UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended December 31, 2009
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number 000-50866
DOLLAR FINANCIAL CORP.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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23-2636866
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(State or Other Jurisdiction of Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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1436 LANCASTER AVENUE,
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrants Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check
þ
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act: (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act) Yes
o
No
þ
As of January 31, 2010, 24,231,708 shares of the registrants common stock, par value $0.001 per
share, were outstanding.
DOLLAR FINANCIAL CORP.
INDEX
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
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Rule 13(a)-14(a)/15d-14a Certification of Executive Vice President and Chief Financial Officer
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Rule 13a-14(a)/15d-14(a) Certification of Senior Vice President of Finance and Corporate Controller
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Section 1350 Certification of Chief Executive Officer
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Section 1350 Certification of Executive Vice President and Chief Financial Officer
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Section 1350 Certification of Senior Vice President of Finance and Corporate Controller
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2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DOLLAR FINANCIAL CORP.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
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June 30,
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December 31,
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2009
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2009
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(unaudited)
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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209,602
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$
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345,444
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Loans receivable, net:
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Loans receivable
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126,826
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142,364
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Less: Allowance for loan losses
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(12,132
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)
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(15,765
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)
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Loans receivable, net
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114,694
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126,599
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Loans in default, net of an allowance of $17,000 and $17,085
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6,436
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7,256
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Other receivables
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7,299
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22,283
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Prepaid expenses and other current assets
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22,794
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22,592
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Current deferred tax asset, net of valuation allowance of $4,816 and $4,816
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39
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602
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Total current assets
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360,864
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524,776
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Deferred tax asset, net of valuation allowance of $84,972 and $77,757
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27,062
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28,254
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Property and equipment, net of accumulated depreciation of $99,803 and $112,214
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58,614
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61,572
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Goodwill and other intangibles
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454,347
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591,945
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Debt issuance costs, net of accumulated amortization of $6,815 and $2,111
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9,869
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20,606
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Other
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10,709
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17,093
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Total Assets
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$
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921,465
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$
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1,244,246
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current Liabilities
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Accounts payable
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$
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36,298
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$
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30,748
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Income taxes payable
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14,834
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18,433
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Accrued expenses and other liabilities
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70,588
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92,307
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Debt due within one year
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5,880
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193
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Current deferred tax liability
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71
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2,357
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Total current liabilities
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127,671
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144,038
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Fair value of derivatives
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10,223
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47,207
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Long-term deferred tax liability
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18,876
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18,163
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Long-term debt
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530,425
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759,232
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Other non-current liabilities
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25,192
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22,963
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Stockholders equity:
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Common stock, $.001 par value: 55,500,000 shares authorized;
24,102,985 shares and 24,228,074 shares issued and outstanding at
June 30, 2009 and December 31, 2009, respectively
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24
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24
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Additional paid-in capital
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311,301
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334,145
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Accumulated deficit
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(110,581
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)
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(98,178
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)
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Accumulated other comprehensive income
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8,018
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16,372
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Total Dollar Financial Corp. stockholders equity
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208,762
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252,363
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Non-controlling interest
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316
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280
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Total stockholders equity
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209,078
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252,643
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Total Liabilities and Stockholders Equity
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$
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921,465
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$
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1,244,246
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See notes to interim unaudited consolidated financial statements
3
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
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Three Months Ended
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Six Months Ended
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December 31,
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December 31,
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2008
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2009
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2008
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2009
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Revenues:
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Check cashing
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$
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41,624
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$
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38,537
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$
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90,156
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$
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76,339
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Fees from consumer lending
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67,254
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82,746
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145,607
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160,188
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Money transfer fees
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6,784
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7,091
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14,394
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13,914
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Pawn service fees and sales
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3,430
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4,655
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7,302
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8,488
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Other
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13,081
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19,712
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27,790
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35,620
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Total revenues
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132,173
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152,741
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285,249
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294,549
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Operating expenses:
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Salaries and benefits
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36,275
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37,723
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77,078
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74,459
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Provision for loan losses
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14,899
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12,662
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30,150
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24,358
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Occupancy
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10,316
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10,838
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21,640
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21,685
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Depreciation
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3,170
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4,071
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6,762
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7,445
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Returned checks, net and cash shortages
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4,227
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2,630
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10,362
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4,894
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Maintenance and repairs
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2,804
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2,880
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6,220
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5,695
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Advertising
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2,396
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4,667
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5,208
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8,114
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Bank charges and armored carrier service
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3,130
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3,457
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6,763
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6,923
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Other
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10,682
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13,203
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22,982
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24,470
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Total operating expenses
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87,899
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92,131
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187,165
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178,043
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Operating margin
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44,274
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60,610
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98,084
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116,506
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Corporate and other expenses:
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Corporate expenses
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17,594
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22,949
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37,114
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43,300
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Other depreciation and amortization
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938
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1,110
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1,978
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2,162
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Interest expense, net
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10,667
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12,842
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22,214
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24,466
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Loss on extinguishment of debt
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8,813
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8,813
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Unrealized foreign exchange (gain) loss
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(3,915
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)
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3,912
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Loss on derivatives not designated as hedges
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3,285
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3,275
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Provison for litigation settlements
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|
509
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|
|
1,267
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Loss on store closings
|
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|
555
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|
|
|
1,332
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|
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5,493
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|
|
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1,650
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Other (income) expense, net
|
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(5,412
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)
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1,254
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(5,669
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)
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1,424
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Income before income taxes
|
|
|
19,932
|
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|
|
12,940
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36,445
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26,237
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|
Income tax provision
|
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10,383
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|
|
|
5,904
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|
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15,609
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|
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13,870
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|
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Net income
|
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|
9,549
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|
|
|
7,036
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|
20,836
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12,367
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Less: Net loss attributable to non-controlling
interests
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(94
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)
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|
|
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(36
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)
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|
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|
|
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|
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Net income attributable to Dollar Financial Corp.
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|
$
|
9,549
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|
|
$
|
7,130
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|
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$
|
20,836
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|
|
$
|
12,403
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|
|
|
|
|
|
|
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|
|
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Net income per share:
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|
|
|
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|
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|
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Basic
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$
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0.40
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|
$
|
0.30
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|
|
$
|
0.87
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|
|
$
|
0.52
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Diluted
|
|
$
|
0.40
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|
|
$
|
0.29
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|
|
$
|
0.86
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|
$
|
0.50
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Weighted average shares outstanding:
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|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
23,941,455
|
|
|
|
24,046,559
|
|
|
|
24,058,984
|
|
|
|
24,022,458
|
|
Diluted
|
|
|
23,980,968
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|
|
|
24,849,876
|
|
|
|
24,156,745
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|
|
|
24,657,334
|
|
See notes to interim unaudited consolidated financial statements.
4
DOLLAR
FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(In thousands, except share data)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
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Accumulated
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Outstanding
|
|
|
Paid-in
|
|
|
Income
|
|
|
Non-Controlling
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Interest
|
|
|
Income (loss)
|
|
|
Equity
|
|
Balance, June 30, 2009
(audited)
|
|
|
24,102,985
|
|
|
$
|
24
|
|
|
$
|
311,301
|
|
|
$
|
(110,581
|
)
|
|
$
|
316
|
|
|
$
|
8,018
|
|
|
$
|
209,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,676
|
|
|
|
7,676
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678
|
|
|
|
678
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,403
|
|
|
|
|
|
|
|
|
|
|
|
12,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,757
|
|
Restricted stock grants
|
|
|
138,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
6,586
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
|
Vested portion of granted restricted stock and restricted stock units
|
|
|
|
|
|
|
|
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,905
|
|
Retirement of common stock
|
|
|
(20,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other stock compensation
|
|
|
|
|
|
|
|
|
|
|
1,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,612
|
|
Net income attributable to non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(36
|
)
|
Debt Discount
|
|
|
|
|
|
|
|
|
|
|
37,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,346
|
|
Retirement of Debt Discount
|
|
|
|
|
|
|
|
|
|
|
(18,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 (unaudited)
|
|
|
24,228,074
|
|
|
$
|
24
|
|
|
$
|
334,145
|
|
|
$
|
(98,178
|
)
|
|
$
|
280
|
|
|
$
|
16,372
|
|
|
$
|
252,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL CORP.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,836
|
|
|
$
|
12,403
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,199
|
|
|
|
11,160
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
8,813
|
|
Change in fair value of derivatives not designated as hedges
|
|
|
|
|
|
|
2,885
|
|
Provision for loan losses
|
|
|
30,150
|
|
|
|
24,358
|
|
Non-cash stock compensation
|
|
|
3,672
|
|
|
|
3,517
|
|
Minority interest
|
|
|
|
|
|
|
(36
|
)
|
Losses on store closings
|
|
|
1,813
|
|
|
|
211
|
|
Unrealized foreign exchange loss
|
|
|
|
|
|
|
3,681
|
|
Deferred tax provision
|
|
|
2,176
|
|
|
|
(3,072
|
)
|
Acretion of debt discount and deferred issuance costs
|
|
|
4,363
|
|
|
|
5,686
|
|
Change in assets and liabilities (net of effect of acquisitions):
|
|
|
|
|
|
|
|
|
Increase in loans and other receivables
|
|
|
(33,739
|
)
|
|
|
(42,580
|
)
|
Increase in prepaid expenses and other
|
|
|
(2,164
|
)
|
|
|
(603
|
)
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities
|
|
|
(20,636
|
)
|
|
|
8,160
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
16,670
|
|
|
|
34,583
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired
|
|
|
(2,041
|
)
|
|
|
(123,484
|
)
|
Additions to property and equipment
|
|
|
(7,715
|
)
|
|
|
(11,688
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(9,756
|
)
|
|
|
(135,172
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from the issuance 10.375% Senior Notes
|
|
|
|
|
|
|
596,388
|
|
Proceeds from the exercise of stock options
|
|
|
3,257
|
|
|
|
100
|
|
Purchase of company stock
|
|
|
(7,492
|
)
|
|
|
|
|
Repayment of term loan notes
|
|
|
(1,834
|
)
|
|
|
(351,057
|
)
|
Other debt payments
|
|
|
|
|
|
|
(6,992
|
)
|
Net increase in revolving credit facilities
|
|
|
36,043
|
|
|
|
|
|
Payment of debt issuance and other costs
|
|
|
(114
|
)
|
|
|
(19,056
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
29,860
|
|
|
|
219,383
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(37,124
|
)
|
|
|
17,048
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(350
|
)
|
|
|
135,842
|
|
Cash and cash equivalents at beginning of period
|
|
|
209,714
|
|
|
|
209,602
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
209,364
|
|
|
$
|
345,444
|
|
|
|
|
|
|
|
|
See notes to interim unaudited consolidated financial statements.
6
DOLLAR
FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited interim consolidated financial statements are of Dollar Financial Corp.
and its wholly owned and majority owned subsidiaries (collectively the Company). Dollar Financial
Corp. is the parent company of Dollar Financial Group, Inc. (OPCO) and its wholly owned
subsidiaries. The activities of Dollar Financial Corp. consist primarily of its investment in OPCO.
The Companys unaudited interim consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (GAAP) for interim financial information, the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by GAAP for complete financial statements and should be read in
conjunction with the Companys audited consolidated financial statements in its annual report on
Form 10-K (File No. 000-50866) for the fiscal year ended June 30, 2009 filed with the Securities
and Exchange Commission as amended on Form 8-K on November 10, 2009 to reflect the adoption of ASC 470-20 and ASC 810-10. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included. Operating
results of interim periods are not necessarily indicative of the results that may be expected for a
full fiscal year.
Dollar Financial Corp. is a Delaware corporation incorporated in April 1990 as DFG Holdings, Inc.
The Company operates a store network through OPCO and its wholly owned and majority owned
subsidiaries. Through its subsidiaries, the Company provides retail financial services to the general public through a network of 1,172 locations (of which 1,043 are
company owned) operating primarily as Money Mart
®
, The Money Shop, Loan
Mart
®
, Insta-Cheques
®
and The Check Cashing Store in
the United States, Canada, the United Kingdom and the Republic of Ireland. This network includes
1,158 locations (including 1,043 company-owned) in the United States, Canada, the United Kingdom
and the Republic of Ireland offering financial services including check cashing, single-payment
consumer loans, sale of money orders, money transfer services, pawn service fees and various other
related services. Also included in this network is the Companys Poland operation acquired in June
2009 which provides financial services to the general public in Poland through in-home servicing.
Dealers Financial Services, LLC and Dealers Financial Services Reinsurance Ltd. (collectively,
DFS), which was acquired in December 2009, the Company also provides services to enlisted military personnel seeking to purchase new
and used vehicles. DFS markets its services through its branded Military Installment Loan and
Education Services, or MILES program. DFS provides services to enlisted military personnel who
make applications for auto loans to purchase new and used vehicles that are funded and serviced
under an exclusive agreement with a major third-party national bank based in the United States.
Additionally, DFS provides ancillary services such as vehicle service contracts and guaranteed asset
protection, or GAP, insurance (through third parties), along with consultations regarding new and used automotive
purchasing, budgeting and credit and ownership training. DFSs revenue comes from fees which are
paid by the third-party national bank and fees from the sale of ancillary products such as vehicle
service contracts and GAP insurance coverage. DFS operates through an established network of
arrangements with more than 580 franchised and independent new and used car dealerships, according
to underwriting protocols specified by the third-party national bank.
The Companys common shares are traded on the NASDAQ Global Select Market under the symbol DLLR.
Subsequent Events
The Company has evaluated all subsequent events through February 9, 2010, which represents the
filing date of this Form 10-Q with the Securities and Exchange Commission, to ensure that this Form
10-Q includes appropriate disclosure of events both recognized in the financial statements as of
December 31, 2009, and events which occurred subsequent to December 31, 2009 but were not
recognized in the financial statements. As of February 9, 2010, there were no subsequent events
which required accounting recognition in the financial statements other than those disclosed elsewhere in the this Form 10-Q.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes. On an ongoing basis, management
evaluates its estimates and judgments, including those related to revenue recognition, loss
reserves, valuation allowance for income taxes and impairment assessment of goodwill and other
intangible assets. Management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities. Actual results
may differ from these estimates.
7
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation.
These reclassifications have no effect on net income or stockholders equity.
Fair Value of Financial Instruments
The fair value of the Term Loan Facilities is calculated as the sum of the present value of
all contractual cash flows. The fair value of the Companys 2.875% Senior Convertible Notes due
2027 (2027 Notes) and 3.00% Senior Convertible Notes due 2028 (2028 Notes) are based on
broker quotations. The fair value of 10.375% Senior Notes due 2016 (the 2016 Notes) approximates
the carrying value as of December 31, 2009. The Companys financial instruments consist of cash
and cash equivalents, loan and other consumer lending receivables, which are short-term in nature
and their fair value approximates their carrying value.
The total fair value of the 2027 Notes and the 2028 Notes were approximately $73.3 million and
$120.4 million, respectively, at December 31, 2009. These fair values relate to the face value of
the 2027 and 2028 Notes and not the carrying value recorded on the Companys balance sheet.
The total fair value of the Canadian Term Facility was approximately $13.6 million at December 31,
2009. The total fair value of the U.K. Term Facility was $4.1 million at December 31, 2009.
Earnings per Share
Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding. Diluted earnings per share are computed by dividing net income by the
weighted average number of common shares outstanding, after adjusting for the dilutive effect of
stock options. The following table presents the reconciliation of the numerator and denominator
used in the calculation of basic and diluted earnings per share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Net income
|
|
$
|
9,549
|
|
|
$
|
7,130
|
|
|
$
|
20,836
|
|
|
$
|
12,403
|
|
Reconciliation of denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding basic
1
|
|
|
23,941
|
|
|
|
24,047
|
|
|
|
24,059
|
|
|
|
24,022
|
|
Effect of dilutive stock options
2
|
|
|
3
|
|
|
|
477
|
|
|
|
53
|
|
|
|
337
|
|
Effect of unvested restricted stock and restricted stock unit grants
|
|
|
37
|
|
|
|
326
|
|
|
|
45
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average of common shares outstanding diluted
|
|
|
23,981
|
|
|
|
24,850
|
|
|
|
24,157
|
|
|
|
24,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes 124 and 101 shares of unvested restricted stock, which are included in total
outstanding common shares as of December 31, 2008 and 2009, respectively. The dilutive
effect of restricted stock is included in the calculation of diluted earnings per share
using the treasury stock method.
|
|
(2)
|
|
The effect of dilutive stock options was determined under the treasury stock method.
|
8
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Stock Based Employee Compensation
The Companys 2005 Stock Incentive Plan (the 2005 Plan) states that 1,718,695 shares of its
common stock may be awarded to employees, directors or consultants of the Company. The awards, at the
discretion of the Companys Board of Directors, may be issued as nonqualified stock options,
incentive stock options or restricted stock awards. The number of shares issued under the 2005 Plan
is subject to adjustment as specified in the 2005 Plan provisions. No options may be granted under
the 2005 Plan after January 24, 2015.
On November 15, 2007, the stockholders adopted the Companys 2007 Equity Incentive Plan (the 2007
Plan). The 2007 Plan provides for the grant of stock options, stock appreciation rights, stock
awards, restricted stock unit awards and performance awards (collectively, the Awards) to
officers, employees, non-employee members of the Board, independent consultants and contractors of
the Company and any parent or subsidiary of the Company. The maximum aggregate number of shares of
the Companys common stock that may be issued pursuant to Awards granted under the 2007 Plan is
2,500,000; provided, however, that no more than 1,250,000 shares may be awarded as restricted stock
or restricted stock unit awards. The shares that may be issued under the 2007 Plan may be
authorized, but unissued or reacquired shares of the Companys common stock. No grantee may receive an Award
relating to more than 500,000 shares in the aggregate per fiscal year under the 2007 Plan.
Stock options and stock appreciation rights granted under the aforementioned plans have an exercise
price equal to the closing price of the Companys common stock on the date of grant. To date no
stock appreciation rights have been granted.
Compensation expense related to share-based compensation included in the statement of operations
for the three months ended December 31, 2008 and 2009 was $1.0 million and $1.3 million,
respectively, net of related tax effects and $1.8 million and $2.5 million , respectively, net of
related tax effects for the six months ended December 31, 2008 and 2009
The weighted average fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
Expected volatility
|
|
|
49.7
|
%
|
|
|
54.5
|
%
|
|
|
49.4
|
%
|
|
|
54.9
|
%
|
Expected life (years)
|
|
|
5.8
|
|
|
|
5.7
|
|
|
|
5.8
|
|
|
|
5.9
|
|
Risk-free interest rate
|
|
|
2.47
|
%
|
|
|
3.01
|
%
|
|
|
2.52
|
%
|
|
|
3.23
|
%
|
Expected dividends
|
|
None
|
|
None
|
|
None
|
|
None
|
Weighted average fair value
|
|
$
|
3.51
|
|
|
$
|
11.87
|
|
|
$
|
3.73
|
|
|
$
|
9.48
|
|
A summary of the status of stock option activity for the six months ended December 31, 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic Value
|
|
|
Options
|
|
Price
|
|
Term (years)
|
|
($ in millions)
|
Options outstanding at June 30,
2009 (911,623 shares exercisable)
|
|
|
1,575,184
|
|
|
$
|
14.56
|
|
|
|
7.8
|
|
|
$
|
3.0
|
|
Granted
|
|
|
257,667
|
|
|
$
|
17.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,586
|
)
|
|
$
|
15.23
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(20,067
|
)
|
|
$
|
16.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2009
|
|
|
1,806,198
|
|
|
$
|
14.95
|
|
|
|
7.6
|
|
|
$
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
1,094,015
|
|
|
$
|
15.77
|
|
|
|
6.8
|
|
|
$
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Stock Based Employee Compensation (continued)
The aggregate intrinsic value in the above table reflects the total pre-tax intrinsic value (the
difference between the Companys closing stock price on the last trading day of the period and the
exercise price of the options, multiplied by the number of in-the-money stock options) that would
have been received by the option holders had all option holders exercised their options on December
31, 2009. The intrinsic value of the Companys stock options changes based on the closing price of
the Companys common stock. The total intrinsic value of
options exercised for the three and six months ended December 31, 2009 was zero and zero,
respectively, and was zero and $1.5 million for the three and six months ended December 31, 2008.
As of December 31, 2009, the total unrecognized compensation cost over a weighted-average period of
2.2 years, related to stock options, is expected to be $2.9 million. Cash received from stock
options exercised for the three and six months ended December 31, 2009 was $0.1 million and $0.1
million, respectively. Cash received from stock options exercised for the three and six months
ended December 31, 2008 was zero and $3.3 million, respectively.
Restricted stock awards granted under the 2005 Plan and 2007 Plan become vested (i) upon the
Company attaining certain annual pre-tax earnings targets (performance-based) and, (ii) after a
designated period of time (time-based), which is generally three years. Compensation expense is
recorded ratably over the requisite service period based upon an estimate of the likelihood of
achieving the performance goals. Compensation expense related to restricted stock awards is
measured based on the fair value using the closing market price of the Companys common stock on
the date of the grant.
Information concerning unvested restricted stock awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
Restricted
|
|
Grant-Date
|
|
|
Stock Awards
|
|
Fair-Value
|
Outstanding at June 30, 2009
|
|
|
105,458
|
|
|
$
|
11.03
|
|
Granted
|
|
|
31,899
|
|
|
$
|
22.86
|
|
Vested
|
|
|
(36,795
|
)
|
|
$
|
11.83
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
100,562
|
|
|
$
|
14.49
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Unit awards (RSUs) granted under the 2005 Plan and 2007 Plan become vested after
a designated period of time (time-based), which is generally on a quarterly basis over three
years. Compensation expense is recorded ratably over the requisite service period. Compensation
expense related to RSUs is measured based on the fair value using the closing market price of the
Companys common stock on the date of the grant.
Information concerning unvested restricted stock unit awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock Unit
|
|
Grant-Date
|
|
|
Awards
|
|
Fair-Value
|
Outstanding at June 30, 2009
|
|
|
413,926
|
|
|
$
|
11.25
|
|
Granted
|
|
|
233,599
|
|
|
$
|
16.73
|
|
Vested
|
|
|
(190,822
|
)
|
|
$
|
12.26
|
|
Forfeited
|
|
|
(13,493
|
)
|
|
$
|
16.86
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
443,210
|
|
|
$
|
13.53
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $7.5 million of total unrecognized compensation cost related to
unvested restricted share-based compensation arrangements granted under the plans. That cost is
expected to be recognized over a weighted average period of 1.8 years. The total fair value of
shares vested during the three and six months ended December 31, 2009 was $2.1 million and 2.8
million, respectively.
10
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (the FASB) issued Accounting Standard
Codification (ASC) 805-10 (formerly SFAS 141R),
Business Combinations
. This Statement
applies to all transactions or other events in which an entity obtains control of one or more
businesses, including those combinations achieved without the transfer of consideration. This
Statement retains the fundamental requirements that the acquisition method of accounting be used
for all business combinations. This Statement expands the scope to include all business
combinations and requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at their fair values as of the acquisition date.
Additionally, the Statement changes the way entities account for business combinations achieved in
stages by requiring the identifiable assets and liabilities to be measured at their full fair
values. The Company adopted the provisions of this Statement on July 1, 2009.
In December 2007, the FASB issued ASC 810-10 (formerly SFAS 160),
Non-controlling Interests in
Consolidated Financial Statements
. This Statement establishes accounting and reporting standards
for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a non-controlling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial statements.
Additionally, this Statement requires that consolidated net income include the amounts attributable
to both the parent and the non-controlling interest. The Company adopted the provisions of this
Statement on July 1, 2009. As a result of the adoption of this standard, the Company restated all
periods presented to retroactively give effect to this change.
In May 2008, the FASB issued ASC 470-20 (formerly FSP APB 14-1),
Accounting for Convertible Debt
Instruments That May Be Settled Upon Conversion (Including Partial Cash Settlement)
. The Statement
requires the initial proceeds from convertible debt that may be settled in cash to be bifurcated
between a liability component and an equity component. The objective of the guidance is to require
the liability and equity components of convertible debt to be separately accounted for in a manner
such that the interest expense recorded on the convertible debt would not equal the contractual
rate of interest on the convertible debt but instead would be recorded at a rate that would reflect
the issuers conventional debt borrowing rate. This is accomplished through the creation of a
discount on the debt that would be accreted using the effective interest method as additional
non-cash interest expense over the period the debt is expected to remain outstanding. The
Statement was adopted by the Company on July 1, 2009 and was applied retroactively to all periods
presented. The adoption impacted the accounting for the Companys 2.875% Senior Convertible Notes
due 2027 and 3.0% Senior Convertible Notes due 2028 (after their
issuance in December 2009) resulting in additional interest expense of
approximately $7.8 million and $8.6 million in fiscal years 2008 and 2009, respectively and
additional interest expense of $2.1 million and $4.2 million for the three months and six months
ended December 31, 2008. Also the adoption of the Statement, reduced the Companys debt balance by
recording a debt discount of approximately $55.8 million, with an offsetting increase to additional
paid in capital. Such amount will be amortized over the remaining expected life of the debt.
In April 2009, the FASB issued ASC 825-10 (formerly FSP SFAS 107-b)
Disclosures about Fair Value of
Financial Instruments
. The Statement requires disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial statements. The Company
adopted the provisions of the Statement for the first quarter fiscal 2010.
In June, 2009, the FASB issued ASC 105-10 (formerly SFAS 168)
Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles
. For most entities, the Statement establishes the FASB
Accounting Standards Codification as the source of authoritative accounting principles recognized
by the FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with US GAAP. The Statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. On the effective date, all
non-SEC accounting and reporting standards will be superseded. The Company has adopted this
Statement for the quarterly period ended September 30, 2009, as required, and adoption has not had
a material impact on the Companys consolidated financial statements.
2. Acquisitions
The following acquisitions have been accounted for under the purchase method of accounting.
On October 17, 2008, the Company entered in a series of purchase agreements to acquire
substantially all of the assets of six franchised stores from a franchisee of the Companys wholly
owned United Kingdom subsidiary. The aggregate purchase price for the acquisitions was
approximately $3.3 million in cash. The Company used excess cash to fund the acquisition. The
Company allocated a portion of
11
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
the purchase price to identifiable intangible assets, reacquired franchise rights, in the amount of
$2.6 million and other assets in the amount of $0.7 million. There was no excess purchase price
over the preliminary fair value of identifiable assets acquired.
On April 21, 2009, the Company entered into a purchase agreement to acquire all of the shares of
Express Finance Limited, a U.K. Internet-based consumer lending business. The aggregate purchase
price for the acquisition was approximately $6.8 million in cash. In addition, the agreement
provides for an earnings-related contingent consideration amount based on the results for the two
years following the date of acquisition. No amounts have been recorded for this contingent
consideration. The Company used excess cash to fund the acquisition. The Company allocated
approximately $0.8 million to net assets acquired, including $2.8 million in net loans receivable.
The excess purchase price over the preliminary fair value of the identifiable assets acquired was
$6.0 million and was recorded as goodwill.
On June 29, 2009, the Company entered into a purchase agreement to acquire substantially all of the
assets of 2 pawn shops located in Scotland from Robert Biggar Limited. The aggregate purchase price
for the acquisition was approximately $8.0 million in cash. The Company used excess cash to fund
the acquisition. The Company allocated approximately $3.4 million to net assets acquired. The
excess purchase price over the preliminary fair value of the identifiable assets acquired was
$4.6 million and was recorded as goodwill.
On June 30, 2009, the Company entered into a purchase agreement to acquire 76% of the shares of
Optima, S.A., a consumer lending business in Poland. The aggregate purchase price for the
acquisition was approximately $5.8 million in cash and the assumption of approximately $6.3 million
in debt. The holders of the assumed debt are current shareholders of Optima. In addition, the
agreement provides for an earnings-related contingent consideration amount based on the cumulative
three year period following the date of acquisition. No amounts have been recorded for this
contingent consideration. The Company used excess cash to fund the acquisition. The Company
allocated approximately $1.3 million to net assets acquired, including $7.4 million in net loans
receivable. The excess purchase price over the preliminary fair value of the identifiable assets
acquired was $4.7 million and was recorded as goodwill.
During fiscal 2009, the Company completed various smaller acquisitions in the United States and the
United Kingdom that resulted in an aggregate increase in goodwill of $1.5 million, calculated as
the excess purchase price over the preliminary fair value of the identifiable assets acquired.
On October 3, 2009, the Company entered into a purchase agreement to acquire all the shares of
Merchant Cash Express Limited, a U.K. entity, which primarily provides working capital needs to
small retail businesses by providing cash advances against a percentage of future credit and debit card
sales. The aggregate purchase price for the acquisition was approximately $4.6 million. The
Company used excess cash to fund the acquisition. The Company allocated approximately $2.6 million
to net assets acquired. The excess purchase price over the preliminary fair value of the
identifiable assets acquired was $2.0 million and recorded as goodwill.
On December 23, 2009, the Company consummated the acquisition of all the shares of Military
Financial Services, including its wholly-owned subsidiaries Dealers Financial Services, LLC and Dealers Financial Services Reinsurance Ltd (DFS
Acquisition), which provide fee-based services for military personnel who obtain auto loans in the
United States made by a third party national bank. The acquisition was effected pursuant to the
terms of a share purchase agreement dated October 28, 2009. The aggregate purchase price for the
acquisition was $123.3 million. In connection with the acquisition, we have also incurred
transaction costs of approximately $0.6 million. The total purchase price of the acquisition,
including transactions costs, was $123.9 million.
12
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
Under the purchase method of accounting, the total estimated purchase price is allocated to DFS
net tangible and intangible assets based on their current estimated fair values. Based on
managements preliminary valuation of the fair value of tangible and intangible assets acquired and
liabilities assumed, which are based on estimates and assumptions that are subject to change, the
preliminary purchase price is allocated as follows (in thousands):
|
|
|
|
|
Cash
|
|
$
|
4,464
|
|
Other receivables
|
|
|
1,471
|
|
Other assets
|
|
|
2,883
|
|
Prepaid expenses and other current assets
|
|
|
1,990
|
|
Property and equipment
|
|
|
559
|
|
Accounts payable
|
|
|
(690
|
)
|
Accrued expenses and other liabilities
|
|
|
(1,896
|
)
|
Other non-current liabilities
|
|
|
(2,974
|
)
|
|
|
|
|
Net tangible assets acquired
|
|
|
5,807
|
|
Definite-lived intangible assets acquired
|
|
|
28,890
|
|
Indefinite-lived intangible assets acquired
|
|
|
35,501
|
|
Goodwill
|
|
|
53,125
|
|
|
|
|
|
|
Total estimated purchase price
|
|
$
|
123,323
|
|
|
|
|
|
Prior to the end of the measurement period for finalizing the purchase price allocation, if
information becomes available which would indicate adjustments are required to the purchase price
allocation, such adjustments will be included in the purchase price allocation retrospectively.
Of the total estimated purchase price, an estimate of $5.8 million has been allocated to net
tangible assets acquired, $28.9 million has been allocated to definite-lived intangible assets
acquired and $35.5 million has been allocated to indefinite-lived intangible assets. The remaining
purchase price has been allocated to goodwill. We anticipate that the entire amount of the
goodwill recorded in connection with the DFS acquisition will be deductible for income tax
purposes.
13
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
The fair value of identifiable intangible assets is determined primarily using the income method,
which starts with a forecast of all the expected future net cash flows. Some of the more
significant assumptions inherent in the development of intangible asset values, from the
perspective of the market participant, include: the amount and timing of the projected future cash
flows (including revenue, cost of sales, operating expenses and working capital/contributory asset
charges); the discount rate selected to measure the risks inherent in the future cash flows; and
the assessment of the assets life cycle and the competitive trends impacting the asset, as well as
other factors. The components of the estimated fair value of the acquired identifiable intangible
assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated Fair
|
|
|
Useful Lives
|
|
|
|
Value
|
|
|
(Years)
|
|
Third-party bank financing contract
|
|
$
|
15,177
|
|
|
|
5
|
|
Service warranty provider contract
|
|
|
7,164
|
|
|
|
5
|
|
Auto dealer relationships
|
|
|
4,253
|
|
|
|
5
|
|
GAP insurance provider contract
|
|
|
1,538
|
|
|
|
3
|
|
Payment processing contract
|
|
|
421
|
|
|
|
5
|
|
Non-compete contracts
|
|
|
337
|
|
|
|
2
|
|
Tradename/Program (DFS MILES Program)
|
|
|
35,501
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
$
|
64,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2010, the Company completed various smaller acquisitions in United Kingdom that
resulted in an aggregate increase in goodwill of $0.2 million, calculated as the excess purchase
price over the preliminary fair value of the identifiable assets acquired. Also in fiscal 2010,
$0.3 million and $0.1 million of purchase accounting adjustments were made to the Robert Biggar
Limited and Optima, S.A., respectively.
