10-Q 1 d434785d10q.htm FORM 10-Q Form 10-Q
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 September 30, 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   x    Accelerated filer   ¨
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 November 8, 2012, 42,813,289 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, 2012 and September 30, 2012 (unaudited)

     3   
  

Interim Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2011 and 2012

     4   
  

Interim Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 30, 2011 and 2012

     5   
  

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

     6   
  

Interim Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2011 and 2012

     7   
  

Notes to Interim Unaudited Consolidated Financial Statements

     8   
Item 2.   

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

     43   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     60   
Item 4.   

Controls and Procedures

     62   

PART II.

  

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     63   
Item 1A.   

Risk Factors

     63   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     63   
Item 3.   

Defaults Upon Senior Securities

     63   
Item 4.   

Mine Safety Disclosures

     63   
Item 5.   

Other Information

     64   
Item 6.   

Exhibits

     65   

Signature

     66   

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

  

 

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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,
2012
    September 30,
2012
 
           (unaudited)  

Current Assets

    

Cash and cash equivalents

   $ 224.0      $ 220.4   

Consumer loans, net:

    

Consumer loans

     206.4        223.8   

Less: Allowance for consumer loan losses

     (19.8     (19.2
  

 

 

   

 

 

 

Consumer loans, net

     186.6        204.6   

Pawn loans

     153.9        162.9   

Loans in default, net of an allowance of $55.9 and $62.2

     29.6        36.4   

Other receivables

     34.0        25.6   

Prepaid expenses and other current assets

     49.8        57.2   

Current deferred tax asset, net of valuation allowance of $5.4 and $5.4

     0.2        0.1   
  

 

 

   

 

 

 

Total current assets

     678.1        707.2   

Deferred tax asset, net of valuation allowance of $79.3 and $84.0

     21.8        18.8   

Property and equipment, net of accumulated depreciation of $165.7 and $176.7

     120.6        127.6   

Goodwill and other intangibles, net

     902.8        923.8   

Debt issuance costs, net of accumulated amortization of $12.6 and $14.5

     22.2        21.1   

Other

     21.0        19.9   
  

 

 

   

 

 

 

Total Assets

   $ 1,766.5      $ 1,818.4   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 52.1      $ 53.1   

Income taxes payable

     15.7        19.5   

Accrued expenses and other liabilities

     99.9        106.5   

Current portion of long-term debt

     73.7        60.7   

Fair value of derivatives

     —          0.1   
  

 

 

   

 

 

 

Total current liabilities

     241.4        239.9   

Fair value of derivatives

     11.2        36.4   

Long-term deferred tax liability

     62.3        62.5   

Long-term debt

     938.9        944.8   

Other non-current liabilities

     52.5        52.6   

Stockholders’ equity:

    

Common stock, $.001 par value: 100,000,000 shares authorized; 43,243,445 shares and 43,322,273 shares issued and outstanding at June 30, 2012 and September 30, 2012, respectively

     —          —     

Additional paid-in capital

     491.5        494.4   

(Accumulated deficit) retained earnings

     (0.8     7.8   

Accumulated other comprehensive loss

     (29.4     (18.7
  

 

 

   

 

 

 

Total DFC Global Corp. stockholders’ equity

     461.3        483.5   

Non-controlling interest

     (1.1     (1.3
  

 

 

   

 

 

 

Total stockholders’ equity

     460.2        482.2   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,766.5      $ 1,818.4   
  

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

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DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share amounts)

 

     Three Months Ended
September 30,
 
     2011     2012  

Revenues:

    

Consumer lending

   $ 157.0      $ 178.6   

Check cashing

     36.2        32.7   

Pawn service fees and sales

     20.8        19.7   

Money transfer fees

     9.6        9.5   

Gold sales

     15.9        14.2   

Other

     22.1        22.0   
  

 

 

   

 

 

 

Total revenues

     261.6        276.7   
  

 

 

   

 

 

 

Operating expenses:

    

Salaries and benefits

     53.8        58.5   

Provision for loan losses

     31.8        38.4   

Occupancy

     15.0        16.8   

Purchased gold costs

     12.1        10.2   

Advertising

     14.0        15.6   

Depreciation

     5.2        6.6   

Maintenance and repairs

     4.1        4.2   

Bank charges and armored carrier service

     5.4        5.7   

Returned checks, net and cash shortages

     2.2        2.4   

Other

     21.3        24.1   
  

 

 

   

 

 

 

Total operating expenses

     164.9        182.5   
  

 

 

   

 

 

 

Operating margin

     96.7        94.2   
  

 

 

   

 

 

 

Corporate and other expenses:

    

Corporate expenses

     31.1        31.0   

Other depreciation and amortization

     6.4        6.6   

Interest expense, net

     24.5        32.1   

Intangible asset impairment charge

     —          5.5   

Unrealized foreign exchange loss (gain)

     42.4        (1.1

Gain on derivatives not designated as hedges

     (20.8     —     

Provision for litigation settlements

     4.0        2.7   

Loss on store closings

     0.1        0.4   

Other expense (income), net

     0.1        (0.2
  

 

 

   

 

 

 

Income before income taxes

     8.9        17.2   

Income tax provision

     10.9        8.8   
  

 

 

   

 

 

 

Net (loss) income

     (2.0     8.4   

Less: Net loss attributable to non-controlling interests

     (0.2     (0.2
  

 

 

   

 

 

 

Net (loss) income attributable to DFC Global Corp.

   $ (1.8   $ 8.6   
  

 

 

   

 

 

 

Net (loss) income per share attributable to DFC Global Corp:

    

Basic

   $ (0.04   $ 0.20   

Diluted

   $ (0.04   $ 0.19   

Weighted average shares outstanding:

    

Basic

     43,727,535        43,244,615   

Diluted

     43,727,535        44,353,149   

See notes to interim unaudited consolidated financial statements.

 

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DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

     Three months ended
September 30,
 
     2011     2012  

Net (loss) income

   $ (2.0   $ 8.4   

Other comprehensive income (loss):

    

Foreign currency translation adjustment(1)

     (5.9     9.5   

Fair value adjustments of derivatives, net(2)

     —         —     

Amortization of accumulated other comprehensive loss related to ineffective cash flow hedges, net (3)

     1.3        1.2   
  

 

 

   

 

 

 

Other comprehensive (loss) income

     (4.6     10.7   

Comprehensive (loss) income

     (6.6     19.1   

Net loss applicable to non-controlling interests

     (0.2     (0.2
  

 

 

   

 

 

 

Comprehensive (loss) income attributable to DFC Global Corp.

   $ (6.4   $ 19.3   
  

 

 

   

 

 

 

 

(1) 

The ending balance of the foreign currency translation adjustments included in accumulated other comprehensive loss on the balance sheet were gains of $8.2 million and $7.3 million as of September 30, 2011 and 2012, respectively.

(2)

Net of $0.8 million of tax for the three months ended September 30, 2012.

(3)

Net of $0.4 million of tax for each of the three months ended September 30, 2011 and 2012.

Accumulated other comprehensive loss, net of related tax, consisted of unrealized losses on terminated cross-currency interest rate swaps of $0.4 million at September 30, 2012, compared to $1.3 million of net unrealized losses on terminated cross-currency interest rate swaps at June 30, 2012.

See notes to interim unaudited consolidated financial statements.

 

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DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except share data)

 

    

 

Common Stock
Outstanding

     Additional
Paid-in

Capital
     (Accumulated
Deficit)
Retained

Earnings
    Non-
Controlling

Interest
    Accumulated
Other
Comprehensive

Loss
    Total
Stockholders’

Equity
 
     Shares     Amount              

Balance, June 30, 2012

     43,243,445      $ —         $ 491.5       $ (0.8   $ (1.1   $ (29.4   $ 460.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

                

Foreign currency translation

                 9.5        9.5   

Cash flow hedges

                 1.2        1.2   

Net income

             8.6            8.6   
                

 

 

 

Total comprehensive income

                   19.3   

Restricted stock grants

     80,271                 

Stock options exercised

     30,389           0.3               0.3   

Vested portion of granted restricted stock and restricted stock units

          1.3               1.3   

Retirement of common stock

     (31,832              

Other stock compensation

          1.3               1.3   

Net loss attributable to non-controlling interest

               (0.2       (0.2
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     43,322,273      $ —         $ 494.4       $ 7.8      $ (1.3   $ (18.7   $ 482.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

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DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Three Months Ended
September 30,
 
     2011     2012  

Cash flows from operating activities:

    

Net (loss) income

   $ (2.0   $ 8.4   

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

    

Depreciation and amortization

     12.9        14.9   

Intangible asset impairment charge

     —          5.5   

Change in fair value of derivatives not designated as hedges

     (25.3     —     

Provision for loan losses

     31.8        38.4   

Non-cash stock compensation

     1.0        2.6   

Loss on disposal of fixed assets

     —          0.5   

Unrealized foreign exchange loss (gain)

     42.4        (1.1

Deferred tax provision

     1.0        1.3   

Accretion of debt discount and deferred issuance costs

     4.0        6.3   

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

    

Increase in pawn loan fees and service charges receivable

     (1.9     (0.9

Increase in finance and service charges receivable

     (5.0     (9.5

Decrease in other receivables

     5.6        9.0   

Increase in prepaid expenses and other

     (2.9     (4.4

Increase in accounts payable, accrued expenses and other liabilities

     6.1        8.2   
  

 

 

   

 

 

 

Net cash provided by operating activities

     67.7        79.2   

Cash flows from investing activities:

    

Net increase in consumer loans

     (35.2     (46.8

Originations of pawn loans

     (48.8     (72.3

Repayment of pawn loans

     41.2        69.1   

Acquisitions, net of cash acquired

     (59.2     (11.0

Additions to property and equipment

     (14.2     (14.2
  

 

 

   

 

 

 

Net cash used in investing activities

     (116.2     (75.2

Cash flows from financing activities:

    

Proceeds from the exercise of stock options

     1.5        0.4   

Net increase (decrease) in revolving credit facilities

     70.4        (14.6

Payment of acquisition installment payments

     (5.2     —     

Payment of debt issuance and other costs

     (0.1     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     66.6        (14.2

Effect of exchange rate changes on cash and cash equivalents

     (10.6     6.6   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     7.5        (3.6

Cash and cash equivalents at beginning of period

     189.0        224.0   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 196.5      $ 220.4   
  

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements

 

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DFC GLOBAL CORP.

