||
(Percentage of total | ||||||||||||||||
($ in thousands) | revenue) | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Check cashing |
$ | 48,532 | $ | 37,802 | 31.7 | % | 26.7 | % | ||||||||
Fees from consumer lending |
81,498 | 78,989 | 53.2 | % | 55.7 | % | ||||||||||
Money transfer fees |
7,610 | 6,823 | 5.0 | % | 4.8 | % | ||||||||||
Franchise fees and royalties |
1,177 | 942 | 0.8 | % | 0.7 | % | ||||||||||
Other revenue |
14,259 | 17,252 | 9.3 | % | 12.1 | % | ||||||||||
Total revenue |
$ | 153,076 | $ | 141,808 | 100.0 | % | 100.0 | % | ||||||||
Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
Total revenues for the three months ended
September 30, 2009 decreased $11.3 million, or 7.4%, as
compared to the three months ended September 30, 2008. The impact of foreign currency accounted
for approximately $10.0 million of the decrease, offset in part by new store openings and
acquisitions of approximately $9.4 million. On a constant currency basis and after eliminating the
impact of new stores and acquisitions, total revenues decreased by $10.7 million.
Consolidated check cashing revenue decreased 22.1%, or $10.7 million, period-over-period. There was
a decrease of $2.4 million related to foreign exchange rates and increases from new stores and
acquisitions of $0.6 million. On a constant currency basis and after eliminating the impact of new
stores and acquisitions, check cashing revenues were down
$8.9 million or 18.4%, for the current
three month period. Check cashing revenues from our U.S., Canadian and U. K. businesses declined
24.5%, 11.0%, and 18.7%, respectively (based on constant currency
reporting), over the previous
years period. On a consolidated constant currency basis, the face amount of the average check
cashed decreased 2.5% to $508 for the first quarter of fiscal 2010 compared to $521 for the prior
year period, while
31
Table of Contents
the
average fee per check cashed increased by 3.2% to $19.79. Also, global check counts declined
by 19.6% from 2.5 million in the first quarter of fiscal 2009 to 2.0 million for the same period in
the current year fiscal year.
Consolidated fees from consumer lending were $79.0 million for the first quarter of fiscal 2010,
representing a decrease of 3.1% or $2.5 million compared to the prior year period. The impact of
foreign currency fluctuations accounted for a decrease of approximately $5.5 million that was
offset by new stores and acquisitions of $7.4 million. The remaining decrease of $4.4 million was
primarily due to decreases in our U.S. consumer lending business which decreased by 21.9%. This
decline is a result of store closures and our credit granting
processes which are developed to decrease our risk exposure to
certain customer segments by reducing the amount we are willing to
loan to these segments. This decrease is
partially offset by an increase in U.K. consumer lending business of
31.9%, which is bolstered in part by
growth in the U.K. pawn lending business. The Companys newly acquired business in Poland
also contributed approximately $1.2 million in consumer lending revenues during the current
quarter.
Money transfer fees for the quarter decreased in reported amounts by $0.8 million, when adjusted
for currency and excluding the impact from new stores and acquisitions, decreased by $0.5 million
or 6.7% for the three months ended September 30, 2009 as compared to the year earlier period. On a
constant currency basis and excluding the impact from new stores and acquisitions, other revenue
increased by $3.1 million for the quarter, principally due to the success of the foreign exchange
product, the debit card business, gold sales and other ancillary products.
Store and Regional Expense Analysis
Three Months Ended September 30, | ||||||||||||||||
(Percentage of total | ||||||||||||||||
($ in thousands) | revenue) | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Salaries and benefits |
$ | 40,803 | $ | 36,736 | 26.7 | % | 25.9 | % | ||||||||
Provision for loan losses |
15,251 | 11,696 | 10.0 | % | 8.2 | % | ||||||||||
Occupancy |
11,324 | 10,847 | 7.4 | % | 7.6 | % | ||||||||||
Depreciation |
3,592 | 3,374 | 2.3 | % | 2.4 | % | ||||||||||
Returned checks, net
and cash shortages |
6,135 | 2,264 | 4.0 | % | 1.6 | % | ||||||||||
Telephone and communications |
2,079 | 1,838 | 1.4 | % | 1.3 | % | ||||||||||
Advertising |
2,812 | 3,447 | 1.8 | % | 2.4 | % | ||||||||||
Bank Charges and armored
carrier expenses |
3,633 | 3,466 | 2.4 | % | 2.4 | % | ||||||||||
Other |
13,637 | 12,244 | 8.8 | % | 8.8 | % | ||||||||||
Total store and regional expenses |
$ | 99,266 | $ | 85,912 | 64.8 | % | 60.6 | % | ||||||||
Store and regional expenses were $85.9 million for the three months ended September 30, 2009
compared to $99.3 million for the three months ended September 30, 2008, a decrease of $13.4
million or 13.5%. The impact of foreign currency accounted for approximately $5.7 million of the
decrease. On a constant currency basis, store expenses decreased by $7.6 million. For the current
year quarter, total store and regional expenses decreased from 64.8% of total revenue to 60.6% of
total revenue year over year. After adjusting for constant currency reporting, the percentage of
total store and regional expenses as compared to total revenue remained relatively consistent at
64.4%.
In relation to our business units and on a constant currency basis, store and regional expenses
decreased by $9.6 million and $4.3 million in the United States and Canada, respectively. The
decreases in these two units are consistent with the closure of
approximately 135 U.S. and Canadian
stores during fiscal 2009. The adjusted store and regional expenses in the United Kingdom
increased by approximately $5.3 million for the three months ended September 30, 2009 as compared
to the prior year which is commensurate with the revenue growth in that country.
Store and regional expenses in the Companys business in Poland
were approximately $1.0 million.
32
Table of Contents
Corporate and Other Expense Analysis
Three Months Ended September 30, | ||||||||||||||||
(Percentage of total | ||||||||||||||||
($ in thousands) | revenue) | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
Corporate expenses |
$ | 19,521 | $ | 20,351 | 12.8 | % | 14.4 | % | ||||||||
Other depreciation and amortization |
1,040 | 1,052 | 0.7 | % | 0.7 | % | ||||||||||
Interest expense, net |
11,547 | 11,624 | 7.5 | % | 8.2 | % | ||||||||||
Unrealized foreign exchange loss |
| 7,827 | | % | 5.5 | % | ||||||||||
Provision for litigation settlements |
509 | 1,267 | 0.3 | % | 0.9 | % | ||||||||||
Loss on store closings |
4,938 | 318 | 3.2 | % | 0.2 | % | ||||||||||
Other (income) expense |
(258 | ) | 160 | (0.2 | )% | 0.1 | % | |||||||||
Income tax provision |
5,226 | 7,966 | 3.4 | % | 5.6 | % |
Corporate Expenses
Corporate expenses were $20.4 million for the three months ended September 30, 2009 and $19.5
million for the three months ended September 30, 2008. On a constant currency basis, corporate
expenses increased by approximately $1.4 million, reflecting the previously announced increased
investment in global management capabilities and infrastructure to support future global store and
product expansion plans, as well as the continuing active acquisition strategy.
Other Depreciation and Amortization
Other depreciation and amortization expenses remained relatively unchanged and were approximately
$1.0 million for the three months ended September 30, 2009 and 2008.
