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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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 333-18221
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: [X]
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, Dollar Financial Corp. See
"Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities".
1
(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 August 31,
2004, 100 shares of the registrant's common stock, par value $1.00 per share,
were outstanding. As of August 31, 2004 19,864.87 shares of common stock, par
value $0.01 per share, of our parent company, Dollar Financial Corp., were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
N/A
2
DOLLAR FINANCIAL GROUP, INC.
Table of Contents
2004 Report on Form 10-K
PART I
Item 1. Business.................................................................................. 4
Item 2. Properties................................................................................ 21
Item 3. Legal Proceedings......................................................................... 22
Item 4. Submission of Matters to a Vote of Security Holders....................................... 22
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................................. 23
Item 6. Selected Financial Data................................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................. 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 36
Item 8. Financial Statements and Supplementary Data............................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................................. 70
Item 9A. Controls and Procedures................................................................... 70
Item 9B. Other Information......................................................................... 70
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 70
Item 11. Executive Compensation.................................................................... 73
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 77
Item 13. Certain Relationships and Related Transactions............................................ 79
Item 14. Principal Accountant Fees and Services.................................................... 81
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 82
Signatures.......................................................................................... 89
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 1,110 stores, including 638 company-operated
stores, in 16 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.
We are a New York corporation formed in 1979. We are the wholly-owned
subsidiary of Dollar Financial Corp., a Delaware corporation incorporated in
April 1990. We operate our store network through our direct and indirect
wholly-owned foreign and domestic subsidiaries.
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 319 stores, with 231 operating under the name
"Money Mart(R)" and 88 operating under the name "Loan Mart(R)." The Money
Mart stores typically offer our full range of 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 458 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 $109.9 million for fiscal 2004 and
$110.5 for fiscal 2003.
Canada
There are 311 stores in our Canadian network, of which 194 are
operated by us and 117 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)84.8 million for fiscal
2004 and $(USD)67.0 for fiscal 2003.
United Kingdom
There are 480 stores in our U.K. network, of which 125 are operated by
us and 355 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)51.8 million for fiscal 2004
for $(USD)41.9 for fiscal 2003.
We have 472 franchised locations in Canada and the United Kingdom.
These franchised locations offer many of the same products and services
offered by company-operated stores using the same associated trade names,
trademarks and service marks within the standards and guidelines we have
established. Total franchise revenues were $6.3 million for fiscal 2003 and
$7.5 million for the fiscal year June 30, 2004. We also use independent
third-party businesses such as mail stores and insurance offices, which we
refer to as document transmitters, to assist in the transmission of
short-term consumer loan applications.
4
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 2004, we cashed 8.4 million checks with
a total face amount of $3.2 billion and an average face amount of $376 per
check. Acting both as a servicer and as a direct lender, we originated 3.0
million short-term consumer loans with an average principal amount of $288 and a
weighted average term of approximately 14 days In addition, we acted as a direct
lender originating 4,675 longer-term installment loans with an average principal
of $845 and a weighted average term of approximately 365 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.
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 U.S. 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.
5
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.
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 319 stores in the United States, 194 stores in Canada and 125
stores in the United Kingdom as of June 30, 2004. We have 117 franchised
locations in Canada and 355 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.
6
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.
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 2004, the
revenue contribution by our check cashing operations was 47.6%, our consumer
lending operations was 39.1% and our other financial services was 13.3%. In
addition to our product diversification, our business is diversified
geographically. For fiscal 2004, our U.S. operations generated 44.6% of our
total revenue, our Canadian operations generated 34.4% of our total revenue and
our U.K. operations generated 21.0% of total revenue. Our product and geographic
mix provides a diverse stream of revenue growth opportunities.
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, includes 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
2004, in our check cashing business, net write-offs as a percentage of the 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 1.8%.
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 Donald Gayhardt, have been
with us since 1990 and have demonstrated the ability to grow our business
through their operational leadership, strategic vision and experience in making
selected acquisitions. Since 1990, Mr. Weiss and Mr. Gayhardt have assisted us
in completing 31 acquisitions that added 418 company-operated stores. In
addition, the management team is highly motivated to ensure continued business
success, as they collectively own approximately 16.9% of our parent company's
common stock.
Business Strategy
Our business strategy is designed to capitalize on our competitive
strengths and enhance our leading market positions. Key elements of our strategy
include:
Capitalizing on Our Enhanced Network and System Capabilities. With our
network of 1,110 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.
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.
7
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
incentive programs to reward employees for exceptional customer service.
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 reloadable debit cards 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.
Expansion of Our Franchising Strategy. We intend to expand the reach of our
business and our network through an extension of our existing franchising
strategy. In Canada and the United Kingdom, we have developed our leading market
positions in part through the use of a franchising strategy that allowed us to
expand without incurring additional capital expenditures. As of June 30, 2004,
we had 117 franchised locations in Canada and 355 franchised locations in the
United Kingdom.