NOTES TO 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, 2012 filed with the Securities and Exchange Commission on August 29, 2012. 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. The Company, through its subsidiaries, provides retail financial services to the general public through a network of 1,429 locations (of which 1,385 are company owned) operating principally as The Money Shop®, Money Mart®, InstaCheques®, Suttons and Robertsons®, The Check Cashing Store®, Sefina®, Helsingin PanttiSM, Super Efectivo® and MoneyNow!® in the United Kingdom, Canada, the United States, Sweden, Finland, Poland, Spain and the Republic of Ireland. This network of stores offers a variety of financial services including unsecured short-term consumer loans, secured pawn services, gold buying, check cashing, money transfer services and various other related services. The Company also offers Internet-based unsecured short-term consumer loans in the United Kingdom primarily under the brand names Payday UK® and Payday Express®, in Canada under the Money Mart and paydayloan.caSM brand names, and Finland, Sweden and Poland primarily under the Risicum® and OK Money® brand names. The Company offers longer term unsecured loans in Poland through in-home servicing under the trade name Optima®. Through its Dealers’ Financial Services, (“DFS”) subsidiary, the Company also 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 primarily 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, allowance for consumer loan losses, loss reserves, valuation allowance for deferred income taxes, litigation reserves, valuation of derivative financial instruments 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.

Reclassifications

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

The Company has reclassified $43.4 million of debt previously classified as Long-term debt on the Consolidated Balance Sheet as of June 30, 2012 to Current portion of long-term debt. This reclassification relates to the Company’s Senior Convertible Notes due 2027 (the “2027 Notes”). The holders of the 2027 Notes have the right to require DFC to purchase all or a portion of the 2027 Notes on December 31, 2012.

During fiscal 2012, the Company identified certain immaterial classification errors in its Consolidated Statements of Cash Flows. The Company has corrected 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 three months ended September 30, 2011. These reclassifications increased total cash provided by operating activities and increased total cash used in investing activities by an equal and offsetting amount. During fiscal 2012, the Company also identified an immaterial reclassification error in its Consolidated Statement of Cash Flows for the three months ended September 30, 2011 related to the classification of acquisition installment payments. This reclassification decreased total cash used in investing activities and decreased net cash provided by investing activities for the three months ended September 30, 2011. The reclassifications did not change total cash, net income, or any other operating measure.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

The following table reflects a summary of the reclassifications to the Company’s historical financial statements for the three months ended September 30, 2011 (in millions):

 

Net cash provided by operating activities, as originally reported

     $ 24.9   

Adjustments

    

Decrease in changes in other receivables

     a     48.9   

Adjustments to prepaid expenses and other

     b )     0.8   

Increase in pawn loan fees and service charges receivable

     c     (1.9

Increase in finance and service charges receivable

     c     (5.0
    

 

 

 

Total adjustments to cash provided by operating activities

       42.8   
    

 

 

 

Net cash provided by operating activities, as adjusted

     $ 67.7   
    

 

 

 

Net cash used in investing activities, as originally reported

     $ (78.6

Adjustments

    

Net increase in consumer loans

     a     (35.2

Originations of pawn loans

     a     (48.8

Repayment of pawn loans

     a     41.2   

Payment of acquisition installment payment

     d     5.2   
    

 

 

 

Total adjustments to net cash used in investing activities

       (37.6
    

 

 

 

Net cash used in investing activities, as adjusted

     $ (116.2
    

 

 

 

Net cash provided by financing activities, as originally reported

     $ 71.8   

Adjustments

    

Payment of acquisition installment payment

     d     (5.2
    

 

 

 

Net cash provided by financing activities, as adjusted

     $ 66.6   
    

 

 

 

Net increase in cash and cash equivalents, as reported

       7.5   

Net increase in cash and cash equivalents, as adjusted

       7.5   

 

a) To reflect the breakout of the change in loan receivables between, for pawn loans, the increase in principal lent and payments received, and, for single payment consumer loans, the net increase in loan receivables, which has been reclassed 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 reclass between change in loans and other receivables to “increase in interest and fees receivable on pawn loans” and “increase in interest and fees on consumer loans, and loans in default”
d) To reflect the reclass of acquisition installment payments previously included in Acquisitions, net of cash acquired, in net cash used in investing activities to net cash provided by financing activities

During the year-end financial close process of fiscal 2012, the Company identified a prior period error related to the deferred tax liability on intangible assets acquired through the purchase of its DFS subsidiary in fiscal 2010. The Company also identified a prior period error related to the depreciation of certain fixed assets of its Canadian subsidiary. The errors, which were immaterial to the prior

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

periods, resulted in an understatement of depreciation expense, and an understatement of the income tax provision in the Consolidated Statement of Operations for prior periods. The recorded balances of accumulated depreciation and deferred tax liabilities were likewise understated in the Consolidated Balance Sheets for prior periods. These errors impacted periods beginning with the fiscal year ended June 30, 2007 and subsequent periods through March 31, 2012. The Company evaluated the effects of these errors on prior periods’ consolidated financial statements, individually and in the aggregate, in accordance with the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-10-S99-1, Assessing Materiality, and ASC Topic 250-10-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and concluded that no prior period is materially misstated. However, in accordance with the aforementioned ASC Topics, the Company is restating its Consolidated Financial Statements for the prior periods impacted.

The correction of these misstatements resulted in an increase of $0.01 in net loss per share basic and diluted for the three months ended September 30, 2011. The Segment Information provided in Note 10 has also been restated to reflect these corrections.

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of DFC Global Corp., its subsidiaries and controlled affiliates. All intercompany transactions and balances have been eliminated in consolidation.

Revenue Recognition

Revenues from the Company’s check cashing, money order sales, money transfer, gold sales 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 or upon delivery to the customer.

For short-term unsecured consumer loans, which generally 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 allowance policy regarding these loans is summarized below in “Consumer Loan Loss Reserves Policy.”

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 pawn shops in the United Kingdom, Sweden, Finland and Spain. 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 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. Pawn revenues are recognized using the interest 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 institutions. 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 receivable, net. Consumer loans, net are reported net of an allowance for loan losses as described below in “Consumer Loan Loss Reserves Policy”.

Loans in Default

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

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Consumer Loan Loss Reserves Policy

The Company maintains a loan loss allowance for anticipated losses for unsecured consumer loans. 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 unsecured loans owed to the Company, historical loans charged off, current collection patterns and current economic trends. The Company’s current loan loss allowance is based on its net charge-offs, typically expressed as a percentage of loan amounts originated for the last twelve months applied against the principal balance of outstanding loans. As these conditions change, the Company may need to make additional allowances in future periods.

Generally, when a short-term 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 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 loan is ultimately charged off. Recoveries on loans that were completely charged off are credited to the allowance when collected.

The Company typically does not maintain a loan loss reserve for potential future losses on secured pawn loans. Pawn loans are secured by the customer’s pledged item, which is generally 50% to 80% of the estimated fair value of the pledged item, thus reducing the Company’s exposure to losses on defaulted pawn loans. The Company’s historical redemption rate on pawn loans is in excess of 80%, which means that for more than 80% of its pawn loans, the customer pays back the dollars 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 within several weeks of 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 and auction-related administrative fees are returned to the customer.

Common Stock

On December 14, 2011, the Company’s Board of Directors approved a stock repurchase plan, authorizing the Company to repurchase in the aggregate up to 5.0 million shares of its outstanding common stock. On September 20, 2012, the Company’s Board of Directors reconfirmed the plan through September 30, 2013. As of September 30, 2012, approximately 4.0 million shares may yet be purchased under the stock repurchase plan.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

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, convertible debt and warrants. 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 September 30,  
     2011     2012  

Net (loss) income attributable to DFC Global Corp.

   $ (1.8   $ 8.6   

Reconciliation of denominator:

    

Weighted average number of common shares outstanding — basic (1)

     43.7        43.2   

Effect of dilutive stock options (2)

     —          1.1   

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

     —          0.1   
  

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding — diluted

     43.7        44.4   
  

 

 

   

 

 

 

 

(1) Excludes 0.1 shares of unvested restricted stock which are included in total outstanding shares of common stock as of September 30, 2011. The dilutive effect of restricted stock and restricted stock units is included in the calculation of diluted earnings per share using the treasury stock method.
(2) The effect of dilutive stock options was determined under the treasury stock method. Due to net loss for the three months ended September 30, 2011, the effect of the dilutive options and unvested shares of restricted stock and restricted stock unit grants were considered to be anti-dilutive, and therefore were not included in the calculation of diluted earnings per share.

Stock Based 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 September 30, 2011 and 2012 was $1.4 million and $2.1 million, respectively, net of related tax.

 

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DFC GLOBAL CORP.

NOTES TO 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
September 30,
 
     2011     2012  

Expected volatility

     51.2     49.7

Expected life (years)

     5.8        5.8   

Risk-free interest rate

     1.45     1.07

Expected dividends

     None        None   

Weighted average fair value

   $ 10.71      $ 8.68   

A summary of the status of stock option activity for the three months ended September 30, 2012 follows:

 

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

Options outstanding at June 30, 2012 (2,379,644 shares exercisable)

     3,256,543      $ 13.17         6.5         19.0   

Granted

     6,549      $ 18.64         

Exercised

     (30,389   $ 11.53         

Forfeited and expired

     (7,467   $ 17.70         
  

 

 

         

Options outstanding at September 30, 2012

     3,225,236      $ 13.19         6.3         15.6   
  

 

 

         

Exercisable at September 30, 2012

     2,443,351      $ 11.36         5.4         15.2   
  

 

 

         

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) as of September 30, 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 months ended September 30, 2012 was $0.3 million. As of September 30, 2012, the total unrecognized compensation cost over a weighted-average period of 2.2 years, related to stock options, is expected to be $4.6 million. Cash received from stock options exercised for the three months ended September 30, 2012 was $0.4 million.

