UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to _____
Commission file number 333-111473-02
DFG HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 23-2636866
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check 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 [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of January 31, 2004, 19,758 of the Registrants common stock, par value $0.001
per share, were outstanding.
DFG HOLDINGS, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2003
and December 31, 2003 (unaudited)........................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three and Six
Months Ended December 31, 2002 and 2003..................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2002 and 2003............................................................ 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 26
Item 4. Controls and Procedures..................................................................... 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 28
Item 2. Changes in Securities and Use of Proceeds................................................... 29
Item 3. Exhibits and Reports on Form 8-K............................................................ 29
Signature ........................................................................................... 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DFG HOLDINGS, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, December 31
----------------- ----------------
2003 2003
----------------- ----------------
(unaudited)
Assets
Cash and cash equivalents............................................... $ 71,809 $ 70,855
Loans and other consumer lending receivables, net of reserve of
$2,437 and $2,604................................................... 17,465 16,948
Loans receivable pledged................................................ 8,000 8,000
Other receivables....................................................... 6,386 8,052
Income taxes receivable................................................. 1,559 2,556
Prepaid expenses........................................................ 6,358 7,304
Deferred income taxes, net of valuation allowance of $0 and $19,660..... 15,610 -
Notes receivable--officers.............................................. 2,756 2,756
Property and equipment, net of accumulated
depreciation of $39,309 and $45,217................................. 29,209 28,427
Goodwill and other intangibles, net of accumulated
amortization of $22,017 and $22,558 ................................ 143,416 149,063
Debt issuance costs, net of accumulated
amortization of $9,201 and $189..................................... 6,737 10,800
Other................................................................... 1,833 2,017
-----------------------------------
$ 311,138 $ 306,778
===================================
Liabilities and shareholders' deficit
Accounts payable........................................................ $ 17,245 $ 12,592
Accrued expenses........................................................ 9,593 13,563
Accrued interest payable................................................ 1,656 5,053
Other collateralized borrowings......................................... 8,000 8,000
Revolving credit facilities............................................. 61,699 -
Long term debt:
10.875% Senior Notes due 2006...................................... 109,190 -
13.0% Senior Discount Notes due 2006............................... 112,644 -
9.75% Senior Notes due 2011........................................ - 220,000
16.0% Senior Notes due 2012........................................ - 47,871
13.95% Senior Subordinated Notes due 2012.......................... - 47,871
Subordinated notes payable and other............................... 20,081 205
-----------------------------------
Total long term debt.................................................... 241,915 315,947
Shareholders' deficit:
Common stock, $.001 par value: 100,000 shares authorized;
19,865 shares issued at June 30, 2003 and December 31, 2003......... - -
Additional paid-in capital.......................................... 61,481 61,481
Accumulated deficit................................................. (92,883) (120,463)
Accumulated other comprehensive income.............................. 7,697 15,870
Treasury stock at cost; 107 shares at June 30, 2003 and
December 31, 2003................................................ (956) (956)
Management equity loan............................................. (4,309) (4,309)
-----------------------------------
Total shareholders' deficit............................................. (28,970) (48,377)
-----------------------------------
$ 311,138 $ 306,778
===================================
See notes to interim unaudited consolidated financial statements.
3
DFG HOLDINGS, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
-----------------------------------------------------------------
2002 2003 2002 2003
------------- ------------- ------------- ------------
Revenues ...................................................... $ 53,290 $ 60,762 $ 105,943 $ 117,752
Store and regional expenses:
Salaries and benefits....................................... 17,281 18,707 34,428 37,484
Occupancy................................................... 4,673 4,885 9,472 9,749
Depreciation................................................ 1,624 1,490 3,243 2,938
Other....................................................... 12,161 14,668 25,018 27,633
------------- ------------- ------------- ------------
Total store and regional expenses.............................. 35,739 39,750 72,161 77,804
Corporate expenses............................................. 7,738 7,126 14,986 14,367
Management fee ............................................... 263 287 524 537
Loss on store closings and sales and other restructuring....... 1,802 61 2,290 121
Other depreciation and amortization............................ 845 914 1,688 1,872
Interest expense (net of interest income of $110, $190,
$217 and $294)............................................... 8,441 10,250 16,800 19,434
Loss on extinguishment of debt................................. - 8,855 - 8,855
Establishment of reserve for legal matter...................... 2,500 - 2,500 -
------------- ------------- ------------- ------------
Loss before income taxes (4,038) (6,481) (5,006) (5,238)
Income tax provision........................................... 2,233 18,492 4,467 22,336
------------- ------------- ------------- ------------
Net loss....................................................... $ (6,271) $ (24,973) $ (9,473) $ (27,574)
============= ============= ============= ============
See notes to interim unaudited consolidated financial statements.
4
DFG HOLDINGS, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
-------------------------------------
2002 2003
---------------- --------------
Cash flows from operating activities:
Net loss.......................................................................... $ (9,473) $ (27,574)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Accretion of interest expense from 13.0% Senior Discount Notes................ 6,941 5,827
Depreciation and amortization................................................. 5,981 5,732
Establishment of reserve for legal matter..................................... 2,500 -
Loss on extinguishment of debt................................................ - 8,855
Loss on store closings and sales and other restructuring...................... 2,290 121
Foreign currency (gain) loss.................................................. - (648)
Deferred tax benefit.......................................................... (1,089) 15,610
Change in assets and liabilities:
Increase in loans and other receivables.................................. (8,152) (1,129)
Increase in income taxes receivable...................................... (7,714) (1,918)
Decrease (increase) in prepaid expenses and other........................ 940 (710)
Increase in accounts payable, income taxes payable,
accrued expenses and accrued interest payable.......................... 151 1,349
---------------- --------------
Net cash (used in) provided by operating activities............................... (7,625) 5,515
Cash flows from investing activities:
Acquisitions, net of cash acquired.............................................. (1,261) -
Gross proceeds from sale of fixed assets........................................ - 41
Additions to property and equipment............................................. (3,130) (3,154)
---------------- --------------
Net cash used in investing activities............................................. (4,391) (3,113)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated Notes due 2006........................ - (20,734)
Redemption of 13.0% Senior Discount Notes due 2006.............................. - (22,962)
Other debt borrowings.......................................................... 8 134
Other collateralized borrowings ............................................... 8,000 -
Issuance of 9.75% Senior Notes due 2011........................................ - 220,000
Redemption of 10.875% Senior Notes due 2006.................................... - (111,170)
Net decrease in revolving credit facilities.................................... (17,973) (61,699)
Payment of debt issuance costs................................................. (688) (9,776)
---------------- --------------
Net cash used in financing activities............................................. (10,653) (6,207)
Effect of exchange rate changes on cash and cash equivalents...................... (337) 2,851
---------------- --------------
Net decrease in cash and cash equivalents......................................... (23,006) (954)
Cash and cash equivalents at beginning of period.................................. 86,637 71,809
---------------- --------------
Cash and cash equivalents at end of period........................................ $ 63,631 $ 70,855
================ ==============
Non-cash transactions: On November 13, 2003, DFG Holdings, Inc. exchanged $49.4
million, or 50% of the accreted value of its 13% Senior Discount Notes for 16.0%
Senior Notes due 2012 and $49.4 million, or 50% of the accreted value of its 13%
Senior Discount Notes for 13.95% Senior Notes due 2012.
See notes to interim unaudited consolidated financial statements.
5
DFG HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements are of DFG
Holdings, Inc. (the "Company") and its wholly owned subsidiaries. The Company is
the parent company of Dollar Financial Group, Inc. ("OPCO") and its wholly owned
subsidiaries. The activities of the Company consist primarily of its investment
in OPCO. The Company's unaudited interim consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information, the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements and should be read in
conjunction with the Company's audited consolidated financial statements
included in the amended Registration Statement on Form S-4 (File No.
333-111473-02) filed with the Securities and Exchange Commission on January 14,
2004. In the opinion of management, all adjustments, (consisting of normal
recurring adjustments), considered necessary for a fair presentation have been
included. Operating results of interim periods are not necessarily indicative of
the results that may be expected for a full fiscal year.
On November 13, 2003, OPCO issued $220.0 million principal amount of 9.75%
Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of
1933. OPCO's senior notes are guaranteed by the Company and every direct and
indirect wholly owned domestic subsidiary of OPCO. The proceeds from the
issuance of OPCO's senior notes were used, among other things, to redeem OPCO's
10.875% Senior Notes due 2006, which were not guaranteed by the Company. On
January 20, 2004, OPCO commenced an offer to exchange its senior notes for 9.75%
Senior Notes due 2011 registered under the Securities Act of 1933. On January
20, 2004, the Registration Statement on Form S-4 (File No. 333-111473-02) with
respect to OPCO's registered senior notes and the Company's guarantee of such
notes became effective. Prior to the effective date, the Company did not file
periodic reports under the Securities Exchange Act of 1934. Subsequent to the
effective date, the Company will file such reports, including this quarterly
report on Form 10-Q. OPCO has also filed a quarterly report on Form 10-Q (File
No. 333-18221) for the period ended December 31, 2003.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Operations
The Company was organized in 1990 under the laws of the State of Delaware. The
activities of the Company consist primarily of its investment in OPCO. The
Company has no employees or operating activities as of December 31, 2003. OPCO,
through its subsidiaries, provides retail financial services to the general
public through a network of 1,100 locations (of which 628 are company-operated)
operating as Money Mart(R), The Money Shop, Loan Mart(R) and Insta-Cheques in
seventeen states, the District of Columbia, Canada and the United Kingdom. The
services provided at OPCO's retail locations include check cashing, short-term
consumer loans, sale of money orders, money transfer services and various other
related services. Also, OPCO's subsidiary, Money Mart Express(R) (formerly known
as moneymart.com(TM)), services and originates short-term consumer loans through
505 independent document transmitters in 16 states.