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
8
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. 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.
Products and Services
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 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 2004, check cashing fees averaged approximately 3.70% 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,
--------------------------------------------------------------------------------------
2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------
Consolidated operations:
Face amount of checks cashed....... $2,743,765,000 $3,046,705,000 $2,969,455,000 $2,938,950,000 $3,169,350,000
Number of checks cashed............ 8,204,528 9,001,635 8,689,819 8,568,944 8,427,990
Average face amount per check...... $334.42 $338.46 $341.72 $342.98 $376.05
Average fee per check.............. $11.87 $11.74 $12.06 $12.65 $13.93
Average fee as a % of face amount.. 3.55% 3.47% 3.53% 3.69% 3.70%
U.S. operations:
Face amount of checks cashed....... $1,712,912,000 $1,728,504,000 $1,636,967,000 $1,384,958,000 $1,349,956,000
Number of checks cashed............ 4,654,747 4,485,393 4,317,534 3,855,664 3,621,174
Average face amount per check...... $367.99 $385.36 $379.14 $359.20 $372.80
Average fee per check.............. $12.17 $12.19 $12.41 $12.75 $13.18
Average fee as a % of face amount.. 3.31% 3.16% 3.27% 3.55% 3.54%
9
Year ended June 30,
--------------------------------------------------------------------------------------
Canadian and U.K. operations: 2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------
Face amount of checks cashed....... $1,030,853,000 $1,318,201,000 $1,332,488,000 $1,553,992,000 $1,819,394,000
Number of checks cashed............ 3,549,781 4,516,242 4,372,285 4,713,280 4,806,816
Average face amount per check...... $290.40 $291.88 $304.76 $329.71 $378.50
Average fee per check.............. $11.47 $11.30 $11.71 $12.58 $14.50
Average fee as a % of face amount.. 3.95% 3.87% 3.84% 3.82% 3.83%
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 2004, we collected 73.6% of the face value
of returned checks.
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,
-----------------------------------------------------------------------------
2000 2001 2002 2003 2004
-----------------------------------------------------------------------------
Consolidated operations:
Face amount of returned checks............ $22,870,000 $27,938,000 $27,874,000 $26,164,000 $29,061,000
Collections on returned checks............ 17,100,000 19,752,000 20,812,000 19,426,000 21,399,000
Net write-offs of returned checks......... 5,770,000 8,186,000 7,062,000 6,738,000 7,662,000
Collections as a percentage of returned
checks................................. 74.7% 70.7% 74.7% 74.2% 73.6%
Net write-offs as a percentage of check
cashing revenues....................... 5.9% 7.7% 6.7% 6.2% 6.5%
Net write-offs as a percentage of face
amount of checks cashed................ 0.21% 0.27% 0.24% 0.22% 0.24%
U.S. operations:
Face amount of returned checks............ $12,023,000 $14,519,000 $15,411,000 $12,046,000 $13,761,000
Collections on returned checks............ 7,811,000 8,872,000 10,560,000 8,335,000 10,285,000
Net write-offs of returned checks......... 4,212,000 5,647,000 4,851,000 3,711,000 3,476,000
Collections as a percentage of returned
checks................................. 65.0% 61.1% 68.5% 69.2% 74.7%
Net write-offs as a percentage of check
cashing revenues....................... 7.4% 10.3% 9.1% 7.6% 7.3%
Net write-offs as a percentage of face
amount of checks cashed................ 0.25% 0.33% 0.30% 0.25% 0.26%
Canadian and U.K. operations:
Face amount of returned checks............ $10,847,000 $13,419,000 $12,463,000 $14,118,000 $15,300,000
Collections on returned checks............ 9,289,000 10,880,000 10,252,000 11,091,000 11,114,000
Net write-offs of returned checks......... 1,558,000 2,539,000 2,211,000 3,027,000 4,186,000
Collections as a percentage of returned
checks................................. 85.6% 81.1% 82.3% 78.6% 72.6%
Net write-offs as a percentage of check
cashing revenues....................... 3.8% 5.0% 4.3% 5.1% 6.0%
Net write-offs as a percentage of face
amount of checks cashed................ 0.15% 0.19% 0.17% 0.20% 0.23%
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
10
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 $700, 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 2004, County Bank originated or extended approximately
$136.2 million of loans through our locations and document transmitters. First
Bank originated or extended approximately $249.1 million of loans through us
during this period. County Bank originated or extended approximately $277.9
million of loans through us during fiscal 2003 and First Bank originated or
extended approximately $92.5 million of loans through us for the same period.