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.

Information concerning unvested restricted stock awards is as follows:

 

     Restricted
Stock Awards
     Weighted
Average
Grant-Date
Fair-Value
 

Outstanding at June 30, 2012

     15,950       $ 15.24   

Granted

     —        $ —     

Vested

     —        $ —     

Forfeited

     —        $ —     
  

 

 

    

Outstanding at September 30, 2012

     15,950       $ 15.24   
  

 

 

    

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

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, 2012

     727,211      $ 18.29   

Granted

     235,118      $ 18.41   

Vested

     (103,855   $ 17.67   

Forfeited

     (4,972   $ 16.25   
  

 

 

   

Outstanding at September 30, 2012

     853,502      $ 18.41   
  

 

 

   

As of September 30, 2012, there was $16.0 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 2.3 years. The total fair value of shares vested during the three months ended September 30, 2012 was $1.8 million.

Recent Accounting Pronouncements

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, Presentation of Comprehensive Income (“ASU 2011-05”), which will enhance comparability between entities that report under GAAP and those that report under International Financial Reporting Standards (“IFRS”). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for the Company’s interim and annual periods beginning after December 15, 2011 and must be applied retrospectively. Early adoption is permitted. In December 2011, the FASB issued ASU No. 2011 — 12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011 — 05 (“ASU 2011 — 12”). ASU 2011 — 12 effectively defers only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. The Company adopted ASU 2011-05, as amended by ASU 2011-12, on July 1, 2012. The adoption of ASU 2011-05, as amended by ASU 2011-12, did not have a material effect on the Company’s financial position or results of operations.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). This update is intended to simplify goodwill impairment testing by adding an optional qualitative review step to assess whether the required quantitative impairment analysis that exists under generally accepted accounting principles (“GAAP”), is necessary. Under the amended rule, a company will not be required to calculate the fair value of a reporting unit that contains recorded goodwill unless it concludes, based on the qualitative assessment, that it is more likely than not (a likelihood of more than 50 percent) that the fair value of that reporting unit is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative goodwill impairment test that exists under current GAAP must be completed. If not, goodwill is deemed not impaired and no further testing is required until the next annual test date, unless conditions or events before that date raise concerns of potential impairment. The amended goodwill impairment guidance does not affect the manner in which a company estimates fair value. ASU 2011-08 is effective for the Company for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company adopted ASU 2011-08 on July 1, 2012. The adoption of ASU 2011-08 did not have a material effect on the Company’s financial position or results of operations.

 

14


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). This update is intended to simplify indefinite-lived asset impairment testing by adding an optional qualitative review step to assess whether the required quantitative impairment analysis that exists under GAAP is necessary. ASU 2012-02 is effective for the Company for interim and annual indefinite-lived intangible asset impairment tests performed for fiscal years beginning on or after September 15, 2012. The Company does not anticipate that the adoption of ASU 2012-02 will have a material effect on its 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 dollar 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 designed to manage risk in its unsecured consumer loan activities. Collection activities are also an important aspect of the Company’s operations, particularly with respect to its unsecured 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 unsecured 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, 2012

 

     Retail-based
Consumer Loans
     Internet-based
Consumer Loans
     Pawn
Loans
 
     Gross      Allowance      Gross      Allowance     

Performing

   $ 117.6       $ 10.3       $ 88.8       $ 9.5       $ 153.9   

Non-performing

     49.5         36.4         36.0         19.5         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 167.1       $ 46.7       $ 124.8       $ 29.0       $ 153.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2012

 

     Retail-based
Consumer Loans
     Internet-based
Consumer Loans
     Pawn
Loans
 
     Gross      Allowance      Gross      Allowance     

Performing

   $ 127.1       $ 10.1       $ 96.7       $ 9.1       $ 162.9   

Non-performing

     55.4         40.1         43.2         22.1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 182.5       $ 50.2       $ 139.9       $ 31.2       $ 162.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

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

Age Analysis of Past Due Loans Receivable

(in millions)

As of June 30, 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

   $ 14.8       $ 8.7       $ 5.7       $ 28.2       $ 57.4       $ 109.7       $ 167.1       $ 1.9   

Internet-based Consumer Loans

     10.9         6.7         6.0         12.5         36.1         88.7         124.8         —     

Pawn Loans

     —           —           —           —           —           153.9         153.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25.7       $ 15.4       $ 11.7       $ 40.7       $ 93.5       $ 352.3       $ 445.8       $ 1.9   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 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

   $ 16.3       $ 9.1       $ 7.1       $ 31.3       $ 63.8       $ 118.7       $ 182.5       $ 2.3   

Internet-based Consumer Loans

     12.1         7.6         6.2         17.3         43.2         96.7         139.9         —     

Pawn Loans

     —           —           —           —           —           162.9         162.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28.4       $ 16.7       $ 13.3       $ 48.6       $ 107.0       $ 378.3       $ 485.3       $ 2.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Loans Receivable on Nonaccrual Status

(in millions)

As of June 30, 2012

 

Retail-based Consumer Loans

   $ 49.4   

Internet-based Consumer Loans

     36.1   

Pawn Loans

     —     
  

 

 

 

Total

   $ 85.5   
  

 

 

 

As of September 30, 2012

 

Retail-based Consumer Loans

   $ 55.4   

Internet-based Consumer Loans

     43.2   

Pawn Loans

     —     
  

 

 

 

Total

   $ 98.6   
  

 

 

 

 

16


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

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

 

     Three months ended
September 30,
 
     2011     2012  

Allowance for Consumer Loan Losses:

    

Beginning Balance

   $ 52.6      $ 75.7   

Provision for loan losses

     31.8        38.4   

Charge-offs

     (27.3     (42.2

Recoveries

     6.1        7.2   

Effect of foreign currency translation

     (4.1     2.3   
  

 

 

   

 

 

 

Ending Balance

   $ 59.1      $ 81.4   
  

 

 

   

 

 

 

 

3. Acquisitions

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

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.

During fiscal 2012, the Company also completed the acquisition 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 fair value of the identifiable assets acquired. Also during fiscal 2012, the Company completed various smaller acquisitions in the United Kingdom, Sweden and Canada that resulted in an aggregate increase in goodwill of $9.5 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired.

During fiscal 2013, the Company completed various small acquisitions in Canada and the United Kingdom that resulted in an aggregate increase in goodwill of $9.8 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 a majority of the purchase price allocated to goodwill, or in some cases, intangible assets.

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

 

Balance at June 30, 2012

   $ 755.5   

Acquisitions:

  

Various small acquisitions

     9.8   

Foreign currency translation adjustment

     17.8   
  

 

 

 

Balance at September 30, 2012

   $ 783.1   
  

 

 

 

 

17


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

4. Goodwill and Other Intangibles

The changes in the carrying amount of goodwill by reportable segment for the three months ended September 30, 2012 are as follows (in millions):

 

     Europe      Canada      United States      Other      Total  

Balance at June 30, 2012

   $ 336.7       $ 178.7       $ 205.7       $ 34.4       $ 755.5   

Acquisitions

     7.4         2.4         —           —           9.8   

Foreign currency translation adjustments

     11.4         6.4         —           —           17.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30, 2012

   $ 355.5       $ 187.5       $ 205.7       $ 34.4       $ 783.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     June 30,
2012
    September 30,
2012
 

Non-amortizing intangible assets:

    

Goodwill

   $ 755.5      $ 783.1   

Reacquired franchise rights

     53.3        55.2   

DFS MILES Program

     25.4        25.4   

Tradenames

     3.4        3.5   
  

 

 

   

 

 

 
   $ 837.6      $ 867.2   
  

 

 

   

 

 

 

Amortizable intangible assets:

    

Purchased technology

   $ 47.7      $ 49.0   

Various contracts

     41.5        36.4   

Reacquired franchise rights

     5.9        6.2   

Accumulated amortization:

    

Purchased Technology

     (7.1     (7.3

Various contracts

     (21.4     (26.0

Reacquired franchise rights

     (1.4     (1.7
  

 

 

   

 

 

 

Total intangible assets

   $ 902.8      $ 923.8   
  

 

 

   

 

 

 

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.

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 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. Changes in foreign exchange rates period over period impact the carrying value of the indefinite lived reacquired franchise rights.

The fair value of reporting units are estimated using a present value technique using discounted future cash flows, and are corroborated with guideline public company market multiple fair value technique. The most significant assumptions used in the discounted cash flow fair value technique are the business projections used to derive future cash flows and the weighted average cost of capital used to discount such projections. Assumptions in estimating future cash flows are subject to a high degree of judgment, and management considers both specified short term planned strategies such as store expansion, new product offerings, and planned marketing strategies, along with longer term business opportunities and growth projections, based in part on past performance. In

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

selecting the appropriate discount rate to use in the individual discounted cash flow models, management considers factors for each reporting unit such as size, the consistency of its previous performance and the general maturity of the reporting units business, and the projected rate of growth in the cash flow model.

During the three months ended September 30, 2012, the Company performed an interim impairment test of its goodwill, indefinite-lived intangible asset and certain other intangible assets related to its DFS reporting unit. The Company determined there was an interim indicator of impairment as a result of the September 2012 notification of the pending termination, effective September 13, 2014, of its contract with the third-party national bank that principally funds the loans for its Military Installment Loan and Education Services, or MILES®, program. The Company recorded an intangible asset impairment charge of approximately $5.5 million for the three months ended September 30, 2012, as a result of the interim impairment review. The Company is in discussions with potential additional lending partners that would more competitively underwrite these loans. These discussions are in advanced stages, and the Company believes that these new lending arrangements will be in place later this fiscal year.