6
DFG HOLDINGS, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION
OPCO's payment obligations under its 9.75% Senior Notes due 2011are jointly and
severally guaranteed (such guarantees, the "Guarantees") on a full and
unconditional basis by the Company and by OPCO's existing and future domestic
subsidiaries (the "Guarantors"). Guarantees of the notes by Guarantors directly
owning, now or in the future, capital stock of foreign subsidiaries will be
secured by second priority liens on 65% of the capital stock of such foreign
subsidiaries. In the event OPCO directly owns a foreign subsidiary in the
future, the notes will be secured by a second priority lien on 65% of the
capital stock of any such foreign subsidiary (such capital stock of foreign
subsidiaries referenced in this paragraph collectively, the "Collateral").
The Guarantees of the notes:
o rank equal in right of payment with all existing and future unsubordinated
indebtedness of the Guarantors;
o rank senior in right of payment to all existing and future subordinated
indebtedness of the Guarantors; and
o are effectively junior to any indebtedness of OPCO, including indebtedness
under OPCO's senior secured reducing revolving credit facility, that is either
(1) secured by a lien on the Collateral that is senior or prior to the second
priority liens securing the Guarantees of the notes or (2) secured by assets
that are not part of the Collateral to the extent of the value of the assets
securing such indebtedness.
Separate financial statements of each Guarantor that is a subsidiary of OPCO
have not been presented because management has determined that they would not be
material to investors. The accompanying tables set forth the condensed
consolidating balance sheet at December 31, 2003, and the condensed
consolidating statements of operations and cash flows for the six month period
ended December 31, 2003 of the Company, OPCO, the combined Guarantor
subsidiaries, the combined non-Guarantor subsidiaries and the consolidated
Company.
7
CONSOLIDATING BALANCE SHEETS
December 31, 2003
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
DFG and Subsidiary Non-
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------
Assets
Cash and cash equivalents........................... $ 4 $ 36,176 $ 34,675 $ - $ 70,855
Loans and other consumer lending receivables, net... - 8,156 8,792 - 16,948
Loans receivable pledged............................ - - 8,000 - 8,000
Other receivables................................... 1,302 3,560 3,729 (539) 8,052
Income taxes receivable............................. - 27,861 - (25,305) 2,556
Prepaid expenses.................................... - 2,259 5,045 - 7,304
Deferred income taxes............................... 1,679 1,064 - (2,743) -
Notes receivable--officers.......................... - 2,756 - - 2,756
Due from affiliates................................. - 92,969 - (92,969) -
Due from parent..................................... - 8,361 - (8,361) -
Property and equipment, net......................... - 12,505 15,922 - 28,427
Goodwill and other intangibles, net................. - 56,522 92,541 - 149,063
Debt issuance costs, net............................ 190 10,383 227 - 10,800
Investment in subsidiaries.......................... 55,357 239,593 6,705 (301,655) -
Other assets........................................ - 690 1,327 - 2,017
-------------------------------------------------------------------------------
$ 58,532 $ 502,855 $ 176,963 $ (431,572) $ 306,778
===============================================================================
Liabilities and shareholders' equity
Accounts payable.................................... $ - $ 7,607 $ 4,985 $ - $ 12,592
Income taxes payable................................ 789 22,870 1,646 (25,305) -
Accrued expenses.................................... 81 6,003 7,479 - 13,563
Accrued interest payable............................ 1,936 2,950 706 (539) 5,053
Deferred tax liability.............................. - 2,743 - (2,743) -
Due to affiliates................................... 8,361 32,460 60,509 (101,330) -
Other collateralized borrowings..................... - - 8,000 - 8,000
9.75% Senior Notes due 2011......................... - 220,000 - - 220,000
16.0% Senior Notes due 2012......................... 47,871 - - - 47,871
13.95% Senior Subordinated Notes due 2012......... 47,871 - - - 47,871
Subordinated notes payable and other................ - 146 59 - 205
Senior Discount Notes............................... - - - - -
-------------------------------------------------------------------------------
106,909 294,779 83,384 (129,917) 355,155
Shareholders' equity:
Common stock..................................... - - - - -
Additional paid-in capital....................... 50,384 136,481 27,304 (152,688) 61,481
(Accumulated deficit) retained earnings.......... (109,366) 86,847 55,153 (153,097) (120,463)
Dividend paid to parent.......................... - (20,000) - 20,000 -
Accumulated other comprehensive income........... 15,870 4,748 11,122 (15,870) 15,870
Treasury stock................................... (956) - - - (956)
Management equity loan........................... (4,309) - - - (4,309)
-------------------------------------------------------------------------------
Total shareholders' (deficit) equity................ (48,377) 208,076 93,579 (301,655) (48,377)
-------------------------------------------------------------------------------
$ 58,532 $ 502,855 $ 176,963 $ (431,572) $ 306,778
===============================================================================
8
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2003
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
DFG and Subsidiary Non-
Holdings, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------------------
Revenues $ - $ 52,761 $ 64,991 $ - $ 117,752
Store and regional expenses:
Salaries and benefits...................... - 20,821 16,663 - 37,484
Occupancy.................................. - 5,560 4,189 - 9,749
Depreciation............................... - 1,589 1,349 - 2,938
Other...................................... - 14,511 13,122 - 27,633
------------------------------------------------------------------------------------
Total store and regional expenses............. - 42,481 35,323 - 77,804
Corporate expenses............................ - 7,231 7,136 - 14,367
Management fee................................ 537 (1,135) 1,135 - 537
Loss on store closings and sales.............. - 120 1 - 121
Other depreciation and amortization........... - 1,112 760 - 1,872
Interest expense, net......................... 7,760 8,535 3,139 - 19,434
Loss on extinguishment of debt................ 1,646 7,209 - - 8,855
Equity in subsidiary.......................... 503 - - (503) -
------------------------------------------------------------------------------------
(Loss) income before income taxes ............ (10,446) (12,792) 17,497 503 (5,238)
Income tax provision (benefit) ............... 17,128 (2,656) 7,864 - 22,336
------------------------------------------------------------------------------------
Net (loss) income ...........................$ (27,574) $ (10,136) $ 9,633 $ 503 $ (27,574)
====================================================================================
9
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2003
(In thousands)
Dollar Financial
Group, Inc. Subsidiary
DFG and Subsidiary Non-
Holdings,Inc. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------
Cash flows from operating activities:
Net (loss) income......................................... $ (27,574) $ (10,136) $ 9,633 $ 503 $ (27,574)
Adjustments to reconcile net (loss) income to net cash
(used
in) provided by operating activities:
Undistributed income of subsidiaries................. 503 - - (503) -
Accretion of interest expense from 13.0% Senior
Discount Notes..................................... 5,827 - - - 5,827
Depreciation and amortization........................ 125 3,498 2,109 - 5,732
Loss on extinguishment of debt....................... 1,646 7,209 - - 8,855
Loss on store closings and sales..................... - 120 1 - 121
Foreign currency (gain) loss......................... - - (648) - (648)
Deferred tax provision............................. 14,769 841 - - 15,610
Changes in assets and liabilities:
(Increase) decrease in loans and other receivables (128) 242 (1,458) 215 (1,129)
Increase in income taxes receivable.............. 1,570 (8,444) - 4,956 (1,918)
Increase in prepaid expenses and other........... - (378) (332) - (710)
Increase (decrease) in accounts payable, income..
taxes payable, accrued expenses and accrued
interest payable .............................. 2,629 5,919 (2,028) (5,171) 1,349
------------------------------------------------------------------------
Net cash (used in) provided by operating activities....... (633) (1,129) 7,277 - 5,515
activities.............................................
Cash flows from investing activities:
Gross proceeds from sale of fixed assets.................. - - 41 - 41
Additions to property and equipment....................... - (976) (2,178) - (3,154)
Net increase in due from affiliates....................... - (5,998) - 5,998 -
------------------------------------------------------------------------
Net cash used in investing activities..................... - (6,974) (2,137) 5,998 (3,113)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated Notes due 2006.. - (20,734) - - (20,734)
Redemption of Senior Discount Notes due 2006.............. (22,962) - - - (22,962)
Other debt borrowings (payments).......................... - 146 (12) - 134
Issuance of 9.75% Senior Notes due 2011................... - 220,000 - - 220,000
Redemption of 10.875% Senior Notes due 2006............... - (111,170) - - (111,170)
Net decrease in revolving credit facilities............... - (60,764) (935) - (61,699)
Payment of debt issuance costs............................ (193) (9,583) - - (9,776)
Net increase (decrease) in due to affiliates and due
from parent............................................ 3,788 12,190 (9,980) (5,998) -
Dividend paid to parent................................... 20,000 (20,000) - - -
------------------------------------------------------------------------
Net cash provided by (used in) financing activities....... 633 10,085 (10,927) (5,998) (6,207)
Effect of exchange rate changes on cash and cash
equivalents............................................... - - 2,851 - 2,851
------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents...... - 1,982 (2,936) - (954)
Cash and cash equivalents at beginning of period.......... 4 34,194 37,611 - 71,809
------------------------------------------------------------------------
Cash and cash equivalents at end of period................ $ 4 $ 36,176 $ 34,675 $ - $ 70,855
========================================================================
10
3. GOODWILL AND OTHER INTANGIBLES
In accordance with the adoption provisions of SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis. The
Company performs its annual impairment test as of June 30. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings. The Company has covenants not to compete, which are deemed to have a
definite life and will continue to be amortized. Amortization for these
intangibles for the six months ended December 31, 2003 was $86,000. The
estimated aggregate amortization expense for each of the five succeeding fiscal
years ending June 30, is:
Year Amount
----------------------------------
2004 $ 95,000
2005 20,000
2006 -
2007 -
2008 -
The following table reflects the components of intangible assets (in thousands):
June 30, 2003 December 31, 2003
----------------------------------------- ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
----------------------------------------- ----------------------------------------
Non-amortized intangible assets:
Cost in excess of net assets acquired $ 162,987 $ 18,977 $ 169,146 $ 20,110
Amortized intangible assets:
Covenants not to compete 2,446 2,331 2,475 2,448
4. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income is the change in equity from transactions and other
events and circumstances from non-owner sources, which includes foreign currency
translation. The following shows the comprehensive (loss) income for the periods
stated:
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
2002 2003 2002 2003
-------------- ---------------- ------------- -------------
Net loss $ (6,271) $ (24,973) $ (9,473) $ (27,574)
Foreign currency translation adjustment 2,054 7,725 658 8,173
-------------- ---------------- ------------- -------------
Total comprehensive loss $ (4,217) $ (17,248) $ (8,815) $ (19,401)
============== ================ ============= =============
11
5. Loss on Store Closings and Sales and Other Restructuring
During the fiscal year ended June 30, 2003, OPCO closed 27 stores and
consolidated and relocated certain non-operating functions to reduce costs and
increase efficiencies. Costs incurred with that restructuring were comprised of
severance and other retention benefits to employees who were involuntarily
terminated and closure costs related to the locations OPCO will no longer
utilize. The restructuring was completed by June 30, 2003. All of the locations
that were closed and for which the workforce was reduced are included in the
United States geographic segment. The Company, as required, adopted Financial
Accounting Standards Board Statement No. 146, Accounting for Costs Associated
with Disposal or Exit Activities, on January 1, 2003. During the first quarter
of fiscal 2004, charges previously accrued for severance and other retention
benefits were reclassed to store closure costs.