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)600, with a
term of 28 days. We originated or extended approximately $491.4 million of the
short-term consumer loans through our locations and document transmitters during
fiscal 2004 and approximately $428.7 million through our locations and document
transmitters during 2003. In addition, beginning in fiscal 2003 we acted as a
direct lender originating 1,402 longer-term installment loans with an average
principal of $793 and a weighted average term of approximately 365 days. In
fiscal 2004, we originated 4,675 longer-term installment loans with an average
principal amount of $845 and a weighted average term of approximately 365 days.
We originated or extended installment loans through our locations in the United
Kingdom of approximately $1.1 million in fiscal 2003 and $3.9 million in fiscal
2004 and introduced this product in certain U.S. and Canadian markets late in
fiscal 2004.
We had approximately $29.1 million of consumer loans on our balance sheet
at June 30, 2004 and approximately $21.4 million on June 30, 2003. These amounts
are reflected in total loans receivable. Loans receivable, net at June 30, 2004
are reported net of a reserve of $2.3 million related to consumer lending. Loans
receivable at June 30, 2003 are reported net of a reserve of $1.3 million
related to consumer lending.
The following table presents a summary of our consumer lending
originations, which includes loan extensions, and revenues for the following
periods (dollars in thousands):
11
Year ended June 30,
--------------------------------------------
2002 2003 2004
--------------------------------------------
(in thousands)
U.S. company funded consumer loan originations(1)............. $ 19,723 $ 81,085 $ 65,868
Canadian company funded consumer loan originations(2)......... 188,632 248,149 309,016
U.K. company funded consumer loan originations(2)............. 76,344 99,499 116,532
--------------------------------------------
Total company funded consumer loan originations............... $ 284,699 $ 428,733 $ 491,416
============================================
Servicing revenues, net....................................... $ 44,765 $ 41,175 $ 47,144
U.S. company funded consumer loan revenues.................... 3,545 14,137 9,873
Canadian company funded consumer loan revenues................ 16,280 22,492 31,479
U.K. company funded consumer loan revenues.................... 10,763 13,725 17,750
Provision for loan losses on company funded loans............. (5,554) (9,967) (9,928)
--------------------------------------------
Total consumer lending revenues, net.......................... $ 69,799 $ 81,562 $ 96,318
Gross charge-offs of company funded consumer loans............ $ 23,684 $ 42,497 $ 45,074
Recoveries of company funded consumer loans................... 18,130 32,105 36,102
--------------------------------------------
Net charge-offs on company funded consumer loans.............. $ 5,554 $ 10,392 $ 8,972
============================================
Gross charge-offs of company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 8.4% 9.9% 9.2%
Recoveries of company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 6.4% 7.5% 7.4%
Net charge-offs on company funded consumer loans as a
percentage of total company funded consumer loan
originations............................................... 2.0% 2.4% 1.8%
(1)Our company-operated stores in the United States originate company
funded and bank funded short-term consumer loans. Document transmitter locations
in the United States originate only bank funded loans.
(2)All consumer loans originated in Canada and the United Kingdom are
company funded.
Following are the number of company-operated U.S. stores at each period end
that originate company funded and bank funded loans.
Year ended June 30,
------------------------------------------
2002 2003 2004
------------ -------------- --------------
U.S. stores originating company funded loans................. 164 33 43
U.S. stores originating bank funded loans.................... 178 286 275
------------ -------------- --------------
Total U.S. stores originating short-term consumer loans...... 342 319 318
============ ============== ==============
The increase in total company funded originations of $59.9 million in fiscal
2004 over fiscal 2003, as well as in prior periods, was driven primarily by
increases in originations in Canada and the United Kingdom from newly opened
stores. Eagle National Bank discontinued the business of offering short-term
consumer loans through our stores pursuant to a December 18, 2001 consent order
entered into with the U.S. Comptroller of the Currency. Under the program with
Eagle National Bank, 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
12
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.
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 170,000 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 2004, we generated
total money transfer revenues of $13.1 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 2004, money order transactions had an
average face amount of $160.1 and an average fee of $1.05. For fiscal 2004,
our customers purchased 2.3 million money orders, generating total money
order revenues of $2.4 million.
13
Store Operations
Locations
The following chart sets forth the number of stores in operation as of the
dates:
June 30,
------------------------------------------
Markets 2000 2001 2002 2003 2004
------- ------------------------------------------
CALIFORNIA
Southern................................. 44 47 47 47 47
Northern................................. 92 95 93 91 90
ARIZONA
Phoenix.................................. 34 40 45 43 43
Tucson................................... 7 13 16 16 16
OHIO
Cleveland................................ 21 19 19 18 18
Other Ohio cities (1).................... 7 5 4 4 4
PENNSYLVANIA
Philadelphia............................. 11 8 8 6 6
Pittsburgh............................... 10 11 11 11 11
OTHER UNITED STATES
Washington............................... 17 21 18 18 18
Virginia................................. 15 16 16 16 16
Oklahoma................................. 8 13 13 10 10
Nevada................................... 1 11 11 8 8
Colorado................................. 6 14 15 7 7
Oregon................................... 2 5 5 5 5
Louisiana................................ 3 4 4 4 4
Texas.................................... 3 3 4 4 4
Utah..................................... 7 5 5 4 4
New Mexico............................... 4 3 3 3 3
Hawaii................................... 3 3 3 3 3
Maryland/D.C............................. 4 11 10 2 1
Wisconsin................................ 1 1 1 1 1
CANADA
Company operated......................... 139 157 167 181 194
Franchised locations..................... 81 86 87 109 117
UNITED KINGDOM
Company operated......................... 107 126 123 122 125
Franchised locations..................... 264 261 290 351 355
------------------------------------------
Total stores............................. 891 978 1,018 1,084 1,110
==========================================
(1) These other cities include Akron, Canton, Youngstown and Cincinnati.
