10-Q 1 d724100d10q.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2014

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, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer, accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one):

 

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

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

As of May 9, 2014, 38,635,364 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, 2013 and March 31, 2014 (unaudited)      3   
  

Interim Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2013 and 2014

     4   
  

Interim Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended March 31, 2013 and 2014

     5   
  

Interim Unaudited Consolidated Statements of Stockholders’ Equity as of June  30, 2013 and March 31, 2014

     6   
  

Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2013 and 2014

     7   
   Notes to Interim Unaudited Consolidated Financial Statements      8   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      54   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      83   

Item 4.

   Controls and Procedures      85   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      86   

Item 1A.

   Risk Factors      86   

Item 2.

   Unregistered Purchases of Equity Securities and Use of Proceeds      89   

Item 3.

   Defaults Upon Senior Securities      89   

Item 4.

   Mine Safety Disclosures      89   

Item 5.

   Other Information      90   

Item 6.

   Exhibits      91   

Signature

     92   

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

  

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

  

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

  

Section 1350 Certification of Chief Executive Officer

  

Section 1350 Certification of Executive Vice President and Chief Financial Officer

  

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

  

 

2


Table of Contents

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

DFC GLOBAL CORP.

INTERIM CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share amounts)

 

     June 30,
2013
    March 31,
2014
 
           (unaudited)  
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 196.2      $ 236.9   

Consumer loans, net:

    

Consumer loans

     229.9        220.2   

Less: Allowance for consumer loan losses

     (39.7     (45.4
  

 

 

   

 

 

 

Consumer loans, net

     190.2        174.8   

Pawn loans, net of an allowance of $6.5 and $2.8

     154.4        153.4   

Loans in default, net of an allowance of $69.6 and $93.4

     31.2        25.5   

Other receivables

     30.2        35.4   

Prepaid expenses and other current assets

     56.6        51.0   

Current deferred tax asset

     4.9        1.5   
  

 

 

   

 

 

 

Total current assets

     663.7        678.5   

Fair value of derivatives

     31.2        —     

Property and equipment, net of accumulated depreciation of $185.7 and $210.4

     122.8        127.6   

Goodwill and other intangibles, net

     866.4        766.6   

Debt issuance costs, net of accumulated amortization of $14.8 and $12.8

     16.6        15.3   

Other

     21.0        23.6   
  

 

 

   

 

 

 

Total Assets

   $ 1,721.7      $ 1,611.6   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current Liabilities

    

Accounts payable

   $ 52.7      $ 39.4   

Income taxes payable

     17.7        24.7   

Accrued expenses and other liabilities

     93.2        100.6   

Current portion of long-term debt

     67.0        92.7   

Current deferred tax liability

     —          0.5   
  

 

 

   

 

 

 

Total current liabilities

     230.6        257.9   

Fair value of derivatives

     —          12.5   

Long-term deferred tax liability

     49.8        47.0   

Long-term debt

     975.0        951.7   

Other non-current liabilities

     35.6        30.7   

Stockholders’ equity:

    

Common stock, $.001 par value: 100,000,000 shares authorized; 40,112,266 shares and 38,635,364 shares issued and outstanding at June 30, 2013 and March 31, 2014, respectively

     —          —     

Additional paid-in capital

     447.3        433.4   

Accumulated deficit

     (1.5     (159.0

Accumulated other comprehensive (loss) income

     (15.1     37.4   
  

 

 

   

 

 

 

Total stockholders’ equity

   $ 430.7      $ 311.8   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 1,721.7      $ 1,611.6   
  

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share amounts)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2013     2014     2013     2014  

Revenues:

        

Consumer lending

   $ 181.7      $ 159.2      $ 549.8      $ 498.8   

Check cashing

     31.9        28.9        97.4        89.6   

Pawn service fees and sales

     21.4        24.0        62.8        70.8   

Money transfer fees

     8.4        8.2        27.9        26.1   

Gold sales

     17.8        8.6        51.0        31.3   

Other

     22.4        19.4        64.3        55.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     283.6        248.3        853.2        772.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries and benefits

     61.3        63.6        181.0        187.4   

Provision for loan losses

     49.7        44.2        128.2        148.4   

Occupancy

     17.6        19.0        51.4        55.8   

Purchased gold costs

     15.3        7.8        40.4        28.3   

Advertising

     18.5        15.1        50.4        45.3   

Depreciation

     6.5        6.7        19.9        19.6   

Maintenance and repairs

     4.6        5.4        13.3        15.7   

Bank charges and armored carrier service

     5.9        5.7        17.5        16.2   

Returned checks, net and cash shortages

     2.6        2.7        7.5        7.4   

Other

     28.7        25.8        76.9        72.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     210.7        196.0        586.5        596.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     72.9        52.3        266.7        175.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

        

Corporate expenses

     27.9        25.9        91.4        77.1   

Other depreciation and amortization

     6.1        4.4        18.8        12.7   

Interest expense, net

     28.4        27.1        91.3        85.0   

Goodwill and other intangible assets impairment charge

     31.1        127.3        36.6        127.3   

Unrealized foreign exchange loss

     2.1        18.6        0.4        8.3   

Provision for litigation settlements

     —          0.1        2.7        0.1   

Loss on store closings

     0.3        0.3        0.9        0.3   

Other expense, net

     12.7        1.5        12.3        2.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (35.7     (152.9     12.3        (138.2

Income tax provision

     0.7        6.2        20.6        19.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (36.4     (159.1     (8.3     (157.5

Less: Net loss attributable to non-controlling interests

     —          —          (0.2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to DFC Global Corp.

   $ (36.4   $ (159.1   $ (8.1   $ (157.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to DFC Global Corp.:

        

Basic

   $ (0.86   $ (4.08   $ (0.19   $ (4.00

Diluted

   $ (0.86   $ (4.08   $ (0.19   $ (4.00

Weighted average shares outstanding:

        

Basic

     42,132,520        38,960,472        42,819,974        39,394,628   

Diluted

     42,132,520        38,960,472        42,819,974        39,394,628   

See notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2013     2014     2013     2014  

Net loss

   $ (36.4   $ (159.1   $ (8.3   $ (157.5

Other comprehensive (loss) income

        

Foreign currency translation adjustment, net (1)

     (22.3     6.8        (5.9     47.9   

Fair value adjustments of derivatives, net (2)

     5.3        0.3        7.2        4.2   

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

     —          0.4        1.6        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (17.0     7.5        2.9        52.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

     (53.4     (151.6     (5.4     (105.0

Net loss applicable to non-controlling interests

     —          —          (0.2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to DFC Global Corp.

   $ (53.4   $ (151.6   $ (5.2   $ (105.0
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net of $0.8 million and $1.6 million of tax for the three and nine months ended March 31, 2014, respectively.
(2) Net of $(0.4) million and $0.0 million of tax for the three months ended March 31, 2013 and March 31, 2014, respectively. For the nine months ended March 31, 2013 and March 31, 2014, the tax was $1.1 million and $1.2 million, respectively.
(3) Net of $0.0 million and $0.1 million of tax for the three months ended March 31, 2013 and March 31, 2014, respectively. For the nine months ended March 31, 2013 and March 31, 2014, the tax was $0.6 million and $0.1 million, respectively.

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
    Accumulated
Other
Comprehensive
(Loss) Income
    Total
Stockholders’
Equity
 
     Shares     Amount           

Balance, June 30, 2013

     40,112,266      $ —         $ 447.3      $ (1.5   $ (15.1   $ 430.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

             

Net loss

            (157.5       (157.5

Other comprehensive income

              52.5        52.5   
             

 

 

 

Total comprehensive loss

                (105.0

Restricted stock grants

     283,248              

Stock options exercised

     53,722           0.4            0.4   

Vested portion of granted restricted stock and restricted stock units

          5.0            5.0   

Repurchase of common stock

     (1,712,365        (21.5         (21.5

Retirement of common stock

     (101,507           

Other stock compensation

          2.2            2.2   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     38,635,364      $ —         $ 433.4      $ (159.0   $ 37.4      $ 311.8   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

     Nine Months Ended
March 31,
 
     2013     2014  

Cash flows from operating activities:

    

Net loss

   $ (8.3   $ (157.5

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

    

Depreciation and amortization

     43.4        36.5   

Goodwill and other intangible assets impairment charges

     36.6        127.3   

Provision for loan losses

     128.2        148.4   

Non-cash stock compensation

     7.9        7.2   

Gain on sale of subsidiary

     —          (1.6

Loss on disposal of fixed assets

     4.0        0.3   

Unrealized foreign exchange loss

     0.4        8.3   

Deferred tax benefit

     (1.7     (2.3

Accretion of debt discount and deferred issuance costs

     15.8        13.5   

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

    

(Increase) decrease in pawn loan fees and service charges receivable

     (2.2     0.2   

Increase in finance and service charges receivable

     (18.8     (21.9

Increase in other receivables

     (1.3     (8.2

(Increase) decrease in prepaid expenses and other

     (0.2     7.0   

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

     11.3        (5.4
  

 

 

   

 

 

 

Net cash provided by operating activities

     215.1        151.8   

Cash flows from investing activities:

    

Net increase in consumer loans

     (120.3     (81.9

Originations of pawn loans

     (225.7     (230.6

Repayment of pawn loans

     219.3        239.2   

Acquisitions, net of cash acquired

     (25.1     (26.3

Additions to property and equipment

     (32.7     (25.5

Proceeds from sale of subsidiary, net of cash disposed

     —          7.2   
  

 

 

   

 

 

 

Net cash used in investing activities

     (184.5     (117.9

Cash flows from financing activities:

    

Proceeds from the exercise of stock options

     1.1        0.4   

Proceeds from termination of cross currency swaps

     —          38.8   

Net decrease in revolving credit facilities

     (5.0     (4.5

Repayment of long-term debt

     —          (10.0

Repurchase of common stock

     (30.1     (21.5

Purchase of 2.875% Senior Convertible Notes due 2027

     (8.6     —     

Payment of acquisition installment payments and contingent consideration

     (3.9     —     

Payment of debt issuance and other costs

     (0.2     (3.0
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (46.7     0.2   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (0.6     6.6   
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (16.7     40.7   

Cash and cash equivalents at beginning of period

     224.0        196.2   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 207.3      $ 236.9   
  

 

 

   

 

 

 

See accompanying notes to interim unaudited consolidated financial statements.

