XNAS:DLLR Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-50866

 

 

DFC GLOBAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   23-2636866
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)

1436 LANCASTER AVENUE,

BERWYN, PENNSYLVANIA 19312

(Address of Principal Executive Offices) (Zip Code)

610-296-3400

(Registrant’s Telephone Number, Including Area Code)

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark 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  x    No  ¨

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):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by a check mark whether the registrant is a shell company (as defined) in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

As of May 4, 2012, 43,967,083 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

 

 

 


Table of Contents

DFC GLOBAL CORP.

INDEX

 

          Page No.  

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Interim Consolidated Balance Sheets as of June 30, 2011 and March 31, 2012 (unaudited)

     3   
  

Interim Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2012

     4   
  

Interim Consolidated Statements of Stockholders’ Equity as of June 30, 2011 and March  31, 2012 (unaudited)

     5   
  

Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March  31, 2011 and 2012

     6   
  

Notes to Interim Unaudited Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     43   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     64   

Item 4.

  

Controls and Procedures

     66   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     67   

Item 1A.

  

Risk Factors

     67   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     74   

Item 6.

  

Exhibits

     75   

Signature

     76   

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

  

Rule 13(a)-14(a)/15d-14a Certification of Executive Vice President and Chief Financial Officer

  

Rule 13a-14(a)/15d-14(a) Certification of Senior Vice President of Finance, Chief Accounting Officer and Corporate Controller

  

Section 1350 Certification of Chief Executive Officer

  

Section 1350 Certification of Executive Vice President and Chief Financial Officer

  

Section 1350 Certification of Senior Vice President of Finance, Chief Accounting Officer and Corporate Controller

  

 

2


Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

DFC GLOBAL CORP.

INTERIM CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

 

     June 30,     March 31,  
     2011     2012  
           (unaudited)  
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 189.0      $ 208.0   

Consumer loans, net:

    

Consumer loans

     176.8        203.5   

Less: Allowance for consumer loan losses

     (14.9     (22.9
  

 

 

   

 

 

 

Consumer loans, net

     161.9        180.6   

Pawn loans

     136.2        153.1   

Loans in default, net of an allowance of $37.7 and $54.8

     13.8        28.0   

Other receivables

     31.2        30.2   

Prepaid expenses and other current assets

     38.5        51.1   

Current deferred tax asset, net of valuation allowance of $2.7 and $2.7

     —          0.3   
  

 

 

   

 

 

 

Total current assets

     570.6        651.3   

Deferred tax asset, net of valuation allowance of $84.9 and $84.5

     21.3        15.1   

Property and equipment, net of accumulated depreciation of $146.7 and $163.9

     100.0        117.6   

Goodwill and other intangibles

     932.0        946.4   

Debt issuance costs, net of accumulated amortization of $7.8 and $11.3

     21.0        17.7   

Other assets

     17.9        20.8   
  

 

 

   

 

 

 

Total Assets

   $ 1,662.8      $ 1,768.9   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 61.1      $ 46.8   

Income taxes payable

     13.7        21.0   

Accrued expenses and other liabilities

     98.4        101.6   

Current portion of long-term debt

     95.7        10.1   

Fair value of derivatives

     —          51.5   
  

 

 

   

 

 

 

Total current liabilities

     268.9        231.0   

Fair value of derivatives

     73.9        —     

Long-term deferred tax liability

     53.8        51.0   

Long-term debt

     775.2        935.2   

Other non-current liabilities

     64.4        63.9   

Stockholders’ equity:

    

Common stock, $.001 par value: 100,000,000 shares authorized; 43,743,941 shares and 44,184,083 shares issued and outstanding at June 30, 2011 and March 31, 2012, respectively

     —          —     

Additional paid-in capital

     469.2        477.1   

(Accumulated deficit) retained earnings

     (49.7     5.9   

Accumulated other comprehensive income

     7.6        5.9   
  

 

 

   

 

 

 

Total DFC Global Corp. stockholders’ equity

     427.1        488.9   

Non-controlling interest

     (0.5     (1.1
  

 

 

   

 

 

 

Total stockholders’ equity

     426.6        487.8   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,662.8      $ 1,768.9   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share amounts)

 

     Three Months Ended     Nine Months Ended  
     March 31,     March 31,  
     2011     2012     2011     2012  

Revenues:

        

Consumer lending

   $ 100.7      $ 163.0      $ 292.0      $ 479.7   

Check cashing

     36.7        35.3        108.7        106.2   

Pawn service fees and sales

     16.6        21.0        30.1        62.3   

Money transfer fees

     7.4        9.4        22.5        28.8   

Gold sales

     12.3        18.6        34.7        52.5   

Other

     24.1        22.7        66.5        65.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     197.8        270.0        554.5        795.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries and benefits

     46.2        56.9        129.7        164.9   

Provision for loan losses

     18.5        33.6        48.9        96.9   

Occupancy costs

     13.3        15.8        36.9        45.6   

Purchased gold costs

     7.5        15.4        22.4        41.8   

Depreciation

     4.3        6.1        11.8        17.5   

Returned checks, net and cash shortages

     2.3        2.8        6.2        7.0   

Maintenance and repairs

     4.1        4.4        10.6        12.5   

Advertising

     5.4        12.2        17.1        40.2   

Bank charges and armored carrier service

     4.1        5.5        11.8        16.2   

Other

     15.0        22.0        43.7        65.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     120.7        174.7        339.1        507.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     77.1        95.3        215.4        287.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

        

Corporate expenses

     25.2        30.4        74.6        91.1   

Other depreciation and amortization

     3.1        6.5        8.6        19.5   

Interest expense, net

     23.0        25.0        66.5        73.7   

Unrealized foreign exchange (gain) loss

     (10.1     (11.8     (42.5     18.3   

Loss (gain) on derivatives not designated as hedges

     9.6        6.4        34.2        (6.3

Provision for (proceeds from) litigation settlements

     0.1        —          (3.8     4.0   

Loss on store closings

     0.1        0.1        0.6        0.4   

Other expense (income), net

     0.8        (1.8     3.4        (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     25.3        40.5        73.8        87.1   

Income tax provision

     9.7        9.2        26.3        32.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     15.6        31.3      $ 47.5      $ 55.0   

Less: Net loss attributable to non-controlling interests

     (0.1     (0.2     (0.5     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DFC Global Corp.

   $ 15.7      $ 31.5      $ 48.0      $ 55.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to DFC Global Corp:

        

Basic

   $ 0.43      $ 0.71      $ 1.31      $ 1.27   

Diluted

   $ 0.41      $ 0.70      $ 1.26      $ 1.22   

Weighted average shares outstanding:

        

Basic

     36,619,929        44,109,501        36,499,154        43,905,764   

Diluted

     38,710,798        45,204,846        38,001,489        45,458,736   

See notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except share data)

 

                Additional
Paid-in
Capital
    Accumulated
Retained
Earnings
    Non-Controlling
Interest
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 
    Common Stock            
    Outstanding            
    Shares     Amount            

Balance, June 30, 2011

    43,743,941      $ —        $ 469.2      $ (49.7   $ (0.5   $ 7.6      $ 426.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

             

Foreign currency translation

              (5.3     (5.3

Cash flow hedges

              3.6        3.6   

Net income attributable to DFC Global Corp.

          55.6            55.6   
             

 

 

 

Total comprehensive income

                53.9   

Restricted stock grants

    371,610               

Stock options exercised

    235,349        —          2.6              2.6   

Vested portion of granted restricted stock and restricted stock units

        2.2              2.2   

Retirement of common stock

    (166,817            

Other stock compensation

        3.1              3.1   

Net loss attributable to non-controlling interest

            (0.6       (0.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

    44,184,083      $ —        $ 477.1      $ 5.9      $ (1.1   $ 5.9      $ 487.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Nine Months Ended  
     March 31,  
     2011     2012  

Cash flows from operating activities:

    

Net income

   $ 47.5      $ 55.0   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     23.2        40.6   

Change in fair value of derivatives not designated as hedges

     20.5        (19.9

Provision for loan losses

     48.9        96.9   

Non-cash stock compensation

     3.8        5.4   

Loss on disposal of fixed assets

     0.8        0.2   

Unrealized foreign exchange (gain) loss

     (42.5     18.3   

Deferred tax provision

     11.0        0.7   

Accretion of debt discount and deferred issuance costs

     11.3        12.1   

Change in assets and liabilities (net of effect of acquisitions):

    

Increase in pawn loan fees and service charges receivable

     (3.2     (6.2

Increase in finance and service charges receivable

     (11.8     (20.2

(Increase) decrease in other receivables

     (4.7     2.6   

Increase in prepaid expenses and other

     (3.0     (9.7

(Decrease) increase in accounts payable, accrued expenses and other liabilities

     (36.0     21.8   
  

 

 

   

 

 

 

Net cash provided by operating activities

     65.8        197.6   

Cash flows from investing activities:

    

Net increase in consumer loans

     (46.1     (92.7

Originations of pawn loans

     (87.3     (205.2

Repayment of pawn loans

     74.4        187.4   

Acquisitions, net of cash acquired

     (74.1     (84.0

Additions to property and equipment

     (29.5     (44.0
  

 

 

   

 

 

 

Net cash used in investing activities

     (162.6     (238.5

Cash flows from financing activities:

    

Proceeds from the exercise of stock options

     0.3        2.6   

Net increase in revolving credit facilities

     154.2        61.3   

Proceeds from issuance of debt

     —          10.6   

Payment of contingent consideration

     —          (8.4

Payment of debt issuance and other costs

     (4.3     (0.8
  

 

 

   

 

 

 

Net cash provided by financing activities

     150.2        65.3   

Effect of exchange rate changes on cash and cash equivalents

     16.6        (5.4
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     70.0        19.0   

Cash and cash equivalents at beginning of period

     291.3        189.0   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 361.3      $ 208.0   
  

 

 

   

 

 

 

See notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL 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 DFC Global Corp. (“DFC”) and its wholly owned and majority owned subsidiaries (collectively with DFC, the “Company”). DFC is the parent company of Dollar Financial Group, Inc. (“DFG”). The activities of DFC consist primarily of its investment in DFG. DFC has no employees or operating activities. The Company’s 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 Company’s audited consolidated financial statements in DFC’s Annual Report on Form 10-K (File No. 000-50866) for the fiscal year ended June 30, 2011 filed with the Securities and Exchange Commission on August 29, 2011. 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.