One of the core strategies of the Company is to capitalize on its competitive strengths and enhance
its leading marketing positions. One of the key elements in the strategy is the intention to grow
our network through acquisitions. The Companys acquisitions provide it with increased market
penetration or in some cases the opportunity to enter new platforms and geographies. The purchase
price of each acquisition is primarily based on a multiple of historical earnings. The Companys
standard business model, and that of the industrys, is one that does not rely heavily on tangible
assets and therefore, it is common to have majority of the purchase price allocated to goodwill, or
in some cases, intangibles.
14
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions (continued)
The following reflects the change in goodwill during the periods presented (in millions):
|
|
|
|
|
Balance at June 30, 2009
|
|
$
|
406.5
|
|
Acquisitions:
|
|
|
|
|
Military Financial Services, LLC
|
|
|
53.1
|
|
Merchant Cash Express
|
|
|
2.0
|
|
Various small acquisitions
|
|
|
0.2
|
|
Purchase accounting adjustments:
|
|
|
|
|
Robert Biggar Limited
|
|
|
0.3
|
|
Optima, S.A.
|
|
|
0.1
|
|
Foreign currency adjustment
|
|
|
13.2
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
475.4
|
|
|
|
|
|
The following pro forma information for the three and six months ended December 31, 2009 presents
the results of operations as if the acquisitions had occurred as of the beginning of the period
presented. The pro forma operating results include the results of these acquisitions for the
indicated periods and reflect the increased interest expense on acquisition debt and the income tax
impact as of the respective purchase dates of the Express Finance, Robert Biggar, Optima, MCE and
DFS acquisitions. Pro forma results of operations are not necessarily indicative of the results of
operations that would have occurred had the purchase been made on the date above or the results
which may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
|
(Unaudited in thousands except per
|
|
|
(Unaudited in thousands except per
|
|
|
|
share amounts)
|
|
|
share amounts)
|
|
|
|
Revenue
|
|
$
|
142,242
|
|
|
$
|
158,549
|
|
|
$
|
305,244
|
|
|
$
|
308,098
|
|
Net income
|
|
$
|
12,557
|
|
|
$
|
8,858
|
|
|
$
|
27,144
|
|
|
$
|
18,828
|
|
Net income per common share basic
|
|
$
|
0.52
|
|
|
$
|
0.37
|
|
|
$
|
1.13
|
|
|
$
|
0.78
|
|
Net income per common share diluted
|
|
$
|
0.52
|
|
|
$
|
0.36
|
|
|
$
|
1.11
|
|
|
$
|
0.76
|
|
15
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Goodwill and Other Intangibles
|
The changes in the carrying amount of goodwill by reportable segment for the six months ended December 31, 2009 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
Dealers Financial
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Services
|
|
|
Canada
|
|
|
Kingdom
|
|
|
Total
|
|
Balance at June 30, 2009
|
|
$
|
210,335
|
|
|
$
|
|
|
|
$
|
124,453
|
|
|
$
|
71,766
|
|
|
$
|
406,554
|
|
Acquisitions and purchase accounting
adjustments
|
|
|
46
|
|
|
|
53,125
|
|
|
|
|
|
|
|
2,467
|
|
|
|
55,638
|
|
Foreign currency translation adjustments
|
|
|
620
|
|
|
|
|
|
|
|
13,787
|
|
|
|
(1,235
|
)
|
|
|
13,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
211,001
|
|
|
$
|
53,125
|
|
|
$
|
138,240
|
|
|
$
|
72,998
|
|
|
$
|
475,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reflects the components of intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Amount
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
406,554
|
|
|
$
|
475,364
|
|
Reacquired franchise rights
|
|
|
47,793
|
|
|
|
52,313
|
|
DFS MILES Program
|
|
|
|
|
|
|
35,501
|
|
|
|
|
|
|
|
|
|
|
$
|
454,347
|
|
|
$
|
563,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets:
|
|
|
|
|
|
|
|
|
Various contracts
|
|
$
|
|
|
|
$
|
28,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
454,347
|
|
|
$
|
591,945
|
|
|
|
|
|
|
|
|
Goodwill is the excess of cost over the fair value of the net assets of the business acquired.
Intangible assets consist of reacquired franchise rights, which are deemed to have an indefinite
useful life and are not amortized.
Goodwill is tested for impairment annually as of June 30, or whenever events or changes in business
circumstances indicate that an asset might be impaired. As of June 30, 2009, there was no
impairment of goodwill. However, if market conditions were to deteriorate or there is significant
regulatory action that negatively affects our business, there can be no assurance that future
goodwill impairment tests will not result in a charge to earnings.
Identified intangibles with indefinite lives are tested for impairment annually as of December 31,
or whenever events or changes in business circumstances indicate that an asset may be impaired. If
the estimated fair value is less than the carrying amount of the intangible assets with indefinite
lives, then an impairment charge would be recognized to reduce the asset to its estimated fair
value. As of December 31, 2009, there was no impairment of reacquired franchise rights or the DFS MILES Program. There can
be no assurance that future impairment tests will not result in a charge to earnings.
The fair value of the Companys goodwill and indefinite-lived intangible assets are estimated based
upon a present value technique using discounted future cash flows. The Company uses management
business plans and projections as the basis for expected future cash flows. Assumptions in
estimating future cash flows are subject to a high degree of judgment. The Company makes every
effort to forecast its future cash flows as accurately as possible at the time the forecast is
developed. However, changes in assumptions and estimates or a significant increase in our weighted average cost of capital used to discount expected future cash flows, may affect the implied fair value of
goodwill and indefinite-lived intangible assets and could result in an additional
impairment charge in future periods.
16
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities
|
Due to the uncertainty surrounding the litigation process, except for those matters where an
accrual has been provided, the Company is unable to reasonably estimate the range of loss, if any,
at this time in connection with the legal proceedings discussed below. While the outcome of many
of these matters is currently not determinable, the Company believes it has meritorious defenses
and that the ultimate cost to resolve these matters will not have a material adverse effect on the
Companys consolidated financial position, results of operations or cash flows. In addition to the
legal proceedings discussed below, the Company is involved in routine litigation and administrative
proceedings arising in the ordinary course of business.
The Company assesses the materiality of litigation by reviewing a range of qualitative and
quantitative factors. These factors include the size of the potential claims, the merits of the
Companys defenses and the likelihood of plaintiffs success on the merits, the regulatory
environment that could impact such claims and the potential impact of the litigation on our
business. The Company evaluates the likelihood of an unfavorable outcome of the legal or
regulatory proceedings to which it is a party in accordance with the Contingencies Topic of the
FASB Codification. This assessment is subjective based on the status of the legal proceedings and
is based on consultation with in-house and external legal counsel. The actual outcomes of these
proceedings may differ from the Companys assessments.
Canadian Legal Proceedings
On August 19, 2003, a former customer in Ontario, Canada, Margaret Smith commenced an action
against OPCO and the Companys Canadian subsidiary, National Money Mart Company (Money Mart), on
behalf of a purported class of Ontario borrowers who, Smith claims, were subjected to usurious
charges in payday-loan transactions (the Ontario Litigation). The action, alleged violations of a
Canadian federal law proscribing usury, seeks restitution and damages, including punitive damages,
and seeks injunctive relief prohibiting further alleged usurious charges. The plaintiffs motion
for class certification was granted on January 5, 2007. The trial of the common issues commenced on
April 27, 2009 but was suspended when the parties reached a settlement. During the fiscal quarter
and fiscal year ended June 30, 2009, our Canadian subsidiary, Money Mart, recorded a charge of
$57.4 million in relation to the pending Ontario settlement and for the potential settlement of
certain of the similar class action proceedings pending in other Canadian provinces described
below. Court approval of the settlement is required and a hearing is presently scheduled for
February 22, 2010. There is no assurance that the Ontario settlement will receive final Court
approval or that any of the other class action proceedings will be settled. Although we believe
that we have meritorious defenses to the claims in the pending class action proceedings and intend to vigorously defend
against such claims, the ultimate cost of resolution of such claims, either through settlements or
pursuant to litigation, may substantially exceed the amount accrued at June 30, 2009, and
additional accruals may be required in the future. As of December 31, 2009, the remaining provision
of approximately $53.4 million is included in the Companys accrued expenses.
On November 6, 2003, Gareth Young, a former customer, commenced a purported class action in the
Court of Queens Bench of Alberta, Canada on behalf of a class of consumers who obtained short-term
loans from Money Mart in Alberta, alleging, among other things, that the charge to borrowers in
connection with such loans is usurious. The action seeks restitution and damages, including
punitive damages. On December 9, 2005, Money Mart settled this action, subject to court approval.
On March 3, 2006, just prior to the date scheduled for final court approval of the settlement, the
plaintiffs lawyers advised that they would not proceed with the settlement and indicated their
intention to join a purported national class action. No steps have been taken in the action since
March 2006. Subsequently, Money Mart commenced an action against the plaintiff and the plaintiffs
lawyer for breach of contract. This latter action has since been resolved.
On March 5, 2007, a former customer, H. Craig Day, commenced an action against OPCO, Money Mart and
several of the Companys franchisees in the Court of Queens Bench of Alberta, Canada on behalf of
a putative class of consumers who obtained short-term loans from Money Mart in Alberta. The
allegations, putative class and relief sought in the
Day
action are substantially the same as those
in the
Young
action but relate to a claim period that commences before and ends after the claim
period in the
Young
action and excludes the claim period described in that action. No steps have
been taken in the action since March 2007.
On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against Money Mart and
26 other Canadian lenders on behalf of a purported class of British Columbia residents who,
MacKinnon claims were overcharged in payday-loan transactions. The action, which is pending in the
Supreme Court of British Columbia, alleges violations of laws proscribing usury and unconscionable
trade practices and seeks restitution and damages, including punitive damages, in an unknown
amount. Following initial denial, MacKinnon obtained an order permitting him to re-apply for class
certification of the action against Money Mart alone, which was appealed. The Court of Appeal
granted MacKinnon the right to apply to the original judge to have her amend her order denying
class
17
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
|
Canadian Legal Proceedings (continued)
certification. On June 14, 2006, the original judge granted the requested order and Money Marts
request for leave to appeal the order was dismissed. The certification motion in this action
proceeded in conjunction with the certification motion in the
Parsons
action described below.
On April 15, 2005, the solicitor acting for MacKinnon commenced a proposed class action against
Money Mart on behalf of another former customer, Louise Parsons. Class certification of the
consolidated MacKinnon and Parsons actions was granted on
March 14, 2007. In December 2007, the
plaintiffs filed a motion to add OPCO as a defendant in this action and in March 2008 an order was
granted adding OPCO as a defendant. On July 25, 2008, the plaintiffs motion to certify the action
against OPCO was granted. Discovery has been completed and a summary trial is scheduled to commence
on March 15, 2010. In an affidavit recently filed in the action,
the plaintiffs estimated damages in the amount of approximately C$120 million plus interest. Although the parties
intend to engage in non-binding mediation before commencement of the
summary trial, there is no assurance that the mediation, or any related settlement discussions,
will be successful.
Similar purported class actions have been commenced against Money Mart in Manitoba, New Brunswick,
Nova Scotia and Newfoundland. OPCO is named as a defendant in the actions commenced in Nova Scotia
and Newfoundland. The claims in these additional actions are substantially similar to those of the
Ontario action referred to above.
On
April 26, 2006 and August 3, 2006, two former employees, Peggy White and Kelly Arseneau, commenced
companion actions against Money Mart and OPCO. The actions, which are pending in the Superior Court
of Ontario, allege negligence on the part of the defendants in security training procedures and
breach of fiduciary duty to employees in violation of applicable statutes. The companion lawsuits
seek combined damages of C$5.0 million plus interest and costs. These claims have been submitted to
the respective insurance carriers. The Company intends to defend these actions vigorously.
At this time, it is too early to determine the likelihood of an unfavorable outcome or the ultimate
liability, if any, resulting from these matters.
California Legal Proceedings
On September 11, 2006, Caren Bufil commenced a lawsuit against OPCO; the claims in
Bufil
are
substantially similar to the claims in a previously dismissed case.
Bufil
sought and obtained class
certification of the action alleging that OPCO failed to provide non-management employees with meal
and rest breaks required under California law. The suit sought an unspecified amount of damages and
other relief. In September 2009, the Company was successful in settling the action, and has
recorded a charge of $1.3 million. Preliminary court approval of the settlement was granted in
November and final court approval will be scheduled later this year. The settlement is subject to
court approval and although likely, there is no assurance that such approval will occur.
On April 26, 2007, the San Francisco City Attorney (City Attorney) filed a complaint in the name
of the People of the State of California alleging that OPCOs subsidiaries engaged in unlawful and
deceptive business practices in violation of California Business and Professions Code Section 17200
by either themselves making installment loans under the guise of marketing and servicing for
co-defendant First Bank of Delaware (the Bank) or by brokering installment loans made by the Bank
in California in violation of the prohibition on usury contained in the California Constitution and
the California Finance Lenders Law and that they have otherwise violated the California Finance
Lenders Law and the California Deferred Deposit Transaction Law. The complaint seeks broad
injunctive relief as well as civil penalties. On January 5, 2009, the City Attorney filed a First
Amended Complaint, restating the claims in the original complaint, adding OPCO as a defendant and
adding a claim that short-term deferred deposit loans made by the Bank, which were marketed and
serviced by OPCO and/or its subsidiaries violated the California Deferred Deposit Transaction law.
OPCO and its subsidiaries have denied the allegations of the First Amended Complaint. Discovery is
proceeding in state court and no trial date has been set. At this time, it is too early to
determine the likelihood of an unfavorable outcome or the ultimate liability, if any, resulting
from this case.
We The People Legal Proceedings
WTPs business model for its legal document processing services business is being challenged in
certain courts, as described below, which could result in WTPs discontinuation of these services
in any one or more jurisdictions. The company from which WTP bought the assets of its WTP business,
We The People Forms and Service Centers USA, Inc. (the Former WTP), certain of its franchisees
and/or WTP are defendants in various lawsuits. The principal litigation for the WTP business unit
is as follows:
18
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
|
We The People Legal Proceedings (continued)
In May 2007, WTP met with the New York State Attorney Generals Office, Consumer Affairs Division,
which had been investigating the We The People operation in the New York City area for over three
years. The Attorney Generals Office alleged that WTP engaged in unfair business practices,
including deceptive advertising that harmed New York consumers. The Attorney Generals Office
demanded that WTP enter into an Agreed Order of Discontinuance (AOD) and demanded WTP pay a fine
of approximately $0.3 million, plus investigation costs. WTP denied the allegations and requested
that the Attorney Generals Office hold the former New York City WTP owners liable for the alleged
misconduct. The terms of the AOD are in negotiation.
In May 2007, WTP franchisee Roseann Pennisi and her company, We The People of Westchester Square,
New York, Inc., sued WTP, OPCO, Ira and Linda Distenfield and the Former WTP in the Supreme Court
of the State of New York, Bronx County. The complaint alleges breach of franchise agreement,
tortious interference with franchise agreement, breach of the covenant of good faith and fair
dealing, unfair competition against defendants and breach of contract and deception and
misrepresentation, unjust enrichment, fraudulent concealment of material facts against the
Distenfields and the Former WTP and seeks over $9.0 million in damages. Following a successful
motion by WTP to compel arbitration of the plaintiffs claims, in October 2008, the plaintiff filed
a request to arbitrate with relief requested in the amount of $0.4 million. In August 2009,
the plaintiff amended her petition to arbitrate and increased it to $0.7 million. The arbitration is
presently scheduled for March 2010. The Company believes the material allegations in the complaint
with respect to OPCO and WTP are without merit and intends to defend the matter vigorously.
In September 2007, Jacqueline Fitzgibbons, a former customer of a WTP store, commenced a lawsuit
against WTP and OPCO and others in California Superior Court for Alameda County. The suit alleges
on behalf of a class of consumers and senior citizens that, from 2003 to 2007, We The People
violated California law by advertising and selling living trusts and wills to certain California
residents. Plaintiff claims, among other things, that WTP and others improperly conspired to
provide her with legal advice, misled her as to what, if any, legitimate service We The People
provided in preparing documents, and misled her regarding the supervising attorneys role in
preparing documents. The plaintiff is seeking class certification, prohibition of WTPs alleged
unlawful business practices, and damages on behalf of the class in the form of disgorgement of all
monies and profits obtained from unlawful business practices, general and special damages,
attorneys fees and costs of the suit, statutory and treble damages pursuant to various California
business, elder abuse, and consumer protection codes. The complaint has been amended several times
to add new parties and additional claims. The Court granted, in part, WTPs motion to dismiss
certain claims alleged by the plaintiffs. In January 2009, an individual named Robert Blau replaced
Fitzgibbons as lead plaintiff. A motion to certify the class was heard in October 2009 and the
court denied Plaintiffs motion for class certification of claims for fraud, false advertising and
violations of the Consumer Legal Remedies Act but granted class certification of the claim that
WTPs business model violates certain unfair competition laws in California. A trial is presently
scheduled for May 2010. The Company believes the allegations are without merit and is defending the
action vigorously.
In August 2008, a group of six former We The People customers commenced a lawsuit in St. Louis
County, Missouri against OPCO and its subsidiary, We The People USA, Inc. and WTP franchisees
offering services to Missouri consumers. The plaintiffs allege, on behalf of a putative class of
over 1,000 consumers that, from 2002 to the present, defendants violated Missouri law by engaging
in: (i) an unauthorized law business; (ii) the unauthorized practice of law; and (iii) unlawful
merchandising practices in the sale of its legal documents. The plaintiffs are seeking class
certification, prohibition of the defendants unlawful business practices, and damages on behalf of
the class in the form of disgorgement of all monies and profits obtained from unlawful business
practices, attorneys fees, statutory and treble damages pursuant to various Missouri consumer
protection codes. In November 2008, the original six plaintiffs were dismissed by plaintiffs
counsel and the initial complaint was also later dismissed. In January 2009, former WTP customers,
Philip Jones and Carol Martin, on behalf of a punitive class of Missouri customers, filed a lawsuit
in St. Louis County against OPCO and its subsidiary, We The People USA, Inc., and a St. Louis WTP
franchisee entity alleging claims similar to the initial August 2008 suit. These new plaintiffs
also seek class certification. The Company intends to defend these allegations and believes that
the plaintiffs claims and allegations of class status are without merit.
On January 14, 2009, a demand for arbitration was made on behalf of Thomas Greene and Rebecca M.
Greene, We The People franchisees, against We The People USA, Inc., We The People LLC and the
Company. The demand alleged violations by We The People of certain state and federal franchise laws
relating to (1) failure to register the franchise as a business opportunity with the Utah Division
of Consumer Protection; (2) earnings claims representations and (3) failure to provide a disclosure
document meeting the substantive and timing requirements mandated by the Utah Business Opportunity
Act. The Greenes are demanding $0.4 million for losses
19
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Contingent Liabilities (continued)
|
We The People Legal Proceedings (continued)
relating to the violations. The arbitration is presently scheduled for April 2010. WTP and the
Company believe the allegations are without merit and intend to defend the matter vigorously.
In June 2009, a demand for arbitration was filed by a current We The People franchisee, Frank
Murphy, Jr., against the Companys subsidiaries, We The People USA, Inc., and We The People LLC.
The demand alleges violations by We The People of certain obligations under the Franchise Agreement
and seeks $1.0 million for losses relating to these violations. WTP believes the allegations are
without merit and intends to defend the matter vigorously.
In January 2009, the Company learned that Ira and Linda Distenfield had filed a joint voluntary
petition under Chapter 7 of the U.S. Bankruptcy Code. In addition to delaying the ultimate
resolution of many of the foregoing matters, the economic effect of this filing and, in particular,
its effect on the Companys ability to seek contribution from its co-defendants in connection with
any of the foregoing matters, cannot presently be estimated.
It is the Companys opinion that many of the WTP related litigation matters relate to actions
undertaken by the Distenfields and the Former WTP during the period of time when they owned or
managed We The People Forms and Service Centers USA, Inc.; this period of time was prior to the
acquisition of the assets of the Former WTP by the Company. However, in many of these actions, the
Company and WTP have been included as defendants in these cases as well. At this time, it is too
early to determine the likelihood of an unfavorable outcome or the ultimate liability, if any, of
any of the aforementioned matters against WTP or the Company or any other Company litigation as
well.
In addition to the matters described above, the Company continues to respond to inquiries it
receives from state bar associations and state regulatory authorities from time to time as a
routine part of its business regarding its legal document processing services business and its WTP
franchisees.
The Company had debt obligations at June 30, 2009 and December 31, 2009 as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2009
|
|
National Money Mart Company 10.375% Senior Notes due 2016
|
|
$
|
|
|
|
$
|
600,000
|
|
Issuance discount on Senior Notes
|
|
|
|
|
|
|
(3,635
|
)
|
Dollar Financial Corp. 2.875% Senior Convertible Notes due 2027
|
|
|
161,315
|
|
|
|
66,601
|
|
Dollar Financial Corp. 3.000% Senior Convertible Notes due 2028
|
|
|
|
|
|
|
77,801
|
|
Term loans due October 2012
|
|
|
368,722
|
|
|
|
1,608
|
|
Term loans due December 2014
|
|
|
|
|
|
|
17,050
|
|
Other
|
|
|
6,268
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
536,305
|
|
|
|
759,425
|
|
Less: current portion of debt
|
|
|
(5,880
|
)
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
530,425
|
|
|
$
|
759,232
|
|
|
|
|
|
|
|
|
Senior Notes
On
December 23, 2009, the Companys wholly owned indirect
Canadian subsidiary, National Money Mart Company
sold pursuant to Rule 144A under the Securities Act of 1933, as amended, $600 million aggregate
principal amount of its 10.375% Senior Notes due 2016 (the 2016 Notes). The 2016 Notes were
issued pursuant to an indenture, dated as of December 23, 2009, among National Money Mart Company,
as issuer, and the Company and certain of its direct and indirect wholly owned U.S. and Canadian
subsidiaries, as guarantors, and U.S. Bank National Association, as trustee. The 2016 Notes bear
interest at a rate of 10.375% per year. National Money Mart Company
is obligated to pay interest on the 2016
Notes on June 15 and December 15 of each year, commencing on June 15, 2010. The 2016 Notes will
mature on December 15, 2016. The maturity date of the 2016 Notes will be automatically shortened to
November 30, 2012,
20
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
unless, prior to October 30, 2012, the aggregate principal amount of the Companys outstanding
2.875% senior convertible notes due 2027 has been reduced to an amount less than or equal to $50.0
million by means of (i) the repurchase or redemption thereof , (ii) defeasance thereof or (iii) the
exchange or conversion thereof into unsecured notes of the Company or any of its direct or indirect
subsidiaries having no mandatory repayment prior to April 1, 2015, or into common stock of the
Company. As of January 31, 2010, $80 million of the Companys 2.875% senior convertible notes due
2027 remained outstanding. Upon the occurrence of certain change of
control transactions, National Money Mart Company will be required to make an offer to repurchase
the 2016 Notes at 101% of the principal amount thereof, plus any accrued and unpaid interest to the
repurchase date, unless certain conditions are met. After December 15, 2013, National Money Mart
Company will have the right to redeem the 2016 Notes, in whole at any time or in part from time to
time, (i) at a redemption price of 105.188% of the principal amount thereof if the redemption
occurs prior to December 15, 2014, (ii) at a redemption price of 102.594% of the principal amount
thereof if the redemption occurs before December 15, 2015, and (iii) at a redemption price of 100%
of the principal amount thereof if the redemption occurs after December 15, 2015. In connection
with the offering, National Money Mart Company agreed to file with the Securities and Exchange
Commission a registration statement under the Securities Act with respect to an offer to exchange
the 2016 Notes for new 10.375% senior notes due 2016 of National Money Mart Company, with terms
substantially similar to the 2016 Notes, no later than 90 days after the issuance of the 2016
Notes.
Convertible Notes
Senior Convertible Notes due 2027
On
June 27, 2007, the Company issued $200.0 million aggregate
principal amount of its 2.875% Senior Convertible Notes due 2027 (the Old 2027 Notes) in a private
offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities
Act of 1933, as amended (Securities Act). The Company received proceeds of approximately
$193.5 million from the issuance, net of underwriting fees of approximately $6.5 million.
Underwriting fees are included in issuance costs on the Companys balance sheet and are amortized
to interest expense using the effective interest rate method over 5.5 years from the date of
issuance.
As a result of the exchange transactions described below, $80.0
million aggregate principal amount of the old 2027 Notes were
outstanding as of December 31, 2009.
The Old 2027 Notes are general unsecured obligations and rank equally in right of
payment with all of the Companys other existing and future obligations that are unsecured and
unsubordinated. The Old 2027 Notes bear interest at the rate of 2.875% per year, payable every
June 30 and December 31 beginning December 31, 2007. The Old 2027 Notes mature on June 30, 2027,
unless earlier converted, redeemed or repurchased by the Company. Holders of the Old 2027 Notes
may require the Company to repurchase in cash some or all of the Old 2027 Notes at any time before
the Old 2027 Notes maturity following a fundamental change as defined in the Indenture dated June
27, 2007 (the 2027 Notes Indenture).
The 2027
Notes Indenture includes a net share settlement provision that allows the Company, upon
redemption or conversion, to settle the principal amount of the notes in cash and the additional
conversion value, if any, in shares of the Companys common stock. Holders of the Old 2027 Notes
may convert their Old 2027 Notes based at an initial conversion rate of 25.7759 shares per $1,000
principal amount of Old 2027 Notes (equivalent to an initial conversion price of $38.796 per share), subject to adjustment, prior to stated maturity under the
following circumstances:
|
|
|
during any calendar quarter commencing after September 30, 2007, if the closing sale price
of the Companys common stock is greater than or equal to 130% of the applicable conversion
price for at least 20 trading days in the period of 30 consecutive trading days ending on
the last day of the preceding calendar quarter;
|
|
|
|
|
during the five day period following any five consecutive trading day period in which the
trading price of the Old 2027 Notes for each day of such period was less than 98.0% of the
product of the closing sale price per share of the Companys common stock on such day and
the conversion rate in effect for the Old 2027 Notes on each such day;
|
|
|
|
|
if such notes have been called for redemption; at any time on or after December 31, 2026; or
|
|
|
|
|
upon the occurrence of specified corporate transactions as
described in the 2027 Notes Indenture.
|
If a fundamental change, as defined in the Indenture, occurs prior to December 31, 2014 and a
holder elects to convert its Old 2027 Notes in connection with such transaction, the Company will
pay a make whole provision, as defined in the Indenture.
On or after December 31, 2012, but prior to December 31, 2014, the Company may redeem for cash
all or part of the Old 2027 Notes, if during any period of 30 consecutive trading days ending not
later than December 31, 2014, the closing sale price of a share of the
21
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Companys common stock is for at least 120 trading days within such period of 30 consecutive
trading days greater than or equal to 120% of the conversion price on each such day. On or after
December 31, 2014, the Company may redeem for cash all or part of the Old 2027 Notes, upon at least
30 but not more than 60 days notice before the redemption date by mail to the trustee, the paying
agent and each holder of Old 2027 Notes. The amount of cash paid in connection with each such
redemption will be 100% of the principal amount of the Old 2027 Notes to be redeemed, plus accrued
and unpaid interest, including any additional amounts, up to but excluding the redemption date.
Holders have the right to require the Company to purchase all or a portion of the Old 2027
Notes on December 31, 2012, December 31,
2014, June 30, 2017 and June 30, 2022 (each of which are referred to as a purchase date). The
purchase price payable will be equal to 100% of the principal amount of the notes to be purchase
plus any accrued and unpaid interest, including any additional amounts, up to but excluding the applicable
purchase date.
If the Company undergoes a fundamental change, as defined in the 2027 Notes Indenture, before maturity of
the Old 2027 Notes, holders will have the right, subject to certain conditions, to require the
Company to repurchase for cash all or a portion of the Old 2027 Notes at a repurchase price equal
to 100% of the principal amount of the Old 2027 Notes being repurchased, plus accrued and unpaid
interest, including any additional amounts, up to but excluding the date of repurchase.
Senior Convertible Notes due 2028
On December 21, 2009, the Company commenced the closing of an exchange offer with certain holders
of the Old 2027 Notes pursuant to the terms of exchange agreements with such holders. Pursuant to
the terms of the exchange agreements, the holders exchanged an aggregate of $120 million principal
amount of the Old 2027 Notes held by such holders for an equal aggregate principal amount of the
Companys 3.0% Senior Convertible Notes due 2028 (the New 2028 Notes).
The New 2028 Notes are general unsecured obligations and rank equally in right of payment with all
of the Companys other existing and future obligations, that are unsecured and unsubordinated,
including the Old 2027 Notes that remain outstanding. The Old 2027 Notes bear interest at the rate
of 3.00% per year, payable every April 1 and October 1 beginning April 1, 2010. The Old 2027 Notes
will mature on April 1, 2028, unless earlier converted, redeemed or repurchased by the Company.
Holders of the New 2028 Notes may require the Company to repurchase in cash some or all of the New
2028 Notes at any time before the New 2027 Notes maturity following a fundamental change as
defined in the Indenture dated December 21, 2009 (the 2029 Notes Indenture).
The 2028 Notes Indenture includes a net share settlement provision that allows the Company,
upon redemption or conversion, to settle the principal amount of the notes in cash and the
additional conversion value, if any, in shares of the Companys common stock. Holders of the New
2028 Notes may convert their New 2028 Notes based at an initial conversion rate of 34.5352 shares
per $1,000 principal amount of New 2028 Notes (equivalent to an initial conversion price of
approximately $28.956 per share), subject to adjustment, prior to stated maturity under the
following circumstances:
|
|
|
during any calendar quarter commencing after December 31, 2009, if the closing sale price of
the Companys common stock is greater than or equal to 130% of the applicable conversion price for
at least 20 trading days in the period of 30 consecutive trading days ending on the last day of the
preceding calendar quarter;
|
|
|
|
|
during the five day period following any five consecutive trading day period in which the trading
price of the New 2028 Notes for each day of such period was less than 98.0% of the product of the
closing sale price per share of the Companys common stock on such day and the conversion rate in
effect for the New 2028 Notes on each such day;
|
|
|
|
|
if such notes have been called for redemption; at any time on or after December 31, 2026; or
|
|
|
|
|
upon the occurrence of specified corporate transactions as described in the 2028 Notes Indenture.
|
If a fundamental change, as defined in the 2028 Notes Indenture, occurs prior to April 1, 2015
and a holder elects to convert its New 2028 Notes in connection with such transaction, the Company
will pay a make whole provision, as defined in the 2028 Notes Indenture.
On or after April 5, 2015, the Company may redeem for cash all or part of the New 2028 Notes,
if during any period of 30 consecutive trading days ending not later than December 31, 2014, the
closing sale price of a share of the Companys common stock is for at least 120 trading days within
such period of 30 consecutive trading days greater than or equal to 120% of the conversion price on
each such day. On or after April 1, 2015, the Company may redeem for cash all or part of the New
2028 Notes, upon at least 30 but not more than 60 days notice before the redemption date by mail to
the trustee, the paying agent and each holder of New 2028 Notes. The amount of cash paid in
connection with each such redemption will be 100% of the principal amount of the New 2028 Notes to
be redeemed, plus accrued and unpaid interest, including any additional amounts, up to but
excluding the redemption date.
Holders have the right to require the Company to purchase all or a portion of the New 2028
Notes on April 1, 2015, April 1, 2018 and April 1, 2023 (each of which are referred to as a
purchase date). The purchase price payable will be equal to 100% of the principal amount of the
notes to be purchase plus any accrued and unpaid interest, including any additional amounts, up to
but excluding the applicable purchase date.
If the Company undergoes a fundamental change, as defined in the 2028 Notes Indenture, before
maturity of the New 2028 Notes, holders will have the right, subject to certain conditions, to
require the Company to repurchase for cash all or a portion of the New 2028 Notes at a repurchase
price equal to 100% of the principal amount of the New 2028 Notes being repurchased, plus accrued
and unpaid interest, including any additional amounts, up to but excluding the date of repurchase.
Treatment of Convertible Notes
The Company has considered the guidance in the
Debt
topic of the FASB Codification, and has
determined that the Old 2027 Notes and the New 2028 Notes (the Convertible Notes) do not contain
a beneficial conversion feature, as the fair value of the Companys common stock on the date of
issuance was less than the initial conversion price.
