UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
New York 13-2997911
-------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 Lancaster Avenue
Berwyn, Pennsylvania 19312-1288
-------------------------------- ---------------------
(Address of Principal Executive (Zip Code)
Offices)
Registrant's telephone number, including area code (610) 296-3400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K: |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |_| No |X|
There is no market for the common stock of Dollar Financial Group, Inc. and all
of such stock is held by the registrant's parent, DFG Holdings, Inc. See "Item
12 - Security Ownership of Certain Beneficial Owners and Management."
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_|
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of September 29,
2003, 100 shares of the registrant's common stock, par value $1.00 per share,
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part IV is incorporated by reference to
the Registrant's Registration Statement on Form S-4 (Registration No. 333-18221)
declared effective March 11, 1997, Registrant's Statement on Form 10-Q filed
February 16, 1999, Registrant's Statement on Form 8-K/A filed April 26, 1999,
Registrant's Statement on Form 8-K/A filed September 30, 1999 and Registrant's
Statement on Form 8-K/A filed February 28, 2000.
2
DOLLAR FINANCIAL GROUP, INC.
Table of Contents
2003 Report on Form 10-K
PART I
Item 1. Business ...................................................... 4
Item 2. Properties .................................................... 20
Item 3. Legal Proceedings ............................................. 21
Item 4. Submission of Matters to a Vote of Security Holders ........... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ................................................... 22
Item 6. Selected Financial Data ....................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .... 33
Item 8. Financial Statements and Supplementary Data ................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ...................................... 62
Item 9A. Controls and Procedures ....................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrant ............ 62
Item 11. Executive Compensation ........................................ 65
Item 12. Security Ownership of Certain Beneficial Owners and
Management ................................................ 67
Item 13. Certain Relationships and Related Transactions ................ 68
Item 14. Principal Accountant Fees and Services ........................ 70
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 70
Signatures ............................................................. 79
3
Item 1. BUSINESS
General
We are a leading international financial services company serving
under-banked consumers. Our customers are typically lower- and middle-income
working-class individuals who require basic financial services but, for reasons
of convenience and accessibility, purchase some or all of their financial
services from us rather than banks and other financial institutions. To serve
this market, we have a network of 1,084 stores, including 624 company-operated
stores, in 17 states, the District of Columbia, Canada and the United Kingdom.
We provide a diverse range of consumer financial products and services primarily
consisting of check cashing, short-term consumer loans, money orders and money
transfers. Our store network represents the second-largest network of its kind
in the United States and the largest network of its kind in each of Canada and
the United Kingdom.
Our network includes the following platforms for delivering our financial
services to the consumer in our core markets:
United States
We operate a total of 321 stores, with 233 operating under the name
"Money Mart" and 88 operating under the name "Loan Mart." The Money Mart
stores typically offer our full range of our products and services,
including check cashing and short-term consumer loans. The Loan Mart
stores offer short-term consumer loans and other ancillary services
depending upon location. By offering short-term lending services, we hope
to attract a customer who might not use check cashing services. We also
have relationships with 443 document transmitter locations, such as
independent mail stores and insurance offices, which assist in completing
short-term consumer loans we market through a direct-to-consumer lending
operation.
Our U.S. business had revenues of $110.5 million for fiscal 2003.
Canada
There are 290 stores in our Canadian network, of which 181 are
operated by us and 109 are operated by franchisees. All stores in Canada
are operated under the name "Money Mart" except locations in the Province
of Quebec. The stores in Canada typically offer check cashing, short-term
consumer loans and other ancillary products and services.
Our Canadian business had revenues of $(USD)67.0 million for fiscal
2003.
United Kingdom
There are 473 stores in our U.K. network, of which 122 are operated
by us and 351 are operated by franchisees. All stores in the United
Kingdom (with the exception of certain franchises operating under the name
"Cash A Cheque") are operated under the name "Money Shop." The stores in
the United Kingdom typically offer check cashing, short-term consumer
loans and other ancillary products and services.
Our U.K. business had revenues of $(USD)41.9 million for fiscal
2003.
Our customers, many of whom receive income on an irregular basis or from
multiple employers, are drawn to our convenient neighborhood locations, extended
operating hours and high-quality customer service. Our products and services,
principally our check cashing and short-term consumer loan program, provide
immediate access to cash for living expenses or other needs. We principally cash
payroll checks, although our stores also cash government benefit, personal and
income-tax-refund checks. During fiscal 2003, we cashed 8.6 million checks with
a total face amount of $3.1 billion and an average face amount of $355 per
check. Acting both as a servicer and as a direct lender, we originated 2.8
million loans with an average principal amount of $282 and a weighted average
term of approximately 15 days. We also strive to provide our customers with
high-value ancillary services, including Western Union money order and money
transfer products, electronic tax filing, bill payment, foreign currency
exchange, photo ID and prepaid local and long-distance phone services.
4
Industry Overview
We operate in a sector of the financial services industry that serves the
basic need of lower- and middle-income working-class individuals to have
convenient access to cash. This need is primarily evidenced by consumer demand
for check cashing and short-term loans, and consumers who use these services are
often underserved by banks and other financial institutions.
Lower- and middle-income individuals represent the largest part of the
population in each country in which we operate. Many of these individuals work
in the service sector, which in the United States is one of the fastest growing
segments of the workforce.
However, many of these individuals, particularly in the United States, do
not maintain regular banking relationships. They use services provided by our
industry for a variety of reasons, including that they often:
o do not have sufficient assets to meet minimum balance requirements
or to achieve the benefits of savings with banks;
o do not write enough checks to make a bank account beneficial;
o need to access financial services outside of normal banking hours;
o desire not to pay fees for banking services that they do not use;
o require immediate access to cash from their paychecks; and
o may have a dislike or distrust of banks.
In addition to check cashing services, under-banked consumers also require
short-term loans that provide cash for living and other expenses. They also may
not be able to or want to obtain loans from banks as a result of:
o their immediate need for cash;
o irregular receipt of payments from their employers;
o their desire for convenience and customer service; and
o the unavailability of bank loans in small denominations for short
terms.
Despite the demand for basic financial services, access to banks has
become more difficult over time for many consumers. Many banks have chosen to
close their less profitable or lower-traffic locations. Typically, these
closings have occurred in lower-income neighborhoods where the branches have
failed to attract a sufficient base of customer deposits. This trend has
resulted in fewer convenient alternatives for basic financial services in many
neighborhoods. Many banks have also reduced or eliminated some services that
under-banked consumers need.
As a result of these trends, a significant number of retailers have begun
to offer financial services to lower- and middle-income individuals. The
providers of these services are fragmented, and range from specialty finance
offices to retail stores in other industries that offer ancillary services.
We believe that the under-banked consumer market will continue to grow as
a result of a diminishing supply of competing banking services as well as
underlying demographic trends. These demographic trends include an overall
increase in the population and an increase in the number of service-sector jobs
as a percentage of the total workforce.
The demographics of the typical customers for non-banking financial
services vary slightly in each of the markets in which we operate, but the
trends driving the industry are generally the same. In addition, the type of
store and services that appeal to customers in each market vary based on
cultural, social, geographic and other factors. Finally, the composition of
providers of these services in each market results in part from the historical
development and regulatory environment in that market.
5
Growth Opportunities
We believe that significant opportunities for growth exist in our industry
as a result of:
o growth of the service-sector workforce;
o failure of commercial banks and other traditional financial service
providers to address adequately the needs of lower- and
middle-income individuals; and
o trends favoring larger operators in the industry.
We believe that, as the lower- and middle-income population segment
increases, and as trends within the retail banking industry make banking less
accessible to these consumers, the industry in which we operate will see a
significant increase in demand for their products and services. We also believe
that the industry will continue to consolidate as a result of a number of
factors, including:
o economies of scale available to larger operators;
o use of technology to serve customers better and to control large
store networks;
o inability of smaller operators to form the alliances necessary to
deliver new products; and
o increased licensing and regulatory burdens.
This consolidation process should provide us, as operator of one of the
largest store networks, with opportunities for continued growth.
Competitive Strengths
We believe that the following competitive strengths position us well for
continued growth:
Leading Position in Core Markets. We have a leading position in core
markets, operating 321 stores in the United States, 181 stores in Canada and 122
stores in the United Kingdom as of June 30, 2003. We have 109 franchised
locations in Canada and 351 franchised locations in the United Kingdom.
Highlights of our competitive position in these core markets include the
following:
o Our domestic network is focused in rapidly growing markets in
the western United States, where we believe we have held
leading market positions for over 10 years.
o We believe that we are the industry leader in Canada, and that
we hold a dominant market share with a store in almost every
city with a population of over 50,000. Based on a public
opinion study of three major metropolitan markets in English
speaking Canada, we have achieved brand awareness of 85%.
o We are the largest check cashing company in the United
Kingdom, comprising nearly 25% of the market measured by
number of stores, although we believe that we account for 40%
of all check cashing transactions performed at check cashing
stores.
High-quality Customer Service. We adhere to a strict set of market survey
and location guidelines when selecting store sites in order to ensure that our
stores are placed in desirable locations near our customers. We believe that our
customers appreciate this convenience, as well as the flexible and extended
operating hours that we typically offer, which are often more compatible with
our customers' work schedules. We provide our customers with a clean, attractive
and secure environment in which to transact their business. We believe that our
friendly and courteous customer service at both the store level and through our
centralized support centers is a competitive advantage.
6
Diversified Product and Geographic Mix. Our stores offer a wide range of
consumer financial products and services to meet the demands of their respective
locales, including check cashing, short-term consumer loans, money orders and
money transfers. We also provide high-value ancillary products and services,
including electronic tax filing, bill payment, foreign currency exchange, photo
ID and prepaid local and long-distance phone services. For fiscal 2003, the
revenue contribution by our check cashing operations was 49.4%, our consumer
lending operations was 37.2% and our other financial services was 13.4%. In
addition to our product diversification, our business is diversified
geographically. For fiscal 2003, our U.S. operations generated 50.4% of our
total revenue, our Canadian operations generated 30.5% of our total revenue and
our U.K. operations generated 19.1% of total revenue. Our product and geographic
mix provides a diverse stream of revenue.