14
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.
Since fiscal 2001, the number of stores operated by us in the United States
has declined from 348 to 319. From fiscal 2001 through fiscal 2004, we did not
renew store leases, which were scheduled to expire, in various markets because
we determined that our operating margins in these locations were not
satisfactory. We expect the number of stores in the United States to remain
relatively stable in the foreseeable future, as we anticipate focusing our new
store and acquisition strategy in Canada and the United Kingdom.
Acquisitions
Since 1990, we have grown our store network domestically and
internationally in part through acquisitions. We have successfully targeted,
executed and closed over 31 acquisitions that added 418 company-owned stores.
In November 1996, we completed our first acquisition of Canadian stores,
adding 36 company operated locations and 107 franchised locations. We now
operate 194 stores in Canada and have 117 franchised locations. During fiscal
1998, we opened our first Loan Mart stores in the United States, offering only
short-term consumer loans. We have continued to build new Loan Mart stores in a
number of markets in the United States and today operate 88 of these stores. In
February 1999, we completed our first acquisition of stores in the United
Kingdom when we purchased 11 stores. Since entering the U.K. market, we have
completed five additional acquisitions of chains which added 74 company-operated
stores and 265 franchised locations, built 40 new company-operated stores and
added 90 new franchised locations, net. We now operate a total of 125 stores in
the United Kingdom and have 355 franchised locations.
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
15
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-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 0.6% of total revenues for fiscal 2004, a
decline from net security losses of 0.8% of total revenues for fiscal 2003.
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.
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.
16
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 15,000 as of December 2002.
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 and/or short-term consumer loans to be 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 480 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. In general, this regulation is
designed to protect consumers who deal with us and not to protect the holders of
our securities, including our common stock.
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,
Hawaii, Louisiana, Maryland, Ohio, Pennsylvania and the District of Columbia
where regulations set maximum fees for cashing various types of checks. Our fees
comply with all state regulations.
Some states, including California, Ohio, Pennsylvania, Utah, Washington and
the District of Columbia 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.
17
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.
In the United Kingdom, as a result of the Cheques Act of 1992, banks are
now liable to refund checks cleared by the bank that involved fraud or
dishonesty. For this reason, banks have invoked more stringent credit inspection
and indemnity criteria for all individuals and businesses wishing to operate a
check clearing facility such as ours. Additionally, in 2001 the Money Laundering
Act of 1993 was enhanced, required check cashing, money transfer and bureau de
change providers to be licensed. We currently comply with these more stringent
rules and regulations.
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(R).
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 do not plan to open any company-operated stores to engage in
the consumer lending business in 13 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
sizable presence, although there is no guarantee that this situation will
continue. We recently ceased offering short-term consumer loans in Georgia in
response to a law passed by the state legislature prohibiting these loans. Our
short-term consumer lending business in Georgia was immaterial financially,
generating revenues of $755,000 in fiscal 2004 and $500,000 in fiscal 2003, and
we had no company-operated stores in that state. We are not currently aware of
similar legislation that would require us to exit markets where we generate
significant revenues.
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
18
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.
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 137 stores in California. This state has enacted a
so-called "prompt remittance" statute. This statute specifies 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 statute limits 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, 2004, we employed 3,343 persons worldwide, consisting of 320
persons in our accounting, management information systems, legal, human
resources, treasury, finance and administrative departments and 3,023 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.
19
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.
20
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 locations open as of June 30, 2004, 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
-------------- ---------------
2005 111
2006 - 2009 425
2010 - 2014 112
2015 - 2019 12
2020 - 2024 1
------
661
======
The following table reflects the change in the number of stores during
fiscal years 2002, 2003 and 2004:
2002 2003 2004
-------- -------- -------
Number of stores at beginning of period 978 1,018 1,084
New stores opened 25 14 14
Stores acquired 1 5 3
Stores closed (16) (36) (3)
Net change in franchise stores 30 83 12
-------- -------- -------
Number of stores at end of period 1,018 1,084 1,110
======== ======== =======
21
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.