Following is a reconciliation of the beginning and ending balances of the
restructuring liability (in millions):
Severance and
Other Store Closure
Retention Benefits Costs Total
Balance at June 30, 2003 $ 1.2 $ 0.2 $ 1.4
Charge recorded in earnings - - -
Reclassification (0.7) 0.7 -
Amounts paid (0.5) (0.4) (0.9)
Non-cash charges - - -
----------- --------- ----------
Balance at December 31, 2003 $ - $ 0.5 $ 0.5
=========== ========= ==========
OPCO also expenses costs related to the closure of stores in the normal course
of its business. Costs directly expensed for the three months ended December 31,
2003 and 2002 were $61,000 and $127,000, respectively and for the six months
ended December 31, 2003 and 2002 were $121,000 and $615,000, respectively.
6. LOSS ON EXTINGUISHMENT OF DEBT
On November 13, 2003, OPCO issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of
OPCO's outstanding senior notes and OPCO's outstanding senior subordinated
notes, to refinance OPCO's credit facility, to distribute a portion of the
proceeds to the Company to redeem an equal amount of the Company's senior
discount notes and to pay fees and expenses with respect to these transactions
and a related note exchange transaction involving the Company's senior discount
notes.
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Call Premium:
OPCO 10.875% Senior notes $ 1.98
OPCO 10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
deferred issuance costs, net 6.14
-----------
Loss on extinguishment of debt $ 8.85
===========
12
7. GEOGRAPHIC SEGMENT INFORMATION
All operations for which geographic data is presented below are in one principal
industry (check cashing and ancillary services) (in thousands):
As of and for the three months United
ended December 31, 2002 United States Canada Kingdom Total
----------------- ------------- -------------- ---------------
Identifiable assets $ 149,132 $ 69,688 $ 69,033 $ 287,853
Goodwill and other intangibles, net 56,457 32,865 45,019 134,341
Sales to unaffiliated customers 26,694 16,085 10,511 53,290
(Loss) income before income taxes (11,303) 5,156 2,109 (4,038)
Income tax (benefit) provision 1,286 308 639 2,233
Net (loss) income (12,589) 4,848 1,470 (6,271)
For the six months
ended December 31, 2002
Sales to unaffiliated customers $ 52,774 $ 32,459 $ 20,710 $ 105,943
(Loss) income before income taxes (23,823) 14,977 3,840 (5,006)
Income tax (benefit) provision (884) 4,190 1,161 4,467
Net (loss) income (22,939) 10,787 2,679 (9,473)
As of and for the three months
ended December 31, 2003
Identifiable assets $ 136,520 $ 85,112 $ 85,146 $ 306,778
Goodwill and other intangibles, net 56,522 40,268 52,273 149,063
Sales to unaffiliated customers 26,670 21,215 12,877 60,762
(Loss) income before income taxes (16,150) 6,146 3,523 (6,481)
Income tax provision 14,592 2,585 1,315 18,492
Net (loss) income (30,742) 3,561 2,208 (24,973)
For the six months
ended December 31, 2003
Sales to unaffiliated customers $ 52,761 $ 40,555 $ 24,436 $ 117,752
(Loss) income before income taxes (22,735) 11,875 5,622 (5,238)
Income tax provision 14,472 5,412 2,452 22,336
Net (loss) income (37,207) 6,463 3,170 (27,574)
8. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Operations in the United Kingdom and Canada have exposed the Company to shifts
in currency valuations. From time to time, the Company may elect to purchase put
options in order to protect earnings in the United Kingdom and Canada against
foreign currency fluctuations. Out of the money put options may be purchased
because they cost less than completely averting risk, and the maximum downside
is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At December 31, 2003, the
Company held put options with an aggregate notional value of $(CAN) 24.0 million
and (pound)(GBP) 6.0 million to protect the currency exposure throughout the
remainder of the fiscal year in Canada and the United Kingdom, respectively. All
put options for the three and six months ended December 31, 2003 expired out of
the money at a cost of $100,000 and $122,000, respectively, which is included in
corporate expenses in the consolidated statement of earnings. There was no such
hedging activity for the same period in fiscal 2003.
Although OPCO's revolving credit facility and overdraft credit facilities carry
variable rates of interest, most of the Company's and OPCO's average outstanding
indebtedness carries a fixed rate of interest. A change in interest rates is not
expected to have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
13
9. CONTINGENT LIABILITIES
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 action is pending in the Court
of Queens Bench of Alberta and seeks an unspecified amount of damages and other
relief. Like the plaintiff in the MacKinnon action referred to below, Mortillaro
and Young have agreed to arbitrate all disputes with us. We believe that we have
meritorious procedural and substantive defenses to Mortillaro's and Young's
claims, and we intend to defend those claims vigorously.
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 its store managers using an impermissible profit-sharing
formula (Williams). In January 2003, without admitting liability, we sought to
settle the Woods case, which we believe to be the most significant of these
suits, by offering each individual putative class member an amount intended in
good faith to settle his or her claim. As of December 31, 2003, 92% of these
settlement offers had been accepted. Plaintiffs' counsel is presently disputing
through arbitration the validity of the settlements accepted by the individual
putative class members. We believe we have meritorious defenses to the challenge
and to the claims of the non-settling putative Woods class members and plan to
defend them vigorously. We believe we have adequately provided for the costs
associated with this matter. We are vigorously defending the Castillo, Chin and
Williams lawsuits and believe we have meritorious defenses to the claims
asserted in those matters. We believe the outcome of such litigation will not
significantly affect our financial results.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action
against our Canadian subsidiary and 26 other Canadian lenders on behalf of a
purported class of British Columbia residents who, plaintiff claims, were
overcharged in payday-loan transactions. The action, which is pending in the
Supreme Court of British Columbia, alleges violations of laws proscribing usury
and unconscionable trade practices and seeks restitution and damages, including
punitive damages, in an unknown amount. On March 25, 2003, we moved to stay the
action as against us and to compel arbitration of plaintiff's claims as required
by his agreement with us. We are presently awaiting a decision on that motion.
We believe we have meritorious defenses to the action and intend to defend it
vigorously. We believe the outcome of such litigation will not significantly
affect its 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 the opinion of management, the outcome of such litigation and
proceedings will not significantly affect our financial results.
10. DEBT
On November 13, 2003, OPCO issued $220.0 million principal amount of 9.75%
Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of
1933 and entered into a new $55.0 million Senior Secured Reducing Revolving
Credit Facility ("New Credit Facility"). The proceeds from these transactions
were used to repay, in full, all borrowings outstanding under OPCO's existing
credit facility, redeem the entire $109.2 million principal amount of OPCO's
10.875% Senior Notes due 2006, redeem the entire $20.0 million principal amount
of OPCO's 10.875% Senior Subordinated Notes due 2006, distribute to the Company
$20.0 million to redeem an equal amount of the Company's 13.0% Senior Discount
Notes due 2006 ("Existing Notes"), and pay all related fees, expenses and
redemption premiums with respect to these transactions. In addition, $49.4
million, or 50% of the accreted value, of the Existing Notes were exchanged for
16% Senior Notes due 2012 ("Replacement Senior Notes") and $49.4 million, or 50%
of the accreted value, of the Existing Notes were exchanged for 13.95% Senior
Subordinated Notes due 2012 ("Replacement Senior Subordinated Notes").
14
The New Credit Facility consists of a $55.0 million senior secured reducing
revolving credit facility. The commitment under the New Credit Facility will be
reduced by $750,000 on January 2, 2004 and on the first business day of each
calendar quarter thereafter, and is subject to additional reductions based on
excess cash flow up to a maximum reduction, including quarterly reductions, of
$15.0 million. The commitment may be subject to further reductions in the event
we engage in certain issuances of securities or asset disposals. Under the New
Credit Facility, up to $20.0 million may be used in connection with letters of
credit. Amounts outstanding under the New Credit Facility bear interest at
either (i) the higher of (a) the federal funds rate plus 0.50% per annum or (b)
the rate publicly announced by Wells Fargo, San Francisco, as its "prime rate,"
plus 3.25% at December 31, 2003, (ii) the LIBOR Rate (as defined therein) plus
4.50% at December 31, 2003, or (iii) the one day Eurodollar Rate (as defined
therein) plus 4.50% at December 31, 2003, determined at the Company's option.