Upon conversion of either series of Convertible Notes, the Company will have the option to either deliver:
|
1.
|
|
cash equal to the lesser of the aggregate principal amount
of the series of Convertible Notes to be converted ($1,000 per note)
or the total conversion value; and shares of the Companys
common stock in respect of the remainder, if any, of the
conversion value over the principal amount such series of the
Convertible Notes; or
|
|
|
2.
|
|
shares of the Companys common stock to the holders,
calculated at the initial conversion price which is
subject to any of the conversion price adjustments
discussed above.
|
22
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company has made a policy election to settle the principal amount of all of the Convertible Notes in
cash. As such, in accordance with the
Earnings Per Share
topic of the FASB Codification, the Convertible Notes
are excluded from the Companys calculation of diluted earnings per share.
Credit Facility
On October 30, 2006, the Company entered into a $475.0 million credit facility (2006 Credit
Agreement). The 2006 Credit Agreement is comprised of the following: (i) a senior secured
revolving credit facility in an aggregate amount of $75.0 million (the U.S. Revolving Facility)
with OPCO as the borrower; (ii) a senior secured term loan facility with an aggregate amount of
$295.0 million (the Canadian Term Facility) with National Money Mart Company, a wholly-owned
Canadian indirect subsidiary of OPCO, as the borrower; (iii) a senior secured term loan facility
with Dollar Financial U.K. Limited, a wholly-owned U.K. indirect
subsidiary of OPCO, as the borrower, in an aggregate amount of $80.0 million (consisting of a
$40.0 million tranche of term loans and another tranche of term loans equivalent to $40.0 million
denominated in Euros) (the UK Term Facility) and (iv) a senior secured revolving credit facility
in an aggregate amount of C$28.5 million (the Canadian Revolving Facility) with National Money
Mart Company as the borrower.
The U.S. Revolving Facility and the Canadian Revolving Facility under the Credit Agreement had an interest rate of LIBOR
plus 300 basis points and CDOR plus 300 basis points, respectively, subject to reduction as the
Company reduced its leverage. The Canadian Term Facility consisted of $295.0 million at an
interest rate of LIBOR plus 275 basis points. The U.K. Term Facility consisted of a $40.0 million
tranche at an interest rate of LIBOR plus 300 basis points and a tranche denominated in Euros
equivalent to $40.0 million at an interest rate of Euribor plus 300 basis points.
In the third quarter of fiscal 2008, the Companys United Kingdom subsidiary entered into an
overdraft facility (U.K. Revolving Facility) which provides for a commitment of up to GBP 5.0
million. Amounts outstanding under the U.K. Revolver Facility bear interest at a rate of the Bank
Base Rate (currently 0.5%) plus 2.0%.
On December 23, 2009,
the Company amended and restated the terms of the Credit Agreement (the Amended
and Restated Credit Agreement). Pursuant to the Amended and Restated
Credit Agreement, lenders representing approximately 90% of the revolving
credit facilities and approximately 91% of the term loans agreed to the
extension of the maturity of the revolving credit facilities and term loans to
December 2014, subject to the condition that, prior to October 30, 2012,
the aggregate principal amount of the Companys 2.875% Senior Convertible
Notes due 2027 has been reduced to an amount less than or equal to $50 million.
Pursuant to the Amended and Restated Credit Agreement, outstanding amounts under
the revolving credit facilities and term loans owed to lenders which consented to
the extended maturity date will receive an annual interest spread of 500 bps with
a minimum 2.0% LIBOR (or LIBOR equivalent) floor and, in the case of the revolving
facilities, based on a leverage based pricing grid. The portions of revolving
credit facilities and term loans owed to lenders that did not consent to the
extended maturity will receive an annual interest spread of 375 bps with a
minimum 2.0% LIBOR (or LIBOR equivalent) floor and, in the case of the
revolving facilities, based on a leverage based pricing grid.
The Company used approximately
$350 million of the net proceeds from its December 2009 offering of $600 million aggregate
principal amount of its 10.375% Senior Notes due 2016 to repay substantially all of
its outstanding obligations under the Credit Agreement. At December 31, 2009 there
were no amounts outstanding under the U.S. Revolving Facility, the Canadian Revolving
Facility or the U.K. Revolving Facility. At December 31, 2009, the outstanding
amount of the Canadian Term Facility was $14.4 million and the outstanding amount
of the U.K. Term Facility consisted of $2.0 million and EUR 1.6 million.
The obligations under the U.S. Revolving Facility are guaranteed by the Company and certain
direct and indirect domestic subsidiaries of the Company. The obligations under the Canadian Term
Facility, the Canadian Revolving Facility and the U.K. Term Facility are guaranteed by the Company
and substantially all of its domestic and foreign direct and indirect subsidiaries. The
obligations of the respective borrowers and guarantors under the facilities are secured by
substantially all of the assets of such borrowers and guarantors.
The Amended and Restated Credit Agreement contains certain financial and other restrictive
covenants, which, among other things, requires the Company to achieve certain financial ratios,
limit capital expenditures, restrict payment of dividends and obtain certain approvals if the
Company wants to increase borrowings. As of December 31, 2009, the Company was in compliance with
all covenants.
Interest expense, net was $10.7 million and $12.8 million for the three months ended December
31, 2008 and 2009, respectively. For the six months ended December 31, 2008 and 2009, interest
expense, net was $22.2 million and $24.5 million, respectively.
23
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On July 21, 2008, the Company announced that its Board of Directors had approved a stock repurchase
plan, authorizing the Company could repurchase in the aggregate up to $7.5 million of its
outstanding common stock, which was the maximum amount of common stock the Company could repurchase
pursuant to the terms of the 2006 Credit Agreement.
Under the plan authorized by its Board of Directors, the Company was permitted to repurchase shares
in open market purchases or through privately negotiated transactions as permitted under Securities
Exchange Act of 1934 Rule 10b-18. The extent to which the Company repurchased its shares and the
timing of such repurchases depended upon market conditions and other corporate considerations, as
determined by the Companys management. The purchases were funded from existing cash balances.
By October 13, 2008, the Company had repurchased 535,799 shares of its common stock at a cost of
approximately $7.5 million, thus completing its stock repurchase plan.
7. Fair Value Measurements
|
The Fair Value Measurements and Disclosures Topic of the FASB Codification specifies a hierarchy of
valuation techniques based on whether the inputs to those valuation techniques are observable or
unobservable. In general, fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets and inputs other than quoted prices that are observable for the asset or liability. Level
3 inputs are unobservable inputs for the asset or liability and include situations where there is
little, if any, market activity for the asset or liability. In certain cases, the inputs used to
measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy is based on the lowest level input that is significant to the
fair value measurement in its entirety. The Companys assessment of the significance of a
particular input to the fair value in its entirety requires judgment and considers factors specific
to the asset or liability.
Currently, the Company uses foreign currency options and cross currency interest rate swaps to
manage its interest rate and foreign currency risk. The valuation of these instruments is
determined using widely accepted valuation techniques including discounted cash flow analysis on
the expected cash flows of each derivative. This analysis reflects the contractual terms of the
derivatives, including the period to maturity and uses observable market-based inputs, including
interest rate curves, foreign exchange rates and implied volatilities. The Company incorporates
credit valuation adjustments to appropriately reflect both its own nonperformance risk and the
respective counterpartys nonperformance risk in the fair value measurements. In adjusting the
fair value of its derivative contracts for the effect of nonperformance risk, the Company has
considered the impact of netting and any applicable credit enhancements, such as collateral
postings, thresholds, mutual puts, and guarantees. Although the Company has determined that the
majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs,
such as estimates of current credit spreads to evaluate the likelihood of default by itself and its
counterparties. However, as of December 31, 2009, the Company has assessed the significance of the
impact of the credit valuation adjustments on the overall valuation of its derivative positions and
has determined that the credit valuation adjustments are not significant to the overall valuation
of its derivatives. As a result, the Company has determined that its derivative valuations in
their entirety are classified in Level 2 of the fair value hierarchy.
24
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Fair Value Measurements (continued)
The table below presents the Companys assets and liabilities measured at fair value on a recurring
basis as of December 31, 2009, aggregated by the level in the fair value hierarchy within which
those measurements fall.
Assets and Liabilities Measured at Fair Value on a Recurring Basis at December 31, 2009
( in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Active Markets
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
Other
|
|
Significant
|
|
Balance at
|
|
|
Assets and
|
|
Observable
|
|
Unobservable
|
|
December 31,
|
|
|
Liabilities (Level 1)
|
|
Inputs (Level 2)
|
|
Inputs (Level 3)
|
|
2009
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial
instruments
|
|
$
|
|
$
|
53
|
|
|
$
|
|
$
|
53
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
financial
instruments
|
|
$
|
|
$
|
47,207
|
|
|
$
|
|
$
|
47,207
|
|
The Company does not have any fair value measurements using significant unobservable inputs (Level
3) as of December 31, 2009.
8. Loss on Extinguishment of Debt
In
December 2009 the Company executed an exchange of $120.0 million of its 2.875% Senior
Convertible Notes due 2027 for an equal amount of 3.0% Senior
Convertible Notes due 2028. Pursuant to the accounting guidance
related to convertible debt, the exchange transaction created a gain that was offset by the write-off of
previously capitalized unamortized deferred debt costs associated
with the Companys 2.875% Senior
Convertible Notes due 2027 issued in June 2007.
On December 23, 2009, the Company amended and restated its Credit Agreement and repaid
substantially all of its term indebtedness thereunder. Due to the significance of the
prepayment, the accounting guidance for debt extinguishment applied and therefore, all previously
capitalized unamortized deferred debt costs were reclassified from the balance sheet and recorded
as expense in the income statement. In addition, there was a non-cash charge related to our U.K.
cross currency interest rate swaps that had been terminated in May 2009. The accumulated net loss
at the time the swaps were terminated was a component of other comprehensive income and was being
amortized over the remaining life of the related underlying U.K. term debt. As a result of the
significant prepayment of term debt, a proportional amount of the remaining other comprehensive
income was reclassified from the balance sheet and recorded as expense in the income statement.
The details related to all elements of the loss on extinguishment of debt are as follows:
|
|
|
|
|
|
|
Loss/(Gain)
|
|
Write-off of previously capitalized Term Loan
deferred debt issuance costs, net
|
|
$
|
4,960
|
|
Reclassification of other comprehensive income
related to U.K. term debt repayment
|
|
|
3,866
|
|
Miscellaneous foreign exchange expense related
to term debt repayment
|
|
|
230
|
|
Gain on
exchange of 2.875% Senior Convertible Notes
|
|
|
(1,821
|
)
|
Write-off of
previously capitalized 2.875% Senior Convertible
deferred debt issuance costs, net
|
|
|
1,578
|
|
|
|
|
|
|
|
$
|
8,813
|
|
|
|
|
|
25
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Segment Information
The Company categorizes its operations into four operating segments that have been identified
giving consideration to geographic area, product mix and regulatory environment. The primary
service offerings in the U.S., Canadian and U.K. operating segments are check cashing, single-payment consumer loans, money
orders, money transfers and other ancillary services. As a result of the mix of service offerings
and diversity in the respective regulatory environments, there are differences in each operating
segments profit margins. The Companys operations in Poland and Belgium are included within the
United States segment. Additionally, the United States operating
segment includes certain corporate
headquarters expenses that have not been charged out to the operating segments in the United
States, Canada and United Kingdom. This factor contributes to the lower pre-tax results
reported in this segment. Those unallocated corporate headquarters expenses are $2.6 million for
the three months ended December 31, 2008 and $2.5 for the three months ended December 31, 2009.
The unallocated corporate expenses for the six months ended December 31, 2008 and 2009 are $4.3
million and $4.7 million, respectively.
26
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9.
Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
Financial
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Services
|
|
|
Canada
|
|
|
Kingdom
|
|
|
Total
|
|
|
|
|
As of and for the three months ended
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
299,322
|
|
|
$
|
|
|
|
$
|
412,344
|
|
|
$
|
164,866
|
|
|
$
|
876,532
|
|
Goodwill and other intangibles, net
|
|
|
206,024
|
|
|
|
|
|
|
|
157,572
|
|
|
|
58,409
|
|
|
|
422,005
|
|
Sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Check cashing
|
|
|
13,914
|
|
|
|
|
|
|
|
17,346
|
|
|
|
10,364
|
|
|
|
41,624
|
|
Fees from consumer lending
|
|
|
22,188
|
|
|
|
|
|
|
|
30,006
|
|
|
|
15,060
|
|
|
|
67,254
|
|
Money transfer fees
|
|
|
1,526
|
|
|
|
|
|
|
|
3,767
|
|
|
|
1,491
|
|
|
|
6,784
|
|
Pawn service fees and sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,430
|
|
|
|
3,430
|
|
Other
|
|
|
3,381
|
|
|
|
|
|
|
|
7,039
|
|
|
|
2,661
|
|
|
|
13,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales to unaffiliated customers
|
|
|
41,009
|
|
|
|
|
|
|
|
58,158
|
|
|
|
33,006
|
|
|
|
132,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
6,618
|
|
|
|
|
|
|
|
6,197
|
|
|
|
2,084
|
|
|
|
14,899
|
|
Interest expense, net
|
|
|
4,693
|
|
|
|
|
|
|
|
4,323
|
|
|
|
1,651
|
|
|
|
10,667
|
|
Depreciation and amortization
|
|
|
1,404
|
|
|
|
|
|
|
|
1,419
|
|
|
|
1,285
|
|
|
|
4,108
|
|
Loss on store closings
|
|
|
422
|
|
|
|
|
|
|
|
127
|
|
|
|
6
|
|
|
|
555
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
(4,027
|
)
|
|
|
(1,385
|
)
|
|
|
(5,412
|
)
|
(Loss) income before income taxes
|
|
|
(7,236
|
)
|
|
|
|
|
|
|
18,942
|
|
|
|
8,226
|
|
|
|
19,932
|
|
Income tax provision
|
|
|
24
|
|
|
|
|
|
|
|
8,467
|
|
|
|
1,892
|
|
|
|
10,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Check cashing
|
|
$
|
28,351
|
|
|
$
|
|
|
|
$
|
37,890
|
|
|
$
|
23,915
|
|
|
$
|
90,156
|
|
Fees from consumer lending
|
|
|
44,991
|
|
|
|
|
|
|
|
67,203
|
|
|
|
33,413
|
|
|
|
145,607
|
|
Money transfer fees
|
|
|
3,118
|
|
|
|
|
|
|
|
8,176
|
|
|
|
3,100
|
|
|
|
14,394
|
|
Pawn service fees and sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,302
|
|
|
|
7,302
|
|
Other
|
|
|
6,779
|
|
|
|
|
|
|
|
15,202
|
|
|
|
5,809
|
|
|
|
27,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales to unaffiliated customers
|
|
|
83,239
|
|
|
|
|
|
|
|
128,471
|
|
|
|
73,539
|
|
|
|
285,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
13,595
|
|
|
|
|
|
|
|
12,094
|
|
|
|
4,461
|
|
|
|
30,150
|
|
Interest expense, net
|
|
|
11,056
|
|
|
|
|
|
|
|
7,589
|
|
|
|
3,569
|
|
|
|
22,214
|
|
Depreciation and amortization
|
|
|
2,862
|
|
|
|
|
|
|
|
3,134
|
|
|
|
2,744
|
|
|
|
8,740
|
|
Provision for litigation settlements
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
509
|
|
Loss on store closings
|
|
|
3,070
|
|
|
|
|
|
|
|
2,417
|
|
|
|
6
|
|
|
|
5,493
|
|
Other expense (income), net
|
|
|
|
|
|
|
|
|
|
|
(4,207
|
)
|
|
|
(1,462
|
)
|
|
|
(5,669
|
)
|
(Loss) income before income taxes
|
|
|
(18,201
|
)
|
|
|
|
|
|
|
37,592
|
|
|
|
17,054
|
|
|
|
36,445
|
|
Income tax provision
|
|
|
(27
|
)
|
|
|
|
|
|
|
11,638
|
|
|
|
3,998
|
|
|
|
15,609
|
|
27
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9.
Segment Information (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
|
|
|
Financial
|
|
|
|
|
|
|
United
|
|
|
|
|
|
|
States
|
|
|
Services(1)
|
|
|
Canada
|
|
|
Kingdom
|
|
|
Total
|
|
|
|
|
As of and for the three months ended December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
313,015
|
|
|
$
|
129,241
|
|
|
$
|
576,078
|
|
|
$
|
225,912
|
|
|
$
|
1,244,246
|
|
Goodwill and other intangibles, net
|
|
|
211,297
|
|
|
|
117,393
|
|
|
|
184,556
|
|
|
|
78,699
|
|
|
|
591,945
|
|
Sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Check cashing
|
|
|
11,133
|
|
|
|
|
|
|
|
18,149
|
|
|
|
9,255
|
|
|
|
38,537
|
|
Fees from consumer lending
|
|
|
19,984
|
|
|
|
|
|
|
|
38,126
|
|
|
|
24,636
|
|
|
|
82,746
|
|
Money transfer fees
|
|
|
1,219
|
|
|
|
|
|
|
|
4,219
|
|
|
|
1,653
|
|
|
|
7,091
|
|
Pawn service fees and sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,655
|
|
|
|
4,655
|
|
Other
|
|
|
2,954
|
|
|
|
621
|
|
|
|
8,692
|
|
|
|
7,445
|
|
|
|
19,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales to unaffiliated customers
|
|
|
35,290
|
|
|
|
621
|
|
|
|
69,186
|
|
|
|
47,644
|
|
|
|
152,741
|
|
Provision for loan losses
|
|
|
3,589
|
|
|
|
|
|
|
|
4,520
|
|
|
|
4,553
|
|
|
|
12,662
|
|
Interest expense, net
|
|
|
4,743
|
|
|
|
|
|
|
|
6,626
|
|
|
|
1,473
|
|
|
|
12,842
|
|
Depreciation and amortization
|
|
|
1,769
|
|
|
|
123
|
|
|
|
1,679
|
|
|
|
1,610
|
|
|
|
5,181
|
|
Loss on extinguishment of debt
|
|
|
450
|
|
|
|
|
|
|
|
3,643
|
|
|
|
4,720
|
|
|
|
8,813
|
|
Unrealized foreign exchange loss (gain)
|
|
|
42
|
|
|
|
|
|
|
|
(3,983
|
)
|
|
|
26
|
|
|
|
(3,915
|
)
|
Loss on derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
3,285
|
|
|
|
|
|
|
|
3,285
|
|
Loss on store closings
|
|
|
784
|
|
|
|
|
|
|
|
541
|
|
|
|
7
|
|
|
|
1,332
|
|
Other expense (income), net
|
|
|
537
|
|
|
|
(13
|
)
|
|
|
35
|
|
|
|
695
|
|
|
|
1,254
|
|
(Loss) income before income taxes
|
|
|
(5,464
|
)
|
|
|
273
|
|
|
|
11,315
|
|
|
|
6,816
|
|
|
|
12,940
|
|
Income tax provision
|
|
|
1,435
|
|
|
|
2
|
|
|
|
2,567
|
|
|
|
1,900
|
|
|
|
5,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the six months ended December
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to unaffiliated customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Check cashing
|
|
$
|
22,039
|
|
|
$
|
|
|
|
$
|
35,488
|
|
|
$
|
18,812
|
|
|
$
|
76,339
|
|
Fees from consumer lending
|
|
|
39,140
|
|
|
|
|
|
|
|
73,342
|
|
|
|
47,706
|
|
|
|
160,188
|
|
Money transfer fees
|
|
|
2,495
|
|
|
|
|
|
|
|
8,267
|
|
|
|
3,152
|
|
|
|
13,914
|
|
Pawn service fees and sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,488
|
|
|
|
8,488
|
|
Other
|
|
|
5,810
|
|
|
|
621
|
|
|
|
16,212
|
|
|
|
12,977
|
|
|
|
35,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales to unaffiliated customers
|
|
|
69,484
|
|
|
|
621
|
|
|
|
133,309
|
|
|
|
91,135
|
|
|
|
294,549
|
|
Provision for loan losses
|
|
|
7,795
|
|
|
|
|
|
|
|
8,291
|
|
|
|
8,272
|
|
|
|
24,358
|
|
Interest expense, net
|
|
|
9,399
|
|
|
|
|
|
|
|
11,995
|
|
|
|
3,072
|
|
|
|
24,466
|
|
Depreciation and amortization
|
|
|
3,061
|
|
|
|
123
|
|
|
|
3,258
|
|
|
|
3,165
|
|
|
|
9,607
|
|
Loss on extinguishment of debt
|
|
|
450
|
|
|
|
|
|
|
|
3,643
|
|
|
|
4,720
|
|
|
|
8,813
|
|
Unrealized foreign exchange loss (gain)
|
|
|
56
|
|
|
|
|
|
|
|
(4,073
|
)
|
|
|
7,929
|
|
|
|
3,912
|
|
Loss on derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
3,275
|
|
|
|
|
|
|
|
3,275
|
|
Provision for litigation settlements
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,267
|
|
Loss on store closings
|
|
|
958
|
|
|
|
|
|
|
|
749
|
|
|
|
(57
|
)
|
|
|
1,650
|
|
Other expense (income), net
|
|
|
754
|
|
|
|
(13
|
)
|
|
|
17
|
|
|
|
666
|
|
|
|
1,424
|
|
(Loss) income before income taxes
|
|
|
(12,957
|
)
|
|
|
273
|
|
|
|
29,572
|
|
|
|
9,349
|
|
|
|
26,237
|
|
Income tax provision
|
|
|
2,770
|
|
|
|
2
|
|
|
|
8,321
|
|
|
|
2,777
|
|
|
|
13,870
|
|
(1)
|
|
The results of operations for Dealers Financial
Services is for the period December 23, 2009 through December 31,
2009.
|
28
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Comprehensive Income
Comprehensive income is the change in equity from transactions and other events and
circumstances from non-owner sources, which includes foreign currency translation and fair value
adjustments for cash flow hedges. The following shows the comprehensive income for the periods
stated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Six months ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Net income
|
|
$
|
9,549
|
|
|
$
|
7,130
|
|
|
$
|
20,836
|
|
|
$
|
12,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
(1)
|
|
|
(25,698
|
)
|
|
|
3,154
|
|
|
|
(36,894
|
)
|
|
|
7,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value adjustments for cash flow hedges,
net
(2)(3)
|
|
|
(17,623
|
)
|
|
|
1,115
|
|
|
|
(14,282
|
)
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
(33,772
|
)
|
|
$
|
11,399
|
|
|
$
|
(30,340
|
)
|
|
$
|
20,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The ending balance of the foreign
currency translation adjustments included in
accumulated other comprehensive income on
the balance sheet were gains of $1.0 million
and $28.9 million respectively as of
December 31, 2008 and 2009.
|
|
(2)
|
|
Net of $8.2 million and $0.6 million of
tax for the three months ended December 31,
2008 and 2009, respectively. For the six
months ended December 31, 2008 and 2009, the
fair value adjustments for cash flow hedges
were net of $10.3 million and $0.9 million of
tax, respectively.
|
|
(3)
|
|
Net of $0.3 million and $3.6 million which
were reclassified into earnings for the
three months ended December 31, 2008 and
2009, respectively. For the six months
ended December 31, 2008 and 2009, the fair
falue adjustments for cash flow hedges which
were reclassified into earnings were $0.7
million and $4.1 million, respectively.
|
Accumulated other comprehensive income, net of related tax, consisted of $12.3 million of net
unrealized losses on cross-currency interest rate swaps previously designated as cash flow hedging
transactions. During the second quarter of fiscal 2010, these swaps
were de-designated as hedging derivatives; however, because
management believes it is probable that the cash flows originally
hedged will continue in the future the amount that was deferred at
the time of de-designation will be amortized into expense over the
life of the cash flows hedged. The Company also had unrealized losses on terminated cross-currency interest rate swaps of $0.2 million
at December 31, 2009, compared to net unrealized losses on put options designated as cash flow
hedges of $0.1 million and net unrealized losses on cross-currency interest rate swaps designated
as cash flow hedging transactions of $18.0 million at December 31, 2008.
11. Income Taxes
Income Tax Provision
The provision for income taxes was $13.9 million for the six months ended December 31, 2009
compared to a provision of $15.6 million for the six months ended December 31, 2008. The Companys
effective tax rate was 52.9% for the six months ended December 31, 2009 and was 42.8% for the six
months ended December 31, 2008. The effective tax rate for the six months ended December 31, 2008
was reduced as a result of the impact of a favorable settlement granted in a competent authority
tax proceeding between the United States and Canadian tax authorities related to transfer pricing
matters for years 2000 through 2003 combined with an adjustment to the Companys reserve for
uncertain tax benefits related to years for which a settlement has not yet been received. The
impact to the six months ended December 31, 2008 provision for income taxes related to these two
items was a tax benefit of $3.5 million. The Companys effective tax rate differs from the federal
statutory rate of 35% due to foreign taxes, permanent differences and a valuation
allowance on U.S. and foreign deferred tax assets and the aforementioned changes to the Companys
reserve for uncertain tax positions. Prior to the global debt restructuring in the Companys fiscal
year ended June 30, 2007, interest expense in the U.S. resulted in U.S. tax losses, thus generating
deferred tax assets. At December 31, 2009 the Company maintained deferred tax assets of $129.4
million which is offset by a valuation allowance of $82.6 million which represents a $7.2 million
reduction in the period. The change for the period in the Companys deferred tax assets and
valuation allowances is presented in the table below and more fully described in the paragraphs
that follow.
29
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Income Taxes (continued)
Change in Deferred Tax Assets and Valuation Allowances (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Valuation
|
|
|
Net Deferred
|
|
|
|
Tax Asset
|
|
|
Allowance
|
|
|
Tax Asset
|
|
Balance at June 30, 2009
|
|
$
|
130.4
|
|
|
$
|
89.8
|
|
|
$
|
40.6
|
|
U.S. increase/(decrease)
|
|
|
(1.4
|
)
|
|
|
(5.9
|
)
|
|
|
4.5
|
|
Foreign increase/(decrease)
|
|
|
0.4
|
|
|
|
(1.3
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
129.4
|
|
|
$
|
82.6
|
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $129.4 million in deferred tax assets consists of $43.3 million related to net operating losses
and the reversal of temporary differences, $57.3 million related to foreign tax credits and $28.8
million in foreign deferred tax assets. At December 31, 2009, U.S. deferred tax assets related to
net operating losses and the reversal of temporary differences were reduced by a valuation
allowance of $43.3 million, which reflects an increase of $13.3 million during the period. The net
operating loss carry forward at December 31, 2009 was $68.3 million compared to an estimated
balance of $106.3 million at June 30, 2009. This reduction in the Companys net operating loss is
a result of the anticipated utilization of $38.0 million of the net operating loss to partially
eliminate the U.S. tax resulting from the deemed dividend caused by the sale of a portion of the
shares of its wholly owned indirect UK subsidiary to its wholly owned indirect Canadian subsidiary.
The Company believes that its ability to utilize net operating losses in a given year will be
limited to $9.0 million under Section 382 of the Internal Revenue Code (the Code) because of
changes of ownership resulting from the Companys June 2006 follow-on equity offering. In addition,
any future debt or equity transactions may reduce the Companys net operating losses or further
limit its ability to utilize the net operating losses under the Code. The deferred tax asset
related to excess foreign tax credits is also fully offset by a valuation allowance of $57.3
million. This represents an increase of $11.8 million for the period related to the deemed dividend
discussed above. Additionally, the Company maintains foreign deferred tax assets in the amount of
$28.8 million. The companys Canadian subsidiary in 2006 had previously recorded a deferred tax
asset and corresponding valuation allowance in the amount of $1.4 million related to an unrealized
capital loss in connection with the hedge of its term loan. In the quarter ended December 31,
2009, this valuation allowance was reversed providing a $1.4 million tax benefit in connection with
the realization of a capital gain related to the repayment of a majority of its term debt.
As described in Note 1, the Company restated its historical financial statements in connection with
the adoption of ASC 470-20 (formerly FSP APB 14-1). The adoption of this standard required the
Company to establish an initial deferred tax liability related to its
2.875% Senior Convertible Notes due 2027 and its newly issued 3.0%
Senior Convertible Notes due 2028 (collectively, the Notes), which represents the tax effect of the book/tax basis
difference created at adoption. The deferred tax liability will reverse as the Notes discount
accretes to zero over the expected life of the Notes. The deferred tax liability associated with
the Notes serves as a source of recovery of the Companys deferred tax assets, and therefore the
restatement also required the reduction of the previously recorded valuation allowance on the
deferred tax asset. Because the Company historically has recorded and continues to record a
valuation allowance on the tax benefits associated with its U.S. subsidiary losses, the reversal of
the deferred tax liability associated with the Notes, which is recorded as a benefit in the
deferred income tax provision, is offset by an increase in the valuation allowance. At December 31,
2009, the deferred tax liability associated with the Notes was $18.0 million. For purposes of
balance sheet presentation, the deferred tax liability related to the Notes has been netted against
the Companys deferred tax asset.
At June 30, 2009, the Company had unrecognized tax benefit reserves related to uncertain tax
positions of $7.8 million which, if recognized, would decrease the effective tax rate. At December
31, 2009, the Company had $9.2 million of unrecognized tax benefits primarily related to transfer
pricing matters, which if recognized, would decrease its effective tax rate.
The tax years ending June 30, 2005 through 2009 remain open to examination by the taxing
authorities in the United States, United Kingdom and Canada.
The Company recognizes interest and penalties related to uncertain tax positions in income tax
expense. As of December 31, 2009, the Company had approximately
$0.7 million of accrued interest
related to uncertain tax positions which represents a minimal increase during the six months ended
December 31, 2009. The provision for unrecognized tax benefits including accrued interest is
included in income taxes payable.
30
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages economic
risks, including interest rate, liquidity, and credit risk primarily by managing the amount,
sources, and duration of its debt funding and by the use of derivative financial instruments. The
primary risks managed by using derivative instruments are interest rate risk, foreign currency
exchange risk and commodity price risk. Specifically, from time to
time the Company enters into derivative financial
instruments to manage exposures that arise from business activities that result in the receipt or
payment of future known and uncertain cash amounts, the value of which are determined by interest
rates, foreign exchange rates or commodity prices.
Specifically, certain of the Companys foreign operations in the United Kingdom and Canada expose
the Company to fluctuations in interest rates and foreign exchange rates. These fluctuations may
impact the value of the Companys cash receipts and payments in terms of the Companys functional
currency because the debt is denominated in a currency other than the subsidiarys functional
currency. The Company enters into derivative financial instruments
either as accounting hedges or economic hedges to protect the value or fix the
amount of certain obligations in terms of its functional currency, the U.S. Dollar.
Cash Flow Hedges of Foreign Exchange Risk
Operations in the United Kingdom and Canada have exposed the Company to changes in the CAD-USD and
GBP-USD foreign exchange rates. From time to time, the Companys U.K. and Canadian subsidiaries
purchase investment securities denominated in a currency other than their functional currency. The
subsidiaries hedge the related foreign exchange risk typically with the use of out of the money put
options because they cost less than completely averting risk using at the money put options, and
the maximum loss is limited to the purchase price of the contracts.
The effective portion of changes in the fair value of derivatives designated and that qualify as
cash flow hedges of foreign exchange risk is recorded in other comprehensive income and
subsequently reclassified into earnings in the period that the hedged forecasted transaction
affects earnings. The ineffective portion of the change in fair value of the derivative, as well
as amounts excluded from the assessment of hedge effectiveness, is recognized directly in earnings.
As of December 31, 2009, the Company did not have any
outstanding foreign currency derivatives accounted for as accounting
hedges.
In January 2010, the Company purchased put options with an aggregate notional value of C$8.3 million
and GBP 2.8 million to protect the Companys operations in Canada and the United Kingdom against
adverse changes in the CAD-USD exchange rates, respectively, through March 2010.
Cash Flow Hedges of Multiple Risks
The Company has foreign subsidiaries in the United Kingdom and Canada with variable-rate borrowings
denominated in currencies other than the foreign subsidiaries functional currencies. The foreign
subsidiaries are exposed to fluctuations in both the underlying variable borrowing rate and the
foreign currency of the borrowing against its functional currency. The foreign subsidiaries use
foreign currency derivatives including cross-currency interest rate swaps to manage its exposure to
fluctuations in the variable borrowing rate and the foreign exchange rate. Cross-currency interest
rate swaps involve both periodically (1) exchanging fixed rate interest payments for floating rate
interest receipts and (2) exchanging notional amounts which will occur at the forward exchange
rates in effect upon entering into the instrument. The derivatives are designated as cash flow
hedges of both interest rate and foreign exchange risks.