Interest Expense
Interest
expense, net was $11.6 million for the three months ended September 30, 2009 and
remained relatively unchanged from $11.5 million from the prior year. As a result of the early
termination of the U.K. cross-currency swaps, the U.K. debts interest rate is now variable and
lower than in the prior year. The impact of this change is reduced interest expense of
approximately $0.9 million. This reduction was offset by increased interest expense on the
Companys revolving credit facility, increased non-cash interest expense on the Companys
convertible debt and a reduction in the amount of interest income earned by the Company.
Unrealized Foreign Exchange Loss
Unrealized
foreign exchange loss of $7.8 million for the three months ended
September 30, 2009 is
due to unrealized foreign exchange losses associated with the U.K. term loans and intercompany
balances. With the early settlement of the cross-currency interest rate swaps in May 2009, all
unrealized foreign exchange gains and losses related to the U.K. term loans will continue to be
reflected in earnings.
Provision for litigation settlements
Provision for litigation settlements was $1.3 million for the three months ended September 30, 2009
compared to $0.5 million for the same period in the prior year.
33
Table of Contents
Loss on Store Closings
We incurred an additional $0.3 million charge in the three months ended September 30, 2009 related
to the previously announced closure of 60 underperforming stores in the United States. The
additional expenses recorded during the current three month period related to continuing occupancy
costs and store closure related expenses as well as the buy-out of certain terminated leases.
Income Tax Provision
The provision for income taxes was $8.0 million for the three months ended September 30, 2009
compared to a provision of $5.2 million for the three months ended September 30, 2008. Our
effective tax rate was 59.9% for the three months ended September 30, 2009 and was 31.6% for the
three months ended September 30, 2008. The effective tax rate
for the three months ended September 30, 2008 was reduced as a result
of the impact of a favorable settlement granted in a competent authority tax
proceeding between the United States and Canadian tax authorities related to transfer pricing
matters for years 2000 through 2003 combined with an adjustment to our reserve for uncertain tax
benefits related to years for which a settlement has not yet been received. The impact to our three
months fiscal 2009 provision for income taxes related to these two items was a tax benefit of $3.5
million. Our effective tax rate differs from the federal statutory rate of 35% due to foreign
taxes, permanent differences and a valuation allowance on U.S. and foreign deferred tax assets and
the aforementioned changes our reserve for uncertain tax positions. Prior to the global debt
restructuring in our fiscal year ended June 30, 2007, interest expense in the U.S. resulted in U.S.
tax losses, thus generating deferred tax assets. At
September 30, 2009, we maintained deferred tax
assets of $118.0 million which is offset by a valuation allowance of $92.0 million of which $2.2
million was provided for in the period. The change for the period in our deferred tax assets and
valuation allowances is presented in the table below and more fully described in the paragraphs
that follow.
Change in Deferred Tax Assets and Valuation Allowances (in millions):
Deferred | Valuation | Net Deferred | ||||||||||
Tax Asset | Allowance | Tax Asset | ||||||||||
Balance at June 30, 2009 |
$ | 116.9 | $ | 89.8 | $ | 27.1 | ||||||
U.S. increase/(decrease) |
2.0 | 2.1 | (0.1 | ) | ||||||||
Foreign increase/(decrease) |
(0.9 | ) | 0.1 | (1.0 | ) | |||||||
Balance at September 30, 2009 |
$ | 118.0 | $ | 92.0 | $ | 26.0 | ||||||
The
$118.0 million in deferred tax assets consists of $45.1 million related to net operating losses
and the reversal of temporary differences, $45.4 million related to foreign tax credits and $27.5
million in foreign deferred tax assets. At September 30, 2009, U.S. deferred tax assets related to
net operating losses and the reversal of temporary differences were reduced by a valuation
allowance of $45.1 million, which reflects an increase of $2.0 million during the period. The net
operating loss carry forward at September 30, 2009 was $105.9 million. We believe that our ability
to utilize net operating losses in a given year will be limited to $9.0 million under Section 382
of the Internal Revenue Code (the Code) because of changes of ownership resulting from the
Companys June 2006 follow-on equity offering. In addition, any future debt or equity transactions
may reduce our net operating losses or further limit our ability to utilize the net operating
losses under the Code. The deferred tax asset related to excess foreign tax credits is also fully
offset by a valuation allowance of $45.4 million. Additionally, we maintain foreign deferred tax
assets in the amount of $27.5 million. Of this amount $1.4 million was recorded by our Canadian
affiliate during fiscal 2008 related to a foreign currency loss sustained in connection with the
hedge of its term loan. This deferred tax asset was offset by a full valuation allowance of $1.4
million since the foreign currency loss is capital in nature and at this time we have not
identified any potential for capital gains against which to offset the loss.
As described in Note 1 to this financial statement, the Company restated its historical financial statements in connection with the adoption of ASC 470-20 (formerly FSP APB 14-1). The adoption of this standard required the Company to establish an initial deferred tax liability related to its 2.875% convertible notes (the Notes), which represents the tax effect of the book/tax basis difference created at adoption. The deferred tax liability will reverse as the Note discount accretes to zero over the expected life of the Notes. The deferred tax liability associated with the Notes serves as a source of recovery of the Companys deferred tax assets, and therefore the restatement also required the reduction of the previously recorded valuation allowance on the deferred tax asset. Because the Company historically has recorded and continues to record a valuation allowance on the tax benefits associated with its US subsidiary losses, the reversal of the deferred tax liability associated with the Notes, which is recorded as a benefit in the deferred income tax provision, is offset by an increase in the valuation allowance. At September 30, 2009, the deferred tax liability associated with the Notes was $12.7 million.
As described in Note 1 to this financial statement, the Company restated its historical financial statements in connection with the adoption of ASC 470-20 (formerly FSP APB 14-1). The adoption of this standard required the Company to establish an initial deferred tax liability related to its 2.875% convertible notes (the Notes), which represents the tax effect of the book/tax basis difference created at adoption. The deferred tax liability will reverse as the Note discount accretes to zero over the expected life of the Notes. The deferred tax liability associated with the Notes serves as a source of recovery of the Companys deferred tax assets, and therefore the restatement also required the reduction of the previously recorded valuation allowance on the deferred tax asset. Because the Company historically has recorded and continues to record a valuation allowance on the tax benefits associated with its US subsidiary losses, the reversal of the deferred tax liability associated with the Notes, which is recorded as a benefit in the deferred income tax provision, is offset by an increase in the valuation allowance. At September 30, 2009, the deferred tax liability associated with the Notes was $12.7 million.
At June 30, 2009, we had unrecognized tax benefit reserves related to uncertain tax positions of
$7.8 million which, if recognized, would decrease the effective tax rate. At September 30, 2009, we
had $8.7 million of unrecognized tax benefits primarily related to transfer pricing matters, which
if recognized, would decrease its effective tax rate.
The tax years ending June 30, 2005 through 2009 remain open to examination by the taxing
authorities in the United States, United Kingdom and Canada.
34
Table of Contents
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of
September 30, 2009, we had approximately $0.6 million of accrued interest related to uncertain tax
positions which represents a minimal increase during the three months ended September 30, 2009. The
provision for unrecognized tax benefits including accrued interest is included in income taxes
payable.