Diversification and Management of Credit Risk. Our revenue is generated
through a high volume of small dollar financial transactions, and therefore our
exposure to loss from a single customer transaction is minimal. In addition, we
actively manage our customer risk profile and collection efforts in order to
maximize our consumer lending and check cashing revenues while maintaining
losses within a targeted range. We have instituted control mechanisms that have
been effective in managing risk. Such mechanisms, among others, include the
daily monitoring of initial return rates on our consumer loan portfolio. As a
result, we believe that we are unlikely to sustain a material credit loss from a
single transaction or series of transactions. We have experienced relatively low
net write-offs as a percentage of the face amount of checks cashed. For fiscal
2003, in our check cashing business, net write-offs as a percentage of face
amount of checks cashed were 0.2%. For the same period, with respect to loans
funded directly by us, net write-offs as a percentage of originations were 2.3%.
Management Expertise. We have a highly experienced and motivated
management team at both the corporate and operational levels. Our senior
management team has extensive experience in the financial services industry. Our
Chairman and Chief Executive, Jeffrey Weiss, and our President and Chief
Financial Officer, Donald Gayhardt, have been with us since 1990 and have
demonstrated, through their operational leadership and strategic vision, the
ability to grow the business, achieving a revenue compound annual growth rate of
23.3% since 1990. In addition to their expertise, the management team is highly
motivated to ensure continued business success, as they collectively own
approximately 19.0% of our parent company's fully diluted common stock.
Strategy
Our business strategy is designed to capitalize on our competitive
strengths and enhance our leading market positions. Key elements of our strategy
include:
Introducing Related Products and Services. We offer our customers multiple
financial products and services. We believe that our check cashing and consumer
lending customers enjoy the convenience of other high-value products and
services offered by us. These products and services enable our customers to
manage their personal finances more effectively. For example, in fiscal 2003, we
introduced debit cards as a new channel for delivering short-term consumer loans
to customers at our document transmitter locations and customer loyalty programs
in many of our stores. We also offered new tax-based products to our Canadian
customers, providing qualified individuals with cash advances against
anticipated tax refunds. We intend to continue to innovate and develop new
products and services for our customers.
Growing Through Disciplined Network Expansion. We intend to continue to
grow our network through the addition of new stores and franchisees, while
adhering to a disciplined selection process. In order to optimize our expansion,
we carefully assess potential markets by analyzing demographic, competitive and
regulatory factors, site selection and availability and growth potential. We
seek to add locations that offer check cashing, consumer lending or a
combination of both. In addition, we will continue to grow our
direct-to-consumer lending services that enable us to access a broader customer
base without the capital expense of adding company stores.
Maintaining our Customer-driven Retail Philosophy. We strive to maintain
our customer-service-oriented approach and meet the basic financial service
needs of our working, lower- and middle-income customers. We believe our
approach differentiates us from many of our competitors and is a key tenet of
our employee training programs. We offer extended operating hours in clean,
attractive and secure store locations to enhance appeal and stimulate store
traffic. In certain markets, we operate stores that are open 24 hours a day. To
ensure customer satisfaction, we periodically send anonymous market researchers
posing as shoppers to our U.S. stores to measure customer service performance.
We plan to continue to develop ways to improve our performance, including
through incentive programs to reward employees for exceptional customer service.
7
Enhancing Network and Store-level Profitability. With our network of 1,084
stores, we are well positioned to capitalize on economies of scale. Our
centralized core support functions, including collections, call center, field
operations and service, loan processing and tax filing, enable us to generate
efficiencies by improving collections and purchasing power with our vendors. Our
proprietary systems are used to further improve our customer relations and loan
servicing activities, as well as to provide a highly efficient means to manage
our internal as well as regulatory compliance efforts. We plan to continue to
take advantage of these efficiencies to enhance network and store-level
profitability.
Customers
Our core customer group generally lacks sufficient income to accumulate
assets or to build savings. These customers rely on their current income to
cover immediate living expenses and cannot afford to wait for checks to clear
through the commercial banking system. We believe that many of our customers use
our check cashing and short-term lending services in order to access cash
immediately without having to maintain a minimum balance in a checking account
and to borrow money to fund living expenses and other needs. We believe that
consumers value our affordability and attention to customer service, and their
choice of financial service provider is influenced by our convenient locations
and extended operating hours.
U.S. Customers
Based on our operating experience and information provided to us by our
customers, we believe that our core domestic check cashing customer group is
composed of individuals between the ages of 18 and 44. The majority of these
individuals rent their homes, are employed and have annual household incomes of
between $10,000 and $35,000, with a median income of $22,500. We believe that
many of our customers are workers or independent contractors who receive payment
on an irregular basis and generally in the form of a check. In addition, we
believe that although approximately 49% of our U.S. customers do have bank
accounts, these customers use check cashing stores because they find the
locations and extended business hours more convenient than those of banks and
because they value the ability to receive cash immediately, without waiting for
a check to clear.
Our operating experience and customer data also suggest that our
short-term consumer loan customers are mainly individuals between the ages of 18
and 49. The majority of these individuals rent their homes and are employed in
professional/managerial positions. A survey conducted by the Credit Research
Center of Georgetown University found that 51.5% of short-term consumer loan
customers reported household incomes between $25,000 and $50,000 with 25.4%
greater than $50,000. The survey also found that these customers choose
short-term consumer loans because of easy and fast approval and convenient
location. Unlike many of our check cashing customers, short-term consumer loan
customers have a bank account but experience temporary shortages in cash from
time to time.
Canadian Customers
Based on recent market research surveys, we believe that the demographics
of our Canadian customers are somewhat different from those of our U.S.
customers. Our typical Canadian check cashing customer is approximately 32 years
old, employed in the trades/labor sector and earning $(USD)28,000 annually. Our
typical Canadian short-term loan customer is 25 to 44 years old, employed in the
services sector and earning $(USD)35,000 annually. Approximately 60% of our
Canadian customers are male and 40% are female. In contrast to the United
States, 66% of our Canadian check cashing customers have bank accounts, and 98%
of our Canadian short-term loan customers have bank accounts. Our research shows
that these customers continue to use our services because of our fast and
courteous service, the stores' extended operating hours and convenient
locations.
U.K. Customers
Recent market research conducted on our behalf and our own customer data
have shown that 89% of our U.K. customers have annual incomes below
$(USD)30,000, and 58% are under the age of 35. According to market research,
approximately 85% of our customer base is employed, with equal numbers of males
and females. While 80% of our U.K. customers have bank accounts, they report a
high level of dissatisfaction with their current bank relationship. Market
research indicated customer service satisfaction levels for our U.K. customers
above 95% compared with 50% to 65% satisfaction for the major banks. Staff
friendliness and face-to-face contact are key drivers of customer satisfaction.
The need for immediate cash is the number one reason for using our services.
8
Products and Services
Our locations provide a broad range of consumer financial products and
services to our customers at convenient locations with extended operating hours.
Customers typically use our stores to cash checks (payroll, government and
personal), obtain short-term consumer loans and use one or more of the
additional financial services available at most locations. In addition,
customers use a variety of other products, including Western Union money order
and money transfer products, electronic tax filing, bill payment, foreign
currency exchange, photo ID and prepaid local and long-distance phone services.
Check Cashing
Customers may cash all types of checks at our check cashing locations,
including payroll checks, government checks and personal checks. In exchange for
a verified check, customers receive cash immediately and do not have to wait
several days for the check to clear. Before we distribute any cash, we verify
both the customer's identification and the validity of the check (occasionally
using multiple sources) as required by our standard verification procedures.
Customers are charged a fee for this service (typically a small percentage of
the face value of the check). The fee varies depending on the size and type of
check cashed as well as the customer's check cashing history at our stores. For
fiscal 2003, check cashing fees averaged approximately 3.55% of the face value
of checks cashed.
The following chart presents summaries of revenue from our check cashing
operations, broken down by consolidated operations, U.S. operations and Canadian
and U.K. operations for the periods indicated below:
Year ended June 30,
--------------------------------------------------------------------------------------
1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------
Consolidated operations:
Face amount of checks cashed .......... $2,319,847,000 $2,743,765,000 $3,046,705,000 $2,969,455,000 $3,051,982,000
Number of checks cashed ............... 7,490,406 8,204,528 9,001,635 8,689,819 8,585,459
Average face amount per check ......... $ 309.71 $ 334.42 $ 338.46 $ 341.72 $ 355.48
Average fee per check ................. $ 10.14 $ 11.87 $ 11.74 $ 12.06 $ 12.63
Average fee as a % of face amount ..... 3.28% 3.55% 3.47% 3.53% 3.55%
U.S. operations:
Face amount of checks cashed .......... $1,723,912,000 $1,712,912,000 $1,728,504,000 $1,636,967,000 $1,508,407,000
Number of checks cashed ............... 5,176,483 4,654,747 4,485,393 4,317,534 3,786,363
Average face amount per check ......... $ 333.03 $ 367.99 $ 385.36 $ 379.14 $ 398.38
Average fee per check ................. $ 10.73 $ 12.17 $ 12.19 $ 12.41 $ 12.98
Average fee as a % of face amount ..... 3.22% 3.31% 3.16% 3.27% 3.26%
Canadian and U.K. operations:
Face amount of checks cashed .......... $ 595,935,000 $1,030,853,000 $1,318,201,000 $1,332,488,000 $1,543,575,000
Number of checks cashed ............... 2,313,923 3,549,781 4,516,242 4,372,285 4,799,096
Average face amount per check ......... $ 257.54 $ 290.40 $ 291.88 $ 304.76 $ 321.64
Average fee per check ................. $ 8.98 $ 11.47 $ 11.30 $ 11.71 $ 12.35
Average fee as a % of face amount ..... 3.49% 3.95% 3.87% 3.84% 3.84%
If a check cashed by us is not paid for any reason, we record the full
face value of the check as a loss in the period when the check was returned
unpaid. We then send the check to our internal collections department, or
occasionally directly to the store, for collection. Our employees contact the
maker and/or payee of each returned check. In certain circumstances, we will
take appropriate legal action. Recoveries on returned items are credited in the
period when the recovery is received. During fiscal 2003, we collected 74.2% of
the face value of returned checks.
