UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____ to _____
Commission file number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-2997911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
None
(Former name, former address and former
fiscal year, if changed since last report)
THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF DFG HOLDINGS, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS
THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTIONS H(2).
Indicate by check whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 31, 2004, 100 shares of the Registrant's common stock, par value
$1.00 per share, were outstanding.
1
DOLLAR FINANCIAL GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2003
and March 31, 2004 (unaudited).............................................................. 3
Interim Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2003 and 2004........................................................ 4
Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2003 and 2004............................................................... 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 21
Item 3. Controls and Procedures..................................................................... 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 30
Item 6. Exhibits and Reports on Form 8-K............................................................ 32
Signature ........................................................................................... 33
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
June 30, March 31,
2003 2004
---------------- -----------------
ASSETS (unaudited)
Cash and cash equivalents.................................................... $ 71,805 $ 79,897
Loans and other consumer lending receivables, net of reserve
of $2,437 and $2,611.................................................... 17,465 19,129
Loans receivable pledged..................................................... 8,000 8,000
Other receivables ........................................................... 4,500 5,638
Income taxes receivable...................................................... 1,369 5,783
Prepaid expenses ........................................................... 6,358 8,457
Notes receivable - officers.................................................. 3,468 3,583
Due from parent ............................................................ 4,573 6,607
Property and equipment, net of accumulated depreciation
of $39,309 and $47,492................................................... 29,209 27,898
Goodwill and other intangibles, net of accumulated
amortization of $22,017 and $22,615...................................... 143,416 150,058
Debt issuance costs, net of accumulated amortization of
$7,945 and $564......................................................... 5,200 10,604
Other........................................................................ 1,833 2,011
----------------- -----------------
$ 297,196 $ 327,665
================= =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable ........................................................... $ 17,245 $ 12,686
Foreign income taxes payable................................................. 1,380 6,805
Accrued expenses 9,419 11,855
Accrued interest payable..................................................... 1,656 8,499
Deferred tax liability....................................................... 838 1,679
Other collateralized borrowings.............................................. 8,000 8,000
Revolving credit facilities.................................................. 61,699 -
Long term debt:
10.875 % Senior Notes due 2006.......................................... 109,190 -
9.75% Senior Notes due 2011............................................. - 220,000
Subordinated notes payable and other.................................... 20,081 206
----------------- -----------------
Total long term debt......................................................... 129,271 220,206
Shareholder's equity:
Common stock, $1 par value: 20,000 shares
authorized; 100 shares issued and outstanding at
June 30, 2003 and March 31, 2004......................................... - -
Additional paid-in capital............................................... 50,957 41,268
Retained earnings (defecit).............................................. 9,034 (214)
Accumulated other comprehensive income................................... 7,697 16,881
----------------- -----------------
Total shareholder's equity................................................... 67,688 57,935
----------------- -----------------
$ 297,196 $ 327,665
================= =================
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------------------------------------------------
2003 2004 2003 2004
------------ ------------ ------------ --------------
Revenues:
Check cashing................................................ $ 27,897 $ 30,398 $ 80,871 $ 87,939
Consumer lending, net........................................ 22,483 25,795 61,329 70,673
Money transfer fees.......................................... 2,807 3,250 8,271 9,584
Other........................................................ 4,787 6,183 13,445 15,182
------------ ------------ ------------- -------------
Total revenues.................................................. 57,974 65,626 163,916 183,378
Store and regional expenses:
Salaries and benefits........................................ 17,519 19,397 51,947 56,881
Occupancy.................................................... 4,686 5,019 14,155 14,768
Depreciation................................................. 1,122 1,533 4,364 4,471
Returned checks, net and cash shortages...................... 1,762 2,052 6,256 6,938
Telephone and telecommunication.............................. 1,429 1,336 4,225 4,328
Advertising.................................................. 1,571 1,735 5,049 5,277
Bank charges................................................. 736 887 2,344 2,777
Armored carrier expenses..................................... 753 785 2,123 2,266
Other........................................................ 5,139 5,773 16,411 18,615
------------ ------------ ------------- -------------
Total store and regional expenses............................... 34,717 38,517 106,874 116,321
Corporate expenses.............................................. 8,708 8,360 23,697 22,727
Loss on store closings and sales and other restructuring........ 460 157 2,750 278
Other depreciation and amortization............................. 759 800 2,446 2,672
Interest expense (net of interest income of $61, $40, $149
and $205)..................................................... 4,955 6,498 14,779 18,172
Loss on extinguishment of debt.................................. - - - 7,209
Establishment of reserve for legal matter....................... - - 2,500 -
------------ ------------ ------------- -------------
Income before income taxes...................................... 8,375 11,294 10,870 15,999
Income tax provision............................................ 7,383 9,728 9,316 14,936
------------ ------------ ------------- -------------
Net income ..................................................... $ 992 1,566 $ 1,554 $ 1,063
============ ============ ============= =============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
------------------------------------
2003 2004
--------------- --------------
Cash flows from operating activities:
Net income......................................................................... $ 1,554 $ 1,063
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................................................ 8,165 8,523
Establishment of reserve for legal matter.................................... 2,500 -
Loss on extinguishment of debt............................................... - 7,209
Loss on store closings and sales and other restructuring..................... 2,750 278
Foreign currency gain on revaluation of other
collateralized borrowings................................................... - (899)
Deferred tax benefit......................................................... 1,455 841
Change in assets and liabilities (net of effect of acquisitions):
Increase in loans and other receivables................................... (6,154) (2,615)
Increase in income taxes receivable....................................... (2,031) (4,402)
Decrease (increase) in prepaid expenses and other......................... 1,286 (1,737)
Increase in accounts payable, income taxes payable,
accrued expenses and accrued interest payable........................... 550 7,662
--------------- --------------
Net cash provided by operating activities.......................................... 10,075 15,923
Cash flows from investing activities:
Acquisitions, net of cash acquired............................................... (3,318) -
Gross proceeds from sale of fixed assets......................................... - 41
Additions to property and equipment.............................................. (5,482) (5,080)
--------------- --------------
Net cash used in investing activities.............................................. (8,800) (5,039)
Cash flows from financing activities:
Redemption of subordinated notes................................................. - (20,734)
Other debt borrowings .......................................................... 1 109
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...................................... (19,406) (61,699)
Payment of debt issuance costs................................................... (810) (10,156)
Net increase in due from parent ................................................. (716) (2,034)
Dividend paid to parent ......................................................... - (20,000)
--------------- --------------
Net cash used in financing activities.............................................. (12,931) (5,684)
Effect of exchange rate changes on cash and cash equivalents....................... 879 2,892
--------------- --------------
Net (decrease) increase in cash and cash equivalents............................... (10,777) 8,092
Cash and cash equivalents at beginning of period................................... 86,633 71,805
--------------- --------------
Cash and cash equivalents at end of period......................................... $ 75,856 $ 79,897
=============== ==============
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Dollar
Financial Group, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by 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 in its annual report on Form
10-K (File No. 333-18221) for the fiscal year ended June 30, 2003 filed with the
Securities and Exchange Commission. In the opinion of management, all
adjustments, (consisting of normal recurring adjustments), considered necessary
for a fair presentation have been included. Operating results of interim periods
are not necessarily indicative of the results that may be expected for a full
fiscal year.
On November 13, 2003, the Company 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 Company's senior notes are guaranteed by the Company's parent
company, Dollar Financial Corp. ("Holdings"), and every direct and indirect
wholly owned domestic subsidiary of the Company. The proceeds from the issuance
of the Company's senior notes were used, among other things, to redeem the
Company's 10.875% Senior Notes due 2006, which were not guaranteed by Holdings.
On January 20, 2004, the Company 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 the Company's registered senior notes and
Holdings' guarantee of such notes became effective. Prior to the effective date,
Holdings did not file periodic reports under the Securities Exchange Act of
1934. Subsequent to the effective date, Holdings will file such reports,
including its quarterly report on Form 10-Q (File No. 333-111473-02) for the
quarter ended March 31, 2004.