The effective portion of changes in the fair value of derivatives designated and that qualify as
cash flow hedges of both interest rate risk and foreign exchange risk is recorded in other
comprehensive income and is subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. The ineffective portion of the change in fair value of
the derivative is recognized directly in earnings.
On May 7, 2009, the Company executed an early settlement of its two cross-currency interest rate
swaps hedging variable-rate borrowings at its foreign subsidiary in the United Kingdom. As a
result, the Company discontinued hedge accounting on these cross-currency swaps on this date. In
accordance with the Derivatives and Hedging Topic of the FASB Codification, the Company continued
to report the net gain or loss related to the discontinued cash flow hedges in other comprehensive
income included in shareholders equity and has been reclassifying such amounts into earnings over
the remaining original term of the derivative when the hedged forecasted transactions are
recognized in earnings.
31
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Derivative Instruments and Hedging Activities (continued)
On
December 23, 2009, the Company used a portion of the net
proceeds of the offering of $600 million aggregate principal
amount on 10.375% Senior
Note due 2016 to prepay $350 million of the $368.6 million outstanding term loans in both the
United Kingdom and Canada. As a result of the Company repaying a significant portion of its terms
loans in the United Kingdom, the Company accelerated the reclassification of amounts in other
comprehensive income to earnings as a result of the hedged forecasted transactions becoming
probable not to occur. The accelerated amount was a loss of $3.9 million reclassified out of other
comprehensive income into earnings due to missed forecasted transactions, this amount is included
in Loss on Extinguishment of Debt. Also, the Company discontinued prospectively hedge accounting on
its Canadian cross-currency swaps as they no longer met the strict hedge accounting requirements of
the Derivatives and Hedging Topic of the FASB Codification. In accordance with the Derivatives
and Hedging Topic of the FASB Codification, the Company will continue to report the net gain or
loss related to the discontinued cash flow hedges at its Canadian entity in other comprehensive
income included in shareholders equity because management has
concluded that it is probable that the cash flows will continue to
occur. The Company will subsequently reclassify such amounts into earnings
over the remaining original term of the derivative when the hedged forecasted transactions are
recognized in earnings.
As of December 31, 2009, the Company had the following outstanding derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay Fixed
|
|
|
Pay Fixed
|
|
|
Receive Floating
|
|
|
Receive Floating
|
|
Foreign Currency Derivates
|
|
Notional
|
|
|
Strike Rate
|
|
|
Notional
|
|
|
Index
|
|
USD-CAD Cross Currency Swap
|
|
CAD183,555,348
|
|
|
7.135
|
%
|
|
$
|
159,637,500
|
|
|
3 mo. LIBOR + 2.75% per annum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD-CAD Cross Currency Swap
|
|
CAD61,455,648
|
|
|
7.130
|
%
|
|
$
|
53,212,500
|
|
|
3 mo. LIBOR + 2.75% per annum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
USD-CAD Cross Currency Swap
|
|
CAD83,838,713
|
|
|
7.070
|
%
|
|
$
|
72,562,500
|
|
|
3 mo. LIBOR + 2.75% per annum
|
On January 14, 2010, we entered into an amendment to the ISDA Master
Agreement governing the outstanding cross-currency interest rate swap
relating to a notional amount of C$184.0 million to which National
Money Mart Company, a Canadian subsidiary of Dollar Financial Corp.,
is a party to hedge its variable-rate Canadian term loans denominated
in U.S. dollars. The amendment eliminates financial covenants and
allows the underlying swap to remain outstanding (with a similar
collateral package in place) in the event that we elect to terminate
our secured credit facility prior to the maturity of the swap in
October 2012. On February 8, 2010, we entered into an amendment to
the ISDA Master
Agreement governing the outstanding cross-currency interest rate swap
relating to a notional amount of C$145.7 million to which National
Money Mart Company, a Canadian subsidiary of Dollar Financial Corp.,
is a party to hedge its variable-rate Canadian term loans denominated
in U.S. dollars. The amendment includes financial covenants identical
to those in the Companys amended credit facility and allows the
underlying swap to remain outstanding (with a similar
collateral package in place) in the event that we elect to terminate
our secured credit facility prior to the maturity of the swap in
October 2012. We agreed to pay a higher rate on the interest rate
swaps in order to secure these amendments, the impact of which will
be recorded in our March 31, 2010 financial statements.
Non-designated Hedges of Commodity Risk
In the normal course of business, the Company maintains inventories of gold at its pawn shops in
the United Kingdom. From time to time, the Company enters into derivative financial instruments to
manage the price risk associated with forecasted gold inventory levels. Derivatives not designated
as hedges are not speculative and are used to manage the Companys exposure to commodity price risk
but do not meet the strict hedge accounting requirements of the Derivatives and Hedging Topic of
the FASB Codification. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly in earnings. As of December 31, 2009, the Companys subsidiary
in the United Kingdom had six outstanding gold options that were not designated as hedges in
qualifying hedging relationships.
32
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Derivative Instruments and Hedging Activities (continued)
The table below presents the fair values of the Companys derivative financial instruments on the
Consolidated Balance Sheet as of December 31, 2009 (in thousands).
Tabular Disclosure of Fair Values of Derivative Instruments
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
As of December 31, 2009
|
|
|
As of December 31, 2009
|
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Balance Sheet Location
|
|
|
Fair Value
|
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swaps
|
|
|
|
|
|
$
|
|
|
|
Derivatives
|
|
$
|
47,207
|
|
Commodity options
|
|
Prepaid expenses
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging
instruments
|
|
|
|
|
|
$
|
53
|
|
|
|
|
|
|
$
|
47,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair values of derivative instruments are presented in the above
table on a gross basis. Certain of the above derivative instruments
are subject to master netting arrangements and qualify for net
presentation in the Consolidated Balance Sheet.
|
The tables below present the effect of the Companys derivative financial instruments on the
Consolidated Statement of Operations for the period ending December 31, 2008 and 2009(in
thousands).
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Six Months Ending
December 31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in
|
|
Amount of Gain or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income on
|
|
(Loss) Recognized
|
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
|
Derivative
|
|
in Income on
|
|
|
|
|
|
|
|
or (Loss)
|
|
|
|
|
|
(Ineffective
|
|
Derivative
|
|
|
|
Amount of Gain or
|
|
|
Reclassified from
|
|
Amount of Gain or
|
|
|
Portion and
|
|
(Ineffective Portion
|
|
|
|
(Loss) Recognized in
|
|
|
Accumulated OCI
|
|
(Loss) Reclassified
|
|
|
Amount
|
|
and Amount
|
|
Derivatives in SFAS 133
|
|
OCI on Derivative
|
|
|
into Income
|
|
from Accumulated
|
|
|
Excluded from
|
|
Excluded from
|
|
Cash Flow Hedging
|
|
(Effective Portion),
|
|
|
(Effective
|
|
OCI into Income
|
|
|
Effectiveness
|
|
Effectiveness
|
|
Relationships
|
|
net of tax
|
|
|
Portion)
|
|
(Effective Portion)
|
|
|
Testing)
|
|
Testing)
|
|
|
Commodity options
|
|
$
|
|
|
|
|
|
$
|
|
|
|
Other income / (expense)
|
|
$
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
(34
|
)
|
|
Foreign currency gain / (loss)
|
|
|
|
|
|
Other income /(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
(4,613
|
)
|
|
Other income /(expense)
|
|
|
(3,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swaps
|
|
|
(2,673
|
)
|
|
Corporate Expenses
|
|
|
1,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(2,707
|
)
|
|
|
|
$
|
(3,318
|
)
|
|
|
|
$
|
(3,322
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
DOLLAR FINANCIAL CORP.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Derivative Instruments and Hedging Activities (continued)
Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Six Months Ending
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain or (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in
|
|
Amount of Gain or
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income on
|
|
(Loss) Recognized
|
|
|
|
|
|
|
|
Location of Gain
|
|
|
|
|
|
Derivative
|
|
in Income on
|
|
|
|
|
|
|
|
or (Loss)
|
|
|
|
|
|
(Ineffective
|
|
Derivative
|
|
|
|
Amount of Gain or
|
|
|
Reclassified from
|
|
Amount of Gain or
|
|
|
Portion and
|
|
(Ineffective Portion
|
|
|
|
(Loss) Recognized in
|
|
|
Accumulated OCI
|
|
(Loss) Reclassified
|
|
|
Amount
|
|
and Amount
|
|
Derivatives in SFAS 133
|
|
OCI on Derivative
|
|
|
into Income
|
|
from Accumulated
|
|
|
Excluded from
|
|
Excluded from
|
|
Cash Flow Hedging
|
|
(Effective Portion),
|
|
|
(Effective
|
|
OCI into Income
|
|
|
Effectiveness
|
|
Effectiveness
|
|
Relationships
|
|
net of tax
|
|
|
Portion)
|
|
(Effective Portion)
|
|
|
Testing)
|
|
Testing)
|
|
|
Commodity options
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Exchange Contracts
|
|
|
201
|
|
|
Foreign currency gain / (loss)
|
|
|
|
|
|
Other income /(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
Other income /(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cross Currency Swaps
|
|
|
(22,938
|
)
|
|
Corporate Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(22,637
|
)
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative
counterparties that contain a provision
where if the Company defaults on any of its indebtedness, including default where repayment of the
indebtedness has not been accelerated by the lender, then the Company could also be declared in
default on its derivative obligations.
The Companys agreements with certain of its derivative counterparties also contain provisions
requiring it to maintain certain minimum financial covenant ratios.
Failure to comply with the covenant provisions would result in the Company being in default on any
derivative instrument obligations covered by the agreement.
As of December 31, 2009, the fair value of derivatives in a net liability position, which includes
accrued interest but excludes any adjustment for nonperformance risk, related to these agreements
was $53.4 million. As of December 31, 2009, the Company has not posted any collateral related to
these agreements. If the Company breached any of these provisions it would be required to settle
its obligations under the agreements at their termination value of $53.5 million.
34
|
|
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
The following is a discussion and analysis of the financial condition and results of operations for
Dollar Financial Corp. for the three and six months ended
December 31, 2009 and 2008. References in this
section to we, our, ours, or us are to Dollar Financial Corp. and its wholly owned
subsidiaries, except as the context otherwise requires. References to OPCO are to our wholly
owned operating subsidiary, Dollar Financial Group, Inc.
Executive Summary
We are the parent company of Dollar Financial Group, Inc., which, together with its wholly owned
subsidiaries, is collectively referred to as OPCO. We derive our revenues
primarily from providing check cashing services, consumer lending and other consumer financial
products and services, including money orders, money transfers, foreign currency exchange, branded
debit cards, pawn lending, gold buying and bill payment. For our check cashing services, we charge
our customers fees that are usually equal to a percentage of the amount of the check being cashed
and are deducted from the cash provided to the customer. For our consumer loans, we receive
interest and fees on the loans.
On June 30, 2008, as part of a process to rationalize our United States markets, we made a
determination to close 24 of our unprofitable stores in various United States markets. In August
2008, we identified another 30 stores in the United States and 17 stores in Canada that were
under-performing and which were closed or merged into a geographically proximate store. The primary
cease-use date for these stores was in September 2008. Customers from these stores were
transitioned to our other stores in close proximity to the stores affected. We recorded costs for
severance and other retention benefits of $0.6 million and store closure costs of $4.9 million
consisting primarily of lease obligations and leasehold improvement write-offs. Subsequent to the
initial expense amounts recorded, we have recorded an additional $0.9 million of additional lease
obligation expense for these locations. During the fourth quarter of fiscal 2009 we announced the
closing of an additional 60 under-performing U.S. store locations. We recorded costs for severance
and other retention benefits of approximately $0.4 million and store closure related costs of
approximately $3.2 million consisting primarily of lease obligations and leasehold improvement
write-offs. During the first quarter of fiscal 2010 we recorded an additional $0.3 million of store
closure related costs.
On July 21, 2008, we announced that our Board of Directors had approved a stock repurchase plan,
authorizing us to repurchase in the aggregate up to $7.5 million of our outstanding common stock,
which is the maximum amount of common stock we could repurchase pursuant to the terms of our 2006
credit facility. By October 13, 2008, we had repurchased 535,799 shares of our common stock at a
cost of approximately $7.5 million, thus completing our stock repurchase plan.
On April 21, 2009 we completed the acquisition of an established profitable U.K. internet-based
consumer lending business which was immediately accretive to earnings. The acquired company is
competitively positioned in a rapidly growing market and further expands our expertise within the
internet lending arena. Moreover, we believe we can export and leverage this expertise to other
European countries as well as our Canadian business unit.
On June 30, 2009, we completed the acquisition of four stores in Northern Ireland. Three of the
stores reside in central Belfast with the fourth store situated in the town of Lisburn, the third
largest city in Northern Ireland. The acquired stores are multi-product locations offering check
cashing, short-term consumer lending, and pawn broking services.
On June 30, 2009, we completed the acquisition of two market leading traditional pawn shops located
in Edinburgh and Glasgow, Scotland. The two stores were established in the year 1830 and primarily
deal in loans securitized by gold jewelry and fine watches, while offering traditional secured pawn
lending for an array of other items. Both stores are located in prominent locations on major
thoroughfares and high pedestrian traffic zones.
On June 30, 2009, we completed the acquisition of 76% of the outstanding equity of an established
consumer lending business in Poland. The acquired company, Optima, S.A., founded in 1999 and
headquartered in Gdansk, offers unsecured loans of generally 40 50 week durations with an average
loan amount of $250 to $500. The loan transaction includes a convenient in-home servicing feature,
whereby loan disbursement and collection activities take place in the customers home according to
a mutually agreed upon and pre-arranged schedule. The in-home loan servicing concept is well
accepted within Poland and Eastern Europe, and was initially established in the U.K. approximately
100 years ago. Customer sales and service activities are managed through an extensive network of
local commission based representatives across five provinces in northwestern Poland.
35
During the fiscal quarter and fiscal year ended June 30, 2009, our Canadian subsidiary, National
Money Mart Company, recorded a charge of US$57.4 million in relation to the pending settlement of a
class action proceeding in the province of Ontario, Canada and for
the potential settlement of certain of the similar class action proceedings pending in other
Canadian provinces. On November 6, 2009, National Money Mart Company and OPCO entered into a
Detailed Settlement Agreement with the plaintiffs in the Ontario Class Action. The Detailed
Settlement Agreement requires court approval to become effective, and there can be no assurance
that the Detailed Settlement Agreement will receive such approval. In addition, there is no
assurance that any of the other class action proceedings will be settled. Although we believe that
we have meritorious defenses to the claims in the proceedings and intend to vigorously defend
against such claims, the ultimate cost of resolution of such claims, either through settlements or
pursuant to litigation, may substantially exceed the amount accrued, and additional accruals may be
required in the future. As of December 31, 2009, the remaining provision of approximately $53.4
million is included in our accrued expenses.
On October 2, 2009 the Company entered into an agreement to acquire a merchant cash advance
business in the United Kingdom. The acquired company primarily provides working capital needs to
small retail businesses by providing cash advances against a percentage of future credit card
sales. The purchase price for the acquired company, which currently manages a receivable portfolio
of approximately $3.0 million, was $4.9 million.
On December 21, 2009, we commenced the closing of an exchange offer with certain holders of our 2.875% Senior
Convertible Notes due 2027 pursuant to the terms of exchange agreements with such holders. Pursuant to the terms
of the exchange agreements, the holders exchanged an aggregate of $120 million principal amount of the 2.875%
Senior Convertible Notes due 2027 held by such holders for an equal aggregate principal amount of our new 3.00%
Senior Convertible Notes due 2028. The 3.00% Senior Convertible Notes due 2028 are senior, unsecured obligations
and rank equal in right of payment to all of our other unsecured and unsubordinated indebtedness and are effectively
subordinated to all of our existing and future secured debt and to the indebtedness and other liabilities of its
subsidiaries.
On
December 23, 2009, National Money Mart Company, issued pursuant to Rule 144A under the Securities
Act of 1933, as amended, $600 million aggregate principal amount
of its 10.375% Senior Notes due
2016 (the 2016 Notes). The 2016 Notes were issued pursuant to an indenture, dated as of December
23, 2009, among National Money Mart Company, as issuer, us and certain of our direct and indirect
wholly-owned U.S. and Canadian subsidiaries, as guarantors, and U.S. Bank National Association, as
trustee. The 2016 Notes bear interest at the rate of 10.375% per
year. We used approximately $350 million of the proceeds from this
offering to repay substantially all of our obligations under our
credit facility.
On December 23, 2009, OPCO consummated its acquisition of Military Financial Services, LLC, which
we refer to as the DFS acquisition. Dealers Financial Services, LLC and Dealers Financial
Services Reinsurance Ltd., (DFS), is an established business that provides services to enlisted
military personnel seeking to purchase new and used vehicles. DFS markets its services through its
branded Military Installment Loan and Education Services, or MILES program. DFS provides services
to enlisted military personnel who make applications for auto loans to purchase new and used
vehicles that are funded and serviced under an exclusive agreement with a major third-party
national bank based in the United States. Additionally, DFS provides ancillary services such as
vehicle service contracts and guaranteed asset protection, or GAP, insurance, along with consultations
regarding new and used automotive purchasing, budgeting and credit and ownership training. OPCO
paid a purchase price of approximately $117.8 million plus
approximately $5.5 million for the
working capital of DFS at the closing date.
Our expenses primarily relate to the operations of our store network, including the provision for
loan losses, salaries and benefits for our employees, occupancy expense for our leased real estate,
depreciation of our assets and corporate and other expenses, including costs related to opening and
closing stores.
In each foreign country in which we operate, local currency is used for both revenues and expenses.
Therefore, we record the impact of foreign currency exchange rate fluctuations related to our
foreign net income.
Discussion of Critical Accounting Policies
In the ordinary course of business, we have made a number of estimates and assumptions
relating to the reporting of results of operations and financial condition in the preparation of
our financial statements in conformity with U.S. generally accepted accounting principles. We
evaluate these estimates on an ongoing basis, including those related to revenue recognition, loan
loss reserves and goodwill and intangible assets. We base these estimates on the information
currently available to us and on various other assumptions that we believe are reasonable under the
circumstances. Actual results could vary from these estimates under different assumptions or
conditions.
36
We believe that the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our financial statements:
Revenue Recognition
With respect to company-operated stores, revenues from our check cashing, money order sales,
money transfer, foreign currency exchange, bill payment services and other miscellaneous services
reported in other revenues on our statement of operations are all recognized when the transactions
are completed at the point-of-sale in the store.
With respect to our franchised locations, we recognize initial franchise fees upon fulfillment of
all significant obligations to the franchisee. Royalties from franchisees are recognized as earned.
The standard franchise agreements grant to the franchisee the right to develop and operate a store
and use the associated trade names, trademarks, and service marks within the standards and
guidelines that we established. As part of the franchise agreement, we provide certain pre-opening
assistance including site selection and evaluation, design plans, operating manuals, software and
training. After the franchised location has opened, we provide updates to the software, samples of
certain advertising and promotional materials and other post-opening assistance that we determine
is necessary. Franchise/agent revenues for the three months ended December 31, 2008 and 2009 were
$1.1 million and $1.0 million, respectively. Franchise/agent revenues were $2.3 million and $1.9
million for the six months ended December 31, 2008 and 2009, respectively.
For single-payment consumer loans that we make directly (company-funded loans), which have terms
ranging from 1 to 45 days, revenues are recognized using the interest method. Loan origination fees
are recognized as an adjustment to the yield on the related loan. Our reserve policy regarding
these loans is summarized below in Company-Funded Consumer Loan Loss Reserves Policy.
Company-Funded Consumer Loan Loss Reserves Policy
We maintain a loan loss reserve for probable losses inherent in the outstanding loan portfolio
for single-payment and other consumer loans we make directly through our company-operated
locations. To estimate the appropriate level of loan loss reserves, we consider known and relevant
internal and external factors that affect loan collectability, including the amount of outstanding
loans owed to us, historical loans charged off, current collection patterns and current economic
trends. Our current loan loss reserve is based on our net charge-offs, typically expressed as a
percentage of loan amounts originated for the last twelve months applied against the total amount
of outstanding loans that we make directly. As these conditions change, we may need to make
additional allowances in future periods. Despite the economic downturn in the U.S. and the foreign
markets in which we operate, we have not experienced any material increase in the defaults on
outstanding loans, however we have tightened lending criteria. Accordingly, we have not modified
our approach to determining our loan loss reserves.
When a loan is originated, the customer receives the cash proceeds in exchange for a post-dated
customer check or a written authorization to initiate a charge to the customers bank account on
the stated maturity date of the loan. If the check or the debit to the customers account is
returned from the bank unpaid, the loan is placed in default status and an additional reserve for
this defaulted loan receivable is established and charged to store and regional expenses in the
period that the loan is placed in default status. This reserve is reviewed monthly and any
additional provision to the loan loss reserve as a result of historical loan performance, current
collection patterns and current economic trends is charged to store and regional expenses. If the
loans remain in defaulted status for 180 days, a reserve for the entire amount of the loan is
recorded and the receivable and corresponding reserve is ultimately removed from the balance sheet.
The receivable for defaulted single-payment loans, net of the allowance of $17.1 million at
December 31, 2009 and $17.0 million at June 30, 2009, is reported on our balance sheet in loans in
default, net, and was $7.3 million at December 31, 2009 and $6.4 million at June 30, 2009.
Check Cashing Returned Item Policy
We charge operating expense for losses on returned checks during the period in which such
checks are returned, which generally is three to five business days after the check is cashed in
our store. Recoveries on returned checks are credited to operating expense during the period in
which recovery is made. This direct method for recording returned check losses and recoveries
eliminates the need for an allowance for returned checks. These net losses are charged to other
store and regional expenses in the consolidated statements of operations.
37
Goodwill and Indefinite-Lived Intangible Assets
Goodwill is the excess of cost over the fair value of the net assets of the business acquired. In
accordance with the Intangibles Topic of the FASB Codification, goodwill is assigned to reporting
units, which we have determined to be our reportable operating
segments of the United States, Dealers Financial Services,
Canada and the United Kingdom. We also have a corporate reporting unit which consists of
costs related to corporate infrastructure, investor relations and
various governance activities.
Because of the limited activities of the corporate reporting unit, no goodwill has been assigned.
Goodwill is assigned to the reporting unit that benefit from the synergies arising from each
particular business combination. The determination of the operating segments being equivalent to
the reporting units for goodwill allocation purposes is based upon our overall approach to managing
our business along operating segment lines, and the consistency of the operations within each
operating segment. Goodwill is evaluated for impairment on an annual basis on June 30 or between
annual tests if events occur or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount. To accomplish this, we are required to
determine the carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units. We are then
required to determine the fair value of each reporting unit and compare it to the carrying amount
of the reporting unit. To the extent the carrying amount of a reporting unit exceeded the fair
value of the reporting unit; we would be required to perform a second step to the impairment test,
as this is an indication that the reporting unit goodwill may be impaired. If after the second
step of testing, the carrying amount of a reporting unit exceeds the fair value of the individual
tangible and identifiable intangible assets, an impairment loss would be recognized in an amount
equal to the excess of the implied fair value of the reporting units goodwill over its carrying
value.
For the U.S. reporting unit, the amount of goodwill has increased significantly since June 30, 2007
primarily due to the acquisitions of APL and CCS during fiscal 2008
and DFS in December 2009. During 2009, the overall fair
value of the U.S. reporting unit has declined based on the Companys internal models; however, the
performance of the two aforementioned acquisitions has continued to perform above initial
expectations and the recent closure of unprofitable U.S. stores has improved store margins.
Therefore, the fair value of the U.S. reporting unit, taken as a whole, continues to exceed its
carrying value. The impact of the recent economic downturn, along with any federal or state
regulatory restrictions on our short-term consumer lending product, could reduce the fair value of
the U.S. goodwill below its carrying value at which time we would be required to perform the second
step of the transitional impairment test, as this is an indication that the reporting unit goodwill
may be impaired.
Indefinite-lived
intangible assets consist of reacquired franchise rights and the DFS
MILES program, which are deemed to have
an indefinite useful life and are not amortized. Non-amortizable intangibles with indefinite lives
are tested for impairment annually as of December 31, or whenever events or changes in business
circumstances indicate that an asset may be impaired. If the estimated fair value is less than the
carrying amount of the intangible assets with indefinite lives, then an impairment charge would be
recognized to reduce the asset to its estimated fair value.
We consider this to be one of the critical accounting estimates used in the preparation of our
consolidated financial statements. We estimate the fair value of our reporting units using a
discounted cash flow analysis. This analysis requires us to make various judgmental assumptions
about revenues, operating margins, growth rates, and discount rates. These assumptions are based on
our budgets, business plans, economic projections, anticipated future cash flows and marketplace
data. Assumptions are also made for perpetual growth rates for periods beyond our long term
business plan period. We perform our goodwill impairment test annually as of June 30, and our
reacquired franchise rights impairment test annually as of December 31. At the date of our last
evaluations, there was no impairment of goodwill or reacquired franchise rights. However, we may
be required to evaluate the recoverability of goodwill and other intangible assets prior to the
required annual assessment if we experience a significant disruption to our business, unexpected
significant declines in our operating results, divestiture of a significant component of our
business, a sustained decline in market capitalization, particularly if it falls below our book
value, or a significant change to the regulatory environment in which we operate. While we believe
we have made reasonable estimates and assumptions to calculate the fair value of goodwill and
indefinite-lived intangible assets, it is possible a material change could occur, including if
actual experience differs from the assumptions and considerations used in our analyses. These
differences could have a material adverse impact on the consolidated results of operations, and
cause us to perform the second step impairment test, which could result in a material impairment of
our goodwill. We will continue to monitor our actual cash flows and other factors that may trigger
a future impairment in the light of the current global recession.
As of the
most recent assessment of our Reacquired Franchise Rights, we concluded
that no impairment exists.
38
Derivative Instruments and Hedging Activities
The Derivative and Hedging Topic of the FASB Codification requires companies to provide users
of financial statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are accounted for,
and (c) how derivative instruments and related hedged items affect an entitys financial position,
financial performance, and cash flows. This Topic also requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about the fair value of
and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
As required by the Derivative and Hedging Topic of the FASB Codification, we record all derivatives
on the balance sheet at fair value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, whether we have elected to designate a derivative in
a hedging relationship and apply hedge accounting and whether the hedging relationship has
satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying
as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future
cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives
may also be designated as hedges of the foreign currency exposure of a net investment in a foreign
operation. Hedge accounting generally provides for the matching of the timing of gain or loss
recognition on the hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the
earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into
derivative contracts that are intended to economically hedge certain of its risk, even though hedge
accounting does not apply or we elect not to apply hedge accounting.
Income Taxes
As part of the process of preparing our consolidated financial statements we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves
estimating the actual current tax liability together with assessing temporary differences resulting
from differing treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated balance sheet. An
assessment is then made of the likelihood that the deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely, we establish a
valuation allowance.
The income taxes topic of the FASB Codification requires that a more-likely-than-not threshold be
met before the benefit of a tax position may be recognized in the financial statements and
prescribes how such benefit should be measured. During the three and six month periods ended December 31, 2009, this requirement did not
result in any adjustment in our liability for unrecognized income tax
benefits other than increases due to
current period activity.
Constant Currency Analysis
We maintain operations primarily in the United States, Canada and United Kingdom. Approximately
70% of our revenues are originated in currencies other than the US Dollar, principally the Canadian
Dollar and British Pound Sterling. As a result, changes in our reported revenues and profits
include the impact of changes in foreign currency exchange rates. As additional information to
the reader, we provide constant currency assessments in the following discussion and analysis to
remove and/or quantify the impact of the fluctuation in foreign
exchange rates on our various business segments. Our constant currency assessment assumes
foreign exchange rates in the current fiscal periods remained the same as in the prior fiscal year
periods. For the three months ended December 31, 2009, the actual average exchange rates used to
translate the Canadian and United Kingdoms results were $0.9469 and $1.6342, respectively. For
our constant currency reporting for the same period, the average exchange rates used to translate
the Canadian and United Kingdoms results were $0.8268 and $1.5716, respectively. For the six
months ended December 31, 2009, the actual average exchange rates used to translate the Canadian
and United Kingdoms results were $0.9290 and $1.6371, respectively. For our constant currency
reporting for the same period, the average exchange rates used to translate the Canadian and United
Kingdoms results were $0.8944 and $1.7326, respectively. Note all conversion rates are based on
the US Dollar equivalent to one Canadian Dollar and one British Pound.
We believe that our constant currency assessments are a useful measure, indicating the actual
growth and profitability of our operations. Earnings from our subsidiaries are not generally
repatriated to the U.S.; therefore, we do not incur significant gains or losses on foreign currency
transactions with our subsidiaries. As such, changes in foreign currency exchange rates primarily
impact only reported earnings and not our actual cash flow.
39
Revenue Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Check cashing
|
|
$
|
41,624
|
|
|
$
|
38,537
|
|
|
|
31.5
|
%
|
|
|
25.2
|
%
|
|
$
|
90,156
|
|
|
$
|
76,339
|
|
|
|
31.6
|
%
|
|
|
25.9
|
%
|
Fees from consumer lending
|
|
|
67,254
|
|
|
|
82,746
|
|
|
|
50.9
|
%
|
|
|
54.2
|
%
|
|
|
145,607
|
|
|
|
160,188
|
|
|
|
51.0
|
%
|
|
|
54.4
|
%
|
Money transfer fees
|
|
|
6,784
|
|
|
|
7,091
|
|
|
|
5.1
|
%
|
|
|
4.6
|
%
|
|
|
14,394
|
|
|
|
13,914
|
|
|
|
5.0
|
%
|
|
|
4.7
|
%
|
Pawn service fees and sales
|
|
|
3,430
|
|
|
|
4,655
|
|
|
|
2.6
|
%
|
|
|
3.0
|
%
|
|
|
7,302
|
|
|
|
8,488
|
|
|
|
2.6
|
%
|
|
|
2.9
|
%
|
Other revenue
|
|
|
13,081
|
|
|
|
19,712
|
|
|
|
9.9
|
%
|
|
|
13.0
|
%
|
|
|
27,790
|
|
|
|
35,620
|
|
|
|
9.8
|
%
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
132,173
|
|
|
$
|
152,741
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
285,249
|
|
|
$
|
294,549
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2009 compared to Three Months Ended December 31, 2008
Total revenues for the three months ended December 31, 2009 increased $20.6 million, or 15.6% as
compared to the three months ended December 31, 2008. The impact of foreign currency accounted for
approximately $10.7 million of the increase and the increase related to new store openings and
acquisitions was approximately $12.4 million. On a constant currency basis and after eliminating
the impact of new stores and acquisitions, total revenues decreased by $2.5 million.
Consolidated check cashing revenue decreased 7.4%, or $3.1 million, period-over-period. There was
an increase of $2.7 million related to foreign exchange rates and increases from new stores and
acquisitions of $0.4 million. On a constant currency basis and after eliminating the impact of new
stores and acquisitions, check cashing revenues were down $6.2 million or 14.8% for the current
three month period as compared to the prior year. Check cashing revenues from our U.S., Canadian
and United Kingdom businesses declined 20.0%, 8.6%, and 14.1%, respectively (based on constant
currency reporting) over the previous years period. The decrease in the United States was
primarily a result of the closure of 114 stores during fiscal 2009. On a consolidated constant
currency basis, the face amount of the average check cashed decreased 1.3% from $464 in the second
quarter of fiscal 2009 to $458 for this quarter while the average fee per check cashed increased by
4.8% from $16.99 in fiscal 2009s second quarter to $17.57 for the quarter just ended. There was
also a decline of 16.6% in the number of checks cashed in the current quarter as compared to the
year earlier period down from 2.5 million in the second quarter of fiscal 2009 to 2.0 million in
the quarter just ended.
Consolidated fees from consumer lending and pawn service fees were $85.8 million for the second
quarter of fiscal 2010, representing an increase of 22.6% or $15.8 million compared to the prior
year period. The impact of foreign currency fluctuations accounted for an increase of
approximately $5.9 million and increases of approximately $9.1 million related to the impact from
new stores and acquisitions. The remaining increase of $0.8 million was primarily due to increases
in our Canadian and U.K. consumer lending business which increased by 10.8% and 8.3%, respectively
offset by a decrease in our U.S. business of approximately 18.1%. The decrease in our U.S.
consumer lending business is the result of 114 stores being closed in the U.S. markets during
fiscal 2009. Consumer lending revenues in the Companys operations in Poland were approximately
$1.8 million for the current quarter.