9
The following chart presents summaries of our returned check experience,
broken down by consolidated operations, U.S. operations and Canadian and U.K.
operations for the periods indicated below:
Year ended June 30,
-----------------------------------------------------------------------
1999 2000 2001 2002 2003
-----------------------------------------------------------------------
Consolidated operations:
Face amount of returned checks $16,607,000 $22,866,000 $27,938,000 $27,875,000 $26,164,000
Collections on returned checks 12,505,000 17,097,000 19,752,000 20,812,000 19,426,000
Net write-offs of returned checks 4,102,000 5,769,000 8,186,000 7,063,000 6,738,000
Collections as a percentage of returned checks 75.3% 74.7% 70.7% 74.7% 74.2%
Net write-offs as a percentage of check
cashing revenues 5.4% 5.9% 7.7% 6.7% 6.2%
Net write-offs as a percentage of face amount
of checks cashed 0.18% 0.21% 0.26% 0.24% 0.22%
U.S. operations:
Face amount of returned checks $11,246,600 $12,019,000 $14,519,000 $15,412,000 $12,046,000
Collections on returned checks 7,646,040 7,808,000 8,872,000 10,560,000 8,335,000
Net write-offs of returned checks 3,600,560 4,211,000 5,647,000 4,852,000 3,711,000
Collections as a percentage of returned checks 68.0% 65.0% 61.1% 68.5% 69.2%
Net write-offs as a percentage of check
cashing revenues 6.5% 7.4% 10.3% 9.1% 7.6%
Net write-offs as a percentage of face amount
of checks cashed 0.21% 0.25% 0.33% 0.30% 0.25%
Canadian and U.K. operations:
Face amount of returned checks $ 5,360,400 $10,847,000 $13,419,000 $12,463,000 $14,118,000
Collections on returned checks 4,858,960 9,289,000 10,880,000 10,252,000 11,091,000
Net write-offs of returned checks 501,440 1,558,000 2,539,000 2,211,000 3,027,000
Collections as a percentage of returned checks 90.7% 85.6% 81.1% 82.3% 78.6%
Net write-offs as a percentage of check
cashing revenues 2.4% 3.8% 5.0% 4.3% 5.1%
Net write-offs as a percentage of face amount
of checks cashed 0.08% 0.15% 0.18% 0.17% 0.20%
Consumer Lending
We originate short-term loans on behalf of two domestic banks and for our
own account.
The short-term consumer loans we originate are commonly referred to as
"payday" or "deferred deposit" loans. In a payday-loan transaction, at the time
the funds are advanced to the borrower, the borrower signs a note and provides
the lender with a post-dated check or a written authorization to initiate an
automated clearinghouse charge to the borrower's checking account for the loan
principal plus a finance charge; on the due date of the loan (which is generally
set at a date on or near the borrower's next payday), the check or automated
clearinghouse debit is presented for payment.
Since June 13, 2002, we have acted as a servicer for County Bank of
Rehoboth Beach, Delaware and since October 18, 2002, for First Bank of Delaware.
On behalf of these banks, we market unsecured short-term loans to customers with
established bank accounts and verifiable sources of income. Loans are made for
amounts up to $500, with terms of 7 to 23 days. Under these programs, we earn
servicing fees, which may be reduced if the related loans are not collected. We
maintain a reserve for estimated reductions. In addition, we maintain a reserve
for anticipated losses for loans we make directly. In order to estimate the
appropriate level of these reserves, we consider the amount of outstanding loans
owed to us, as well as loans owed to banks and serviced by us, the historical
loans charged-off, current collection patterns and current economic trends. As
these conditions change, additional allowances might be required in future
periods. During fiscal 2003, County Bank originated or extended approximately
$277.9 million of loans through our locations and document transmitters. First
Bank originated or extended approximately $92.5 million of loans through us
10
during this period. County Bank originated or extended approximately $14.7
million of loans through us during fiscal 2002.
We also originate unsecured short-term loans to customers on our own
behalf in Canada, the United Kingdom and certain U.S. markets. We bear the
entire risk of loss related to these loans. In the United States, these loans
are made for amounts up to $500, with terms of 7 to 37 days. In Canada, loans
are issued to qualified borrowers based on a percentage of the borrowers' income
with terms of 1 to 35 days. We issue loans in the United Kingdom for up to
(pound)500, with a term of 28 days. We originated or extended approximately
$427.6 million of the loans through our locations and document transmitters
during fiscal 2003 and approximately $284.7 million through our locations and
document transmitters during 2002.
We had approximately $20.4 million of consumer loans on our balance sheet
at June 30, 2003 and approximately $18.2 million on June 30, 2002. These amounts
are reflected in loans and other receivables. Loans and other receivables at
June 30, 2003 are reported net of a reserve of $2.4 million related to consumer
lending. Loans and other receivables at June 30, 2002 are reported net of a
reserve of $2.9 million related to consumer lending.
The following chart presents a summary of our consumer lending
originations and revenues for the following periods:
Year ended June 30,
----------------------------------
2001 2002 2003
----------------------------------
(in thousands)
U.S. originations ..................................... $ 11,965 $ 19,723 $ 81,085
Canadian originations ................................. 138,127 188,632 248,149
U.K. originations ..................................... 44,679 76,344 98,388
----------------------------------
Total originations .................................... $194,771 $284,699 $427,622
==================================
Servicing revenues, net ............................... $ 41,920 $ 44,765 $ 41,175
Company funded domestic loan revenues ................. 1,966 3,545 14,137
Company funded foreign loan revenues .................. 18,776 27,043 35,918
Net write-offs on company funded loans ................ (4,295) (5,554) (9,716)
----------------------------------
Total consumer lending revenues, net .................. $ 58,367 $ 69,799 $ 81,514
==================================
Net write-offs as a percentage of total originations .. 2.2% 2.0% 2.3%
During 2002, Eagle National Bank discontinued the business of offering
short-term consumer loans through our stores and our document transmitter
locations. Under this program, we earned marketing and servicing fees. Eagle
originated or extended approximately $402.7 million of loans through us during
fiscal 2002.
Other Services and Products
In addition to check cashing and short-term loans, our customers may
choose from a variety of products and services when conducting business at our
locations. These services include Western Union money order and money transfer
products, electronic tax filing, bill payment, foreign currency exchange, photo
ID and prepaid local and long-distance phone services. A survey of our customers
by an independent third party revealed that over 50% of customers use other
services in addition to check cashing. We offer our customers multiple financial
products and services. We believe that our check cashing and consumer lending
customers enjoy the convenience of other high-value products and services
offered by us.
11
Among our most significant products and services other than check cashing
and short-term loans are the following:
o Money Transfers--Through a strategic alliance with Western Union,
customers can transfer funds to any location providing Western Union money
transfer services. Western Union currently has 150,000 agents in more than
190 countries throughout the world. We receive a percentage of the
commission charged by Western Union for the transfer. For fiscal 2003, we
generated total money transfer revenues of $11.7 million, primarily at our
check cashing stores.
o Money Orders--Our stores issue money orders for a minimal fee. Customers
who do not have checking accounts typically use money orders to pay rent
and utility bills. During fiscal 2003, money order transactions had an
average face amount of $140 and an average fee of $1.03. For fiscal 2003,
our customers purchased 2.4 million money orders, generating total money
order revenues of $2.5 million.
12
Store Operations
Locations
The following chart sets forth the number of stores in operation as of the
dates:
June 30,
----------------------------------------
Markets 1999 2000 2001 2002 2003
------- ----------------------------------------
CALIFORNIA
Southern................................. 41 44 47 47 47
Northern................................. 79 92 95 93 91
ARIZONA
Phoenix.................................. 25 34 40 45 43
Tucson................................... 0 7 13 16 16
OHIO
Cleveland................................ 22 21 19 19 18
Other Ohio cities (1).................... 5 7 5 4 4
PENNSYLVANIA
Philadelphia............................. 10 11 8 8 6
Pittsburgh............................... 10 10 11 11 11
OTHER UNITED STATES
Washington............................... 15 17 21 18 18
Virginia................................. 14 15 16 16 16
Oklahoma................................. 0 8 13 13 10
Nevada................................... 0 1 11 11 8
Colorado................................. 0 6 14 15 7
Oregon................................... 0 2 5 5 5
Louisiana................................ 3 3 4 4 4
Texas.................................... 3 3 3 4 4
Utah..................................... 3 7 5 5 4
New Mexico............................... 4 4 3 3 3
Hawaii................................... 3 3 3 3 3
Maryland/D.C............................. 4 4 11 10 2
Wisconsin................................ 1 1 1 1 1
Franchised locations..................... 3 0 0 0 0
CANADA
Company operated......................... 101 139 157 167 181
Franchised locations..................... 80 81 86 87 109
UNITED KINGDOM
Company operated......................... 11 107 126 123 122
Franchised locations..................... 0 264 261 290 351
---------------------------------------
Total stores............................. 437 891 978 1,018 1,084
=======================================
- ----------
(1) These other cities include Akron, Canton, Youngstown and Cincinnati.
13
All of our company-operated stores are leased, generally under leases
providing for an initial multi-year term and renewal terms from one to five
years. We generally assume the responsibility for required leasehold
improvements, including signage, customer service representative partitions,
alarm systems, computers, time-delayed safes and other office equipment. We
adhere to a strict set of market survey and location guidelines when selecting
store sites in order to ensure that our stores are placed in desirable locations
near our customers.
Facilities and Hours of Operation
As part of our retail and customer-driven strategy, we present a clean and
attractive environment and an appealing format for our stores. Size varies by
location, but the stores are generally 1,000 to 1,400 square feet, with
approximately half of that space allocated to the teller and back office areas.
Operating hours vary by location, but are typically extended and designed
to cater to those customers who, due to work schedules, cannot make use of
"normal" banking hours. A typical store operates from 9:00 A.M. to 9:00 P.M.
during weekdays and on Saturdays, and from 10:00 A.M. to 5:00 P.M. on Sundays.
In certain locations, we operate stores 24 hours, seven days per week.
Operational Structure
Our senior management is located at our corporate headquarters in Berwyn,
Pennsylvania and is responsible for our overall direction. We also maintain
corporate offices in Victoria, British Columbia and Nottingham, England.