Approximately 92% of these settlement offers have been accepted. Plaintiff's'
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. The court's decision denying that motion is presently
on appeal. 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 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an
action against our Canadian subsidiary on behalf of a purported class of
Canadian borrowers (except those residing in British Columbia and Quebec) who,
Mortillaro claims, were subjected to usurious charges in payday loan
transactions. The action, which is pending in the Ontario Superior Court of
Justice, alleges violations of a Canadian federal law proscribing usury and
seeks restitution and damages in an unspecified amount, including punitive
damages. On November 6, 2003, we learned of substantially similar claims
asserted on behalf of a purported class of Alberta borrowers by Gareth Young, a
former customer of our Canadian subsidiary. The Young action is pending in the
Court of Queens Bench of Alberta and seeks an unspecified amount of damages and
other relief. On December 23, 2003, we were served with the statement of claim
in an action brought in the Ontario Superior Court of Justice by another former
customer, Margaret Smith. A similar action was also filed in the Court of
Queen's Bench of Manitoba on April 26, 2004 by Nicole Blasko. The allegations
and putative class in the Smith and Blasko actions are substantially the same as
those in the Mortillaro action. Like the plaintiff in the MacKinnon action
referred to above, Mortillaro, Young, Smith and Blasko have agreed to arbitrate
all disputes with us. We believe that we have meritorious procedural and
substantive defenses to the claims of each of these plaintiffs, and we intend to
defend the claims vigorously. We believe 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.
22
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for our common stock.
Dollar Financial Corp. (formerly known as DFG Holdings, Inc.) is the sole
record and beneficial owner of all of our outstanding common stock. For
information regarding certain of the beneficial owners of Dollar Financial
Corp.'s common stock, please see "Item 12 - Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters."
We did not pay any cash dividends in respect of our common stock during
fiscal 2003 and fiscal 2004. The Indenture dated November 13, 2003 between us
and U.S. Bank, National Association as trustee (the "Indenture"), relating to
our 9.75% Senior Notes due 2011, as well as our credit agreement, contain
restrictions on our 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
We derived the following historical financial information from our audited
consolidated financial statements as of June 30, 2003 and June 30, 2004 and for
each of the years in the three-year period ended June 30, 2004, which are
included elsewhere in this report, and our audited consolidated financial
statements as of and for the years ended June 30, 2000, June 30, 2001 and June
30, 2002. This table should be read together with the information contained in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our audited consolidated financial statements and
related notes included in "Item 8 - Financial Statements of Supplementary Data."
23
Selected Financial Data: Year ended June 30,
--------------------------------------------------------------------------------------
2000(1) 2001(2) 2002 2003 2004
--------------------------------------------------------------------------------------
(dollars in thousands, except Check Cashing Data)
Statement of Operations Data:
Revenues:
Revenues from check cashing........ $ 97,350 $ 105,690 $ 104,792 $ 108,435 $ 117,397
Consumer lending:
Fees from consumer lending.... 44,974 77,854 97,712 106,557 120,807
Provision for loan losses and
adjustment to servicing
revenue................... (10,187) (19,487) (27,913) (24,995) (24,489)
--------------------------------------------------------------------------------------
Consumer lending, net.............. 34,787 58,367 69,799 81,562 96,318
Money transfer fees................ 7,881 9,444 10,098 11,652 13,052
Other revenues..................... 25,735 21,998 17,287 17,739 19,663
--------------------------------------------------------------------------------------
Total revenues........................ 165,753 195,499 201,976 219,388 246,430
Store and regional expenses:
Salaries and benefits.............. 47,058 57,453 65,295 69,799 76,008
Occupancy.......................... 12,800 16,881 18,087 18,856 19,805
Depreciation....................... 4,683 5,829 6,522 5,859 6,546
Other.............................. 36,503 45,321 46,238 47,766 53,321
--------------------------------------------------------------------------------------
Total store and regional expenses..... 101,044 125,484 136,142 142,280 155,680
Establishment of reserves for new
consumer lending arrangements...... - - 2,244 - -
Corporate expenses.................... 22,342 22,500 24,516 31,241 32,813
Losses on store closings and sales and
other restructuring................ 249 926 1,435 3,987 361
Goodwill amortization (3)............. 5,564 4,710 - - -
Other depreciation and amortization... 1,620 1,952 2,709 3,320 3,286
Interest expense, net of interest
income............................. 17,491 20,361 18,694 20,168 25,303
Loss on extinguishment of debt........ - - - - 7,486
Litigation settlement costs........... - - - 2,750 -
--------------------------------------------------------------------------------------
Income before income taxes............ 17,443 19,566 16,236 15,642 21,501
Income tax provision(4) .............. 12,043 12,876 10,199 13,511 16,589
--------------------------------------------------------------------------------------
Net income ........................... $ 5,400 $ 6,690 $ 6,037 $ 2,131 $ 4,912
======================================================================================
Operating and Other Data:
Net cash provided by (used in):
Operating activities............... $ 16,792 $ 16,442 $ 14,453 $ 3,832 $ 20,372
Investing activities............... (44,526) (32,365) (10,108) (10,679) (8,619)
Financing activities............... 35,306 15,602 9,409 (10,897) (16,468)
Stores in operation at end of period..