On a constant currency basis and excluding the impacts of new stores and acquisitions, money
transfer fees, franchise fees and all other revenues were up $2.8 million, or 13.7% for the quarter
ended December 31, 2009 as compared to the quarter ended December 31, 2008. The increase came
principally in the U.K. business and was due to the success of the foreign exchange product, the
branded debit card business and scrap gold sales.
Six Months Ended December 31, 2009 compared to Six Months Ended December 31, 2008
Total revenues for the six months ended December 31, 2009 increased $9.3 million, or 3.3% as
compared to the six months ended December 31, 2008. The impact of foreign currency accounted for
$0.7 million of the increase and the impact of new stores and acquisitions contributed $22.1
million of the increase. On a constant currency basis and excluding the impacts of new stores and
acquisitions, total revenues decreased by $13.5 million or 4.7%. The decrease was the result of a
$17.1 million decrease in the U.S. revenues primarily resulting from the closure of 114
under-performing store locations during the fiscal 2009.
40
Relative to our products, consolidated check cashing revenue decreased $13.8 million or 15.3% for
the six months ended December 31, 2009 compared to the same period in the prior year. There was a
nominal increase of approximately $0.2 million related to foreign exchange rates and increases from
new stores and acquisitions of $1.1 million. The remaining check cashing revenues were down $15.1
million or 16.8% for the current six month period. Check cashing revenues from our U.S. business
segment decreased 22.5%, again
heavily influenced by the closure of under-performing stores during fiscal 2009. On a constant
dollar basis and excluding the impacts of new stores and acquisitions, the Canadian business
declined 10.0% and the U.K. business was down 20.9% for the six months ended December 31, 2009 as
compared to the same period in the prior year. On a consolidated constant currency basis, the face
amount of the average check cashed decreased 2.0% to $483 for the six months ended December 31,
2009 compared to $493 for the prior year period while the average fee per check cashed decreased by
3.1% to $18.68. There was also a decline of 18.0% in the number of checks cashed for the six
months ended December 31, 2009 as compared to the six months ended December 31, 2008 down from
5.0 million in the prior year to 4.1 million in the current year.
Consolidated fees from consumer lending and pawn service fees were $164.8 million for the six
months ended December 31, 2009 compared to $151.5 million for the year earlier period, an increase
of $13.3 million or 8.8%. The impact of foreign currency fluctuations accounted for an increase of
approximately $0.4 million and the impact of new stores and acquisitions was an increase of $16.7
million. On a constant dollar basis and excluding the impacts of new stores and acquisitions,
consumer lending revenues decreased by approximately $3.8 million. The U.S. consumer lending
revenues were down approximately $9.0 million, due to its fiscal
2009 store closures, while both the Canadian and U.K.s consumer lending
revenues were up by $3.1 million and $2.1 million, respectively (on a constant dollar basis and
excluding the impacts of new stores and acquisitions). Polands consumer lending revenues for the
six months ended December 31, 2009 were approximately $3.1 million.
For the six months ended December 31, 2009, money transfer fees, franchise fees and all other
revenues increased by $9.8 million in reported amounts. On a constant dollar basis and excluding
the impacts of new stores and acquisitions, these revenues increased by $5.5 million or 12.6% for
the six months ended December 31, 2009 as compared to the year earlier period. The increase came
principally in the U.K. business and was due to the success of the foreign exchange product, the
branded debit card business and scrap gold sales.
Operating Expense Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Salaries and benefits
|
|
$
|
36,275
|
|
|
$
|
37,723
|
|
|
|
27.4
|
%
|
|
|
24.7
|
%
|
|
$
|
77,078
|
|
|
$
|
74,459
|
|
|
|
27.0
|
%
|
|
|
25.3
|
%
|
Provision for loan losses
|
|
|
14,899
|
|
|
|
12,662
|
|
|
|
11.3
|
%
|
|
|
8.3
|
%
|
|
|
30,150
|
|
|
|
24,358
|
|
|
|
10.6
|
%
|
|
|
8.3
|
%
|
Occupancy
|
|
|
10,316
|
|
|
|
10,838
|
|
|
|
7.8
|
%
|
|
|
7.1
|
%
|
|
|
21,640
|
|
|
|
21,685
|
|
|
|
7.6
|
%
|
|
|
7.4
|
%
|
Depreciation
|
|
|
3,170
|
|
|
|
4,071
|
|
|
|
2.4
|
%
|
|
|
2.7
|
%
|
|
|
6,762
|
|
|
|
7,445
|
|
|
|
2.4
|
%
|
|
|
2.5
|
%
|
Returned checks, net
and cash shortages
|
|
|
4,227
|
|
|
|
2,630
|
|
|
|
3.2
|
%
|
|
|
1.7
|
%
|
|
|
10,362
|
|
|
|
4,894
|
|
|
|
3.6
|
%
|
|
|
1.7
|
%
|
Maintenance and repairs
|
|
|
2,804
|
|
|
|
2,880
|
|
|
|
2.1
|
%
|
|
|
1.9
|
%
|
|
|
6,220
|
|
|
|
5,695
|
|
|
|
2.2
|
%
|
|
|
1.9
|
%
|
Advertising
|
|
|
2,396
|
|
|
|
4,667
|
|
|
|
1.8
|
%
|
|
|
3.1
|
%
|
|
|
5,208
|
|
|
|
8,114
|
|
|
|
1.8
|
%
|
|
|
2.8
|
%
|
Bank Charges and armored
carrier expenses
|
|
|
3,130
|
|
|
|
3,457
|
|
|
|
2.4
|
%
|
|
|
2.3
|
%
|
|
|
6,763
|
|
|
|
6,923
|
|
|
|
2.4
|
%
|
|
|
2.4
|
%
|
Other
|
|
|
10,682
|
|
|
|
13,203
|
|
|
|
8.1
|
%
|
|
|
8.5
|
%
|
|
|
22,982
|
|
|
|
24,470
|
|
|
|
8.0
|
%
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
87,899
|
|
|
$
|
92,131
|
|
|
|
66.5
|
%
|
|
|
60.3
|
%
|
|
$
|
187,165
|
|
|
$
|
178,043
|
|
|
|
65.6
|
%
|
|
|
60.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2009 compared to Three Months Ended December 31, 2008
Operating expenses were $92.1 million for the three months ended December 31, 2009 compared to
$87.9 million for the three months ended December 31, 2008, an increase of $4.2 million or 4.8%.
The impact of foreign currency accounted for approximately $5.7 million of the increase and new
stores and acquisitions made up $6.3 million of the increase. On a constant currency basis and
excluding the impacts of new stores and acquisitions, store expenses decreased by $7.8 million or
8.8%. For the current year quarter,
41
total operating expenses decreased from 66.5% of total revenue
to 60.3% of total revenue year over year. After adjusting for constant currency reporting, the
percentage of total operating expenses as compared to total revenue was 61.8%.
Relative to our business units, on a constant currency basis and excluding the impacts of new
stores and acquisitions, operating expenses decreased by $9.4 million and $0.5 million in the
United States and Canada, respectively. The decreases in these two units were the result of a
focus on cost reductions in addition to the closure of approximately 114 United States stores and
21 Canadian stores during fiscal 2009. The adjusted operating expenses in the United Kingdom
increased by approximately $2.1 million for the three months
ended December 31, 2009 as compared to the prior year which is commensurate with the revenue growth
in that country primarily as a result of the cost of bought scrap gold. The Companys operations in
Poland reported $1.9 million in operating expenses for the quarter ended December 31, 2009.
Six Months Ended December 31, 2009 compared to Six Months Ended December 31, 2008
Operating expenses were $178.0 million for the six months ended December 31, 2009 compared to
$187.2 million for the six months ended December 31, 2008, a decrease of $9.1 million or 4.9%. The
impact of foreign currency had only a minor impact on the periods operating expenses, accounting
for an increase of $0.2 million. There was an increase in operating expenses related to new stores
and acquisitions of approximately $10.8 million. On a constant currency basis and excluding the
impacts of new stores and acquisitions, operating expenses decreased by $20.1 million. For the
current year cumulative period, total operating expenses decreased to 60.4% of total revenue
compared to 65.6% of total revenue for the same period in the prior year. After adjusting for
constant currency reporting and elimination of acquisitions, the percentage of total operating
expenses as compared to total revenue increased from the reported amount of 60.4% to 61.5% or a
6.3% decline over the prior year.
Relative to our business units, after excluding the impacts of foreign currency and acquisitions,
U.S. operating expenses decreased by $19.0 million and Canadas operating expenses decreased by
$4.8 million. The results in the United States and Canada were a result of a focus on cost
reductions in addition to the closure of approximately 114 United
States stores and 17 Canadian stores
during fiscal 2009. The adjusted store and regional expenses in the United Kingdom were up
approximately $3.6 million for the six months ended December 31, 2009 as compared to the prior
year. The U.K. increase was primarily attributable to the categories of loan loss provision, the
cost of scrap gold and advertising which are all commensurate with growth in that country.
Operating expenses in Poland for the six months ended December 31, 2009 were $2.8 million.
Corporate and Other Expense Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
|
|
|
|
|
|
|
(Percentage of total
|
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
($ in thousands)
|
|
|
revenue)
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Corporate expenses
|
|
$
|
17,594
|
|
|
$
|
22,949
|
|
|
|
13.3
|
%
|
|
|
15.0
|
%
|
|
$
|
37,114
|
|
|
$
|
43,300
|
|
|
|
13.0
|
%
|
|
|
14.7
|
%
|
Other depreciation and
amortization
|
|
|
938
|
|
|
|
1,110
|
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
|
|
1,978
|
|
|
|
2,162
|
|
|
|
0.7
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
10,667
|
|
|
|
12,842
|
|
|
|
8.1
|
%
|
|
|
8.4
|
%
|
|
|
22,214
|
|
|
|
24,466
|
|
|
|
7.8
|
%
|
|
|
8.3
|
%
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
8,813
|
|
|
|
|
%
|
|
|
5.8
|
%
|
|
|
|
|
|
|
8,813
|
|
|
|
|
%
|
|
|
3.0
|
%
|
Unrealized foreign exchange
loss
|
|
|
|
|
|
|
(3,915
|
)
|
|
|
|
%
|
|
|
(2.6)
|
%
|
|
|
|
|
|
|
3,912
|
|
|
|
|
%
|
|
|
1.3
|
%
|
Loss on derivatives not
designated as hedges
|
|
|
|
|
|
|
3,285
|
|
|
|
|
%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
3,275
|
|
|
|
|
%
|
|
|
1.1
|
%
|
Provision for litigation
settlements
|
|
|
|
|
|
|
|
|
|
|
|
%
|
|
|
|
%
|
|
|
509
|
|
|
|
1,267
|
|
|
|
0.2
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on store closings
|
|
|
555
|
|
|
|
1,332
|
|
|
|
0.4
|
%
|
|
|
0.9
|
%
|
|
|
5,493
|
|
|
|
1,650
|
|
|
|
1.9
|
%
|
|
|
0.6
|
%
|
Other (income) expense
|
|
|
(5,412
|
)
|
|
|
1,254
|
|
|
|
(4.1)
|
%
|
|
|
0.8
|
%
|
|
|
(5,669
|
)
|
|
|
1,424
|
|
|
|
(2.0)
|
%
|
|
|
0.5
|
%
|
Income tax provision
|
|
|
10,383
|
|
|
|
5,904
|
|
|
|
7.9
|
%
|
|
|
3.9
|
%
|
|
|
15,609
|
|
|
|
13,870
|
|
|
|
5.5
|
%
|
|
|
4.7
|
%
|
42
Three Months Ended December 31, 2009 compared to Three Months Ended December 31, 2008
Corporate Expenses
Corporate expenses were $22.9 million for the three months ended December 31, 2009 compared to
$17.6 million for the same period in the prior year or an increase of $5.3 million. On a constant
currency basis, corporate expenses increased by approximately $4.6 million reflecting an increased
investment in our infrastructure to support global store, product and platform expansion plans as
well our investment in our global business development team who are focused on acquisition
strategies.
Other Depreciation and Amortization
Other depreciation and amortization remained relatively unchanged and was approximately $1.0
million for the three months ended December 31, 2009 and 2008. With the acquisition of Dealers
Financial Services in late December 2009, we will incur approximately an additional $1.5 million
per quarter related to the amortization of identifiable intangible assets.
Extinguishment of Debt and Loss on Derivatives Not Designated as Hedges
In connection with our refinancing activities during the three months ended December 31, 2009,
certain non-recurring expenses have been reported in the current periods results. There were $8.8
million of expenses related to the repayment of our term loan debt and the exchange of $120.0
million of our 2.875% Senior Convertible Debt due 2027 that have been reported as Extinguishment
of Debt. Of that amount, approximately $5.0 million related to the write-off of pre-existing
deferred term debt costs that were being amortized over the life of the term debt. The other
primary element of this expense was a $3.9 million non-cash charge related to our U.K.
cross-currency interest rate swaps that had been terminated in May 2009. As a result of the
prepayment of substantially all of our term debt obligations, the net loss related to the discontinued cash flow hedge that was
included in other comprehensive income was reclassified to the income statement.
As a
result of the prepayment of substantially all our obligations with
respect to the Canadian term loans, our cross-currency interest rate swaps
associated with that term debt have been rendered ineffective. Accordingly, all subsequent
changes in the value of the swaps will be recorded in our income statement and reported as
Gain/Loss on Derivatives Not Designated as Hedges. In addition to the changes in the value of
the swaps, the difference between the cash interest paid and received related to these swaps will
also be reflected in this expense category.
Interest Expense
Interest expense, net was $12.8 million for the three months ended December 31, 2009 compared to
$10.7 million for the same period in the prior year. Interest
related to National Money Mart Companys newly issued $600.0
million principal 10.375% Senior Notes due 2016 accounted for $1.4 million of the increase. In
addition, interest expense associated our revolving credit facility and the reduction in the amount
of interest income earned by us accounted for $0.5 million of the net increase. These increases
were partially offset by lower interest expense in the UK related to
our UK term debt. As a result of the
early termination of the U.K. cross-currency swaps, the U.K. term debts interest rate is now
variable and lower than the synthetically fixed rate in the prior year. The impact of this change
reduced interest expense by approximately $0.7 million for the three months ended December 31, 2009
compared to the same period in the prior year.
Non-cash interest accounted for $0.8 million of the overall increase. This increase is comprised of
$0.3 million related to our convertible debt as a result of the retroactive adoption on July 1,
2009 of ASC 470-20 (formally FSP APB 14-1,
Accounting for Convertible Debt Instruments That May Be
Settled Upon Conversion (Including Partial Cash Settlement)
. The balance of the increase in
non-cash interest relates to the amortization of accumulated charges related to the discontinuance
of hedge accounting for our cross currency interest rate swaps.
|
|
|
Subsequent to the early settlement in May 2009 of our two cross-currency interest rate
swaps hedging variable-rate borrowings at our foreign subsidiary in the United Kingdom, we
discontinued prospectively hedge accounting on these cross-currency swaps. In accordance
with the Derivatives and Hedging Topic of the FASB Codification, we were required to
continue to report the net loss related to the discontinued cash flow hedge in other
comprehensive income included in shareholders equity and subsequently reclassify such
amounts into earnings over the remaining original term of the derivative when the hedged
forecasted transactions are recognized in earnings. This resulted in a $0.4 million
non-cash interest charge for the quarter ended December 31, 2009. As a result of the
prepayment of substantially all of the United Kingdoms term debt on December 23, 2009, we
reclassified primarily all of the U.K.s remaining net loss from other comprehensive income
into earnings. This resulted in a charge of $3.9 million which is included in Loss on
Extinguishment of Debt.
|
|
|
|
|
Subsequent to the prepayment of substantially all of our Canadian term debt on December 23,
2009, we discontinued prospectively
|
43
|
|
|
hedge accounting on these cross-currency swaps. In accordance with the Derivatives and
Hedging Topic of the FASB Codification, we were required to continue to report the net loss
related to the discontinued cash flow hedge in other comprehensive income included in
shareholders equity and subsequently reclassify such amounts into earnings over the remaining
original term of the derivative when the hedged forecasted transactions are recognized in
earnings. This resulted in a $0.1 million non-cash interest charge for the quarter ended
December 31, 2009.
Because we believe that the cash flows that
were originally hedged will continue to occur through the
newly issued $600.0 million principal 10.375% Senior Notes due
2016 in Canada, we will continue to reclassify such amounts into earnings over the remaining
original term of the derivative.
|
Unrealized Foreign Exchange Gain
The unrealized foreign exchange gain of $3.9 million for the three months ended December 31, 2009 is
due primarily to the unrealized foreign exchange gain associated with
the issuance by our Canadian subsidiary, National Money Mart Company,
of its $600 million
aggregate principal amount of 10.375% Senior Notes due 2016 in
December 2009. The notes are denominated in U.S. Dollars have been issued by our
wholly-owned indirect Canadian subsidiary. As such, the impact of all prospective changes in the exchange
rate between the U.S. Dollar and the Canadian Dollar will be reflected in our earnings as
unrealized foreign exchange gains and losses.
Loss on Store Closings
During the
three months ended December 31, 2009, we recorded additional expense related to stores
closed during fiscal 2009 of approximately $0.5 million. This additional expense was related to
adjustment assumptions related to sub-lease potential of some of the locations. We also incurred
additional expenses of approximately $0.2 million for current period store closures. Lastly, we
incurred approximately $0.6 million of expense in relation to the buy-out of certain We the
People franchises.
Other Expense
During the three months ended December 31, 2009, we reported other expenses of approximately $1.3
million. The primary elements of these expenses were $0.6 million in costs associated with our
activities to hedge foreign currency risks in the operating results of Canada and the United
Kingdom. During the current period, we also recorded approximately $0.7 million in expenses
related to acquisition related activities. Under new accounting guidance that became effective for
us on July 1, 2009, all acquisition related expenses are reflected in our earnings.
Income Tax Provision
The provision for income taxes was $5.9 million for the three months ended December 31, 2009
compared to a provision of $10.4 million for the three months ended December 31, 2008. Our
effective tax rate was 45.6% for the three months ended December 31, 2009 and was 52.1% for the
three months ended December 31, 2008. The effective tax rate for the three months ended December
31, 2008 was reduced as a result of the impact of a favorable settlement granted in a competent
authority tax proceeding between the United States and Canadian tax authorities related to transfer
pricing matters for years 2000 through 2003 combined with an adjustment to our reserve for
uncertain tax benefits related to years for which a settlement has not yet been received. The
impact to the three months ended December 31, 2008 provision for income taxes related to these two
items was a tax benefit of $3.5 million. Our effective tax rate differs from the federal statutory
rate of 35% due to foreign taxes, permanent differences and a valuation allowance on U.S. and
foreign deferred tax assets and the aforementioned changes to our reserve for uncertain tax
positions. Prior to the global debt restructuring in our fiscal year ended June 30, 2007, interest
expense in the U.S. resulted in U.S. tax losses, thus generating deferred tax assets. At December
31, 2009 we maintained deferred tax assets of $129.4 million which is offset by a valuation
allowance of $82.6 million which represents a reduction of $9.5 million in the quarter ended
December 31, 2009. The change for the period in our deferred tax assets and valuation allowances is
presented in the table below and more fully described in the paragraphs that follow.
Change in Deferred Tax Assets and Valuation Allowances (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Deferred
|
|
|
Valuation
|
|
|
Deferred
|
|
|
|
Tax Asset
|
|
|
Allowance
|
|
|
Tax Asset
|
|
Balance at September 30, 2009
|
|
$
|
130.8
|
|
|
$
|
92.0
|
|
|
$
|
38.8
|
|
U.S. increase/(decrease)
|
|
|
(2.7
|
)
|
|
|
(8.0
|
)
|
|
|
5.3
|
|
Foreign increase/(decrease)
|
|
|
1.3
|
|
|
|
(1.4
|
)
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
129.4
|
|
|
$
|
82.6
|
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
44
The $129.4 million in deferred tax assets consists of $43.3 million related to net operating losses
and the reversal of temporary differences, $57.3 million related to foreign tax credits and $28.8
million in foreign deferred tax assets. At December 31, 2009, U.S. deferred tax assets related to
net operating losses and the reversal of temporary differences were reduced by a valuation
allowance of $43.3 million, which reflects a decrease of $14.6 million during the period. The net
operating loss carry forward at December 31, 2009
was $68.3 million compared to an estimated balance of $106.3 million at June 30, 2009. This
reduction in our net operating loss is a result of the anticipated utilization of $38.0 million of
our net operating loss to partially offset the US tax resulting from the deemed dividend caused by
the sale of a portion of the shares of our wholly-owned indirect U.K. subsidiary to our
wholly-owned indirect Canadian subsidiary. We believe that our ability to utilize net operating losses in a
given year will be limited to $9.0 million under Section 382 of the Internal Revenue Code (the
Code) because of changes of ownership resulting from our June 2006 follow-on equity offering. In
addition, any future debt or equity transactions may reduce our net operating losses or further
limit our ability to utilize the net operating losses under the Code. The deferred tax asset
related to excess foreign tax credits is also fully offset by a valuation allowance of $57.3
million. This represents an increase of $11.8 million for the period related to the deemed dividend
discussed above. Additionally, we maintain foreign deferred tax assets in the amount of $28.8
million. Our Canadian affiliate during fiscal 2006 had previously recorded a deferred tax asset and
corresponding valuation allowance related to an unrealized foreign currency loss sustained in
connection with
its U.S. Dollar denominated term debt prior to
entering into its cross currency interest rate swaps. In the quarter ended December 31, 2009, this valuation
allowance was reversed providing a $1.4 million tax benefit in connection with the realization of a
capital gain related to the repayment of a majority of its term debt.
As described in Note 1 to this financial statement, we restated our historical financial statements
in connection with the adoption of ASC 470-20 (formerly FSP APB 14-1). The adoption of this
standard required us to establish an initial deferred tax liability related to our 2.875% and 3.0%
newly issued Senior Convertible Notes (Notes), which represents the tax effect of the book/tax
basis difference created at adoption. The deferred tax liability will reverse as the Notes discount
accretes to zero over the expected life of the Notes. The deferred tax liability associated with
the Notes serves as a source of recovery of our deferred tax assets, and therefore the restatement
also required the reduction of the previously recorded valuation allowance on the deferred tax
asset. Because we historically have recorded and continue to record a valuation allowance on the
tax benefits associated with our U.S. subsidiary losses, the reversal of the deferred tax liability
associated with the Notes, which is recorded as a benefit in the deferred income tax provision, is
offset by an increase in the valuation allowance. At December 31, 2009, the deferred tax liability
associated with the Notes was $18.0 million. For purposes of balance sheet presentation, the
deferred tax liability related to the Notes has been netted against the Companys deferred tax
asset.
At June 30, 2009, we had unrecognized tax benefit reserves related to uncertain tax positions of
$7.8 million which, if recognized, would decrease the effective tax rate. At December 31, 2009, we
had $9.2 million of unrecognized tax benefits primarily related to transfer pricing matters, which
if recognized, would decrease its effective tax rate.
The tax years ending June 30, 2005 through 2009 remain open to examination by the taxing
authorities in the United States, United Kingdom and Canada.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of
December 31, 2009, we had approximately $0.7 million of accrued interest related to uncertain tax
positions which represents a minimal increase during the three months ended December 31, 2009. The
provision for unrecognized tax benefits including accrued interest is included in income taxes
payable.
Six Months Ended December 31, 2009 compared to Six Months Ended December 31, 2008
Corporate Expenses
Corporate expenses were $43.3 million for the six months ended December 31, 2009 compared to $37.1
million for the same period in the prior year or an increase of $6.2 million. On a constant
currency basis corporate expenses were the same as the actual reported number. The increase
reflects increased investment in our infrastructure to support global store, product and platform
expansion plans as well our investment in our global business development team who are focused on
acquisition strategies.
Other Depreciation and Amortization
Other depreciation and amortization remained relatively unchanged and was approximately $2.0
million for the six months ended December 31, 2009 and 2008. With the acquisition of Dealers
Financial Services in late December 2009, we will incur approximately an additional $1.5 million
per quarter related to the amortization of identifiable intangible assets.
45
Extinguishment of Debt and Loss on Derivatives Not Designated as Hedges
In connection with our refinancing activities during the three months ended December 31, 2009,
certain non-recurring expenses have been reported in the current periods results. There were $8.8
million of expenses related to the repayment of our term loan debt and the exchange of $120.0
million of our 2.875% Senior Convertible Debt due 2027 that have been reported as Extinguishment
of Debt. Of that amount, approximately $5.0 million related to the write-off of pre-existing
deferred term debt costs that were being amortized over the life of the term debt. The other
primary element of this expense was a $3.9 million non-cash charge related to our U.K. cross-
currency interest rate swaps that had been terminated in May 2009. As a result of the prepayment of
substantially all of our term debt obligations, the net loss related to the discontinued cash flow hedge that was included in
other comprehensive income was reclassified to the income statement.
As a result of the prepayment of substantially all our obligations with respect to
the Canadian term loans, our cross-currency interest rate swaps
associated with that term debt have been rendered ineffective. Accordingly, all subsequent
changes in the value of the swaps will be recorded in our income statement and reported as
Gain/Loss on Derivatives Not Designated as Hedges. In addition to the changes in the value of
the swaps, the difference between the cash interest paid and received related to these swaps will
also be reflected in this expense category.
Interest Expense
Interest expense, net was $24.5 million for the six months ended December 31, 2009 compared to
$22.2 million for the same period in the prior year. Interest related to National Money Mart Companys newly issued $600.0
million principal 10.375% Senior Notes due 2016 accounted for $1.4 million of the increase. In
addition, interest expense associated with our revolving credit facility and the reduction in the
amount of interest income earned by us accounted for $1.3 million of the net increase. These
increases were partially offset by lower interest in the UK related to our UK term debt. As a result
of the early termination of the U.K. cross-currency swaps, the U.K. term debts interest rate is
now variable and lower than the synthetically fixed rate in the prior year. The impact of this
change reduced interest expense by approximately $1.7 million for the six months ended December 31,
2009 compared to the same period in the prior year.
Non-cash interest accounted for $1.3 million of the overall increase. This increase is comprised
of $0.5 million related to our convertible debt as a result of the retroactive adoption on July 1,
2009 of ASC 470-20 (formally FSP APB 14-1,
Accounting for Convertible Debt Instruments That May Be
Settled Upon Conversion (Including Partial Cash Settlement)
. The balance of the increase in
non-cash interest relates to the amortization of accumulated charges related to the discontinuance
of hedge accounting for our cross currency interest rate swaps.
|
|
|
Subsequent to the early settlement in May 2009 of our two cross-currency interest rate
swaps hedging variable-rate borrowings at our foreign subsidiary in the United Kingdom, we
discontinued prospectively hedge accounting on these cross-currency swaps. In accordance
with the Derivatives and Hedging Topic of the FASB Codification, we were required to
continue to report the net loss related to the discontinued cash flow hedge in other
comprehensive income included in shareholders equity and subsequently reclassify such
amounts into earnings over the remaining original term of the derivative when the hedged
forecasted transactions are recognized in earnings. This resulted in a $0.7 million
non-cash interest charge for the six months ended December 31, 2009. As a result of the
prepayment of substantially all of the United Kingdoms term debt on December 23, 2009, we
reclassified primarily all of the U.K.s remaining net loss from other comprehensive income
into earnings. This resulted in a charge of $3.9 million which is included in Loss on
Extinguishment of Debt.
|
|
|
|
|
Subsequent to the prepayment of substantially all of our Canadian term debt on December 23,
2009, we discontinued prospectively hedge accounting on these cross-currency swaps. In
accordance with the Derivatives and Hedging Topic of the FASB Codification, we were
required to continue to report the net loss related to the discontinued cash flow hedge in
other comprehensive income included in shareholders equity and subsequently reclassify
such amounts into earnings over the remaining original term of the derivative when the
hedged forecasted transactions are recognized in earnings. This resulted in a $0.1 million
non-cash interest charge for the six months ended December 31, 2009. Due to the newly
issued $600.0 million principal 10.375% Senior Notes due 2016 in Canada, we will continue
to reclassify such amounts into earnings over the remaining original term of the
derivative.
|
Unrealized Foreign Exchange Loss
Unrealized foreign exchange losses for the six months ended December 31, 2009 was $3.9 million.
Unrealized foreign exchange losses of $7.6 million related to our U.K. term loans and intercompany
balances was offset by an unrealized foreign exchange gain of $3.7 million associated
with the
issuance by our Canadian subsidiary National Money Mart Company, of its
$600 million aggregate principal amount of 10.375% senior notes due 2016 in December 2009. The notes are denominated in U.S. Dollars and were issued
by our indirect wholly-owned Canadian subsidiary. As such, the impact of all prospective changes
in the exchange rate between the U.S.
46
Dollar and the Canadian Dollar will be reflected in our
earnings as unrealized foreign exchange gains and losses. As a result of our refinancing
activities during this period, there will be minimal future charges related to the U.K. term debt
and intercompany balances.
Provision for Litigation Settlements
Provision for litigation settlements during the six months ended December 31, 2009 was $1.3
million.
Loss on Store Closings
During the six months ended December 31, 2009, we recorded additional expense related to store
closings during fiscal 2009 of approximately $0.5 million. This additional expense was related to
adjustment assumptions related to sub-lease potential of some of the locations. We also incurred
additional expenses of approximately $0.5 million for current period store closures. Lastly, we
incurred approximately $0.7 million of expense in relation to the buy-out of certain We the
People franchises.
Other Expense
During the six months ended December 31, 2009, we reported other expenses of approximately $1.4
million. The primary elements of these expenses were $1.0 million in costs associated with our
activities to hedge foreign currency risks in the operating results of Canada and the United
Kingdom. During the current period, we also recorded approximately $1.0 million in expenses
related to acquisition related activities. Under new accounting guidance that became effective for
the Company on July 1, 2009, all acquisition related expenses are reflected in our earnings.
During the current six month period, we have recorded miscellaneous other revenues of approximately
$0.6 million.
Income Tax Provision
The provision for income taxes was $13.9 million for the six months ended December 31, 2009
compared to a provision of $15.6 million for the six months ended December 31, 2008. Our effective
tax rate was 52.9% for the six months ended December 31, 2009 and was 42.8% for the six months
ended December 31, 2008. The effective tax rate for the six months ended December 31, 2008 was
reduced as a result of the impact of a favorable settlement granted in a competent authority tax
proceeding between the United States and Canadian tax authorities related to transfer pricing
matters for years 2000 through 2003 combined with an adjustment to our reserve for uncertain tax
benefits related to years for which a settlement has not yet been received. The impact to the six
months ended December 31, 2009 provision for income taxes related to these two items was a tax
benefit of $3.5 million. Our effective tax rate differs from the federal statutory rate of 35% due
to foreign taxes, permanent differences and a valuation allowance on U.S. and foreign deferred tax
assets and the aforementioned changes to our reserve for uncertain tax positions. Prior to the
global debt restructuring in our fiscal year ended June 30, 2007, interest expense in the U.S.
resulted in U.S. tax losses, thus generating deferred tax assets. At December 31, 2009 we
maintained deferred tax assets of $129.4 million which is offset by a valuation allowance of $82.6
million which represents a $7.2 million reduction in the period. The change for the period in our
deferred tax assets and valuation allowances is presented in the table below and more fully
described in the paragraphs that follow.
Change in Deferred Tax Assets and Valuation Allowances (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
Deferred
|
|
|
Valuation
|
|
|
Deferred
|
|
|
|
Tax Asset
|
|
|
Allowance
|
|
|
Tax Asset
|
|
Balance at June 30, 2009
|
|
$
|
130.4
|
|
|
$
|
89.8
|
|
|
$
|
40.6
|
|
U.S. increase/(decrease)
|
|
|
(1.4
|
)
|
|
|
(5.9
|
)
|
|
|
4.5
|
|
Foreign increase/(decrease)
|
|
|
0.4
|
|
|
|
(1.3
|
)
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
129.4
|
|
|
$
|
82.6
|
|
|
$
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
The $129.4 million in deferred tax assets consists of $43.3 million related to net operating losses
and the reversal of temporary differences, $57.3 million related to foreign tax credits and $28.8
million in foreign deferred tax assets. At December 31, 2009, U.S. deferred tax assets related to
net operating losses and the reversal of temporary differences were reduced by a valuation
allowance of $43.3 million, which reflects a decrease of $14.6 million during the period. The net
operating loss carry forward at December 31, 2009 was $68.3 million compared to an estimated
balance of $106.3 million at June 30, 2009. This reduction in our net operating loss is a result
of the anticipated utilization of $38.0 million of our net operating loss to partially offset the
US tax resulting from the deemed dividend caused by the sale of a portion of the shares of our
wholly-owned indirect U.K. subsidiary to our wholly-owned indirect
47
Canadian subsidiary. We believe
that our ability to utilize net operating losses in a given year will be limited to $9.0 million
under Section 382 of the Internal Revenue Code (the Code) because of changes of ownership
resulting from our June 2006 follow-on equity offering. In addition, any future debt or equity
transactions may reduce our net operating losses or further limit our ability to utilize the net
operating losses under the Code. The deferred tax asset related to excess foreign tax credits is
also fully offset by a valuation allowance of $57.3 million. This represents an increase of $11.8
million for the period related to the deemed dividend discussed above. Additionally, we maintain
foreign deferred tax assets in the amount of $28.8 million. Our Canadian affiliate during fiscal
2006 had previously recorded a deferred tax asset and corresponding valuation allowance related to
an unrealized foreign currency loss sustained in connection with
its U.S. Dollar denominated term debt prior to
entering into its cross currency interest rate swaps. In the
quarter ended December 31, 2009, this valuation allowance was reversed providing a $1.4 million tax
benefit in connection with the realization of a capital gain related to the repayment of a majority
of its term debt.