DFC Global Corp. is a Delaware corporation formed in 1990. Prior to August 2011, DFC’s corporate name was “Dollar Financial Corp.”. The Company, through its subsidiaries, provides retail financial services to the general public through a network of 1,361 locations (of which 1,302 are company owned) operating principally as Money Mart®, The Money Shop®, Insta-Cheques®, Suttons and Robertson®, The Check Cashing Store®, Sefina®, Helsingin PanttiSM, Super Efectivo® and MoneyNow!® in Canada, the United Kingdom, the United States, Poland, the Republic of Ireland, Sweden, Finland, Spain and Poland. This network of stores offers a variety of financial services including consumer loans, pawn services, gold buying, check cashing, money transfer services and various other related services. The Company also offers Internet-based short-term consumer loans in the United Kingdom primarily under the brand names Payday Express® and Payday UK®, in Canada under the Money Mart and paydayloan.ca brand names, and in Finland, Sweden and Poland primarily under the Risicum® and OK Money® brand names. In the United Kingdom, the Company also operates a merchant cash advance business, under the brand name mce®, that primarily provides working capital to small retail businesses by providing cash advances against a future receivable calculated as a percentage of future credit card receipts. In addition, the Company provides financial services to primarily unbanked and underbanked consumers in Poland through in-home servicing under the trade name Optima®. Through its Dealers’ Financial Services, LLC (“DFS”) subsidiary, the Company provides fee based services to enlisted military personnel seeking to purchase new and used vehicles who make applications for auto loans that are funded and serviced under an agreement with a major third-party national bank based in the United States.

The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “DLLR”.

Use of Estimates

The preparation of financial statements in conformity with GAAP 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, litigation reserves 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.

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.

Reclassifications

Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications have no effect on net income or stockholders’ equity.

In March 2012, the Company identified certain immaterial classification errors in its Consolidated Statements of Cash Flows. The Company has determined that in this Quarterly Report and in its future periodic reports it will correct these errors by reclassifying certain cash flows related to consumer loan and pawn lending activities from operating activities cash flows to investing activities cash flows for the years ended June 30, 2010 and June 30, 2011, and the interim periods ended March 31, September 30, and December 31, 2011. These reclassifications will increase total cash provided by operating activities and increase total cash used in investing activities by an equal and offsetting amount, and the reclassifications do not change total cash, net income, or any other operating measure.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reflects a summary of the reclassifications to the Company’s historical financial statements for the nine months ended March 31, 2011 (in millions):

 

Net cash provided by operating activities, as reported

     $ 6.8   

Adjustments

    

Decrease in changes in other receivables

     a     71.7   

Adjustments to prepaid expenses and other

     b )     2.3   

Increase in pawn loan fees and service charges receivable

     c     (3.2

Increase in finance and service charges receivable

     c     (11.8
    

 

 

 

Total adjustments to cash provided by operating activities

       59.0   
    

 

 

 

Net cash provided by operating activities, as adjusted

     $ 65.8   
    

 

 

 

Net cash used in investing activities, as reported

     $ (103.6

Adjustments

    
    

Net increase in consumer loans

     a     (46.1

Originations of pawn loans

     a     (87.3

Repayment of pawn loans

     a     74.4   
    

 

 

 

Total adjustments to net cash used in investing activities

       (59.0
    

 

 

 

Net cash used in investing activities, as adjusted

     $ (162.6
    

 

 

 

Net (decrease) increase in cash and cash equivalents, as reported

       70.0   

Net (decrease) increase in cash and cash equivalents, as adjusted

       70.0   

 

a) To reflect the breakout of the change in loan receivables between, for single payment consumer loans, the net increase in consumer loans, and, for pawn loans, the increase in principal lent and payments received, which has been reclassified to investing activities, and the net (increase)/decrease in accrued income receivable, which has been separately reported as an operating activity.
b) To reflect the change in forfeited pawn inventory that had previously been presented within changes in loan receivables.
c) To reflect the reclassification between change in loans and other receivables to “increase in pawn loan fees and service charges receivable” and “increase in finance and service charges receivable”.

Revenue Recognition

With respect to company-operated stores, revenues from the Company’s check cashing, money order sales, money transfer and other miscellaneous services reported in other revenues on its statement of operations are all recognized when the transactions are completed at the point-of-sale in the store.

With respect to the Company’s franchised locations, the Company recognizes initial franchise fees upon fulfillment of all significant obligations to the franchisee. Royalties from franchisees are recognized as earned. The Company’s standard franchise agreement forms 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 established by the Company. As part of the franchise agreement, the Company provides certain pre-opening assistance and after the franchised location has opened, the Company also provides updates to the software, samples of certain advertising and promotional materials and other post-opening assistance.

For single-payment consumer 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. The Company’s reserve policy regarding these loans is summarized below in “Consumer Loan Loss Reserves Policy.”

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Secured pawn loans are offered at most of the Company’s retail financial services locations in the United Kingdom and Poland and at the Company’s stand-alone pawn shops in the United Kingdom, Sweden and Finland. Pawn loans are short-term in nature and are secured by the customer’s personal property (“pledge”). At the time of pledge, the loan is recorded and interest and fees, net of costs are accrued for over the life of the loan. If the loan is not repaid, the collateral is deemed forfeited and the pawned item will, in most markets, go up for auction. If the item is sold, proceeds are used to recover the loan value, interest accrued and fees. Generally, excess funds received from the sale are repaid to the customer. As with the Company’s single-payment consumer loans, revenues are recognized using the interest rate method and loan origination fees, net, are recognized as an adjustment to the yield on the related loan.

DFS fee income associated with originated loan contracts is recognized as revenue by the Company concurrent with the funding of loans by the third party lending financial institution. The Company also earns additional fee income from sales of service agreement and guaranteed asset protection (“GAP”) insurance contracts. DFS may be charged back (“chargebacks”) for service agreement and GAP fees in the event contracts are prepaid, defaulted or terminated. Service agreement and GAP contract fees are recorded at the time the contracts are sold and a reserve for future chargebacks is established based on historical operating results and the termination provisions of the applicable contracts. Service warranty and GAP contract fees, net of estimated chargebacks, are included in Other revenues in the accompanying consolidated statements of operations.

Consumer Loans, Net

Unsecured short-term and longer-term installment loans that the Company originates are reflected on the balance sheet in Consumer loans, net. Consumer loans, net are reported net of a reserve as described below in “Consumer Loan Loss Reserves Policy”.

Loans in Default

Loans in default consist of short-term consumer loans which are in default status. An allowance for the defaulted loans receivable is established and is included in the loan loss provisions in the period that the loan is placed in default status. The reserve is reviewed monthly and any additional provision to the loan loss reserve as a result of historical loan performance, current and expected collection patterns and current economic trends is included with the Company’s loan loss provisions. Generally, if the loans remain in a defaulted status for an extended period of time, generally 180 days, an allowance for the entire amount of the loan is recorded and the receivable is ultimately charged off.

Consumer Loan Loss Reserves Policy

The Company maintains a loan loss reserve for anticipated losses for consumer loans that the Company originates but have not yet become due (presented as “Consumer Loans” on the balance sheet). To estimate the appropriate level of loan loss reserves, the Company considers known relevant internal and external factors that affect loan collectability, including the amount of outstanding loans owed to the Company, historical loans charged off, current collection patterns and current economic trends. The Company’s loan loss reserve on Consumer Loans is based on its net charge-offs, typically expressed as a percentage of loan amounts originated for the last twelve months applied against the balance of outstanding loans. As these conditions change, the Company may need to make additional allowances in future periods.

Generally, when a loan is originated, the customer receives the cash proceeds in exchange for a post-dated check or a written authorization to initiate a charge to the customer’s bank account on the stated maturity date of the loan. If the check or the debit to the customer’s account is returned from the bank unpaid, the loan is placed in default status and an allowance for this defaulted loan receivable is established and reflected as a reduction to the gross loans in default balances and is included in loan loss provision expense 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 included in loan loss provision expense. If a loan remains in defaulted status for an extended period of time, typically 180 days, an allowance for the entire amount of the loan is recorded and the receivable is ultimately charged off. Recoveries on loans that were completely charged off are credited to the allowance when collected.

The Company does not maintain a loan loss reserve for potential future losses on pawn loans. Pawn loans are secured by the customer’s pledged item. Pawn loans generally 50% to 80% of the appraised fair value of the pledged item, thus mitigating the Company’s exposure to losses on defaulted pawn loans. The Company’s historical redemption rate on pawn loans is in excess of 85%, which means that for more than 85% of its pawn loans, the customer pays back the amount borrowed, plus interest and fees, and the Company returns the pledged item to the customer. In the instance where the customer defaults on a pawn loan (fails to redeem), the pledged item is either sold at auction or sold to a third party in the Company’s retail stores after the customer default. Except in very isolated instances, the amount received at auction or in the Company’s store is in excess of the original loan principal plus accrued interest and fees. Generally, excess amounts received over and above the Company’s recorded asset value and any related administrative costs and fees are returned to the customer.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Fair Value of Financial Instruments

The fair value of the 2.875% Senior Convertible Notes due 2027 issued by DFC (the “2027 Notes”), the 3.00% Senior Convertible Notes due 2028 issued by DFC (the “2028 Notes”) and the 10.375% Senior Notes due 2016 issued by the Company’s Canadian subsidiary, National Money Mart Company (the “2016 Notes”), are based on broker quotations.

The total fair value of the 2027 Notes and the 2028 Notes were approximately $42.1 million and $154.5 million, respectively, at June 30, 2011. The total fair value of the 2027 Notes and the 2028 Notes were approximately $48.3 million and $142.4 million, respectively, at March 31, 2012. These fair values relate to the face value of the 2027 Notes and the 2028 Notes, and not the carrying value recorded on the Company’s balance sheet. The fair value of the 2016 Notes was approximately $658.5 million and $663.0 million at June 30, 2011 and March 31, 2012, respectively.

The outstanding borrowings under the Company’s Global Revolving Credit Facility and Scandinavian Credit Facilities are variable interest debt instruments and their fair value approximates their carrying value.

The Company’s other financial instruments consist of cash and cash equivalents and derivatives, consumer loans and pawn loans, which are short-term in nature and their fair value approximates their carrying value net of allowance for loan loss.

Common Stock

On December 14, 2011, the Company announced that its Board of Directors had approved a stock repurchase plan, authorizing the Company to repurchase in the aggregate up to five million shares of its outstanding common stock. As of March 31, 2012, no shares of the Company’s common stock have been repurchased under the plan.