Discussion and analysis for each geographic segment
Following is a discussion and analysis of the operating results of each of our reportable segments:
The following table presents each reportable segments revenue and store and regional margin results:
Three Months Ended September 30, | ||||||||||||
Percent/ | ||||||||||||
($ in thousands) | Margin | |||||||||||
2008 | 2009 | Change | ||||||||||
Revenue: |
||||||||||||
United
States (1) |
$ | 42,230 | $ | 34,195 | (19.0) | % | ||||||
Store and regional margin |
10.1 | % | 14.2 | % | 4.1 pts. | |||||||
Canada |
$ | 70,313 | $ | 64,122 | (8.8) | % | ||||||
Store and regional margin |
47.1 | % | 51.2 | % | 4.1 pts. | |||||||
United Kingdom |
$ | 40,533 | $ | 43,491 | 7.3 | % | ||||||
Store and regional margin |
40.6 | % | 41.8 | % | 1.2 pts. | |||||||
Total Revenue |
$ | 153,076 | $ | 141,808 | (7.4) | % | ||||||
Store and regional margin |
$ | 53,810 | $ | 55,896 | 3.9 | % | ||||||
Store and regional margin
percent |
35.2 | % | 39.4 | % | 4.2 pts. |
(1) For
the three months ended September 30, 2009 the results of Poland are
included with the United States results.
The following table presents each reportable segments revenue as a percentage of total segment
revenue and each reportable segments pre-tax income as a percentage of total segment pre-tax income:
Three Months Ended September 30, | ||||||||||||||||
Pre-tax | ||||||||||||||||
Revenue | Income/(Loss) | |||||||||||||||
2008 | 2009 | 2008 | 2009 | |||||||||||||
United
States (1) |
27.6 | % | 24.1 | % | (66.4 | )% | (56.4 | )% | ||||||||
Canada |
45.9 | % | 45.2 | % | 112.9 | % | 137.3 | % | ||||||||
United Kingdom |
26.5 | % | 30.7 | % | 53.5 | % | 19.1 | % | ||||||||
Total |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
(1) For
the three months ended September 30, 2009 the results of Poland are
included with the United States results.
Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008
United States
Total U.S.
revenues were $33.0 million (excluding Poland) for the three months ended September 30, 2009 compared to
$42.2 million for the three months ended September 30, 2008, a decrease of 21.8%. This decline is
primarily related to decreases of $3.5 million and $4.9 million in check
35
Table of Contents
cashing and consumer
lending revenue, respectively. The decrease in check cashing revenue
is related to the recession and other factors which resulted in decreases in
both the number of checks as well as the face amount of checks that were presented in the United
States. The number of checks decreased year over year
by approximately 257 thousand and with a corresponding decrease in face value of approximately $122
million. The face amount of the average check has decreased by 3.3% and the average fee has
decreased from $12.75 to $12.47.
Increasing unemployment through all sectors of the U.S. economy in the current period negatively
impacted consumer lending volumes. As a result of current economic conditions, we are
seeking to take
a
more cautious approach to lending in all of our segments, including the United States. Lastly, the
closure of underperforming stores during the fourth quarter of the prior fiscal year has also
contributed to lower year-over-year lending volumes. U.S. funded loan originations decreased 18.4%
or $30.6 million in the current years period as compared to the year earlier period. Included
with the U.S. results, is approximately $1.2 million of revenues related to
the Companys newly acquired operations in Poland.
Store and regional expenses in the United States decreased by $9.6 million, or 25.4%, from the
first quarter of fiscal year 2009 as compared to the current period. The significant decrease is
consistent with the closure of 114 underperforming stores in fiscal 2009. We continue to closely
monitor and control expenses. Further, the U.S. provision for loan losses as a percentage of loan
revenues decreased by 9.8 pts from 30.6% for the three months ended September 30, 2008 as compared
to 20.8% for the current three month period due to improved collections and a tightening of our
lending criteria.
Store and
regional margins in the United States (excluding Polands
results) increased to 14.4% for the three months ended
September 30, 2009 compared to 10.1% for the same period in the prior year. The U.S. store and
regional margins are significantly lower than the other segments. The primary drivers for this
disparity are greater competition in the United States, which effects
revenue per store, higher U.S. salary costs, somewhat higher occupancy costs and marginally higher loan
loss provisions. Management is addressing the lower U.S. margins which is evidenced by the closure
of 114 underperforming stores during fiscal 2009. It is anticipated that the closure of those
mostly underperforming stores will be accretive to earnings, which is supported by the strong
growth in U.S. store and regional margins during the quarter ended September 30, 2009 as compared
to the year earlier period.
The U.S.
pre-tax loss was $7.5 million for the three months ended September 30, 2009 compared to a
pre-tax loss of $11.0 million for the same period in the prior year. Additional expenses
associated with increased corporate expenses of approximately $1.5 million and increased provisions
for legal settlement expenses of $0.8 million were offset by decreases in U.S. intercompany
interest expense of $1.8 million, reduction in store closure expenses of $2.5 million and increases
in intercompany transfer pricing revenues of $1.3 million.
Canada
Total
Canadian revenues were $64.1 million for the three months ended September 30, 2009, a decrease
of 8.8%, or $6.2 million as compared to the year earlier period. The impact of foreign currency
rates accounted for $3.4 million of this decrease. On a constant dollar basis, the decrease in
current year revenues was primarily a result of a $2.3 million decrease in check cashing revenue.
On a constant dollar basis, check cashing revenues in Canada were
impacted by the recession, resulting in decreases in the
number of checks and the total value of checks cashed down by 16.2% and 16.6%, respectively. The average
face amount per check decreased by 0.6%, while the average fee per check increased by 6.2% for the
three months ended September 30, 2009 as compared to the three months ended September 30, 2008.
Store and regional expenses in Canada decreased $5.9 million or 15.9% from $37.2 million in the
first quarter of fiscal 2009 to $31.3 million in the current years fiscal period. Of this
decrease approximately $1.7 million related to the impacts of changes in foreign currency rates.
The remaining decrease of approximately $4.2 million is primarily related to the decrease in
salaries and benefits, provision for loan losses and returned checks. On a constant currency basis,
provision for loan losses, as a percentage of loan revenues, has decreased by 5.0 pts from 15.8% to
10.8%. Overall Canadas store and regional margin percentage has increased from 47.1% to 51.2%.
The solid improvement in this area is the result of the Companys efforts to reduce costs and
promote efficiencies.
The Canadian pre-tax income was $18.3 million for the three months ended September 30, 2009
compared to pre-tax income of $18.7 million for the same period in the prior year. On a constant
dollar basis, Canadas pre-tax income was up by approximately $0.5 million. In addition to
increased store and regional operating margins of $1.5 million, pre-tax income was negatively
impacted by decreases in intercompany interest income and intercompany transfer pricing expenses of
$3.6 million offset by reduced corporate expenses and store closure expenses of approximately $2.7
million.
United Kingdom
Total U.K. revenues were $43.5 million for the three months ended September 30, 2009 compared to
$40.5 million for the year earlier period, an increase of $3.0 million or 7.3%. The increase was
offset by a decrease of approximately $6.6 million related to the impact of changes in foreign
currency rates. On a constant dollar basis and excluding the impact of acquisitions, U.K.
year-over-year revenues
36
Table of Contents
have increased by $1.5 million, or 3.7%. Both consumer lending and other
revenues (pawn broking, gold scrap sales, foreign exchange products and debit cards) were up by
$0.8 million and $3.9 million, respectively. As in the other two business sectors, U.K. check
cashing revenues (also on a constant dollar basis and excluding
acquisitions/new stores) was impacted by the recession and decreased
by approximately $3.1 million, or
22.8%. Rising unemployment and the shrinking construction industry in the London area, principally
due to the slowing housing market, were the primary drivers of the decreased check cashing fees in
the United Kingdom.