As described in Note 1 to this financial statement, we restated our historical financial statements
in connection with the adoption of ASC 470-20 (formerly FSP APB 14-1). The adoption of this
standard required us to establish an initial deferred tax liability related to our
2.875% and 3.0% newly issued Senior Convertible Notes (Notes), which represents the tax effect of
the book/tax basis difference created at adoption. The deferred tax liability will reverse as the
Notes discount accretes to zero over the expected life of the Notes. The deferred tax liability
associated with the Notes serves as a source of recovery of our deferred tax assets, and therefore
the restatement also required the reduction of the previously recorded valuation allowance on the
deferred tax asset. Because we historically have recorded and continue to record a valuation
allowance on the tax benefits associated with our U.S. subsidiary losses, the reversal of the
deferred tax liability associated with the Notes, which is recorded as a benefit in the deferred
income tax provision, is offset by an increase in the valuation allowance. At December 31, 2009,
the deferred tax liability associated with the Notes was $18.0 million. For purposes of balance
sheet presentation, the deferred tax liability related to the Notes has been netted against the
Companys deferred tax asset.
At June 30, 2009, we had unrecognized tax benefit reserves related to uncertain tax positions of
$7.8 million which, if recognized, would decrease the effective tax rate. At December 31, 2009, we
had $9.2 million of unrecognized tax benefits primarily related to transfer pricing matters, which
if recognized, would decrease its effective tax rate.
The tax years ending June 30, 2005 through 2009 remain open to examination by the taxing
authorities in the United States, United Kingdom and Canada.
We recognize interest and penalties related to uncertain tax positions in income tax expense. As of
December 31, 2009, we had approximately $0.7 million of accrued interest related to uncertain tax
positions which represents a minimal increase during the six months ended December 31, 2009. The
provision for unrecognized tax benefits including accrued interest is included in income taxes
payable.
Discussion and analysis for each geographic segment
Following is a discussion and analysis of the operating results of each of our reportable segments:
48
The following table presents each reportable segments revenue and store and regional margin results:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
Percent/
|
|
|
|
|
|
Percent/
|
|
|
|
($ in thousands)
|
|
|
Margin
|
|
|
($ in thousands)
|
|
|
Margin
|
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
2009
|
|
|
Change
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States (1)
|
|
$
|
41,009
|
|
|
$
|
35,290
|
|
|
|
(13.9)
|
%
|
|
$
|
83,239
|
|
|
$
|
69,484
|
|
|
|
(16.5
|
)%
|
Operating margin
|
|
|
11.6
|
%
|
|
|
18.5
|
%
|
|
6.9 pts.
|
|
|
10.8
|
%
|
|
|
16.4
|
%
|
|
5.6 pts.
|
Dealers
Financial Services (2)
|
|
$
|
|
|
|
$
|
621
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
$
|
621
|
|
|
|
100.0
|
%
|
Operating margin
|
|
|
|
%
|
|
|
61.6
|
%
|
|
61.6 pts.
|
|
|
|
%
|
|
|
61.6
|
%
|
|
61.6 pts.
|
Canada
|
|
$
|
58,158
|
|
|
$
|
69,186
|
|
|
|
19.0
|
%
|
|
$
|
128,471
|
|
|
$
|
133,309
|
|
|
|
3.8
|
%
|
Operating margin
|
|
|
45.2
|
%
|
|
|
48.0
|
%
|
|
2.8 pts.
|
|
|
46.2
|
%
|
|
|
49.5
|
%
|
|
3.3 pts.
|
United Kingdom
|
|
$
|
33,006
|
|
|
$
|
47,644
|
|
|
|
44.3
|
%
|
|
$
|
73,539
|
|
|
$
|
91,135
|
|
|
|
23.9
|
%
|
Operating margin
|
|
|
40.0
|
%
|
|
|
43.0
|
%
|
|
3.0 pts.
|
|
|
40.3
|
%
|
|
|
42.5
|
%
|
|
2.2 pts.
|
|
|
|
|
|
Total Revenue
|
|
$
|
132,173
|
|
|
$
|
152,741
|
|
|
|
15.6
|
%
|
|
$
|
285,249
|
|
|
$
|
294,549
|
|
|
|
3.3
|
%
|
|
|
|
|
|
Operating margin
|
|
$
|
44,274
|
|
|
$
|
60,610
|
|
|
|
36.9
|
%
|
|
$
|
98,084
|
|
|
$
|
116,506
|
|
|
|
18.8
|
%
|
Operating margin percent
|
|
|
33.5
|
%
|
|
|
39.7
|
%
|
|
6.2 pts.
|
|
|
34.4
|
%
|
|
|
39.6
|
%
|
|
5.2 pts.
|
The following table presents each reportable segments revenue as a percentage of total segment revenue and each reportable segments pre-tax income as a percentage of total segment pre-tax income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Six Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
|
|
|
|
|
|
|
|
Pre-tax
|
|
|
|
Revenue
|
|
|
Income/(Loss)
|
|
|
Revenue
|
|
|
Income/(Loss)
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
United
States (1)
|
|
|
31.0
|
%
|
|
|
23.1
|
%
|
|
|
(36.3)
|
%
|
|
|
(42.2)
|
%
|
|
|
29.2
|
%
|
|
|
23.6
|
%
|
|
|
(49.9)
|
%
|
|
|
(49.4
|
)%
|
Dealers Financial Services
|
|
|
|
%
|
|
|
0.4
|
%
|
|
|
|
%
|
|
|
2.1
|
%
|
|
|
|
%
|
|
|
0.2
|
%
|
|
|
|
%
|
|
|
1.0
|
%
|
Canada
|
|
|
44.0
|
%
|
|
|
45.3
|
%
|
|
|
95.0
|
%
|
|
|
87.4
|
%
|
|
|
45.0
|
%
|
|
|
45.3
|
%
|
|
|
103.1
|
%
|
|
|
112.8
|
%
|
United Kingdom
|
|
|
25.0
|
%
|
|
|
31.2
|
%
|
|
|
41.3
|
%
|
|
|
52.7
|
%
|
|
|
25.8
|
%
|
|
|
30.9
|
%
|
|
|
46.8
|
%
|
|
|
35.6
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For the three and six months ended December 31, 2009 the results
of Poland are included with the United States results.
|
|
(2)
|
|
We acquired Dealer Financial Services on December 23, 2009
and accordingly, only eight days of activity has been
included with the results reported for three and six months ended
December 31, 2009.
|
Three Months Ended December 31, 2009 compared to Three Months Ended December 31, 2008
United States
Total U.S. revenues (excluding Poland) were $33.3 million for the three months ended December 31,
2009 compared to $41.0 million for the three months ended
December 31, 2008, a decrease of 18.8%. We closed 114 under-performing U.S. stores during fiscal year 2009 and significantly
reduced the related field management and store support functions. The closure of these locations
was the primary factor in the period-over-period decrease, along with the effects of the economic
downturn. From a product perspective, this decline is primarily related to decreases of $2.8
million and $4.0 million in check cashing and consumer lending revenue, respectively. The decrease
in check cashing revenue is related to decreases in both the number of checks as well as the face
amount of checks that were presented in the U.S. The number of checks decreased year over year by
approximately 200,000 and with a
49
corresponding decrease in face value of approximately $92 million related to the aforementioned
closure of 114 U.S. stores during fiscal 2009 and the economic downturn. The face amount of the
average check decreased by 1.6% and the average fee decreased from $12.79 to $12.59.
The continued high rate of unemployment through all sectors of the U.S. economy also negatively
impacts consumer lending volumes. As a result of current economic conditions, we continue
to take a more cautious approach to lending in all of our segments, including the United
States. U.S. funded loan originations decreased 14.9% or $24.4 million in the current years
period as compared to the year earlier period. Included with the U.S. results, is approximately
$2.0 million of revenues related to our newly acquired operations in Poland.
Operating margins in the United States (excluding Polands results) increased to 19.5% for the
three months ended December 31, 2009 compared to 11.6% for the same period in the prior year. The
U.S. operating margins are significantly lower than the other segments. The primary drivers for
this disparity are greater competition in the United States, which effects revenue per store,
higher U.S. salary costs, somewhat higher occupancy costs and marginally higher loan loss
provisions. As a result of the lower U.S. margins, management closed 114 underperforming stores
during fiscal 2009. The Companys U.S. strategy of closing unprofitable locations and focusing on
states with more favorable and stable regulatory environments has shown positive results. Even
with significantly lower U.S. revenues, the operating margins in this segment of the business
increased by $1.7 million for the three months ended December 31, 2009 as compared to the three
months ended December 31, 2008, or an increase of 36.0%.
The U.S. pre-tax loss (excluding Poland) was $5.4 million for the three months ended December 31,
2009 compared to a pre-tax loss of $7.2 million for the same period in the prior year. The
decrease in the pre-tax loss of $1.8 million is the net result of the operating margin increase,
net increases in intercompany revenues and corporate expenses of approximately
$1.3 million offset by approximately $1.0 million of one-time expenses associated with the
Companys recent refinancing activities.
Dealers Financial Services (DFS)
We
acquired DFS on December 23, 2009 and accordingly only eight days of
activity has been included with the results reported for the three months ended December 31, 2009.
DFS provides services to enlisted military personnel seeking to purchase new and used vehicles.
DFSs revenue comes from fees which are paid by a third-party national bank and fees from the sale
of ancillary products such as vehicle service contracts and guaranteed asset protection (GAP insurance).
DFS operates through an established network of arrangements with more
than 580 new and used car dealerships, according to underwriting protocols specified by the
third-party national bank. DFS operating expenses are primarily compensation/benefits,
amortization of their identifiable intangible assets, professional service fees and field
management expenses. Since the DFS business model is based on receiving fees for services, it is
unlike our store-based businesses and will therefore be reported as a stand-alone
segment.
Canada
Total Canadian revenues were $69.2 million for the three months ended December 31, 2009, an
increase of 19.0%, or $11.0 million as compared to the year earlier period. The impact of foreign
currency rates accounted for $8.8 million of this increase. On a constant dollar basis, revenues
increased by $2.2 million. On a constant dollar basis, check cashing revenues were down $1.5
million in Canada with the effects of higher unemployment resulting in decreases in the number of
checks and the total value of checks cashed down by 13.6% and 14.1%, respectively. However,
the Company continues to see signs of moderate employment recovery in its
customer base evidenced by moderate sequential quarterly growth in constant dollar check cashing revenues. The average face amount per check
remained relatively flat, while the average fee per check increased by 5.8% for the three months
ended December 31, 2009 as compared to the three months ended December 31, 2008. In the consumer
lending area, the Company continues to leverage its position as the lowest cost provider in the
industry as well as its multi-product store platform, by offering products and services at prices
below many of its competitors in an effort to enhance its share of the Canadian market. As a
result, consumer lending revenues in Canada increased by 10.9% (on a constant dollar basis) for the
three months ended December 31, 2009 as compared to the year earlier period. Additionally, Canada
recorded approximately $2.0 million of revenue in relation to its recently launched gold buying
initiative.
Operating expenses in Canada increased $4.2 million or 13.0% from $31.9 million in the second
quarter of fiscal 2009 to $36.0 million in the current years fiscal period. The impacts of
changes in foreign currency rates resulted in an increase of $4.6 million. The remaining decrease
of approximately $0.4 million is consistent with the Companys efforts to closely monitor and
control expenses. On a constant currency basis, provision for loan losses, as a percentage of loan
revenues, has decreased by 8.8 pts from 20.7% to 11.9%. Overall Canadas operating margin
percentage has increased from 45.2% to 48.0%. The solid improvement in this area is the result of
increased consumer lending revenues in addition to efforts to reduce costs and promote
efficiencies. To date, provinces which comprise
50
more than 90% of our Canadian company-operated store base have all announced maximum lending rates
that are above our existing price structure, but generally below the pricing of many competitors.
As a result, we have recently resumed our television advertising campaign in certain Canadian
provinces and are beginning to witness an increase in the number of new customers conducting
transactions in our Canadian stores.
The Canadian pre-tax income was $11.3 million for the three months ended December 31, 2009 compared
to pre-tax income of $18.9 million for the same period in the prior year. In addition to increased
operating margins of $6.9 million, pre-tax income was negatively impacted by additional interest
expense of $2.3 million, expenses related to the Companys recent refinancing efforts of $6.7
million, increased corporate and intercompany expenses of $4.7 million, unrealized foreign exchange
losses of $0.3 million and miscellaneous other expenses of $0.5 million.
United Kingdom
Total U.K. revenues were $47.6 million for the three months ended December 31, 2009 compared to
$33.0 million for the year earlier period, an increase of $14.6 million or 44.3%. On a constant
dollar basis and excluding the impact of acquisitions, U.K. year-over-year revenues have increased
by $3.0 million, or 9.2%. Both consumer lending/pawn service fees and other revenues (gold scrap
sales, foreign exchange products and debit cards) were up by $1.5 million and $3.4 million,
respectively. As in the other two business sectors, U.K. check cashing revenues were impacted by
the recession and decreased by approximately $1.9 million, or 18.0% (on a constant dollar basis and
excluding new stores and acquisitions).
U.K. operating expenses increased by $7.3 million, or 4.8% from $19.8 million for the three months
ended December 31, 2008 as compared to $27.1 million for the current three month period. On a
constant currency basis and excluding new stores and acquisitions, U.K. operating expenses
increased by $2.1 million or 10.5%. The increase is consistent with an operation that is in a
growth mode. There was an increase of 4.6 pts relating to the provision for loan losses as a
percentage of loan revenues primarily due to the mix of lending products including the
Internet-based consumer lending business acquired in April 2009. On a constant currency basis, the
rate for the three months ended December 31, 2008 was 11.7% while for the current three month
period, the rate increased to 16.3%. On a constant currency basis, U.K. store and regional margin
percentage has improved from 40.0% for the three months ended December 31, 2008 to 43.9% for the
current three month period ended December 31, 2009 due to the strong revenue growth, offset in part
with a marginal increase in costs.
The U.K. pre-tax income was $6.8 million for the three months ended December 31, 2009 compared to
$8.2 million for the same period in the prior year, a decrease of $1.4 million. In addition to
increased operating margins of $7.3 million, pre-tax income was negatively impacted by expenses
related to the Companys recent refinancing efforts of $4.7 million, increased corporate and
intercompany expenses of $2.4 million and unrealized foreign exchange losses of $1.8 million.
Six Months Ended December 31, 2009 compared to Six Months Ended December 31, 2008
United States
Total U.S. revenues (excluding Poland) were $66.3 million for the six months ended December 31,
2009 compared to $83.2 million for the six months ended December 31, 2008, a decrease of $16.9
million or 20.3%. We closed 114 under-performing U.S. stores during fiscal year 2009 and
significantly reduced the related field management and store support functions. The closure of
these locations was the primary factor in the period-over-period
decrease, along with the economic downturn. From a product
perspective, this decline is primarily related to decreases of $6.3 million and $9.0 million in
check cashing and consumer lending revenue, respectively. The economic downturn contributed to the
decrease in check cashing revenue, as there were decreases in both the number of checks as well as
the face amount of checks that were presented in the U.S. The number of checks decreased year over
year by approximately 461,000 and with a corresponding decrease in face value of approximately
$214.2 million primarily related to the aforementioned closure of 114 U.S. stores during fiscal
2009 and the economic downturn. The face amount of the average check decreased by 2.5% and the
average fee decreased from $12.77 to $12.53.
The continued high rate of unemployment through all sectors of the U.S. economy negatively impacts
consumer lending volumes. As a result of current economic conditions, the Company continues to
take a more cautious approach to lending in all of our segments, including the United States. U.S.
funded loan originations decreased 17.4% or $57.8 million for the six months ended December 31,
2009 as compared to the six months ended December 31, 2008. Included with the U.S. results, is
approximately $3.1 million of revenues related to the Companys newly acquired operations in
Poland.
51
Operating margins in the United States (excluding Polands results) increased to 17.0% for the six
months ended December 31, 2009 compared to 10.8% for the same period in the prior year. The U.S.
operating margins are significantly lower than the other segments. The primary drivers for this
disparity are greater competition in the United States, which effects revenue per store, higher
U.S. salary costs, somewhat higher occupancy costs and marginally higher loan loss provisions. The
closure of 114 underperforming stores during fiscal 2009 is consistent with the Companys U.S.
strategy of closing unprofitable locations and focusing on states with more favorable and stable
regulatory environments. This action has shown positive results, resulting in improved year-over-year
operating margins.
The U.S. pre-tax loss (excluding Poland) was $12.9 million for the six months ended December 31,
2009 compared to a pre-tax loss of $18.2 million for the same period in the prior year. The
decrease in the pre-tax loss of $5.3 million is the net result of the operating margin increase,
decreased net corporate and intercompany expenses of $1.2 million, reduced expenses of
approximately $2.1 million related to fiscal 2009 store closure expenses and reduced interest
expense of $1.8 million. These positive impacts were offset by approximately $1.0 million of
one-time expenses associated with the Companys recent refinancing activities.
Dealers Financial Services (DFS)
We
acquired DFS on December 23, 2009 and accordingly only the final eight
days of activity has been included with the results reported for the three months ended December
31, 2009. DFS provides services to enlisted military personnel seeking to purchase new and used
vehicles. DFSs revenue comes from fees which are paid by a third-party national bank and fees
from the sale of ancillary products such as vehicle service contracts and guaranteed asset protection (GAP
insurance). DFS operates through an established network of
arrangements with more than 580 new and used car dealerships, according to underwriting protocols
specified by the third-party national bank. DFS operating expenses are primarily
compensation/benefits, amortization of their identifiable intangible assets, professional service
fees and field management expenses. Since the DFS business model is based on receiving fees for
services, it is unlike our store-based businesses and will be reported as a stand-alone
segment.
Canada
Total Canadian revenues were $133.3 million for the six months ended December 31, 2009, an increase
of 3.8%, or $4.8 million as compared to the six months ended December 31, 2008. The impact of
foreign currency rates accounted for $5.4 million of this increase. On a constant dollar basis,
revenues decreased by $0.6 million reflecting the economic downturn. On a constant dollar basis,
check cashing revenues were down $3.8 million in Canada with the effects of higher unemployment
resulting in decreases in the number of checks and the total value of checks cashed down by 14.9%
and 15.5%, respectively. The average face amount per check decreased from $518.04 for the
six months ended December 31, 2008 to $514.70 for the current six month period, while the average
fee per check increased by 5.9% for the six months ended December 31, 2009 as compared to the six
months ended December 31, 2008. Consumer lending revenues in Canada increased by 4.6% (on a
constant dollar basis) for the six months ended December 31, 2009 as compared to the year earlier
period.
Operating expenses in Canada decreased $1.8 million or 2.6% from $69.1 million for the six months
ended December 31, 2008 to $67.3 million for the six months ended December 31, 2009. The impacts
of changes in foreign currency rates resulted in an increase of $2.9 million. The remaining
decrease of approximately $4.7 million is primarily related to decreases in salary and benefits,
provision for loan losses, returned check expenses offset by increased expenses in advertising in
relation to the new favorable regulatory environment in Canada. On a constant currency basis, provision for
loan losses, as a percentage of loan revenues, has decreased by 6.7 pts from 18.0% to 11.3%.
Overall Canadas operating margin percentage has increased from 46.2% for the six months ended
December 31, 2008 to 49.7% for the six months ended December 31, 2009. The solid improvement in
this area is the result of increased consumer lending revenues in addition to efforts to reduce
costs and promote efficiencies. To date, provinces which comprise more than 90% of our Canadian
company-operated store base have all announced maximum lending rates that are above our existing
price structure, but generally below the pricing of many competitors. As a result we have recently
resumed our television advertising campaign in certain Canadian provinces and are beginning to
witness an increase in the number of new customers conducting transactions in our Canadian stores.
The Canadian pre-tax income was $29.6 million for the six months ended December 31, 2009 compared
to pre-tax income of $37.6 million for the same period in the prior year, a decrease of $7.7
million. In addition to increased operating margins of $6.6 million, pre-tax income was negatively
impacted by corporate expenses of $3.8 million, additional interest expense of $3.8 million,
expenses related to the Companys recent refinancing efforts of $6.7 million and unrealized foreign
exchange losses of $0.3 million.
52
United Kingdom
Total U.K. revenues were $91.1 million for the six months ended December 31, 2009 compared to $73.5
million for the year earlier period, an increase of $17.6 million or 23.9%. On a constant dollar
basis and excluding the impact of acquisitions, U.K. year-over-year revenues have increased by $4.3
million, or 5.9%. Both consumer lending/pawn service fees and other revenues (gold scrap sales,
foreign exchange products and debit cards) were up by $2.2 million and $7.2 million, respectively.
As in the other two business sectors, U.K. check cashing revenues was impacted by the recession
and decreased by approximately $5.0 million, or 20.9% (also on a constant dollar basis and
excluding new stores and acquisitions).
U.K. operating expenses increased by $8.5 million, or 19.5% from $43.9 million for the six months
ended December 31, 2008 as compared to $52.4 million for the current six month period. On a
constant currency basis and excluding new stores and acquisitions, U.K. operating expenses
increased by $3.6 million or 8.3%. The increase is consistent with an operation that is in a
growth mode. There was an increase of 4.3 pts relating to the provision for loan losses as a
percentage of loan revenues primarily due to the mix of lending products including the
Internet-based lending business acquired in April 2009. On a constant currency basis, the rate for
the six months ended December 31, 2008 was 11.4% while for the current six month period, the rate
increased to 15.7%. On a constant currency basis, U.K. store and regional margin percentage has
improved from 40.3% for the six months ended December 31, 2008 to 42.4% for the current three month
period ended December 31, 2009 due to the strong revenue growth offset in part with a marginal
increase in costs.
The U.K. pre-tax income was $9.3 million for the six months ended December 31, 2009 compared to
$17.1 million for the same period in the prior year, a decrease of $7.8 million. In addition to
increased operating margins of $9.0 million and a reduction in interest expense of $0.5 million,
pre-tax income was negatively impacted by expenses related to the Companys recent refinancing
efforts of $4.7 million, increased corporate and intercompany expenses of $3.0 million and
unrealized foreign exchange losses of $9.7 million.
Changes in Financial Condition
On a constant currency basis, cash and cash equivalent balances and the revolving credit facilities
balances fluctuate significantly as a result of seasonal, intra-month and day-to-day requirements
for funding check cashing and other operating activities. For the six months ended December 31,
2009, cash and cash equivalents increased $135.8, million which is net of a $17.0 million increase
as a result of the effect of exchange rate changes on foreign cash and cash equivalents. However,
as these foreign cash accounts are maintained in Canada and the U.K. in local currency, there is no
actual diminution in value from changes in currency rates, and as a result, the cash balances are
still fully available to fund the daily operations of the U.K. and Canadian business units. Net
cash provided by operating activities was $34.6 million for the six months ended December 31, 2009
compared to $16.7 million for the six months ended December 31, 2008. The increase in net cash
provided by operations was primarily the result of strong operating results, the impact of foreign
exchange rates on translated net income and timing differences in payments to third party vendors.
Liquidity and Capital Resources
Our principal sources of cash have been from operations, borrowings under our credit
facilities and the issuance of our common stock, senior convertible notes and issuance of debt
securities including the 2016 Notes. We anticipate that our
primary uses of cash will be to provide working capital, finance capital expenditures, meet debt
service requirements, fund company originated consumer loans, finance store expansion, finance
acquisitions and finance the expansion of our products and services.
Net cash provided by operating activities was $34.6 million for the six months ended December 31,
2009 compared to $16.7 million for the six months ended December 31, 2008. The increase in net cash
provided by operations was primarily the result of strong operating results, the impact of foreign
exchange rates on translated net income and timing differences in payments to third party vendors.
Net cash
used in investing activities was $135.2 million for the six months ended December 31, 2009
compared to $9.8 million for the six months ended December 31, 2008. Our investing activities
primarily related to acquisitions, purchases of property and equipment for our stores and
investments in technology. For the six months ended December 31, 2009, we made capital
expenditures of $11.7 million and acquisitions of $123.5 million. The actual amount of capital
expenditures each year will depend in part upon the number of new stores opened or acquired and the
number of stores remodeled. Our capital expenditures, excluding acquisitions, are currently
anticipated to aggregate approximately $26.2 million during our fiscal year ending June 30, 2010.
Net cash provided by financing activities was $219.4 million for the six months ended December 31,
2009 compared to net cash
53
provided
by financing activities of $29.9 million for the six months
ended December 31, 2008. The cash provided by financing activities during the six months ended
December 31, 2009 was primarily a
result of $596.4 million in proceeds from National Money Mart Companys
offering of the 2016 Notes in
December 2009, in part offset by a
partial repayment of $350.0 million of our term debt and payment of debt issuance cost of $19.1
million. The cash provided by financing activities during the six months ended December 31, 2008
was primarily a result of a net drawdown on our revolving credit facilities and the proceeds from
the exercise of stock options offset in part by the repurchase of our common stock.
Credit
Facilities
. On December 23, 2009, we amended and restated
our Credit Agreement and repaid substantially all of our term
outstanding obligations thereunder. After giving effect to such amendments and
prepayments, the Credit Agreement is comprised of the following: (i) a senior secured revolving
credit facility in an aggregate amount of $75.0 million, which we refer to as the U.S. Revolving
Facility, with DFG as the borrower; (ii) a senior secured term loan with an aggregate balance of
$14.4 million at December 31, 2009, which we refer to as the Canadian Term Facility, with National
Money Mart Company, a wholly owned Canadian indirect subsidiary of
OPCO, as the borrower; (iii)
senior secured term loans with Dollar Financial U.K. Limited, a wholly-owned U.K. indirect
subsidiary of OPCO, as the borrower, with an aggregate balance at December 31, 2009 of $2.0 million
and Euro1.6 million, respectively, which we refer to as the UK Term Facility, and (iv) a senior
secured revolving credit facility in an aggregate amount of C$28.5 million, which we refer to as
the Canadian Revolving Facility, with National Money Mart Company as the borrower.
The
amendments to the Credit Agreement included provisions extending the
maturity of most of
each of the facilities thereunder to December 31, 2014. The effectiveness of the extensions of
maturity is conditioned upon the aggregate principal amount of our outstanding 2.875% Senior
Convertible Notes due 2027 being reduced from the present $80.0 million amount to an amount less
than or equal to $50.0 million prior to October 30, 2012.
The Credit Agreement contains certain financial and other restrictive covenants, which among other
things, require us to achieve certain financial ratios, limit capital expenditures, restrict the
magnitude of payment of dividends and obtain certain approvals if we want to increase borrowings.
As of December 31, 2009, we are in compliance with all covenants.
Revolving Credit Facilities
. We have three revolving credit facilities: the U.S. Revolving
Facility, the Canadian Revolving Facility and the United Kingdom Overdraft Facility.
United States Revolving Credit Facility
. OPCO is the borrower under the U.S. Revolving
Facility. A portion of the U.S. Revolving Facility ($7.5 million) terminates on October 30,
2011, and the remainder ($67.5 million) will terminate on December 31, 2014 provided the
extension condition described above is met. The portion of the U.S. Revolving Facility that
expires on October 30, 2011 bears an interest rate of LIBOR (but not less than 2%) plus 375
basis points, subject to reductions as we reduce our leverage. The portion that expires on
December 31, 2014 bears an interest rate of LIBOR (but not less than 2%) plus 500 basis
points, subject to reductions as we reduce our leverage. The facility may be subject to
mandatory reduction and the revolving loans subject to mandatory prepayment (after prepayment
of the term loans under the Credit Agreement), principally in an amount equal to 50% of
excess cash flow (as defined in the Credit Agreement). OPCOs borrowing capacity under the
U.S. Revolving Facility is limited to the lesser of the total commitment of $75.0 million or
85% of certain domestic liquid assets plus $30.0 million. Under this revolving facility, up
to $30.0 million may be used in connection with letters of credit. At December 31, 2009, the
borrowing capacity was $75.0 million. At December 31, 2009, there was no outstanding
indebtedness under the U.S. Revolving Facility and $13.6 million
was outstanding in letters of
credit issued by Wells Fargo Bank, N.A. which guarantee the performance of certain of our
contractual obligations.
Canadian Revolving Credit Facility.
National Money Mart Company, OPCOs wholly owned indirect
Canadian subsidiary, is the borrower under the Canadian Revolving Facility. A portion of the
Canadian Revolving Facility (C$2.7 million) terminates on October 30, 2011, and the remainder
(C$25.8 million) will terminate on December 31, 2014 provided the extension condition
described above is met. The portion that expires on October 30, 2011 bears an interest rate
of CDOR (but not less than 2%) plus 375 basis points, subject to reductions as we reduce our
leverage. The portion that expires on December 31, 2014 bears an interest rate of CDOR (but
not less than 2%) plus 500 basis points, subject to reductions as we reduce our leverage. The
facility may be subject to mandatory reduction and the revolving loans subject to mandatory
prepayment (after prepayment of the term loans under the Credit Agreement), principally in an
amount equal to 50% of excess cash flow (as defined in the Credit Agreement). National Money
Mart Companys borrowing capacity under the Canadian Revolving Facility is limited to the
lesser of the total commitment of C$28.5 million or 85% of certain combined liquid assets of
National Money Mart Company and Dollar Financial U.K. Limited and their respective
subsidiaries. At December 31, 2009, the borrowing capacity was C$28.5 million. There was no
outstanding indebtedness under the Canadian facility at December 31, 2009.
54
United Kingdom Overdraft Facility
. In the third quarter of fiscal 2008, our U.K
subsidiary entered into an overdraft facility which provides for a commitment of up to GBP
5.0 million. There was no outstanding indebtedness under the United Kingdom facility at
December 31, 2009. We have the right of offset under the overdraft facility, by which we net
our cash bank accounts with our lender and the balance on the overdraft facility. Amounts
outstanding under the United Kingdom overdraft facility bear interest at a rate of the Bank
Base Rate (0.5% at December 31, 2009) plus 2.0%. Interest accrues on the net amount of the
overdraft facility and the cash balance.
Debt Due Within One Year.
As of December 31, 2009, debt due within one year consisted of $0.2
million mandatory repayment of 1.0% per annum of the principal balance of the Canadian Term
Facility and the U.K. Term Facility.
Long-Term Debt.
As of December 31, 2009, long term debt consisted of $596.4 million of 10.375%
Senior Notes due December 15, 2016, $66.6 million of 2.875% Convertible Notes, $77.8 million of
3.0% Convertible Notes and $18.7 million in term loans of which $1.6 million matures on October 30,
2012 and $17.1 million matures on December 31, 2014.
On December 21, 2009, we commenced the closing of an exchange offer with certain holders of our
2.875% Senior Convertible Notes due 2027 (Old 2027 Notes) pursuant to the terms of exchange
agreements with such holders. Pursuant to the terms of the exchange agreements, the holders
exchanged an aggregate of $120 million principal amount of the Old 2027 Notes held by such holders
for an equal aggregate principal amount of 3.0% Senior Convertible Notes due 2028 (New 2028 Notes).