Additionally, on September 11, 2012, a bill was introduced in the Finland Parliament to restrict the interest rate on loans less than EUR 2,000 to an annual percentage rate of 49% plus the European Central Bank rate. If approved as drafted, this law would significantly restrict the Company’s present Internet-based short-term loan product in Finland.

If the Company is not successful in replacing the current primary lending bank for its MILES loan program, or if the proposed Finnish regulation is passed and the Company is not successful in adding other products in Finland, it is reasonably possible that future goodwill impairment charges could be recognized.

Amortization expense of intangible assets was $4.6 million and $4.7 million for the three months ended September 30, 2011 and 2012, respectively.

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

 

Fiscal Year Ended June 30,

   Amount  

2013

   $ 16.3   

2014

     13.4   

2015

     10.6   

2016

     8.7   

2017

     7.0   
  

 

 

 
   $ 56.0   
  

 

 

 

 

5. Debt

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

 

     June 30,     September 30,  
     2012     2012  

Global Revolving credit facility

   $ 22.0      $ 8.0   

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

     (2.6     (2.5

DFC Global Corp. 3.25% Senior Convertible Notes due 2017

     181.4        183.4   

DFC Global Corp. 2.875% Senior Convertible Notes due 2027

     43.4        44.1   

DFC Global Corp. 3.000% Senior Convertible Notes due 2028

     97.5        99.3   

Scandinavian credit facilities

     62.6        64.6   

Other

     8.3        8.6   
  

 

 

   

 

 

 

Total debt

     1,012.6        1,005.5   
  

 

 

   

 

 

 

Less: current portion of debt

     (73.7     (60.7
  

 

 

   

 

 

 

Long-term debt

   $ 938.9      $ 944.8   
  

 

 

   

 

 

 

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Senior Notes

On December 23, 2009, the Company’s wholly owned indirect Canadian subsidiary, National Money Mart Company (“NMM”), issued $600.0 million aggregate principal amount of its 10.375% Senior Notes due December 15, 2016 (the “2016 Notes”). The 2016 Notes were issued pursuant to an indenture, dated as of December 23, 2009, among NMM, as issuer, and DFC and certain of its direct and indirect wholly owned U.S. and Canadian subsidiaries, as guarantors, and U.S. Bank National Association, as trustee. The 2016 Notes bear interest at the rate of 10.375% per year, payable on June 15 and December 15 of each year, commencing on June 15, 2010. The 2016 Notes will mature on December 15, 2016. Upon the occurrence of certain change of control transactions, NMM will be required to make an offer to repurchase the 2016 Notes at 101% of the principal amount thereof, plus any accrued and unpaid interest to the repurchase date, unless certain conditions are met. At any time prior to December 15, 2012, NMM may redeem up to 35% of the aggregate principal amount of the 2016 Notes at a redemption price of 110.375% of the principal amount of the 2016 Notes redeemed if; (1) such redemption is made with the proceeds of one or more public equity offerings by DFC; (2) at least $390 million in aggregate principal amount of the 2016 Notes remain outstanding immediately after the occurrence of such redemption; and (3) the redemption occurs within 90 days of such public equity offering by DFC. NMM also may redeem some or all of the 2016 Notes at any time prior to December 15, 2013 at a redemption price equal to 100% of the principal amount of the 2016 Notes redeemed plus accrued and unpaid interest, if any, plus a “make-whole” premium defined in the indenture governing the 2016 Notes. On or after December 15, 2013, NMM will have the right to redeem the 2016 Notes, in whole at any time or in part from time to time; (i) at a redemption price of 105.188% of the principal amount thereof if the redemption occurs prior to December 15, 2014; (ii) at a redemption price of 102.594% of the principal amount thereof if the redemption occurs between December 15, 2014 and December 15, 2015; and (iii) at a redemption price of 100% of the principal amount thereof if the redemption occurs after December 15, 2015.

Convertible Notes

Senior Convertible Notes due 2027

On June 27, 2007, DFC issued $200.0 million aggregate principal amount of its 2.875% Senior Convertible Notes due 2027 (the “2027 Notes”). The 2027 Notes were issued under an indenture between DFC and U.S. Bank National Association, as trustee, dated as of June 27, 2007 (the “2027 Indenture”).

In February 2010, DFC repurchased $35.2 million aggregate principal amount of the 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 these repurchase transactions and the privately negotiated exchange transactions described below that were completed in December 2009, $44.8 million aggregate principal amount of 2027 Notes remains outstanding as of June 30, 2012 and September 30, 2012.

The 2027 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. The 2027 Notes mature on June 30, 2027, unless earlier converted, redeemed or repurchased by DFC. Holders of the 2027 Notes may require DFC to repurchase in cash some or all of the 2027 Notes at any time before the 2027 Notes’ maturity following a “fundamental change” (as defined in the 2027 Indenture).

The 2027 Indenture includes a “net share settlement” provision that allows DFC, upon redemption or conversion, to settle the principal amount of the 2027 Notes in cash and the additional conversion value, if any, in shares of DFC’s common stock. Holders of the 2027 Notes may convert their 2027 Notes based at an initial conversion rate of 38.6641 shares per $1,000 principal amount of 2027 Notes, which is equal to an initial conversion price of $25.86 per share, subject to adjustment, prior to stated maturity under the following circumstances:

 

   

during any calendar quarter commencing after September 30, 2007, if the closing sale price of DFC’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last day of the preceding calendar quarter;

 

   

during the five day period following any five consecutive trading day period in which the trading price of the 2027 Notes for each day of such period was less than 98.0% of the product of the closing sale price per share of DFC’s common stock on such day and the conversion rate in effect for the 2027 Notes on each such day;

 

   

if the 2027 Notes are called for redemption; or

 

   

upon the occurrence of specified corporate transactions as described in the 2027 Indenture.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

If a “fundamental change” (as defined in the 2027 Indenture) occurs prior to December 31, 2014 and a holder elects to convert its 2027 Notes in connection with such transaction, DFC will pay a make-whole provision, as defined in the 2027 Indenture.

On or after December 31, 2012, but prior to December 31, 2014, DFC may redeem for cash all or part of the 2027 Notes, if during any period of 30 consecutive trading days ending not later than December 31, 2014, the closing sale price of a share of DFC’s common stock is for at least 120 trading days within such period of 30 consecutive trading days greater than or equal to 120% of the conversion price on each such day. On or after December 31, 2014, DFC may redeem for cash all or part of the 2027 Notes upon at least 30 but not more than 60 days notice before the redemption date by mail to the trustee, the paying agent and each holder of 2027 Notes. The amount of cash paid in connection with each such redemption will be 100% of the principal amount of the 2027 Notes to be redeemed, plus accrued and unpaid interest, including any additional amounts, up to but excluding the redemption date.

Holders have the right to require DFC to purchase all or a portion of the 2027 Notes on each of December 31, 2012, December 31, 2014, June 30, 2017 and June 30, 2022 for a purchase price payable in cash equal to 100% of the principal amount of the 2027 Notes purchased plus any accrued and unpaid interest, up to but excluding the purchase date.

The Company has classified its 2.875% Senior Convertible Notes due 2027 as current, due to the holders of the notes having the right to require DFC to purchase all or a portion of the 2027 Notes on December 31, 2012.

If a “fundamental change” (as defined in the 2027 Indenture) occurs before maturity of the 2027 Notes, holders will have the right, subject to certain conditions, to require DFC to repurchase for cash all or a portion of the 2027 Notes at a repurchase price equal to 100% of the principal amount of the 2027 Notes being repurchased, plus accrued and unpaid interest, including any additional amounts, up to but excluding the date of repurchase.

Senior Convertible Notes due 2028

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”).

The 2028 Notes are general unsecured obligations of DFC and rank equally in right of payment with all of DFC’s other existing and future obligations that are unsecured and unsubordinated. The 2028 Notes accrue 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. The maturity date of the 2028 Notes is April 1, 2028. The 2028 Notes were issued under an indenture between DFC and U.S. Bank National Association, as trustee, dated as of December 21, 2009 (the “2028 Indenture”).

The 2028 Indenture includes a “net share settlement” provision that allows DFC, upon redemption or conversion, to settle the principal amount of the 2028 Notes in cash and the additional conversion value, if any, in shares of DFC’s common stock. Holders of the 2028 Notes may convert their 2028 Notes based at an initial conversion rate of 51.8032 shares per $1,000 principal amount of 2028 Notes, which is equal to an initial conversion price of $19.30 per share, subject to adjustment, prior to stated maturity under the following circumstances:

 

   

during any calendar quarter commencing after December 31, 2009, if the closing sale price of DFC’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last day of the preceding calendar quarter;

 

   

during the five day period following any five consecutive trading day period in which the trading price of the 2028 Notes for each day of such period was less than 98.0% of the product of the closing sale price per share of DFC’s common stock on such day and the conversion rate in effect for the 2028 Notes on each such day;

 

   

if the 2028 Notes are called for redemption;

 

   

at any time on or after December 31, 2026; or

 

   

upon the occurrence of specified corporate transactions as described in the 2028 Indenture.

If a “fundamental change” (as defined in the 2028 Indenture) occurs prior to December 31, 2014 and a holder elects to convert its 2028 Notes in connection with such transaction, DFC will pay a make-whole provision, as defined in the 2028 Indenture.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

On or after April 5, 2015, DFC may redeem for cash all or part of the 2028 Notes upon at least 30 but not more than 60 days notice before the redemption date by mail to the trustee, the paying agent and each holder of 2028 Notes. The amount of cash paid in connection with each such redemption will be 100% of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, including any additional amounts, up to but excluding the redemption date.