Company-owned...................... 546 631 641 624 638
Franchised stores and check cashing
merchants....................... 345 347 377 460 472
--------------------------------------------------------------------------------------
Total ................................ 891 978 1,018 1,084 1,110
======================================================================================
Check Cashing Data:
Face amount of checks cashed.......... $ 2,743,765,000 $ 3,046,705,000 $ 2,969,455,000 $ 2,938,950,000 $ 3,169,350,000
Number of checks cashed............... 8,204,528 9,001,635 8,689,819 8,568,944 8,427,990
Average face amount per check cashed.. $334.42 $338.46 $341.72 $342.98 $376.05
Average fee per check................. $11.87 $11.74 $12.06 $12.65 $13.93
Average fee as a % of face amount..... 3.55% 3.47% 3.53% 3.69% 3.70%
Balance Sheet Data (at end of period):
Cash.................................. $ 73,288 $ 72,452 $ 86,633 $ 71,805 $ 69,266
Total assets.......................... 259,714 276,544 292,480 298,289 321,034
Total indebtedness.................... 179,146 197,136 208,191 198,970 241,281
Shareholder's equity.................. 39,595 42,624 53,515 67,688 38,017
24
(1) 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.
(2) 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.
(3) 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.
(4) As a result of our refinancing in November 2003, we do not expect to
continue to pay U.S. tax on our foreign earnings for the foreseeable
future. This will result in a substantial reduction in our effective tax
rate. The amount of such tax was as follows (dollars in thousands):
Year ended June 30,
---------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
1,745 $3,189 $2,370 $5,162 $2,349
25
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Executive Summary
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 and fees on the loans.
We operate in a sector of the financial services industry that serves the
basic need of lower- and middle-income working-class individuals to have
convenient access to cash. This need is primarily evidenced by consumer demand
for check cashing and short-term loans, and consumers who use these services are
often underserved by banks and other financial institutions.
Our expenses primarily relate to the operations of our store network,
including salaries and benefits for our employees, occupancy expense for our
leased real estate, depreciation of our assets and corporate and other expenses,
including costs related to opening and closing stores. 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.
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.
In our discussion of our financial condition and results of operations, we
refer to stores, franchises and document transmitters that were open for an
entire period and the comparable prior period as comparable stores, franchises
and document transmitters.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with U.S.
generally accepted accounting principles. We evaluate these estimates on an
ongoing basis, including those related to revenue recognition, loss reserves and
intangible assets. We base these estimates on the information currently
available to us and on various other assumptions that we believe are reasonable
under the circumstances. Actual results could vary from these estimates under
different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition
With respect to company-operated stores, revenue from our check cashing,
money order sales, money transfer and bill payment services and other
miscellaneous services reported in other revenues on our statement of operations
are all recognized when the transactions are completed at the point-of-sale in
the store.
With respect to our franchised locations, we recognize initial franchise
fees upon fulfillment of all significant obligations to the franchisee. Royalty
payments from our franchisees are recognized as earned.
For short term consumer loans that we make directly, which have terms
ranging from 1 to 37 days, revenue is recognized using the interest method. Loan
origination fees are recognized as an adjustment to the yield on the related
loan. Our reserve policy regarding these loans is summarized below in "Company
Funded Consumer Loan Loss Reserves Policy."
In addition to the short-term consumer loans originated and funded by us,
we also have relationships with two banks, County Bank of Rehoboth Beach,
Delaware and First Bank of Delaware. Pursuant to these relationships, we market
and service short-term consumer loans, which have terms ranging from 7 to 23
days, that are funded by the banks. The banks are responsible for the
application review process and determining whether to approve an application and
26
fund a loan. As a result, the banks' loans are not reflected on our balance
sheet. We earn a marketing and servicing fee for each loan that is paid by
borrowers to the banks.
For loans funded by County Bank, we recognize net servicing fee income
ratably over the life of the related loan. In addition, each month County Bank
withholds certain servicing fees payable to us in order to maintain a cash
reserve. The amount of the reserve is equal to a fixed percentage of outstanding
loans at the beginning of the month plus a percentage of the finance charges
collected during the month. Each month, net credit losses are applied against
County Bank's cash reserve. Any excess reserve is then remitted to us as a
collection bonus. The remainder of the finance charges not applied to the
reserve are either used to pay costs incurred by County Bank related to the
short term loan program, retained by the bank as interest on the loan or
distributed to us as a servicing fee.