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.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Operations
The Company, organized in 1979 under the laws of the State of New York, is a
wholly owned subsidiary of Holdings. The Company, through its subsidiaries,
provides retail financial services to the general public through a network of
1,016 locations (of which 630 are company owned) 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 the Company's
retail locations include check cashing, short-term consumer loans, sale of money
orders, money transfer services and various other related services. Also, the
Company's subsidiary, Money Mart(R) Express (formerly known as
moneymart.com(TM)), services and originates short-term consumer loans through
471 independent document transmitters in 15 states.
6
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION
The Company's payment obligations under its 9.75% Senior Notes due 2011 are
jointly and severally guaranteed (such guarantees, the "Guarantees") on a full
and unconditional basis by Holdings and by the Company's existing and future
domestic subsidiaries (the "Guarantors"). Guarantees of the notes by Guarantors
directly owning, now or in the future, capital stock of foreign subsidiaries
will be secured by second priority liens on 65% of the capital stock of such
foreign subsidiaries. In the event the Company directly owns a foreign
subsidiary in the future, the notes will be secured by a second priority lien on
65% of the capital stock of any such foreign subsidiary (such capital stock of
foreign subsidiaries referenced in this paragraph collectively, the
"Collateral").
The Guarantees of the notes:
o rank equal in right of payment with all existing and future unsubordinated
indebtedness of the Guarantors;
o rank senior in right of payment to all existing and future subordinated
indebtedness of the Guarantors; and
o are effectively junior to any indebtedness of the Company, including
indebtedness under the Company's senior secured reducing revolving credit
facility, that is either (1) secured by a lien on the Collateral that is
senior or prior to the second priority liens securing the Guarantees of the
notes or (2) secured by assets that are not part of the Collateral to the
extent of the value of the assets securing such indebtedness.
Separate financial statements of each Guarantor that is a subsidiary of the
Company have not been presented because management has determined that they
would not be material to investors. The accompanying tables set forth the
condensed consolidating balance sheets at March 31, 2004 and June 30, 2003, and
the condensed consolidating statements of operations and cash flows for the nine
month periods ended March 31, 2004 and 2003 of the Company, the combined
Guarantor subsidiaries, the combined non-Guarantor subsidiaries and the
consolidated Company.
7
CONSOLIDATING BALANCE SHEETS
March 31, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
----------------------------------------------------------------------------
Assets
Cash and cash equivalents............................ $ 18,660 $ 22,750 $ 38,487 $ - $ 79,897
Loans and other consumer lending receivables, net.... 6,063 2,200 10,866 - 19,129
Loans receivable pledged............................. - - 8,000 - 8,000
Other receivables.................................... 1,273 1,050 3,623 (308) 5,638
Income taxes receivable.............................. 31,094 - 6,206 (31,517) 5,783
Prepaid expenses..................................... 1,940 821 5,696 - 8,457
Deferred income taxes................................ 1,064 - - (1,064) -
Notes and interest receivable--officers.............. 3,583 - - - 3,583
Due from affiliates.................................. (49,797) 110,698 - (60,901) -
Due from parent...................................... 6,607 - - - 6,607
Property and equipment, net.......................... 4,713 6,808 16,377 - 27,898
Goodwill and other intangibles, net.................. - 56,522 93,536 - 150,058
Debt issuance costs, net............................. 10,604 - - - 10,604
Investment in subsidiaries........................... 235,508 9,801 6,705 (252,014) -
Other................................................ 97 582 1,332 - 2,011
----------------------------------------------------------------------------
$ 271,409 $ 211,232 $ 190,828 $ (345,804) $ 327,665
============================================================================
Liabilities and shareholder's equity
Accounts payable..................................... $ 125 $ 6,345 $ 6,216 $ - $ 12,686
Income taxes payable................................. - 31,517 - (31,517) -
Foreign income taxes payable......................... - - 6,805 - 6,805
Accrued expenses..................................... 1,922 2,448 7,485 - 11,855
Accrued interest payable............................. 8,162 146 499 (308) 8,499
Deferred tax liability............................... - 2,743 - (1,064) 1,679
Due to affiliates.................................... - - 60,901 (60,901) -
Other collateralized borrowings...................... - - 8,000 - 8,000
9.75% Senior Notes due 2011.......................... 220,000 - - - 220,000
Subordinated notes payable and other................. 128 - 78 - 206
----------------------------------------------------------------------------
230,337 43,199 89,984 (93,790) 269,730
Shareholder's equity:
Common stock...................................... - - - - -
Additional paid-in capital........................ 41,268 85,524 27,304 (112,828) 41,268
Retained earnings (defecit)....................... (214) 76,667 62,519 (139,186) (214)
Accumulated other comprehensive income............ 18 5,842 11,021 - 16,881
----------------------------------------------------------------------------
Total shareholder's equity........................... 41,072 168,033 100,844 (252,014) 57,935
----------------------------------------------------------------------------
$ 271,409 $ 211,232 $ 190,828 $ (345,804) $ 327,665
============================================================================
8
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------------------------------------------------------------------------
Revenues...................................... $ - $ 83,657 $ 99,721 $ - $ 183,378
Store and regional expenses:
Salaries and benefits...................... - 31,320 25,561 - 56,881
Occupancy.................................. - 8,280 6,488 - 14,768
Depreciation............................... - 2,382 2,089 - 4,471
Other...................................... - 21,153 19,048 - 40,201
------------------------------------------------------------------------------
Total store and regional expenses............. - 63,135 53,186 - 116,321
Corporate expenses............................ 11,149 (6) 11,584 - 22,727
Management fee................................ (1,739) - 1,739 - -
Loss on store closings and sales and other
restructuring.............................. 212 29 37 - 278
Other depreciation and amortization........... 1,595 30 1,047 - 2,672
Interest expense (income)..................... 14,796 (1,491) 4,867 - 18,172
Loss on extinguishment of debt................ 7,209 - - - 7,209
------------------------------------------------------------------------------
(Loss) income before income taxes ............ (33,222) 21,960 27,261 - 15,999
Income tax (benefit) provision ............... (11,533) 16,208 10,261 - 14,936
------------------------------------------------------------------------------
(Loss) income before equity in net
income of subsidiaries..................... (21,689) 5,752 17,000 - 1,063
Equity in net income of subsidiaries:
Domestic subsidiary guarantors............. 5,752 - - (5,752) -
Foreign subsidiary guarantors.............. 17,000 - - (17,000) -
------------------------------------------------------------------------------
Net income.................................... $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063
==============================================================================
9
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2004
(In thousands)
Dollar Subsidiary
Financial Subsidiary Non-
Group, Inc. Guarantors Guarantors Eliminations Consolidated
-------------------------------------------------------------------------
Cash flows from operating activities:
Net income .............................................. $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Undistributed income of subsidiaries................ (22,752) - - 22,752 -
Depreciation and amortization....................... 2,745 2,410 3,368 - 8,523
Loss on extinguishment of debt...................... 7,209 - - - 7,209
Loss on store closings and sales and other
restructuring..................................... 212 29 37 - 278
Foreign currency gain on revaluation of
other collateralized borrowings................... - - (899) - (899)
Deferred tax provision.............................. - 841 - - 841
Changes in assets and liabilities:
Decrease (increase) in loans and other
receivables................................... 2,684 (2,139) (3,144) (16) (2,615)
Increase in income taxes receivable............. (11,677) - (5,924) 13,199 (4,402)
(Increase) decrease in prepaid expenses and other (1,175) 307 (869) - (1,737)
Increase in accounts payable,
income taxes payable, accrued expenses and
accrued interest payable ..................... 4,372 12,678 3,795 (13,183) 7,662
-------------------------------------------------------------------------
Net cash (used in) provided by operating activities...... (17,319) 19,878 13,364 - 15,923
Cash flows from investing activities:
Gross proceeds from sale of fixed assets................. - - 41 - 41
Additions to property and equipment...................... (368) (958) (3,754) - (5,080)
Net increase in due from affiliates...................... - (22,383) - 22,383 -
-------------------------------------------------------------------------
Net cash used in investing activities.................... (368) (23,341) (3,713) 22,383 (5,039)
Cash flows from financing activities:
Redemption of 10.875% Senior Subordinated notes due 2006. (20,734) - - - (20,734)
Other debt borrowings (payments)......................... 128 - (19) - 109
Issuance of 9.75% Senior Notes due 2011.................. 220,000 - - - 220,000
Redemption of 10.875% Senior Notes due 2006.............. (111,170) - - - (111,170)
Net decrease in revolving credit facilities.............. (60,764) - (935) - (61,699)
Payment of debt issuance costs........................... (10,156) - - - (10,156)
Net increase in due from parent ......................... (2,034) - - - (2,034)
Net increase (decrease) in due to affiliates............. 33,096 - (10,713) (22,383) -
Dividend paid to parent.................................. (20,000) - - - (20,000)
-------------------------------------------------------------------------
Net cash provided by (used in) financing activities...... 28,366 - (11,667) (22,383) (5,684)
Effect of exchange rate changes on cash and cash
equivalents.............................................. - - 2,892 - 2,892