Management of our North American store operations is located in our Victoria
office while the Nottingham office provides support for our U.K. store
operations. This support includes centralized functions such as information
systems, treasury, accounting, human resources, loss prevention and marketing.
Our corporate staff also includes personnel dedicated to compliance functions,
including internal audit, risk management, privacy and general counsel
functions. We believe that our ongoing investment in and company-wide focus on
our compliance practices provides us with a competitive advantage relative to
most other companies in our industry.
Additionally, in each country in which we operate, we have a store
management organization that is responsible for the day to day operations of our
stores. District managers are directly responsible for the oversight of our
store managers and store operations. Typically, each district manager oversees
eight to ten stores. Each district manager reports to a market manager who
supervises approximately five district managers. The market managers report to
the head of operations in each of our corporate offices.
In addition, in fiscal 2001 we opened a centralized facility to support
our domestic consumer lending business. This call-center facility, located in
Salt Lake City, Utah, currently employs 141 full-time staff. Operating from 8:00
A.M. to midnight, eastern time (including weekends), our staff performs inbound
and outbound customer service for current and prospective consumer loan
customers as well as collection and loan-servicing functions for all past-due
domestic consumer loans. Our management at this facility includes experienced
call-center operations, customer service, information technology and collection
personnel. We believe that this centralized facility has helped us to improve
our loan servicing significantly and has led to reduced credit losses on loans
originated by us in the United States and significantly enhances our ability to
manage the compliance responsibilities related to our domestic consumer lending
operations.
Technology
We currently have an enterprise-wide transaction processing computer
network. We believe that this system has improved customer service by reducing
transaction time and has allowed us to manage returned-check losses and loan
collection efforts better and to comply with regulatory record keeping and
reporting requirements.
We continue to enhance our point-of-sale transaction processing system
composed of a networked hardware and software package with integrated database
and reporting capabilities. The point-of-sale system provides our stores with
instantaneous customer information, thereby reducing transaction time and
improving the efficiency of our credit verification process. Also, we have
deployed an enhanced centralized loan management and collections system that
provides improved customer service processing and management of loan
transactions. The loan-management system and collections system uses integrated
automated clearinghouse payment and returns processing, which facilitates faster
notification of returns and faster clearing of funds as well as utilizing fax
server document-processing technology, which has the effect of reducing both
processing and loan closing times. The point-of-sale system, together with the
enhanced loan-
14
management and collections systems, has improved our ability to offer new
products and services and our customer service.
Security
The principal security risks to our operations are robbery and
defalcation. We have put in place extensive security systems, dedicated security
personnel and management information systems to address both areas of potential
loss. We believe that our systems are among the most effective in the industry.
Net security losses represented less than 0.8% of total revenues for fiscal
2003, a decline from net security losses of 1.1% of total revenues for fiscal
2002.
To protect against robbery, most store employees work behind
bullet-resistant glass and steel partitions, and the back office, safe and
computer areas are locked and closed to customers. Each store's security
measures include safes, electronic alarm systems monitored by third parties,
control over entry to teller areas, detection of entry through perimeter
openings, walls, and ceilings and the tracking of all employee movement in and
out of secured areas. Employees use cellular phones to ensure safety and
security whenever they are outside the secure teller area. Additional security
measures include identical alarm systems in all stores, remote control over
alarm systems, arming/disarming and changing user codes and mechanically and
electronically controlled time-delay safes.
Since we handle high volumes of cash and negotiable instruments at our
locations, daily monitoring, unannounced audits and immediate responses to
irregularities are critical in combating defalcations. We have an internal
auditing program that includes periodic unannounced store audits and cash counts
at randomly selected locations.
Seasonality
Our business is seasonal due to the impact of several tax-related
services, including cashing tax refund checks. Historically, we have generally
experienced our highest revenues and earnings during our third fiscal quarter
ending March 31, when revenues from these tax-related services peak.
Advertising and Marketing
We frequently survey and research customer trends and purchasing patterns
in order to place the most effective advertising for each market. Our marketing
promotions typically include in-store merchandising materials, advertising
support and instruction of store personnel in the use of the materials. Drawing
on statistical data from our transaction database, we use sophisticated direct
marketing strategies to communicate with existing customers and prospects with
demographic characteristics similar to those of existing customers. National
television advertising promotes our brand in Canada and our franchisees
contribute to fund this advertising. We also arrange cooperative advertising for
our products and services with strategic partners such as Western Union. We
provide our store managers with local marketing training that sets standards for
promotions and marketing programs for their stores. Local marketing includes
attendance and sponsorship of community events. A national classified telephone
directory company is used to place all Yellow Pages advertising as effectively
and prominently as possible. We research directory selection to assure effective
communication with our target customers.
Competition
Our store network represents the second-largest network of its kind in the
United States and the largest network of its kind in each of Canada and the
United Kingdom. The industry in which we operate in the United States is highly
fragmented. An independent industry report estimated the number of check cashing
outlets at 13,000 in March 2002, an increase from the approximately 2,200
national listings in 1986, according to a similar industry survey. We believe we
operate one of only seven U.S. check cashing store networks that have more than
100 locations, the remaining competitors being local chains and single-unit
operators. According to an industry survey, the seven largest check cashing
chains in the United States control fewer than 22% of the total number of U.S.
stores, reflecting the industry's fragmented nature. An independent report
estimated the number of stores offering short-term consumer loans as their
principal business at approximately 12,000 as of June 2003.
In Canada, we believe that we are the industry leader and that we hold a
dominant market share with exceptional brand awareness. In a recent public
opinion study of three major metropolitan markets in English speaking Canada, we
found that we have achieved brand awareness of 85%. We estimate that the number
of outlets offering check cashing
15
and/or short-term consumer loans is 1,100. We believe there is only one
other network of stores with over 100 locations and only three chains with over
50 locations. While we believe that we enjoy almost 30% market share by outlet
in Canada, our research estimates our market share by volume of business to be
closer to 50%.
Based on information from the British Cheque Cashers Association, we
believe that we have a U.K. market share of approximately 25%. In addition, we
believe that our 473 company-operated and franchised stores account for up to
40% of the total check cashing transactions performed at check cashing stores in
the United Kingdom. In the consumer lending market, recent research indicates
that the market for small, short-term loans is served by approximately 1,500
store locations, which include check cashers, pawn brokers and home-collected
credit companies.
In addition to other check cashing stores and consumer lending stores in
the United States, Canada and the United Kingdom, we compete with banks and
other financial services entities, as well as with retail businesses, such as
grocery and liquor stores, which often cash checks for their customers. Some
competitors, primarily grocery stores, do not charge a fee to cash a check.
However, these merchants provide this service to a limited number of customers
with superior credit ratings and will typically only cash "first party" checks,
or those written on the customer's account and made payable to the store.
We also compete with companies that offer automated check cashing
machines, and with franchised kiosk units that provide check-cashing and money
order services to customers, which can be located in places such as convenience
stores, bank lobbies, grocery stores, discount retailers and shopping malls.
We believe that convenience, hours of operations and other aspects of
customer service are the principal factors influencing customers' selection of a
financial services company in our industry, and that the pricing of products and
services is a secondary consideration.
Regulation
We are subject to regulation by foreign, federal and state governments
that affects the products and services we provide.
Regulation of Check Cashing
To date, regulation of check cashing fees has occurred on the state level.
We are currently subject to fee regulation in seven states: Arizona, California,
the District of Columbia, Hawaii, Louisiana, Maryland, Ohio and Pennsylvania,
where regulations set maximum fees for cashing various types of checks. Our fees
comply with all state regulations.
Certain states, including California, the District of Columbia, Ohio,
Pennsylvania, Utah and Washington, have enacted licensing requirements for check
cashing stores. Other states, including Ohio, require the conspicuous posting of
the fees charged by each store. A number of states, including Ohio, also have
imposed recordkeeping requirements, while others require check cashing stores to
file fee schedules with the state.
In Canada, the federal government does not directly regulate our industry,
nor do provincial governments generally impose any regulations specific to the
industry. The exception is in the Province of Quebec, where check cashing stores
are not permitted to charge a fee to cash government checks.
Regulation of Consumer Lending
In the majority of states where we engage in consumer lending, we act as a
servicer for County Bank or First Bank, federally insured financial institutions
both chartered under the laws of the state of Delaware. We provide County Bank
and First Bank with marketing, servicing and collections services for their
unsecured short-term loan products that are offered under our brand name Cash
'Til Payday.
16
County Bank and First Bank are subject to federal and state banking
regulations. Legislation has been introduced in the past at both the state and
federal levels that could affect our ability to generate origination fees as a
servicer for a bank, as well as our ability to offer consumer loans directly to
consumers. While we do not believe that any federal legislation will be passed,
if enacted we would not be able to market short-term loans as currently
structured. The FDIC has also proposed increasing the capital requirement for
banks involved in this business to as much as 100%. These capital requirements
could make it substantially more expensive for such banks to engage in consumer
lending.
We have determined, primarily for regulatory reasons, that we should make
consumer loans directly to consumers in seven states where advantageous enabling
legislation exists: California, Colorado, Louisiana, Oklahoma, Oregon, Virginia
and Wisconsin. We have decided not to participate in the consumer lending
business in certain other states where legislation is unfavorable or the service
is not likely to be profitable. We currently can participate in the consumer
lending business in all states where we have a sizeable presence, although there
is no guarantee that this situation will continue at the federal or state level.
Our Canadian consumer lending activities are subject to provincial
licensing in Saskatchewan, Nova Scotia and Newfoundland but are subject only to
limited substantive regulation. A federal usury ceiling applies to loans we make
to Canadian consumers. Such borrowers contract to repay us in cash; if they
repay by check, we also collect, in addition to the maximum permissible finance
charge, our customary check-cashing fees.
In the United Kingdom, consumer lending is governed by the Consumer Credit
Act of 1974 and related rules and regulations. As required by the act, we have
obtained licenses from the Office of Fair Trading, which is responsible for
regulating competition policy and consumer protection. The act also contains
rules regarding the presentation, form and content of loan agreements, including
statutory warnings and the layout of financial information. To comply with these
rules, we use model credit agreements provided by the British Cheque Cashers
Association.