Earnings per Share

Basic earnings per share are computed by dividing net income/loss by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed by dividing net income/loss by the weighted average number of shares of common stock outstanding, after adjusting for the dilutive effect of stock options restricted stock, restricted stock units and convertible debt. The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share (in millions):

 

     Three Months Ended      Nine Months Ended  
     March 31,      March 31,  
     2011      2012      2011      2012  

Net income attributable to DFC Global Corp.

   $ 15.7       $ 31.5       $ 48.0       $ 55.6   

Reconciliation of denominator:

           

Weighted average of common shares outstanding — basic (1)

     36.6         44.1         36.5         43.9   

Effect of dilutive stock options — (2)

     1.3         1.0         1.0         1.1   

Effect of unvested restricted stock and restricted stock unit grants (2)

     0.4         0.1         0.4         0.2   

Dilutive effect of convertible debt (2)

     0.4         —           0.1         0.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average of common shares outstanding — diluted

     38.7         45.2         38.0         45.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Excludes 0.1 million shares of unvested restricted stock which are included in total outstanding shares of common stock as of March 31, 2011.
(2) The effect of dilutive stock options and convertible debt was determined under the treasury stock method.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Stock Based Employee Compensation

The DFC Global Corp. 2005 Stock Incentive Plan (the “2005 Plan”), after giving effect for DFC’s three for two stock split for stockholders of record on January 20, 2011, states that 2,578,043 shares of DFC’s common stock may be awarded to employees or consultants of DFC. The awards may be issued at the discretion of DFC’s Board of Directors 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 Company’s stockholders adopted the DFC Global Corp. 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 non-employee members of DFC’s Board of Directors and officers, employees, independent consultants and contractors of DFC and any subsidiary of DFC. On November 11, 2010, DFC’s stockholders approved an amendment to the 2007 Plan. Under the terms of the amendment, the maximum aggregate number of shares of DFC’s common stock that may be issued pursuant to Awards granted under the 2007 Plan is 10,500,000, after giving effect for DFC’s three for two stock split for stockholders of record as of January 20, 2011; provided, however, that 1.67 shares will be deducted from the number of shares available for grant under the 2007 Plan for each share that underlies an Award granted under the 2007 Plan on or after November 11, 2010 for restricted stock, restricted stock units, performance awards or other Awards for which the full value of such share is transferred by DFC to the award recipient. The shares that may be issued under the 2007 Plan may be authorized, but unissued or reacquired shares of DFC’s common stock. No grantee may receive an Award relating to more than 750,000 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 DFC’s 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 March 31, 2011 and 2012 was $1.3 million and $1.8 million, respectively, net of related tax and $3.9 million and $5.1 million, respectively, net of related tax effects for the nine months ended March 31, 2011 and 2012, respectively.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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
March 31,
    Nine Months Ended
March 31,
 
     2011     2012     2011     2012  

Expected volatility

     52.0     50.9     52.7     51.1

Expected life (years)

     5.6        5.6        5.5        5.8   

Risk-free interest rate

     2.77     1.40     1.92     1.45

Expected dividends

     None        None        None        None   

Weighted average fair value

   $ 10.23      $ 8.79      $ 8.33      $ 10.34   

A summary of the status of stock option activity for the nine months ended March 31, 2012 follows:

 

     Options     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (years)
     Aggregate
Intrinsic Value
($ in millions)
 

Options outstanding at June 30, 2011 (2,044,088 shares exercisable)

     2,772,445      $ 11.28         6.7       $ 28.8   

Granted

     445,973      $ 21.38         

Exercised

     (235,349   $ 11.12         

Forfeited and expired

     (12,882   $ 17.43         
  

 

 

         

Options outstanding at March 31, 2012

     2,970,187      $ 12.78         6.4       $ 19.6   
  

 

 

         

Exercisable at March 31, 2012

     2,292,418      $ 10.87         5.6       $ 18.7   
  

 

 

         

The aggregate intrinsic value in the above table reflects the total pre-tax intrinsic value (the difference between closing stock price of DFC’s common stock 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 March 31, 2012. The intrinsic value of DFC’s common stock options changes based on the closing price of DFC’s common stock. The total intrinsic value of options exercised for the three and nine months ended March 31, 2012 was $0.2 million and $2.3 million, respectively. As of March 31, 2012, the total unrecognized compensation cost over a weighted-average period of 2.3 years, related to stock options, is expected to be $4.7 million. Cash received from stock options exercised for the three and nine months ended March 31, 2012 was $0.1 million and $2.6 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 DFC’s common stock on the date of the grant.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Information concerning unvested restricted stock awards is as follows:

 

     Restricted
Stock Awards
    Weighted
Average
Grant-Date
Fair-Value
 

Outstanding at June 30, 2011

     80,276      $ 9.82   

Granted

     —        $ —     

Vested

     (64,326   $ 8.48   

Forfeited

     —        $ —     
  

 

 

   

Outstanding at March 31, 2012

     15,950      $ 15.24   
  

 

 

   

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 DFC’s common stock on the date of the grant.

Information concerning unvested restricted stock unit awards is as follows:

 

     Restricted
Stock Unit
Awards
    Weighted
Average
Grant-Date
Fair-Value
 

Outstanding at June 30, 2011

     716,973      $ 13.75   

Granted

     237,649      $ 21.27   

Vested

     (405,883   $ 11.81   

Forfeited

     (12,104   $ 17.47   
  

 

 

   

Outstanding at March 31, 2012

     536,635      $ 18.47   
  

 

 

   

As of March 31, 2012, there was $10.2 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 nine months ended March 31, 2012 was $1.4 million and $5.3 million, respectively.

Recent Accounting Pronouncements

In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805) — Disclosure of Supplementary Pro Forma Information for Business Combinations. This standard update clarifies that, when presenting comparative financial statements, SEC registrants should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The Company adopted ASU 2010-29 on July 1, 2011. ASU 2010-29 concerns disclosures only and did not have a material impact on the Company’s financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This standard update amends certain accounting and disclosure requirements related to fair value measurements. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. The Company adopted ASU 2011-04 on January 1, 2012. The adoption of ASU 2011-04 did not have a material impact on the Company’s financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) — Presentation of Comprehensive Income. This standard update amends Topic 220 to require entities to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. These provisions are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, and should be applied retrospectively. ASU 2011-05 concerns disclosures only and will not have a material impact on the Company’s financial position or results of operations.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350) — Testing Goodwill for Impairment. This standard update amends Topic 350 to give entities the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 with early adoption permitted. Since ASU 2011-08 only impacts whether or not to perform the two-step impairment test, it will not have a material impact on the Company’s financial position or results of operations.

 

2. Financing Receivables

The Company offers a variety of short-term loan products and credit services to customers who typically cannot access other traditional sources of credit and have non-traditional loan histories. Accordingly, the Company has implemented proprietary predictive scoring models that are designed to limit the amount of loans it offers to customers who statistically would likely be unable to repay their loan. The Company has instituted control mechanisms and a credit analytics function to manage risk in its consumer loan activities. Collection activities are also an important aspect of the Company’s operations, particularly with respect to its consumer loan products due to the relatively high incidence of unpaid balances beyond stated terms. The Company operates centralized collection centers to coordinate a consistent approach to customer service and collections in each of its markets. The Company’s risk control mechanisms include, among others, the daily monitoring of initial return rates with respect to payments made on its consumer loan portfolio. Because the Company’s revenue from its consumer lending activities is generated through a high volume of small-dollar financial transactions, its exposure to loss from a single customer transaction is minimal.

The following reflects the credit quality of the Company’s loans receivable. Generally, loans are determined to be nonperforming when they are one day past due without a payment for short term consumer loans and one hundred eighty days past due without a payment for longer-term (less than one year) installment loans:

Consumer Credit Exposure

Credit Risk Profile Based on Payment Activity

(in millions)

 

As of June 30, 2011  
     Retail-based      Internet-based         
     Consumer Loans,      Consumer Loans,      Pawn  
     Gross      Allowance      Gross      Allowance      Loans  

Performing

   $ 117.7       $ 8.0       $ 59.1       $ 6.9       $ 136.2   

Non-performing

     41.3         31.6         10.2         6.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 159.0       $ 39.6       $ 69.3       $ 13.0       $ 136.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of March 31, 2012  
     Retail-based      Internet-based         
     Consumer Loans,      Consumer Loans,      Pawn  
     Gross      Allowance      Gross      Allowance      Loans  

Performing

   $ 115.1       $ 11.4       $ 88.4       $ 11.5       $ 153.1   

Non-performing

     48.7         36.8         34.1         18.0         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 163.8       $ 48.2       $ 122.5       $ 29.5       $ 153.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following presents the aging of the Company’s past due loans receivable as of June 30, 2011 and March 31, 2012:

Age Analysis of Past Due Loans Receivable

(in millions)

 

As of June 30, 2011  
     1-30 days
Past Due
     30-59 days
Past Due
     60-89 days
Past Due
     Greater
Than 90
days Past
Due
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investment
> 90 Days
and
Accruing
 

Retail-based Consumer Loans

   $ 11.9       $ 6.3       $ 5.2       $ 24.8       $ 48.2       $ 110.8       $ 159.0       $ 1.9   

Internet-based Consumer Loans

     5.3         3.4         1.4         0.1         10.2         59.1         69.3         —     

Pawn Loans

     —           —           —           —           —           136.2         136.2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 17.2       $ 9.7       $ 6.6       $ 24.9       $ 58.4       $ 306.1       $ 364.5       $ 1.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of March 31, 2012  
     1-30 days
Past Due
     30-59 days
Past Due
     60-89 days
Past Due
     Greater
Than 90
days
Past Due
     Total Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investment
> 90 Days
and
Accruing
 

Retail-based Consumer Loans

   $ 13.1       $ 7.3       $ 6.7       $ 29.2       $ 56.3       $ 107.5       $ 163.8       $ 2.0   

Internet-based Consumer Loans

     10.7         6.2         5.3         11.9         34.1         88.4         122.5         —     

Pawn Loans

     —           —           —           —           —           153.1         153.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23.8       $ 13.5       $ 12.0       $ 41.1       $ 90.4       $ 349.0       $ 439.4       $ 2.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following details the Company’s loans receivable that are on nonaccrual status as of June 30, 2011 and March 31, 2012:

Loans Receivable on Nonaccrual Status

(in millions)

 

     June 30, 2011      March 31, 2012  

Retail-based Consumer Loans

   $ 41.3       $ 48.7   

Internet-based Consumer Loans

     10.2         34.1   

Pawn Loans

     —           —     
  

 

 

    

 

 

 

Total

   $ 51.5       $ 82.8   
  

 

 

    

 

 

 

The following table presents changes in the allowance for consumer loans credit losses (in millions):

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2011     2012     2011     2012  

Allowance for Consumer Loan Losses:

        

Beginning Balance

   $ 38.4      $ 68.8      $ 32.2      $ 52.6   

Provision for loan losses

     18.5        33.6        48.8        96.9   

Charge-offs

     (19.6     (33.8     (52.4     (90.9

Recoveries

     4.2        6.5        10.6        21.2   

Effect of foreign currency translation

     1.0        2.6        3.3        (2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 42.5      $ 77.7      $ 42.5      $ 77.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

3. Acquisitions

The following acquisitions have been accounted for under the purchase method of accounting.