-------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents..... 10,679 (3,463) 876 - 8,092
Cash and cash equivalents at beginning of period......... 7,981 26,213 37,611 - 71,805
-------------------------------------------------------------------------
Cash and cash equivalents at end of period............... $ 18,660 $ 22,750 $ 38,487 $ - $ 79,897
=========================================================================
10
CONSOLIDATING BALANCE SHEETS
June 30, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------ ------------- ------------- --------------- -------------
ASSETS
Cash and cash equivalents.........................$ 7,981 $ 26,213 $ 37,611 $ - $ 71,805
Loans and other consumer lending receivables, net. 7,095 808 9,562 - 17,465
Loans receivable pledged.......................... - - 8,000 - 8,000
Other receivables................................. 3,042 303 1,479 (324) 4,500
Income taxes receivable........................... 19,417 - 281 (18,329) 1,369
Prepaid expenses.................................. 804 1,111 4,443 - 6,358
Deferred income taxes............................. 1,064 - - (1,064) -
Notes and interest receivable-officers............ 3,466 - 2 - 3,468
Due from affiliates............................... - 83,738 - (83,738) -
Due from parent................................... 4,573 - - - 4,573
Property and equipment, net....................... 5,884 8,260 15,065 - 29,209
Goodwill and other intangibles, net............... 58 56,551 86,807 - 143,416
Debt issuance costs, net.......................... 4,990 - 210 - 5,200
Investment in subsidiaries........................ 212,757 9,801 6,705 (229,263) -
Other............................................. 58 599 1,176 - 1,833
------------ ------------- ------------- --------------- -------------
$ 271,189 $ 187,384 $ 171,341 $ (332,718) $ 297,196
============ ============= ============= =============== =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable................................. $ 148 $ 7,225 $ 9,872 $ - $ 17,245
Income taxes payable............................. - 18,329 - (18,329) -
Foreign income taxes payable..................... - - 1,380 - 1,380
Accrued expenses................................. 2,886 2,161 4,372 - 9,419
Accrued interest payable......................... 1,491 57 432 (324) 1,656
Deferred tax liability........................... - 1,902 - (1,064) 838
Due to affiliates................................ 17,215 - 66,523 (83,738) -
Revolving credit facilities...................... 60,764 - 935 - 61,699
10-7/8% Senior Notes due 2006.................... 109,190 - 0 - 109,190
Other collateralized borrowings.................. - - 8,000 - 8,000
Subordinated notes payable and other............. 20,000 - 81 - 20,081
------------ ------------- ------------- --------------- -------------
211,694 29,674 91,595 (103,455) 229,508
Shareholder's equity:
Common stock..................................... - - - - -
Additional paid-in capital....................... 50,957 88,380 27,304 (115,684) 50,957
Retained earnings................................ 9,034 68,059 45,520 (113,579) 9,034
Accumulated other comprehensive (loss)
income........................................ (496) 1,271 6,922 - 7,697
------------ ------------- ------------- --------------- -------------
Total shareholder's equity....................... 59,495 157,710 79,746 (229,263) 67,688
------------ ------------- ------------- --------------- -------------
$ 271,189 $ 187,384 $ 171,341 $ (332,718) $ 297,196
============ ============= ============= =============== =============
11
CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended March 31, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------ ------------ ----------- ----------- ------------
Revenues............................................. $ - $ 84,473 $ 79,443 $ - $ 163,916
Store and regional expenses:
Salaries and benefits............................. - 31,386 20,561 - 51,947
Occupancy......................................... - 8,409 5,746 - 14,155
Depreciation...................................... - 2,467 1,897 - 4,364
Other............................................. - 22,682 13,726 - 36,408
------------ ------------ ----------- ----------- ------------
Total store and regional expenses.................... - 64,944 41,930 - 106,874
Corporate expenses................................... 14,539 43 9,115 - 23,697
Management fees...................................... (8,633) 7,779 854 - -
Loss on store closings and sales and other 2,235 419 96 - 2,750
restructuring......................................
Other depreciation and amortization.................. 1,520 43 883 - 2,446
Interest expense .................................... 12,996 1,558 225 - 14,779
Establishment of reserve for legal matter............ - 2,500 - - 2,500
------------ ------------ ----------- ----------- ------------
(Loss) income before income taxes ................... (22,657) 7,187 26,340 - 10,870
Income tax (benefit) provision ...................... (7,776) 7,870 9,222 - 9,316
------------ ------------ ----------- ----------- ------------
(Loss) income before equity in net (loss) income
of subsidiaries................................. (14,881) (683) 17,118 - 1,554
Equity in net (loss) income of subsidiaries:
Domestic subsidiary guarantors....................... (683) - - 683 -
Foreign subsidiary guarantors........................ 17,118 - - (17,118) -
------------ ------------ ----------- ----------- ------------
Net income (loss).................................... $ 1,554 $ (683) $ 17,118 $ (16,435) $ 1,554
============ ============ =========== =========== ============
12
CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended March 31, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group,Inc. Guarantors Guarantors Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) .................................. $ 1,554 $ (683) $ 17,118 $ (16,435) $ 1,554
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Undistributed income of subsidiaries.......... (16,435) - - 16,435 -
Depreciation and amortization................. 2,874 2,511 2,780 - 8,165
Establishment of reserves for legal matter.... - 2,500 - - 2,500
Loss on store closings and sales and other
restructuring.............................. 2,235 419 96 - 2,750
Deferred tax provision........................ 230 1,225 - - 1,455
Change in assets and liabilities (net of
effect of acquisitions):
(Increase) decrease in loans and other
receivables............................... (6,051) 6,304 (2,523) (3,884) (6,154)
Increase in income taxes receivable.......... (8,006) - (1,073) 7,048 (2,031)
(Increase) decrease in prepaid expenses and
other..................................... (480) 658 1,108 - 1,286
Increase (decrease) in accounts payable,
income taxes payable, accrued expenses and
accrued interest payable.................. 2,759 4,420 (3,465) (3,164) 550
----------- ----------- ------------ ------------ -----------
Net cash (used in) provided by operating activities.. (21,320) 17,354 14,041 - 10,075
Cash flows from investing activities:
Acquisitions, net of cash acquired.............. - - (3,318) - (3,318)
Additions to property and equipment............. (780) (740) (3,962) - (5,482)
Net increase in due from affiliates............. - (21,004) - 21,004 -
----------- ----------- ------------ ------------ -----------
Net cash used in investing activities................ (780) (21,744) (7,280) 21,004 (8,800)
Cash flows from financing activities:
Other debt borrowings........................... - - 8,001 - 8,001
Net decrease in revolving credit facilities..... (9,936) - (9,470) - (19,406)
Payment of debt issuance costs.................. (610) - (200) - (810)
Net increase in due from parent................. (716) - - - (716)
Net increase (decrease) in due to affiliates.... 35,082 - (14,078) (21,004)
----------- ----------- ------------ ------------ -----------
Net cash provided by (used in) financing activities.. 23,820 - (15,747) (21,004) (12,931)
Effect of exchange rate changes on cash and cash
equivalents..................................... - - 879 - 879
----------- ----------- ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents. 1,720 (4,390) (8,107) - (10,777)
Cash and cash equivalents at beginning of period..... 1,746 41,405 43,482 - 86,633
----------- ----------- ------------ ------------ -----------
Cash and cash equivalents at end of period........... $ 3,466 $ 37,015 $ 35,375 $ - $ 75,856
=========== =========== ============ ============ ===========
13
3. GOODWILL AND OTHER INTANGIBLES
In accordance with the adoption provisions of SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis. The
Company performs its annual impairment test as of June 30. There can be no
assurance that future goodwill impairment tests will not result in a charge to
earnings. The Company has a covenant not to compete, which is deemed to have a
definite life of two years and will continue to be amortized through January
2005. Amortization for this covenant not to compete for the nine months ended
March 31, 2004 was $86,000. The amortization expense for the covenant not to
compete will be as follows:
Year Amount
(in thousands)
--------------------------------------------
2004 $ 95.0
2005 20.0
The following table reflects the components of intangible assets (in thousands):
June 30, 2003 March 31, 2004
------------------------------------------ ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------------------------------ ----------------------------------------
Non-amortized intangible assets:
Cost in excess of net assets acquired $ 162,987 $ 19,686 $ 170,207 $ 20,176
Amortized intangible assets:
Covenants not to compete 2,446 2,331 2,466 2,439
4. COMPREHENSIVE INCOME
Comprehensive income is the change in equity from transactions and other events
and circumstances from non-owner sources, which includes foreign currency
translation. The following shows the comprehensive income for the periods
stated:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
2003 2004 2003 2004
-------------- --------------- ------------- -------------
Net income $ 992 $ 1,566 $ 1,554 $ 1,063
Foreign currency translation adjustment 3,257 1,017 3,915 9,184
-------------- --------------- ------------- -------------
Total comprehensive income $ 4,249 $ 2,583 $ 5,469 $ 10,247
============== =============== ============= =============
14
5. Loss on Store Closings and Sales and Other Restructuring
During the fiscal year ended June 30, 2003, the Company 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 the Company 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
Reclassification (0.7) 0.7 -
Amounts paid (0.5) (0.5) (1.0)
----------- --------- ----------
Balance at March 31, 2004 $ - $ 0.4 $ 0.4
=========== ========= ==========
The Company also expenses costs related to the closure of stores in the normal
course of its business. Costs directly expensed for the three months ended March
31, 2004 and 2003 were $157,000 and $60,000, respectively and for the nine
months ended March 31, 2004 and 2003 were $278,000 and $675,000, respectively.