Our consumer lending activities are also subject to certain other state,
federal and U.K. regulations, including, but not limited to, regulations
governing lending practices and terms, such as truth in lending and usury laws,
and rules regarding advertising content.
Currency Reporting Regulation
Regulations promulgated by the United States Department of the Treasury
under the Bank Secrecy Act require reporting of transactions involving currency
in an amount greater than $10,000, or the purchase of monetary instruments for
cash in amounts from $3,000 to $10,000. In general, every financial institution
must report each deposit, withdrawal, exchange of currency or other payment or
transfer that involves currency in an amount greater than $10,000. In addition,
multiple currency transactions must be treated as a single transaction if the
financial institution has knowledge that the transactions are by, or on behalf
of, any one person and result in either cash in or cash out totaling more than
$10,000 during any one business day. We believe that our point-of-sale system
and employee training programs support our compliance with these regulatory
requirements.
Also, money services businesses are required by the Money Laundering Act
of 1994 to register with the United States Department of the Treasury. Money
services businesses include check cashers and sellers of money orders. Money
services businesses must renew their registrations every two years, maintain a
list of their agents, update the agent list annually and make the agent list
available for examination. In addition, the Bank Secrecy Act requires money
services businesses to file a Suspicious Activity Report for any transaction
conducted or attempted involving amounts individually or in total equaling
$2,000 or greater, when the money services businesses knows or suspects that the
transaction involves funds derived from an illegal activity, the transaction is
designed to evade the requirements of the Bank Secrecy Act or the transaction is
considered so unusual that there appears to be no reasonable explanation for the
transaction. The USA PATRIOT Act includes a number of anti-money-laundering
measures designed to assist in the identification and seizure of terrorist
funds, including provisions that will directly impact check cashers and other
money services businesses. Specifically, the USA PATRIOT Act requires all check
cashers to establish certain programs designed to detect and report money
laundering activities to law enforcement. We believe we are in compliance with
the USA PATRIOT Act.
17
Privacy Regulation
We are subject to a variety of state, federal and foreign laws and
regulations restricting the use and seeking to protect the confidentiality of
identifying and other personal consumer information. We have systems in place
intended to safeguard such information as required.
Other Regulation
We operate a total of 139 stores in California and Maryland. These states
have enacted so-called "prompt remittance" statutes. These statutes specify a
maximum time for the payment of proceeds from the sale of money orders to the
issuer of the money orders. In this way, the statutes limit the number of days,
known as the "float," that we have use of the money from the sale of the money
order.
In addition to fee regulations, licensing requirements and prompt
remittance statutes, certain jurisdictions have also placed limitations on the
commingling of money order proceeds and established minimum bonding or capital
requirements.
Proprietary Rights
We hold the rights to a variety of service marks relating to products or
services we provide in our stores. In addition, we maintain service marks
relating to the various names under which our stores operate.
Insurance Coverage
We maintain insurance coverage against losses, including theft, to protect
our earnings and properties. We also maintain insurance coverage against
criminal acts with a deductible of $50,000 per occurrence.
Employees
On June 30, 2003, we employed 3,348 persons worldwide, consisting of 274
persons in our accounting, management information systems, legal, human
resources, treasury, finance and administrative departments and 3,074 persons in
our stores, including customer service representatives, store managers, regional
supervisors, operations directors and store administrative personnel.
None of our employees is represented by a labor union, and we believe that
our relations with our employees are good.
18
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report may contain certain forward-looking statements regarding our
expected performance for future periods, and actual results for such periods may
materially differ. Such forward-looking statements involve risks and
uncertainties, including risks of changing market conditions in the overall
economy and the industry, consumer demand, regulatory factors and the success of
our strategies and other factors detailed from time to time in our annual and
other reports filed with the Securities and Exchange Commission. The words
"believe," "expect," "anticipate," "will" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date on which they
are made. We undertake no obligation to update publicly or revise any
forward-looking statements. Factors that could cause actual results to differ
materially from the forward-looking statement, including our goals referred to
herein, include but are not limited to our inability to:
o effectively compete in the financial services industry and maintain
our share of the market;
o manage risks inherent in an international operation, including
foreign currency fluctuation;
o maintain our key banking relationships;
o sustain demand for our products and services;
o manage changes in applicable laws and regulations governing consumer
protection and lending practices;
o manage our growth effectively;
o compete in light of technological advances; or
o safeguard against employee error and theft.
19
Item 2. PROPERTIES
All of our company-operated stores are leased, generally under leases
providing for an initial multi-year term and renewal terms from one to five
years. The leases may contain provisions for additional rental charges based on
revenue and payment of real estate taxes and common area charges. With respect
to leased stores open as of June 30, 2003, the following table shows the total
number of leases expiring during the periods indicated, assuming the exercise of
our renewal options:
Period Ending Number of
June 30, Leases Expiring
-------- ---------------
2004 110
2005 - 2008 465
2009 - 2013 59
2014 - 2018 12
2019 - 2023 2
------
648
The following table reflects the change in the number of stores during
fiscal 2003:
Number of stores at June 30, 2002 1,018
New stores opened 14
Stores acquired 5
Stores closed (36)
Net change in franchise stores 83
---------
Number of stores at June 30, 2003 1,084
=========
20
Item 3. LEGAL PROCEEDINGS
We are a defendant in four putative class-action lawsuits, all of which
were commenced by the same plaintiffs' law firm, alleging violations of
California's wage-and-hour laws. The named plaintiffs in these suits, which are
pending in the Superior Court of the State of California, are our former
employees Vernell Woods (commenced August 22, 2000), Juan Castillo (commenced
May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth Williams
(commenced June 3, 2003). Each of these suits seeks an unspecified amount of
damages and other relief in connection with allegations that we misclassified
California store (Woods) and regional (Castillo) managers as "exempt" from a
state law requiring the payment of overtime compensation, that we failed to
provide employees with meal and rest breaks required under a new state law
(Chin) and that we computed bonuses payable to our store managers using an
impermissible profit-sharing formula (Williams). In January 2003, without
admitting liability, we sought to settle the Woods case, which we believe to be
the most significant of these suits, by offering each individual putative class
member an amount intended in good faith to settle his or her claim. As of June
30, 2003, 92% of these settlement offers had been accepted. Plaintiffs' counsel
is presently disputing through arbitration the validity of the settlements
accepted by the individual putative class members. We believe we have
meritorious defenses to the challenge and to the claims of the non-settling
putative Woods class members and plan to defend them vigorously. We believe we
have adequately provided for the costs associated with this matter. We are
vigorously defending the Castillo, Chin and Williams lawsuits and believe we
have meritorious defenses to the claims asserted in those matters. We believe
the outcome of such litigation will not significantly affect our financial
results.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an
action against our Canadian subsidiary and 26 other Canadian lenders on behalf
of a purported class of British Columbia residents who, plaintiff claims, were
overcharged in payday-loan transactions. The action, which is pending in the
Supreme Court of British Columbia, alleges violations of laws proscribing usury
and unconscionable trade practices and seeks restitution and damages, including
punitive damages, in an unknown amount. On March 25, 2003, we moved to stay the
action as against us and to compel arbitration of plaintiff's claims as required
by his agreement with us. We are presently awaiting a decision on that motion.
We believe we have meritorious defenses to the action and intend to defend it
vigorously. We believe the outcome of such litigation will not significantly
affect our financial results.
On October 30, 2002, the Oklahoma Administrator of Consumer Credit issued
an administrative order revoking the supervised-lending license of our Oklahoma
subsidiary on the ground that certain loans we marketed that were made by County
Bank did not conform with Oklahoma internal usury laws. The Administrator's
order also requires us to refund certain purportedly excess finance charges
collected by County Bank. The Administrator's order is presently on appeal to
the Oklahoma District Court. On August 20, 2003, that court denied the
Administrator's motion to require us to desist from further loan-origination
activities pending appeal. We are also appealing a federal court's abstention
from ruling on this matter to the United States Court of Appeals for the Tenth
Circuit. We are presently unable to evaluate the likelihood of any particular
outcome of this matter but, in our opinion, the outcome of such litigation will
not significantly affect our financial results.
In addition to the litigation discussed above, we are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business. In our opinion, the outcome of such litigation and proceedings will
not significantly affect our financial results.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for our common stock.
DFG Holdings, Inc. is the sole record and beneficial owner of all of our
outstanding common stock.
The Indenture dated November 15, 1996 between us and State Street Bank and
Trust Company, as trustee (the "Indenture"), relating to the 10 7/8% Senior
Notes due 2006, the agreement dated December 18, 1998 relating to the 10 7/8%
Senior Subordinated Notes due 2006 as well as our credit agreement, contain
restrictions as to the declaration and payment of dividends. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the notes to consolidated financial statements included
elsewhere in this report.
Item 6. SELECTED FINANCIAL DATA
The selected consolidated historical financial information on the
following page should be read in conjunction with the consolidated financial
statements and notes thereto and the information contained in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report. The balance sheet and statement
of operations data as of and for the years ended June 30, 1999, 2000, 2001, 2002
and 2003 have been derived from historical consolidated financial statements.