Holders of the 2028 Notes have the right to require DFC to purchase all or a portion of the 2028 Notes on each of April 1, 2015, April 1, 2018 and April 1, 2023 for a purchase price payable in cash equal to 100% of the principal amount of the 2028 Notes to be purchased plus any accrued and unpaid interest, up to but excluding the date of purchase.

If a “fundamental change” (as defined in the 2028 Indenture) occurs before the maturity of the 2028 Notes, the holders will have the right, subject to certain conditions, to require DFC to repurchase for cash all or a portion of their 2028 Notes at a repurchase price equal to 100% of the principal amount of the 2028 Notes being repurchased, plus accrued and unpaid interest, up to but excluding the date of repurchase.

Senior Convertible Notes due 2017

On April 16, 2012, DFC issued $230.0 million aggregate principal amount of its senior convertible notes due 2017 (the “2017 Notes”). The 2017 Notes are general unsecured obligations of DFC and rank equally in right of payment with all of DFC’s other existing and future obligations that are unsecured and unsubordinated. The notes bear interest at a rate of 3.25% per annum, payable in cash in arrears on April 15 and October 15 of each year beginning on October 15, 2012. The 2017 Notes were issued under an indenture between DFC and U.S. Bank National Association, as trustee, dated as of April 16, 2012 (the “2017 Indenture”).

The 2017 Indenture includes a “net share settlement” provision that allows DFC, upon redemption or conversion, to settle the principal amount of the 2017 Notes in cash and the additional conversion value, if any, in shares of DFC’s common stock. Holders of the 2017 Notes may convert their 2017 Notes based at an initial conversion rate of 46.8962 shares of common stock per $1,000 principal amount of notes, which is equal to an initial conversion price of $21.32 per share, subject to adjustment, prior to stated maturity under the following circumstances:

 

   

during any calendar quarter commencing after June 30, 2012, if the closing sale price of DFC’s common stock is greater than or equal to 130% of the applicable conversion price for at least 20 trading days in the period of 30 consecutive trading days ending on the last day of the preceding calendar quarter;

 

   

during the five day period following any five consecutive trading day period in which the trading price of the 2017 Notes for each day of such period was less than 98.0% of the product of the closing sale price per share of DFC’s common stock on such day and the conversion rate in effect for the 2017 Notes on each such day;

 

   

at any time on or after October 15, 2016; or

 

   

upon the occurrence of specified corporate transactions as described in the 2017 Indenture.

If a “fundamental change” (as defined in the 2017 Indenture) occurs and a holder elects to convert its 2017 Notes in connection with such transaction, that holder may be entitled to a make-whole premium (as defined in the 2017 Indenture) in the form of an increase in the conversion rate.

If a “fundamental change” (as defined in the 2017 Indenture) occurs before the maturity of the 2017 Notes, the holders will have the right, subject to certain conditions, to require DFC to repurchase for cash all or a portion of their 2017 Notes at a repurchase price equal to 100% of the principal amount of the 2017 Notes being repurchased, plus accrued and unpaid interest, up to but excluding the date of repurchase.

The 2017 Notes are not redeemable at DFC’s option prior to their maturity date.

In connection with the offering of the 2017 Notes, DFC and its primary holding subsidiary in the United Kingdom entered into convertible note hedge transactions in respect of its common stock with affiliates of the initial purchasers of the 2017 Notes, and separate warrant transactions with the option counter parties, which effectively increase the conversion price of the 2017 Notes to $26.45 per share. The convertible note hedge transactions cover the number of shares of common stock required to be issued upon the conversion of the 2017 notes, at a strike price that corresponds to the initial conversion price of the 2017 Notes, subject to adjustment, and are exercisable upon conversion of the 2017 Notes.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

The Company paid $43.8 million and $6.5 million for the convertible note hedge transactions entered into on April 10, 2012 and April 11, 2012. As described in more detail below, these costs were partially offset by the proceeds from the sale of the warrants in separate transactions.

The convertible note hedge transactions are intended generally to reduce the potential dilution to DFC’s common stock upon conversion of the 2017 Notes in the event that the market price per share of the common stock is greater than the strike price.

The convertible note hedge transactions are separate transactions and are not part of the terms of the 2017 Notes. Holders of the 2017 Notes have no rights with respect to the convertible note hedge transactions.

In April 2012, DFC also entered into privately-negotiated warrant transactions with affiliates of the initial purchasers of the 2017 Notes, whereby DFC sold warrants to acquire, subject to customary anti-dilution adjustments, 9,379,240 and 1,406,886 million shares, respectively, of DFC common stock at a strike price of $26.45 per share, also subject to adjustment. As consideration for the warrants, the Company received $26.4 million and $4.0 million, respectively.

If the market value per share of DFC common stock, as measured under the warrants, exceeds the strike price of the warrants at the time the warrants are exercisable, the warrants will have a dilutive effect on the Company’s earnings per share.

The convertible note hedge transactions expire April 15, 2017, or the last day on which any of the 2017 Notes remain outstanding. The warrants expire in daily installments from July 17, 2017 to November 6, 2017. Both the convertible note hedge transactions and the warrant transactions require net-share settlement and are accounted for as equity instruments.

Accounting for Convertible Notes

The Company follows the guidance issued in ASC 470-20, which clarifies the accounting for convertible debt instruments that may be settled in cash (including partial cash settlement) upon conversion. This accounting standard requires issuers of convertible debt that can be settled in cash to separately account for (i.e., bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to stockholders’ equity. The liability portion, which represents the fair value of the debt without the conversion feature, is accreted to its face value using the effective interest method by amortizing the discount between the face amount and the fair value. The amortization is recorded as non-cash interest expense. The Company is required to record the liability portion of the 2027 Notes, the 2028 Notes and the 2017 Notes (collectively, the “Convertible Notes”) at their fair value as of the date of issuance and amortize the discount into interest expense over the life of the Convertible Notes during the periods in which the Notes are outstanding. The Company recorded a discount of $50.3 million to Additional paid-in capital for the 2017 Notes at the time of issuance. As of September 30, 2012, the remaining discount of $0.7 million on the 2027 Notes will be amortized using the effective interest method through December 31, 2012, the remaining discount of $20.7 million on the 2028 Notes similarly will be amortized through April 1, 2015, and the remaining discount of $46.6 million on the 2017 Notes similarly will be amortized through April 15, 2017. There is no effect, however, on the Company’s cash interest payments.

The Company has considered the guidance in the Debt topic of the FASB Codification, and has determined that the Convertible Notes do not contain a beneficial conversion feature, as the fair value of DFC’s common stock on the date of issuance was less than the initial conversion price.

Upon conversion, DFC will have the option to either deliver:

 

  1. cash equal to the lesser of the aggregate principal amount of the Convertible Notes to be converted ($1,000 per note) or the total conversion value; and shares of DFC’s common stock in respect of the remainder, if any, of the conversion value over the principal amount of the Convertible Notes; or

 

  2. shares of DFC’s common stock to the holders, calculated at the initial conversion price which is subject to any of the conversion price adjustments discussed above.

The Company has made a policy election to settle the principal amount of the Convertible Notes in cash. As such, in accordance with the Earnings Per Share topic of the FASB Codification, the Convertible Notes will be excluded from the Company’s calculation of diluted earnings per share. However, any conversion premium associated with the Convertible Notes would have an impact on the Company’s diluted earnings per share.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Credit Facility

Global Revolving Credit Facility

The Company has a senior secured credit facility with a syndicate of lenders, the administrative agent for which is Wells Fargo Bank, National Association. The facility consists of a $235.0 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. Availability under the Global Revolving Credit Facility is based on a borrowing base comprised of cash and consumer loan 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 based on the Company’s consolidated leverage ratio, which as of September 30, 2012 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 (6.25% at September 30, 2012). The Global Revolving Credit Facility matures on March 1, 2015.

The Global Revolving Credit Facility allows for borrowings by DFG, NMM, Dollar Financial U.K. Limited, an indirect U.K. subsidiary of DFC, and Instant Cash Loans Limited, a direct U.K. subsidiary of Dollar Financial U.K. Limited. Borrowings by DFG under the Global Revolving Credit Facility are guaranteed by DFC and certain direct and indirect domestic U.S. subsidiaries of DFC. Borrowings by non-U.S. borrowers under the Global Revolving Credit Facility are guaranteed by DFC and DFG and substantially all of their domestic U.S. subsidiaries, by NMM and substantially all of the Company’s other direct and indirect Canadian subsidiaries, and by Dollar Financial U.K. Limited and Instant Cash Loans Limited. The obligations of the respective borrowers and guarantors under the Global Revolving Credit Facility are secured by substantially all the assets of such borrowers and guarantors.

As of September 30, 2012, $8.0 million was 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 all amounts outstanding within one year.

The senior secured credit agreement governing the global revolving credit facility contains customary covenants, representations and warranties and events of default. As of September 30, 2012, the Company is in compliance with all such covenants.

Scandinavian Credit Facilities

As a result of its December 2010 acquisition of Sefina, the Company assumed borrowings under Sefina’s existing secured credit facilities in Sweden and Finland, consisting of two working capital facilities in Sweden of SEK 185 million and SEK 55 million and overdraft facilities in Sweden and Finland with commitments of up to SEK 85 million and EUR 17.5 million, respectively.

In February 2012, the Company refinanced the Finnish overdraft facility with a new secured credit facility consisting of a revolving credit facility with a commitment of up to EUR 10.75 million, of which EUR 7.9 million (approximately $10.1 million) was outstanding as of September 30, 2012, and a term loan facility of EUR 8.0 million (approximately $10.3 million), all of which was outstanding as of September 30, 2012. The Finnish revolving credit facility expires in February 2014 and has an interest rate of the one month Euribor plus 155 basis points (1.67% at September 30, 2012). The Finnish term loan is due in February 2016, and has an interest rate of the three month Euribor plus 300 basis points (3.25% at September 30, 2012). The Finnish loans are secured by the assets of the Company’s pawn lending operating subsidiary in Finland.