6. LOSS ON EXTINGUISHMENT OF DEBT
On November 13, 2003, the Company issued $220 million principal amount of 9.75%
Senior Notes due 2011. The proceeds from this offering were used to redeem all
of the Company's outstanding senior notes and the Company's outstanding senior
subordinated notes, to refinance its credit facility, to distribute a portion of
the proceeds to Holdings to redeem an equal amount of Holdings' senior discount
notes and to pay fees and expenses with respect to these transactions and a
related note exchange transaction involving Holdings' senior discount notes.
The loss incurred on the extinguishment of debt is as follows (in millions):
Call Premium:
10.875% Senior notes $ 1.98
10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
deferred issuance costs, net 4.50
----------
Loss on extinguishment of debt $ 7.21
==========
15
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 March 31, 2003 United States Canada Kingdom Total
----------------- ------------- -------------- ---------------
Identifiable assets $ 139,805 $ 79,907 $ 72,083 $ 291,795
Goodwill and other intangibles, net 56,414 35,517 46,134 138,065
Sales to unaffiliated customers
Check cashing 14,159 7,686 6,052 27,897
Consumer lending, net 14,591 4,838 3,054 22,483
Money transfer fees 1,107 1,216 484 2,807
Other 1,843 2,288 656 4,787
Income before income taxes 852 5,243 2,280 8,375
Income tax provision 3,512 3,194 677 7,383
Net (loss) income (2,660) 2,049 1,603 992
For the nine months
ended March 31, 2003
Sales to unaffiliated customers
Check cashing $ 37,633 $ 24,157 $ 19,081 $ 80,871
Consumer lending, net 38,932 13,706 8,691 61,329
Money transfer fees 3,439 3,584 1,248 8,271
Other 4,469 7,040 1,936 13,445
(Loss) income before income taxes (15,470) 20,220 6,120 10,870
Income tax provision 94 7,384 1,838 9,316
Net (loss) income (15,564) 12,836 4,282 1,554
As of and for the three months
ended March 31, 2004
Identifiable assets $ 143,542 $ 93,426 $ 90,697 $ 327,665
Goodwill and other intangibles, net 56,522 39,711 53,825 150,058
Sales to unaffiliated customers
Check cashing 13,824 8,913 7,661 30,398
Consumer lending, net 14,855 7,502 3,438 25,795
Money transfer fees 1,147 1,418 685 3,250
Other 1,070 3,912 1,201 6,183
Income before income taxes 1,530 7,117 2,647 11,294
Income tax provision 7,329 1,811 588 9,728
Net (loss) income (5,799) 5,306 2,059 1,566
For the nine months
ended March 31, 2004
Sales to unaffiliated customers
Check cashing $ 36,632 $ 28,726 $ 22,581 $ 87,939
Consumer lending, net 40,811 20,291 9,571 70,673
Money transfer fees 3,362 4,288 1,934 9,584
Other 2,852 8,995 3,335 15,182
(Loss) income before income taxes (11,261) 18,992 8,268 15,999
Income tax provision 4,674 7,223 3,039 14,936
Net (loss) income (15,935) 11,769 5,229 1,063
16
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 March 31, 2004, the Company
held put options with an aggregate notional value of $(CAN) 36.0 million and
(GBP) 9.0 million to protect the currency exposure in Canada and the United
Kingdom throughout the remainder of the fiscal year and the first half of fiscal
2005. The cost of these put options is included in prepaid expenses on the
consolidated balance sheet. The cost of the options are amortized over the
period in which the options are exercisable. Changes in the fair value of the
put options are recorded through the statement of operations in corporate
expenses and were not significant. All put options for the three and nine months
ended March 31, 2004 expired out of the money at a cost of $69,000 and $190,000,
respectively, which is included in corporate expenses in the consolidated
statement of earnings. There were no put options held for the same period in
fiscal 2003.
Although the Company's revolving credit facility and overdraft credit facilities
carry variable rates of interest, most of the Company's and Holdings' 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.
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 Young action is pending in the
Court of Queens Bench of Alberta and seeks an unspecified amount of damages and
other relief. On December 23, 2003, we were served with the statement of claim
in an action brought in the Ontario Superior Court of Justice by another former
customer, Margaret Smith. The allegations and putative class in the Smith action
are substantially the same as those in the Mortillaro action. Like the plaintiff
in the MacKinnon action referred to below, Mortillaro, Smith and Young have
agreed to arbitrate all disputes with us. On January 29, 2003, a former
customer, Kurt MacKinnon, commenced an action against our Canadian subsidiary
and 26 other Canadian lenders on behalf of a purported class of British Columbia
residents who, MacKinnon claims, were overcharged in payday-loan transactions.
The action, which is pending in the Supreme Court of British Columbia, alleges
violations of laws proscribing usury and unconscionable trade practices and
seeks restitution and damages, including punitive damages, in an unknown amount.
On February 3, 2004, our motion to stay the action and to compel arbitration of
MacKinnon's claims, as required by his agreement with us, was denied; we are
appealing this ruling. We believe we have meritorious defenses to each of these
actions and intend to defend them vigorously. Similar class actions have been
threatened against us in other provinces of Canada, but we have not been served
with the statements of claim in any such actions to date. We believe that any
possible claims in these actions, if they are served, will likely be
substantially similar to those of the Ontario actions referred to above.
We are a defendant in four putative class-action lawsuits, all of which were
commenced by the same plaintiffs' law firm, alleging violations of California's
wage-and-hour laws. The named plaintiffs in these suits, which are pending in
the Superior Court of the State of California, are our former employees Vernell
Woods (commenced August 22, 2000), Juan Castillo (commenced May 1, 2003),
Stanley Chin (commenced May 7, 2003) and Kenneth Williams (commenced June 3,
2003). Each of these suits seeks an unspecified amount of damages and other
relief in connection with allegations that we misclassified California store
(Woods) and regional (Castillo) managers as "exempt" from a state law requiring
the payment of overtime compensation, that we failed to provide employees with
meal and rest breaks required under a new state law (Chin) and that we computed
bonuses payable to our store managers using an impermissible profit-sharing
formula (Williams). In January 2003, without admitting liability, we sought to
settle the Woods case, which we believe to be the most significant of these
suits, by offering each individual putative class member an amount intended in
good faith to settle his or her claim. These settlement offers have been
accepted by 92% of the members of the putative class. We recorded a charge of
$2.8 million related to this matter during fiscal 2003. Woods' counsel is
presently disputing through arbitration the validity of the settlements accepted
by the individual putative class members. We believe we have meritorious
defenses to the challenge and to the claims of the non-settling putative Woods
class members and plan to defend them vigorously. We believe we have adequately
provided for the costs associated with this matter. We are vigorously defending
the Castillo, Chin and Williams lawsuits and believe we have meritorious
defenses to the claims asserted in those matters.