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements are of DFC Global Corp. (“DFC”) and its wholly owned and majority owned subsidiaries (collectively with DFC, the “Company”). DFC is the parent company of Dollar Financial Group, Inc. (“DFG”). The activities of DFC consist primarily of its investment in DFG. DFC has no employees or operating activities. The Company’s unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements in DFC’s Annual Report on Form 10-K (File No. 0-50866) for the fiscal year ended June 30, 2013 filed with the Securities and Exchange Commission on August 29, 2013. In the opinion of management, all adjustments of a normal recurring nature 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 1,535 locations (of which 1,525 are company owned) operating principally as The Money Shop®, Money Mart®, InstaCheques®, Suttons & Robertsons®, The Check Cashing Store®, Sefina®, Helsingin PanttiSM, Super Efectivo®, MoneyNow!®, Express Credit Amanet® and Monte Caja Oro® in the United Kingdom, Canada, the United States, Sweden, Finland, Poland, Spain, Romania 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 short-term consumer loans in the United Kingdom primarily under the brand names Payday UK® and Payday Express®, in Canada under the kyzoo and paydayloan.caSM brand names, and primarily under the OK Money brand name in the Czech Republic, Spain, Sweden and Poland (where we also offer a product branded kyzoo). The Company offers longer term unsecured loans in Poland through in-home servicing under the trade name Optima®, an installment loan in the United Kingdom branded as Ladder Loans®, and a consumer line of credit in Finland offered by DFC Nordic Oyj. In addition, the Company’s DFS subsidiary provides fee-based services to enlisted military personnel applying for loans to purchase new and used vehicles that are funded and serviced primarily under an agreement with a third-party lender through its branded Military Installment Loan and Education Services, or MILES®, program.

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

As discussed in Note 14, on April 1, 2014, the Company entered into an Agreement and Plan of Merger pursuant to which, upon the terms and subject to the conditions therein, LSF8 Sterling Merger Company, LLC (“Merger Sub”), a wholly owned subsidiary of LSF8 Sterling Parent, LLC (“Parent”), will merge with and into DFC Global Corp. (the “Merger”), with DFC Global Corp. being the surviving corporation and a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of Lone Star Funds.

Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of common stock of the Company (other than shares (i) held in treasury by the Company, (ii) owned by Parent, Merger Sub, the Company or any subsidiary of the Company, or (iii) held by any holder who has not voted in favor of the Merger and who is entitled to demand and properly demands appraisal of such shares pursuant to the Delaware General Corporation Law) that is outstanding immediately prior to the Effective Time shall be cancelled and converted automatically into the right to receive $9.50 per share in cash, without interest (the “Merger Consideration”). Furthermore, upon the change in control, substantially all of the Company’s outstanding indebtedness becomes payable and due.

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 and pawn 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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Reclassifications

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

Note 13—Subsidiary Guarantor Financial Information has been corrected in order to revise the presentation in the consolidating condensed statements of cash flows for the nine months ended March 31, 2013 to reflect intercompany activity, which had previously been included in cash flows from investing activities, as cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company. All intercompany transactions and balances have been eliminated in consolidation. The Company’s investments in 50% or less owned joint ventures are accounted for by the equity method of accounting. Such investments are not significant to the Company’s consolidated results of operations, financial position or cash flows.

Revenue Recognition

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

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 Allowance Policy.”

Secured pawn loans are offered at most of the Company’s retail financial services locations in the United Kingdom, Poland, Sweden, Finland, Spain and Romania, as well as certain of its U.S. and Canadian stores. 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 be sold. 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 lender. 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 consolidated balance sheets in consumer loans, net. Consumer loans, net are reported net of a reserve as described below in “Consumer Loan Loss Allowance 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, typically 180 days, an allowance for the entire amount of the loan is recorded and the receivable is charged off.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consumer Loan Loss Allowance

The Company maintains a loan loss allowance for estimated losses for unsecured consumer loans. To estimate the appropriate level of loan loss allowance, 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. Management also considers internal and external factors such as the regulatory environment, credit quality trends, underwriting and collection practices and other risks as necessary to estimate credit losses in the portfolio. Such qualitative factors are used to reflect changes in the loan portfolios collectability characteristics not captured by historical loss data. As these conditions change, the Company may need to record 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 charged off. Recoveries on loans that were completely charged off are credited to the allowance when collected.

During fiscal year 2013, the Office of Fair Trading (“OFT”) announced significant proposed changes to marketing, rollover and collection practices which have had and, together with any new changes required by the Financial Conduct Authority, which will assume regulatory oversight from the OFT in April 2014, are expected to have a significant impact on the Company’s short-term loan portfolio within its United Kingdom businesses. The Company’s allowance for loan losses as of March 31, 2014 has been calculated to reflect management’s best estimate and judgment of the likely impact of these changes on probable loan losses. However, these estimates are inherently uncertain, especially given that these regulatory changes have only recently been implemented by the Company. As the ultimate impact of these regulatory actions and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from the Company’s additional experience operating under the revised regulations within the United Kingdom will be reflected in the financial statements in future periods.

Due to a significant decline in gold prices during the fourth quarter of the fiscal year ended June 30, 2013, the Company recorded a $7.1 million provision for expected unredeemed pledges with a carrying value higher than current market gold prices. The Company recorded an additional $2.3 million and $13.3 million provision during the three and nine months ended March 31, 2014, respectively, as a result of a continued weakness in the market price of gold in local currencies. 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 repays the amount borrowed, plus interest and fees, and the Company returns the pledged item to the customer. In the instance where the customer defaults on a pawn loan (fails to redeem), the pledged item is either sold at auction, sold to a gold smelter or sold to a third party in the Company’s retail stores within several weeks of the customer default. Generally, excess amounts received over and above the Company’s recorded asset and auction-related administrative fees are returned to the customer. Included in prepaid expenses and other current assets is unredeemed pawn inventory, consisting primarily of gold-based merchandise, of $23.1 million and $24.0 million at June 30, 2013 and March 31, 2014, respectively.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill is the excess of cost over the fair value of the net assets of the business acquired. In accordance with ASC 350, goodwill is assigned to reporting units, which the Company has determined to be United States Retail, Canada Retail, United Kingdom Retail, Europe Retail, eCommerce and DFS. The Company also has a corporate reporting unit which consists of costs related to corporate management, oversight and infrastructure, investor relations and other governance activities. Because of the limited activities of the corporate reporting unit, no goodwill has been assigned to it. Goodwill is assigned to the reporting unit that benefits from the synergies arising from each particular business combination. The Company determines reporting units based on a review of operating segments, and to the extent present, the underlying components. To the extent that two or more components within the same operating segment have similar economic characteristics, their results are aggregated into one

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

reporting unit. Goodwill is evaluated for impairment on an annual basis on June 30 or between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. To accomplish this, the Company is required to determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company is then required to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, the Company would be required to perform a second step to the impairment test. An impairment loss would be recognized in an amount equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value.

Indefinite-lived intangible assets consist of reacquired franchise rights, trade names and the DFS’ MILES program brand name, which are deemed to have indefinite useful lives 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.

The Company considers the goodwill impairment and indefinite intangible impairment testing process to be one of the critical accounting estimates used in the preparation of its consolidated financial statements. The Company estimates the fair value of its reporting units by using a discounted cash flow analysis or a market-based approach, or a combination thereof. The discounted cash flow analysis requires the Company to make various assumptions about revenues, operating margins, growth rates, and discount rates. These assumptions are based on the Company’s budgets, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for perpetual growth rates for periods beyond the period covered by the Company’s long term business plan. The Company performs its goodwill impairment test annually as of June 30, and its other intangibles impairment test annually as of December 31. The Company may be required to evaluate the recoverability of goodwill and other intangible assets prior to the required annual assessment if the Company experiences a significant disruption to its business, unexpected significant declines in its operating results, divestiture of a significant component of its business, a sustained decline in market capitalization, particularly if it falls below the Company’s book value, or a significant change to the regulatory environment in which the Company operates. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting units and indefinite-lived intangible assets, it is possible that a material change could occur, including if actual experience differs from the assumptions and considerations used in the Company’s analyses. These differences could have a material adverse impact on the consolidated results of operations and could result in a material impairment of the Company’s goodwill.

Stockholders’ Equity

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. On August 21, 2013, the Company’s Board of Directors authorized an increase of 5.0 million shares under the plan. Under the repurchase plan, the Company can repurchase shares of its outstanding common stock on a discretionary basis. During the fiscal year ended June 30, 2013, the Company repurchased 3,499,881 shares of its outstanding common stock for an aggregate purchase price of $54.4 million. During the nine months ended March 31, 2014, the Company repurchased an additional 1,712,365 shares of its outstanding common stock for an aggregate purchase price of $21.5 million. As of March 31, 2014, an additional approximately 3.8 million shares may be repurchased under the stock repurchase plan.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED 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 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 March 31,     Nine Months Ended March 31,  
     2013     2014     2013     2014  

Net loss attributable to DFC Global Corp.

   $ (36.4   $ (159.1   $ (8.1   $ (157.5

Reconciliation of denominator:

        

Weighted average number of common shares outstanding — basic

     42.1        39.0        42.8        39.4   

Effect of dilutive stock options (1)

     —          —          —          —     

Effect of unvested restricted stock and restricted stock unit grants (1)

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding—diluted

     42.1        39.0        42.8        39.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The effect of the dilutive stock options was determined under the treasury stock method. Due to net losses during the three and nine months ended March 31, 2013 and 2014, 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”) states that 2,578,043 shares of the Company’s common stock may be awarded to employees or consultants of the Company. The awards may be issued at the discretion of the Company’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 the Company’s Board of Directors and officers, employees, independent consultants and contractors of the Company and any subsidiary of the Company. On November 11, 2010, the Company’s stockholders approved an amendment to the 2007 Plan. Under the terms of the amendment, the maximum aggregate number of shares of the Company’s common stock that may be issued pursuant to Awards granted under the 2007 Plan is 10,500,000; 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 the Company to the award recipient. The shares that may be issued under the 2007 Plan may be authorized, but unissued or reacquired shares of the Company’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 the Company’s common stock on the date of grant. To date, no stock appreciation rights have been granted.