In June 2012, the Company entered into a new secured credit facility which replaces, and refinances the outstanding borrowings under the prior Swedish facilities. The new Swedish credit facility consists of a term loan facility of SEK 240 million (approximately $36.6 million), all of which was drawn at September 30, 2012, and a revolving credit facility of SEK 125 million (approximately $19.0 million at September 30, 2012), of which SEK 50.0 million (approximately $7.6 million) was outstanding as of September 30, 2012. The Swedish term loan is due June 2016 and carries an interest rate of STIBOR plus 300 basis points (4.59% at September 30, 2012). The Swedish revolving credit facility is due June 2014 and carries an interest rate of STIBOR plus 200 basis points (3.59% at September 30, 2012). The Swedish loans are secured primarily by the value of the Company’s pawn pledge stock in Sweden.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Other Debt

Other debt consists of $8.6 million of debt assumed as part of the Suttons and Robertsons acquisition, consisting of a $2.9 million revolving loan and a $5.7 million term loan, all of which matures in November 2012.

Interest Expense

Interest expense, net was $24.5 million and $32.1 million for the three months ended September 30, 2011 and 2012, respectively. Included in interest expense for the three months ended September 30, 2011 and 2012 is approximately $5.1 million and $7.8 million, respectively, of non-cash interest expense related to the amortization of unrealized losses related to the discontinuance of hedge accounting for the Company’s cross currency interest rate swaps, the non-cash interest expense associated with our Convertible Notes and the amortization of various deferred issuance costs.

 

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 a gold collar 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 reflect both its own nonperformance risk and the respective counterparty’s 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 September 30, 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 fiscal year ended June 30, 2012, the Company made contingent consideration payments of $11.9 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. The assumed discount rate was 4.9%. The fair value of the contingent consideration is not significantly affected by changes in the discount rate, due to the short-term nature of the liability. Changes in the fair value of the contingent consideration due to time value are recorded in other operating expenses. As of September 30, 2012, the balance of the contingent consideration was $4.0 million and the assumptions for the valuation did not materially change.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2012, aggregated by the level in the fair value hierarchy within which those measurements fall.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 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
September 30, 2012
 

Assets

           

Derivative financial instruments

   $ —         $ —         $ —         $ —     

Assets held in funded deferred compensation plan

   $ 7.8       $ 5.8       $ —         $ 13.6   

Liabilities

           

Derivative financial instruments

   $ —         $ 36.4       $ —         $ 36.4   

Contingent consideration — Sefina acquisition

   $ —         $ —         $ 4.0       $ 4.0   

The following table reconciles the change in the Level 3 liabilities for the three months ended September 30, 2011 and 2012 (in millions):

 

     Three Months Ended September 30,  
     2011     2012  

Beginning balance

   $ 17.8      $ 4.1   

Changes in fair value of contingent consideration

     —          (0.6

Unrealized foreign exchange (gain) loss on contingent consideration

     (0.9     0.1   

Foreign currency translation adjustment

     (0.5     0.4   
  

 

 

   

 

 

 

Ending balance

   $ 16.4      $ 4.0   
  

 

 

   

 

 

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2012

(in millions)

 

     Balance at
September 30,
2012
     Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
(Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Total Gains
(Losses)
 

DFS bank contract

   $ 1.3       $ —         $ —         $ 1.3       $ (5.5 (1) 

 

(1) In accordance with ASC 360-10, the DFS bank contract intangible asset with an net carrying amount of $6.8 million was written down to its fair value of $1.3 million, resulting in an impairment charge of $5.5 million, which is included in earnings for the period.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

The table below presents the Company’s financial assets and liabilities that are not measured at fair value in the consolidated balance sheets as of June 30, 2012 and September 30, 2012.

Financial Assets and Liabilities Not Measured at Fair Value at June 30, 2012 and September 30, 2012

(in millions)

 

            Estimated Fair Value  
     Carrying Value
June 30, 2012
     Quoted Prices
in Active
Markets for
Identical

Assets and
Liabilities

(Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     June 30, 2012  

Financial assets:

              

Cash and cash equivalents

   $ 224.0       $ 224.0       $ —         $ —         $ 224.0   

Consumer loans, net

     186.6         —           —           186.6         186.6   

Pawn loans

     153.9         —           —           153.9         153.9   

Loans in default

     29.6         —           —           29.6         29.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 594.1       $ 224.0       $ —         $ 370.1       $ 594.1   

Financial liabilities:

              

Global revolving credit facility

   $ 22.0       $ —         $ 22.0       $ —         $ 22.0   

10.375% Senior notes

     600.0         661.5         —           —           661.5   

3.25% Senior convertible notes

     230.0         247.5         —           —           247.5   

2.875% Senior convertible notes

     44.8         46.7         —           —           46.7   

3.00% Senior convertible notes

     120.0         138.0         —           —           138.0   

Scandinavian credit facilities

     62.6         —           62.6         —           62.6   

Other debt

     8.3         —           8.3         —           8.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 1,087.7       $ 1,093.7       $ 92.9       $ —         $ 1,186.6   
            Estimated Fair Value  
     Carrying Value
September 30, 2012
     Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
(Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     September 30, 2012  

Financial assets:

              

Cash and cash equivalents

   $ 220.4       $ 220.4       $ —         $ —         $ 220.4   

Consumer loans, net

     204.6         —           —           204.6         204.6   

Pawn loans

     162.9         —           —           162.9         162.9   

Loans in default

     36.4         —           —           36.4         36.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 624.3       $ 220.4       $ —         $ 403.9       $ 624.3   

Financial liabilities:

              

Global revolving credit facility

   $ 8.0       $ —         $ 8.0       $ —         $ 8.0   

10.375% Senior notes

     600.0         670.5         —           —           670.5   

3.25% Senior convertible notes

     230.0         244.5         —           —           244.5   

2.875% Senior convertible notes

     44.8         45.8         —           —           45.8   

3.00% Senior convertible notes

     120.0         133.0         —           —           133.0   

Scandinavian credit facilities

     64.6         —           64.6         —           64.6   

Other debt

     8.6         —           8.6         —           8.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 1,076.0       $ 1,093.8       $ 81.2       $ —         $ 1,175.0   

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Cash equivalents are defined as short-term, highly liquid investments both readily convertible to known amount of cash and so near maturity that there is insignificant risk of changes in values because of changes in interest rates.

Consumer loans are carried on the consolidated balance sheet net of the allowance for estimated loan losses, which is calculated by applying historical loss rates combined with current collection patterns and current economic trends to the gross consumer loan balance. The unobservable inputs used to calculate the carrying value of consumer loans include historical loss rates and the current collection patterns and current economic trends. Consumer loans generally have terms ranging from 1 to 45 days.

Loans in default consist of unsecured short-term consumer loans originated by the Company which are in default status. An allowance for the defaulted loans receivable is established and is included in the loan loss provision in the period that the loan is placed in default status. The reserve is reviewed monthly and any change to the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic trends is included with the Company’s loan loss provision. If the loans remain in a 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. The unobservable inputs used to calculate the carrying value of loans in default include historical loss rates and the current collection patterns and current economic trends.

Pawn loans are short-term in nature and are secured by the customer’s personal property (“pledge”). Pawn lawns are secured by the customer’s pledged item, which is generally 50% to 80% of the appraised fair value of the pledged item, thus reducing the Company’s exposure to losses on defaulted pawn loans. The Company’s historical redemption rate on pawn loans is in excess of 80%, which means that for more than 80% of its pawn loans, the customer pays back the dollars 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 either sold at auction or sold to a third party in the Company’s retail stores within several weeks of 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 are returned to the customer. The unobservable inputs used to calculate the carrying value of loans in default include historical redemption rates and the current redemption patterns and current economic trends, such as gold prices.

The fair value of the 10.375% Senior notes, the 3.25% Senior convertible notes, the 2.875% Senior Convertible Notes, and the 3.00% Senior convertible notes are based on quoted market prices.

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.

7. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to 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.

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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Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Cash Flow Hedges of Foreign Exchange Risk

Operations in Europe and Canada have exposed the Company to changes in 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 June 30, 2012 and September 30, 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 loss included in stockholders’ equity, and is subsequently reclassifying this amount into earnings as an adjustment to interest expense over the remaining original term of the derivative (October 2012). At September 30, 2012, the balance remaining in accumulated other comprehensive income is $0.6 million ($0.4 million net of tax).

On April 27, 2012, the Company terminated all of its remaining legacy cross-currency interest rate swap agreements originally put in place to hedge the currency and interest rate fluctuations of its previously retired term bank loans. The cash payment to terminate the swaps was $55.7 million. Also on April 27, 2012, the Company entered into new swap agreements to hedge the U.S. Dollar exposure associated with its $600.0 million tranche of senior unsecured notes issued by its Canadian subsidiary. The new swaps eliminate the non-cash mark-to-market volatility that had historically been impacting the income statement as a result of the cross-currency swap instruments that were no longer eligible for cash flow hedge accounting and therefore had their changes in fair value recorded directly in earnings, and lock in the Canadian Dollar and U.S. Dollar exchange value of the notes at maturity. The swaps mature on December 15, 2016. In addition, on April 20, 2012, the Company entered into swap agreements to hedge currency exchange risk related to intercompany transactions stemming from the convertible notes issued in April 2012. The swaps mature on April 12, 2017.