17
In addition to the litigation discussed above, we are involved in routine
litigation and administrative proceedings arising in the ordinary course of
business.
We do not believe that the outcome of any of the matters referred to in the
preceding paragraphs will materially affect our financial condition, results of
operations or cash flows in future periods.
10. DEBT
On November 13, 2003, the Company 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 the
Company's existing credit facility, redeem the entire $109.2 million principal
amount of the Company's 10.875% Senior Notes due 2006, redeem the entire $20.0
million principal amount of the Company's 10.875% Senior Subordinated Notes due
2006, distribute to Holdings $20.0 million to redeem an equal amount of its
13.0% Senior Discount Notes due 2006, and pay all related fees, expenses and
redemption premiums with respect to these transactions.
The New Credit Facility consists of a $55.0 million senior secured reducing
revolving credit facility. The commitment under the New Credit Facility was
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 March 31, 2004, (ii) the LIBOR Rate (as defined therein) plus
4.50% at March 31, 2004, or (iii) the one day Eurodollar Rate (as defined
therein) plus 4.50% at March 31, 2004, determined at the Company's option.
18
SUPPLEMENTAL STATISTICAL DATA
March 31,
Company Operating Data: 2003 2004
------------- -------------
Stores in operation:
Company-Owned................................. 621 630
Franchised Stores and Check Cashing Merchants. 466 476
--- ---
Total............................................ 1,087 1,106
===== =====
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
Operating Data: 2003 2004 2003 2004
------------ ----------- ----------- -------------
Face amount of checks cashed (in millions)..................... $ 731 $ 801 $ 2,190 $ 2,375
Face amount of average check................................... $ 354 $ 388 $ 339 $ 376
Face amount of average check (excluding Canada and the United
Kingdom).................................................... $ 398 $ 414 $ 360 $ 375
Average fee per check.......................................... $ 13.52 $ 14.73 $ 12.53 $ 13.91
Number of checks cashed (in thousands)......................... 2,063 2,064 6,453 6,323
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
Collections Data: 2003 2004 2003 2004
------------ ----------- ----------- -------------
Face amount of returned checks (in thousands).................. $ 5,756 $ 7,208 $ 19,033 $ 22,159
Collections (in thousands)..................................... 4,420 5,562 14,234 16,383
------------ ----------- ----------- -------------
Net write-offs (in thousands).................................. $ 1,336 $ 1,646 $ 4,799 $ 5,776
============ =========== =========== =============
Collections as a percentage of
returned checks............................................. 76.8% 77.2% 74.8% 73.9%
Net write-offs as a percentage of
check cashing revenues...................................... 4.8% 5.4% 5.9% 6.6%
Net write-offs as a percentage of the
face amount of checks cashed................................ 0.18% 0.21% 0.22% 0.24%
19
The following table presents a summary of the Company's consumer lending
originations, which includes loan extensions, and revenues for the following
periods (in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------- -------------------------------
2003 2004 2003 2004
--------------------------------- -------------------------------
U.S. company funded originations.................... $ 14,714 $ 17,443 $ 68,051 $ 47,638
Canadian company funded originations................ 60,053 75,791 177,519 231,729
U.K. company funded originations.................... 25,606 28,675 73,451 80,279
--------------------------------- -------------------------------
Total company funded originations................ $ 100,373 $ 121,909 $ 319,021 $ 359,646
================================= ===============================
Servicing revenues, net............................. $ 11,507 $ 12,094 $ 32,019 $ 35,413
Company funded domestic loan revenues............... 2,616 2,666 11,884 7,137
Company funded foreign loan revenues................ 8,951 12,161 25,984 34,423
Net write-offs on company funded loans.............. (591) (1,126) (8,558) (6,300)
--------------------------------- -------------------------------
Total consumer lending revenues, net............. $ 22,483 $ 25,795 $ 61,329 $ 70,673
================================= ===============================
Net write-offs as a percentage of total
company funded originations....................... 0.6% 0.9% 2.7% 1.8%
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion and analysis of the financial condition and
results of operations for Dollar Financial Group, Inc. for the three month and
nine month periods ended March 31, 2003 and 2004. References in this section to
"we," "our," "ours," or "us" are to Dollar Financial Group, Inc. and its wholly
owned subsidiaries, except as the context otherwise requires. References to
"Holdings" are to our parent company, Dollar Financial Corp. For a separate
discussion and analysis of the financial condition and results of operations of
Holdings, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Holdings' quarterly report on Form 10-Q (File
No. 333-111473-02) for the period ended March 31, 2004.
General
We are a leading international financial services company serving under-banked
consumers. Our customers are typically lower- and middle-income working-class
individuals who require basic financial services but, for reasons of convenience
and accessibility, purchase some or all of their financial services from us
rather than banks and other financial institutions. To serve this market, we
have a network of 1,106 stores, including 630 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 March 31, 2004, we generated revenue of
$65.6 million, an increase of 13.2% over the same period in the prior year. For
the nine-months ended March 31, 2004, we generated revenue of $183.4 million, an
increase of 11.9% 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 March 31, 2004 and the results of operations for the three and nine months
ended March 31, 2004 and 2003. The results for the three and nine months ended
March 31, 2004 are not necessarily indicative of the results for the full fiscal
year and should be read in conjunction with our unaudited financial statements
included in this filing and our audited consolidated financial statements
included in our Annual Report on Form 10-K (File No. 333-111473) for the fiscal
year ended June 30, 2003.
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, revenue is recognized when services for the customer have been
provided which, in the case of check cashing, money order sales, money transfer
services, bill payment services and other miscellaneous services, is at the
point-of-sale in our company-owned locations.
The Company originates unsecured short-term loans on its own behalf or acts as a
servicer for two banks marketing unsecured short-term loans for which the
Company earns a fee. Revenues from loan fees and interest are recognized ratably
over the life of each loan.
In our franchised locations, we recognize initial franchise fees upon
fulfillment of all significant obligations to the franchisee. In addition,
royalties from the franchisees are accrued as earned.
21
Consumer Loan Loss Reserves 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,
including the reserve for estimated reductions to loan servicing fees, 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. Our current loan loss reserve is based on
our net loss rate, expressed as a percentage of loans originated for the last
twelve months, applied against the total amount of outstanding loans that we
make directly and outstanding loans we originate and service for others. As
these conditions change, we may need to make additional allowances in future
periods.
A loss on consumer loans is charged against the reserve during the period in
which the loss occurred. A recovery is credited to the reserve during the period
in which the recovery is made. Any additional provisions to the loan loss
reserve as a result of the calculation in the preceding paragraph are charged
against revenues.
Check Cashing Returned Item Policy
We charge operating expense for losses on returned checks during the period in
which such checks are returned. Recoveries on returned checks are credited to
operating expense during the period in which recovery is made. This direct
method for recording returned check losses and recoveries eliminates the need
for an allowance for returned checks. These net losses are charged to other
store and regional expenses in the consolidated statements of operations.
Goodwill
We have significant goodwill on our balance sheet. The testing of goodwill for
impairment under established accounting guidelines also requires significant use
of judgment and assumptions. In accordance with accounting guidelines, we
determine the fair value of our goodwill using multiples of earnings of other
companies. Goodwill is tested and reviewed for impairment on an ongoing basis
under established accounting guidelines. However, changes in business conditions
may require future adjustments to asset valuations.
Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process involves estimating the actual current tax exposure
together with assessing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within the consolidated balance
sheet. An assessment is then made of the likelihood that the deferred tax assets
will be recovered from future taxable income and to the extent we believe that
recovery is not likely, we must establish a valuation allowance.