On December 31, 2010, the Company’s wholly owned U.K. subsidiary, Dollar Financial U.K. Ltd., acquired Sefina Finance AB (“Sefina”), a Scandinavian pawn lending business with its headquarters in Stockholm, Sweden. Sefina provides pawn loans primarily secured by gold jewelry, diamonds and watches through 16 retail store locations in Sweden and 12 retail store locations in Finland. The total cash consideration for the acquisition is estimated to be approximately $90.6 million, of which approximately $59.1 million was cash paid at closing. Approximately $14.9 million of additional cash was paid by the Company to the seller in three equal installments on March 31, 2011, June 30, 2011 and September 30, 2011. Furthermore, the Company is obligated to pay the seller additional contingent consideration based on the financial performance of Sefina during each of the two successive 12 month periods following the closing of the acquisition, the aggregate amount of which the Company estimated at the time of acquisition to be approximately $16.6 million. All future payments have been recorded as liabilities on the balance sheet of the acquiring U.K. entity. The Company made the first contingent consideration payment of $7.7 million during the three months ended March 31, 2012. In connection with the acquisition, the Company also incurred transaction costs of approximately $1.0 million. Of the aggregate purchase price for Sefina, $14.5 million was allocated to net tangible assets acquired and $0.3 million was allocated to indefinite-lived intangible assets acquired. The remaining purchase price was allocated to goodwill.

On April 1, 2011, the Company’s wholly owned U.K. subsidiary, Dollar Financial U.K. Ltd., acquired Purpose U.K. Holdings Limited (“Purpose U.K.”), a leading provider of online short-term loans in the United Kingdom. Purpose U.K. Holdings Limited, which operates primarily under the brand name “Payday U.K.”, provides loans through both Internet and telephony-based technologies throughout the United Kingdom. The total cash consideration for the acquisition was approximately $195.0 million. In connection with the acquisition, the Company also incurred transaction costs of approximately $3.7 million.

Under the purchase method of accounting, the total estimated purchase price is allocated to Purpose U.K.’s net tangible and intangible assets based on their current estimated fair values. The purchase price was allocated as follows (in millions):

 

Cash

   $ 8.3   

Consumer loans

     33.3   

Prepaid expenses and other current assets

     0.7   

Property and equipment

     2.1   

Accounts payable

     (1.2

Accrued expenses and other liabilities

     (2.5

Other non-current liabilities

     (21.1
  

 

 

 

Net tangible assets acquired

     19.6   

Definite-lived intangible assets acquired

     56.3   

Indefinite-lived intangible assets acquired

     3.3   

Goodwill

     115.8   
  

 

 

 

Total purchase price

   $ 195.0   
  

 

 

 

Of the total estimated purchase price for Purpose U.K., an estimate of $19.6 million has been allocated to net tangible assets acquired, $56.3 million has been allocated to definite-lived intangible assets and $3.3 million has been allocated to indefinite-lived intangible assets acquired. The remaining purchase price has been allocated to goodwill.

During fiscal 2011, the Company completed the acquisitions of the assets of three Canadian franchisees with 40 stores for an aggregate purchase price of $39.6 million that resulted in an increase in goodwill of $29.0 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. The Company also purchased five stores in the United Kingdom during fiscal 2011 that resulted in an aggregate increase in goodwill of $0.5 million. Also during fiscal 2011, $13.5 million of purchase accounting adjustments related to contingent consideration payments were made with respect to the Express Finance Limited acquisition. These payments are treated as adjustments to purchase price and are accordingly recognized as goodwill.

On July 6, 2011, the Company acquired Risicum Oyj (“Risicum”), a provider of Internet loans in Finland with headquarters in Helsinki, Finland. Risicum, which was established in 2005, provides loans predominately in Finland through both Internet and mobile phone technology, utilizing multiple brands to target specific customer demographics. Risicum also provides Internet and telephony- based loans in Sweden. The total cash consideration for the acquisition was approximately $46.5 million. The Company also incurred transaction costs of approximately $0.9 million.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Under the purchase method of accounting, the total estimated purchase price is allocated to Risicum’s net tangible and intangible assets based on their current estimated fair values. Management’s valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, is based on estimates and assumptions subject to the finalization of the Company’s fair value allocation. The purchase price, subject to the finalization of the fair value allocation, is allocated as follows (in millions):

 

Cash

   $ 2.0   

Consumer loans

     21.0   

Prepaid expenses and other current assets

     2.1   

Property and equipment

     0.2   

Accounts payable

     (1.7

Accrued expenses and other liabilities

     (2.8

Other non-current liabilities

     (1.3
  

 

 

 

Net tangible assets acquired

     19.5   

Definite-lived intangible assets acquired

     6.7   

Goodwill

     20.3   
  

 

 

 

Total purchase price

   $ 46.5   
  

 

 

 

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 for Risicum, an estimate of $19.5 million has been allocated to net tangible assets acquired, and $6.7 million has been allocated to definite-lived intangible assets. The remaining purchase price has been allocated to goodwill.

During fiscal 2012, the Company completed the acquisitions of the assets of a Canadian franchisee with six stores for an aggregate purchase price of $7.8 million that resulted in an increase in goodwill of $6.1 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. The company also purchased Super Efectivo S.L. (“Super Efectivo”), a pawn business operating eight stores predominantly in Madrid, Spain for an aggregate purchase price of $9.0 million that resulted in an increase in goodwill of $5.4 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. Also during fiscal 2012, the Company completed various smaller acquisitions, primarily of franchisees, in the United Kingdom and Canada that resulted in aggregate increase in goodwill of $5.5 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired.

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 Company’s strategy is the intention to grow its network through acquisitions. The Company believes that acquisitions provide it with increased market penetration or in some cases the opportunity to enter new platforms and geographies with de novo expansion following thereafter. The purchase price of each acquisition is primarily based on a multiple of historical earnings. The Company’s standard business model, and that of its industry, 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, intangible assets.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following reflects the change in goodwill during the periods presented (in millions):

 

Balance at June 30, 2011

   $ 758.5   

Acquisitions:

  

Risicum

     20.3   

Canadian franchisee acquisitions

     6.1   

Super Efectivo

     5.4   

Various small acquisitions

     5.5   

Foreign currency translation adjustment

     (13.8
  

 

 

 

Balance at March 31, 2012

   $ 782.0   
  

 

 

 

The following pro forma information for the periods ended March 31, 2011 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 acquisition dates of Sefina, Purpose U.K. Holdings and Risicum. 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.

 

     Pro Forma Results  
     Three months ended      Nine months ended  
     March 31,      March 31,  
     2011      2011  
     (Unaudited in millions except per share amounts)  

Revenue

   $ 233.5       $ 669.9   

Net income attributable to DFC Global Corp.

   $ 21.1       $ 66.9   

Net income per common share — basic

   $ 0.57       $ 1.83   

Net income per common share — diluted

   $ 0.54       $ 1.76   

 

4. Goodwill and Other Intangibles

The changes in the carrying amount of goodwill by reportable segment for the nine months ended March 31, 2012 are as follows (in millions):

 

     United States
Retail
     Canada     Europe     Other      Total  

Balance at June 30, 2011

   $ 205.7       $ 179.9      $ 320.8      $ 52.1       $ 758.5   

Acquisitions and purchase accounting adjustments

     —           8.1        29.2        —           37.3   

Foreign currency translation adjustments

     —           (6.3     (7.5     —           (13.8
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance at March 31, 2012

   $ 205.7       $ 181.7      $ 342.5      $ 52.1       $ 782.0   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reflects the components of intangible assets (in millions):

 

     June 30,     March 31,  
     2011     2012  

Non-amortizing intangible assets:

    

Goodwill

   $ 758.5      $ 782.0   

Reacquired franchise rights

     56.4        54.4   

DFS MILES Program

     35.4        35.4   

Trade names

     3.6        3.5   
  

 

 

   

 

 

 
   $ 853.9      $ 875.3   
  

 

 

   

 

 

 

Amortizable intangible assets:

    

Purchased technology

   $ 46.1      $ 48.7   

Various contracts

     39.0        41.9   

Reacquired franchise rights

     5.2        6.0   

Accumulated amortization:

    

Purchased technology

     (1.2     (7.3

Various contracts

     (10.6     (17.1

Reacquired franchise rights

     (0.4     (1.1
  

 

 

   

 

 

 

Total intangible assets

   $ 932.0      $ 946.4   
  

 

 

   

 

 

 

Goodwill is the excess of cost over the fair value of the net assets of the business acquired.

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. As of June 30, 2011, there was no impairment of goodwill.

Other indefinite-lived intangible assets consist of reacquired franchise rights, DFS’ MILES program brand name and the Sefina and Purpose U.K. trade names, 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. As of December 31, 2011, there was no impairment of other indefinite-lived intangible assets. As prescribed under ASC 805, beginning with franchisee acquisitions consummated in fiscal 2010 or later, reacquired franchise rights are no longer considered indefinite-lived; rather they are amortized over the remaining contractual life of the franchise agreement.

The fair value of the Company’s indefinite-lived intangible assets is estimated based upon a present value technique using discounted future cash flows (the “relief from royalty” method). The fair value of the Company’s operating segments is estimated based upon a present value technique using discounted future cash flows or a market-based approach, or a combination thereof. 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 may affect the implied fair value of goodwill and indefinite-lived intangible assets and could result in an impairment charge in future periods.

The Company recently initiated a management plan to improve the performance of the DFS business, including the addition of another lender for the origination of certain loans of DFS. The attainment of the forecasted business plan and projections related to the DFS MILES program is in part dependent on the success of the management plan to both a) expand the MILES program through its existing channels and b) introduce the MILES program to other branches of the military and military-related organizations. If these initiatives do not achieve the results anticipated, it is reasonably possible that there could be future impairment of the DFS MILES program indefinite-lived intangible asset and goodwill related to the DFS business unit.