The Company accounts for stock-based compensation under the provisions of ASC Topic 718 (ASC 718), Compensation—Stock Compensation. The Company has elected to apply the with-and-without method to assess the realization of excess tax benefits. Compensation expense related to share-based compensation included in the consolidated statements of operations for the three months ended March 31, 2013 and 2014 was $1.9 million and $1.6 million, respectively, net of related tax, and $6.1 million and $4.7 million, respectively, net of related tax effects for the nine months ended March 31, 2013 and 2014, respectively.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The weighted average fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in the periods presented:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2013     2014     2013     2014  

Expected volatility

     48.5     50.6     49.1     48.8

Expected life (years)

     5.6        5.6        5.6        5.8   

Risk-free interest rate

     1.31     2.16     1.07     1.95

Expected dividends

     None        None        None        None   

Weighted average fair value

   $ 8.69      $ 3.71      $ 7.55      $ 6.34   

A summary of the status of stock option activity for the nine months ended March 31, 2014 follows:

 

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

Options outstanding at June 30, 2013 (2,634,198 shares exercisable)

     3,080,697      $ 13.27         5.6       $ 8.2   

Granted

     749,149      $ 13.41         

Exercised

     (53,722   $ 8.27         

Forfeited and expired

     (195,606   $ 16.35         
  

 

 

         

Options outstanding at March 31, 2014

     3,580,518      $ 13.21         5.6       $ 1.7   
  

 

 

         

Exercisable at March 31, 2014

     2,895,277      $ 12.90         4.8       $ 1.7   
  

 

 

         

The aggregate intrinsic value in the above table reflects the total pre-tax intrinsic value (the difference between closing stock price of DFC’s common stock on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) as of March 31, 2014. The intrinsic value of DFC’s common stock options changes based on the closing price of DFC’s common stock. The total intrinsic value of options exercised for the three and nine months ended March 31, 2014 was $0.0 million and $0.2 million, respectively. As of March 31, 2014, the total unrecognized compensation cost over a weighted-average period of 1.9 years, related to stock options, is expected to be $4.2 million. Cash received from stock options exercised for the three and nine months ended March 31, 2014 was $0.0 million and $0.4 million, respectively.

Restricted stock awards granted under the 2005 Plan and 2007 Plan become vested (i) upon the Company attaining certain annual pre-tax earnings targets (“performance-based”), and (ii) after a designated period of time (“time-based”), which is generally three years. Compensation expense is recorded ratably over the requisite service period based upon an estimate of the likelihood of achieving the performance goals. Compensation expense related to restricted stock awards is measured based on the fair value using the closing market price of DFC’s common stock on the date of the grant. There were no outstanding restricted stock awards at March 31, 2014.

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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Information concerning unvested restricted stock unit awards is as follows:

 

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

Outstanding at June 30, 2013

     499,565      $ 18.69   

Granted

     585,525      $ 13.18   

Vested

     (349,373   $ 17.16   

Forfeited

     (141,323   $ 15.70   
  

 

 

   

Outstanding at March 31, 2014

     594,394      $ 14.88   
  

 

 

   

As of March 31, 2014, there was $8.8 million of total unrecognized compensation cost related to unvested restricted share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted average period of 1.7 years. The total fair value of shares vested during the three and nine months ended March 31, 2014 was $1.8 million and $6.0 million, respectively.

Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU 2012-2, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-2”). 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 2012-2 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 adopted ASU 2012-2 on July 1, 2013. The adoption of ASU 2012-2 did not have a material effect on the Company’s financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-2, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-2”). ASU 2013-2 requires companies to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-2 is effective for the Company for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted ASU 2013-2 on July 1, 2013. The adoption of ASU 2013-2 did not have a material effect on the Company’s financial position or results of operations.

In March 2013, the FASB issued ASU 2013-5, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-5 clarifies the accounting for the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. The ASU also clarifies the treatment of business combinations achieved in stages involving a foreign entity. The amendment is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not anticipate that the adoption of ASU 2013-5 will have a material effect on its financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-10, Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes (“ASU 2013-10”). The amendments in this update permit the Fed Funds Effective Swap Rate (“OIS”) to be used as a U.S. benchmark interest rate for hedge accounting purposes, in addition to Treasury obligations of the U.S. government (“UST”) and the London Interbank Offered Rate (“LIBOR”). The amendments also remove the restriction on using different benchmark rates for similar hedges. This update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The Company does not anticipate that the adoption of ASU 2013-10 will have a material effect on its financial position or results of operations.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). This update provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. Specifically, this update specifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not anticipate that the adoption of ASU 2013-11 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 180 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)

 

 
     Retail-based
Consumer Loans
     As of June 30, 2013
Internet-based
Consumer Loans
     Pawn Loans  
     Gross      Allowance      Gross      Allowance      Gross      Allowance  

Performing

   $ 130.4       $ 11.3       $ 99.5       $ 28.4       $ 160.9       $ 6.5 (1) 

Non-performing

     60.6         44.5         40.2         25.1         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 191.0       $ 55.8       $ 139.7       $ 53.5       $ 160.9       $ 6.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Retail-based
Consumer Loans
     As of March 31, 2014
Internet-based
Consumer Loans
     Pawn Loans  
     Gross      Allowance      Gross      Allowance      Gross      Allowance  

Performing

   $ 120.7       $ 14.3       $ 99.5       $ 31.1       $ 156.2       $ 2.8 (1) 

Non-performing

     70.3         59.0         48.5         34.3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 191.0       $ 73.3       $ 148.0       $ 65.4       $ 156.2       $ 2.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Company recorded an allowance as of June 30, 2013 and March 31, 2014 against the Company’s pawn loans receivable due to a significant decline in gold prices.

Included in consumer loans, net on the Company’s consolidated balance sheet at June 30, 2013 and March 31, 2014 are $25.2 million of loans, with a related allowance of $15.6 million, and $31.6 million of loans, with a related allowance of $19.6 million, respectively, to customers of the Company’s United Kingdom-based operations who have entered into payment plans. The Company does not recognize revenue on consumer loans in payment plan status; however, it does consider them as performing loans.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following presents the aging of the Company’s past due loans receivable as of June 30, 2013 and March 31, 2014:

 

Age Analysis of Past Due Loans Receivable

(in millions)

 

As of June 30, 2013

 

 
     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

   $ 16.7       $ 11.1       $ 8.2       $ 32.6       $ 68.6       $ 122.4       $ 191.0       $ 2.1   

Internet-based consumer loans

     10.4         7.0         6.0         16.8         40.2         99.5         139.7         —     

Pawn loans

     —           —           —           —           —           160.9         160.9         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27.1       $ 18.1       $ 14.2       $ 49.4       $ 108.8       $ 382.8       $ 491.6       $ 2.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

As of March 31, 2014

 

 
     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

   $ 16.4       $ 11.0       $ 11.1       $ 43.4       $ 81.9       $ 109.1       $ 191.0       $ 2.8   

Internet-based consumer loans

     10.8         6.5         5.8         25.4         48.5         99.5         148.0         —     

Pawn loans

     —           —           —           —           —           156.2         156.2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27.2       $ 17.5       $ 16.9       $ 68.8       $ 130.4       $ 364.8       $ 495.2       $ 2.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following details the Company’s loans receivable that are on nonaccrual status as of June 30, 2013 and March 31, 2014:

 

Loans Receivable on Nonaccrual Status

(in millions)

As of June 30, 2013

 

 

Retail-based consumer loans

   $ 60.6   

Internet-based consumer loans

     40.2   

Pawn loans

     —     
  

 

 

 

Total

   $ 100.8   
  

 

 

 

 

As of March 31, 2014

 

 

Retail-based consumer loans

   $ 70.3   

Internet-based consumer loans

     48.5   

Pawn loans

     —     
  

 

 

 

Total

   $ 118.8   
  

 

 

 

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2013     2014     2013     2014  

Allowance for Consumer Loan Losses:

        

Beginning Balance

   $ 103.0      $ 139.1      $ 75.7      $ 109.3   

Provision for loan losses

     49.7        42.0        128.2        135.1   

Charge-offs

     (53.8     (51.3     (124.4     (138.7

Recoveries

     7.3        9.1        23.5        24.7   

Effect of foreign currency translation

     (4.8     (0.1     (1.6     8.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 101.4      $ 138.8      $ 101.4      $ 138.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended
March 31, 2014
    Nine Months Ended
March 31, 2014
 

Allowance for Pawn Loan Losses:

    

Beginning Balance

   $ 4.2      $ 6.5   

Provision for loan losses

     2.3        13.3   

Charge-offs

     (0.5     (2.7

Reclassed to prepaid expenses for unredeemed pawn inventory

     (3.2     (14.5

Effect of foreign currency translation

     —          0.2   
  

 

 

   

 

 

 

Ending Balance

   $ 2.8      $ 2.8   
  

 

 

   

 

 

 

During the three and nine months ended March 31, 2014, the Company applied CAD 6.9 million (approximately $6.3 million) and CAD 16.2 million (approximately $15.1 million), respectively, of credits awarded under the class action settlements discussed in Note 10 – Contingent Liabilities against defaulted loan balances, which resulted in a reduction of the provision for loan losses of the same amount.

During the three and nine months ended March 31, 2014, the Company sold approximately $4.3 million and $9.6 million, respectively, of non-performing consumer loans for proceeds of approximately $1.9 million and $3.0 million, respectively, and recorded a reduction in the provision from loan losses of $0.9 million and $1.5 million, respectively. The Company has no continuing involvement with the sold consumer loans.

 

3. Acquisitions

During fiscal 2013, the Company completed the acquisition of Express Credit Amanet, a pawn loan provider operating 32 stores in Romania. The aggregate purchase price of this acquisition was $18.7 million, which resulted in an increase in goodwill of $13.3 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. Additionally, the Company completed various small acquisitions in Canada and the United Kingdom that resulted in an aggregate increase in goodwill of $16.5 million. Management’s valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, is based on estimates and assumptions subject to the finalization of the Company’s fair value allocations.