Interest on the Replacement Senior Notes and Replacement Senior Subordinated
Notes will be payable semi-annually in arrears. On any semi-annual interest
payment date on or prior to November 15, 2008, the Company has the option to pay
all or any portion of the interest payable on the relevant interest payment date
by increasing the principal amount of the Replacement Senior Notes or
Replacement Senior Subordinated Notes, as applicable, in a principal amount
equal to the interest that the Company chooses not to pay in cash. On any
semi-annual payment date on or after May 15, 2009, all interest due on the
Replacement Senior Notes and the Replacement Senior Subordinated Notes is
payable in cash semi-annually, in arrears.
The Replacement Senior Notes and the Replacement Senior Subordinated Notes are
redeemable, in whole or in part, at the Company's option, at any time.
The Replacement Senior Notes will be redeemable at the following redemption
prices if redeemed during the indicated calendar year (or on any earlier date,
in the case of 2004), expressed as percentages of the principal amount, plus
accrued interest, if any, to the date of redemption:
Year Percentage
---- ----------
2004 or prior..................... 112.5%
2005.............................. 110.0%
2006.............................. 107.5%
2007.............................. 105.0%
2008.............................. 102.5%
2009 and thereafter............... 100.0%
The Replacement Senior Subordinated Notes will be redeemable at the following
redemption prices if redeemed during the indicated calendar year (or on any
earlier date, in the case of 2005), expressed as percentages of the principal
amount, plus accrued interest, if any, to the date of redemption:
Year Percentage
---- ----------
2005 or prior..................... 100.0%
2006.............................. 112.5%
2007.............................. 110.0%
2008.............................. 107.5%
2009.............................. 105.0%
2010.............................. 102.5%
2011 and thereafter............... 100.0%
15
SUPPLEMENTAL STATISTICAL DATA
December 31,
Company Operating Data: 2002 2003
------------- -------------
Stores in operation:
Company-Owned................................. 619 628
Franchised Stores and Check Cashing Merchants. 464 472
----- -----
Total............................................ 1,083 1,100
===== =====
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
Operating Data: 2002 2003 2002 2003
------------ ----------- ----------- -------------
Face amount of checks cashed (in millions) $ 721 $ 821 $ 1,443 $ 1,561
Face amount of average check $ 324.79 $ 384.14 $ 325.39 $ 370.97
Face amount of average check (excluding Canada and the United
Kingdom) $ 343.67 $ 360.86 $ 346.06 $ 359.35
Average fee per check $ 11.94 $ 13.77 $ 11.95 $ 13.68
Number of checks cashed (in thousands) 2,220 2,136 4,434 4,207
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
Collections Data: 2002 2003 2002 2003
------------ ----------- ----------- -------------
Face amount of returned checks (in thousands) $ 6,408 $ 7,316 $ 13,277 $ 14,951
Collections (in thousands) 4,871 5,325 9,814 10,821
------------ ----------- ----------- -------------
Net write-offs (in thousands) $ 1,537 $ 1,991 $ 3,463 $ 4,130
============ =========== =========== =============
Collections as a percentage of
returned checks 76.0% 72.8% 73.9% 72.4%
Net write-offs as a percentage of
check cashing revenues 5.8% 6.8% 6.5% 7.2%
Net write-offs as a percentage of the
face amount of checks cashed 0.21% 0.24% 0.24% 0.26%
16
The following chart presents a summary of our consumer lending originations,
which includes loan extensions and revenues for the following periods (in
thousands):
Three Months Ended Six Months Ended
December 31, December 31,
--------------------------------- -------------------------------
2002 2003 2002 2003
--------------------------------- -------------------------------
U.S. company funded originations.................... $ 27,349 $ 15,928 $ 53,337 $ 30,195
Canadian company funded originations................ 59,635 80,364 117,466 155,938
U.K. company funded originations.................... 24,087 26,041 47,845 52,549
--------------------------------- -------------------------------
Total company funded originations................ $ 111,071 $ 122,333 $ 218,648 $ 238,682
================================= ===============================
Servicing revenues, net............................. $ 9,935 $ 11,907 $ 20,512 $ 23,319
Company funded domestic loan revenues............... 4,613 2,316 9,268 4,471
Company funded foreign loan revenues................ 8,584 11,767 17,033 22,262
Net write-offs on company funded loans.............. (3,221) (2,509) (7,967) (5,174)
--------------------------------- -------------------------------
Total consumer lending revenues, net............. $ 19,911 $ 23,481 $ 38,846 $ 44,878
================================= ===============================
Net write-offs as a percentage of total company
funded originations (2.9%) (2.1%) (3.6%) (2.2%)
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of the financial condition and
results of operations for DFG Holdings, Inc. for the three month and six month
periods ended December 31, 2002 and 2003. References in this section to "we,"
"our," "ours," or "us" are to DFG Holdings, Inc. and its wholly owned
subsidiaries, except as the context otherwise requires. References to "OPCO" are
to our wholly owned operating subsidiary, Dollar Financial Group, Inc. For a
separate discussion and analysis of the financial condition and results of
operations of OPCO, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations included in OPCO's quarterly report on Form
10-Q (File No. 333-18221) for the period ended December 31, 2003.
General
DFG Holdings, Inc. is the parent company of Dollar Financial Group, Inc. and its
wholly owned subsidiaries. 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 1,100 stores, including 628
company-operated stores, in 17 states, the District of Columbia, Canada and the
United Kingdom. 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 provide a diverse range of consumer financial
products and services primarily consisting of check cashing, short-term consumer
loans, money orders and money transfers. For the three-months ended December 31,
2003, we generated revenue of $60.8 million, an increase of 14.0% over the same
period in the prior year. For the six-months ended December 31, 2003, we
generated revenue of $117.8 million, an increase of 11.2% over the same period
in the prior year.
In our opinion, we have included all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of our financial position
at December 31, 2003 and the results of operations for the three and six months
ended December 31, 2003 and 2002. The results for the three and six months ended
December 31, 2003 are not necessarily indicative of the results for the full
fiscal year and should be read in conjunction with the unaudited financial
statements included in this filing and our audited consolidated financial
statements included in the amended Registration Statement on Form S-4 (File No.
333-111473-02) filed with the Securities and Exchange Commission on January 14,
2004 and declared effective January 20, 2004.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our financial statements in conformity with
accounting principles generally accepted in the United States. We evaluate these
estimates on an ongoing basis, including those related to revenue recognition,
loss reserves and intangible assets. We base these estimates on the information
currently available to us and on various other assumptions that we believe are
reasonable under the circumstances. Actual results could vary from these
estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our financial
statements:
Revenue Recognition
Generally, we recognize revenue when services for the customer have been
provided which, in the case of check cashing and other retail products, is at
the time of sale. For our unsecured short-term loan service, all revenues are
recognized ratably over the life of the loan, offset by net write-offs.
Consumer Loan Loss Reserves and Check Cashing Returned Item Policy
We maintain a loan loss reserve for anticipated losses for loans we make
directly as well as for fee adjustments for losses on loans we originate and
service for others. To estimate the appropriate level of loan loss reserves, we
consider the amount of outstanding loans owed to us, as well as loans owed to
banks and serviced by us, historical loans charged off, current collection
patterns and current economic trends. As these conditions change, we may need to
make additional allowances in future periods.
A loss on consumer loans is charged against revenues during the period in which
the loss occurred. A recovery is credited to revenues during the period in which
the recovery is made. These net losses and changes in the loan loss reserve are
charged to revenues in the consolidated statements of operations.
18
We charge operating expense for losses on returned checks during the period in
which such checks are returned. Recoveries on returned checks are credited to
operating expense in the period during which recovery occurs. These net losses
are charged to other store and regional expenses in the consolidated statements
of operations.
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill for
impairment under established accounting guidelines also requires significant use
of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance.
Results of Operations
Revenue Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
-------------------------- ----------------- --------------------------- ------------------
2002 2003 2002 2003 2002 2003 2002 2003
----------- ----------- ------ ------ ----------- ------------ ------ -------
Check cashing................ $ 26,520 $ 29,418 49.8% 48.4% $ 52,974 $ 57,541 50.0% 48.9%
Consumer lending revenues,
net........................ 19,911 23,481 37.4 38.6 38,846 44,878 36.7 38.1
Money transfer fees.......... 2,676 3,252 5.0 5.4 5,464 6,334 5.1 5.4
Other revenue................ 4,183 4,611 7.8 7.6 8,659 8,999 8.2 7.6
----------- ----------- ------ ------ ----------- ------------ ------ -------
Total revenue................ $ 53,290 $ 60,762 100.0% 100.0% $ 105,943 $ 117,752 100.0% 100.0%
=========== =========== ====== ====== =========== ============ ====== =======
THREE MONTH COMPARISON
Total revenues were $60.8 million for the three months ended December 31, 2003
compared to $53.3 million for the three months ended December 31, 2002, an
increase of $7.5 million or 14.1%. Comparable retail store, franchised store and
document transmitter sales for the entire period increased $7.0 million or
13.2%. New store openings accounted for an increase of $717,000, which was
partially offset by a decrease of $321,000 in revenues from closed stores.
A stronger British pound and Canadian dollar positively impacted revenue by $4.0
million for the quarter. In addition to the currency benefit, revenues in our
foreign operations, primarily check cashing fees and short term consumer loans,
increased by $3.5 million while the US revenues remained relatively flat.
SIX MONTH COMPARISON
Total revenues were $117.8 million for the six months ended December 31, 2003
compared to $105.9 million for the six months ended December 31, 2002, an
increase of $11.9 million or 11.2%. Comparable store, franchised store and
document transmitter sales for the entire period increased $11.4 million or
10.9%. New store openings accounted for an increase of $1.5 million while closed
stores accounted for a decrease of $1.2 million.