22
Year ended June 30,
-----------------------------------------------------------------------------------
1999(1),(2) 2000(3) 2001(4) 2002(5) 2003
-----------------------------------------------------------------------------------
(dollars in thousands, except check cashing data)
Statement of Operations Data:
Revenues:
Revenues from check cashing .......... $ 76,304 $ 97,350 $ 105,690 $ 104,792 $ 108,435
Revenues from consumer lending, net .. 18,559 34,787 58,367 69,799 81,514
Other revenues ....................... 26,116 33,616 31,442 27,385 29,439
-----------------------------------------------------------------------------------
Total revenues .......................... 120,979 165,753 195,499 201,976 219,388
Store and regional expenses:
Salaries and benefits ................ 35,329 47,058 57,453 65,295 69,799
Occupancy ............................ 9,609 12,800 16,881 18,087 18,856
Depreciation ......................... 2,227 4,683 5,829 6,522 5,859
Other ................................ 23,764 36,503 45,321 46,238 47,766
-----------------------------------------------------------------------------------
Total store and regional expenses ....... 70,929 101,044 125,484 136,142 142,280
Establishment of reserves for new
consumer lending arrangements ........ -- -- -- 2,244 --
Corporate expenses ...................... 13,648 20,864 22,500 24,516 31,241
Loss on store closings and sales and
other restructuring .................. 103 249 926 1,435 3,987
Goodwill amortization ................... 4,686 5,564 4,710 -- --
Other depreciation and amortization ..... 1,020 1,620 1,952 2,709 3,320
Interest expense ........................ 16,401 17,491 20,361 18,694 20,168
Recapitalization costs .................. 12,575 1,478 -- -- --
Establishment of reserve for legal matter -- -- -- -- 2,750
-----------------------------------------------------------------------------------
Income before income taxes and
extraordinary item ................... 1,617 17,443 19,566 16,236 15,642
Income tax provision .................... 3,881 12,043 12,876 10,199 13,511
-----------------------------------------------------------------------------------
(Loss) income before extraordinary item . (2,264) 5,400 6,690 6,037 2,131
Extraordinary loss on debt extinguishment
(net of income tax benefit of $45) .. 85 -- -- -- --
-----------------------------------------------------------------------------------
Net (loss) income ....................... $ (2,349) $ 5,400 $ 6,690 $ 6,037 $ 2,131
===================================================================================
Operating and Other Data:
Net cash provided by (used in):
Operating activities ................. $ 15,951 $ 16,792 $ 16,442 $ 14,453 $ 4,230
Investing activities ................. (23,471) (44,526) (32,365) (10,108) (10,679)
Financing activities ................. 18,269 35,306 15,602 9,409 (11,295)
Stores in operation at end of period .... 437 891 978 1,018 1,084
Check Cashing Data:
Face amount of checks cashed ............ $2,319,847,000 $2,743,765,000 $3,046,705,000 $2,969,455,000 $3,051,982,000
Number of checks cashed ................. 7,490,406 8,204,528 9,001,635 8,689,819 8,585,459
Average face amount per check cashed .... $ 309.71 $ 334.42 $ 338.46 $ 341.72 $ 355.48
Average fee per check ................... $ 10.14 $ 11.87 $ 11.74 $ 12.06 $ 12.63
Average fee as a % of face amount ....... 3.28% 3.55% 3.47% 3.53% 3.55%
Balance Sheet Data (at end of period):
Cash .................................... $ 65,782 $ 73,288 $ 72,452 $ 86,633 $ 71,805
Total assets ............................ 203,709 259,714 276,172 291,312 296,536
Total indebtedness ...................... 142,166 179,146 197,136 208,191 198,970
Shareholder's equity .................... 36,334 39,595 42,624 53,515 68,397
23
(1) On November 13, 1998, Holdings entered into an agreement and plan of
merger with DFG Acquisition, Inc., a Delaware corporation, controlled by
Green Equity Investors II, L.P., a Delaware limited partnership and some
of the Holdings' stockholders providing for the merger of DFG Acquisition,
Inc. with and into Holdings, with Holdings as the surviving corporation.
The merger, which was consummated on December 18, 1998 was accounted for
as a recapitalization of Holdings. In the merger, the senior members of
management of Holdings retained substantially all of their stock in
Holdings, and the other stockholders received cash in exchange for their
shares of Holdings.
(2) On February 10, 1999, we acquired all of the outstanding shares of Instant
Cash Loans Limited, which operated eleven stores in the UK. The initial
purchase price for this acquisition was $9.4 million plus initial working
capital of approximately $2.0 million and was funded with the issuance of
our 10 7/8% Senior Subordinated Notes Due 2006. The excess of the purchase
price over the fair value of identifiable net assets acquired was $8.3
million. On February 17, 1999, National Money Mart Company, one of our
subsidiaries, acquired the remaining 86.5% partnership interest in its
Calgary Money Mart Partnership. The Calgary Money Mart Partnership
operated six stores in Alberta, Canada. The aggregate purchase price for
this acquisition was $5.6 million and was funded with the issuance of our
10 7/8% Senior Subordinated Notes Due 2006. The excess of the purchase
price over the fair value of identifiable net assets acquired was $5.2
million.
(3) On July 7, 1999, we acquired all of the outstanding shares of Cash A
Cheque Holdings Great Britain Limited, which operated 44 company owned
stores in the UK. The initial purchase price for this acquisition was
$12.5 million and was funded through excess internal cash, our revolving
credit facility and our 10 7/8% Senior Subordinated Notes Due 2006. The
excess of the purchase price over the fair value of the identifiable net
assets acquired was $8.2 million. Additional consideration of $9.7 million
was subsequently paid based under the profit-based earn-out agreement. On
November 18, 1999, we acquired all of the outstanding shares of Cheques R
Us, Inc. and Courtenay Money Mart Ltd. , which operated six stores in
British Columbia. The aggregate purchase price for this acquisition was
$1.2 million and was funded through excess internal cash. The excess of
the purchase price over the fair value of identifiable net assets acquired
was $1.1 million. On December 15, 1999, we acquired all of the outstanding
shares of Cash Centres Corporation Limited, which operated five company
owned stores and 238 franchises in the UK. The aggregate purchase price
for this acquisition was $8.4 million and was funded through our revolving
credit facility. The excess of the purchase price over the fair value of
identifiable net assets acquired was $7.7 million. Additional
consideration of $2.7 million was subsequently paid based under a
profit-based earn-out agreement. On February 10, 2000, we acquired
substantially all of the assets of CheckStop, Inc., which is a payday-loan
business operating through 150 independent document transmitters in 17
states. The aggregate purchase price for this acquisition was $2.6 million
and was funded through our revolving credit facility. The excess of the
purchase price over the fair value of identifiable net assets acquired was
$2.4 million. Additional consideration of $250,000 was subsequently paid
based upon a future results of operations earn-out agreement.
(4) On August 1, 2000, we purchased all of the outstanding shares of West
Coast Chequing Centres, Ltd, which operated six stores in British
Columbia. The aggregate purchase price for this acquisition was $1.5
million and was funded through excess internal cash. The excess price over
the fair value of identifiable net assets acquired was $1.4 million. On
August 7, 2000, we purchased substantially all of the assets of Fast 'n
Friendly Check Cashing, which operated 8 stores in Maryland. The aggregate
purchase price for this acquisition was $700,000 and was funded through
our revolving credit facility. The excess purchase price over fair value
of identifiable net assets acquired was $660,000. Additional consideration
of $150,000 was subsequently paid based on a revenue earn-out agreement.
On August 28, 2000, we purchased primarily all of the assets of Ram-Dur
Enterprises, Inc. d/b/a AAA Check Cashing Centers, which operated five
stores in Tucson, Arizona. The aggregate purchase price for this
acquisition was $1.3 million and was funded through our revolving credit
facility. The excess purchase price over fair value of identifiable net
assets acquired was $1.2 million. On December 5, 2000, we purchased all of
the outstanding shares of Fastcash Ltd., which operated 13 company owned
stores and 27 franchises in the UK. The aggregate purchase price for this
acquisition was $3.1 million and was funded through our revolving credit
facility. The excess of the purchase price over the fair value of the
identifiable assets acquired was $2.7 million. Additional consideration of
$2.0 million was subsequently paid during fiscal 2003 based upon a future
results of operations earn-out agreement.
(5) On July 1, 2001, we adopted Financial Accounting Standards Board
Opinion No. 142 "Goodwill and Other Intangible Assets". In accordance with
the provisions of SFAS No. 142 we ceased amortization of
goodwill.
24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
We have historically derived our revenues primarily from providing check
cashing services, consumer lending and other consumer financial products and
services, including money orders, money transfers and bill payment. For our
check cashing services, we charge our customers fees that are usually equal to a
percentage of the amount of the check being cashed and are deducted from the
cash provided to the customer. For our consumer loans, we receive origination
and servicing fees from the banks providing the loans or, if we fund the loans
directly, interest on the loans.
Our expenses primarily relate to the operations of our store network,
including salaries and benefits for our employees, occupancy expense for our
leased real estate, depreciation of our assets and corporate and other expenses,
including costs related to opening and closing stores. During fiscal 2003, we
took actions to reduce costs and make our operations more efficient, including
centralizing and consolidating our store support functions for our North
American operations. We expect that these actions will reduce our expenses by in
excess of $5.0 million during fiscal 2004.
In each foreign country in which we operate, local currency is used for
both revenue and expenses. Therefore, we record the impact of foreign currency
exchange rate fluctuations related to our foreign net income.
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
accounting principles generally accepted in the United States. We evaluate these
estimates on an ongoing basis, including those related to revenue recognition,
loss reserves and intangible assets. We base these estimates on the information
currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition
Generally, we recognize revenue when services for the customer have been
provided which, in the case of check cashing and other retail products, is at
the point of sale. For our unsecured short-term loan service, all revenues are
recognized ratably over the life of the loan, offset by net write-offs.
Consumer Loan Loss Reserves and Check Cashing Returned Item Policy
We maintain a loan loss reserve for anticipated losses for loans we make
directly as well as for fee adjustments for losses on loans we originate and
service for others. To estimate the appropriate level of loan loss reserves, we
consider the amount of outstanding loans owed to us, as well as loans owed to
banks and serviced by us, historical loans charged off, current collection
patterns and current economic trends. As these conditions change, we may need to
make additional allowances in future periods.
A loss on consumer loans is charged against revenues during the period in
which the loss occurred. A recovery is credited to revenues during the period in
which the recovery is made. These net losses and changes in the loan loss
reserve are charged to revenues in the consolidated statements of operations.
We charge operating expense for losses on returned checks during the
period in which such checks are returned. Recoveries on returned checks are
credited to operating expense in the period during which recovery occurs. These
net losses are charged to other store and regional expenses in the consolidated
statements of operations.