During fiscal 2014, the Company acquired the entire issued share capital of Gemgain Limited, which operates 14 pawnbroking stores in the United Kingdom trading under the name TGS Pawnbrokers. The aggregate purchase price was $12.5 million, which resulted in an increase in goodwill of $4.2 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. Additionally, the Company completed two acquisitions in Spain, the first being Crirama, S.A. which operates 27 pawnbroking stores. The aggregate purchase price was $8.2 million, which resulted in an increase in goodwill of $5.7 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. The second acquisition in Spain was Belen Oro, S. L. which operates one pawnbroking store in Madrid. The aggregate purchase price was $5.6 million, which resulted in an increase in goodwill of $3.5 million, calculated as the excess purchase price over the preliminary fair value of the identifiable assets acquired. Management’s valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, is based on estimates and assumptions subject to the finalization of the Company’s fair value allocations.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

One of the core strategies of the Company is to capitalize on its competitive strengths and enhance its leading market 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, particularly in its unsecured consumer lending business, 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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Goodwill and Other Intangibles

The changes in the carrying amount of goodwill by reportable segment for the nine months ended March 31, 2014 are as follows (in millions):

 

     Europe Retail     Canada Retail     United States
Retail
     eCommerce     Other     Total  

Balance at June 30, 2013:

             

Goodwill

   $ 190.2      $ 182.0      $ 205.7       $ 161.9      $ 52.1      $ 791.9   

Accumulated impairment charges

     —          —          —           —          (30.1     (30.1
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     190.2        182.0        205.7         161.9        22.0        761.8   

Acquisitions

     13.8        —          —           —          —          13.8   

Disposals

     (1.0     —          —           —          —          (1.0

Goodwill impairment

     (52.7     —          —           (52.5     (16.3     (121.5

Foreign currency translation adjustments

     13.6        (8.9     —           14.9        —          19.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014:

             

Goodwill

     216.6        173.1        205.7         176.8        52.1        824.3   

Accumulated impairment charges

     (52.7     —          —           (52.5     (46.4     (151.6
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
   $ 163.9      $ 173.1      $ 205.7       $ 124.3      $ 5.7      $ 672.7   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

     June 30, 2013     March 31, 2014  

Non-amortizing intangible assets:

    

Goodwill

   $ 761.8      $ 672.7   

Reacquired franchise rights

     51.7        50.0   

DFS MILES program

     10.9        5.1   

Tradenames

     3.4        3.6   
  

 

 

   

 

 

 
   $ 827.8      $ 731.4   
  

 

 

   

 

 

 

Amortizable intangible assets:

    

Purchased technology

   $ 46.4      $ 50.8   

Various contracts

     31.6        32.8   

Reacquired franchise rights

     6.1        5.9   

Accumulated amortization:

    

Purchased technology

     (14.1     (22.1

Various contracts

     (28.9     (28.8

Reacquired franchise rights

     (2.5     (3.4
  

 

 

   

 

 

 

Total intangible assets

   $ 866.4      $ 766.6   
  

 

 

   

 

 

 

Goodwill is the excess of purchase price 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. To perform the impairment testing, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair values of its reporting units is less than their carrying amounts as a basis for determining whether or not to perform the quantitative two-step goodwill impairment test. The Company then estimates the fair value of each reporting unit not meeting the qualitative criteria and compares their fair values to their carrying values. If the carrying value of a reporting unit exceeds its fair value, the Company determines the implied fair value of goodwill for that reporting unit by deducting the estimated fair value of its assets, other than goodwill, from its overall fair value. If the fair value of goodwill is less than its carrying amount, the Company recognizes an impairment loss for the difference.

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

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 recorded value of the indefinite lived reacquired franchise rights.

During the three months ended March 31, 2014, the Company completed an interim test for goodwill impairment as a result of events and circumstances occurring during this interim period that would more likely than not reduce the fair value of certain reporting units below their respective carrying amount. The Company identified interim impairment indicators resulting from: (i) a further decline in the Company’s stock price and market capitalization since the prior fiscal quarter; (ii) a significant reduction in forecasted earnings and cash flows based on projections developed during the month of March 2014 and announced on April 2, 2014; and (iii) the Company’s agreement to be acquired by an affiliate of Lone Star Funds dated April 1, 2014 for $9.50 per share, which was significantly below the Company’s book value of stockholders’ equity at March 31, 2014, prior to the recognition of the impairment charges discussed herein. The significant reduction in earnings resulted in part from the communications with the OFT in February and March 2014 regarding the Company’s compliance with the enhanced regulatory requirements of the FCA.

As disclosed in the Company’s annual consolidated financial statements for the fiscal year ended June 30, 2013, goodwill is assigned to reporting units, which the Company has determined to be United States Retail, Canada Retail, United Kingdom Retail, Europe Retail, eCommerce and DFS. The Company also has a corporate reporting unit which consists of corporate debt and costs related to corporate management, oversight and infrastructure, investor relations and other governance activities. Because of the limited activities of the corporate reporting unit, no goodwill has been assigned to it. Goodwill is assigned to the reporting unit which benefits from the synergies arising from each particular business combination. As a result of the events and circumstances noted above, the Company performed its interim goodwill impairment test by determining the carrying value of each reporting unit, which requires the assignment of the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company then estimated the fair value of each reporting unit and compared it to the carrying amount of the respective reporting unit.

The fair values of reporting units are estimated using a weighted average of a discounted future cash flows technique (income approach) and a guideline public company market multiples technique (market approach). The most significant assumptions used in the discounted cash flow fair value technique are the projections used to derive future cash flows and the weighted average cost of capital used to discount such projections. The discounted cash flow analysis requires the Company to make various assumptions about revenues, operating margins, growth rates, and discount rates. These assumptions are based on the Company’s budgets, business plans, economic projections, regulatory guidelines, anticipated future cash flows and marketplace data. Assumptions are also made for perpetual growth rates for periods beyond the period covered by our long term business plan.

The Company completed Step 1 of its interim goodwill impairment test during the three months ended March 31, 2014 and concluded that the fair values of the DFS, Europe Retail and eCommerce reporting units were less than their respective carrying values. As a result, a preliminary Step 2 of the goodwill impairment test was performed for these reporting units. The Company recognized a preliminary goodwill impairment charge of approximately $121.5 million during the three months ended March 31, 2014, which represents its best estimate of the impairment loss based on the latest information and cash flow projections available. Additionally, the Company recognized an impairment charge of $5.8 million related to DFS’ MILES program indefinite-lived intangible asset. The MILES program indefinite-lived intangible valuation was calculated using a relief from royalty valuation method. The significant assumptions used in determining the fair value of the MILES program asset were a 23% discount rate, a pre-tax royalty rate of 10%, a 22% annual revenue growth rate and a 3% long-term growth rate.

The impairment charges related to the Company’s DFS reporting unit were the result of an increase in discount rates due to the increased risk of not meeting future projections, as well as reduced projections. The estimates of future cash flows for the DFS reporting unit are in large part dependent on increased market share as a result of more competitive financing alternatives to DFS’ service member customers. These estimates are inherently uncertain.

The Company estimates that the final goodwill impairment charge will be in the range of $120.0 million to $140.0 million. In the fourth quarter of the fiscal year ending June 30, 2014, the Company will perform its annual impairment tests of goodwill, and will finalize the interim estimated impairment of the DFS, Europe Retail and eCommerce goodwill. The Company has not been able to finalize the impairment due to the significant amount of work required to calculate the implied value of goodwill, including the valuation of recognized and unrecognized intangible assets, calculation of deferred taxes and due to the timing of the interim impairment indicator. The actual goodwill impairment charge could be materially different from the estimated charge recognized.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Since the Company estimates the fair value of its reporting units by using a combination of an income approach and a market approach, the fair value estimates are sensitive to the selection of the following inputs: the weighted-average cost of capital rate used to discount the projected cash flows, and the market multiples applied to earnings, but are especially sensitive to the projected future cash flows of the respective reporting unit. The Company’s estimates of future cash flows in its eCommerce reporting unit include the following significant yet inherently uncertain growth and profitability assumptions:

 

    Expansion of the Company’s on-line lending platforms in additional jurisdictions where the Company does not currently operate;

 

    Growth within the Company’s on-line lending business in jurisdictions in which the Company has recently entered and where the Company has recently experienced significant growth, such as Canada, Spain, Poland and the Czech Republic;

 

    Moderation of loan losses, as its borrowers and potentially some of its competitors adjust to the impending revised regulations within the United Kingdom for renewals and collections;

 

    Growth in market share resulting from consolidation within the industry as a number of existing competitors will unlikely make the necessary investments to comply with the impending revised payday loan regulations within the United Kingdom.

 

    Improved margins within the Company’s United Kingdom businesses principally resulting from revised underwriting criteria in conjunction with its expectation of servicing more credit worthy customers which is expected to improve credit quality from current levels.

 

    Introduction of a multi-payment loan (“MPL”) product in certain jurisdictions

The significant decline in fair value of the eCommerce reporting unit since the most recent interim impairment test resulted principally from a significant increase in the weighted average cost of capital to reflect the increasing uncertainties in forecasted earnings resulting from the regulatory changes promulgated and proposed in the United Kingdom, as well as the decline in market valuations.

The fair value of the Company’s U.K. Retail reporting unit is approximately 8% above its carrying value at March 31, 2014. A combination of an increase of 2.5% in the discount rate (from 14.5%) and a decrease in the long-term growth rate of 1.0% (from 3.0%) would have led to the carrying value of U.K. Retail being less than its fair value. The carrying amount of goodwill for the U.K. reporting unit was approximately $100.4 million at March 31, 2014.

The Company’s estimate of future cash flows for its U.K. Retail reporting unit include the following significant and inherently uncertain growth and profitability assumptions:

 

    Moderation of loan losses, as its borrowers and potentially some of its competitors adjust to the impending revised regulations within the United Kingdom for renewals and collections;

 

    Growth in market share resulting from consolidation within the industry as a number of existing competitors will unlikely make the necessary investments to comply with the impending revised payday loan regulations within the United Kingdom.

 

    Improved margins, principally resulting from revised underwriting criteria in conjunction with its expectation of servicing more credit worthy customers which is expected to improve credit quality from current levels.