19
Favorable foreign currency rates attributed to $6.6 million of the increase for
the six months. In addition, revenues in our foreign operations, primarily check
cashing fees and short term consumer loans, increased by $5.3 million while the
US revenues remained relatively flat.
Store and Regional Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
--------------------------- ------------------ -------------------------- ----------------
2002 2003 2002 2003 2002 2003 2002 2003
----------- ------------ ------- ------- ----------- ----------- ------ ------
Salaries and benefits....... $ 17,281 $ 18,707 32.4% 30.8% $ 34,428 $ 37,484 32.5% 31.8%
Occupancy................... 4,673 4,885 8.8 8.0 9,472 9,749 8.9 8.3
Depreciation................ 1,624 1,490 3.0 2.5 3,243 2,938 3.1 2.5
Other....................... 12,161 14,668 22.8 24.1 25,018 27,633 23.6 23.5
----------- ------------ ------- ------- ----------- ----------- ------ ------
Total store and regional
expenses ................... $ 35,739 $ 39,750 67.0% 65.4% $ 72,161 $ 77,804 68.1% 66.1%
=========== ============ ======= ======= =========== =========== ====== ======
THREE MONTH COMPARISON
Store and regional expenses were $39.8 million for the three months ended
December 31, 2003 compared to $35.8 million for the three months ended December
31, 2002, an increase of $4.0 million or 11.2%. The impact of foreign currencies
accounted for $2.1 million of the increase. New store openings accounted for an
increase of $432,000 while closed stores accounted for a decrease of $536,000.
Comparable retail store and franchised store expenses for the entire period
increased $2.9 million. For the three months ended December 31, 2003 total store
and regional expenses decreased to 65.4% of total revenue compared to 67.0% of
total revenue for the three months ended December 31, 2002. The percentage
decline is due to lower salaries and occupancy costs relative to revenue as a
result of improved operating efficiencies and the impact of stores closed in
fiscal 2003.
SIX MONTH COMPARISON
Store and regional expenses were $77.8 million for the six months ended December
31, 2003 compared to $72.2 million for the six months ended December 31, 2002,
an increase of $5.6 million or 7.8%. The impact of foreign currencies accounted
for $3.4 million of the increase. New store openings accounted for an increase
of $881,000 while closed stores accounted for a decrease of $1.2 million.
Comparable retail store and franchised store expenses for the entire period
increased $4.9 million primarily related to foreign operations commensurate with
the increase in foreign revenues and the effect of currency rates. For the six
months ended December 31, 2003 total store and regional expenses decreased to
66.1% of total revenue compared to 68.1% of total revenue for the six months
ended December 31, 2002. The percentage decline is due to lower salaries and
occupancy costs relative to revenue as a result of improved operating
efficiencies and the impact of stores closed in fiscal 2003.
Other Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
---------------------- ------------------- ----------------------- ------------------
2002 2003 2002 2003 2002 2003 2002 2003
-------- --------- ------- -------- --------- ---------- ------- -------
Corporate expenses.................. $ 7,738 $ 7,126 14.5% 11.7% $ 14,986 $ 14,367 14.1% 12.2%
Management fee...................... 263 287 0.5 0.5 524 537 0.5 0.5
Loss on store closings and sales.... 1,802 61 3.4 0.1 2,290 121 2.2 0.1
Other depreciation and amortization. 845 914 1.6 1.5 1,688 1,872 1.6 1.6
Interest expense.................... 8,441 10,250 15.8 16.9 16,800 19,434 15.9 16.5
Loss on extinguishment of debt...... - 8,855 - 14.6 - 8,855 - 7.5
Establishment of reserve for
legal matter..................... 2,500 - 4.7 - 2,500 - 2.4 -
Income tax provision................ 2,233 18,492 4.2 30.4 4,467 22,336 4.2 19.0
20
THREE MONTH COMPARISON
Corporate Expenses
Corporate expenses were $7.1 million for the three months ended December 31,
2003 compared to $7.7 million for the three months ended December 31, 2002. For
the three months ended December 31, 2003, corporate expenses decreased to 11.7%
of total revenue compared to 14.5% of total revenue for the three months ended
December 31, 2002. The decline reflects the cost reductions related to the
recent rationalization of our store support functions for our North American
operations offset somewhat by increased accrued expenses for incentive
compensation and legal and professional fees.
Management Fees
Management fees were $287,000 for the three months ended December 31, 2003,
compared to $263,000 for the three months ended December 31, 2002. Under an
amended and restated management services agreement among Leonard Green &
Partners, L.P., OPCO and us, we have agreed to pay Leonard Green & Partners,
L.P., our largest shareholder, an annual management fee equal to $1.0 million,
reasonable and customary fees for financial advisory and investment banking
services in connection with major financial transactions that we may undertake
in the future and reimbursement of any out-of-pocket expenses incurred. Under
our new Senior Notes due 2012 and our new Senior Subordinated Notes due 2012,
management fees may not be paid to Leonard Green & Partners, L.P. until the
first cash interest payments are made on our new notes. During this period, no
interest will accrue on the unpaid management fees. In addition, OPCO's
replacement credit facility and OPCO's new Senior Notes due 2011 will restrict
OPCO from making distributions to us to allow us to pay interest on our new
notes on or prior to the fifth anniversary of their issuance. As a result of
these restrictions, we will likely exercise our option under our new notes to
capitalize interest due on or prior to the fifth anniversary of their issuance.
Consequently, management fees payable to Leonard Green & Partners, L.P. will
likely be accrued, without interest, and not paid until after the fifth
anniversary of the issuance of our notes.
Loss on Store Closings and Sales
Loss on store closings and sales was $61,000 for the three months ended December
31, 2003 compared to $1.8 million for the three months ended December 31, 2002.
For the three months ended December 31, 2002, we provided $1.3 million for the
closure costs associated with the shutdown of 27 underperforming stores. In
addition, we provided $400,000, consisting primarily of severance and retention
bonus costs, for the consolidation and relocation of certain non-operating
functions.
Interest Expense
Interest expense was $10.3 million for the three months ended December 31, 2003
compared to $8.4 million for the three months ended December 31, 2002, an
increase of $1.9 million or 22.6%. A portion of the increase is attributable to
$990,000 of interest paid on OPCO's old 10.875% senior notes for the 30-day
period subsequent to OPCO's issuance on November 13, 2003 of $220 million
principal amount of new 9.75% senior notes due 2011. OPCO elected to effect
covenant defeasance on the old senior notes by depositing with the trustee funds
sufficient to satisfy the old notes together with the call premium and accrued
interest to the December 13, 2003 redemption date. Additionally, the increased
interest on the incremental long-term debt outstanding after the refinancing
accounted for $1.3 million of the increase in total interest expense. Offsetting
these increases was a decline of $400,000 in interest on OPCO's revolving credit
facility. This decline is a result of OPCO using a portion of the proceeds from
the issuance of the new notes to repay the entire outstanding revolving credit
balance on November 13, 2003. As a result of the refinancing, our effective
annual interest rate has declined.
Loss on Extinguishment of Debt
On November 13, 2003, OPCO issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of
OPCO's outstanding 10.875% senior notes and OPCO's outstanding 10.875% senior
subordinated notes, to refinance OPCO's credit facility, to distribute a portion
of the proceeds to us to redeem an equal amount of our senior discount notes and
to pay fees and expenses with respect to these transactions and a related note
exchange transaction involving our senior discount notes.
21
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Call Premium:
OPCO 10.875% Senior notes $ 1.98
OPCO 10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
Deferred issuance costs, net 6.14
----------
Loss on extinguishment of debt $ 8.85
==========
Income Tax Provision
The provision for income taxes was $18.5 million for the three months ended
December 31, 2003 compared to a provision of $2.2 million for the three months
ended December 31, 2002, an increase of $16.3 million. We recorded a valuation
allowance against deferred taxes of $19.7 million at December 31, 2003. Due to
the restructuring of our debt, significant deferred tax assets have been
generated. Because realization is not assured, we have not recorded the benefit
of the deferred tax assets.
SIX MONTH COMPARISON
Corporate Expenses
Corporate expenses were $14.4 million for the six months ended December 31, 2003
compared to $15.0 million for the six months ended December 31, 2002, a decrease
of $600,000 or 4.0%. The decline reflects the cost reductions related to the
recent rationalization of our store support functions for our North American
operations offset somewhat by increased accrued expenses for incentive
compensation and legal and professional fees.
Management Fees
Management fees were $537,000 for the six months ended December 31, 2003,
compared to $524,000 for the six months ended December 31, 2002. Under an
amended and restated management services agreement among Leonard Green &
Partners, L.P., Dollar Financial Group, Inc. and us, we have agreed to pay
Leonard Green & Partners, L.P., our largest shareholder, an annual management
fee equal to $1.0 million, reasonable and customary fees for financial advisory
and investment banking services in connection with major financial transactions
that we may undertake in the future and reimbursement of any out-of-pocket
expenses incurred. Under our new Senior Notes due 2012 and our new Senior
Subordinated Notes due 2012, management fees may not be paid to Leonard Green &
Partners, L.P. until the first cash interest payments are made on our new notes.
During this period, no interest will accrue on the unpaid management fees. In
addition, OPCO's replacement credit facility and OPCO's new Senior Notes due
2011 will restrict OPCO from making distributions to us to allow us to pay
interest on our new notes on or prior to the fifth anniversary of their
issuance. As a result of these restrictions, we will likely exercise our option
under our new notes to capitalize interest due on or prior to the fifth
anniversary of their issuance. Consequently, management fees payable to Leonard
Green & Partners, L.P. will likely be accrued, without interest, and not paid
until after the fifth anniversary of the issuance of our notes.
Loss on store closings and sales and other restructuring
Loss on store closings and sales and other restructuring was $121,000 for the
six months ended December 31, 2003 compared to $2.3 million for the six months
ended December 31, 2002, a decrease of $2.2 million. For the six months ended
December 31, 2002, we provided $1.3 million for the closure costs associated
with the shutdown of 27 underperforming stores. In addition, we provided
$400,000, consisting primarily of severance and retention bonus costs, for the
consolidation and relocation of certain non-operating functions.