For loans funded by First Bank of Delaware, we recognize net servicing fee
income ratably over the life of the related loan. In addition, the bank has
established a target loss rate for the loans marketed and serviced by us.
Servicing fees payable to us are reduced if actual losses exceed this target
loss rate by the amount they exceed it. If actual losses are below the target
loss rate, the difference is paid to us as a servicing fee. The measurement of
the actual loss rate and settlement of servicing fees occurs twice every month.
Because our servicing fees are reduced by loan losses incurred by the
banks, we have established a reserve for servicing fee adjustments. To estimate
the appropriate reserve for servicing fee adjustments, we consider the amount of
outstanding loans owed to the banks, historical loans charged off, current
collections patterns and current economic trends. The reserve is then based on
net charge-offs, expressed as a percentage of loans originated on behalf of the
banks applied against the total amount of the banks' outstanding loans. This
reserve is reported in accrued expenses and other liabilities on our balance
sheet and was $1,093 at June 30, 2003 and $1,380 at June 30, 2004.
If one of the banks suffers a loss on a loan, we immediately record a
charge-off against the reserve for servicing fee adjustments for the entire
amount of the unpaid item. A recovery is credited to the reserve during the
period in which the recovery is made. Each month, we replenish the reserve in an
amount equal to the net losses charged to the reserve in that month. This
replenishment, as well as any additional provisions to the reserve for servicing
fees adjustments as a result of the calculations set forth above, is charged
against revenues. The total amount of outstanding loans owed to the banks did
not change significantly during the periods ended June 30, 2004 and June 30,
2003, and during these periods the loss rates on loans declined. As a result of
these factors, we did not increase our reserve for servicing fee adjustments. We
serviced $385 million loans for County Bank and First Bank during fiscal 2004
and $370 million during fiscal 2003. At June 30, 2004 and 2003 we serviced $15.2
million and $15.0 million, respectively, for County Bank and First Bank.
Company Funded Consumer Loan Loss Reserves Policy
We maintain a loan loss reserve for anticipated losses for loans we make
directly through some of our company-operated locations. To estimate the
appropriate level of loan loss reserves we consider the amount of outstanding
loans owed to us, historical loans charged off, current collection patterns and
current economic trends. Our current loan loss reserve is based on our net
charge-offs, expressed as a percentage of loan amounts originated for the last
twelve months applied against the total amount of outstanding loans that we make
directly. As these conditions change, we may need to make additional provisions
in future periods.
When a loan is originated, the customer receives the cash proceeds in
exchange for a post-dated check or a written authorization to initiate a charge
to the customer's bank account on the stated maturity date of the loan. If the
check or the debit to the customer's account is returned from the bank unpaid,
we immediately record a charge-off against the consumer loan loss reserve for
the entire amount of the unpaid item. A recovery is credited to the reserve
during the period in which the recovery is made. Each month, we replenish the
reserve in an amount equal to the net losses charged to the reserve in that
month. This replenishment, as well as any additional provisions to the loan loss
reserve as a result of the calculations in the preceding paragraph, is charged
against revenues. As a result of the increase in our installment loan portfolio,
we increased our loan loss reserve during fiscal 2004.
Check Cashing Returned Item Policy
We charge operating expense for losses on returned checks during the period
in which such checks are returned. Recoveries on returned checks are credited to
operating expense during the period in which recovery is made. This direct
method for recording returned check losses and recoveries eliminates the need
for an allowance for returned checks. These net losses are charged to returned
checks, net and cash shortages in the consolidated statements of operations.
27
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 reporting units multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Income Taxes
As part of the process of preparing our consolidated financial statements
we are required to estimate our income taxes in each of the jurisdictions in
which we operate. This process involves estimating our current tax exposure and
assessing the impact of differing treatment of items for tax and accounting
purposes. If an item is treated differently for tax and accounting purposes, we
report the difference as a deferred tax asset or liability, on our consolidated
balance sheet. When then assess the likelihood that any deferred tax assets will
be recovered from future taxable income. To the extent we believe that recovery
of a deferred tax asset is not likely, we establish a valuation allowance.