 

    Introduction of an MPL product

While these assumptions are inherently uncertain, especially given the fluidity of the proposed regulatory changes within the United Kingdom, the Company believes that such assumptions are reasonable and appropriate when considering all available market information as of the date of the interim impairment test, as well as the Company’s past experiences in similar jurisdictions such as Canada and the United States, which had previously implemented significant changes to regulations for single payment loans. Furthermore, the weighted average cost of capital that has been applied to the cash flows of the respective reporting units when calculating the fair value of the reporting units have been adjusted to reflect the inherent risks and uncertainties addressed herein.

As of March 31, 2014, the fair value of the Company’s Europe Retail reporting unit is negatively impacted principally by the reduction in gold prices and start up costs associated with new store openings in Poland and Spain. The estimates of future cash flows for the Europe Retail reporting unit are in large part dependent on the projected growth and profitability of our store-based operations in Spain and Poland, which are inherently uncertain.

The significant decline in the fair value of the Europe Retail reporting unit since the most recent interim impairment test resulted from (i) a significant increase in the weighted average cost of capital to reflect the increasing uncertainties in forecasted earnings, (ii) reductions in forecasted earnings to reflect the expectation of continued depressed gold prices, greater competition in emerging markets and less contribution from store openings, and (iii) reductions in market valuations.

The failure to achieve one or more of the Company’s anticipated business model assumptions described herein, or the impact of the implementation of final single payment loan regulations in the United Kingdom that are different than those contemplated in the Company’s forecast could lead to additional goodwill impairment of the Company’s reporting units, and any such impairments may be material.

On October 1, 2013, the Company sold its shares of Merchant Cash Express Limited and recorded a gain of $1.6 million.

Amortization expense of intangible assets was $3.9 million and $2.4 million for the three months ended March 31, 2013 and 2014, respectively. Amortization expense of intangible assets was $12.8 million and $6.5 million for the nine months ended March 31, 2013 and 2014, respectively.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

Fiscal Year Ended June 30,    Amount  

2014

   $ 10.9   

2015

     9.6   

2016

     8.9   

2017

     7.2   

2018

     5.1   
  

 

 

 
   $ 41.7   
  

 

 

 

 

5. Debt

The Company had debt obligations at June 30, 2013 and March 31, 2014 as follows (in millions):

 

     June 30,     March 31,  
     2013     2014  

Global Revolving credit facility

   $ 50.0      $ 46.0   

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

     (2.1     (1.7

DFC Global Corp. 3.25% Senior Convertible Notes due 2017

     189.9        196.9   

DFC Global Corp. 2.875% Senior Convertible Notes due 2027

     36.2        36.2   

DFC Global Corp. 3.000% Senior Convertible Notes due 2028

     105.0        111.1   

Scandinavian credit facilities

     54.9        47.0   

Other

     8.1        8.9   
  

 

 

   

 

 

 

Total debt

     1,042.0        1,044.4   
  

 

 

   

 

 

 

Less: current portion of debt

     (67.0     (92.7
  

 

 

   

 

 

 

Long-term debt

   $ 975.0      $ 951.7   
  

 

 

   

 

 

 

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. The consummation of the acquisition of the Company by Lone Star addressed in Note 14 represents such a change-of-control transaction. On or after December 15, 2013, NMM has 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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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. The consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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 had the right to require DFC to purchase all or a portion of the 2027 Notes on December 31, 2012, (the “Repurchase Option”) and will have the same right on each of 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.

On December 31, 2012, an aggregate principal amount of $8.6 million of the 2027 Notes were surrendered and repurchased pursuant to the Repurchase Option. Any 2027 Notes not repurchased pursuant to the Repurchase Option remain outstanding and continue to be subject to the terms and conditions of the 2027 Notes and the indenture governing the 2027 Notes. 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, 2014.

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. The consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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”).

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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. The consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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 the 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. The consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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;

 

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NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

    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. The consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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 consummation of the Company’s acquisition by Lone Star that is discussed in Note 14 is considered a fundamental change.

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 counterparties, 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.

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 the Company’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 shares and 1,406,886 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

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2014, the discount on the 2027 Notes has been fully amortized using the effective interest method, the remaining discount of $8.9 million on the 2028 Notes similarly will be amortized through April 1, 2015, and the remaining discount of $33.1 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.

Credit Facility

Senior Secured Credit Facility 

On October 25, 2013, we replaced our existing bank facility and entered into a new senior secured credit facility (the “Revolving Facility”) with a syndicate of lenders, with Deutsche Bank AG, New York Branch, serving as the administrative agent (the “Agent”). The Revolving Facility provides for a five-year $180.0 million global revolving credit facility, with potential to further increase the credit facility to up to $230.0 million. Availability under the Revolving Facility is based on a borrowing base comprised of cash and consumer receivables of the borrowers and guarantors, as described below. There is a sublimit for borrowings in the United States based on the borrowing base assets of the U.S. borrower and guarantors.

Borrowings under the Revolving Facility may be denominated in United States Dollars, British Pounds Sterling, Euros or Canadian Dollars (and other currencies as may be approved by the lenders). Interest on borrowings under the Revolving Facility will be derived from a pricing grid based on our total secured leverage ratio, which currently allows borrowing for fixed interest periods at an interest rate equal to the LIBO Rate or Canadian Dollar Offer Rate (as applicable based on the currency of borrowing) plus 400 basis points. The credit agreement executed in connection with the entry into the Revolving Facility (the “Credit Agreement”) also allows for borrowing at daily rates equal to ABR (the greater of the US prime rate, the one-month LIBO Rate plus 1.00% and the federal funds rate plus 1/2 of 1%) plus 300 basis points in the case of borrowing in United States Dollars, Canadian prime rate (equal to the greater of the published Canadian dollar prime rate or one-month CDOR plus 1.00%) plus 300 basis points in the case of borrowings in Canadian Dollars, or a weekly LIBO Rate plus 400 basis points in the case of borrowings in British Pounds Sterling or Euros.

The Revolving Facility allows for borrowings by DFG, National Money Mart Company, an indirect Canadian subsidiary of DFC (“NMM”), Dollar Financial U.K. Limited, an indirect U.K. subsidiary of DFC (“DFUK”) and DF Eurozone (UK) Limited, an indirect U.K. subsidiary of DFC (“DF Eurozone”). Borrowings by DFG under the Revolving Facility are guaranteed by DFC and certain direct and indirect U.S. subsidiaries of DFC. Borrowings by non-U.S. borrowers under the Revolving Facility are guaranteed by DFC and DFG and substantially all of their U.S. subsidiaries, by NMM and substantially all of its direct and indirect Canadian subsidiaries, and by DFUK, DF Eurozone and Instant Cash Loans Limited, a U.K. subsidiary of DFUK. The obligations of the respective borrowers and guarantors under the Revolving Facility are secured by substantially all the assets of such borrowers and guarantors.

The Revolving Facility will mature on October 25, 2018, subject to earlier maturity in the event that the outstanding unsecured notes issued by NMM are not refinanced by September 14, 2016 or the outstanding 3.25% convertible notes issued by DFC are not refinanced by January 15, 2017.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of March 31, 2014, there was $46.0 million outstanding under the Revolving Facility. The Credit Agreement contains customary covenants, representations and warranties and events of default. The agreement contains two primary financial maintenance covenants: a secured leverage ratio and a fixed charge ratio. As of March 31, 2014, we were in compliance with all such covenants. Furthermore, based on the Company’s forecasted earnings as of March 31, 2014, the Company expects to be in compliance with such covenants for the succeeding twelve months. However, it is reasonably possible that the Company could violate one or more covenants in the future if actual earnings are less than forecasted earnings or if other actions contemplated in the Company’s forecast are not executed. If the Company was to breach the covenants under the senior secured Credit Agreement, the lenders would be entitled to declare all amounts borrowed under it immediately due and payable. This acceleration of debt, if not paid by the Company, would be an event of default under, each of the indentures governing the senior and convertible notes issued or guaranteed by the Company (described above), and give rise to the right, in respect of each tranche of senior and convertible notes, of the trustee and of holders of at least 25% in aggregate principal amount of such notes, to demand immediate repayment of such tranche of notes.

Global Revolving Credit Facility

Prior to entering into the Revolving Facility, the Company had a senior secured credit facility with a syndicate of lenders, the administrative agent for which was Wells Fargo Bank, National Association. The facility consisted 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 was based on a borrowing base comprised of cash and consumer loan receivables in the Company’s U.S., Canadian and U.K.-based retail operations, and its U.K.-based pawn loan receivables. There was 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 were to 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 was derived from a pricing grid based on the Company’s consolidated leverage ratio, which as of March 31, 2014 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 was the greater of the prime rate or the federal funds rate plus 1/2 of 1%, plus 300 basis points. The Global Revolving Credit Facility was due to mature on March 1, 2015.

On each of December 23, 2011 and December 31, 2012, the Company entered into amendments to the senior secured credit agreement governing the Company’s Global Revolving Credit Facility, which increased the Company’s flexibility with respect to its business operations, transactions and reporting.

On June 25, 2013, the Company entered into the Third Amendment (the “Amendment”) to the Second Amended and Restated Credit Agreement dated as of March 3, 2011 with Wells Fargo Bank, National Association and the lenders party thereto. The Amendment amended certain financial and operating covenants in order to provide additional flexibility to the Company. The Amendment also added a new liquidity covenant, and prohibited the payment of cash dividends.

The Global Revolving Credit Facility allowed 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 were 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 were 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 were secured by substantially all the assets of such borrowers and guarantors.

As of June 30, 2013, there was $50.0 million outstanding under the Global Revolving Credit Facility. Historically, the Company had 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.

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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 5.4 million (approximately $7.4 million) was outstanding as of March 31, 2014, and a term loan facility of EUR 8.0 million ($11.0 million), all of which was outstanding as of March 31, 2014. In February 2014, the Company refinanced the EUR 10.75 million Finnish revolving credit facility extending the maturity date from February 15, 2014 to February 15, 2016. The facility will now bear an interest rate of one month Euribor plus 200 basis points (2.28% at March 31, 2014) with unused fees of 100 basis points on the unused portion of the facility.