U.K. store and regional expenses increased by $1.2 million, or 5.0% from $24.1 million for the
three months ended September 30, 2008 as compared to $25.3 million for the current three month
period. On a constant currency basis U.K. store and regional expenses increased by $5.3 million or
22.0%. The increase is consistent with an operation that is in a growth mode. There was an
increase of 3.9 pts relating to the provision for loan losses as a percentage of loan revenues. On
a constant currency basis, the rate for the three months ended September 30, 2008 was 11.1% while
for the current three month period, the rate increased to 15.0%. On a constant currency basis,
U.K. store and regional margin percentage has improved from 40.6% for the year earlier quarter to
41.3% for the current three month period ended September 30, 2009 due to the strong revenue growth
offset in part with a marginal increase in costs.
The U.K. pre-tax income was $2.5 million for the three months ended September 30, 2009 compared to
$8.8 million for the same period in the prior year or a decrease of $6.3 million. On a constant
currency basis the decrease year-over-year was $5.8 million. This decrease is primarily related to
the unrealized foreign exchange losses related to the U.K. term loans of $9.0 million, increased
corporate expenses and intercompany transfer pricing expenses of approximately $1.2 million,
partially offset by the aforementioned increase of $4.3 million in store and regional margin.
Changes in Financial Condition
On a constant currency basis, cash and cash equivalent balances and the revolving credit facilities
balances fluctuate significantly as a result of seasonal, intra-month and day-to-day requirements
for funding check cashing and other operating activities. For the three months ended September 30,
2009, cash and cash equivalents decreased $17.1, million which is net
of a $11.9 million decline as
a result of the effect of exchange rate changes on foreign cash and cash equivalents. However, as
these foreign cash accounts are maintained in Canada and the U.K. in
local currency, there is no near term diminution in value from
changes in currency exchange rates, and as a result, the cash balances are
still fully available to fund the daily operations of the U.K. and Canadian business units. Net
cash provided by operating activities was $18.8 million for the three months ended September 30,
2009 compared to $4.4 million for the three months ended September 30, 2008. The increase in net cash
provided by operations was primarily the result of the impact of foreign exchange rates on
translated net income and timing differences in payments to third party vendors.
Liquidity and Capital Resources
Our principal sources of cash are from operations, borrowings under our credit facilities and the
issuance of our common stock and senior convertible notes. We anticipate that our primary uses of
cash will be to provide working capital, finance capital expenditures, meet debt service
requirements, fund company originated consumer loans, finance store expansion, finance acquisitions
and finance the expansion of our products and services.
Net cash provided by operating activities was $18.8 million for the three months ended September
30, 2009 compared to $4.4 million for the three months ended September 30, 2008. The increase in
net cash provided from operating activities was primarily a result of the impact of foreign
exchange rates on translated net income, timing differences in payments to third party vendors and
a reduction in loans receivable.
Net cash used in investing activities was $5.5 million for the three months ended September 30,
2009 compared $5.2 million for the three months ended September 30, 2008. Our investing activities
primarily related purchases of property and equipment for our stores and investments in technology.
The actual amount of capital expenditures each year will depend in part upon the number of new
stores opened or acquired and the number of stores remodeled. Our capital expenditures, excluding
acquisitions, are currently anticipated to aggregate approximately $21.2 million during our fiscal
year ending June 30, 2010.
Net cash used in financing activities was $8.1 million for the three months ended September 30,
2009 compared to net cash provided by financing activities of $7.3 million for the three months
ended September 30, 2008. The cash used in financing activities during the three months ended
September 30, 2009 was primarily a result of debt payments of $8.0 million. The cash provided by
financing activities during the three months ended September 30, 2008 was primarily a result of a
net drawdown on our revolving credit facilities and the proceeds from the exercise of stock options
offset in part by the repurchase of our common stock.
37
Table of Contents
Credit
Facilities. On October 30, 2006, we entered into our present Credit Agreement. The Credit Agreement
is comprised of the following: (i) a senior secured revolving credit facility in an aggregate
amount of $75.0 million, which we refer to as the U.S. Revolving Facility, with OPCO as the
borrower; (ii) a senior secured term loan facility with an aggregate amount of $295.0 million,
which we refer to as the Canadian Term Facility, with National Money Mart Company, a wholly-owned
Canadian indirect subsidiary of OPCO, as the borrower; (iii) a senior secured term loan facility
with Dollar Financial U.K. Limited, a wholly-owned U.K. indirect subsidiary of OPCO, as the
borrower, in an aggregate amount of $80.0 million (consisting of a $40.0 million tranche of term
loans and another tranche of term loans
equivalent to$40.0 million denominated in Euros), which we refer to as the UK Term Facility, and
(iv) a senior secured revolving credit facility in an aggregate amount of $25.0 million, which we
refer to as the Canadian Revolving Facility, with National Money Mart Company as the borrower.
In April 2007, we entered into an amendment and restatement of the Credit Agreement to, among other
things, change the currency of the Canadian Revolving Facility to Canadian dollars (C$28.5
million), make corresponding modifications to the interest rates applicable and permit secured debt
in the United Kingdom not to exceed GBP 5.0 million. On June 20, 2007, we entered into a second
amendment of the Credit Agreement to, among other things, permit the issuance of up to $200 million
of unsecured senior convertible debt, make changes to financial covenants and other covenants in
connection with the issuance of such debt and to increase the amount of acquisitions permitted
under the Credit Agreement.
The Credit Agreement contains certain financial and other restrictive covenants, which among other
things, require us to achieve certain financial ratios, limit capital expenditures, restrict
payment of the dividends and obtain certain approvals if we want to increase borrowings. As of
September 30, 2009, we are in compliance with all covenants.
Revolving Credit Facilities. We have three revolving credit facilities: the U.S. Revolving
Facility, the Canadian Revolving Facility and the United Kingdom Overdraft Facility.
United States Revolving Credit Facility. OPCO is the borrower under the U.S. Revolving
Facility which has an interest rate of LIBOR plus 300 basis points, subject to reductions as
we reduce our leverage. The facility terminates on October 30, 2011. The facility may be
subject to mandatory reduction and the revolving loans subject to mandatory prepayment (after
prepayment of the term loans under the Credit Agreement), principally in an amount equal to
50% of excess cash flow (as defined in the Credit Agreement). OPCOs borrowing capacity under
the U.S. Revolving Facility is limited to the lesser of the total commitment of $75.0 million
or 85% of certain domestic liquid assets plus $30.0 million. Under this revolving facility,
up to $30.0 million may be used in connection with letters of credit. At September 30, 2009,
the borrowing capacity was $75.0 million. At September 30, 2009, there was no outstanding
indebtedness under the U.S. Revolving Facility and $13.6 million outstanding in letters of
credit issued by Wells Fargo Bank, which guarantee the performance of certain of our
contractual obligations.
Canadian Revolving Credit Facility. National Money Mart Company, OPCOs wholly owned indirect
Canadian subsidiary, is the borrower under the Canadian Revolving Facility which has an
interest rate of CDOR plus 300 basis points, subject to reductions as we reduce our leverage.