Interest Expense
Interest expense was $19.4 million for the six months ended December 31, 2003
and was $16.8 million for the six months ended December 31, 2002, an increase of
$2.6 million or 15.5%. A portion of the increase is attributable to $990,000 of
interest paid on OPCO's old 10.875% senior notes for the 30 day period
subsequent to OPCO's issuance on November 13, 2003 of $220 million principal
amount of new 9.75% senior notes. OPCO elected to effect covenant defeasance on
old notes by depositing with the trustee funds sufficient to satisfy the old
notes together with the call premium and accrued interest to the December 13,
2003 redemption date. Additionally, the increased interest on the incremental
long-term debt outstanding after the refinancing accounted for $1.3 million of
the increase in total interest expense. Offsetting these increases was a decline
22
of $500,000 in interest on OPCO's revolving credit facility. This decline is a
result of OPCO using a portion of the proceeds from the issuance of the new
notes to repay the entire outstanding revolving credit balance on November 13,
2003. As a result of the refinancing, our effective annual interest rate has
declined.
Loss on Extinguishment of Debt
On November 13, 2003, OPCO issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of
OPCO's outstanding 10.875% senior notes and OPCO's outstanding 10.875% senior
subordinated notes, to refinance OPCO's credit facility, to distribute a portion
of the proceeds to us to redeem an equal amount of our senior discount notes and
to pay fees and expenses with respect to these transactions and a related note
exchange transaction involving our senior discount notes.
The loss incurred on the extinguishment of debt is as follows ($ in millions):
Call Premium:
OPCO 10.875% Senior notes $ 1.98
OPCO 10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
deferred issuance costs, net 6.14
-----------
Loss on extinguishment of debt $ 8.85
===========
Establishment of reserve for legal matter
In August 2000, a former employee instituted an action against us in the
Superior Court of California, purportedly on behalf of a class of current and
former salaried managers of our California stores. In January 2003, without
admitting liability, we sought to settle the case by offering each individual
putative class member an amount intended in good faith to settle his or her
claim. As of December 31, 2003, 92% of these settlement offers had been
accepted. We believe we have meritorious defenses to the unsettled claims and
plan to defend them vigorously. We accrued $2.5 million at December 31, 2002
related to this matter. This matter is described in more detail in Item 1 of
Part II of this filing, "Legal Proceedings".
Income Taxes
The provision for income taxes was $22.3 million for the six months ended
December 31, 2003 compared to a provision of $4.5 million for the six months
ended December 31, 2002, an increase of $17.8 million. We recorded a valuation
allowance against deferred taxes of $19.7 million at December 31, 2003. Due to
the restructuring of our debt, significant deferred tax assets have been
generated. Because realization is not assured, we have not recorded the benefit
of the deferred tax assets.
Changes in Financial Condition
Cash and cash equivalent balances and the revolving credit facilities balances
fluctuate significantly as a result of seasonal, monthly and day-to-day
requirements for funding check cashing and other operating activities. For the
six months ended December 31, 2003, cash and cash equivalents decreased
$954,000. Net cash provided by operations was $5.5 million. The increase in net
cash provided by operations was primarily the result of improved operating
results and a reduction in growth of company funded unsecured short-term loans.
Accrued interest increased due to the timing of the semi-annual interest
payments on OPCO's 9.75% Senior Notes due 2011 and our 16.0% Senior Notes due
2012 and 13.95% Senior Subordinated Notes due 2012.
Liquidity and Capital Resources
On November 13, 2003, OPCO issued $220.0 million principal amount of 9.75%
Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of
1933. The proceeds of this offering were used to redeem the entire $109.2
million principal amount of OPCO's 10.875% Senior Notes due 2006, the entire $20
million principal amount of OPCO's 10.875% Senior Subordinated Notes due 2006,
to repay in full $40.6 million outstanding under OPCO's revolving credit
facility, to redeem $20 million of our 13.0% Senior Discount Notes and to pay
all related fees, expenses, accrued interest and redemption premiums with
respect to these transactions and a related note exchange transaction involving
our senior discount notes. Simultaneously with the issuance of OPCO's new senior
23
notes, $49.4 million, or 50% of the accreted value, of our senior discount notes
were exchanged for 16.0% Senior Notes due 2012 and $49.4 million, or 50% of the
accreted value, of our senior discount notes were exchanged for 13.95% Senior
Subordinated notes due 2012. In addition, OPCO entered into a new $55.0 million
Senior Secured Reducing Revolving Credit Facility.
Our principal sources of cash are from operations and borrowings under our
credit facilities. We anticipate that our primary uses of cash will be to
provide working capital, finance capital expenditures, meet debt service
requirements, finance acquisitions, and finance store expansion.
Net cash provided by operating activities was $5.5 million for the six months
ended December 31, 2003 compared to a usage of $7.6 million for the six months
ended December 31, 2002. The increase in net cash provided by operations was
primarily the result of improved operating results and a reduction in growth of
company funded unsecured short-term loans.
Net cash used for investing activities for the six months ended December 31,
2003 was $3.1 million compared to a usage of $4.4 million for the six months
ended December 31, 2002. The increase of $1.3 million is attributable to an
earn-out payment made in the first half of fiscal 2003 on acquisitions completed
during a previous year. For the six months ended December 31, 2003 we made
capital expenditures of $3.2 million. The actual amount of capital expenditures
for the year will depend in part upon the number of new stores acquired or
opened and the number of stores remodeled. Our budgeted capital expenditures,
excluding acquisitions, are currently anticipated to aggregate approximately
$7.0 million during our fiscal year ending June 30, 2004, for remodeling and
relocation of certain existing stores and for opening new stores.
Net cash used for financing activities for the six months ended December 31,
2003 was $6.2 million compared to a usage of $10.7 million for the six months
ended December 31, 2002. The decline in the six months ended December 31, 2003
was a result of a decrease in the borrowings under our bank facilities offset
somewhat by net cash from the refinancing activities discussed above.
Revolving Credit Facilities. We have three revolving credit facilities: a
domestic revolving credit facility, a Canadian overdraft facility and a United
Kingdom overdraft facility.
Domestic Revolving Credit Facility. On November 13, 2003, OPCO repaid
in full all borrowings outstanding under its previously existing credit
facility using a portion of the proceeds from the issuance of $220.0
million principal amount of 9.75% Senior Notes due 2011 and
simultaneously entered into a new $55.0 million Senior Secured Reducing
Revolving Credit Facility. The commitment under the new facility will
be reduced by $750,000 on January 2, 2004 and on the first business day
of each calendar quarter thereafter, and is subject to additional
reductions based on excess cash flow up to a maximum reduction,
including quarterly reductions, of $15.0 million. The commitment may be
subject to further reductions in the event we engage in certain
issuances of securities or asset disposals. Under the new facility, up
to $20.0 million may be used in connection with letters of credit.
OPCO's borrowing capacity under the new facility is limited to the
total commitment of $55.0 million less letters of credit totaling $19.0
million issued by Wells Fargo Bank, which guarantee the performance of
certain of OPCO's contractual obligations. At December 31, 2003, OPCO's
borrowing capacity was $36.0 million and the amount outstanding was $0.
Consequently, we had $1.3 million cash in excess of our short-term
borrowing needs.
Canadian Overdraft Facility. Our Canadian operating subsidiary has a
Canadian overdraft facility to fund peak working capital needs for our
Canadian operations. The Canadian overdraft facility provides for a
commitment of up to approximately $5.4 million, of which there was no
outstanding balance on December 31, 2003. Amounts outstanding under the
Canadian overdraft facility bear interest at a rate of Canadian prime
plus 0.50% and is secured by a $10 million letter of credit issued by
Wells Fargo Bank under our domestic revolving credit facility.
United Kingdom Overdraft Facility. For our U.K. operations, our U.K.
operating subsidiary has a an overdraft facility which provides for a
commitment of up to approximately $6.2 million, of which there was no
outstanding balance on December 31, 2003. Amounts outstanding under the
United Kingdom overdraft facility bear interest of the bank base rate
plus 1.00%. The United Kingdom overdraft facility is secured by a $6.0
million letter of credit issued by Wells Fargo Bank under our domestic
revolving credit facility.
Long-Term Debt. As of December 31, 2003, long term debt consisted of $220
million principal amount of OPCO's 9.75% Senior Notes due November 15, 2011,
$49.4 million principal amount of our 16.0% Senior Notes due May 15, 2012 and
$49.4 million principal amount of our 13.95% Senior Subordinated Notes due May
15, 2012. Interest on Senior Notes and Senior Subordinated Notes will be payable
semi-annually in arrears. On any semi-annual interest payment date on or prior
to November 15, 2008, the Company has the option to pay all or any portion of
the interest payable on the relevant interest payment date by increasing the
principal amount of the Senior Notes or Senior Subordinated Notes, as
applicable, in a principal amount equal to the interest that the Company chooses
not to pay in cash. On any semi-annual payment date on or after May 15, 2009,
all interest due on the Senior Notes and the Senior Subordinated Notes is
payable in cash semi-annually, in arrears.
24
The Senior Notes and the Senior Subordinated Notes are redeemable, in whole or
in part, at the Company's option, at any time.