The Finnish term loan is due in February 2016, and has an interest rate of the six month Euribor plus 300 basis points (3.28% at March 31, 2014). 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 secured credit facility which replaced and refinanced the outstanding borrowings under the prior Swedish facilities. On September 27, 2013, the Company entered into an amendment to the secured credit facility. The amendment amends certain financial and operating covenants in order to provide additional flexibility to the Company, and resulted in a SEK 65 million (approximately $10.0 million) prepayment of the term loan portion of the facility, and reduced the capacity under the revolving credit facility by SEK 10 million (approximately $1.6 million). The Swedish credit facility now consists of a term loan facility of SEK 175 million (approximately $27.0 million), all of which was outstanding at March 31, 2014, and a revolving credit facility of SEK 115 million (approximately $17.8 million at March 31, 2014), of which SEK 10 million (approximately $1.6 million) was outstanding as of March 31, 2014. The Swedish term loan is due June 2016 and carries an interest rate of the three month Stockholm Interbank Offered Rate (STIBOR) plus 300 basis points (3.80% at March 31, 2014). The Swedish revolving credit facility is due June 2014 and carries an interest rate of the three month STIBOR plus 200 basis points (2.80% at March 31, 2014). The Swedish loans are secured primarily by the value of the Company’s pawn pledge stock in Sweden.

Other Debt

Other debt consists of $8.9 million of debt assumed as part of the Suttons & Robertsons acquisition, consisting of a $3.0 million revolving loan and a $5.9 million term loan, all of which matures in May 2014. The Company is in the process of negotiating an extension of this facility, and has a month-to-month arrangement in place until the extension is finalized.

Interest Expense

Interest expense, net was $28.4 million and $27.1 million for the three months ended March 31, 2013 and 2014, respectively. For the nine months ended March 31, 2013 and 2014, interest expense, net was $91.3 million and $85.0 million, respectively. Included in interest expense for the three months ended March 31, 2013 and 2014 is approximately $5.4 million and $6.1 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 its Convertible Notes and the amortization of various deferred issuance costs. For the nine months ended March 31, 2013 and 2014, this non-cash interest is approximately $20.1 million and $17.8 million, respectively.

 

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.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Currently, the Company uses foreign currency options and cross currency interest rate swaps to manage certain of its interest rate and foreign currency risk and a gold collar to manage certain of 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 March 31, 2014, 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 was payable over two years. During the fiscal years ended June 30, 2012 and 2013, the Company made contingent consideration payments of $15.3 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 was 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 were recorded in other operating expenses. As of March 31, 2014, the balance of the contingent consideration was fully paid.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 and March 31, 2014, 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 June 30, 2013

 

(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
June 30, 2013
 

Assets

        

Derivative financial instruments

   $ —         $ 31.2       $ —         $ 31.2   

Assets held in funded deferred compensation plan

   $ 2.0       $ 13.0       $ —         $ 15.0   

Liabilities

        

Derivative financial instruments

   $ —         $ 0.1       $ —         $ 0.1   

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis at March 31, 2014

 

(in millions)

 

 
     Quoted Prices in
Active Markets
for Identical
Assets and
Liabilities (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Balance at
March 31, 2014
 

Assets

        

Assets held in funded deferred compensation plan

   $ 2.1       $ 13.6       $ —         $ 15.7   

Liabilities

        

Derivative financial instruments

   $ —         $ 12.5       $ —         $ 12.5   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reconciles the change in the Level 3 liabilities for the nine months ended March 31, 2013 (in millions):

 

    Nine Months Ended
March 31, 2013
 

Beginning balance

  $ 4.1   

Changes in fair value of contingent consideration

    (1.4

Payments

    (3.3

Unrealized foreign exchange loss on contingent consideration

    0.5   

Foreign currency translation adjustment

    0.1   
 

 

 

 

Ending balance

  $ —     
 

 

 

 

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis at March 31, 2014

 

(in millions)

 

 
     Balance at March 31,
2014
     Quoted Prices in
Active Markets in
Identical Assets
and Liabilities
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable
Inputs (Level 3)
     Total Gains
(Losses)
 

DFS goodwill

   $ 5.7       $ —         $ —         $ 5.7       $ (16.3 )(1) 

DFS MILES Program

     5.1         —           —           5.1         (5.8 )(2) 

Europe Retail goodwill

     63.5         —           —           63.5         (52.7 )(1) 

E-Commerce goodwill

     124.3         —           —           124.3         (52.5 )(1) 

 

(1) In accordance with ASC-350-20, goodwill with a carrying amount of $22.0 million, $116.2 million and $176.8 million, for DFS, Europe Retail and E-commerce reporting units, respectively, were written down to their implied fair value of $5.7 million, $63.5 million and $124.3 million, respectively, resulting in impairment charges of $16.3 million, $52.7 million and $52.5 million, respectively, which are included in earnings for the period.
(2) In accordance with ASC 360-10, the MILES program indefinite-lived intangible asset was written down to its fair value of $5.1 million, resulting in an impairment charge of $5.8 million, which is included in earnings for the period.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED 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, 2013 and March 31, 2014.

Financial Assets and Liabilities Not Measured at Fair Value at June 30, 2013 and March 31, 2014

 

(in millions)

 

 
            Estimated Fair Value  
     Carrying Value
June 30, 2013
     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, 2013  

Financial assets:

              

Cash and cash equivalents

   $ 196.2       $ 196.2       $ —         $ —         $ 196.2   

Consumer loans, net

     190.2         —           —           190.2         190.2   

Pawn loans, net

     154.4         —           —           154.4         154.4   

Loans in default

     31.2         —           —           31.2         31.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 572.0       $ 196.2       $ —         $ 375.8       $ 572.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

              

Global revolving credit facility

   $ 50.0       $ —         $ 50.0       $ —         $ 50.0   

10.375% Senior notes (1)

     600.0         636.0         —           —           636.0   

3.25% Senior convertible notes (1)

     230.0         225.8         —           —           225.8   

2.875% Senior convertible notes

     36.2         35.6         —           —           35.6   

3.00% Senior convertible notes (1)

     120.0         123.6         —           —           123.6   

Scandinavian credit facilities

     54.9         —           54.9         —           54.9   

Other debt

     8.1         —           8.1         —           8.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 1,099.2       $ 1,021.0       $ 113.0       $ —         $ 1,134.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

          Estimated Fair Value  
    Carrying Value
March 31,
2014
    Quoted Prices
in Active
Markets for
Identical
Assets and
Liabilities
(Level 1)
    Significant
Other
Observable
Inputs (Level 2)
    Significant
Unobservable
Inputs (Level 3)
    March 31, 2014  

Financial assets:

         

Cash and cash equivalents

  $ 236.9      $ 236.9      $ —        $ —        $ 236.9   

Consumer loans, net

    174.8        —          —          174.8        174.8   

Pawn loans, net

    153.4        —          —          153.4        153.4   

Loans in default

    25.5        —          —          25.5        25.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  $ 590.6      $ 236.9      $ —        $ 353.7      $ 590.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

         

Global revolving credit facility

  $ 46.0      $ —        $ 46.0      $ —        $ 46.0   

10.375% Senior notes (1)

    600.0        603.0        —          —          603.0   

3.25% Senior convertible notes (1)

    230.0        196.1        —          —          196.1   

2.875% Senior convertible notes

    36.2        34.6        —          —          34.6   

3.00% Senior convertible notes (1)

    120.0        110.2        —          —          110.2   

Scandinavian credit facilities

    47.0        —          47.0        —          47.0   

Other debt

    8.9        —          8.9        —          8.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

  $ 1,088.1      $ 943.9      $ 101.9      $ —        $ 1,045.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The carrying values above exclude any discount.

 

31


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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED 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. The carrying value of consumer loans approximates the fair value.

Pawn loans are short-term in nature and are secured by the customer’s personal property (“pledge”). Pawn loans 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. Generally, excess amounts received over and above the Company’s recorded asset and auction-related administrative fees are returned to the customer. The unobservable inputs used to calculate the carrying value of pawn loans include historical redemption rates and the current redemption patterns and current economic trends, such as gold prices. The carrying value of pawn loans approximates the fair value.

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. The carrying value of loans in default approximates the fair value.

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

The 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.

 

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.

 

32


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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, 2013 and March 31, 2014, the Company did not have any outstanding foreign currency derivatives that were designated as hedges.

Cash Flow Hedges of Multiple Risks

Between December 18, 2013 and December 20, 2013, the Company terminated the cross-currency swaps which its Canadian subsidiary had entered into in order to hedge the U.S. Dollar exposure associated with the $600.0 million senior unsecured notes issued by NMM. The termination of the swaps was effected pursuant to negotiated transactions with the respective counter-parties to such swaps. The Company received net proceeds in the aggregate amount of approximately $38.8 million as a result of the terminations. The proceeds were used to pay down outstanding balances under our global revolving credit facility. In accordance with the Derivatives and Hedging Topic of the FASB Codification, the Company is required to continue to report the net loss related to the discontinued cash flow hedge in accumulated other comprehensive income included in shareholders’ equity and subsequently reclassify such amounts into earnings over the remaining original term of the derivative when the hedged forecasted transactions are recognized in earnings. The amount of loss included in accumulated other comprehensive income related to these terminated hedges was approximately $5.3 million ($3.9 million net of tax) as of March 31, 2014, which will be reclassified into earnings over the remaining original term of the derivatives (December 2016), or approximately $2.0 million, net of tax annually.

Prior to the Company’s termination of the cross-currency swaps in December 2013, the Company entered into 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 on April 27, 2012. The swaps eliminated 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 were to mature on December 15, 2016. In addition, on April 20, 2012, the Company’s UK subsidiary 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.

The intercompany cross-currency swap is designated as a cash flow hedge of interest payments and principal repayments on its foreign denominated debt due to changes in foreign exchange rates. Because this derivative is designated as a cash flow hedge, 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 and nine months ended March 31, 2014, there was no ineffectiveness on these cash flow hedges.

As of March 31, 2014, 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

 

33


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 March 31, 2014, the Company’s subsidiary in the United Kingdom had the following outstanding derivatives.

 

Commodity Options

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

Gold Collars (XAU/GBP)

     13         5,500       £675-£700    £792-£916

The tables below present the fair values of the Company’s derivative financial instruments on the consolidated balance sheets as of June 30, 2013 and March 31, 2014 (in millions). The Company’s accounting policy is to present the fair value of all derivative instruments on a gross basis on the consolidated balance sheets and in the table below even if right of offset exists per executed master netting agreements with counterparties.