The New 2028 Notes were issued under an indenture between us and U.S. Bank National Association, as
trustee. Holders have the right to convert the New 2028 Notes into cash and, if applicable, shares
of our common stock prior to the close of business on the trading day immediately preceding the
maturity date upon the satisfaction of certain conditions. The initial conversion rate of the New
2028 Notes is 34.5352 per $1,000 principal amount of New 2028 Notes (equivalent to an initial
conversion price of approximately $28.956 per share). The New 2028 Notes accrue interest at a rate
of 3.00% per annum. Interest on the New 2028 Notes is payable in cash semi-annually in arrears on
April 1 and October 1 of each year beginning on April 1, 2010. The maturity date of the New 2028
Notes is April 1, 2028. On or after April 5, 2015, we have the right to redeem for cash all or
part of the New 2028 Notes for a payment in cash equal to 100% of the principal amount of the New
2028 Notes to be redeemed, plus accrued and unpaid interest. Holders of the New 2028 Notes have the
right to require us to purchase all or a portion of the New 2028 Notes on each of April 1, 2015,
April 1, 2018 and April 1, 2023 for a purchase price payable in cash equal to 100% of the principal
amount of the New 2028 Notes to be purchased plus any accrued and unpaid interest. If we are
subject of a change of control or similar transaction before the maturity of the New 2028 Notes,
the holders will have the right, subject to certain conditions, to require us to repurchase for
cash all or a portion of their New 2028 Notes at a repurchase price equal to 100% of the principal
amount of the New 2028 Notes being repurchased, plus accrued and unpaid interest. The New 2028
Notes are senior, unsecured obligations and rank equal in right of payment to all of our other
unsecured and unsubordinated indebtedness and are effectively subordinated to all of our existing
and future secured debt and to the indebtedness and other liabilities of its subsidiaries.
On
December 23, 2009, National Money Mart Company issued pursuant to Rule 144A under the Securities
Act of 1933, as amended, $600 million aggregate principal amount
of its 10.375% Senior Notes due
2016 (the 2016 Notes). The 2016 Notes were issued pursuant to an indenture, dated as of December
23, 2009, among National Money Mart Company, as issuer, and us and certain of our direct and
indirect wholly owned U.S. and Canadian subsidiaries, as guarantors, and U.S. Bank National
Association, as trustee. The 2016 Notes bear interest at the rate of 10.375% per year. National
Money Mart Company will pay interest on the 2016 Notes on June 15 and December 15 of each year,
commencing on June 15, 2010. The 2016 Notes will mature on December 15, 2016. The maturity date of
the 2016 Notes will be automatically shortened to November 30, 2012, unless, prior to October 30,
2012, the aggregate principal amount of the our outstanding 2.875% senior convertible notes due
2027 has been reduced from its present $80 million amount to an amount less than or equal to $50.0
million by means of (i) the repurchase or redemption thereof , (ii) defeasance thereof or (iii) the
exchange or conversion thereof into unsecured notes of ours or any of its direct or indirect
subsidiaries having no mandatory repayment prior to April 1, 2015, or into our common stock. As of
January 31, 2010, $80 million of our 2.875% senior convertible notes due 2027 remained outstanding.
Upon the occurrence of certain change of control transactions, National Money Mart Company will be
required to make an offer to repurchase the 2016 Notes at 101% of the principal amount thereof,
plus any accrued and unpaid interest to the repurchase date, unless certain conditions are met.
After December 15, 2013, National Money Mart Company will have the right to redeem the 2016 Notes,
in whole at any time or in part from time to time, (i) at a redemption price of 105.188% of the
principal amount thereof if the redemption occurs prior to December 15, 2014, (ii) at a redemption
price of 102.594% of the principal amount thereof if the redemption occurs before December 15,
2015, and (iii) at a redemption price of 100% of the principal amount thereof if the redemption
occurs after December 15, 2015. In connection with the offering, National Money Mart Company
agreed to file with the Securities and Exchange Commission a registration statement under the
Securities Act with respect to an offer to exchange the 2016 Notes
for new 10.375% senior notes due
2016 of National Money Mart Company, with terms substantially similar to the 2016 Notes, no
55
later than 90 days after the issuance of the 2016 Notes.
Operating Leases.
Operating leases are scheduled payments on existing store and other
administrative leases. These leases typically have initial terms of five years and may contain
provisions for renewal options, additional rental charges based on revenue and payment of real
estate taxes and common area charges.
We entered into the commitments described above and other contractual obligations in the ordinary
course of business as a source of funds for asset growth and asset/liability management and to meet
required capital needs. Our principal future obligations and commitments as of December 31, 2009,
excluding periodic interest payments, include the following (in thousands):
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Less than
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1-3
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4-5
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After 5
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Total
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1 Year
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Years
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Years
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Years
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Long-term debt:
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10.375% Senior Notes due 2016
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$
|
600,000
|
|
|
$
|
|
|
|
$
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|
|
|
$
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|
|
|
$
|
600,000
|
|
2.875% Senior Convertible Notes due 2027
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80,000
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|
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80,000
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|
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3.0% Senior Convertible Notes due 2028
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|
120,000
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|
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120,000
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Term loans due 2012
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1,608
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17
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1,591
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|
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|
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Term loans due 2014
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17,050
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|
|
176
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|
|
353
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16,521
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Operating lease obligations
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143,819
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|
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35,338
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51,418
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30,110
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26,953
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Total contractual cash obligations
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$
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962,477
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$
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35,531
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$
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53,362
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$
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46,631
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|
$
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826,953
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We believe
that, based on current levels of operations and our improved 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, build de
novo stores and effectuate various acquisitions and make payment of interest and principal on our
indebtedness. This belief is based upon our historical growth rate and the anticipated benefits we
expect from operating efficiencies. We also expect operating expenses to increase, although the
rate of increase is expected to be less than the rate of revenue growth for existing stores.
Furthermore, we do not believe that additional acquisitions or expansion are necessary to cover our
fixed expenses, including debt service.
Balance Sheet Variations
December 31, 2009 compared to June 30, 2009
.
The
Companys cash balances increased from $209.6 million at
June 30, 2009 compared to $345.4 million at December 31, 2009 primarily as the
result of approximately $105 million of excess cash generated from the Companys refinancing activities (net of cash
utilized in DFS acquisition) during December 2009.
Loans receivable, net increased by $11.9 million to $126.6 million at December 31, 2009 from $114.7
million at June 30, 2009. Loans receivable, gross increased by $15.5 million and the related
allowance for loan losses increased by $3.6 million. The U.K. and Poland business units showed
increases in their loan receivable balances of $4.9 million and $1.8 million, respectively. The
U.S. and Canadian businesses, had decreases of $0.8 million and $1.0 million, respectively. In
constant dollars, the allowance for loan losses increased by $3.0 million and increased to 10.9% of
the outstanding principal balance at December 31, 2009 as
compared to 9.6% at June 30, 2009, primarily due to the mix of
lending products. The
following factors impacted this area:
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Continued improvements in U.S. collections and our actions, taken in an effort to
decrease our risk exposure by reducing the amount that we are willing to loan to certain
customer segments. The historical loss rates (expressed as a percentage of loan amounts
originated for the last twelve months applied against the principal balance of outstanding
loans) have continued to decline. The ratio of the allowance for loan losses related to
U.S. short-term consumer loans decreased by 20.4% from 4.6% at
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56
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June 30, 2009 compared to 3.7% at December 31, 2009.
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In constant dollars, the Canadian ratio of allowance for loan losses has increased from
3.3% at June 30, 2009 to 4.6% at December 31, 2009. The primary factor driving this
increase relates to an increase to reserves associated with an
installment loan product that is
being discontinued. The general loans receivable classification continues to show
improvement with the loan loss reserve as a percentage of outstanding principle dropping
from 2.9% at June 30, 2009 to 2.4% at December 31, 2009.
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In constant dollars, the U.K.s allowance for loan losses increased from 8.5% of
outstanding principal at June 30, 2009 to 9.9% at December 31, 2009. This percentage
increase relates to the mix of loan products and the associated loss
rates.
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Loans in default, net increased by $0.8 million from $6.4 million at June 30, 2009 to $7.3 million
at December 31,
2009. On a constant dollar basis, there was only a small increase in the loans in default, net of
$0.2 million.
Other receivables increased by $15.0 million from $7.3 million at June 30, 2009 to $22.3 million at
December 31, 2009. The Companys acquisitions accounted for $6.6 million of the increase and $7.6
million of the increase related to the timing of settlements with certain Canadian vendors
associated with our money order business. The remaining increase was primarily related to foreign
currency translation impacts.
Goodwill and other intangibles increased $137.6 million, from $454.3 million at June 30, 2009 to
$591.9 million at December 31, 2009 due to $119.9 million of additional goodwill and intangibles
associated with acquisitions during the current fiscal year and foreign currency translation
impacts of $17.7 million.
Debt issuance costs, net of accumulated amortization increased from $9.9 million at June 30, 2009
to $20.6 million at December 31, 2009 in connection with the Companys refinancing activities in
December 2009.
Accrued expenses and other liabilities increased $21.7 million from $70.6 million at June 30, 2009
to $92.3 million at December 31, 2009 due to the reclassification of $8.6 million from long-term to
current related to a payment in connection with the Ontario class action settlement that is
anticipated to be made in July of 2010, increases in accrued payroll of $5.2 million and increases
in accrued interest expense of $1.6 million on the Companys new senior notes. Foreign currency
translation adjustments also accounted for $5.9 million of the increase.
The fair value of derivatives increased from a liability position of $10.2 million at June 30, 2009
to a liability of $47.2 million as of December 31, 2009 a change of $37.0 million. The change in
the fair value of these cash flow hedges are a result of the change in the foreign currency
exchange rates and interest rates related to the tranche of 2006 Canadian term loans.
Long-term debt increased by $228.8 million from $530.4 million at June 30, 2009 to $759.2 million
at December 31, 2009 as the result of the Companys refinancing activities in December 2009.
Seasonality and Quarterly Fluctuations
Our business is seasonal due to the impact of several tax-related services, including cashing
tax refund checks, making electronic tax filings and processing applications of refund anticipation
loans. Historically, we have generally experienced our highest revenues and earnings during our
third fiscal quarter ending March 31, when revenues from these tax-related services peak. Due to
the seasonality of our business, results of operations for any fiscal quarter are not necessarily
indicative of the results of operations that may be achieved for the full fiscal year. In addition,
quarterly results of operations depend significantly upon the timing and amount of revenues and
expenses associated with the addition of new stores.
Impact of Recent Accounting Pronouncement
On January 21, 2010, the FASB issued ASU 2010-06,
Improving Disclosures about Fair Value
Measurements.
The standard amends ASC Topic 820,
Fair Value Measurements and Disclosures
to require
additional disclosures related to transfers between levels in the hierarchy of fair value
measurement. The standard does not change how fair values are measured. The standard is effective
for interim and annual reporting periods beginning after December 15, 2009. We will adopt this
Statement for the quarterly period ended March 31, 2009, as required, and adoption is not expected
to have a material impact on our consolidated financial statements.
57
Cautionary Statement for Purposes of the Safe Harbor Provisions of the Private Securities
Litigation Reform Act of 1995
This report includes forward-looking statements regarding, among other things, anticipated
improvements in operations, our plans, earnings, cash flow and expense estimates, strategies and
prospects, both business and financial. All statements other than statements of current or
historical fact contained in this Form 10-Q are forward-looking statements. The words believe,
expect, anticipate, should, plan, will, may, intend, estimate,
potential, continue and similar expressions, as they relate to us, are intended to identify
forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections
about future events, financial trends, litigation and industry regulations that we believe may
affect our financial condition, results of operations, business strategy and financial needs. They
can be affected by inaccurate assumptions, including, without limitation, with respect to risks,
uncertainties, anticipated operating efficiencies, the general economic conditions in the markets
in which we operate, new business prospects and the rate of expense increases. In light of these
risks, uncertainties and assumptions, the forward-looking statements in this report may not occur
and actual results could differ materially from those anticipated or implied in the forward-looking
statements. When you consider these forward-looking statements, you should keep in mind the risk
factors in Part II, section 1A of this Quarterly Report on Form 10-Q. We undertake no obligation to
update or revise any forward-looking statements, whether as a result of new information, future
events or otherwise.
58
DOLLAR FINANCIAL CORP.
SUPPLEMENTAL STATISTICAL DATA
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
Company Operating Data:
|
|
|
|
|
|
|
|
|
Stores in operation:
|
|
|
|
|
|
|
|
|
Company-owned
|
|
|
1,078
|
|
|
|
1,043
|
|
Franchised stores and check cashing merchants
|
|
|
292
|
|
|
|
129
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,370
|
|
|
|
1,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Check Cashing Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face amount of checks cashed (in millions)
|
|
$
|
1,138
|
|
|
$
|
1,004
|
(1)
|
|
$
|
2,455
|
|
|
$
|
1,987
|
(1)
|
Face amount of average check
|
|
$
|
464
|
|
|
$
|
491
|
(2)
|
|
$
|
493
|
|
|
$
|
488
|
(2)
|
Average fee per check
|
|
$
|
16.99
|
|
|
$
|
18.87
|
(3)
|
|
$
|
18.11
|
|
|
$
|
18.73
|
(3)
|
Number of checks cashed (in thousands)
|
|
|
2,450
|
|
|
|
2,043
|
|
|
|
4,979
|
|
|
|
4,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
Check Cashing Collections Data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Face amount of returned checks
|
|
$
|
14,239
|
|
|
$
|
8,532
|
|
|
$
|
33,400
|
|
|
$
|
17,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections
|
|
|
(10,449
|
)
|
|
|
(6,526
|
)
|
|
|
(24,387
|
)
|
|
|
(13,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net write-offs
|
|
$
|
3,790
|
|
|
$
|
2,006
|
|
|
$
|
9,013
|
|
|
$
|
4,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collections as a percentage of returned checks
|
|
|
73.4
|
%
|
|
|
76.5
|
%
|
|
|
73.0
|
%
|
|
|
77.3
|
%
|
Net write-offs as a percentage of check cashing revenues
|
|
|
9.1
|
%
|
|
|
5.2
|
%
|
|
|
10.0
|
%
|
|
|
5.4
|
%
|
Net write-offs as a percentage of the face amount of checks cashed
|
|
|
0.33
|
%
|
|
|
0.20
|
%
|
|
|
0.37
|
%
|
|
|
0.21
|
%
|
|
|
|
(1)
|
|
Net of a $68 and $18 increase as a result of the impact of exchange rates for the three and six months ended December 31, 2009, respectively.
|
|
(2)
|
|
Net of a $33 and $5 increase as a result of the impact of exchange rates for the three and six months ended December 31, 2009, respectively.
|
|
(3)
|
|
Net of a $1.30 and $0.05 increase as a result of the impact
of exchange rates for the three and six months ended December 31 2009, respectively.
|
59
The following chart presents a summary of
our consumer lending operations, including loan originations, which
includes loan extensions and revenues for our legacy retail store
businesses in the U.S., Canada and U.K. for the
following periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
December 31th,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
U.S. company-funded consumer loan originations
|
|
$
|
161,067
|
|
|
$
|
139,419
|
|
|
$
|
327,447
|
|
|
$
|
275,222
|
|
Canadian company-funded consumer loan originations
|
|
|
192,739
|
|
|
|
208,994
|
(1)
|
|
|
425,583
|
|
|
|
408,161
|
(1)
|
U.K. company-funded consumer loan originations
|
|
|
90,321
|
|
|
|
111,078
|
(2)
|
|
|
202,205
|
|
|
|
220,906
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total company-funded consumer loan originations
|
|
$
|
444,127
|
|
|
$
|
459,491
|
|
|
$
|
955,235
|
|
|
$
|
904,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Servicing revenues
|
|
$
|
539
|
|
|
$
|
|
|
|
$
|
1,117
|
|
|
$
|
|
|
U.S. company-funded consumer loan revenues
|
|
|
21,649
|
|
|
|
18,180
|
|
|
|
43,874
|
|
|
|
36,038
|
|
Canadian company-funded consumer loan revenues
|
|
|
30,006
|
|
|
|
38,107
|
|
|
|
67,203
|
|
|
|
73,322
|
|
U.K. company-funded consumer loan revenues
|
|
|
17,811
|
|
|
|
21,424
|
|
|
|
39,309
|
|
|
|
41,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consumer lending revenues, net
|
|
$
|
70,005
|
|
|
$
|
77,711
|
|
|
$
|
151,503
|
|
|
$
|
150,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross charge-offs of company-funded consumer loans
|
|
$
|
48,781
|
|
|
$
|
38,169
|
|
|
$
|
108,258
|
|
|
$
|
79,886
|
|
|
Recoveries of company-funded consumer loans
|
|
|
(33,732
|
)
|
|
|
(29,285
|
)
|
|
|
(81,171
|
)
|
|
|
(62,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs on company-funded consumer loans
|
|
$
|
15,049
|
|
|
$
|
8,884
|
|
|
$
|
27,087
|
|
|
$
|
17,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross charge-offs of company-funded consumer loans as
a percentage of total company-funded consumer loan
originations
|
|
|
11.0
|
%
|
|
|
8.3
|
%
|
|
|
11.3
|
%
|
|
|
8.8
|
%
|
Recoveries of company-funded consumer loans as a
percentage of total company-funded consumer loan
originations
|
|
|
7.6
|
%
|
|
|
6.4
|
%
|
|
|
8.5
|
%
|
|
|
6.8
|
%
|
Net charge-offs on company-funded consumer loans as a
percentage of total company-funded consumer loan
originations
|
|
|
3.4
|
%
|
|
|
1.9
|
%
|
|
|
2.8
|
%
|
|
|
2.0
|
%
|
|
|
|
(1)
|
|
Net of a $26.5 million and $16.0 million increase as a result of the impact of exchange rates for the three and six months ended
December 31, 2009.
|
|
(2)
|
|
Net of a $4.4 million increase and $12.3 million decrease as a result of the impact of exchange rates for the three and six months
December 31, 2009
|
60
|
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Generally
In the operations of our subsidiaries and the reporting of our consolidated financial results,
we are affected by changes in interest rates and currency exchange rates. The principal risks of
loss arising from adverse changes in market rates and prices to which we and our subsidiaries are
exposed relate to:
|
|
|
interest rates on revolving credit facilities; and
|
|
|
|
|
foreign exchange rates generating translation gains and losses.
|
We and our
subsidiaries have no market risk sensitive instruments entered into
with the intent to hold for trading
purposes, as defined by U.S. generally accepted accounting principles
or GAAP. As discussed below, as a result of the refinancing we do
have cross currency swaps not designated as hedging instruments under
GAAP. While the instruments have the same market risk exposure that
they had in our historical financial statements, future changes in
the market value of these instruments will be recorded in the
statement of operations.
Interest Rate Risk
Our outstanding indebtedness, and related interest rate risk, is managed centrally by our
finance department by implementing the financing strategies approved by our Board of Directors.
Our revolving credit facilities carry variable rates of interest.
With the repayment of substantially all of our outstanding
obligations under the credit facilities during December 2009 with the proceeds of a fixed
rate bond issuance without termination of its Canadian cross currency swaps hedging the debt, the
Company is exposed to adverse changes in interest rates that will likely have an impact on our
consolidated statement of financial position. See the section entitled Cross Currency Interest
Rate Swaps.
Foreign Currency Exchange Rate Risk
Put Options
Operations in the United Kingdom and Canada have exposed us to shifts in currency valuations. From
time to time, we may elect to purchase put options in order to protect certain earnings in the
United Kingdom and Canada against the translational impact of foreign currency fluctuations. Out
of the money put options may be purchased because they cost less than completely averting risk, and
the maximum downside is limited to the difference between the strike price and exchange rate at the
date of purchase and the price of the contracts. At December 31, 2009, we did not hold put
options, however in January we purchased put options to protect certain currency exposure in Canada
and the United Kingdom through March, 2010. We use purchased options designated as cash flow
hedges to protect against certain of the foreign currency exchange rate risks inherent in our
forecasted earnings denominated in currencies other than the U.S. dollar. These cash flow hedges
have a duration of less than 12 months. For derivative instruments that are designated and qualify
as cash flow hedges, the effective portions of the gain or loss on the derivative instrument are
initially recorded in accumulated other comprehensive income as a separate component of
stockholders equity and subsequently reclassified into earnings in the period during which the
hedged transaction is recognized in earnings. The ineffective portion of the gain or loss is
reported in other expense (income), net on the statement of operations. For options designated as
hedges, hedge effectiveness is measured by comparing the cumulative change in the hedge contract
with the cumulative change in the hedged item, both of which are based on forward rates. As of
December 31, 2009, no amounts were excluded from the assessment of hedge effectiveness. There was
no ineffectiveness from these cash flow hedges for fiscal 2009.
Canadian operations (exclusive of the unrealized foreign exchange gain of $4.1 million, loss on
extinguishment of debt of $3.6 million, loss on derivatives not designated as hedges of $3.3
million and the loss on store closings of $0.7 million) accounted for approximately 73.5% of
consolidated pre-tax earnings for the six months ended December 31, 2009 and 95.4% of consolidated
pre-tax earnings (exclusive of loss on store closings of $2.4 million) for the six months ended
December 31, 2008. U.K. operations (exclusive of the loss on extinguishment of debt of $4.7
million and unrealized foreign exchange losses of $7.9 million) accounted for approximately 48.6%
of consolidated pre-tax earnings for the six months ended December 31, 2009 and 40.7% of
consolidated pre-tax earnings for the six months ended December 31, 2008. U.S. operations
(exclusive of the loss on extinguisment of debt of $0.5 million, litigation expense of $1.3 million
and losses on store closings of $1.0 million) accounted for approximately (22.1)% of consolidated
pre-tax earnings for the six months ended December 31, 2009 and (36.1)% of consolidated pre-tax
earnings (exclusive of losses on store closings of $3.1 million) for the six months ended December
31, 2008. As currency exchange rates change, translation of the financial results of the Canadian
and U.K. operations into U.S. dollars will be impacted. Changes in exchange rates have resulted in
cumulative translation adjustments increasing our net assets by $28.9 million. These gains and
losses are included in other comprehensive income.
61
We estimate that a 10.0% change in foreign exchange rates by itself would have impacted reported
pre-tax earnings from continuing operations (exclusive in the six months ended December 31, 2009 of
losses on extinguishment of debt of $8.4 million, unrealized
foreign exchange losses of $3.9 million, losses on derivatives not designated as hedges of $3.3
million and losses on store closings of $0.7 million) by approximately $5.5 million for the six
months ended December 31, 2009 and $6.2 million (exclusive of losses on store closings of $2.4
million) for the six months ended December 31, 2008. This impact represents 12.2% of our
consolidated foreign pre-tax earnings for the six months ended December 31, 2009 and 14.8% of our
consolidated foreign pre-tax earnings for the six months ended December 31, 2008.
Cross-Currency Interest Rate Swaps
In December 2006, we entered into cross-currency interest rate swaps to hedge against the
changes in cash flows of our U.K. and Canadian term loans denominated in a currency other than our
foreign subsidiaries functional currency.
In December 2006, our U.K. subsidiary, Dollar Financial U.K. Limited, entered into a cross-currency
interest rate swap with a notional amount of GBP 21.3 million that was set to mature in
October 2012. Under the terms of this swap, Dollar Financial U.K. Limited paid GBP at a rate of
8.45% per annum and Dollar Financial U.K. Limited received a rate of the three-month EURIBOR plus
3.00% per annum on EUR 31.5 million. In December 2006, Dollar Financial U.K. Limited also entered
into a cross-currency interest rate swap with a notional amount of GBP 20.4 million that was set to
mature in October 2012. Under the terms of this cross-currency interest rate swap, we paid GBP at
a rate of 8.36% per annum and we received a rate of the three-month LIBOR plus 3.00% per annum on
US$40.0 million.
On May 7, 2009, our U.K. subsidiary, terminated its two cross-currency interest rate swaps hedging
variable-rate borrowings. As a result, we prospectively discontinued hedge accounting on these
cross-currency swaps. In accordance with the provisions of FASB Codification Topic Derivatives and
Hedging, we will continue to report the net gain or loss related to the discontinued cash flow
hedge in other comprehensive income and will subsequently reclassify such amounts into earnings
over the remaining original term of the derivative when the hedged forecasted transactions are
recognized in earnings.
In December 2006, our Canadian subsidiary, National Money Mart Company, entered into cross-currency
interest rate swaps with aggregate notional amounts of C$339.9 million that mature in October 2012.
Under the terms of the swaps, National Money Mart Company pays Canadian dollars at a blended rate
of 7.12% per annum and National Money Mart Company receives a rate of the three-month LIBOR plus
2.75% per annum on $295.0 million.
On December 23, 2009, the Company used a portion of the net proceeds of its $600 million Senior
Note Offering to prepay $350 million of the $368.6 million outstanding term loans. As a result,
the Company prospectively discontinued hedge accounting on its Canadian cross-currency swaps because they were no longer effective. In
accordance with the provisions of FASB Codification Topic Derivatives and Hedging, we will continue
to report the net gain or loss related to the discontinued cash flow hedge in other comprehensive
income and will subsequently reclassify such amounts into earnings over the remaining original term
of the derivative when the hedged forecasted transactions are recognized in earnings.
On a quarterly basis, the cross-currency interest rate swap agreements call for the exchange of
0.25% of the original notional amounts. Upon maturity, these cross-currency interest rate swap
agreements call for the exchange of the remaining notional amounts. Prior to December 23, 2009
these derivative contracts were designated as cash flow hedges for accounting purposes. Because
these derivatives were designated as cash flow hedges, we recorded the effective portion of the
after-tax gain or loss in other comprehensive income, which is subsequently reclassified to
earnings in the same period that the hedged transactions affect earnings. Subsequent to December
23, 2009, the swaps are no longer designated as hedges, therefore we record foreign exchange
re-measurement gains and losses related to the term loans and also record the changes in fair value
of the cross-currency swaps each period in corporate expenses in our consolidated statements of
operations. As of December 31, 2009, amounts related to cross-currency interest rate swaps
amounted to a decrease in stockholders equity of $34.2 million, net of tax. The aggregate fair
market value of the cross-currency interest rate swaps at December 31, 2009 is a liability of $47.2
million and is included in fair value of derivatives on the balance sheet. During the three and six
months ended December 31, 2009, we recorded $3.3 million in earnings related to the ineffective
portion of these cash flow hedges.
On January 14, 2010, we entered into an amendment to the ISDA Master
Agreement governing the outstanding cross-currency interest rate swap
relating to a notional amount of C$184.0 million to which National
Money Mart Company, a Canadian subsidiary of Dollar Financial Corp.,
is a party to hedge its variable-rate Canadian term loans denominated
in U.S. dollars. The amendment eliminates financial covenants and
allows the underlying swap to remain outstanding (with a similar
collateral package in place) in the event that we elect to terminate
our secured credit facility prior to the maturity of the swap in
October 2012. On February 8, 2010, we entered into an amendment to
the ISDA Master
Agreement governing the outstanding cross-currency interest rate swap
relating to a notional amount of C$145.7 million to which National
Money Mart Company, a Canadian subsidiary of Dollar Financial Corp.,
is a party to hedge its variable-rate Canadian term loans denominated
in U.S. dollars. The amendment includes financial covenants identical
to those in the Companys amended credit facility and allows the
underlying swap to remain outstanding (with a similar
collateral package in place) in the event that we elect to terminate
our secured credit facility prior to the maturity of the swap in
October 2012. We agreed to pay a higher rate on the interest rate
swaps in order to secure these amendments, the impact of which will
be recorded in our March 31, 2010 financial statements.
62
|
|
Item 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, our management conducted an evaluation,
with the participation of our Chief
Executive Officer, Chief Financial Officer and Senior Vice President, Finance and Corporate
Controller, of the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)).
Based on this evaluation, our Chief Executive Officer, Chief Financial Officer and Senior Vice
President, Finance and Corporate Controller have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commissions rules and forms and that
such information is accumulated and communicated to management, including our Chief Executive
Officer, Chief Financial Officer and Senior Vice President, Finance and Corporate Controller, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our fiscal quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II OTHER INFORMATION
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Item 1.
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Legal Proceedings
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The information required by this Item is incorporated by reference herein to the section in Part I,
Item 1 Note 4. Contingent Liabilities of this Quarterly Report on Form 10-Q.
In addition to the other information set forth in this Form 10-Q, you should carefully consider the following risk
factors, which contain material changes to, and amend and restate in their entirety, the risk factors set forth in Part I,
Item 1A Risk Factors of our Annual Report on Form 10-K for the fiscal year ended June 30, 2009 which could
materially affect our business, financial condition or future results of operations. The risks described below in this
item are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially adversely affect our business, financial condition and future
results of operations.
Risks Related to Our Business and Industry
If we do not generate a sufficient amount of cash, which depends on many factors beyond our
control, our liquidity and our ability to service our indebtedness and fund our operations would be
harmed.
We believe that our cash flow from operations, available cash and available borrowings under our
senior secured credit facilities will be adequate to meet our future liquidity needs. However, we
have substantial debt service obligations, working capital needs and contractual commitments. We
cannot assure you that our business will generate sufficient cash flow from operations, that our
anticipated revenue growth will be realized or that future borrowings will be available to us under
credit facilities in amounts sufficient to enable us to pay our existing indebtedness, fund our
expansion efforts or fund our other liquidity needs. In addition, adverse changes in any of the
measures above may impact the value of the goodwill or other intangible assets on our balance sheet
by causing us to write-down or write-off the balance completely.
Changes in applicable laws and regulations governing consumer protection and lending practices,
both domestically and abroad, may have a significant negative impact on our business, results of
operations and financial condition.
Our business is subject to numerous state and certain federal and foreign laws and regulations
which are subject to change and which may impose significant costs or limitations on the way we
conduct or expand our business. These regulations govern or affect:
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check cashing fees;
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licensing and posting of fees;
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lending practices, such as truth in lending and installment and single-payment lending;
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interest rates and usury;
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loan amount and fee limitations;
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currency reporting;
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privacy of personal consumer information; and
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prompt remittance of proceeds for the sale of money orders.
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As we develop and introduce new products and services, we may become subject to additional federal,
state and foreign regulations. In addition, future legislation or regulations may restrict our
ability to continue our current methods of operation or expand our operations and may have a
negative effect on our business, results of operations and financial condition. In addition, local
and federal governments may seek to impose new licensing requirements or interpret or enforce
existing requirements in new ways. Our business is also subject to litigation and regulatory
proceedings, which could generate adverse publicity or cause us to incur substantial expenditures
or modify the way we conduct our business.
Various anti-cash advance legislation has been proposed or introduced in various state legislatures
and in the U.S. Congress. Congressional members continue to receive pressure from consumer
advocates and other industry opposition groups to adopt such legislation. Any U.S. federal
legislative or regulatory action that severely restricts or prohibits cash advance and similar
services, if enacted, could have an adverse impact on our business, prospects, results of
operations and financial condition.
Currently our check cashing and consumer lending activities are subject to only limited substantive
regulation in Canada other than usury laws. Effective May 3, 2007, the Canadian Parliament amended
the federal usury law to transfer jurisdiction and the development of laws and regulations of our
industrys consumer loan products to the respective provinces. There can be no assurance that the
new regulations that may be adopted would not have a detrimental effect on our consumer lending
business in Canada. Historically, our Canadian consumer lending activities were subject to
provincial licensing in Saskatchewan, Nova Scotia, New Brunswick and Newfoundland. A federal usury
ceiling applied to loans we made to Canadian customers. Such borrowers historically contracted to
repay us in cash; if they elected to repay by check, we also collected, in addition to a
permissible finance charge, our customary check-cashing fees. To date, the provinces of British
Columbia, Saskatchewan, Manitoba, Ontario, Nova Scotia, Prince Edward Island, Alberta and
New Brunswick have all passed legislation to regulate short term consumer lenders and each are in
the process of adopting the new regulations and rates consistent with the regulations. In general,
the regulations proposed and implemented to date are similar to those in effect in the United
States which require lenders to be licensed, set maximum limits on the charges to the consumer for
a loan and regulate collection practices.
In the United Kingdom, our consumer lending activities must comply with the Consumer Credit Act of
1974 and related rules and regulations which, among other things, require us to obtain governmental
licenses and prescribe the presentation, form and content of loan agreements. The modification of
existing laws or regulations in Canada and the United Kingdom, or the adoption of new laws or
regulations restricting or imposing more stringent requirements on our international check cashing
and consumer lending activities, could increase our operating expenses and significantly limit our
international business activities.
Public perception and press coverage of single-payment consumer loans as being predatory or abusive
could negatively affect our revenues and results of operations.
Consumer advocacy groups and some legislators have recently advocated governmental action to
prohibit or severely restrict certain types of short-term consumer lending. Typically the consumer
groups, some legislators and press coverage focus on lenders that charge consumers interest rates
and fees that are higher than those charged by credit card issuers to more creditworthy consumers.