These cross-currency swaps are designated as cash flow hedges of interest payments and principal repayments on its foreign denominated debt due to changes in foreign exchange rates. Because these derivatives are designated as cash flow hedges, the Company records the effective portion of the after-tax gain or loss in other comprehensive income, which is subsequently reclassified to earnings in interest expense as an offset to the accrual of interest expense and in unrealized foreign exchange loss (gain) as an offset to the remeasurement of the foreign loan balances. For the three months ended September 30, 2012, there was no ineffectiveness on these cash flow hedges.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

As of September 30, 2012, the Company had the following outstanding derivatives:

 

Foreign Currency Derivatives    Number of
Instruments
   Pay Notional      Receive Notional      Average
Pay Fixed
Strike Rate
    Average
Receive
Fixed Strike
Rate
 

GBP-USD Cross Currency Swaps

   2    GBP 125,415,438       USD 200,000,000         10.057     9.00

USD-CAD Cross Currency Swaps

   4    CAD 592,231,250       USD 600,000,000         12.445     10.375

Non-designated Hedges of Commodity Risk

In the normal course of business, the Company maintains inventories of gold at its pawn and retail 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 September 30, 2012, the Company’s subsidiary in the United Kingdom had the following outstanding derivatives:

 

Commodity Options

   Number of
Instruments
   Notional (ounces
of gold bullion)
     Floor Price    Cap Price

Gold Collars (XAU/GBP)

   5      7,100       £850-875    £1,168-1,222

The tables below present the fair values of the Company’s derivative financial instruments on the consolidated balance sheet as of June 30, 2012 and September 30, 2012 (in millions).

 

Tabular Disclosure of Fair Values of Derivative Instruments  
    

Asset Derivatives

As of June 30, 2012

    

Liability Derivatives

As of June 30, 2012

 
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives designated as hedging instruments:

           

Cross Currency Swaps

   Derivatives    $ —         Derivatives    $ 11.2   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity Options

   Derivatives    $ —         Derivatives    $ —     
     

 

 

       

 

 

 
    

Asset Derivatives

As of September 30, 2012

    

Liability Derivatives

As of September 30, 2012

 
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives designated as hedging instruments:

           

Cross Currency Swaps

   Derivatives    $ —         Derivatives    $ 36.4   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity Options

   Derivatives    $ —         Derivatives    $ 0.1   
     

 

 

       

 

 

 

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

The table below presents the effect of the Company’s derivative financial instruments designated as cash flow hedges on the consolidated statement of operations for the three months ending September 30, 2012 (in millions).

 

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ending
September 30, 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)
 

Cross Currency Swaps

   $ (28.7  

Interest Expense

   $ (4.1
    

Unrealized foreign exchange gain (loss)

     (26.9
  

 

 

      

 

 

 

Total

   $ (28.7      $ (31.0
  

 

 

      

 

 

 

As of September 30, 2012, the Company anticipates reclassifying approximately $15.1 million of losses from accumulated other comprehensive loss to earnings during the next twelve months, including the $0.6 million associated with the cross-currency swaps on which cash flow hedge accounting was discontinued.

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.

As of September 30, 2012, the termination value of derivatives is a net liability position of $43.8 million. This amount includes accrued interest but excludes any adjustment for non-performance risk.

The table below presents the effect of the Company’s derivative financial instruments not designated as hedges on the consolidated statement of operations for the three months ending September 30, 2011 and 2012 (in millions).

 

Derivatives Not Designated as Hedging
Instruments

  

Location of Gain or (Loss) Recognized in
Income on Derivative

   Amount of Gain or (Loss) Recognized
in Income on Derivative
 
          2011     2012  

Commodity Options

  

Purchased gold costs

   $ (0.8   $ —     

Cross Currency Swaps

  

Interest expense

     (1.7 ) (1)      (1.6 ) (1) 
  

Income tax provision

     0.4  (1)      0.4  (1) 
  

Loss (gain) on derivatives not designated as hedges

     20.8        —     
     

 

 

   

 

 

 

Total

      $ 18.7      $ (1.2
     

 

 

   

 

 

 

 

(1) Amounts reclassified out of accumulated other comprehensive income

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

8. Income Taxes

Income Tax Provision

The provision for income taxes was $10.9 million for the three months ended September 30, 2011 compared to a provision of $8.8 million for the three months ended September 30, 2012. The Company’s effective tax rate was 122.1% for the three months ended September 30, 2011 and was 50.8% for the three months ended September 30, 2012. The decrease in the effective tax rate for the three months ended September 30, 2012 as compared to the prior year was primarily a result of the tax treatment of the unrealized foreign currency exchange losses in Canada for the three months ended September 30, 2011. 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 September 30, 2012, the Company maintained deferred tax assets of $132.0 million, which is offset by a valuation allowance of $89.4 million, which represents a decrease of $4.7 million in the net deferred tax asset during the three months ended September 30, 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, 2012

   $ 132.0      $ 84.7       $ 47.3   

U.S. increase/(decrease)

     3.0        4.7         (1.7

Foreign increase/(decrease)

     (3.0     —           (3.0
  

 

 

   

 

 

    

 

 

 

Balance at September 30, 2012

   $ 132.0      $ 89.4       $ 42.6   
  

 

 

   

 

 

    

 

 

 

The $132.0 million in deferred tax assets consists of $56.4 million related to net operating losses and other temporary differences, $56.7 million related to foreign tax credits, and $18.9 million in foreign deferred tax assets. At September 30, 2012, U.S. deferred tax assets related to net operating losses and other temporary differences were reduced by a valuation allowance of $56.4 million, which reflects an increase of $3.1 million during the period. The net operating loss carry forward at both June 30, 2012 and September 30, 2012 was $65.4 million. The U.S. federal net operating loss carry forwards will begin to expire in 2025, if not utilized. Included in the net operating loss carry forwards is $2.5 million of potential tax benefits that, if realized, would be an increase to additional paid-in capital. The Company has foreign tax credit carry forwards of approximately $56.7 million, which will begin to expire in 2017 if not utilized. Included in the foreign tax credit carry forwards is $3.9 million of potential tax benefits that, if realized, would be an increase to additional paid-in capital. 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 “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 is also fully offset by a valuation allowance of $56.7 million. Additionally, the Company maintains foreign deferred tax assets in the amount of $18.9 million, which is not offset by a valuation allowance.

At June 30, 2012, the Company had unrecognized tax benefit reserves related to uncertain tax positions of $16.1 million, primarily related to transfer pricing matters which, if recognized, would decrease the effective tax rate. At September 30, 2012, the Company had $19.4 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 2012 remain open to examination by the taxing authorities in the United States and the United Kingdom, tax years ending June 30, 2006 through 2012 for Canada, and tax years 2006 through 2012 for Sweden and Finland. On September 5, 2012, the Canada Revenue Agency (“CRA”) issued assessment letters for National Money Mart Company related to tax fiscal years ending June 30, 2008 and 2009. Similar to the CRA assessments for 2006 and 2007, the Company has not agreed with the proposed transfer pricing adjustments and is contesting them through the administrative process.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

9. 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 the liability with respect to a matter 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 filed motions to enforce the arbitration clause and to stay the actions. In October 2012, NMM learned that the court had denied the motions and NMM is considering an appeal of that ruling. 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 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 September 30, 2012, an aggregate of approximately CAD 33.2 million is included in the Company’s accrued expenses and other 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 19.6 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 September 30, 2012 and additional accruals may be required in the future.

Other Canadian Litigation

In 2006, two former employees 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

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

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 September 30, 2012, $5.7 million is included in accrued expenses and other liabilities relating to the settlement agreement, including an increase of approximately $2.7 million during the three months ended September 30, 2012 relating to increased claim submissions by eligible customers.

 

10. Segment Information

The Company classifies its businesses into three reportable segments: Europe, Canada and the United States. 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 within 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 reportable segment includes the Company’s operating segments in the United Kingdom, the Sefina business (acquired in December 2010) in Sweden and Finland, the Risicum Oyj business (acquired in July 2011) in Finland and Sweden, the 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 the United States.

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

(In millions)

 

     Europe      Canada     United States     Other     Total  

As of and for the three months ended September 30, 2011

           

Total assets

   $ 835.9       $ 425.0      $ 263.8      $ 148.9      $ 1,673.6   

Goodwill and other intangibles, net

     390.1         220.1        206.1        105.9        922.2   

Sales to unaffiliated customers:

           

Consumer lending

     93.3         47.1        16.6        —          157.0   

Check cashing

     7.4         20.3        8.5        —          36.2   

Pawn service fees and sales

     20.8         —          —          —          20.8   

Money transfer fees

     2.5         5.8        1.3        —          9.6   

Gold sales

     10.7         3.8        1.4        —          15.9   

Other

     7.8         7.5        3.2        3.6        22.1   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total sales to unaffiliated customers

     142.5         84.5        31.0        3.6        261.6   

Provision for loan losses

     23.9         5.2        2.7        —          31.8   

Depreciation and amortization

     6.7         2.2        0.6        2.1        11.6   

Interest expense, net

     4.6         17.7        —          2.2        24.5   

Unrealized foreign exchange loss (gain)

     0.4         42.3        (0.1     (0.2     42.4   

Gain on derivatives not designated as hedges

     —           (20.8     —          —          (20.8

Provision for litigation settlements

     —           0.1        3.9        —          4.0   

Loss on store closings

     —           0.1        —          —          0.1   

Other expense (income), net

     0.6         (1.1     —          0.6        0.1   

Income (loss) before income taxes

     24.9         (8.9     2.7        (9.8     8.9   

Income tax provision

     8.3         1.6        1.0        —          10.9   

(In millions)

 

     Europe     Canada     United States      Other     Total  

As of and for the three months ended September 30, 2012

           

Total assets

   $ 967.7      $ 461.4      $ 264.6       $ 124.7      $ 1,818.4   

Goodwill and other intangibles, net

     409.5        241.3        206.1         66.9        923.8   

Sales to unaffiliated customers:

           

Consumer lending

     110.4        50.9        17.3         —          178.6   

Check cashing

     6.6        18.6        7.5         —          32.7   

Pawn service fees and sales

     19.7        —          —           —          19.7   

Money transfer fees

     2.8        5.5        1.2         —          9.5   

Gold sales

     10.6        2.7        0.9         —          14.2   

Other

     9.9        6.9        3.3         1.9        22.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total sales to unaffiliated customers