28
Results of Operations
The following table sets forth our results of operations as a percentage of
total consolidated revenues for the following periods:
Year ended June 30,
---------------------------
2002 2003 2004
---------------------------
Statement of Operations Data:
Total revenues:
Check cashing......................................................... 51.8% 49.4% 47.6%
Consumer lending, net................................................. 34.6 37.2 39.1
Money transfers....................................................... 5.0 5.3 5.3
Other ................................................................ 8.6 8.1 8.0
---------------------------
Total revenues............................................................ 100.0 100.0 100.0
U.S. revenues:
Check cashing......................................................... 26.5 22.4 19.4
Consumer lending, net................................................. 23.4 23.3 21.9
Money transfers....................................................... 2.2 2.2 1.8
Other ................................................................ 3.8 2.5 1.4
---------------------------
Total U.S. revenues....................................................... 55.9 50.4 44.5
Canada revenues:
Check cashing......................................................... 15.0 15.1 15.6
Consumer lending, net................................................. 6.6 8.8 11.6
Money transfers....................................................... 2.2 2.3 2.4
Other ................................................................ 3.7 4.3 4.9
---------------------------
Total Canada revenues..................................................... 27.5 30.5 34.5
United Kingdom revenues:
Check cashing......................................................... 10.3 11.9 12.6
Consumer lending, net................................................. 4.6 5.1 5.6
Money transfers....................................................... 0.6 0.8 1.1
Other ................................................................ 1.1 1.3 1.7
---------------------------
Total United Kingdom revenues............................................. 16.6 19.1 21.0
Store and regional expenses:
Salaries and benefits................................................. 32.3 31.8 30.8
Occupancy............................................................. 9.0 8.6 8.0
Depreciation.......................................................... 3.2 2.7 2.7
Other................................................................. 22.9 21.8 21.7
---------------------------
Total store and regional expenses......................................... 67.4 64.9 63.2
Establishment of reserves for new consumer lending arrangements............ 1.1 - -
Corporate expenses........................................................ 12.1 14.2 13.3
Losses on store closings and sales and other restructuring................ 0.8 1.8 0.1
Other depreciation and amortization....................................... 1.3 1.5 1.3
Interest expense, net of interest income.................................. 9.3 9.2 10.3
Loss on extinguishment of debt............................................ - - 3.0
Litigation settlement costs............................................... - 1.3 -
---------------------------
Income before income taxes................................................ 8.0 7.1 8.8
Income tax provision ..................................................... 5.0 6.1 6.8
---------------------------
Net income................................................................ 3.0% 1.0% 2.0%
===========================
Year Ended June 30, 2004 Compared to the Year Ended June 30, 2003
Revenues. Total revenues were $246.4 million for fiscal 2004 compared to
$219.4 million for fiscal 2003, an increase of $27.0 million or 12.3%.
Comparable store, franchised store and document transmitter sales for the entire
period increased $24.8 million or 11.5%. New store openings accounted for an
increase of $3.6 million while closed stores accounted for a decrease of $1.7
million. Favorable foreign currency rates attributed to $12.3 million of the
increase for the fiscal year. In addition to the currency benefit, revenues in
the United Kingdom for the fiscal year increased by $5.8 million primarily
related to revenues from check cashing and the impact of a new installment loan
product. Revenues in Canada for the fiscal year increased $9.6 million after
adjusting for favorable exchange rate. An increase in volume of short-term
29
consumer loans originated in Canada and higher consumer loan pricing contributed
to the increase in Canadian revenues . In addition, our Canadian subsidiary
introduced a new tax product in all of its stores offering refund anticipation
loans and electronic Canadian tax filing. This product, which was only tested in
a limited number of locations in the prior year period, added $1.0 million in
revenue for the fiscal year, which is included in other revenues. In the United
States, revenues declined $612,000 for the fiscal year, primarily due to the
decline in our distribution of government assistance food coupons. California,
the last state in which we offer food coupons, is implementing an electronic
benefits transfer system designed to disburse public assistance benefits
directly to individuals. Beginning in fiscal 2005, we do not expect to derive
any revenue from the distribution of government assistance food coupons.
Revenues from franchise fees and royalties accounted for $7.5 million, or 3.0%
of total revenues, for the fiscal year compared to $6.3 million, or 2.9% of
total revenues, for the same period in 2003, representing a $1.2 million, or
19.0%, increase. Stronger foreign currencies in both the United Kingdom and
Canada accounted for $721,000, or 60.1%, of the increase. The balance of the
increase resulted from the addition of a total of 12 franchised locations during
fiscal 2004 and an overall increase in revenues generated by existing
franchises.
Store and Regional Expenses. Store and regional expenses were $155.7
million for fiscal 2004 compared to $142.3 million for fiscal 2003, an increase
of $13.4 million or 9.4%. The impact of foreign currencies accounted for $6.4
million of this increase. New store openings accounted for an increase of $2.1
million while closed stores accounted for a decrease of $1.3 million. Comparable
retail store and franchised store expenses for the entire period increased $15.5
million. For the fiscal year ended June 30, 2004, total store and regional
expenses decreased to 63.2% of total revenues compared to 64.9% of total
revenues for the fiscal year ended June 30, 2003. After adjusting for the impact
of the changes in exchange rates, store and regional expenses increased $5.9
million in Canada, $2.2 million in the United Kingdom and declined $720,000 in
the United States. The increase in Canada was primarily due to increases of $1.2
million in salaries, $512,000 in returned checks, net and cash shortages,
$494,000 in advertising and $429,000 in occupancy costs. These costs, in
addition to the aggregate of other operating costs, are commensurate with the
overall growth in C