Results of Operations
Revenue Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
-------------------------- ----------------- --------------------------- --------------
2003 2004 2003 2004 2003 2004 2003 2004
----------- ----------- ------ ------ ----------- ------------ ----- -----
Check cashing.....................$ 27,897 $ 30,398 48.1% 46.3% $ 80,871 $ 87,939 49.3% 48.0%
Consumer lending revenues, net.. 22,483 25,795 38.8 39.3 61,329 70,673 37.5 38.5
Money transfer fees............... 2,807 3,250 4.8 5.0 8,271 9,584 5.0 5.2
Other revenue..................... 4,787 6,183 8.3 9.4 13,445 15,182 8.2 8.3
-------- ------- ------ ------ -------- -------- ------ ------
Total revenue.....................$ 57,974 $ 65,626 100.0% 100.0% $ 163,916 $ 183,378 100.0% 100.0%
======== ======= ====== ====== ======== ======== ====== ======
22
THREE MONTH COMPARISON
Total revenues were $65.6 million for the three months ended March 31, 2004
compared to $58.0 million for the three months ended March 31, 2003, an increase
of $7.6 million or 13.2%. Comparable retail store, franchised store and document
transmitter sales for the entire period increased $7.1 million or 12.4%. New
store openings accounted for an increase of $733,000 while closed stores
accounted for a decrease of $241,000.
A stronger British pound and Canadian dollar positively impacted revenue by $3.9
million for the quarter. In addition to the currency benefit, revenues in the
United Kingdom for the quarter increased by $1.2 million primarily related to
revenues from check cashing and the impact of the new installment loan product.
Revenues from our Canadian subsidiary for the quarter increased $3.4 million
after adjusting for the favorable exchange rate. Higher short term consumer loan
volume and pricing, slightly offset by lower check cashing revenues, accounted
for the increase. For the three months ended March 31, 2004, our Canadian
subsidiary rolled out, to all its locations, a new tax product offering rapid
access loans and electronic Canadian tax filing. This product, which was only
tested in a limited number of locations in the prior year, added $521,000 in
revenue for the current quarter which is included in other revenues. In the
U.S., food stamp revenues declined $773,000 for the three months ended March 31,
2004, primarily due to the decline in our distribution of government assistance
food coupons. California, the last state in which we offer food coupons, is
implementing an electronic benefits transfer system designed to disburse public
assistance benefits directly to individuals. We expect to generate only minimal
revenues from this product for the remainder of the fiscal year.
NINE MONTH COMPARISON
Total revenues were $183.4 million for the nine months ended March 31, 2004
compared to $163.9 million for the nine months ended March 31, 2003, an increase
of $19.5 million or 11.9%. Comparable store, franchised store and document
transmitter sales for the entire period increased $18.4 million or 11.4%. New
store openings accounted for an increase of $2.4 million while closed stores
accounted for a decrease of $1.5 million.
Favorable foreign currency rates attributed to $10.5 million of the increase for
the nine months. In addition to the currency benefit, revenues in the United
Kingdom for the nine months increased by $3.6 million primarily related to
revenues from check cashing and the impact of the new installment loan product.
Revenues from our Canadian subsidiary for the nine months increased $6.2 million
after adjusting for the favorable exchange rate. Higher short term consumer loan
volume and pricing, slightly offset by lower check cashing revenues, accounted
for the increase. In addition, our Canadian subsidiary rolled out, to all its
locations, a new tax product offering rapid access loans and electronic Canadian
tax filing. This product, which was only tested in a limited number of locations
in the third quarter of the prior year, added $521,000 in revenue for the
current quarter which is included in other revenues. In the U.S., food stamp
revenues declined $1.6 million for the nine months ended March 31, 2004,
primarily due to the decline in our distribution of government assistance food
coupons. California, the last state in which we offer food coupons, is
implementing an electronic benefits transfer system designed to disburse public
assistance benefits directly to individuals. We expect to generate only minimal
revenues from this product for the remainder of the fiscal year.
Store and Regional Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
--------------------------- ------------------ -------------------------- ----------------
2003 2004 2003 2004 2003 2004 2003 2004
----------- ------------ ------- ------- ----------- ----------- ------ ------
Salaries and benefits.......... $ 17,519 $ 19,397 30.2% 29.6% $ 51,947 $ 56,881 31.7% 31.0%
Occupancy...................... 4,686 5,019 8.1 7.6 14,155 14,768 8.6 8.1
Depreciation................... 1,122 1,533 1.9 2.3 4,364 4,471 2.7 2.4
Returned checks, net and
cash shortages.............. 1,762 2,052 3.0 3.1 6,256 6,938 3.8 3.8
Telephone and
telecommunications.......... 1,429 1,336 2.5 2.0 4,225 4,328 2.6 2.4
Advertising.................... 1,571 1,735 2.7 2.6 5,049 5,277 3.1 2.9
Bank charges................... 736 887 1.3 1.4 2,344 2,777 1.4 1.5
Armored carrier service........ 753 785 1.3 1.2 2,123 2,266 1.3 1.2
Other.......................... 5,139 5,773 8.9 8.8 16,411 18,615 10.0 10.2
----------- ------------ ------- ------- ----------- ----------- ------ ------
Total store and regional
expenses ................... $ 34,717 $ 38,517 59.9% 58.6% $ 106,874 $ 116,321 65.2% 63.5%
=========== ============ ======= ======= =========== =========== ====== ======
23
THREE MONTH COMPARISON
Store and regional expenses were $38.5 million for the three months ended March
31, 2004 compared to $34.7 million for the three months ended March 31, 2003, an
increase of $3.8 million or 11.0%. The impact of foreign currencies accounted
for $2.0 million of this increase. New store openings accounted for an increase
of $434,000 while closed stores accounted for a decrease of $135,000. Comparable
retail store and franchised store expenses for the entire period increased $4.3
million. For the three months ended March 31, 2004 total store and regional
expenses decreased to 58.6% of total revenue compared to 59.9% of total revenue
for the three months ended March 31, 2003. After adjusting for the impact of the
changes in exchange rates, store and regional expenses increased $1.7 million in
Canada, $358,000 in the U.K. and declined $270,000 in the U.S. The increase in
Canada was primarily due to increases of $362,000 in salaries, $245,000 in
returned checks, net and cash shortages and $181,000 in advertising, all of
which are commensurate with the overall growth in Canadian revenues.
NINE MONTH COMPARISON
Store and regional expenses were $116.3 million for the nine months ended March
31, 2004 compared to $106.9 million for the nine months ended March 31, 2003, an
increase of $9.4 million or 8.8%. The impact of foreign currencies accounted for
$5.5 million of this increase. New store openings accounted for an increase of
$1.3 million while closed stores accounted for a decrease of $1.4 million.
Comparable retail store and franchised store expenses for the entire period
increased $12.4 million. For the nine months ended March 31, 2004 total store
and regional expenses decreased to 63.5% of total revenue compared to 65.2% of
total revenue for the nine months ended March 31, 2003. After adjusting for the
impact of the changes in exchange rates, store and regional expenses increased
$4.4 million in Canada, $1.3 million in the U.K. and declined $1.8 million in
the U.S. The increase in Canada was primarily due to increases of $737,000 in
salaries, $600,000 in returned checks, net and cash shortages, $335,000 in
advertising and $273,000 in occupancy costs. These costs in addition to the
aggregate of other operating costs are commensurate with overall growth in
Canadian revenues. The increase in the U.K. is almost entirely associated with
increased salary expense which is also commensurate with the revenue growth in
that business segment. The decline in store and regional expenses in the U.S. is
primarily due to the impact of stores closed in the second quarter of fiscal
2003.
Other Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
---------------------- ------------------- ----------------------- ------------------
2003 2004 2003 2004 2003 2004 2003 2004
-------- --------- ------- -------- --------- ---------- ------- -------
Corporate expenses.................. $ 8,708 $ 8,360 15.0% 12.7% $ 23,697 $ 22,727 14.5% 12.4%
Loss on store closings and sales.... 460 157 0.8 0.2 2,750 278 1.7 0.2
Other depreciation and amortization. 759 800 1.3 1.2 2,446 2,672 1.5 1.5
Interest expense.................... 4,955 6,498 8.5 9.9 14,779 18,172 9.0 9.9
Loss on extinguishment of debt...... - - - - - 7,209 - 3.9
Establishment of reserve for
legal matter...................... - - - - 2,500 - 1.5 -
Income tax provision................ 7,383 9,728 12.7 14.8 9,316 14,936 5.7 8.1
THREE MONTH COMPARISON
Corporate Expenses
Corporate expenses were $8.4 million for the three months ended March 31, 2004
compared to $8.7 million for the three months ended March 31, 2003. For the
three months ended March 31, 2004, corporate expenses decreased to 12.7% of
total revenue compared to 15.0% of total revenue for the three months ended
March 31, 2003. The decline reflects the cost reductions related to the
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.