     160.0        84.6        30.2         1.9        276.7   

Provision for loan losses

     30.5        4.9        3.0         —          38.4   

Depreciation and amortization

     7.9        2.3        0.6         2.4        13.2   

Interest expense, net

     9.5        19.8        —           2.8        32.1   

Intangible asset impairment charge

     —          —          —           5.5        5.5   

Unrealized foreign exchange gain

     (0.6     (0.5     —           —          (1.1

Provision for litigation settlements

     —          —          2.7         —          2.7   

Loss on store closings

     0.3        —          0.1         —          0.4   

Other expense (income), net

     0.4        (0.6     —           —          (0.2

Income (loss) before income taxes

     16.7        11.0        3.1         (13.6     17.2   

Income tax provision

     3.3        3.6        1.9         —          8.8   

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

11. 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 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 any 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 applicable law 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, 2012 and September 30, 2012 and the condensed consolidating statements of operations and cash flows for the three months ended September 30, 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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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Consolidating Condensed Balance Sheets

June 30, 2012

(In millions)

 

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

Current Assets

               

Cash and cash equivalents

   $ 0.3       $ 96.2       $ 35.2       $ 92.3      $ —        $ 224.0   

Consumer loans, net

     —           37.9         22.9         125.8        —          186.6   

Pawn loans

     —           0.3         —           153.6        —          153.9   

Loans in default, net

     —           3.9         0.4         25.3        —          29.6   

Other receivables

     0.3         7.9         4.5         21.3        —          34.0   

Prepaid expenses and other current assets

     —           5.6         8.3         36.1        —          50.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     0.6         151.8         71.3         454.4        —          678.1   

Deferred tax asset, net of valuation allowance

     —           20.5         —           1.3        —          21.8   

Intercompany receivables

     582.9         —           —           —          (582.9     —     

Property and equipment, net

     —           30.8         19.5         70.3        —          120.6   

Goodwill and other intangibles, net

     —           230.7         279.9         392.2        —          902.8   

Debt issuance costs, net

     7.4         11.9         1.8         1.1        —          22.2   

Investment in subsidiaries

     195.7         457.1         124.3         —          (777.1     —     

Other

     —           0.8         20.2         —          —          21.0   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Assets

   $ 786.6       $ 903.6       $ 517.0       $ 919.3      $ (1,360.0   $ 1,766.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Current Liabilities

               

Accounts payable

   $ 0.6       $ 16.5       $ 14.9       $ 20.1      $ —        $ 52.1   

Income taxes payable

     —           —           1.4         14.3        —          15.7   

Accrued expenses and other liabilities

     2.4         29.2         34.5         33.8        —          99.9   

Current portion of long-term debt

     43.4         —           22.0         8.3        —          73.7   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current liabilities

     46.4         45.7         72.8         76.5        —          241.4   

Fair value of derivatives

     —           6.9         —           4.3        —          11.2   

Long-term deferred tax liability

     —           16.4         31.2         14.7        —          62.3   

Long-term debt

     278.9         597.4         —           62.6        —          938.9   

Intercompany payables

     —           21.7         192.7         368.5        (582.9     —     

Other non-current liabilities

     —           25.5         21.1         5.9        —          52.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     325.3         713.6         317.8         532.5        (582.9     1,306.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Mandatorily redeemable preferred shares

     —           —           —           58.3        (58.3     —     

Total DFC Global Corp. stockholders’ equity

     461.3         190.0         199.2         329.6        (718.8     461.3   

Non-controlling interest

     —           —           —           (1.1     —          (1.1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     461.3         190.0         199.2         328.5        (718.8     460.2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 786.6       $ 903.6       $ 517.0       $ 919.3      $ (1,360.0   $ 1,766.5   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Consolidating Condensed Statements Of Operations

Three Months ended September 30, 2011

(In millions)

 

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

Revenues:

  

Consumer lending

   $ —        $ 47.1      $ 16.6      $ 93.3      $ —        $ 157.0   

Check cashing

     —          20.3        8.5        7.4        —          36.2   

Other

     —          17.1        9.5        41.8        —          68.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          84.5        34.6        142.5        —          261.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Salaries and benefits

     —          16.8        12.5        24.5        —          53.8   

Provision for loan losses

     —          5.2        2.7        23.9        —          31.8   

Occupancy

     —          5.3        3.3        6.4        —          15.0   

Purchased gold costs

     —          2.1        0.8        9.2        —          12.1   

Depreciation

     —          1.4        0.7        3.1        —          5.2   

Other

     —          10.9        5.7        30.4        —          47.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          41.7        25.7        97.5        —          164.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     —          42.8        8.9        45.0        —          96.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

            

Corporate expenses

     —          5.7        19.3        6.1        —          31.1   

Intercompany charges

     —          7.0        (12.1     5.1        —          —     

Other depreciation and amortization

     —          0.7        2.1        3.6        —          6.4   

Interest expense (income), net

     3.5        17.8        (1.3     4.5        —          24.5   

Unrealized foreign exchange loss (gain)

     —          42.3        (0.3     0.4        —          42.4   

Gain on derivatives not designated as hedges

     —          (20.8     —          —          —          (20.8

Provision for litigation settlements

     —          0.1        3.9        —          —          4.0   

Loss on store closings

     —          0.1        —          —          —          0.1   

Other (income) expense, net

     —          (0.3     (0.1     0.5        —          0.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (3.5     (9.8     (2.6     24.8        —          8.9   

Income tax provision

     —          1.6        1.0        8.3        —          10.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (3.5     (11.4     (3.6     16.5        —          (2.0

Less: Net loss attributable to non-controlling interests

     —          —          —          (0.2     —          (0.2

Equity in net (loss) income of subsidiaries:

            

National Money Mart Company

     (11.4     —          —          —          11.4        —     

Guarantors

     (3.6     —          —          —          3.6        —     

Non-guarantors

     16.7        —          —          —          (16.7     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to DFC Global Corp.

   $ (1.8   $ (11.4   $ (3.6   $ 16.7      $ (1.7   $ (1.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Consolidating Condensed Statements Of Cash Flows

Three Months Ended September 30, 2011

(In millions)

 

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

Cash flows from operating activities:

  

Net income (loss)

  $ (1.8   $ (11.4   $ (3.6   $ 16.5      $ (1.7   $ (2.0

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

           

Undistributed income of subsidiaries

    (1.7     —          —          —          1.7        —     

Depreciation and amortization

    —          2.8        3.0        7.1        —          12.9   

Change in fair value of derivatives not designated as hedges

    —          (25.5     —          0.2          (25.3

Provision for loan losses

    —          5.2        2.7        23.9        —          31.8   

Non-cash stock compensation

    1.0        —          —          —          —          1.0   

Unrealized foreign exchange loss (gain)

    —          42.3        (0.3     0.4        —          42.4   

Deferred tax (benefit) provision

    —          (2.7     1.4        2.3        —          1.0   

Accretion of debt discount and deferred issuance costs

    2.2        1.7        —          0.1        —          4.0   

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

           

Increase in pawn loan fees and service charges receivable

    —          —          —          (1.9     —          (1.9

Increase in finance and service charges receivable

    —          (1.4     (0.2     (3.4     —          (5.0

Decrease (increase) in other receivables

    —          6.9        —          (1.3     —          5.6   

Increase in prepaid expenses and other

    —          (0.5     (1.3     (1.1     —          (2.9

Increase (decrease) in accounts payable, accrued expenses and other liabilities

    0.6        0.2        (3.3     8.6        —          6.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

    0.3        17.6        (1.6     51.4        —          67.7   

Cash flows from investing activities:

           

Net increase in consumer loans

    —          (5.2     (1.3     (28.7     —          (35.2

Originations of pawn loans

    —          —          —          (48.8     —          (48.8

Repayment of pawn loans

    —          —          —          41.2        —          41.2   

Acquisitions, net cash acquired

    —          (2.6     —          (56.6     —          (59.2

Additions to property and equipment

    —          (3.4     (4.0     (6.8     —          (14.2

Net (increase) decrease in due from affiliates

    (0.9     (9.7     3.7        6.9        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (0.9     (20.9     (1.6     (92.8     —          (116.2

Cash flows from financing activities:

           

Proceeds from exercise of stock options

    1.5        —          —          —          —          1.5   

Net increase in revolving credit facilities

    —          —          11.0        59.4        —          70.4   

Payment of acquisition installment payments

    —          —          —          (5.2     —          (5.2

Payment of debt issuance and other costs

    (0.2     0.1        —          —          —          (0.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    1.3        0.1        11.0        54.2        —          66.6   

Effect of exchange rate changes on cash and cash equivalents

    —          (7.9     —          (2.7     —          (10.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    0.7        (11.1     7.8        10.1        —          7.5   

Cash and cash equivalents balance-beginning of period

    —          95.2        23.2        70.6        —          189.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents balance-end of period

  $ 0.7      $ 84.1      $ 31.0      $ 80.7      $ —        $ 196.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

DFC GLOBAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS– (Continued)

 

Consolidating Condensed Balance Sheets

September 30, 2012

(In millions)

 

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

Current Assets

               

Cash and cash equivalents

   $ —         $ 95.6       $ 31.6       $ 93.2      $ —        $ 220.4   

Consumer loans, net

     —           40.5         26.0         138.1        —          204.6   

Pawn loans, net

     —           0.4         —           162.5        —          162.9   

Loans in default, net

     —           5.5         0.6         30.3        —          36.4   

Other receivables

     0.3         8.3         3.5         13.5        —          25.6   

Prepaid expenses and other current assets

     —           6.2         9.1         42.0        —          57.3   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total current assets

     0.3         156.5         70.8         479.6        —          707.2   

Deferred tax asset, net of valuation allowance

     —