The facility terminates on October 30, 2011. The facility may be subject to mandatory
reduction and the revolving loans subject to mandatory prepayment (after prepayment of the
term loans under the Credit Agreement), principally in an amount equal to 50% of excess cash
flow (as defined in the Credit Agreement). National Money Mart Companys borrowing capacity
under the Canadian Revolving Facility is limited to the lesser of the total commitment of
C$28.5 million or 85% of certain combined liquid assets of National Money Mart Company and
Dollar Financial U.K. Limited and their respective subsidiaries. At September 30, 2009, the
borrowing capacity was C$28.5 million. There was no outstanding indebtedness under the
Canadian facility at September 30, 2009.
United Kingdom Overdraft Facility. In the third quarter of fiscal 2008, our U.K subsidiary
entered into an overdraft facility which provides for a commitment of up to GBP 5.0 million.
There was no outstanding indebtedness under the United Kingdom facility at September 30,
2009. We have the right of offset under the overdraft facility, by which we net our cash
bank accounts with our lender and the balance on the overdraft facility. Amounts outstanding
under the United Kingdom overdraft facility bear interest at a rate of the Bank Base Rate
(0.5% at September 30, 2009) plus 2.0%. Interest accrues on the net amount of the overdraft
facility and the cash balance.
Debt Due Within One Year. As of September 30, 2009, debt due within one year consisted of $3.8
million mandatory repayment of 1.0% per annum of the original principal balance of the Canadian
Term Facility and the U.K. Term Facility.
38
Table of Contents
Long-Term Debt. As of September 30, 2009, long term debt consisted of $163.7 million of Convertible
Notes and $365.8 million in term loans due October 30, 2012 under the Credit Agreement.
Operating Leases. Operating leases are scheduled payments on existing store and other
administrative leases. These leases typically have initial terms of five 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 September 30, 2009, excluding periodic interest payments, include the following
(in thousands):
Less than | 1-3 | 4-5 | After 5 | |||||||||||||||||
Total | 1 Year | Years | Years | Years | ||||||||||||||||
Long-term debt: |
||||||||||||||||||||
Term loans due 2012 |
$ | 369,642 | $ | 3,811 | $ | 7,621 | $ | 358,210 | $ | | ||||||||||
2.875% Senior Convertible Notes
due 2027 |
163,709 | | | | 163,709 | |||||||||||||||
Operating lease obligations |
138,272 | 34,257 | 49,506 | 28,915 | 25,594 | |||||||||||||||
Total contractual cash obligations |
$ | 671,623 | $ | 38,068 | $ | 57,127 | $ | 387,125 | $ | 189,303 | ||||||||||
We believe that, based on current levels of operations and anticipated improvements in operating
results, cash flows from operations and borrowings available under our credit facilities will allow
us to fund our liquidity and capital expenditure requirements for the foreseeable future, including
payment of interest and principal on our indebtedness. This belief is based upon our historical
growth rate and the anticipated benefits we expect from operating efficiencies. We also expect
operating expenses to increase, although the rate of increase is expected to be less than the rate
of revenue growth for existing stores. Furthermore, we do not believe that additional acquisitions
or expansion are necessary to cover our fixed expenses, including debt service.
Balance Sheet Variations
September 30, 2009 compared to June 30, 2009.
Loans receivable, net increased by $9.3 million to $124.0 million at September 30, 2009 from $114.7
million at June 30, 2009. Loans receivable, gross increased by $10.6 million and the related
allowance for loan losses increased by $1.3 million. All of the Companys business units showed
increases in their loan receivable balances with the U.K. business comprising almost 47% of the
increase followed by the newly acquired Poland business accounting for 24% of the consolidated
increase. In constant dollars, the allowance for loan losses increased by $0.8 million and
remained relatively constant at 9.6% of outstanding principal balances at both September 30, 2009
and June 30, 2009. The following factors impacted this area:
| Continued improvements in U.S. collections and our actions taken in an effort to decrease our risk exposure by reducing the amount that we are willing to loan to certain customer segments, the historical loss rate, which is expressed as a percentage of loan amounts originated for the last twelve months applied against the principal balance of outstanding loans declined have shown further improvement. The ratio of the allowance for loan losses related to U.S. short-term consumer loans decreased by 13.0% from 4.6% at June 30, 2009 compared to 4.0% at September 30, 2009. | ||
| In constant dollars, the Canadian ratio of allowance for loan losses has decreased modestly from 3.3% at June 30, 2009 to 3.0% at September 30, 2009. This is continued improvement over allowance for loan loss rates at or near the 5.0% rates being recorded in early fiscal 2009. | ||
| In constant dollars, the U.K.s allowance for loan losses remained relatively stable at approximately 8.5% of outstanding principal at both September 30, 2009 and June 30, 2009. |
Loans in default, net increased by $0.4 million from $6.4 million at June 30, 2009 to $6.8 million
at September 30, 2009. On a constant dollar basis, there was
effectively no change in the net loans in
default, balance from the end of the prior fiscal year.
39
Table of Contents
Goodwill and other intangibles increased $12.9 million, from $454.3 million at June 30, 2009 to
$467.3 million at September 30, 2009 due primarily to foreign currency translation adjustments of
$12.4 million and by purchase accounting adjustments of $0.5 million.
Income taxes payable decreased $4.3 million, from $14.8 million at June 30, 2009 to $10.5 million
at September 30, 2009 due primarily to timing of payment with taxing authorities.
Accrued expenses and other liabilities increased $11.0 million from $70.6 million at June 30, 2009
to $81.6 million at September 30, 2009 primarily due to the reclassification of $8.6 million from
long-term to current related to a payment in connection with the
anticipated Ontario class action settlement
that is anticipated to be made in July of 2010. Foreign currency translation adjustments accounted
for $4.0 million of the decrease.
The fair value of derivatives increased from a liability position of $10.2 million at June 30, 2009
to a liability of $36.2 million as of September 30, 2009 a change of $26.0 million. The change in
the fair value of these cash flow hedges are a result of the change in the
foreign currency exchange rates and interest rates related to Canadian term loans.
Other non-current liabilities decreased by $6.7 million from $25.2 million at June 30, 2009 to
$18.5 million at September 30, 2009 primarily due to the reclassification of $8.6 million noted in
the discussion of accrued expenses.
Seasonality and Quarterly Fluctuations
Our business is seasonal due to the impact of several tax-related services, including cashing tax
refund checks, making electronic tax filings and processing applications of 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 of operations that may be achieved for the full fiscal year. In addition,
quarterly results of operations depend significantly upon the timing and amount of revenues and
expenses associated with the addition of new stores.
Impact of Recent Accounting Pronouncement
In
December 2007, the Financial Accounting Standards Board (the
FASB) issued Accounting Standard
Codification (ASC) 8055-10 (formerly SFAS 141R,
Business Combinations). This Statement
applies to all transactions or other events in which an entity obtains control of one or more
businesses, including those combinations achieved without the transfer of consideration. This
Statement retains the fundamental requirements that the acquisition method of accounting be used
for all business combinations. This Statement expands the scope to include all business
combinations and requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at their fair values as of the acquisition date.
Additionally, the Statement changes the way entities account for business combinations achieved in
stages by requiring the identifiable assets and liabilities to be measured at their full fair
values. We adopted the provisions of this Statement on July 1, 2009.
In December 2007, the FASB issued ASC 810-10 (formerly SFAS 160, Non-controlling Interests in
Consolidated Financial Statements). This Statement establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements.