24
Loss on Store Closings and Sales
Loss on store closings and sales was $157,000 for the three months ended March
31, 2004 compared to $460,000 for the three months ended March 31, 2003. For the
three months ended March 31, 2003, we provided $400,000 of severance and
retention bonus costs for the consolidation and relocation of certain
non-operating functions.
Interest Expense
Interest expense was $6.5 million for the three months ended March 31, 2004
compared to $5.0 million for the three months ended March 31, 2003, an increase
of $1.5 million or 30%. The increased interest on the incremental long-term debt
outstanding after the refinancing accounted for $1.9 million of the increase in
total interest expense. Offsetting these increases was a decline of $800,000 in
interest on our revolving credit facility. This decline is a result of using a
portion of the proceeds from the issuance of the new notes to pay down 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, we issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of our
outstanding senior notes and our outstanding senior subordinated notes, to
refinance our credit facility, to distribute a portion of the proceeds to
Holdings to redeem an equal amount of Holdings' senior discount notes and to pay
fees and expenses with respect to these transactions and a related note exchange
transaction involving Holdings' senior discount notes.
The loss incurred on the extinguishment of debt is as follows (in millions):
Call Premium:
10.875% Senior notes $ 1.98
10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
deferred issuance costs, net 4.50
----------
Loss on extinguishment of debt $ 7.21
==========
Income Tax Provision
The provision for income taxes was $9.7 million for the three months ended March
31, 2004 compared to a provision of $7.4 million for the three months ended
March 31, 2003, an increase of $2.3 million. Our effective tax rate differs from
the federal statutory rate of 35% due to state taxes and foreign taxes and a
one-time charge related to the debt restructuring. Our effective income tax rate
was 86.1% for the three months ended March 31, 2004 and 88.2% for the three
months ended March 31,2003.
NINE MONTH COMPARISON
Corporate Expenses
Corporate expenses were $22.7 million for the nine months ended March 31, 2004
compared to $23.7 million for the nine months ended March 31, 2003, a decrease
of $1.0 million or 4.2%. The decline reflects the cost reductions related to the
rationalization of our store support functions for our North American operations
offset somewhat by increased accrued expenses for incentive compensation, legal
and professional fees and the impact of foreign exchange rates.
Loss on store closings and sales and other restructuring
Loss on store closings and sales and other restructuring was $278,000 for the
nine months ended March 31, 2004 compared to $2.8 million for the nine months
ended March 31, 2003, a decrease of $2.5 million. For the nine months ended
March 31, 2003, we provided $1.3 million for the closure costs associated with
the shutdown of 27 underperforming stores. In addition, we provided $800,000,
consisting primarily of severance and retention bonus costs, for the
consolidation and relocation of certain non-operating functions.
25
Interest Expense
Interest expense was $18.2 million for the nine months ended March 31, 2004 and
was $14.8 million for the nine months ended March 31, 2003, an increase of $3.4
million, or 23.0%. A portion of the increase is attributable to $990,000 of
interest paid on our old 10.875% senior notes for the 30 day period subsequent
to our issuance on November 13, 2003 of $220 million principal amount of new
9.75% Senior Notes due 2011. We elected to effect covenant defeasance on the old
notes by depositing with the trustee funds sufficient to satisfy the old notes
together with the call premium and accrued interest to the December 13, 2003
redemption date. Additionally, the increased interest on the incremental
long-term debt outstanding after the refinancing accounted for $3.2 million of
the increase in total interest expense. Offsetting these increases was a decline
of $1.4 million in interest on our revolving credit facility. This decline is a
result of using a portion of the proceeds from the issuance of the new notes to
pay down 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, we issued $220 million principal amount of 9.75% Senior
Notes due 2011. The proceeds from this offering were used to redeem all of our
outstanding senior notes and our outstanding senior subordinated notes, to
refinance our credit facility, to distribute a portion of the proceeds to
Holdings to redeem an equal amount of Holdings' senior discount notes and to pay
fees and expenses with respect to these transactions and a related note exchange
transaction involving Holdings' senior discount notes.
The loss incurred on the extinguishment of debt is as follows (in millions):
Call Premium:
10.875% Senior notes $ 1.98
10.875% Senior Subordinated notes 0.73
Write-off of previously capitalized
deferred issuance costs, net 4.50
----------
Loss on extinguishment of debt $ 7.21
==========
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 $14.9 million for the nine months ended March
31, 2004 compared to $9.3 million for the nine months ended March 31, 2003, an
increase of $5.6 million. Our effective tax rate differs from the federal
statutory rate of 35% due to state and foreign taxes and a one-time charge
related to the debt restructuring. Our effective income tax rate was 93.4% for
the nine months ended March 31,2004 and 85.7% for the nine months ended March
31, 2003.
Changes in Financial Condition
Cash and cash equivalent balances and the revolving credit facilities balances
fluctuate significantly as a result of seasonal, monthly and day-to-day
requirements for funding check cashing and other operating activities. For the
nine months ended March 31, 2004, cash and cash equivalents increased $8.1
million. Net cash provided by operations was $15.9 million. The increase in net
cash provided by operations was primarily the result of improved operating
results and the impact of the timing of settlements in fiscal 2003 related to
our loan servicing arrangements with County Bank and First Bank of Delaware.
Accrued interest increased due to the timing of the semi-annual interest
payments on our 9.75% Senior Notes due 2011.
26
Liquidity and Capital Resources
On November 13, 2003, we 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 our 10.875% Senior Notes due 2006, to redeem the entire $20
million principal amount of our 10.875% Senior Subordinated Notes due 2006, to
repay in full $40.6 million outstanding under our revolving credit facility, to
distribute $20 million to Holdings to redeem an equal amount of its 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 Holdings' senior discount notes. Simultaneously
with the issuance of our 9.75% senior notes, we 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 $15.9 million for the nine months
ended March 31, 2004 compared to cash provided of $10.1 million for the nine
months ended March 31, 2003. The increase in net cash provided by operations was
primarily the result of improved operating results and the impact of the timing
of settlements in fiscal 2003 related to our loan servicing arrangements with
County Bank and First Bank of Delaware.
Net cash used for investing activities for the nine months ended March 31, 2004
was $5.0 million compared to a usage of $8.8 million for the nine months ended
March 31, 2003. The decrease of $3.8 million is attributable to an earn-out
payment made in the first nine months of fiscal 2003 on acquisitions completed
during a previous year. For the nine months ended March 31, 2004 we made capital
expenditures of $5.1 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 $8.0 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 nine months ended March 31, 2004
was $5.7 million compared to a usage of $12.9 million for the nine months ended
March 31, 2003. The decline in the nine months ended was a result of a decrease
in the borrowings under our bank facilities of $61.7 million from $61.7 million
at June 30, 2003 to $0.0 at March 31, 2004 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, we repaid in
full all borrowings outstanding under our previously existing credit
facility using a portion of the proceeds from the issuance of $220.0
million principal amount of 9.75% Senior Notes due 2011 and
simultaneously entered into a new $55.0 million Senior Secured
Reducing Revolving Credit Facility. The commitment under the new
facility was 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. Our borrowing capacity under the new facility is limited to
the total commitment of $54.25 million less letters of credit totaling
$19.0 million, issued by Wells Fargo Bank, which guarantee the
performance of certain of our contractual obligations. At March 31,
2004, our borrowing capacity was $35.25 million and the amount
outstanding was $0.0. Consequently, we had $16.7 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 $10.0 million, of which there was no
outstanding balance on March 31, 2004. Amounts outstanding under the
Canadian overdraft facility bear interest at a rate of Canadian prime
and are secured by the pledge of a cash collateral account of an
equivalent balance.
United Kingdom Overdraft Facility. For our U.K. operations, our U.K
operating subsidiary has an overdraft facility which provides for a
commitment of up to approximately $6.9 million, of which there was no
outstanding balance on March 31, 2004. 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. The U.K. overdraft facility expired on
March 31, 2004 and we elected not to extend.