Amortization expense of intangible assets was $1.7 million and $4.7 million for the three months ended March 31, 2011 and 2012, respectively. Amortization expense of intangible assets was $4.7 million and $14.2 million for the nine months ended March 31, 2011 and 2012, respectively.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Estimated amortization expense of intangible assets during the next five fiscal years is shown below (in millions):

 

Fiscal Year Ending
June 30,

      

2012

   $ 18.9   

2013

     18.0   

2014

     15.7   

2015

     11.8   

2016

     8.6   
  

 

 

 
   $ 73.0   
  

 

 

 

 

5. Debt

The Company had debt obligations at June 30, 2011 and March 31, 2012 as follows (in millions):

 

     June 30,     March 31,  
     2011     2012  

Global revolving credit facility

   $ 65.9      $ 141.8   

National Money Mart Company 10.375% Senior Notes due December 15, 2016

     600.0        600.0   

Issuance discount on 10.375% Senior Notes due 2016

     (3.0     (2.7

DFC Global Corp. 2.875% Senior Convertible Notes due 2027

     40.7        42.7   

DFC Global Corp. 3.0% Senior Convertible Notes due 2028

     90.9        95.8   

Scandinavian credit facilities

     67.6        59.2   

Other

     8.8        8.5   
  

 

 

   

 

 

 

Total debt

     870.9        945.3   
  

 

 

   

 

 

 

Less: current portion of long-term debt

     (95.7     (10.1
  

 

 

   

 

 

 

Long-term debt

   $ 775.2      $ 935.2   
  

 

 

   

 

 

 

Senior Notes

On December 23, 2009, the Company’s wholly owned indirect Canadian subsidiary, National Money Mart Company, issued $600.0 million aggregate principal amount of its 10.375% Senior Notes due December 15, 2016 (the “2016 Notes”) which are guaranteed by DFC and certain of its wholly owned direct and indirect U.S. and Canadian subsidiaries. The 2016 Notes bear interest at the rate of 10.375% per year, payable on June 15 and December 15 of each year, commencing on June 15, 2010, and will mature on December 15, 2016.

Convertible Notes

On June 27, 2007, DFC issued $200.0 million aggregate principal amount of its 2.875% Senior Convertible Notes due 2027 (the “2027 Notes”).

In December 2009, DFC entered into privately negotiated exchange agreements with certain holders of its 2027 Notes, pursuant to which such holders exchanged an aggregate of $120.0 million aggregate principal amount of the 2027 Notes for an equal aggregate principal amount of 3.0% Senior Convertible Notes due 2028 issued by DFC (the “2028 Notes” and, together with the 2027 Notes, the “Convertible Notes”).

In February 2010, DFC repurchased $35.2 million aggregate principal amount of the remaining outstanding 2027 Notes in privately negotiated transactions with three of the holders of the 2027 Notes. The purchase price paid by DFC in the transactions was 91% of the stated principal amount of the repurchased 2027 Notes, for an aggregate price of $32.0 million. As a result of the repurchase and privately negotiated exchange transactions, $44.8 million and $120.0 million aggregate principal amount of 2027 Notes and 2028 Notes, respectively, remained outstanding as of June 30, 2011 and March 31, 2012.

The Convertible Notes are general unsecured obligations of DFC and rank equally in right of payment with all of its other existing and future obligations that are unsecured and unsubordinated. The 2027 Notes bear interest at the rate of 2.875% per year, payable in cash in arrears on June 30 and December 31 of each year beginning on December 31, 2007, and will mature on June 30, 2027, unless

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

earlier converted, redeemed or repurchased. The 2028 Notes bear interest at a rate of 3.00% per annum, payable in cash in arrears on April 1 and October 1 of each year beginning on April 1, 2010, and will mature on April 1, 2028, unless earlier converted, redeemed or repurchased.

Global Revolving Credit Facility

On March 3, 2011, the Company replaced its existing credit facility with a new senior secured credit facility with a syndicate of lenders, for which the administrative agent is Wells Fargo Bank, National Association. The facility consists of a $200.0 million global revolving credit facility (the “Global Revolving Credit Facility”), with the potential to further increase the Company’s available borrowings under the facility to $250.0 million. On February 29, 2012, Barclay’s Bank PLC and Deutsche Bank AG New York Branch became lenders under the Global Revolving Credit Facility, increasing the aggregate commitments under the facility to $235.0 million. Availability under the Global Revolving Credit Facility is based on a borrowing base comprised of cash and consumer receivables in the Company’s U.S. and Canadian operations, and its U.K.-based retail operations, and its U.K.-based pawn loan receivables. There is a sublimit for borrowings in the United States based on the lesser of the U.S. borrowing base under the Global Revolving Credit Facility or $75 million.

Borrowings under the Global Revolving Credit Facility may be denominated in United States Dollars, British Pounds Sterling, Euros or Canadian Dollars, as well as any other currency as may be approved by the lenders. Interest on borrowings under the Global Revolving Credit Facility is derived from a pricing grid primarily based on the Company’s consolidated leverage ratio, which currently allows borrowing at an interest rate equal to the applicable London Inter-Bank Offered Rate (LIBOR) or Canadian Dollar Offer Rate (based on the currency of borrowing) plus 400 basis points, or in the case of borrowings in U.S. Dollars only, at an alternate base rate which is the greater of the prime rate or the federal funds rate plus 1/2 of 1%, plus 300 basis points. The Global Revolving Credit Facility will mature on March 1, 2015.

On December 23, 2011, the Company, along with certain of its direct and indirect wholly owned subsidiaries, entered into an amendment to the Global Revolving Credit Facility which increases the Company’s flexibility with respect to business operations, transactions and reporting.

As of March 31, 2012, there was $141.8 million outstanding under the Global Revolving Credit Facility. Historically, the Company has classified all borrowings under the Global Revolving Credit Facility as current, due to the Company’s intention to repay within one year. However, subsequent to March 31, 2012, the amount outstanding under this facility was repaid using the proceeds from the April 16, 2012 sale of $230.0 million aggregate principal of senior convertible notes (as disclosed in Note 13 – Subsequent Events). Since the senior notes will be classified as long term debt in our future balance sheets, the March 31, 2012 revolving credit balance has been included in long term debt.

Scandinavian Credit Facilities

As a result of the December 2010 acquisition of Sefina, the Company assumed borrowings under Sefina’s existing credit facilities. The loans are secured primarily by the value of Sefina’s pawn pledge stock. The borrowings consist of a working capital facility consisting of two loans of SEK 185 million and SEK 55 million (in aggregate, $36.2 million at March 31, 2012). These loans are due July 2013 and December 2015, respectively, at an interest rate of the lender’s borrowing rate plus 160 basis points (4.21% at March 31, 2012). Also with the same Scandinavian bank, the Company assumed an overdraft facility due March 31, 2012 with a commitment of up to SEK 85 million. In December 2011, this overdraft facility was extended to December 31, 2012. As of March 31, 2012, SEK 10.3 million ($1.6 million) was outstanding at the lender’s borrowing rate plus 170 basis points (4.31% at March 31, 2012). The Company also assumed a Euro overdraft facility with another Scandinavian bank maturing in April 2012 with a commitment of up to EUR 17.5 million. In February 2012, the Company refinanced this overdraft facility with a new credit agreement with the same Scandinavian bank, consisting of a working capital facility with a commitment of up to EUR 10.75 million, of which EUR 8.1 million ($10.7 million) was outstanding as of March 31, 2012, and a term loan of EUR 8.0 million ($10.7 million at March 31, 2012). The working capital facility expires in February 2014 and has an interest rate of the one month Euribor plus 155 basis points (1.98% at March 31, 2012). The term loan is due in February 2016, and has an interest rate of the three month Euribor plus 300 basis points (3.95% at March 31, 2012)

Interest Expense

Interest expense, net was $23.0 million and $25.0 million for the three months ended March 31, 2011 and 2012, respectively. For the nine months ended March 31, 2011 and 2012, interest expense, net was $66.5 million and $73.7 million, respectively. Included in interest expense for the three months ended March 31, 2011 and March 31, 2012 is approximately $4.8 million and $5.2 million, respectively, and for the nine months ended March 31, 2011 and March 31, 2012 is approximately $13.9 million and $15.4 million, respectively, of non-cash interest expense related to the amortization of accumulated charges related to the discontinuance of hedge accounting for the Company’s Canadian cross currency interest rate swaps, the non-cash interest expense associated with the Convertible Notes and the amortization of various deferred issuance costs.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

A full description of the terms of the Company’s indebtedness and related requirements is contained in Note 10 to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

 

6. Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the FASB Codification establishes a fair value hierarchy that distinguishes between observable and unobservable market participant assumptions. 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 Company’s 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 and gold collars to manage its exposure to variability in gold prices. 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, gold forward curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparties’ 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 March 31, 2012, 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.

During fiscal 2011, the Company recorded a liability for contingent consideration of $16.6 million arising from the acquisition of Sefina which is payable over two years. During the three months ended March 31, 2012, the Company made a contingent consideration payment of $7.7 million. The fair value of the contingent consideration was determined at the acquisition date using a probability weighted income approach based on the net present value of estimated payments and is re-measured in each reporting period. The contingent consideration was classified within Level 3 as management assumptions for the valuation included discount rates and estimated probabilities of achievement of pre-tax income levels which are unobservable in the market. Changes in fair value of the contingent consideration are recorded in other operating expenses. As of March 31, 2012, the balance of the contingent consideration liability was $9.2 million.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2012

(in millions)

 

     Quoted Prices in
Active Markets for
Identical Assets
and Liabilities
(Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Balance at
March 31, 2012
 

Assets

           

Derivative financial instruments

   $ —         $ —         $ —         $ —     

Liabilities

           

Derivative financial instruments

   $ —         $ 51.5       $ —         $ 51.5   

Contingent consideration — Sefina acquisition

   $ —         $ —         $ 9.2       $ 9.2   

The following table reconciles the change in the Level 3 liabilities for the nine months ended March 31, 2012 (in millions):

 

     Fair Value Measurements
Using Significant
Unobservable Inputs
 
     Level 3  

Balance as of June 30, 2011

   $ 17.8   

Changes in fair value of contingent consideration

     0.1   

Payments

     (7.7

Unrealized foreign exchange gain on contingent consideration

     (0.6

Foreign currency translation adjustment

     (0.4
  

 

 

 

Balance as of March 31, 2012

   $ 9.2   
  

 

 

 

 

7. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks 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, 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.