The Senior Notes will be redeemable at the following redemption prices if
redeemed during the indicated calendar year (or on any earlier date, in the case
of 2004), expressed as percentages of the principal amount, plus accrued
interest, if any, to the date of redemption:
Year Percentage
2004 or prior........ 112.5%
2005................. 110.0%
2006................. 107.5%
2007................. 105.0%
2008................. 102.5%
2009 and thereafter.. 100.0%
The Senior Subordinated Notes will be redeemable at the following redemption
prices if redeemed during the indicated calendar year (or on any earlier date,
in the case of 2005), expressed as percentages of the principal amount, plus
accrued interest, if any, to the date of redemption:
Year Percentage
2005 or prior........ 100.0%
2006................. 112.5%
2007................. 110.0%
2008................. 107.5%
2009................. 105.0%
2010................. 102.5%
2011 and thereafter.. 100.0%
Operating Leases. Operating leases are scheduled payments on existing store and
other administrative leases. These leases typically have initial terms of 5
years and may contain provisions for renewal options, additional rental charges
based on revenue and payment of real estate taxes and common area charges.
Other Collateralized Borrowings. On November 15, 2002, we entered into an
agreement with a third party to sell, without recourse subject to certain
obligations, a participation interest in a portion of the short-term consumer
loans originated by us in the United Kingdom. Pursuant to the agreement, we will
retain servicing responsibilities and earn servicing fees, which are subject to
reduction if the related loans are not collected. At December 31, 2003, we had
$8.0 million of loans receivable pledged under this agreement. The agreement
expires on September 30, 2004; however the term of the agreement is
automatically renewed each year for a term of twelve months, unless either party
terminates it.
We entered into the commitments described above and other contractual
obligations in the ordinary course of business as a source of funds for asset
growth and asset/liability management and to meet required capital needs. Our
principal future obligations and commitments as of December 31, 2003, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
---------------------------------------------------------------------------------
Total Less than 1 - 3 Years 4 - 5 Years After 5 Years
1 Year
-------------- ------------ ------------ ------------ --------------
Long-term debt:
OPCO 9.75% Senior Notes due 2011...... $ 220,000 $ - $ - $ - $ 220,000
16.0% Senior notes due 2012........... 47,871 - - - 47,871
13.95% Senior Subordinated notes due
2012................................. 47,871 - - - 47,871
Operating leases........................... 42,400 14,260 16,312 7,287 4,541
Other collateralized borrowings............ 8,000 8,000 - - -
Other...................................... 205 205 - - -
-------------- ------------ ------------ ------------ --------------
Total contractual cash obligations........ $ 366,347 $ 22,465 $ 16,312 $ 7,287 $ 320,283
============== ============ ============ ============ ==============
- ---------------------------------------------------------------------------------------------------------------------------------
25
We are highly leveraged, and borrowings under the credit facilities will
increase our debt service requirements. We believe that, based on current levels
of operations and anticipated improvements in operating results, cash flows from
operations and borrowings available under our credit facilities will allow us to
fund our liquidity and capital expenditure requirements for the foreseeable
future, including payment of interest and principal on our indebtedness. This
belief is based upon our historical growth rate and the anticipated benefits we
expect from operating efficiencies. We expect additional revenue growth to be
generated by increased check cashing revenues, growth in the consumer lending
business, the maturity of recently opened stores and the continued expansion of
new stores. We also expect operating expenses to increase, although the rate of
increase is expected to be less than the rate of revenue growth. Furthermore, we
do not believe that additional acquisitions or expansion are necessary to cover
our fixed expenses, including debt service. However, we cannot assure you that
we will generate sufficient cash flow from operations or that future borrowings
will be available under our credit facilities in an amount sufficient to meet
our debt service requirements or to make anticipated capital expenditures. We
may need to refinance all or a portion of our indebtedness on or prior to
maturity, under certain circumstances, and we cannot assure you that we will be
able to effect such refinancing on commercially reasonable terms or at all.
Seasonality and Quarterly Fluctuations
Our business is seasonal due to the impact of tax-related services, including
cashing tax refund checks, making electronic tax filings and processing
applications for refund anticipation loans. Historically, we have generally
experienced our highest revenues and earnings during our third fiscal quarter
ending March 31, when revenues from these tax-related services peak. Due to the
seasonality of our business, results of operations for any fiscal quarter are
not necessarily indicative of the results that may be achieved for the full
fiscal year. In addition, quarterly results of operations depend significantly
upon the timing and amount of revenues and expenses associated with acquisitions
and the addition of new stores.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995
This report contains 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 in which we operate, weakening consumer demand and
other factors detailed from time to time in our annual and other reports filed
with the Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Generally
In the operations of our subsidiaries and the reporting of our
consolidated financial results, we are affected by changes in interest rates and
currency exchange rates. The principal risks of loss arising from adverse
changes in market rates and prices to which we and our subsidiaries are exposed
relate to:
o. interest rates on debt; and
o. foreign exchange rates generating translation gains and losses.
We and our subsidiaries have no market risk sensitive instruments
entered into for trading purposes, as defined by GAAP. Information contained in
this section relates only to instruments entered into for purposes other than
trading.
Interest Rates
Our outstanding indebtedness, and related interest rate risk, is
managed centrally by our finance department by implementing the financing
strategies approved by our board of directors. Although our revolving credit
facilities carry variable rates of interest, our debt consists primarily of
fixed-rate senior notes and senior subordinated notes. Because most of our
average outstanding indebtedness carries a fixed rate of interest, a change in
interest rates is not expected to have a significant impact on our consolidated
financial position, results of operations or cash flows.
26
Foreign Exchange Rates
Operations in the United Kingdom and Canada have exposed us to shifts
in currency valuations. From time to time, we may elect to purchase put options
in order to protect earnings in the United Kingdom and Canada against foreign
currency fluctuations. Out of the money put options may be purchased because
they cost less than completely averting risk, and the maximum downside is
limited to the difference between the strike price and exchange rate at the date
of purchase and the price of the contracts. At December 31, 2003, we held put
options with an aggregate notional value of $(CAN) 24.0 million and (pound)(GBP)
6.0 million to protect the currency exposure in Canada and the United Kingdom
throughout the remainder of the fiscal year. All put options for the three and
six months ended December 31, 2003 expired out of the money at a cost of
$100,000 and $122,000, respectively, which is included in corporate expenses in
the consolidated statement of earnings. There was no such hedging activity for
the same period in fiscal 2003.
Canadian operations accounted for approximately 226.7% of consolidated
pre-tax earnings for the six months ended December 31, 2003, and 299.2% of
consolidated pre-tax earnings for the six months ended December 31, 2002. U.K.
operations accounted for approximately 107.3% of consolidated pre-tax earnings
for the six months ended December 31, 2003 and approximately 76.7% of
consolidated pre-tax earnings for the six months ended December 31, 2002. As
currency exchange rates change, translation of the financial results of the
Canadian and U.K. operations into U.S. dollars will be impacted. Changes in
exchange rates have resulted in cumulative translation adjustments increasing
our net assets by $15.9 million. Our U.K. subsidiaries have collateralized
borrowings denominated in U.S. dollars that are subject to foreign currency
transaction gains and losses. These gains and losses are included in corporate
expenses.
We estimate that a 10.0% change in foreign exchange rates by itself
would have impacted reported pre-tax earnings from continuing operations by
approximately $1.8 million for the six months ended December 31, 2003 and $1.9
million for the six months ended December 31, 2002. This impact represents
nearly 33.4% of our consolidated pre-tax earnings for the six months ended
December 31, 2003 and 37.6% of our consolidated pre-tax earnings for the six
months ended December 31, 2002.
27
Item 4. Controls and procedures
Evaluation of Disclosure Control and Procedures
As of the end of the period covered by this report, our management
conducted an evaluation, with the participation of our chief executive officer
and chief financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our chief
executive officer and chief financial officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting
during our fiscal quarter ended December 31, 2003 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 21, 2003, a former customer, Kenneth D. Mortillaro,
commenced an action against our Canadian subsidiary on behalf of a purported
class of Canadian borrowers (except those residing in British Columbia and
Quebec) who, 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 action is pending in the Court
of Queens Bench of Alberta and seeks an unspecified amount of damages and other
relief. Like the plaintiff in the MacKinnon action referred to below, Mortillaro
and Young have agreed to arbitrate all disputes with us. We believe that we have
meritorious procedural and substantive defenses to Mortillaro's and Young's
claims, and we intend to defend those claims vigorously.
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 its store managers using an
impermissible profit-sharing formula (Williams). In January 2003, without
admitting liability, we sought to settle the Woods case, which we believe to be
the most significant of these suits, by offering each individual putative class
member an amount intended in good faith to settle his or her claim. As of
December 31, 2003, 92% of these settlement offers had been accepted. Plaintiffs'
counsel is presently disputing through arbitration the validity of the
settlements accepted by the individual putative class members. We believe we
have meritorious defenses to the challenge and to the claims of the non-settling
putative Woods class members and plan to defend them vigorously. We believe we
have adequately provided for the costs associated with this matter. We are
vigorously defending the Castillo, Chin and Williams lawsuits and believe we
have meritorious defenses to the claims asserted in those matters. We believe
the outcome of such litigation will not significantly affect our financial
results.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an
action against our Canadian subsidiary and 26 other Canadian lenders on behalf
of a purported class of British Columbia residents who, plaintiff claims, were
overcharged in payday-loan transactions. The action, which is pending in the
Supreme Court of British Columbia, alleges violations of laws proscribing usury
and unconscionable trade practices and seeks restitution and damages, including
punitive damages, in an unknown amount. On March 25, 2003, we moved to stay the
action as against us and to compel arbitration of plaintiff's claims as required
by his agreement with us. We are presently awaiting a decision on that motion.
We believe we have meritorious defenses to the action and intend to defend it
vigorously. We believe the outcome of such litigation will not significantly
affect our financial results.
In addition to the litigation discussed above, we are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business. In the opinion of management, the outcome of such litigation and
proceedings will not significantly affect our financial results.
28
Item 2. Changes in Securities and Use of Proceeds
On November 13, 2003, OPCO issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used, among other things,
to redeem all of OPCO's outstanding 10.875% Senior Notes due 2006. OPCO elected
to effect covenant defeasance on the 10.875% senior notes by depositing with the
trustee funds sufficient to satisfy such notes together with accrued interest to
the December 13, 2003 redemption date and the call premium.