Additionally, this Statement requires that consolidated net income include the amounts attributable
to both the parent and the non-controlling interest. We adopted the provisions of this Statement
on July 1, 2009.
In March 2008, the FASB issued ASC 815-10 (formerly SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities). The Statement applies to all derivative instruments and related
hedged items accounted for under hedge accounting. The Statement requires (1) qualitative
disclosures about objectives for using derivatives by primary underlying risk exposure and by
purpose or strategy, (2) information about the volume of derivative activity in a flexible format
that the preparer believes is the most relevant and practicable, (3) tabular disclosures about
balance sheet location and gross fair value amounts of derivative instruments, income statement and
other comprehensive income location and amounts of gains and losses on derivative instruments by
type of contract and (4) disclosures about credit-risk-related contingent features in derivative
agreements. We adopted the provisions of the Statement on January 1, 2009.
In May 2008, the FASB issued ASC 470-20 (formerly FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be
40
Table of Contents
Settled
Upon Conversion (Including Partial Cash Settlement)). The Statement
requires the initial proceeds from convertible debt that may be settled in cash to be bifurcated
between a liability component and an equity component. The objective of the guidance is to require
the liability and equity components of convertible debt to be separately accounted for in a manner
such that the interest expense recorded on the convertible debt would not equal the contractual
rate of interest on the convertible debt but instead would be recorded at a rate that would reflect
the issuers conventional debt borrowing rate. This is accomplished through the creation of a
discount on the debt that would be accreted using the effective interest method as additional
non-cash interest expense over the period the debt is expected to remain outstanding. We adopted
the Statement on July 1, 2009 and applied it retroactively to all periods presented. The adoption
impacted the accounting of our 2.875% Senior Convertible Notes due 2027 resulting in additional
interest expense of approximately $7.8 million and $8.6 million in fiscal years 2008 and 2009,
respectively and additional interest expense of $2.1 million for the three months ended September
30, 2008. Also the adoption of the Statement reduced our debt balance by recording a debt discount
of approximately $55.8 million, with an offsetting increase to additional paid in capital. Such
amount will be amortized over the remaining expected life of the debt.
In April 2009, the FASB issued ASC 825-10 (formerly FSP SFAS 107-b Disclosures about Fair Value of
Financial Instruments). The Statement requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial statements. We adopted
the provisions of the Statement for the first quarter fiscal 2010.
In
May 2009, the FASB issued ASC 855-10 (formerly SFAS 165 Subsequent Events). The Statement
requires companies to evaluate events and transactions that occur after the balance sheet date but
before the date the financial statements are issued, or available to be issued in the case of
non-public entities. The Statement requires entities to recognize in the financial statements the
effect of all events or transactions that provide additional evidence of conditions that existed at
the balance sheet date, including the estimates inherent in the financial preparation process.
Entities shall not recognize the impact of events or transactions that provide evidence about
conditions that did not exist at the balance sheet date but arose after that date. The Statement
also requires entities to disclose the date through which subsequent events have been evaluated. We
adopted the provisions of the Statement, as required, the adoption did not have a material impact
on our financial statements. We have evaluated subsequent events from the balance sheet date
through November 6, 2009, see subsequent event note.
In June, 2009, the FASB issued ASC 105-10 (formerly SFAS 168 Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles). The Statement establishes the FASB
Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with US GAAP. The Statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009, for most entities. On the effective date, all
non-SEC accounting and reporting standards will be superseded. We adopted this Statement for the
quarterly period ended September 30, 2009, as required, and adoption has not had a material impact
on our consolidated financial statements.
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.
We have based these forward-looking statements largely on our current expectations and projections
about future events, financial trends, litigation 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, the general economic conditions in the markets
in which we operate, 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 the risk
factors in this Quarterly Report on Form 10-Q and other cautionary statements in this Item 1A of
our annual report on Form 10-K for the year ended June 30, 2009. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
41
Table of Contents
DOLLAR FINANCIAL CORP.
SUPPLEMENTAL STATISTICAL DATA
SUPPLEMENTAL STATISTICAL DATA
September 30, | ||||||||
2008 | 2009 | |||||||
Company Operating Data: |
||||||||
Stores in operation: |
||||||||
Company-owned |
1,064 | 1,032 | ||||||
Franchised stores and check cashing merchants |
313 | 156 | ||||||
Total |
1,377 | 1,188 | ||||||
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Check Cashing Data: |
||||||||
Face amount of checks cashed (in millions) |
$ | 1,318 | $ | 983 | (1) | |||
Face amount of average check |
$ | 521 | $ | 484 | (2) | |||
Average fee per check |
$ | 19.19 | $ | 18.60 | (3) | |||
Number of checks cashed (in thousands) |
2,529 | 2,032 |
Three Months Ended | ||||||||
September 30, | ||||||||
2008 | 2009 | |||||||
Check Cashing Collections Data (in thousands): |
||||||||
Face amount of returned checks |
$ | 19,161 | $ | 9,433 | ||||
Collections |
(13,938 | ) | (7,354 | ) | ||||
Net write-offs |
$ | 5,223 | $ | 2,079 | ||||
Collections as a percentage of returned checks |
72.7 | % | 78.0 | % | ||||
Net write-offs as a percentage of check cashing revenues |
10.8 | % | 5.5 | % | ||||
Net write-offs as a percentage of the face amount of checks cashed |
0.40 | % | 0.21 | % |
(1) | Net of a $50 decrease as a result of the impact of exchange rates for the three months ended September 30, 2009. | |
(2) | Net of a $24 decrease as a result of the impact of exchange rates for the three months ended September 30, 2009. | |
(3) | Net of a $1.19 decrease as a result of the impact of exchange rates for the three months ended September 30 2009. |
42
Table of Contents
The following chart presents a summary of our consumer lending operations, including loan originations,
which includes loan extensions and revenues for the following periods (in thousands):
Three Months Ended | ||||||||
September 30th, | ||||||||
2008 | 2009 | |||||||
U.S. company-funded consumer loan originations |
$ | 166,380 | $ | 135,803 | ||||
Canadian company-funded consumer loan originations |
232,845 | 199,167 | (1) | |||||
U.K. company-funded consumer loan originations |
111,884 | 109,828 | (2) | |||||
Total company-funded consumer loan originations |
$ | 511,109 | $ | 444,798 | ||||
U.S. Servicing revenues |
$ | 578 | $ | | ||||
U.S. company-funded consumer loan revenues |
22,225 | 17,858 | ||||||
Canadian company-funded consumer loan revenues |
37,197 | 35,215 | ||||||
U.K. company-funded consumer loan revenues |
21,498 | 19,690 | ||||||
Total consumer lending revenues, net |
$ | 81,498 | $ | 72,763 | ||||
Gross charge-offs of company-funded consumer loans |
$ | 59,477 | $ | 41,716 | ||||
Recoveries of company-funded consumer loans |
(47,439 | ) | (32,966 | ) | ||||
Net charge-offs on company-funded consumer loans |
$ | 12,038 | $ | 8,750 | ||||
Gross charge-offs of company-funded consumer loans as
a percentage of total company-funded consumer loan
originations |
11.6 | % | 9.4 | % | ||||
Recoveries of company-funded consumer loans as a
percentage of total company-funded consumer loan
originations |
9.2 | % | 7.4 | % | ||||
Net charge-offs on company-funded consumer loans as a
percentage of total company-funded consumer loan
originations |
2.4 | % | 2.0 | % |
(1) | Net of a $10.5 million decrease as a result of the impact of exchange rates for the three months ended September 30, 2009. | |
(2) | Net of a $16.7 million decrease as a result of the impact of exchange rates for the three months ended September 30, 2009 |
43
Table of Contents
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:
| interest rates on revolving credit facilities; and | ||
| 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 U.S. generally accepted accounting principles or GAAP. Information
contained in this section relates only to instruments entered into for purposes other than trading.