25
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill
for impairment under established accounting guidelines also requires significant
use of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Results of Operations
The following table sets forth our results of operations as a percentage
of revenues for the following periods:
Year ended June 30,
-------------------------
2001 2002 2003
-------------------------
Statement of Operations Data:
Revenues:
Revenues from check cashing ................................. 54.1% 51.9% 49.4%
Revenues from consumer lending, net ......................... 29.9 34.6 37.2
Other revenues .............................................. 16.0 13.5 13.4
-----------------------
Total revenues .................................................. 100.0 100.0 100.0
Store and regional expenses:
Salaries and benefits ....................................... 29.4 32.3 31.8
Occupancy ................................................... 8.6 9.0 8.6
Depreciation ................................................ 3.0 3.2 2.7
Other ....................................................... 23.2 22.9 21.8
-----------------------
Total store and regional expenses ............................... 64.2 67.4 64.9
Establishment of reserves for new consumer lending arrangements . -- 1.1 --
Corporate expenses .............................................. 11.5 12.1 14.2
Loss on store closings and sales and other restructuring ........ 0.5 0.8 1.8
Goodwill amortization ........................................... 2.4 -- --
Other depreciation and amortization ............................. 1.0 1.3 1.5
Interest expense ................................................ 10.4 9.3 9.2
Establishment of reserve for legal matter ....................... -- -- 1.3
-----------------------
Income before income taxes ...................................... 10.0 8.0 7.1
Income tax provision ............................................ 6.6 5.0 6.1
-----------------------
Net income ...................................................... 3.4% 3.0% 1.0%
=======================
Year Ended June 30, 2003 Compared to the Year Ended June 30, 2002
Revenues. Total revenues were $219.4 million for fiscal 2003, compared to
$202.0 million for fiscal 2002, an increase of $17.4 million, or 8.6%.
Comparable retail store, franchised store and document transmitter revenues
increased $15.8 million, or 8.1%, which is primarily attributable to our foreign
operations as those markets continue to mature as well as the impact of
favorable foreign currency rates in fiscal 2003. New store openings accounted
for an increase of $4.5 million, which was partially offset by a decline of $2.9
million in revenues from closed stores.
The increase in total revenues resulted primarily from an increase of
$11.7 million, or 16.8%, in consumer lending revenues. The increase in consumer
lending revenues was primarily a result of a $7.8 million, or 34.2%, increase in
revenues in Canada resulting from higher lending volumes and increased finance
charges, and an increase of $3.9 million, or 8.3%, in domestic revenues
primarily resulting from a decrease in credit losses (which are netted against
revenues). In addition to the increase in consumer lending revenues, our check
cashing revenues increased by $3.6 million, or 3.5%. Foreign check cashing
revenues accounted for $8.1 million of this increase offset by a $4.5 million
decline in domestic check cashing revenues due to an overall decline in service
sector employment. The balance of the increase in total revenues, $2.1 million,
relates to other ancillary products, primarily revenues from money transfer
fees.
26
Store and Regional Expenses. Store and regional expenses were $142.3
million for fiscal 2003, compared to $136.1 million for fiscal 2002, an increase
of $6.2 million, or 4.5%. The full-year effect of the new store openings in
fiscal 2003 accounted for an increase of $1.5 million. Also, store and regional
expenses increased $4.0 million due to increased salaries and benefits
attributable to our foreign subsidiaries, commensurate with the growth in those
operations. Total store and regional expenses as a percentage of revenues
decreased from 67.4% in fiscal 2002 to 64.9% in fiscal 2003. Store and regional
expenses as a percentage of revenues of our foreign subsidiaries were 55.7% for
fiscal 2002 and 52.5% for fiscal 2003.
Salaries and Benefits Expense. Salaries and benefits expense was
$69.8 million for fiscal 2003, compared to $65.3 million for fiscal 2002,
an increase of $4.5 million, or 6.9%. New store openings accounted for
$600,000 of the increase. Our foreign subsidiaries accounted for an
increase of $4.0 million in salaries and benefits. Salaries and benefits
expenses as a percentage of revenues decreased from 32.3% for fiscal 2002
to 31.8% for fiscal 2003.
Occupancy Expense. Occupancy expense was $18.9 million for fiscal
2003, compared to $18.1 million for fiscal 2002, an increase of $800,000,
or 4.3%. New store openings accounted for $400,000 of the increase.
Occupancy expense as a percentage of revenues decreased from 9.0% for
fiscal 2002 to 8.6% for fiscal 2003.
Depreciation Expense. Depreciation expense was $5.9 million for
fiscal 2003, compared to $6.5 million for fiscal 2002, a decrease of
$600,000, or 10.2%. Depreciation expense as a percentage of revenues
decreased from 3.2% for fiscal 2002 to 2.7% for fiscal 2003.
Other. Other store and regional expenses were $47.8 million for
fiscal 2003, compared to $46.2 million for fiscal 2002, an increase of
$1.6 million, or 3.3%. New store openings accounted for an increase in
other store and regional expenses of $700,000. The closing of stores
during the fiscal year partially offset these increases. Other store and
regional expenses consist of bank charges, armored security costs, net
returned third party checks, cash shortages, cost of goods sold,
advertising and other costs incurred by the stores.
Establishment of Reserves for New Consumer Lending Arrangements. During
fiscal 2002 we ceased servicing loans for Eagle National Bank, entered into a
new servicing arrangement with County Bank and increased the number of
company-funded loans we originated. In connection with these new consumer
lending arrangements, we established a reserve of $2.2 million.
Corporate Expenses. Corporate expenses were $31.2 million for fiscal 2003,
compared to $24.5 million for fiscal 2002, an increase of $6.7 million, or
27.4%. The increase was due to costs associated with the implementation of
enhanced transaction processing systems, the establishment of new business
development strategies, professional fees associated with our new banking
relationships with First Bank and County Bank and increased salaries and
benefits associated with the growth of foreign operations. During the fourth
quarter of fiscal 2003, we transferred certain operational support functions to
our Canadian headquarters from our U.S. headquarters to complete a process of
rationalizing our North American corporate office functions that had begun in
October 2002. We believe the restructuring efforts undertaken in fiscal 2003
will result in an annual savings of $5.0 million. Corporate expenses as a
percentage of revenues increased from 12.1% for fiscal 2002 to 14.2% for fiscal
2003. We expect corporate expenses as a percentage of revenues to decline in
fiscal 2004.
Loss on Store Closings and Sales and Other Restructuring. Loss on store
closings and sales and other restructuring was $4.0 million for fiscal 2003,
compared to $1.4 million for fiscal 2002. For fiscal 2003, we provided $1.6
million for the closure costs associated with the shutdown of 27 underperforming
stores. These costs consist primarily of lease obligations and leasehold
improvement write-offs. In addition, we provided $1.7 million, consisting
primarily of severance and retention bonus costs, for the consolidation and
relocation of certain non-operating functions. We anticipate that loss on store
closings and sales and other restructuring will decline significantly in 2004.
Other Depreciation and Amortization. Other depreciation and amortization
expenses were $3.3 million for fiscal 2003, compared to $2.7 million for fiscal
2002, an increase of $600,000, or 22.6%. This increase is attributable to
additional investments in technology and the expansion of our Canadian corporate
office as a result of the relocation of certain operational support functions to
Canada from the U.S. headquarters. Other depreciation and amortization as a
percentage of revenues increased from 1.3% for fiscal 2002 to 1.5% for fiscal
2003.
27
Interest Expense. Interest expense was $20.2 million for fiscal 2003,
compared to $18.7 million for fiscal 2002, an increase of $1.5 million, or 7.9%.
This increase is attributable to an increase in the average borrowings of our
credit facilities, an increase in interest rates as a result of the November
2002 amendment of our credit facility and the impact of the 15.6% interest rate
associated with our collateralized borrowing.
Establishment of Reserve for Legal Matter. We accrued $2.8 million during
fiscal 2003 related to a legal matter described in "Business--Legal
Proceedings."
Income Tax Provision. Provision for income taxes was $13.5 million in 2003
and $10.2 million in 2002. Our effective tax rate for 2003 was 86.4%, compared
to 62.8% for 2002. The effective rate differs from the federal statutory rate of
35% due to state taxes, foreign taxes and U.S. taxes on foreign earnings,
primarily resulting from the guarantees on our domestic revolving credit
facility and senior notes by our foreign subsidiaries.
Year Ended June 30, 2002 Compared to the Year Ended June 30, 2001
Revenues. Total revenues were $202.0 million for fiscal 2002, compared to
$195.5 million for fiscal 2001, an increase of $6.5 million, or 3.3%. Comparable
retail store, franchised store and document transmitter revenues increased $2.4
million, or 1.3%. The entities acquired during fiscal 2001 and new store
openings accounted for an increase of $10.0 million. The increase in total
revenues resulted from an $11.4 million, or 19.5%, increase in consumer lending
revenues, net. The increase in consumer lending revenues, net was primarily a
result of a $7.9 million, or 53%, increase in foreign lending operations,
principally due to volume growth in Canada and the introduction of consumer loan
products into our acquired stores in the United Kingdom, and a $2.2 million, or
61.4%, revenue increase in our direct-to-consumer lending business. The balance
of the increase in consumer lending revenues, net, $1.3 million, is attributable
to other domestic lending operations. Partially offsetting this increase,
however, was a decline in revenues of $3.1 million from closed stores and a
decline in revenues of $2.8 million from the termination of the State of New
York government contract, both occurring during fiscal 2001.
Store and Regional Expenses. Store and regional expenses were $136.1
million for fiscal 2002, compared to $125.5 million for fiscal 2001, an increase
of $10.6 million, or 8.4%. The full-year effect of the acquisitions in fiscal
2001 resulted in an increase in store and regional expenses of $1.0 million and
new store openings accounted for an increase of $6.0 million. Also, store and
regional expenses increased $1.3 million due to salaries and benefits
attributable to foreign subsidiaries, commensurate with the growth in those
operations. In addition, $600,000 of the increase in store and regional expenses
resulted from an increase in salaries and benefits due to the continued growth
of our direct-to-consumer lending business and $1.9 million of the increase in
store and regional expenses resulted from the costs of the further development
of our centralized collection division in fiscal 2002. Store and regional
expenses as a percentage of revenues increased from 64.2% in fiscal 2001 to
67.4% in fiscal 2002. Store and regional expenses as a percentage of revenues
from our foreign subsidiaries were 57.5% for fiscal 2001 and 55.7% for fiscal
2002.