Item 3. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
4.1 Indenture, dated as of November 13, 2003, among Dollar
Financial Group, Inc., the Guarantors (as defined therein),
and U.S. Bank National Association, as Trustee (the
"Indenture")(1)
4.2 Form of 9.75% Senior Notes due 2011 with Guarantees endorsed
thereon (included in Exhibit 4.1)
4.3 Registration Rights Agreement, dated as of November 13, 2003,
by and among Dollar Financial Group, Inc., the Guarantors (as
defined therein), and the Initial Purchasers (as defined
therein)(1)
4.4 Indenture, dated as of November 13, 2003, by and between DFG
Holdings, Inc. and U.S. Bank National Association, as Trustee,
with respect to DFG Holdings, Inc.'s 16% Senior Notes due
2012(1)
4.5 Indenture, dated as of November 13, 2003, by and between DFG
Holdings, Inc. and U.S. Bank National Association, as Trustee,
with respect to DFG Holdings, Inc.'s 13.95% Senior
Subordinated Notes due 2012(1)
4.6 Form of DFG Holdings, Inc.'s 16% Senior Notes due 2012
(included in Exhibit 4.4)
4.7 Form of DFG Holdings, Inc.'s 13.95% Senior Subordinated Notes
due 2012 (included in Exhibit 4.5)
10.1 Second Amended and Restated Credit Agreement, dated as of the
November 13, 2003, by and among Dollar Financial Group, Inc.,
DFG Holdings, Inc., the lenders from time to time party
thereto, Wells Fargo Bank, National Association, as
administrative agent, U.S. Bank National Association, as
syndication agent, and Citicorp North America, Inc., as
documentation agent (the "Second Amended and Restated Credit
Agreement")(1)
10.2 Form of Pledge and Security Agreement, dated as of November 3,
2003, by and between the Guarantor (as defined therein) and
Wells Fargo Bank, National Association, as administrative
agent for itself and the lenders under the Second Amended and
Restated Credit Agreement(1)
10.3 Pledge and Security Agreement, dated as of November 13, 2003,
by and between Dollar Financial Group, Inc, and Wells Fargo
Bank, National Association, as administrative agent for itself
and the lenders under the Second Amended and Restated Credit
Agreement(1)
10.4 Form of Guarantor Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative
agent for the Lenders under the Second Amended and Restated
Credit Agreement, and the Creditor (as defined therein)(1)
10.5 Form of Foreign Subsidiary Subordination Agreement, dated as
of November 13, 2003 by and among Dollar Financial Group,
Inc., Wells Fargo Bank, National Association, as
administrative agent for the Lenders under the Second Amended
and Restated Credit Agreement, and the Creditor (as defined
therein)(1)
10.6 Foreign Subsidiary Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative
agent for the Lenders under the Second Amended and Restated
Credit Agreement, and National Money Mart Company(1)
10.7 Foreign Subsidiary Subordination Agreement, dated as of
November 13, 2003 by and among Dollar Financial Group, Inc.,
Wells Fargo Bank, National Association, as administrative
agent for the Lenders under the Second Amended and Restated
Credit Agreement, and Dollar Financial UK Limited(1)
10.8 Supplemental Security Agreement (Trademarks), dated November
13, 2003 by and between Dollar Financial Group, Inc and Wells
Fargo Bank, National Association, as administrative agent for
itself and the lenders under the Second Amended and Restated
Credit Agreement(1)
10.9 Supplemental Security Agreement (Copyrights), dated November
13, 2003 by and between Dollar Financial Group, Inc and Wells
Fargo Bank, National Association, as administrative agent for
itself and the lenders under the Second Amended and Restated
Credit Agreement(1)
10.10 Supplemental Security Agreement (Patents), dated November 13,
2003 by and between Dollar Financial Group, Inc and Wells
Fargo Bank, National Association, as administrative agent for
itself and the lenders under the Second Amended and Restated
Credit Agreement(1)
29
10.11 Form of Letter Agreement, dated October 10, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Plc, as agent for National Westminster Bank Plc,
extending Multi Line Facility Agreement(1)
10.12 Form of Letter Agreement, dated October 24, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Plc, as agent for National Westminster Bank Plc,
extending Multi Line Facility Agreement(1)
10.13 Form of Letter Agreement, dated November 21, 2003, by and
between Dollar Financial U.K. Limited and The Royal Bank of
Scotland Plc, as agent for National Westminster Bank Plc(1)
10.14 Intercreditor Agreement, dated as of November 13, 2003, by and
between Wells Fargo Bank, National Association, as
administrative agent, and U.S. Bank National Association, a
national banking association, as trustee for the holders of
Dollar Financial Group's 9.75% Senior Notes due 2011 under the
Indenture(1)
10.15 Exchange Agreement, dated as of November 13, 2003, among DFG
Holdings, Inc., GS Mezzanine Partners, L.P., GS Mezzanine
Partners Offshore, L.P., Stone Street Fund 1998, L.P., Bridge
Street Fund 1998, L.P., Ares Leveraged Investment Fund, L.P.,
and Ares Leveraged Investment Fund II, L.P., with respect to
DFG Holdings, Inc.'s 16% Senior Notes Due 2012(1)
10.16 Exchange Agreement, dated as of November 13, 2003, among DFG
Holdings, Inc., GS Mezzanine Partners, L.P., GS Mezzanine
Partners Offshore, L.P., Stone Street Fund 1998, L.P., Bridge
Street Fund 1998, L.P., Ares Leveraged Investment Fund, L.P.
and Ares Leveraged Investment Fund II, L.P., with respect to
DFG Holdings, Inc.'s 13.95% Senior Subordinated Notes Due
2012(1)
10.17 Exchange and Registration Rights Agreement, dated as of
November 13, 2003, by and among DFG Holdings, Inc. and GS
Mezzanine Partners, L.P. GS Mezzanine Partners Offshore, L.P.,
Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P.,
Ares Leveraged Investment Fund, L.P., as the purchasers of DFG
Holdings, Inc.'s 16% Senior Notes Due 2012(1)
10.18 Exchange and Registration Rights Agreement, dated as of
November 13, 2003, by and among DFG Holdings, Inc. and GS
Mezzanine Partners, L.P. GS Mezzanine Partners Offshore, L.P.,
Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P.,
Ares Leveraged Investment Fund, L.P., as the purchasers of DFG
Holdings Inc.'s 13.95% Senior Subordinated Notes Due 2012(1)
10.19 Amended and Restated Management Services Agreement, dated as
of November 13, 2003, by and among DFG Holdings, Inc., Dollar
Financial Group, Inc. and Leonard Green & Partners, L.P.(1)
10.20 Second Amended and Restated Stockholders Agreement, dated as
of November 13, 2003, by and among Green Equity Investors II,
L.P., Stone Street Fund 1998, L.P, Bridge Street Fund 1998,
L.P., GS Mezzanine Partners, L.P., GS Mezzanine Partners
Offshore, L.P., Ares Leveraged Investment Fund, L.P., a
Delaware limited partnership, Ares Leveraged Investment Fund
II, L.P., a Delaware limited partnership, C.L. Jeffrey, Sheila
Jeffrey, certain stockholders signatories thereto and DFG
Holdings, Inc.(1)
10.21 Acknowledgment, dated as of November 13, 2003, to the Exchange
and Registration Rights Agreement by and among DFG Holdings,
Inc. GS Mezzanine Partners, L.P., GS Mezzanine Partners
Offshore, L.P., Stone Street Fund 1998, L.P., Bridge Street
Fund 1998, L.P., Ares Leveraged Investment Fund, L.P. and Ares
Leveraged Investment Fund II, L.P. with respect to DFG
Holdings, Inc.'s 16% Senior Notes due 2012(1)
10.22 Acknowledgment, dated as of November 13, 2003, to the Exchange
and Registration Rights Agreement by and among DFG Holdings,
Inc. GS Mezzanine Partners, L.P., GS Mezzanine Partners
Offshore, L.P., Stone Street Fund 1998, L.P., Bridge Street
Fund 1998, L.P., Ares Leveraged Investment Fund, L.P. and Ares
Leveraged Investment Fund II, L.P. with respect to DFG
Holdings, Inc.'s 13.95% Senior Subordinated Notes due 2012(1)
10.23 Amendment, dated as of November 13, 2003, to the Exchange
Agreement by and among DFG Holdings, Inc. GS Mezzanine
Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., Ares
Leveraged Investment Fund, L.P. and Ares Leveraged Investment
Fund II, L.P., with respect to DFG Holdings, Inc.'s 16% Senior
Notes due 2012(1)
10.24 Amendment, dated as of November 13, 2003, to the Exchange
Agreement by and among DFG Holdings, Inc. GS Mezzanine
Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone
Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., Ares
Leveraged Investment Fund, L.P. and Ares Leveraged Investment
Fund II, L.P., with respect to DFG Holdings, Inc.'s 13.95%
Senior Subordinated Notes due 2012(1)
10.25 Secured Note, dated December 18, 1998, made by Jeffrey Weiss
in favor of the Company.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer.
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(1) Incorporated by reference to the amended Registration Statement on
Form S-4 filed the Company on January 14, 2004 (File No. 333-111473-02).
30
(b) Reports on Form 8-K
On October 9, 2003, OPCO furnished on Form 8-K a transcript of its
October 1, 2003 investor conference call.
On October 24, 2003, OPCO furnished on Form 8-K a press release
announcing its earnings for the fiscal quarter ended September 30, 2003.
31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DFG HOLDINGS, INC.
Date: February 3, 2003 *By: /s/ DONALD GAYHARDT
---------------- -------------------------------
Name: Donald Gayhardt
Title: President and Chief Financial Officer
(principal financial and
chief accounting officer)
* The signatory hereto is the principal financial and chief accounting officer
and has been duly authorized to sign on behalf of the registrant.
32