Interest Rate Risk
Our outstanding indebtedness, and related interest rate risk, is managed centrally by our
finance department by implementing the financing strategies approved by our Board of Directors.
Our revolving credit facilities carry variable rates of interest. The Canadian debt has been
effectively converted to the equivalent of a fixed rate basis. With the termination of the United
Kingdom cross currency interest rate swaps in May 2009, changes in interest rates will have an
impact on our consolidated statement of financial position. See the section entitled Cross
Currency Interest Rate Swaps.
Foreign Currency Exchange Rate Risk
Put Options
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 certain earnings in the
United Kingdom and Canada against the translational impact of foreign currency fluctuations. Out
of the money put options may be purchased because they cost less than completely averting risk, and
the maximum downside is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At September 30, 2009, we held put options with
an aggregate notional value of C$10.5 million and GBP 3.9 million to protect certain currency
exposure in Canada and the United Kingdom through December 31, 2009. We use purchased options
designated as cash flow hedges to protect against certain of the foreign currency exchange rate
risks inherent in our forecasted earnings denominated in currencies other than the U.S. dollar.
These cash flow hedges have a duration of less than 12 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 stockholders 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 other expense (income), net on the statement of operations. For
options designated as hedges, hedge effectiveness is measured by comparing the cumulative change in
the hedge contract with the cumulative change in the hedged item, both of which are based on
forward rates. As of September 30, 2009, no amounts were excluded from the assessment of hedge
effectiveness. There was no ineffectiveness from these cash flow hedges for fiscal 2009. As of
September 30, 2009, amounts related to these derivatives qualifying as cash flow hedges amounted to
an increase of stockholders equity of $8 thousand, net of tax, all of which is expected to be
transferred to earnings in the next three months along with the earnings effects of the related
forecasted transactions. The fair market value at September 30, 2009 was $0.3 million and is
included in prepaid expenses on the balance sheet.
Canadian operations (exclusive of the unrealized foreign exchange gain of approximately $0.1
million and the loss on store closings of approximately $0.2 million) accounted for approximately
80.9% of consolidated pre-tax earnings for the three months ended September 30, 2009 and 95.4% of
consolidated pre-tax earnings (exclusive of loss on store closings of approximately $2.3 million)
for the three months ended September 30, 2008. U.K. operations (exclusive of unrealized foreign
exchange losses of approximately $7.9 million) accounted for approximately 45.7% of consolidated
pre-tax earnings for the three months end September 30, 2008 and approximately 40.2% of
consolidated pre-tax earnings for the three months ended September 30, 2008. U.S. operations
(exclusive of litigation expense of $1.3 million and losses on store closings of approximately $0.2
million) accounted for approximately (26.7%) of consolidated pre-tax earnings for the three months
ended September 30, 2009 and (35.6%) of consolidated pre-tax earnings (exclusive of litigation
expense of $0.5 million and losses on store closings of $0.5 million) for the three months ended
September 30, 2008. As currency exchange
44
Table of Contents
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 $26.1 million. These
gains and losses are included in other comprehensive income.
We estimate that a 10.0% change in foreign exchange rates by itself would have impacted reported
pre-tax earnings from continuing operations (exclusive in the three months ended September 30, 2009
of unrealized foreign exchange losses of approximately $7.8 million and losses on store closings of
approximately $0.2 million) by approximately $2.9 million for the three months ended September 30,
2009 and $3.0 million (exclusive of losses on store closings of approximately $2.3 million) for the
three months ended September 30, 2008. This impact represents 12.7% of our consolidated foreign
pre-tax earnings for the three months ended September 30, 2009 and 13.6% of our consolidated
foreign pre-tax earnings for the three months ended September 30, 2008.
Cross-Currency Interest Rate Swaps
In December 2006, we entered into cross-currency interest rate swaps to hedge against the
changes in cash flows of our U.K. and Canadian term loans denominated in a currency other than our
foreign subsidiaries functional currency.
In December 2006, our U.K. subsidiary, Dollar Financial U.K. Limited, entered into a cross-currency
interest rate swap with a notional amount of GBP 21.3 million that was set to mature in October
2012. Under the terms of this swap, Dollar Financial U.K. Limited paid GBP at a rate of 8.45% per
annum and Dollar Financial U.K. Limited received a rate of the three-month EURIBOR plus 3.00% per
annum on EUR 31.5 million. In December 2006, Dollar Financial U.K. Limited also entered into a
cross-currency interest rate swap with a notional amount of GBP 20.4 million that was set to mature
in October 2012. Under the terms of this cross-currency interest rate swap, we paid GBP at a rate
of 8.36% per annum and we received a rate of the three-month LIBOR plus 3.00% per annum on US$40.0
million.
On May 7, 2009, our U.K. subsidiary, terminated its two cross-currency interest rate swaps hedging
variable-rate borrowings. As a result, we discontinued prospectively hedge accounting on these
cross-currency swaps. In accordance with the provisions of FASB Codification Topic Derivatives and
Hedging, we will continue to report the net gain or loss related to the discontinued cash flow
hedge in other comprehensive income and will subsequently reclassify such amounts into earnings
over the remaining original term of the derivative when the hedged forecasted transactions are
recognized in earnings.
In December 2006, our Canadian subsidiary, National Money Mart Company, entered into cross-currency
interest rate swaps with aggregate notional amounts of C$339.9 million that mature in October 2012.
Under the terms of the swaps, National Money Mart Company pays Canadian dollars at a blended rate
of 7.12% per annum and National Money Mart Company receives a rate of the three-month LIBOR plus
2.75% per annum on $295.0 million.
On a quarterly basis, the cross-currency interest rate swap agreements call for the exchange of
0.25% of the original notional amounts. Upon maturity, these cross-currency interest rate swap
agreements call for the exchange of the remaining notional amounts. We have designated these
derivative contracts as cash flow hedges for accounting purposes. We record foreign exchange
re-measurement gains and losses related to the term loans and also record the changes in fair value
of the cross-currency swaps each period in corporate expenses in our consolidated statements of
operations. Because these derivatives are designated as cash flow hedges, we record the effective
portion of the after-tax gain or loss in other comprehensive income, which is subsequently
reclassified to earnings in the same period that the hedged transactions affect earnings. As of
September 30, 2009, amounts related to cross-currency interest rate swaps amounted to a decrease in
stockholders equity of $21.3 million, net of tax. The aggregate fair market value of the
cross-currency interest rate swaps at September 30, 2009 is a liability of $36.2 million and is
included in fair value of derivatives on the balance sheet. During the three months ended September
30, 2009, we recorded $9 thousand in earnings related to the ineffective portion of these cash flow
hedges.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation,
with the participation of our Chief Executive Officer, Chief Financial Officer and Senior Vice
President, Finance and Corporate Controller, 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, Chief Financial
Officer and Senior Vice President, Finance
45
Table of Contents
and Corporate Controller 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
Commissions rules and forms and that such information is accumulated and communicated to
management, including our Chief Executive Officer, Chief Financial Officer and Senior Vice
President, Finance and Corporate Controller, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our fiscal quarter
ended September 30, 2009 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
The information required by this Item is incorporated by reference herein to the section in Part I,
Item 1 Note 4. Contingent Liabilities and in Part I,
Item 1 Note 11 Subsequent Events of this Quarterly Report on Form 10-Q.