Certain parts of the Company’s operations in Canada and Europe expose the Company to fluctuations in foreign exchange rates. The Company’s goal is to reduce its exposure to such foreign exchange risks on its foreign currency cash flows and fair value fluctuations on recognized foreign currency denominated assets, liabilities and unrecognized firm commitments to acceptable levels primarily through the use of foreign exchange-related derivative financial instruments. From time to time, the Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar.

The Company maintains gold inventory in quantities expected to be sold in a reasonable period of time in the normal course of business. The Company generally enters into agreements for forward delivery. The prices paid in the forward delivery contracts are generally variable within a capped or collared price range. Forward derivative contracts on gold are entered into to manage the price risk associated with forecasted sales of gold inventory in the Company’s pawn shops.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Cash Flow Hedges of Foreign Exchange Risk

Operations in the United Kingdom and Canada have exposed the Company to changes in the GBP-USD and CAD-USD foreign exchange rates. From time to time, the Company’s U.K. and Canadian subsidiaries purchase investment securities denominated in a currency other than their functional currency. The subsidiaries from time to time 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 March 31, 2012, the Company did not have any outstanding foreign currency derivatives that were designated as hedges.

Cash Flow Hedges of Multiple Risks

Prior to the Company’s refinancing activities in December 2009, the Company’s foreign subsidiaries in the United Kingdom and Canada had variable-rate term loan borrowings denominated in currencies other than the foreign subsidiaries’ functional currencies. To hedge these risks, the Company had entered into cross-currency interest rate swaps. These derivatives were originally designated as cash flow hedges of both interest rate and foreign exchange risks. As a result of prepaying all of the outstanding term loans in both the United Kingdom and Canada, the Company discontinued hedge accounting prospectively on its outstanding cross currency swaps. The Company continues to report a net loss related to the discontinued cash flow hedges in accumulated other comprehensive income included in stockholders’ equity, and is subsequently reclassifying this amount into earnings (interest expense) over the remaining original term of the derivative (October 2012). The Canadian cross-currency swaps continue to be outstanding with prospective changes in fair value of these instruments being recorded directly through the income statement.

As of March 31, 2012, the Company had the following outstanding derivatives:

 

Foreign Currency Derivatives    Pay Fixed Notional      Pay Fixed
Strike Rate
    Receive Floating
Notional
     Receive Floating
Index

USD-CAD Cross Currency Swap

     CAD 179,286,619         8.75   $ 155,925,000       3 mo. LIBOR +

2.75% per annum

USD-CAD Cross Currency Swap

     CAD 60,026,447         7.47   $ 51,975,000       3 mo. LIBOR +
2.75% per annum

USD-CAD Cross Currency Swap

     CAD 81,888,975         7.41   $ 70,875,000       3 mo. LIBOR +
2.75% per annum

On April 27, 2012, the Company retired all of its remaining legacy cross-currency swap agreements, as further discussed in Note 13.

Non-designated Hedges of Commodity Risk

In the normal course of business, the Company maintains inventories of gold at its pawn shops. 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 Company’s 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 March 31, 2012, the Company’s subsidiary in the United Kingdom had five outstanding gold collars with an aggregate notional amount of 4,900 ounces of gold bullion.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The table below presents the fair values of the Company’s derivative financial instruments on the consolidated balance sheet as of June 30, 2011 and March 31, 2012 (in millions):

Tabular Disclosure of Fair Values of Derivative Instruments

 

     Asset Derivatives      Liability Derivatives  
     As of June 30, 2011      As of June 30, 2011  
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives not designated as hedging instruments:

           

Commodity Options

   Other current assets    $ —         Fair value of derivatives    $ 0.1   

Cross Currency Interest Rate Swaps

   Fair value of derivatives    $ —         Fair value of derivatives    $ 73.8   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

      $ —            $ 73.9   
     

 

 

       

 

 

 

 

     Asset Derivatives      Liability Derivatives  
     As of March 31, 2012      As of March 31, 2012  
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives not designated as hedging instruments:

           

Commodity Options

   Other current assets    $ —         Fair value of derivatives    $ —     

Cross Currency Interest Rate Swaps

   Fair value of derivatives      —         Fair value of derivatives      51.5   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

      $ —            $ 51.5   
     

 

 

       

 

 

 

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The tables below present the effect of the Company’s derivative financial instruments on the Consolidated Statement of Operations for the periods ending March 31, 2011 and 2012 (in millions):

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Consolidated Statement of Operations for the Nine Months Ending March 31, 2011

 

Derivatives in Cash Flow
Hedging Relationships

   Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax
    

Location of Gain or (Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)

   Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
   

Location of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective Portion
and Amount Excluded from
Effectiveness Testing)

   Amount of
Gain or
(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 

Commodity Options

   $ —            $ —        Purchased gold costs    $ —     

Cross Currency Swaps

     —         Interest Expense      (4.8   Loss on derivatives not designated as hedges      (34.2
      Tax Benefit      1.3        
  

 

 

       

 

 

      

 

 

 

Total

   $ —            $ (3.5      $ (34.2
  

 

 

       

 

 

      

 

 

 

 

Tabular Disclosure of the Effect of Derivative Instruments on the

Consolidated Statement of Operations for the Nine Months Ending March 31, 2012

 
Derivatives in Cash Flow
Hedging Relationships
   Amount of
Gain or
(Loss)
Recognized
in OCI on
Derivative
(Effective
Portion),
net of tax
    

Location of Gain or (Loss)
Reclassified from Accumulated
OCI into Income (Effective
Portion)

   Amount of
Gain or
(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
   

Location of Gain or (Loss)
Recognized in Income on
Derivative (Ineffective Portion
and Amount Excluded from
Effectiveness Testing)

   Amount of
Gain or
(Loss)
Recognized
in Income
on
Derivative
(Ineffective
Portion and
Amount
Excluded
from
Effectiveness
Testing)
 

Commodity Options

   $ —            $ —        Purchased gold costs    $ (0.4

Cross Currency Swaps

   $ —         Interest Expense    $ (4.9   Gain on derivatives not designated as hedges    $ 6.3   
      Tax Benefit      1.3        
  

 

 

       

 

 

      

 

 

 

Total

   $ —            $ (3.6      $ 5.9   
  

 

 

       

 

 

      

 

 

 

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 Company’s agreements with certain of its derivative counterparties also contain provisions requiring it to maintain certain minimum financial covenant ratios related to its indebtedness. Failure to comply with the covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement. At March 31, 2012, the Company was in compliance with its covenant provisions.

As of March 31, 2012, the fair value of derivatives is in a net liability position of $51.7 million. This amount includes accrued interest but excludes any adjustment for non-performance risk.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

8. Comprehensive Income

Comprehensive income encompasses all changes in stockholders’ equity (except those arising from transactions with stockholders) and includes net income, foreign currency translation adjustments and fair value adjustments for cash flow hedges (see Note 7). The following shows the comprehensive income for the periods stated (in millions):

 

     Three months ended
March 31,
    Nine months ended
March 31,
 
     2011     2012     2011     2012  
        

Net income

   $ 15.6      $ 31.3      $ 47.5      $ 55.0   

Foreign currency translation adjustment(1)

     7.5        12.4        3.2        (5.3

Amortization of accumulated other comprehensive income related to ineffective cash flow hedges (2)

     1.1        1.6        3.6        3.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     24.2        45.3        54.3        53.3   

Net loss applicable to non-controlling interests

     (0.1     (0.2     (0.5     (0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to DFC Global Corp.

   $ 24.3      $ 45.5      $ 54.8      $ 53.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The ending balance of the foreign currency translation adjustments included in accumulated other comprehensive income on the balance sheet was a gain of $17.5 million and a loss of $8.2 million as of March 31, 2011 and 2012, respectively.
(2) Net of $0.4 million of tax each for the three months ended March 31, 2011 and 2012. For the nine months ended March 31, 2011 and 2012, the tax was $1.2 million and $1.3 million, respectively.

Accumulated other comprehensive income, net of related tax, consisted of unrealized losses on terminated cross-currency interest rate swaps of $6.5 million at June 30, 2011, compared to $2.4 million of net unrealized losses on terminated cross-currency interest rate swaps at March 31, 2012.

 

9. Income Taxes

Income Tax Provision

The provision for income taxes was $26.3 million for the nine months ended March 31, 2011 compared to a provision of $32.1 million for the nine months ended March 31, 2012. The Company’s effective tax rate was 35.7% for the nine months ended March 31, 2011 and was 36.9% for the nine months ended March 31, 2012. The increase in the effective tax rate for the nine months ended March 31, 2012 as compared to the prior year was primarily a result of the tax treatment of the unrealized foreign currency exchange losses in Canada. The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% due to foreign taxes, permanent differences, the impact of unrealized foreign exchange gains/losses and a valuation allowance on U.S. and certain foreign deferred tax assets. At March 31, 2012 the Company maintained net deferred tax assets of $111.7 million, which is offset by a valuation allowance of $87.2 million, which represents a decrease of $8.2 million in the net deferred tax asset during the nine months ended March 31, 2012. The change for the period in the Company’s 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):

 

     Deferred
Tax Asset
    Valuation
Allowance
    Net Deferred
Tax Asset
 

Balance at June 30, 2011

   $ 120.3      $ 87.6      $ 32.7   

U.S. decrease

     (2.5     (0.2     (2.3

Foreign decrease

     (6.1     (0.2     (5.9
  

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 111.7      $ 87.2      $ 24.5   
  

 

 

   

 

 

   

 

 

 

The $111.7 million in deferred tax assets consists of $39.1 million related to net operating losses and other temporary differences, $56.6 million related to foreign tax credits and $16.0 million in foreign deferred tax assets. At March 31, 2012, U.S. deferred tax assets related to net operating losses and other temporary differences were reduced by a valuation allowance of $39.1 million, which represents a decrease of $5.8 million in the period. The net operating loss carry forward at June 30, 2011 was $78.2 million and at March 31, 2012 was $63.4 million, a decrease of $14.8 million due to provision to return adjustments related to the Company’s fiscal year 2011 tax return, the utilization of a net operating loss carryforward, and competent authority adjustments. The Company’s ability to utilize pre-fiscal 2007 net operating losses in a given year is limited to $9.0 million under Section 382 of the Internal Revenue Code (the

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

“Code”) because of changes of ownership resulting from the Company’s June 2006 follow-on equity offering. In addition, any future debt or equity transactions may reduce the Company’s 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 increased $3.4 million due to provision to return adjustments related to the Company’s fiscal year 2011 tax returns. The deferred tax asset related to excess foreign tax credits is also fully offset by a valuation allowance of $56.6 million. Additionally, the Company maintains foreign deferred tax assets in the amount of $16.0 million, which is offset by a valuation allowance of $0.6 million related to the Canadian cross-currency interest rate swaps.