Tabular Disclosure of Fair Values of Derivative Instruments

 

    

Asset Derivatives

As of June 30, 2013

    

Liability Derivatives

As of June 30, 2013

 
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives designated as hedging instruments:

           

Cross Currency Swaps

   Derivatives    $ 31.2       Derivatives    $ —     
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments:

           

Commodity Options

   Derivatives    $ 0.1       Derivatives    $ —     
     

 

 

       

 

 

 

 

    

Asset Derivatives

As of March 31, 2014

    

Liability Derivatives

As of March 31, 2014

 
     Balance Sheet Location    Fair Value      Balance Sheet Location    Fair Value  

Derivatives designated as hedging instruments:

     

Cross Currency Swaps

   Derivatives    $ —         Derivatives    $ 12.5   
     

 

 

       

 

 

 

 

34


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED 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 nine months ended March 31, 2013 and 2014 (in millions):

Tabular Disclosure of the Effect of Derivative Instruments on the Consolidated Statements of Operations for the Nine Months Ended March 31, 2013 and 2014

 

Derivatives in Cash Flow Hedging

Relationships

   Amount of Gain or (Loss)
Recognized
in OCI on Derivatives
(Effective

Portion)
    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)
 

Nine months ended March 31, 2013

      

Cross Currency Swaps

   $ 3.2      Interest Expense   $ (10.2
     Unrealized
foreign
exchange gain
(loss)
    4.6   
  

 

 

     

 

 

 

Total

   $ 3.2        $ (5.6
  

 

 

     

 

 

 

Nine months ended March 31, 2014

      

Cross Currency Swaps

   $ (9.7   Interest Expense   $ (5.8
     Unrealized
foreign
exchange gain
(loss)
    (9.9
  

 

 

     

 

 

 

Total

   $ (9.7     $ (15.7
  

 

 

     

 

 

 

As of March 31, 2014, the Company anticipates reclassifying approximately $3.0 million of losses from accumulated other comprehensive loss to earnings during the next twelve months.

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 March 31, 2014, the termination value of derivatives is a net liability position of $17.0 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 statements of operations for the nine months ended March 31, 2013 and 2014 (in millions).

 

Derivatives Not Designated as Hedging

Instruments

  

Location of Gain or (Loss)
Recognized in

Income on Derivatives

   Amount of Gain or (Loss) Recognized
in Income on Derivatives
 
          2013     2014  

Commodity Options

   Purchased gold costs    $ —        $ —     

Cross Currency Swaps

   Interest expense      (2.2 )(1)      (0.6 )(1) 
  

Income tax provision

     0.6 (1)      0.1 (1) 
     

 

 

   

 

 

 

Total

      $ (1.6   $ (0.5
     

 

 

   

 

 

 

 

(1) Amounts reclassified out of accumulated other comprehensive income

 

35


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

8. Income Taxes

Income Tax Provision

The provision for income taxes was $20.6 million for the nine months ended March 31, 2013 compared to a provision of $19.3 million for the nine months ended March 31, 2014. The Company’s effective tax rate was 167.8% for the nine months ended March 31, 2013 and was (14.0)% for the nine months ended March 31, 2014. The increase in the effective tax rate for the nine months ended March 31, 2014 as compared to the prior year was primarily a result of lower pretax income principally resulting from goodwill impairment losses in the UK, Sweden, Poland, Spain, Romania, Finland, and the United States, as well as operating losses within the UK, Finland, and the United States. Substantially all of the goodwill impairment was non-deductible. The provision for income taxes for the nine months ended March 31, 2014 also included the initial recognition of full valuation allowances on deferred tax assets from operations in the UK, and valuation allowances in Finland, Poland and the United States as it is not more-likely-than-not that deferred tax assets within these jurisdictions will be realized. Furthermore, the provision for income taxes for both periods also includes recognition of additional tax reserves for uncertain tax positions within Canada.

At June 30, 2013 and March 31, 2014, the Company had unrecognized tax benefit reserves related to uncertain tax positions of $20.7 million and $21.6 million, respectively, which primarily related to transfer pricing matters which, if recognized, would decrease the effective tax rate. The total decrease for the quarter, from $21.8 million at December 31, 2013 to $21.6 million at March 31, 2014, was $0.2 million, and is comprised of a decrease of $0.0 million in interest and a decrease of $0.2 million in unrecognized tax benefit reserves. The cumulative interest at June 30, 2013 and March 31, 2014 was $2.6 million and $2.9 million, respectively.

 

9. Accumulated Other Comprehensive Income (Loss)

In accordance with ASU 2013-2, the reclassification adjustments from accumulated other comprehensive income (loss) to net income were as follows (in millions):

 

     Three Months Ended
March 31, 2014
     Nine Months Ended
March 31, 2014
 
     Derivatives     Foreign
currency
translation
adjustment
     Derivatives     Foreign
currency
translation
adjustment
 

Balance at beginning of period

   $ (7.3   $ 37.2       $ (11.2   $ (3.9

Other comprehensive income before reclassifications, net

     (1.3     6.8         (8.5     47.9   

Amounts reclassified from accumulated other comprehensive income, net

     2.0        —           13.1        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance at end of period

   $ (6.6   $ 44.0       $ (6.6   $ 44.0   
  

 

 

   

 

 

    

 

 

   

 

 

 

The reclassifications are recorded to interest expense and unrealized foreign-exchange gain (loss) as described in Note 7, net of tax effect of approximately $(0.5) million and $(3.1) million for the three and nine months ended March 31, 2014, respectively.

 

36


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

10. Contingent Liabilities

Contingent Liabilities

The Company is subject to various asserted and unasserted claims during the course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. In addition to the legal proceedings discussed below, the Company is involved in routine litigation and administrative proceedings arising in the ordinary course of business.

The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include the size of the potential claims, the merits of the Company’s defenses and the likelihood of plaintiffs’ success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on our business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with ASC Topic 450, Contingencies. 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 has filed motions to enforce the arbitration clause and to stay the actions. NMM’s motions to compel arbitration and to stay the actions were dismissed. Money Mart appealed those decisions and in July 2013, the Court of Appeal dismissed NMM’s appeal. In September 2013, NMM filed an application for leave to appeal to the Supreme Court of Canada, but on January 30, 2014, the Supreme Court of Canada denied the application for leave to appeal. Motions for class certification of these actions are scheduled for September 18 and 19, 2014. To date, neither case has been certified as a class action nor consolidated with the other 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 Dollar Financial Group, Inc. in Manitoba on behalf of a purported class of consumers which substantially overlaps with the purported class in the 2004 action. In April 2013, NMM filed a motion to enforce the arbitration/mediation terms in the second action. In July 2013, the Court denied the motion to compel arbitration. The Company is evaluating an appeal to the appellate court. In October 2013, NMM filed an appeal with the appellate court. The appellate court held a hearing on January 10, 2014 on NMM’s appeal and is taking the matter under advisement. The appeal is still under advisement with the Court. 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. The Company intends to defend these actions vigorously.

As of March 31, 2014, an aggregate of approximately CAD 14.3 million is included in the Company’s accrued liabilities relating to the purported Canadian class action proceedings pending in Alberta and Manitoba and for the settled class actions in Ontario, British Columbia, New Brunswick, Nova Scotia and Newfoundland that were settled by the Company in 2010. The settlements in those class action proceedings consisted of a cash component and vouchers to the class members for future services. The component of the accrual that relates to vouchers is approximately CAD 5.0 million, the majority of which is expected to be non-cash. Although we believe that we have meritorious defenses to the claims in the purported class proceedings in Alberta and Manitoba described above and intend vigorously to defend against such remaining pending claims, the ultimate cost of resolution of such claims may exceed the amount accrued at March 31, 2014 and additional accruals may be required in the future. During the three and nine months ended March 31, 2014, the Company applied CAD 6.9 million and CAD 16.2 million, respectively, of credits awarded under the class action settlements against defaulted loan balances, which resulted in a corresponding decrease to the provision for loan losses. In April 2014, the Company made its final payments totaling approximately CAD 5.8 million in respect of the settled Ontario class action litigation.

 

37


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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. NMM and Dollar Financial Group, Inc. filed a motion for summary judgment that was initially scheduled for January 2014, but has now been rescheduled to May 2014. The plaintiffs’ claims were settled in April 2014 and we anticipate the court will dismiss the action in due course. The payments associated with the settlements were covered under the Company’s insurance policies.

In 2010, The Cash Store Financial Services, Inc. and its subsidiaries, The Cash Store Inc. and Instaloans Inc. (“Cash Store”), filed a complaint and motion for injunctive relief in Ontario Superior Court against NMM alleging trademark violations and false and misleading advertising, along with claims for CAD 60 million in damages, regarding NMM’s print, television and internet advertising featuring Cash Store’s higher payday loan costs compared to those of NMM. NMM filed its opposition to Cash Store’s motion based, in part, on data gathered from Cash Store loan transactions that supported NMM’s advertising statements. Prior to the hearing on the motion, the Cash Store abandoned its position to enjoin NMM’s advertising, and the Court granted NMM’s request for reimbursement from the Cash Store of NMM’s 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. In December 2012, in response to the plaintiff’s failure to honor NMM’s request to meet and confer, NMM filed a motion with the Court asking that it impose a discovery plan on the parties to move the case along. In April 2013, the Court, rather than granting NMM’s motion, instructed the parties to meet and confer on a discovery plan. The parties were scheduled to complete discovery and witness examinations in November 2013, but the Cash Store did not conduct its required discovery during the required time period. NMM evaluated its procedural options. NMM intended to vigorously defend this matter and its advertising. In March 2014, the parties settled their dispute and the case was dismissed by the court in March 2014. No payments were made by either party as a result of the settlement.