Item 1A. RISK FACTORS
Our current business and future results may be affected by a number of risks and
uncertainties, including those described below. The risks and uncertainties described below are
not the only risks and uncertainties we face. Additional risks and uncertainties not currently
known to us or that we currently deem immaterial also may impair our business operations. If any
of the following risks actually occur, our business, results of operations and financial condition
could suffer. The risks discussed below also include forward-looking statements and our actual
results may differ substantially from those discussed in these forward-looking statements.
Unexpected changes in foreign tax rates and political and economic conditions could negatively impact our operating results.
We currently conduct significant check cashing and consumer lending activities internationally.
Our foreign subsidiaries accounted for 75.9% of our total revenues during the three months ended
September 30, 2009 and 72.4% of our total revenues during the three months ended September 30,
2008. Our financial results may be negatively impacted to the extent tax rates in foreign
countries where we operate increase and/or exceed those in the United States and as a result of the
imposition of withholding requirements on foreign earnings.
Demand for our products and services is sensitive to the level of transactions effected by our
customers, and accordingly, our revenues could be affected negatively by a general economic
slowdown.
A significant portion of our revenues is derived from cashing checks. Revenues from check cashing
accounted for 26.7% of our total revenues during the three months ended September 30, 2009 and
31.7% of our total revenues during the three months ended September 30, 2008. Any changes in
economic factors that adversely affect consumer transactions and employment could reduce the volume
of transactions that we process and have an adverse effect on our revenues and results of
operations.
The price of our common stock may be volatile.
The market price of our common stock has been subject to significant fluctuations and may continue
to fluctuate or decline. Over the course of the three months ended September 30, 2009, the market
price of our common stock has been as high as $18.99, and as low as $12.88. The market price of
our common stock has been, and is likely to continue to be, subject to significant fluctuations due
to a variety of factors, including quarterly variations in operating results, operating results
which vary from the expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us or our competitors of a
material nature, additions or departures of key personnel, changes in applicable laws and
regulations governing consumer protection and lending practices, the effects of litigation, future
sales of common stock and general stock market price and volume fluctuations. In addition, general
political and economic conditions such as a recession, or interest rate or currency rate
fluctuations may adversely affect the market price of the common stock of many companies, including
our common stock. A significant decline in our stock price could result in substantial losses for
individual stockholders and could lead to costly and disruptive securities litigation.
46
Table of Contents
Any change in the accounting method for convertible debt securities could have an adverse impact on
our reported or future financial results and could adversely affect the trading price of our
securities, including our common stock and the 2.875% Senior Convertible Notes due 2027.
For the purpose of calculating diluted earnings per share, a convertible debt security providing
for net share settlement of the excess of the conversion value over the principal amount, if any,
and meeting specified requirements under Emerging Issues Task Force, or EITF, Issue No. 00-19,
Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, is accounted for in a
manner similar to nonconvertible debt, with the stated coupon constituting interest expense and any
shares issuable upon conversion of the security being accounted for under the treasury stock
method. The effect of the treasury stock method is that the shares potentially issuable upon
conversion of our 2.875% Senior Convertible Notes due 2027 are not included in the calculation of
our earnings per share until the conversion price is in the money, and we are assumed to issue
the number of shares of common stock necessary to settle.
We cannot predict any other changes in generally accepted accounting principles, or GAAP, that may
be made affecting accounting for convertible debt securities. Any change in the accounting method
for convertible debt securities could have an adverse impact on our reported or future financial
results. These impacts could adversely affect the trading price of our securities, including our
common stock and the 2.875% Senior Convertible Notes due 2027.
Item 5. Other Information
In a Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 9, 2009 (the 8-K), the Company disclosed that, on June 5, 2009, National Money Mart Company (Money Mart)
and Dollar Financial Group, Inc. (DFG), each a wholly-owned direct or indirect subsidiary of the
Company, entered into a binding Summary Settlement Agreement providing for the settlement of their outstanding Ontario class action litigation (the Ontario Class Action)
in which the plaintiffs claimed that the business model used by Money Mart resulted in the collection of fees in excess of the statutory limit for the payday loans made since 1997 to a group of Money Marts customers.
On November 6, 2009, Money Mart and DFG entered into a Detailed Settlement Agreement with the plaintiffs in the Ontario Class
Action in which the parties detailed the obligations which were set forth in the Summary Settlement Agreement.
The Detailed Settlement Agreement requires court approval to become effective, and there can be no assurance that the Detailed Settlement Agreement will receive such approval. A court hearing to review and approve the settlement is scheduled for February 2010. The settlement does not reflect any admission of wrongdoing by the Company, Money Mart, DFG or any of their subsidiaries or affiliates.
The Detailed Settlement Agreement reconfirms the settlement terms agreed to by the parties in the Summary Settlement Agreement as disclosed by the Company in the 8-K. Under the terms of the Detailed Settlement Agreement:
1. Money Mart has and will make cash payments aggregating C$27.5 million, payable as follows:
a. C$7.5 million was paid to plaintiffs counsel upon the signing of the Summary Settlement Agreement
and which is to be held in trust pending final court approval of the settlement terms;
b. C$2.5 million upon final approval of the settlement by the court;
c. C$10.0 million to be paid on July 15, 2010; and
d. C$7.5 million to be remitted on July 15, 2011.
2. Money Mart will release approximately C$43.0 million of defaulted indebtedness of class members that
has built up since 1997, as of April 30, 2009 and which is still outstanding as of December 31, 2009. Money Mart will take steps to notify all such class members that, as a result of this defaulted debt amnesty program, they will be returned to a status in good standing at any Money Mart location throughout Canada.
3. Money Mart will provide C$30.0 million in transaction credits for this broad group of customers, which can be applied in C$5.00 increments to future product transactions on most of
Money Marts products.
The above summary of the material terms of the Detailed Settlement Agreement is qualified in its entirety by reference to the complete text of the Detailed Settlement Agreement filed with this Quarterly Report on Form 10-Q as Exhibit 10.1 and is in its entirety incorporated in this Part II, Item 5 of this Quarterly Report on Form 10-Q by reference.
47
Table of Contents
Item 6.
Exhibits
Exhibit No. | Description of Document | |
10.1
|
Detailed Settlement Agreement by and among Kenneth Smith, as Estate Trustee of the last Will and Testament of Margaret Smith, deceased and Ronald Adrien Oriet, as plaintiffs and National Money Mart Company and Dollar Financial Group, Inc., as defendants, dated November 6, 2009. | |
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 Executive Vice President and Chief Financial Officer | |
31.3
|
Rule 13a-14(a)/15d-14(a) Certification of Senior Vice President of Finance and Corporate Controller | |
32.1
|
Section 1350 Certification of Chief Executive Officer | |
32.2
|
Section 1350 Certification of Executive Vice President and Chief Financial Officer | |
32.3
|
Section 1350 Certification of Senior Vice President of Finance and Corporate Controller |
48
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DOLLAR FINANCIAL CORP. |
||||
Date: November 9, 2009 | *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. |
49