At June 30, 2011, the Company had unrecognized tax benefit reserves related to uncertain tax positions of $14.2 million, primarily related to transfer pricing matters which, if recognized, would decrease the effective tax rate. At March 31, 2012, the Company had $15.8 million of unrecognized tax benefits primarily related to transfer pricing matters, which if recognized, would decrease the effective tax rate.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The provision for unrecognized tax benefits including accrued interest is included in income taxes payable.

The tax years ending June 30, 2008 through 2011 remain open to examination by the taxing authorities in the United States and the United Kingdom, tax years ending June 30, 2006 through 2011 for Canada, and tax years 2006 through 2011 for Sweden and Finland. The Canadian tax authorities have assessed tax for fiscal years ending June 30, 2006 and 2007, which the Company is contesting and for which a notice of objection has been filed. During the quarter ended December 31, 2011, the Canadian tax authorities proposed adjustments related to intercompany transfer pricing for the Canadian affiliate for the year ended June 30, 2008. The Company has not agreed with these proposed transfer pricing adjustments and is contesting them through the administrative process. The Canadian affiliate is also under audit for transfer pricing for the year ended June 30, 2009.

 

10. Contingent Liabilities

Contingent Liabilities

The Company is subject to various asserted and unasserted claims during the course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material impact on the Company’s 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 Company’s 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. An accrual for a loss contingency is recorded if it is probable that a liability has been incurred at the date of the financial statements and the amount of the loss can be reasonably estimated. When a matter’s liability is reasonably possible, the Company estimates the possible loss or range of loss or determines why such an estimate cannot be made. 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 Company’s assessments.

Purported Canadian Class Actions

In 2003 and 2006, purported class actions were brought against NMM and Dollar Financial Group, Inc. in the Court of Queen’s Bench of Alberta, Canada on behalf of a class of consumers who obtained short-term loans from NMM in Alberta, alleging, among other things, that the charge to borrowers in connection with such loans was usurious under Canadian federal law (the “Alberta Litigation”). The actions seek restitution and damages, including punitive damages. In April 2010, the plaintiffs in both actions indicated that they would proceed with their claims. Demands for arbitration were served on the plaintiff in each of the actions, and NMM has filed motions to enforce the arbitration clause and to stay the actions. To date, neither case has been certified as a class action. The Company is defending these actions vigorously.

In 2004, an action was filed against NMM in Manitoba on behalf of a purported class of consumers who obtained short-term loans from NMM. In early February 2012, a separate action was filed against NMM and DFG in Manitoba on behalf of a purported class of consumers which substantially overlaps with the purported class in the 2004 action. The allegations in each of these actions are substantially similar to those in the Alberta Litigation and, to date, neither action has been certified as a class action. If either or both of

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

these actions proceed, the Company intends to seek a stay on the grounds that the plaintiffs entered into arbitration and mediation agreements with NMM with respect to the matters which are the subject of the actions. The Company intends to defend these actions vigorously.

As of March 31, 2012, an aggregate of approximately CAD 36.1 million is included in the Company’s accrued liabilities relating to the purported Canadian class action proceedings pending in Alberta and Manitoba and for the settled class actions in Ontario, British Columbia, New Brunswick, Nova Scotia and Newfoundland that were settled by the Company in 2010. The settlements in those class action proceedings consisted of a cash component and vouchers to the class members for future services. The component of the accrual that relates to vouchers is approximately CAD 21.6 million, the majority of which is expected to be non-cash. Although we believe that we have meritorious defenses to the claims in the purported class proceedings in Alberta and Manitoba described above and intend vigorously to defend against such remaining pending claims, the ultimate cost of resolution of such claims may exceed the amount accrued at March 31, 2012 and additional accruals may be required in the future.

Other Canadian Litigation

In 2006, two former employees, Peggy White and Kelly Arseneau, commenced companion actions against NMM and Dollar Financial Group, Inc. 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 CAD 5.0 million plus interest and costs. The Company continues to defend these actions vigorously and believes it has meritorious defenses.

In 2010, The Cash Store Financial Services, Inc. and its subsidiaries, The Cash Store Inc. and Instaloans Inc. (“Cash Store”), filed a complaint and motion for injunctive relief in Ontario Superior Court against NMM alleging trademark violations and false and misleading advertising, along with claims for CAD 60 million in damages, regarding NMM’s print, television and internet advertising featuring Cash Store’s higher payday loan costs compared to those of NMM. NMM filed its opposition to Cash Store’s motion based, in part, on data gathered from Cash Store loan transactions that supported NMM’s advertising statements. Prior to the hearing on the motion, the Cash Store abandoned its position to enjoin NMM’s advertising, and the Court granted NMM’s request for reimbursement from the Cash Store of NMMs’ attorneys’ fees incurred to defeat Cash Store’s injunction motion. NMM filed a Statement of Defense to the action in May 2011, and no further action in the case has been taken by Cash Store. NMM intends to vigorously defend this matter and its advertising. 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.

California Legal Proceeding

In 2007, the San Francisco City Attorney (the “City Attorney”) filed a complaint in the name of the People of the State of California alleging, among other things, that certain of the Company’s subsidiaries violated 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 otherwise violated the California Finance Lenders Law and the California Deferred Deposit Transaction Law. In October 2011, the Company and the City Attorney entered into a settlement agreement pursuant to which the Company agreed (i) to pay $0.9 million to the City of San Francisco, and (ii) to contribute between $3.0 million and $7.5 million to a settlement fund to satisfy claims for restitution by customers who allegedly were damaged by these loans. As of March 31, 2012, $3.0 million is included in the Company’s accrued liabilities relating to the settlement agreement.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

11. Segment Information

The Company classifies its businesses into three reportable segments: Europe, Canada and United States Retail. These three reporting segments have been identified giving consideration to geographic area, products offered, regulatory environment and management’s view of the business. The Company provides financial services primarily to unbanked and under-banked consumers and small businesses that are typically not well serviced by banks due to their lack of credit history, smaller transaction size and the necessity for a quick and convenient response. The types of service offered to this customer group is the primary commonality enjoining all of the Company’s products and services and delivery channel methodologies. The Company’s strategy is to deliver its various products and services through the most convenient means its customers are accustomed to and comfortable with in each market, and in many instances a single customer may choose multiple delivery methods over time to access the same financial service or product. Due to similarities with respect to customer demographics, the Company’s principal products and services may be offered in all of its geographic jurisdictions. The Europe reporting segment includes the Company’s operating segments in the United Kingdom, the Sefina pawn business (acquired in December 2010) in Sweden and Finland, the Risicum Oyj Internet lending and telephony based loans business (acquired in July 2011) in Finland and Sweden, the pawn business (acquired in March 2012) in Spain and the Company’s businesses in Poland. These operating segments generally offer the same services distributed in similar fashions, have the same types of customers, are subject to similar regulatory requirements and have similar economic characteristics, allowing these operations to be aggregated into one reporting segment. The amounts reported as “Other”, includes Dealers’ Financial Services as well as all corporate headquarters expenses that support the expansion of the global business that have not been charged out to the reporting segments in Europe, Canada and United States Retail.

The primary service offerings of the Europe, Canada and United States Retail reportable segments are single-payment consumer loans, check cashing, money transfers, pawn loans and sales, gold sales and other ancillary services. As a result of the maturation level of the retail locations, mix of service offerings, competitive conditions, and diversity in the respective geographic regulatory environments, there are differences in each reporting segment’s profit margins.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

(In millions)

 

     Europe      Canada     United States
Retail
     Other     Total  

As of and for the three months ended March 31, 2011

            

Total assets

   $ 713.9       $ 433.5      $ 257.9       $ 150.7      $ 1,556.0   

Goodwill and other intangibles, net

     197.0         216.8        206.0         108.4        728.2   

Sales to unaffiliated customers:

            

Consumer lending

     44.3         41.8        14.6         —          100.7   

Check cashing

     6.7         17.1        12.9         —          36.7   

Pawn service fees and sales

     16.6         —          —           —          16.6   

Money transfer fees

     1.9         4.4        1.1         —          7.4   

Gold sales

     8.1         3.6        0.6         —          12.3   

Other

     4.6         10.9        3.2         5.4        24.1   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total sales to unaffiliated customers

     82.2         77.8        32.4         5.4        197.8   

Provision for loan losses

     10.7         6.6        1.2         —          18.5   

Depreciation and amortization

     2.6         2.2        0.6         2.0        7.4   

Interest expense, net

     3.6         13.2        —           6.2        23.0   

Unrealized foreign exchange loss (gain)

     2.2         (13.0     —           0.7        (10.1

Loss on derivatives not designated as hedges

     —           9.6        —           —          9.6   

Provision for litigation settlements

     —           —          —           0.1        0.1   

Loss (gain) on store closings

     —           0.2        0.1         (0.2     0.1   

Other expense (income), net

     4.2         (0.7     —           (2.7     0.8   

Income (loss) before income taxes

     8.6         14.9        9.2         (7.4     25.3   

Income tax provision

     3.8         3.0        2.8         0.1        9.7   

As of and for the nine months ended March 31, 2011

            

Sales to unaffiliated customers:

            

Consumer lending

     118.7         126.3        47.0         —          292.0   

Check cashing

     22.6         54.0        32.1         —          108.7   

Pawn service fees and sales

     30.1         —          —           —          30.1   

Money transfer fees

     5.5         13.6        3.4         —          22.5   

Gold sales

     21.8         11.3        1.6         —          34.7   

Other

     15.6         24.4        9.1         17.4        66.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total sales to unaffiliated customers

     214.3         229.6        93.2         17.4        554.5   

Provision for loan losses

     27.8         15.7        5.4         —          48.9   

Depreciation and amortization

     6.7         5.6        2.0         6.1        20.4   

Interest expense, net

     4.3         48.6        —           13.6        66.5   

Unrealized foreign exchange loss (gain)

     2.1         (47.1     —           2.5        (42.5

Loss on derivatives not designated as hedges

     —           34.2        —           —          34.2   

(Proceeds from) provision for litigation settlements

     —           (4.0     —           0.2        (3.8

Loss (gain) on store closings

     —           0.4        0.3         (0.1     0.6   

Other expense (income), net

     4.4         (2.0     —           1.0        3.4   

Income (loss) before income taxes

     32.5         46.7        22.1         (27.5     73.8   

Income tax provision

     11.1         11.0        3.8         0.4        26.3   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