Salaries and Benefits Expense. Salaries and benefits expense was
$65.3 million for fiscal 2002, compared to $57.5 million for fiscal 2001,
an increase of $7.8 million, or 13.6%. Acquisitions accounted for an
increase in salaries and benefits of $500,000 and new store openings
accounted for $2.8 million. Our foreign subsidiaries accounted for an
increase of $1.3 million in salaries and benefits. In addition, our
direct-to-consumer lending business and centralized collection divisions
accounted for an increase of $2.5 million due to increased growth.
Salaries and benefits expenses as a percentage of revenues increased from
29.4% for fiscal 2001 to 32.3% for fiscal 2002.
Occupancy Expense. Occupancy expense was $18.1 million for fiscal
2002, compared to $16.9 million for fiscal 2001, an increase of $1.2
million, or 7.1%. New store openings and acquisitions accounted for the
increase. Occupancy expense as a percentage of revenues increased from
8.6% for fiscal 2001 to 9.0% for fiscal 2002.
Depreciation Expense. Depreciation expense was $6.5 million for
fiscal 2002, compared to $5.8 million for fiscal 2001 an increase of
$700,000, or 12.1%. New store openings and acquisitions accounted for an
increase of $600,000. Depreciation expense as a percentage of revenues
increased to 3.2% for fiscal 2002 from 3.0% for fiscal 2001.
28
Other. Other store and regional expenses were $46.2 million for
fiscal 2002, compared to $45.3 million for fiscal 2001, an increase of
$900,000, or 2.0%. New store openings and acquisitions accounted for an
increase in other store and regional expenses of $1.8 million. In
addition, costs associated with our direct-to-consumer lending business
and centralized collection divisions increased during fiscal 2002 due to
the growth in that business. Stores closed during fiscal 2002 partially
offset these increases.
Establishment of Reserves for New Consumer Lending Arrangements. During
fiscal 2002 we ceased servicing loans for Eagle National Bank, entered into a
new servicing arrangement with County Bank and increased the number of
company-funded loans we originated. In connection with these new consumer
lending arrangements, we established a reserve of $2.2 million.
Corporate Expenses. Corporate expenses were $24.5 million for fiscal 2002,
compared to $22.5 million for fiscal 2001, an increase of $2.0 million, or 8.9%.
This increase resulted from additional salaries and benefits associated with the
growth of the foreign operations during fiscal 2002. Corporate expenses as a
percentage of revenues increased to 12.1% for fiscal 2002 from 11.5% for fiscal
2001.
Loss on Store Closings and Sales. During fiscal 2002, we closed 16 stores.
Loss on store closings and sales was $1.2 million for fiscal 2002, compared to
$900,000 for fiscal 2001.
Other Depreciation and Amortization. Other depreciation and amortization
expenses were $2.7 million for fiscal 2002, compared to $2.0 million for fiscal
2001, an increase of $0.7 million, or 35%. This increase is attributable to
additional capital expenditures made by the corporate office during fiscal 2002.
Other depreciation and amortization as a percentage of revenues increased from
1.0% for fiscal 2001 to 1.3% for fiscal 2002.
Interest Expense. Interest expense was $18.7 million for fiscal 2002,
compared to $20.4 million for fiscal 2001, a decrease of $1.7 million, or 8.3%.
This decrease was primarily attributable to the decrease in the average interest
rates of our credit facilities.
Income Tax Provision. Provision for income taxes was $10.2 million in 2002
and $12.9 million in 2001. Our effective tax rate for 2002 was 62.8%, compared
to 65.8% for 2001. The effective rate differs from the federal statutory rate of
35% due to state taxes, foreign taxes, U.S. taxes on foreign earnings and, for
fiscal 2001, nondeductible goodwill amortization resulting from the management
buyout of our company on June 30, 1994 and several subsequent acquisitions.
Liquidity and Capital Resources
Our principal sources of cash are from operations and borrowings under our
credit facilities. We anticipate that our primary uses of cash will be to
provide working capital, finance capital expenditures, meet debt service
requirements, fund company-originated short-term consumer loans and finance
store expansion.
Net cash provided by operating activities was $16.4 million in fiscal
2001, $14.5 million in fiscal 2002 and $4.2 million in fiscal 2003. The decline
in net cash provided by operating activities is primarily a result of the
increased working capital related to the timing of settlements associated with
the consumer lending program. Our prior relationship with Eagle National Bank
provided for daily settlement of amounts owed to us from consumer loan activity;
our relationship with County Bank provides for monthly settlement and our
relationship with First Bank provides for semi-monthly settlement.
Net cash used in investing activities was $32.4 million in fiscal 2001,
$10.1 million in fiscal 2002 and $10.7 million in fiscal 2003. Our investing
activities primarily relate to purchases of property and equipment for our
stores, investments in technology and acquisitions. During fiscal 2003, $3.0
million of this amount was attributable to earn-out payments on acquisitions
completed during previous years. We currently expect that our capital
expenditures will aggregate approximately $7.0 million during fiscal 2004 for
remodeling and relocation of certain existing stores and for opening new stores.
29
Net cash provided by (used in) financing activities was $15.6 million in
fiscal 2001, $9.4 million in fiscal 2002 and $(11.3) million in fiscal 2003. The
decline during fiscal 2003 was primarily the result of a decrease in borrowings
under our revolving credit facilities from $78.9 million as of June 30, 2002 to
$61.7 million as of June 30, 2003.
Revolving Credit Facilities. We have three revolving credit facilities: a
domestic revolving credit facility, a Canadian overdraft facility and a United
Kingdom overdraft facility.
Domestic Revolving Credit Facility. Our borrowing capacity under our
domestic revolving credit facility is limited to the total commitment of
$72.0 million less letters of credit totaling $9.0 million issued by Wells
Fargo Bank, which guarantee the performance of certain of our contractual
obligations. At June 30, 2003, our borrowing capacity was $63.0 million.
The domestic revolving credit facility contains a provision for a
reduction of $1.5 million by September 30, 2003 and an additional $1.5
million by December 31, 2003. Borrowings under the domestic revolving
credit facility as of June 30, 2003 were $60.8 million.
Canadian Overdraft Facility. We have a Canadian overdraft facility
to fund peak working capital needs for our Canadian operations. The
Canadian overdraft facility provides for a commitment of up to
approximately $4.8 million, of which $4.8 million was outstanding on June
30, 2002 and $0.0 was outstanding on June 30, 2003. Amounts outstanding
under the Canadian overdraft facility bear interest at a rate of Canadian
prime plus 0.50% and are secured by the pledge of a cash collateral
account of an equivalent balance.
United Kingdom Overdraft Facility. For our U.K. operations, we have
a United Kingdom overdraft facility which provides for a commitment of up
to approximately $6.2 million, of which $5.5 million was outstanding on
June 30, 2002 and $900,000 was outstanding on June 30, 2003. Amounts
outstanding under the United Kingdom overdraft facility bear interest at a
rate of LIBOR plus 1.00%. The United Kingdom overdraft facility is secured
by a $6.0 million letter of credit issued by Wells Fargo Bank under our
domestic revolving credit facility.
Long-Term Debt. Long-term debt consists of our senior notes that mature on
November 15, 2006, and our senior subordinated notes that mature on December 31,
2006.
Operating Leases. Operating leases are scheduled payments on existing
store and other administrative leases. These leases typically have initial terms
of 5 years and may contain provisions for renewal options, additional rental
charges based on revenue and payment of real estate taxes and common area
charges.
Other Collateralized Borrowings. On November 15, 2002, we entered into an
agreement with a third party to sell, without recourse subject to certain
obligations, a participation interest in a portion of the short-term consumer
loans originated by us in the United Kingdom. Pursuant to the agreement, we will
retain servicing responsibilities and earn servicing fees, which are subject to
reduction if the related loans are not collected. At June 30, 2003, we had $8.0
million of loans receivable pledged under this agreement.
30
We entered into the commitments described above and other contractual
obligations in the normal course of business as a source of funds for asset
growth and asset/liability management and to meet required capital needs. Our
principal future obligations and commitments as of June 30, 2003, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
-------------------------------------------------------------------
Total Less than 1 1 - 3 Years 4 - 5 Years After 5
Year Years
----------- ----------- ----------- ----------- -----------
Revolving credit facilities ................ $ 61,699 $ 61,699 $ -- $ -- $ --
Long-term debt
Senior notes ,.......................... 109,190 -- -- 109,190 --
Senior subordinated notes .............. 20,000 -- -- 20,000 --
Operating leases ........................... 50,281 15,717 20,412 9,148 5,004
Other collateralized borrowings ............ 8,000 8,000 -- -- --
Other ...................................... 81 81 -- -- --
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations ......... $ 249,251 $ 85,497 $ 20,412 $ 138,338 $ 5,004
=========== =========== =========== =========== ===========
We are highly leveraged, and borrowings under the credit facilities will
increase our debt service requirements. We believe that, based on current levels
of operations and anticipated improvements in operating results, cash flows from
operations and borrowings available under our credit facilities will allow us to
fund our liquidity and capital expenditure requirements for the foreseeable
future, including payment of interest and principal on our indebtedness. This
belief is based upon our historical growth rate and the anticipated benefits we
expect from operating efficiencies. We expect additional revenue growth to be
generated by increased check cashing revenues, growth in the consumer lending
business, the maturity of recently opened stores and the continued expansion of
new stores. We also expect operating expenses to increase, although the rate of
increase is expected to be less than the rate of revenue growth. Furthermore, we
do not believe that additional acquisitions or expansion are necessary to cover
our fixed expenses, including debt service. However, we cannot assure you that
we will generate sufficient cash flow from operations or that future borrowings
will be available under our credit facilities in an amount sufficient to meet
our debt service requirements or to make anticipated capital expenditures. We
may need to refinance all or a portion of our indebtedness on or prior to
maturity, under certain circumstances, and we cannot assure you that we will be
able to effect such refinancing on commercially reasonable terms or at all.
Impact of New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 46, "Consolidation of Variable Interest Entities." This
Interpretation provides guidance on how to identify a variable interest entity
and determine when the assets, liabilities, noncontrolling interests and results
of operations of a variable interest entity need to be included in a company's
consolidated financial statements. A company that holds a variable interest in
an entity will need