This difference in credit cost may become more significant if a consumer does not repay the loan
promptly, but renews the loan for one or more additional short-term periods. These types of
short-term single-payment loans are often characterized by consumer groups, some legislators and
press coverage as predatory or abusive toward consumers. If consumers accept this negative
characterization of certain single-payment consumer loans and believe that the loans we provide to
our customers fit this characterization, demand for our loans could significantly decrease, which
could negatively affect our revenues and results of operations.
If our estimates of loan losses are not adequate to absorb losses, our results of operations and
financial condition may be adversely affected.
We maintain an allowance for loan losses for anticipated losses on company-funded loans and loans
in default. To estimate the appropriate level of loan loss reserves, we consider known and relevant
internal and external factors that affect loan collectability,
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including the amount of outstanding loans owed to us, historical loans charged off, current collection patterns and current economic
trends. Our current allowance for loan losses is based on our charge-offs, expressed as a
percentage of loan amounts originated for the last twelve months applied against the principal
balance of outstanding loans. As of December 31, 2009, our allowance for loan losses on
company-funded consumer loans that were not in default was $15.8 million and our allowance for
losses on loans in default was $17.1 million. These reserves, however, are estimates, and if actual
loan losses are materially greater than our loan loss reserves, our results of operations and
financial condition could be adversely affected.
Legal proceedings may have a material adverse impact on our results of operations or cash flows in
future periods.
We are currently subject to a number of legal proceedings. We are vigorously defending these
proceedings. In addition, we are likely to be subject to further legal proceedings in the future.
The resolution of any current or future legal proceeding could cause us to have to
refund fees and/or interest collected, refund the principal amount of advances, pay damages or
other monetary penalties and/or modify or terminate our operations in particular local and federal
jurisdictions. We may also be subject to adverse publicity. Defense of any legal proceedings, even
if successful, requires substantial time and attention of our senior officers and other management
personnel that would otherwise be spent on other aspects of our business and requires the
expenditure of significant amounts for legal fees and other related costs. Settlement of lawsuits
may also result in significant payments and modifications to our operations. Any of these events
could have a material adverse effect on our business, prospects, results of operations and
financial condition.
Competition in the financial services industry could cause us to lose market share and revenues.
The industry in which we operate is highly fragmented and very competitive. In addition, we believe
that the market will become more competitive as the industry consolidates. In addition to other
check cashing stores and consumer lending stores in the United States, Canada, the United Kingdom
and Europe, we compete with banks and other financial services entities and retail businesses that
cash checks, offer consumer loans, sell money orders, provide money transfer services or offer
other products and services offered by us. Some of our competitors have larger and more established
customer bases and substantially greater financial, marketing and other resources than we have. As
a result, we could lose market share and our revenues could decline, thereby affecting our ability
to generate sufficient cash flow to service our indebtedness and fund our operations.
Unexpected changes in foreign tax rates could negatively impact our operating results.
We currently conduct significant check cashing and consumer lending activities internationally. Our
foreign subsidiaries accounted for 76.5% of our total revenues during the three months ended
December 31, 2009, and 69.0% of our total revenues during the three months ended December 31, 2008.
Our financial results may be negatively impacted to the extent tax rates in foreign countries where
we operate increase and/or exceed those in the United States and as a result of the imposition of
withholding requirements on foreign earnings.
Risk and uncertainties related to political and economic conditions in foreign countries in which
we operate could negatively impact our operations.
We currently conduct significant check cashing and consumer lending activities internationally. If
political, regulatory or economic conditions deteriorate in these countries, our ability to conduct
our international operations could be limited and our costs could be increased. Moreover, actions
or events could occur in these countries that are beyond our control, which could restrict or
eliminate our ability to operate in such jurisdictions or significantly reduce product demand and
the expected profitability of such operations.
The international scope of our operations may contribute to increased costs and negatively impact
our operations.
Our operations in Canada and the United Kingdom are significant to our business and present risks
which may vary from those we face domestically. At December 31, 2009, assets held by our foreign
subsidiaries represented 64.5% of our total assets. Since international operations increase the
complexity of an organization, we may face additional administrative costs in managing our
business. In addition, most countries typically impose additional burdens on non-domestic companies
through the use of local regulations, tariffs and labor controls. Unexpected changes to the
foregoing could negatively impact our operations.
Foreign currency fluctuations may adversely affect our results of operations.
We derive significant revenue, earnings and cash flow from our operations in Canada and the
United Kingdom. Our results of operations are vulnerable to currency exchange rate fluctuations
principally in the Canadian dollar and the British pound against the
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United States dollar. We estimate that a 10.0% change in foreign exchange
rates by itself would have impacted reported pre-tax earnings from continuing operations (exclusive in the six months ended
December 31, 2009 of losses on extinguishment of debt of $8.4 million, unrealized foreign exchange losses of $3.9 million, losses on
derivatives not designated as hedges of $3.3 million and losses on store closings of $0.7 million) by approximately $5.5 million
for the six months ended December 31, 2009 and $6.2 million
(exclusive of losses on store closings of $2.4 million) for the six
months ended December 31, 2008. This impact represents 12.2% of our consolidated foreign pre-tax earnings for the six months
ended December 31, 2009 and 14.8% of our consolidated foreign pre-tax earnings for the six months
ended December 31, 2008.
Demand for our products and service is sensitive to the level of transactions effected by our
customers, and accordingly, our revenues could be affected negatively by a general economic
slowdown.
A significant portion of our revenues is derived from cashing checks and consumer lending. Revenues
from check cashing and consumer lending accounted for 25.2% and 54.2%, respectively, of our total
revenues during the three months ended December 31, 2009 and 31.5% and 50.9%, respectively, of our
total revenues during the three months ended December 31, 2008. Any changes in
economic factors that adversely affect consumer transactions and employment could reduce the volume
of transactions that we process and have an adverse effect on our revenues and results of
operations.
If the national and worldwide financial crisis continues, potential disruptions in the credit
markets may negatively impact the availability and cost of short-term borrowing under our senior
secured credit facility, which could adversely affect our results of operations, cash flows and
financial condition.
If internal funds are not available from our operations and after utilizing our excess cash we may
be required to rely on the banking and credit markets to meet our financial commitments and
short-term liquidity needs. Disruptions in the capital and credit markets, as have been experienced
during 2008 and 2009, could adversely affect our ability to draw on our revolving loans. Our access
to funds under that credit facility is dependent on the ability of the banks that are parties to
the facility to meet their funding commitments.
Those banks may not be able to meet their funding commitments to us if they experience shortages of
capital and liquidity or if they experience excessive volumes of borrowing requests from us and
other borrowers within a short period of time. In addition, the effects of the global recession and
its effects on our operations and the translational effects of our foreign operations, could cause
us to have difficulties in complying with our credit agreements.
Longer term disruptions in the capital and credit markets as a result of uncertainty, changing or
increased regulation, reduced alternatives, or failures of significant financial institutions could
adversely affect our ability to refinance our outstanding indebtedness on favorable terms, if at
all. The lack of availability under, and the inability to subsequently refinance, our indebtedness
could require us to take measures to conserve cash until the markets stabilize or until alternative
credit arrangements or other funding for our business needs can be arranged. Such measures could
include deferring capital expenditures, including acquisitions, and reducing or eliminating other
discretionary uses of cash.
Our business model for our legal document processing services business is being challenged in the
courts, as well as by state legislatures, which could result in our discontinuation of these
services in any one or more jurisdictions.
Our business model for our legal document processing services business is being challenged in
various states and, at the federal level, by various United States bankruptcy trustees, as the
unauthorized practice of law. A finding in any of these pending lawsuits and proceedings that our
legal document processing services business model constitutes the unauthorized practice of law
could result in our discontinuation of these services in any one or more jurisdictions.
Future legislative and regulatory activities and court orders may restrict our ability to continue
our current legal document processing services business model or expand its use. For example, there
have been recent efforts by various trade and state bar associations and state legislatures and
regulators to define the practice of law in a manner which would prohibit the preparation of legal
documents by non-attorneys or prohibit non-attorneys from offering for sale certain legal
documents.
Changes in local rules and regulations such as local zoning ordinances could negatively impact our
business, results of operations and financial condition.
In addition to state and federal laws and regulations, our business can be subject to various local
rules and regulations such as local zoning regulations. Any actions taken in the future by local
zoning boards or other local governing bodies to require special use permits
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for, or impose other restrictions on, our ability to provide products and services could adversely affect our ability to
expand our operations or relocate existing stores.
A reduction in demand for our products and services and failure by us to adapt to such
reduction could adversely affect our business and results of operations.
The demand for a particular product or service we offer may be reduced due to a variety of factors,
such as regulatory restrictions that decrease customer access to particular products, the
availability of competing products or changes in customers preferences or financial conditions.
Should we fail to adapt to significant changes in our customers demand for, or access to, our
products or services, our revenues could decrease significantly and our operations could be harmed.
Even if we do make changes to existing products or services or introduce new products or services
to fulfill customer demand, customers may resist or may reject such products or services. Moreover,
the effect of any product change on the results of our business may not be fully ascertainable
until the change has been in effect for some time and by that time it may be too late to make
further modifications to such product or service without causing further harm to our business and
results of operations.
Our business and results of operations may be adversely affected if we are unable to manage our
growth effectively.
Our expansion strategy, which contemplates the addition of new stores, the acquisition of
competitor stores and acquiring or developing new distribution channels for our products in the
United States, Canada, the United Kingdom, the Republic of Ireland, Poland and other international
markets, is subject to significant risks. Our continued growth is dependent upon a number of
factors, including the ability to hire, train and retain an adequate number of experienced
management employees, the availability of adequate financing for our expansion activities, the
ability to successfully transition acquired stores or their historical customer base to our
operating platform, the ability to obtain any government permits and licenses that may be required,
the ability to identify and overcome cultural and linguistic differences which may impact market
practices within a given geographic region, and other factors, some of which are beyond our
control. There can be no assurance that we will be able to successfully grow our business or that
our current business, results of operations and financial condition will not suffer if we are
unable to do so. Expansion beyond the geographic areas where the stores are presently located will
increase demands on management and divert their attention. In addition, expansion into new products
and services will present new challenges to our business and will require additional management
time.
Our ability to open and acquire new stores is subject to outside factors and circumstances over
which we have limited control or that are beyond our control which could adversely affect our
growth potential.
Our expansion strategy includes acquiring existing stores and opening new ones. The success of this
strategy is subject to numerous outside factors, such as the availability of attractive acquisition
candidates, the availability of acceptable business locations, the ability to access capital to
acquire and open such stores and the ability to obtain required permits and licenses. We have
limited control, and in some cases, no control, over these factors. Moreover, the start-up costs
and the losses we likely would incur from initial operations attributable to each newly opened
store place demands upon our liquidity and cash flow, and we cannot assure you that we will be able
to satisfy these demands. The failure to execute our expansion strategy would adversely affect our
ability to expand our business and could materially adversely affect our revenue, profitability and
results of operations.
If we do not successfully integrate newly acquired businesses into our operations, our performance
and results of operations could be negatively affected.
We have historically grown through strategic acquisitions and a key component of our growth
strategy is to continue to pursue attractive acquisition opportunities. The success of our
acquisitions is dependent, in part, upon our effectively integrating the management, operations and
technology of acquired businesses into our existing management, operations and technology
platforms, of which there can be no assurance. The failure to successfully integrate acquired
businesses into our organization could materially adversely affect our business, prospects, results
of operations and financial condition.
Our check cashing services may further diminish because of technological advances.
We derive a significant component of our revenues from fees associated with cashing payroll,
government and personal checks. Recently, there has been increasing penetration of electronic
banking services into the check cashing and money transfer industry, including direct deposit of
payroll checks and electronic transfer of government benefits. To the extent that checks received
by our customer base are replaced with such electronic transfers, demand for our check cashing
services could decrease.
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Our business is seasonal in nature, which causes our revenues and earnings to fluctuate.
Our business is seasonal due to the impact of several tax-related services, including cashing tax
refund checks, making electronic tax filings and processing applications for refund anticipation
loans. Historically, we have generally experienced our highest revenues and earnings during the
third fiscal quarter ending March 31 when revenues from these tax-related services peak. This
seasonality requires us to manage our cash flows over the course of the year. If our revenues were
to fall substantially below what we would normally expect during certain periods, our financial
results would be adversely impacted and our ability to service our debt, including our ability to
make interest payments on our debt, may also be adversely affected.
Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages
due to robbery, employee error and theft.
Since our business requires us to maintain a significant supply of cash in each of our stores, we
are subject to the risk of cash shortages resulting from robberies, as well as employee errors and
theft. Although we have implemented various programs to reduce these risks, maintain insurance
coverage for theft and provide security, systems and processes for our employees and facilities, we
cannot assure you that robberies, employee error and theft will not occur and lead to cash
shortages that could adversely affect our results of operations.
If we lose key management or are unable to attract and retain the talent required for our business,
our operating results could suffer.
Our future success depends to a significant degree upon the members of our senior management team,
which have been instrumental in procuring capital to assist us in executing our growth strategies,
identifying and negotiating domestic and international acquisitions and providing expertise in
managing our developing international operations. The loss of the services of one or more members
of senior management could harm our business and future development. Our continued growth also will
depend upon our ability to attract and retain additional skilled management personnel. If we are
unable to attract and retain the requisite personnel as needed in the future, our operating results
and growth could suffer.
A catastrophic event at our corporate or international headquarters or our centralized call-center
facilities in the United States, Canada and the United Kingdom could significantly disrupt our
operations and adversely affect our business, results of operations and financial condition.
Our global business management processes are primarily provided from our corporate headquarters in
Berwyn, Pennsylvania, and our operations headquarters in Victoria, British Columbia, Nottingham,
England and a satellite office in Fort Lauderdale, Florida. We also maintain a centralized
call-center facility in Salt Lake City, Utah that performs customer service, collection and
loan-servicing functions for our consumer lending business, as well as similar facilities in
Victoria, British Columbia, Nottingham, England and a satellite office in Fort Lauderdale, Florida.
We have in place disaster recovery plans for each of these sites, including data redundancy and
remote information back-up systems, but if any of these locations were severely damaged by a
catastrophic event, such as a flood, significant power outage or act of terror, our operations
could be significantly disrupted and our business, results of operations and financial condition
could be adversely impacted.
Any disruption in the availability of our information systems could adversely affect our business
operations.
We rely upon our information systems to manage and operate our stores and business. Each store is
part of an information network that is designed to permit us to maintain adequate cash inventory,
reconcile cash balances on a daily basis and report revenues and expenses to our headquarters. Our
back-up systems and security measures could fail to prevent a disruption in our information
systems. Any disruption in our information systems could adversely affect our business, prospects,
results of operations and financial condition.
In the event that our cash flow from operations are not sufficient to meet our future liquidity
needs, a portion of the goodwill on our balance sheet could become impaired, which could
significantly impact our total shareholders equity.
In the event that our cash flow from operations are not sufficient to meet our future liquidity
needs, a portion of the goodwill on our balance sheet could become impaired as the fair value of
our goodwill is estimated based upon a present value technique using discounted future cash flows.
The balance of our goodwill as of December 31, 2009 of $475.4 million exceeded total shareholders
equity of $252.6 million. As a result, a decrease to our cash flow from operations could result in
a charge that significantly impacts the balance of our total shareholders equity.
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Risks Related to the Notes and Our Indebtedness
We have a holding company structure and may not be able to generate sufficient cash to service all
of our indebtedness and may be forced to take other actions to satisfy our obligations under our
indebtedness, which may not be successful.
We, and certain guarantors of our indebtedness, are holding companies that conduct all of our, or
their, operations through subsidiaries. Our and our holding company subsidiaries ability to
service debt are principally dependent upon our and their subsidiaries earnings and distributions
of those earnings and may also be dependent upon loans, advances or other payments of funds to such
holding company by those subsidiaries. In some circumstances, these subsidiaries may be unable to
pay dividends or otherwise make payments, including as a result of insufficient cash flow,
restrictive covenants in loan agreements, foreign exchange limitations or other regulatory
restrictions. If such subsidiaries are unable to pay dividends or otherwise make payments to these
holding company guarantors, the holding company guarantors will not be able to make debt service
payments on the guarantee obligations under the notes. In addition, any payments of dividends,
distributions, loans or advances to us by our subsidiaries could be subject to legal and
contractual restrictions. Our operating subsidiaries are permitted under the terms of our
indebtedness, including the indenture governing the notes and our senior secured credit facility to
incur additional indebtedness that may restrict payments from those subsidiaries to us. The
agreements governing the current and future indebtedness of our operating subsidiaries may not
permit those subsidiaries to provide us and certain other guarantors with sufficient cash to meet
their guarantee obligations on the notes when due. If our cash flows and capital resources are
insufficient to fund our debt service obligations, we may be forced to reduce or delay capital
expenditures, seek additional capital or seek to restructure or refinance our indebtedness. These
alternative measures may not be successful and may not permit us to meet our scheduled debt service
obligations. In the absence of such operating results and resources, we could face substantial
liquidity problems and might be required to sell material assets or operations to attempt to meet
our debt service and other obligations. Our senior secured credit facility restricts our ability to
use the proceeds from asset sales. We may not be able to consummate those asset sales to raise
capital or sell assets at prices that we believe are fair and proceeds that we do receive may not
be adequate to meet any debt service obligations then due.
The maturity date of our secured credit facility and
2016 N
otes are subject to a springing maturity
which requires us to satisfy certain conditions for the springing maturity to become effective.
The extension of certain maturity dates contemplated by our senior secured credit facility will not
become effective and the maturity date of the 2016 Notes will be automatically shortened to
November 30, 2012, unless prior to October 30, 2012, the aggregate $80.0 million principal amount
of our outstanding 2.875% senior convertible notes due 2027 has been reduced to an amount less than
or equal to $50.0 million by means of (i) our repurchase or redemption, (ii) defeasance by us in
accordance with the terms thereof or (iii) the exchange or conversion thereof into our unsecured
notes or unsecured notes of any of our direct or indirect subsidiaries having no mandatory
repayment prior to April 1, 2015, or into our common stock. We refer to this condition as the
springing maturity.
If we are unable to satisfy the springing maturity condition we will be required to repay or
refinance the amounts due under our senior secured credit facility and the notes earlier than
otherwise anticipated. In such case, if we are unable to repay or refinance our senior secured
credit facility, which will mature before the notes, we would be in default under our senior
secured credit facility. If we were to default on our credit facility, we would also be in default
under the notes as a result of the cross-default provisions under the indenture governing the terms
of the notes. We cannot be sure that we would have, or be able to obtain, sufficient funds to repay
the amounts outstanding under our senior secured credit facility and the notes if we are unable to
satisfy the springing maturity condition or that we would be able to obtain third-party financing
on terms reasonably acceptable to us or at all.
In addition, if we are unable to satisfy the springing maturity condition our ability to timely
refinance our senior secured credit facility and the notes will depend upon the foregoing factors
as well on continued and sustained improvements in financing markets. We cannot assure creditors
that refinancing will be possible. If we are unable to refinance our debt on a timely basis, we
might be forced to dispose of certain assets, minimize capital expenditures or take other steps
that could be detrimental to our business. There is no assurance that any of these alternatives
would be available to us, if at all, on satisfactory terms or on terms that would not require us to
breach the terms and conditions or our existing or future debt agreements. The inability to
refinance or obtain additional financing could have a material adverse effect on our financial
condition and on our ability to meet our obligations to holders of the notes.
We are subject to restrictive covenants imposed by our senior secured credit facility and by the
indenture governing the 2016 Notes.
Our senior secured credit facility and the indenture governing the 2016 Notes contain numerous
financial and operating covenants. These covenants restrict or limit, among other things, our
ability to:
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dispose of assets;
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make capital expenditures;
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repurchase or redeem equity interests or subordinated indebtedness;
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make principal payments or prepayments on the notes;
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make certain investments;
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incur additional indebtedness;
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create liens;
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incur restrictions on the ability of our subsidiaries to grant liens or to pay dividends
or make other payments or transfers to us;
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merge or consolidate with or into any other person or transfer all or substantially all
of our assets;
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enter into new businesses unrelated to our existing businesses;
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enter into transactions with our affiliates;
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enter into swap agreements; and
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enter into sale and leaseback transactions.
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Our senior secured credit facility also requires us to maintain minimum financial ratios. Such
financial ratios are a maximum ratio of debt to EBITDA, a maximum ratio of secured debt to EBITDA
and a minimum ratio of EBITDA to fixed charges. The restrictions in our senior secured credit
facility and restrictions in the indenture governing the 2016 Notes limit our financial and
strategic flexibility, and may prohibit or limit any contemplated strategic initiatives and limit
our ability to grow and increase our revenues or respond to competitive changes. The failure to
comply with the covenants would result in a default and permit the lenders under our senior secured
credit facility to accelerate the maturity of the indebtedness issued thereunder, and we could be
prohibited from making any principal payments on the remaining balance of the notes.
Agreements governing future indebtedness could also contain significant financial and operating
restrictions. A failure to comply with the obligations contained in the indenture governing the
2016 Notes could result in an event of default under the indenture, which could permit acceleration
of the 2016 Notes and acceleration of debt under other instruments that may contain
cross-acceleration or cross-default provisions. We are not certain whether we would have, or be
able to obtain, sufficient funds to make these accelerated payments. If not, the notes would likely
lose much or all of their value.
Despite the level of our indebtedness, we may still incur significantly more indebtedness. This
could further increase the risks associated with our indebtedness.
Despite our current level of indebtedness, we may need to incur significant additional
indebtedness, including secured indebtedness, in the future. Although our senior secured credit
facility and our indenture governing the 2016 Notes contain restrictions on our ability to incur
additional indebtedness, these restrictions are subject to a number of qualifications and
exceptions, and, under certain circumstances, the indebtedness incurred in compliance with such
restrictions could be substantial. If new indebtedness is added to our current debt levels, the
related risks that we face would be increased, and we may not be able to meet all our debt
obligations, including repayment of the notes, in whole or in part.
Risks Related to the DFS Business
The DFS business relies upon exclusive contractual relationships with its service providers, and
the DFS business would be harmed from the loss of any of these service providers or if alternate
service providers are needed but cannot be arranged or are not available.
70
DFS is an established business that provides services to enlisted military personnel who make
application for auto loans to purchase new and used vehicles that are funded and serviced under an
exclusive agreement with a major third-party national bank based in the United States. DFSs
revenue comes from fees related to the loan application which are paid by the third-party national
bank and fees from the sale of ancillary products such as warranty service contracts and GAP
insurance coverage. DFS relies upon exclusive contractual relationships with the third-party
national bank for the funding and servicing of auto loans made in connection with qualifying
applications submitted for its customers through DFSs MILES program, a third-party provider for
service contracts and a third-party provider for GAP insurance contracts. If events were to occur
which resulted in DFS losing any or all of these contractual relationships, or which resulted in a
material reduction in the services provided, a material increase in the cost of the services
provided or a material reduction in the fees earned by DFS for the services provided under these
exclusive contractual relationships, DFS could be required to locate new or alternate service
providers. In such event, and until DFS would be able to locate new or alternate service providers,
the DFS business could be significantly disrupted. In addition, these new or alternate service
providers may offer services that are more costly to DFSs customers or that pay premiums or fees
below the level that DFS currently receives. These changes could have a material adverse effect on
the DFS business and negatively affect its revenues and results of operations.
Potential disruptions in the credit markets may negatively impact the availability and cost of auto
loans which could adversely affect DFSs results of operations, cash flows and financial condition.
The auto loans made in connection with qualifying applications submitted for its customers through
DFSs MILES program are funded and serviced under an exclusive agreement with a major third-party
national bank based in the United States. Disruptions in the capital and credit markets could
adversely affect the third-party national banks ability to continue funding and servicing these
auto loans. In addition, longer term disruptions in the capital and credit markets as a result of
uncertainty, changing or increased regulation, reduced alternatives, or failures of significant
financial institutions could adversely affect DFSs ability to make arrangements with replacement
or alternate lenders on favorable terms, if at all. If this third-party national bank were to
provide DFS notice under its contract with DFS of its intent to terminate the contract, DFS would
be required to find new or alternate service providers of credit arrangements for its customers.
Increases in the costs of auto loans, reductions in the fees paid to DFS in connection with auto
loans or declines in business while replacement or alternate lenders are arranged could adversely
affect DFSs results of operations, cash flows and financial condition.
The DFS business relies upon ongoing enlistment in the U.S. military and budget cuts that reduce
enlistments or reduce the number of active duty military personnel could harm the DFS business.
DFS offers its services to enlisted active duty U.S. military personnel. The number of enlisted
active duty military personnel and the number of recruits joining the military each year are
subject to the U.S. defense budget. Cuts in the U.S. defense budget may result in reductions in
recruitment targets, reductions in the number of active duty military personnel or both, any of
which would reduce the overall number of potential DFS customers or potentially reduce demand for
the services offered by DFS which would cause the revenue of DFS to decline and could otherwise
harm its business, financial condition and results of operations.
Risks Relating to Our Capital Stock
The price of our common stock may be volatile
.
The market price of our common stock has been subject to significant fluctuations and may continue
to fluctuate or decline. Since February 2009, our common stock has been particularly volatile as
the price of our common stock has ranged from a high of $25.50 to a low of $4.83. The market price
of our common stock has been, and is likely to continue to be, subject to significant fluctuations
due to a variety of factors, including quarterly variations in operating results, operating results
which vary from the expectations of securities analysts and investors, changes in financial
estimates, changes in market valuations of competitors, announcements by us or our competitors of a
material nature, additions or departures of key personnel, changes in applicable laws and
regulations governing consumer protection and lending practices, the effects of litigation, future
sales of common stock and general stock market price and volume fluctuations. In addition, general
political and economic conditions such as a recession, or interest rate or currency rate
fluctuations may adversely affect the market price of the common stock of many companies, including
our common stock. A significant decline in our stock price could result in substantial losses for
individual stockholders and could lead to costly and disruptive securities litigation.
We have never paid dividends on our common stock and do not anticipate paying any in the
foreseeable future.
We have never declared or paid any cash dividends on our common stock. We currently expect to
retain any future earnings for use in
71
the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Our anti-takeover provisions could prevent or delay a change in control of our company, even if
such change of control would be beneficial to our stockholders.
Provisions of our amended and restated certificate of incorporation and amended and restated
bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger,
acquisition or other change in control of our company, even if such change in control would be
beneficial to our stockholders. These provisions include:
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a board of directors that is classified such that only one-third of directors are elected each year;
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authorizing the issuance of blank check preferred stock that could be issued by our board of
directors to increase the number of outstanding shares and thwart a takeover attempt;
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limitations on the ability of stockholders to call special meetings of stockholders;
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prohibiting stockholder action by written consent and requiring all stockholder actions to be taken
at a meeting of our stockholders; and
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establishing advance notice requirements for nominations for election to the board of directors or
for proposing matters that can be acted upon by stockholders at stockholder meetings.
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In addition, Section 203 of the Delaware General Corporation Law limits business combination
transactions with 15% stockholders that have not been approved by the board of directors. These
provisions and other similar provisions make it more difficult for a third party to acquire us
without negotiation. These provisions may apply even if the transaction may be considered
beneficial by some stockholders.
Risks Relating to Our Outstanding Convertible Notes
Any change in the accounting method for convertible debt securities could have an adverse impact on
our reported or future financial results and could adversely affect the trading price of our
securities, including our common stock and the 2.875% Senior
Convertible Notes due 2027and the 3.0% Senior Convertible Notes Due 2028.
For the purpose of calculating diluted earnings per share, a convertible debt security
providing for net share settlement of the excess of the conversion value over the principal amount,
if any, and meeting specified requirements under Emerging Issues Task Force, or EITF, Issue
No. 00-19, Convertible Bonds with Issuer Option to Settle for Cash upon Conversion, is accounted
for in a manner similar to nonconvertible debt, with the stated coupon constituting interest
expense and any shares issuable upon conversion of the security being accounted for under the
treasury stock method. The effect of the treasury stock method is that the shares potentially
issuable upon conversion of our 2.875% Senior Convertible Notes due 2027 and the 3.0% Senior
Convertible Notes due 2028 are not included in the calculation of our earnings per share until the
conversion price is in the money, and we are assumed to issue the number of shares of common
stock necessary to settle.
We cannot predict any other changes in generally accepted accounting principles, or GAAP, that
may be made affecting accounting for convertible debt securities. Any change in the accounting
method for convertible debt securities could have an adverse impact on our reported or future
financial results. These impacts could adversely affect the trading price of our securities,
including our common stock and the Senior Convertible Notes due 2027 and 2028.
72
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Item 4.
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Submission of Matters to a Vote of Security Holders
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The Annual Meeting of our stockholders was held on November 11, 2009.
The following persons were elected to serve as Class B members of our Board of
Directors each to serve until the 2012 annual meeting of our stockholders and
unitl their repective successors are duly elected and qualified.
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Votes For:
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Votes Witheld:
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David Jessick
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19,447,167
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3,000,531
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Kenneth Schwenke
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14,209,406
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8,238,292
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Michael Kooper
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16,024,073
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6,423,625
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The appointment of Ernst & Young LLP as our independent registered public
accounting firm for the fiscal year ended June 30, 2010 was ratified:
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Votes For
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22,032,866
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Votes Against
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409,780
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Abstentions
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5,051
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73
Item 6.
Exhibits
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Exhibit No.
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Description of Document
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2.1
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Purchase Agreement dated as of October 28, 2009 by and among Dollar Financial Corp., Military
Financial Services, LLC, Southfield Partners, LLC, Joseph S. Minor, Don Jacobs, Larry Mountford,
and Robert H. Nelson (incorporated by reference to the Current Report on Form 8-K filed by Dollar
Financial Corp. on December 2, 2009)
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2.2
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Amendment to Purchase Agreement dated as of December 23, 2009 by and among Dollar Financial
Corp., Military Financial Services, LLC, Southfield Partners, LLC, Joseph S. Minor, Don Jacobs,
Larry Mountford, and Robert H. Nelson (incorporated by reference to the Current Report on Form 8-K
filed by Dollar Financial Corp. on December 24, 2009)
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4.1
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Indenture dated December 23, 2009 by and among National Money Mart Company, Dollar Financial
Corp. and the guarantors party thereto and U.S. Bank National Association, as trustee, governing
the terms of the 10.375% Senior Notes due 2016 (incorporated by reference to the Current Report on
Form 8-K filed by Dollar Financial Corp. on December 24, 2009)
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4.2
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Registration Rights Agreement dated December 23, 2009 by and among National Money Mart
Company, Dollar Financial Corp. and the guarantors party thereto and Credit Suisse Securities
(USA) LLC and Wells Fargo Securities, LLC, as representatives of the initial purchasers
(incorporated by reference to the Current Report on Form 8-K filed by Dollar Financial Corp. on
December 24, 2009)
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4.3
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Indenture dated December 23, 2009 by and among Dollar Financial Corp. and U.S. Bank National
Association, as trustee, governing the terms of the 3.00% Senior Convertible Notes due 2028
(incorporated by reference to the Current Report on Form 8-K filed by Dollar Financial Corp. on
December 24, 2009)
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10.1
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Employment Agreement by and among Jeffrey Weiss, the Company and Dollar Financial Group,
Inc., dated October 30, 2009 (incorporated by reference to the Current Report on Form 8-K filed by
Dollar Financial Corp. on November 2, 2009)
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10.2
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Detailed Settlement Agreement by and among Kenneth Smith, as Estate Trustee of the last Will
and Testament of Margaret Smith, deceased and Ronald Adrien Oriet, as plaintiffs and National
Money Mart Company and Dollar Financial Group, Inc., as defendants, dated November 6,
2009 (incorporated by reference to the Quarterly Report on Form 10-Q filed by Dollar Financial
Corp. on November 9, 2009)
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10.3
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Form of Amended and Restated Credit Agreement (incorporated by reference to the Current
Report on Form 8-K filed by Dollar Financial Corp. on December 2, 2009)
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Executive Vice President and Chief Financial Officer
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31.3
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Rule 13a-14(a)/15d-14(a) Certification of Senior Vice President of Finance and Corporate Controller
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74
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32.1
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Section 1350 Certification of Chief Executive Officer
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32.2
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Section 1350 Certification of Executive Vice President and Chief Financial Officer
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32.3
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Section 1350 Certification of Senior Vice President of Finance and Corporate Controller
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75
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.
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DOLLAR FINANCIAL CORP.
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Date: February 9, 2010
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*By:
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/s/ Randy Underwood
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Name:
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Randy Underwood
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Title:
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Executive Vice
President and Chief
Financial Officer
(principal
financial and chief
accounting officer)
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*
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The signatory hereto is the principal financial and chief accounting officer
and has been duly authorized to sign on behalf of the registrant.
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76
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