(In millions)

 

     Europe     Canada     United States
Retail
     Other     Total  

As of and for the three months ended March 31, 2012

           

Total assets

   $ 910.0      $ 444.7      $ 262.2       $ 152.0      $ 1,768.9   

Goodwill and other intangibles, net

     402.2        235.0        206.1         103.1        946.4   

Sales to unaffiliated customers:

           

Consumer lending

     103.7        43.7        15.6         —          163.0   

Check cashing

     6.4        16.9        12.0         —          35.3   

Pawn service fees and sales

     21.0        —          —           —          21.0   

Money transfer fees

     2.7        5.4        1.3         —          9.4   

Gold sales

     14.0        3.3        1.3         —          18.6   

Other

     5.4        11.0        3.3         3.0        22.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total sales to unaffiliated customers

     153.2        80.3        33.5         3.0        270.0   

Provision for loan losses

     28.0        4.5        1.1         —          33.6   

Depreciation and amortization

     7.0        2.8        0.6         2.2        12.6   

Interest expense, net

     6.5        16.2        —           2.3        25.0   

Unrealized foreign exchange (gain) loss

     (1.1     (10.8     —           0.1        (11.8

Loss on derivatives not designated as hedges

     —          6.4        —           —          6.4   

Loss on store closings

     —          0.1        —           —          0.1   

Other (income) expense, net

     (1.9     (0.5     0.1         0.5        (1.8

Income (loss) before income taxes

     21.1        15.7        10.0         (6.3     40.5   

Income tax provision

     4.1        1.8        3.3         —          9.2   

As of and for the nine months ended March 31, 2012

           

Sales to unaffiliated customers:

           

Consumer lending

     293.4        136.7        49.6         —          479.7   

Check cashing

     21.2        56.1        28.9         —          106.2   

Pawn service fees and sales

     62.2        0.1        —           —          62.3   

Money transfer fees

     8.1        16.9        3.8         —          28.8   

Gold sales

     37.1        11.1        4.3         —          52.5   

Other

     19.5        26.6        9.5         9.9        65.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total sales to unaffiliated customers

     441.5        247.5        96.1         9.9        795.0   

Provision for loan losses

     75.8        14.6        6.5         —          96.9   

Depreciation and amortization

     20.4        8.0        1.9         6.7        37.0   

Interest expense, net

     16.3        50.4        —           7.0        73.7   

Unrealized foreign exchange (gain) loss

     (0.2     18.6        —           (0.1     18.3   

Gain on derivatives not designated as hedges

     —          (6.3     —           —          (6.3

Provision for litigation settlements

     —          0.1        3.9         —          4.0   

Loss on store closings

     —          0.2        0.2         —          0.4   

Other (income) expense, net

     (0.9     (1.7     0.1         1.9        (0.6

Income (loss) before income taxes

     69.1        22.9        19.5         (24.4     87.1   

Income tax provision

     18.5        9.4        4.2         —          32.1   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

12. Subsidiary Guarantor Financial Information

National Money Mart Company’s payment obligations under its 10.375% Senior Notes due 2016 are jointly and severally guaranteed (such guarantees, the “Guarantees”) on a full and unconditional basis by DFC Global Corp. and certain of its direct and indirect wholly owned U.S. and Canadian subsidiaries (the “Guarantors”).

The Guarantees of the 2016 Notes are:

 

   

senior unsecured obligations of the applicable Guarantor;

 

   

rank equal in right or payment with existing and future unsubordinated indebtedness of the applicable Guarantor;

 

   

rank senior in right of payment to all existing and future subordinated indebtedness of the applicable Guarantor; and

 

   

effectively junior to an indebtedness of such Guarantor, including indebtedness under the Company’s Global Revolving Credit Facility, which is secured by assets of such Guarantor to the extent of the value of the assets securing such Indebtedness.

Separate financial statements of each subsidiary Guarantor have not been presented because they are not required by securities laws and management has determined that they would not be material to investors. The accompanying tables set forth the condensed consolidating balance sheets at June 30, 2011 and March 31, 2012, the condensed consolidating statements of operations for the three and nine months ended March 31, 2011 and 2012 and the condensed consolidating statements of cash flows for the nine months ended March 31, 2011 and 2012 of DFC Global Corp., National Money Mart Company, the combined Guarantors, the combined Non-Guarantors and the consolidated Company.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Balance Sheets

June 30, 2011

(In millions)

 

     DFC Global
Corp.
     National
Money Mart
Company
     DFG and
Guarantors
     Non-Guarantors     Eliminations     Consolidated  

Current Assets

               

Cash and cash equivalents

   $ —         $ 95.2       $ 23.2       $ 70.6      $ —        $ 189.0   

Consumer loans, net

     —           35.7         23.2         103.0        —          161.9   

Pawn loans

     —           0.1         —           136.1        —          136.2   

Loans in default, net

     —           5.0         0.1         8.7        —          13.8   

Other receivables

     0.3         16.6         3.7         10.6        —          31.2   

Prepaid expenses and other current assets

     —           6.0         6.6         25.9        —          38.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     0.3         158.6         56.8         354.9        —          570.6   

Deferred tax asset, net of valuation allowance

     —           20.2         —           1.1        —          21.3   

Intercompany receivables

     392.7         148.0         —           —          (540.7     —     

Property and equipment, net

     —           32.6         16.4         51.0        —          100.0   

Goodwill and other intangibles

     —           235.1         313.5         383.4        —          932.0   

Debt issuance costs, net

     1.1         16.0         1.6         2.3        —          21.0   

Investment in subsidiaries

     166.8         302.0         56.3         —          (525.1     —     

Other assets

     —           0.7         17.1         0.1        —          17.9   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 560.9       $ 913.2       $ 461.7       $ 792.8      $ (1,065.8   $ 1,662.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current Liabilities

               

Accounts payable

   $ 0.6       $ 16.0       $ 12.8       $ 31.7      $ —        $ 61.1   

Income taxes payable

     —           0.5         1.3         11.9        —          13.7   

Accrued expenses and other liabilities

     0.9         32.7         26.2         38.6        —          98.4   

Current portion of long-term debt

     —           —           6.5         89.2        —          95.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     1.5         49.2         46.8         171.4        —          268.9   

Fair value of derivatives

     —           73.8         —           0.1        —          73.9   

Long-term deferred tax liability

     —           14.3         23.0         16.5        —          53.8   

Long-term debt

     131.6         597.0         —           46.6        —          775.2   

Intercompany payables

     —           —           214.0         326.7        (540.7     —     

Other non-current liabilities

     —           38.8         18.3         7.3        —          64.4   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     133.1         773.1         302.1         568.6        (540.7     1,236.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total DFC Global Corp. stockholders’ equity

     427.8         140.1         159.6         224.7        (525.1     427.1   

Non-controlling interest

     —           —           —           (0.5     —          (0.5
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     427.8         140.1         159.6         224.2        (525.1     426.6   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 560.9       $ 913.2       $ 461.7       $ 792.8      $ (1,065.8   $ 1,662.8   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Operations

Three Months Ended March 31, 2011

(In millions)

 

     DFC Global
Corp.
    National
Money Mart
Company
    DFG and
Guarantors
    Non-Guarantors     Eliminations     Consolidated  

Revenues:

            

Consumer lending

   $ —        $ 41.8      $ 14.7      $ 44.2      $ —        $ 100.7   

Check cashing

     —          17.1        12.9        6.7        —          36.7   

Other

     —          18.9        10.2        31.3        —          60.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          77.8        37.8        82.2        —          197.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Salaries and benefits

     —          16.0        12.7        17.5        —          46.2   

Provision for loan losses

     —          6.6        1.2        10.7        —          18.5   

Occupancy costs

     —          4.8        3.3        5.2        —          13.3   

Purchased gold costs

     —          2.2        0.4        4.9        —          7.5   

Depreciation

     —          1.5        0.7        2.1        —          4.3   

Other

     —          10.7        6.5        13.7        —          30.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          41.8        24.8        54.1        —          120.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     —          36.0        13.0        28.1        —          77.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

            

Corporate expenses

     —          5.7        14.7        4.8        —          25.2   

Intercompany charges

     —          5.7        (9.9     4.2        —          —     

Other depreciation and amortization

     —          0.5        2.1        0.5        —          3.1   

Interest expense, net

     3.4        13.2        2.8        3.6        —          23.0   

Unrealized foreign exchange (gain) loss

     —          (13.0     0.7        2.2        —          (10.1

Loss on derivatives not designated as hedges

     —          9.6        —          —          —          9.6   

Provision for litigation settlements

     —          —          0.1        —          —          0.1   

Loss (gain) on store closings

     —          0.2        (0.1     —          —          0.1   

Other (income) expense, net

     —          (0.1     (0.3     1.2        —          0.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (3.4     14.2        2.9        11.6        —          25.3   

Income tax provision

     —          3.0        2.9        3.8        —          9.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (3.4     11.2        —          7.8        —          15.6   

Less: Net loss attributable to non-controlling interests

     —          —          —          (0.1     —          (0.1

Equity in net income of subsidiaries:

            

National Money Mart Company

     11.2        —          —          —          (11.2     —     

Guarantors

     —          —          —          —          —          —     

Non-guarantors

     7.9        —          —          —          (7.9     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to DFC Global Corp.

   $ 15.7      $ 11.2      $ —        $ 7.9      $ (19.1   $ 15.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Operations

Nine Months Ended March 31, 2011

(In millions)

 

     DFC Global
Corp.
    National
Money Mart
Company
    DFG and
Guarantors
    Non-Guarantors     Eliminations     Consolidated  

Revenues:

            

Consumer lending

   $ —        $ 126.3      $ 47.0      $ 118.7      $ —        $ 292.0   

Check cashing

     —          53.9        32.1        22.7        —          108.7   

Other

     —          49.4        31.5        72.9        —          153.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          229.6        110.6        214.3        —          554.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Salaries and benefits

     —          46.9        38.4        44.4        —          129.7   

Provision for loan losses

     —          15.7        5.4        27.8        —          48.9   

Occupancy costs

     —          13.6        9.9        13.4        —          36.9   

Purchased gold costs

     —          6.8        1.0        14.6        —          22.4   

Depreciation

     —          4.3        2.2        5.3        —          11.8   

Other

     —          31.1        18.9        39.4        —          89.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          118.4        75.8        144.9        —          339.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     —          111.2        34.8        69.4        —          215.4