27
Long-Term Debt. As of March 31, 2004, long term debt consisted of $220 million
principal amount of our 9.75% Senior Notes due November 15, 2011.
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 March 31, 2004, 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 March 31, 2004, excluding
periodic interest payments, include the following:
Payments Due by Period (in thousands)
----------------------------------------------------------------------------------
Total Less than 1 1 - 3 Years 4 - 5 Years After 5 Years
Year
-------------- ------------- ------------ ------------- --------------
Long-term debt:
Senior notes due 2011........... $ 220,000 $ - $ - $ - $ 220,000
Operating leases..................... 52,384 16,153 20,373 9,798 6,060
Other collateralized borrowings...... 8,000 8,000 - - -
Other................................ 206 206 - - -
---------- --------- --------- --------- ----------
Total contractual cash obligations... $ 280,590 $ 24,359 $ 20,373 $ 9,798 $ 226,060
========== ========= ========= ========= ==========
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.
Balance Sheet Variations
March 31, 2004 compared to June 30, 2003
Cash and cash equivalents increased to $79.9 million at March 31, 2004 from
$71.8 million at June 30, 2003. Cash and cash equivalent balances fluctuate
significantly as a result of seasonal, monthly and day-to-day requirements for
funding check cashing and other operating activities.
Income taxes receivable increased to $5.8 million at March 31, 2004 from $1.4
million related primarily to U.S. carryback losses and the prepayment of taxes
in our Canadian subsidiary.
28
Goodwill and other intangibles increased $6.7 million from $143.4 million at
June 30, 2003 to $150.1 million at March 31, 2004 due to foreign currency
translation adjustments.
Debt issuance costs increased from $5.2 million at June 30, 2003 to $10.6
million at March 31, 2004 due to the refinancing of our debt.
Accounts payable decreased $4.5 million from $17.2 million at June 30, 2003 to
$12.7 million at March 31, 2004 due to the timing of settlements with third
party vendors and our franchisees.
Foreign income taxes payable increased from $1.4 million at June 30, 2003 to
$6.8 million at March 31, 2004 due primarily to accrued Canadian taxes for the
current fiscal year.
Accrued expenses increased to $11.9 million at March 31, 2004 from $9.4 million
at June 30, 2003 due to professional fees associated with legal matters
associated with our Canadian subsidiary and the timing of our salary accrual.
Revolving credit facilities and long-term debt increased $29.2 million from
$191.0 million at June 30, 2003 to $220.2 million at March 31, 2004. On November
13, 2003, we 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. The
proceeds from these transactions were used to repay, in full, all borrowings
outstanding under our existing credit facility, redeem the entire $109.2 million
principal amount of our 10.875% Senior Notes due 2006, redeem the entire $20.0
million principal amount of our 10.875% Senior Subordinated Notes due 2006,
redeem $20.0 million of our parent's 13.0% Senior Discount Notes due 2006, and
pay all related fees, expenses and redemption premiums with respect to these
transactions.
Total shareholder's equity decreased $9.8 million to $57.9 million from $67.7
million due to our $20 million dividend payment to our parent company associated
with the redemption of $20.0 million of our parent's 13.0% Senior Discount Notes
due 2006 on November 13, 2003, offset by net income for the nine months ended
March 31, 2004 and foreign translation adjustments.
Our parent company, Dollar Financial Corp., has filed a registration statement
on Form S-1 with the Securities and Exchange Commission for a proposed initial
public offering of common stock. In addition to the proposed sale of common
stock by the company, certain stockholders intend to sell common stock in the
offering and intend to grant the underwriters an option to purchase common stock
to cover over-allotments. The company will not receive any proceeds from the
sale of shares by the selling stockholders. A copy of the prospectus relating to
these securities may be obtained when available from Citigroup, Brooklyn Army
Terminal, 140 58th Street, 8th floor, Brooklyn, NY 11220 (tel: 718-765-6732). A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold and offers to buy may not be accepted prior to the
time the registration statement becomes effective. This Form 10-Q shall not
constitute an offer to sell or a solicitation of an offer to buy, and there
shall not be any sale of these securities in any state or jurisdiction in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such state or jurisdiction.
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.
29
Item 3. 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 March 31, 2004 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 Young action is pending in the
Court of Queens Bench of Alberta and seeks an unspecified amount of damages and
other relief. On December 23, 2003, we were served with the statement of claim
in an action brought in the Ontario Superior Court of Justice by another former
customer, Margaret Smith. The allegations and putative class in the Smith action
are substantially the same as those in the Mortillaro action. Like the plaintiff
in the MacKinnon action referred to below, Mortillaro, Smith and Young have
agreed to arbitrate all disputes with us. On January 29, 2003, a former
customer, Kurt MacKinnon, commenced an action against our Canadian subsidiary
and 26 other Canadian lenders on behalf of a purported class of British Columbia
residents who, MacKinnon claims, were overcharged in payday-loan transactions.
The action, which is pending in the Supreme Court of British Columbia, alleges
violations of laws proscribing usury and unconscionable trade practices and
seeks restitution and damages, including punitive damages, in an unknown amount.
On February 3, 2004, our motion to stay the action and to compel arbitration of
MacKinnon's claims, as required by his agreement with us, was denied; we are
appealing this ruling. We believe we have meritorious defenses to each of these
actions and intend to defend them vigorously. Similar class actions have been
threatened against us in other provinces of Canada, but we have not been served
with the statements of claim in any such actions to date. We believe that any
possible claims in these actions, if they are served, will likely be
substantially similar to those of the Ontario actions referred to above.
We are a defendant in four putative class-action lawsuits, all of
which were commenced by the same plaintiffs' law firm, alleging violations of
California's wage-and-hour laws. The named plaintiffs in these suits, which are
pending in the Superior Court of the State of California, are our former
employees Vernell Woods (commenced August 22, 2000), Juan Castillo (commenced
May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth Williams
(commenced June 3, 2003). Each of these suits seeks an unspecified amount of
damages and other relief in connection with allegations that we misclassified
California store (Woods) and regional (Castillo) managers as "exempt" from a
state law requiring the payment of overtime compensation, that we failed to
provide employees with meal and rest breaks required under a new state law
(Chin) and that we computed bonuses payable to our store managers using an
impermissible profit-sharing formula (Williams). In January 2003, without
admitting liability, we sought to settle the Woods case, which we believe to be
the most significant of these suits, by offering each individual putative class
member an amount intended in good faith to settle his or her claim. These
settlement offers have been accepted by 92% of the members of the putative
class. We recorded a charge of $2.8 million related to this matter during fiscal
2003. Woods' counsel is presently disputing through arbitration the validity of
the settlements accepted by the individual putative class members. We believe we
have meritorious defenses to the challenge and to the claims of the non-settling
putative Woods class members and plan to defend them vigorously. We believe we
have adequately provided for the costs associated with this matter. We are
vigorously defending the Castillo, Chin and Williams lawsuits and believe we
have meritorious defenses to the claims asserted in those matters.
30
In addition to the litigation discussed above, we are involved in
routine litigation and administrative proceedings arising in the ordinary course
of business.
We do not believe that the outcome of any of the matters referred to
in the preceding paragraphs will materially affect our financial condition,
results of operations or cash flows in future periods.
31
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description of Document
10.1 Employment Agreement, dated as of December 13, 2003, by and
among Dollar Financial Group, Inc., Dollar Financial Corp. and
Jeffrey Weiss.(1)
10.2 Employment Agreement, dated as of December 13, 2003, by and
among Dollar Financial Group, Inc., Dollar Financial Corp. and
Donald Gayhardt.(1)
10.3 Employment Agreement, dated as of April 30, 2002, by and
between Dollar Financial Group, Inc. and Cameron
Hetherington.(2)
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).
(2) Incorporated by reference to the Quarterly Report on Form 10-Q filed
by Dollar Financial Corp. on April 23, 2004 (File No. 333-111473-02).
(b) Reports on Form 8-K
On February 4, 2004, we furnished on Form 8-K a press release announcing
our earnings for the fiscal quarter ended December 31, 2003.
On February 12, 2004, we furnished on Form 8-K a transcript of our
February 12, 2004 investor conference call.
32
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL GROUP, INC.
Date: April 23, 2004 *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.