Administrative Action by Consumer Financial Protection Bureau

In 2012, the Consumer Financial Protection Bureau (“CFPB”), as part of its short-term lending supervision program, commenced an onsite review of the Company’s U.S. lending operations. CFPB announced that it planned to gather information from short-term lenders to evaluate their policies and procedures, assess whether lenders are in compliance with consumer financial laws, and identify risks to consumers throughout the lending process. The CFPB completed its exam in fiscal year 2013. In July 2013, personnel for the Company’s US lending operations met with the CFPB to discuss a process for meeting certain compliance and reporting standards as cited in the CFPB’s examination report. In October 2013, the Company submitted its plans for compliance enhancements to the CFPB. On a quarterly basis, the Company provides updates to the CFPB regarding the enhancements to its compliance management system.

The CFPB performed an examination of DFS during the fiscal year ended June 30, 2013. As a result of this examination, DFS was informed by the CFPB that it intended to initiate an administrative proceeding against DFS relating to its marketing of certain vehicle service and insurance products and to the requirement that MILES program loans be repaid via a military allotment. DFS cooperated in the CFPB examination. In June 2013, DFS agreed to provide, and the CFPB agreed to accept, a $3.3 million “redress” fund for affected DFS customers. The $3.3 million was paid in February 2014. DFS signed a Consent Order and Stipulation with the CFPB on June 25, 2013. In July 2013, DFS met with the CFPB to discuss the process for meeting certain compliance management system requirements as agreed to in its Consent Order. Subsequently, DFS submitted its customer redress plan and its compliance plan to the CFPB. The CFPB issued a non-objection to DFS’ customer redress plan. On a quarterly basis, the Company provides updates to the CFPB regarding the enhancements to its compliance management system.

Purported U.S. Class Actions

In November 2013, the Company was served with a purported shareholder class action lawsuit filed against it and certain of its senior executives in the United States District Court for the Eastern District of Pennsylvania (the “Court”). The complaint, which purports to be brought as a class action on behalf of purchasers of the Company’s common stock between January 28, 2011 and August 22, 2013, alleges violations of federal securities laws regarding disclosures made by the Company with respect to its compliance with U.K. regulatory requirements, U.K. lending practices, and its earnings guidance during the relevant period. On April 9, 2014, the Court named as lead plaintiff in this purported class action a group consisting of the West Palm Beach Police Pension Fund, the Arkansas Teachers Retirement System, the Macomb County Employees Retirement System and the Laborers’ District Council and Contractors’ Pension Fund of Ohio. The complaint seeks unspecified monetary damages and other relief. The Company believes that the complaint is without merit and intends to defend against it vigorously.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In March 2014, the Company was served with a separate purported class action lawsuit filed against it, certain of its senior executives and directors, and the two underwriters who served as joint book-running managers for the Company’s April 7, 2011 common stock offering (the “2011 Offering”) in the United States District Court for the Eastern District of Pennsylvania. The named plaintiff is the Arkansas Teachers Retirement System, and its complaint, which purports to be brought as a class action on behalf of purchasers of the Company’s common stock in the 2011 Offering, alleges violations of federal securities laws regarding disclosures made by the Company with respect to its prospectus and registration statement relating to the 2011 Offering (the “Offering Materials”), and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2010 and the Annual Report on Form 10-K for the fiscal year ended June 30, 2010 which were incorporated by reference into the Offering Materials. The complaint seeks unspecified monetary and other relief. The Company believes that the complaint is without merit and intends to defend against it vigorously.

On April 21, 2014, the Court consolidated the above referenced West Palm Beach Police Pension Fund and Arkansas Teachers Retirement System complaints based on the similarity of alleged facts and alleged overlap of putative class members, along with a scheduling order.

Litigation Relating to the Proposed Merger

Six purported class action lawsuits challenging the proposed merger (the “Merger”) of the Company with an affiliate of Lone Star Funds (“Lone Star”) were filed in the Delaware Chancery Court between April 8 and May 2, 2014: Michael Marcus v. DFC Global Corp., et al., Civil Action No. 9520-VCP; Maxine Phillips v. DFC Global Corp., et al., Civil Action No. 9558-VCP; Mark Silverstein v. DFC Global Corp., et al., Civil Action No. 9564-VCP; Noh-Joon Choo v. DFC Global Corp., et al., Civil Action No. 9572-VCP; Cordell Jeffrey and Sheila A. Jeffrey v. DFC Global Corp., et al., Civil Action No. 9590-VCP; and KC Gamma Opportunity Fund, LP v. DFC Global Corp., et al., Civil Action No. 9601-VCP.

The initial complaints in the six lawsuits are substantively identical, naming the same defendants and seeking the same relief based on the same asserted claims. The complaints allege that the merger consideration is unfair, that the merger is the result of an unfair process and that the terms of the merger are inadequate. The defendants include the Company and its directors, Jeffrey A. Weiss, John Gavin, Clive Kahn, Michael Kooper, Ronald McLaughlin, Edward A. Evans, and David Jessick as defendants along with LSF8 Sterling Parent, LLC (“Parent”) and LSF8 Sterling Merger Company, LLC, a wholly-owned subsidiary of Parent (“Purchaser” and, collectively with Parent, the “Purchasing Parties”).

The first count in each of the complaints is brought against the Company’s directors, alleging that they breached their fiduciary duties to stockholders by approving the merger. The second count in each of the complaints is brought against the Company and the Purchasing Parties alleging that those entities aided and abetted the individual defendants’ alleged breaches of fiduciary duty. Each of the complaints seeks class-action certification with the respective named plaintiff as class representative. The complaints seek preliminary and permanent injunctions barring the merger and, if the merger is completed, rescission of the merger or damages. Each of the complaints also seeks an award of attorneys’ fees and expenses.

On April 25, 2014, plaintiff Maxine Phillips filed an amended complaint, adding allegations that the Company’s preliminary proxy statement filed with the SEC on April 18, 2014 is materially false, incomplete and/or misleading, and seeking disclosure of additional information before the stockholder vote. The amended complaint also seeks a constructive trust in favor of plaintiff and the class upon any benefits improperly received by defendants as a result of their alleged wrongful conduct and an accounting and damages. On April 28, 2014, plaintiff Michael Marcus filed an amended complaint adding similar allegations.

On May 7, 2014, plaintiffs Michael Marcus and KC Gamma Opportunity Fund, LP filed motions to consolidate the six actions, with themselves as co-lead plaintiffs and their respective counsel as co-lead counsel. In addition, the two plaintiffs filed motions for expedited proceedings, seeking a preliminary injunction hearing in advance of the stockholder vote scheduled for June 6, 2014.

DFC Global and its directors believe that the allegations of the complaints are without merit.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

11. Restructuring Activities

During the year ended June 30, 2013, the Company initiated a restructuring plan to better align its global retail and Internet platforms. The restructuring plan included workforce reductions as well as the closure of retail store locations and asset write-offs. For the year ended June 30, 2013, the Company recognized $7.1 million of costs associated with the restructuring plan, all of which was included in Other income (expense) on the consolidated statement of operations. The plan was substantially completed as of June 30, 2013.

Of the $7.1 million accrued for restructuring during the year ended June 30, 2013, $3.9 million has been paid and $2.2 million of property and equipment has been written off, leaving an accrual of $1.0 million as of March 31, 2014. The Company expects the majority of this amount will be paid by June 30, 2014.

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

12. Segment Information

Through the third quarter of the fiscal year ended June 30, 2013, the Company had been organized based on geographic location and the types of products and services offered. Under this structure, the Company had three reportable segments: Europe, Canada and the United States. The Company’s Chief Operating Decision Maker (CODM) evaluated performance and allocated resources based upon review of the segment information.

During the fourth quarter of the year ended June 30, 2013, the Company implemented changes in its operating segments resulting from changes in the processes employed for allocating resources across the Company and reviewing operating results to assess performance by its CODM. These changes, which resulted in part from the reorganization of the Company’s business operations that were initiated during the third quarter of fiscal 2013, were fully implemented in the fourth quarter of fiscal year 2013 to align the Company’s operating and reportable segments with how the Company manages the business and view the markets the Company serves.

The Company reports its financial performance based on the following four reportable segments: Europe Retail, Canada Retail, United States Retail and eCommerce. The Europe Retail reportable segment includes the Company’s UK Retail and Europe Retail operating segments. These operating segments generally offer the same services distributed in similar fashions, have the same types of customers, have similar economic characteristics and are subject to similar regulatory requirements, allowing these operations to be aggregated into one reporting segment. As required by ASC Topic 280, all segment information for the three and nine months ended March 31, 2013 has been recast to conform to the current segment composition.

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 reportable segments.

 

(In millions)

 

 
     Europe
Retail
    Canada
Retail
     United States
Retail
     eCommerce     Other     Total  

As of and for the three months ended March 31, 2013

              

Total assets

   $ 623.3      $ 439.6       $ 262.6       $ 318.7      $ 92.3      $ 1,736.5   

Goodwill and other intangibles, net

     219.4        240.1         206.1         167.8        34.0        867.4   

Sales to unaffiliated customers:

              

Consumer lending

     44.0        45.6         16.6         75.5        —          181.7   

Check cashing

     5.5        15.8         10.6         —          —          31.9   

Pawn service fees and sales

     21.3        0.1         —           —          —          21.4   

Money transfer fees

     2.7        4.7         1.0         —          —          8.4   

Gold sales

     14.8        2.3         0.7         —          —          17.8   

Other

     6.8        10.1         3.5         0.1        1.9        22.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total sales to unaffiliated customers

     95.1        78.6         32.4         75.6        1.9        283.6   

Operating margin

     23.9        37.5         9.5         2.1        (0.1     72.9   

Provision for loan losses

     10.0        4.9         2.3         32.5        —          49.7   

Depreciation and amortization

     4.2        2.2         0.5         4.0        1.7        12.6   

Interest expense, net

     10.8        15.8         —           (0.5     2.3        28.4   

Goodwill and other intangible assets impairment charge

     —          —           —           —          31.1        31.1   

Unrealized foreign exchange loss (gain)

     2.0        0.2         —           —          (0.1     2.1   

Loss on store closings

     0.1        0.1         0.1         —          —          0.3   

Other expense, net

     0.3        0.9         0.3         2.4        8.8        12.7   

(Loss) income before income taxes

     (2.7     9.5         8.0         (6.6     (43.9     (35.7

Income tax (benefit) provision

     (0.7     3.0         0.1         (1.7     —          0.7   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

(In millions)

 

 
     Europe
Retail
     Canada
Retail
    United States
Retail
     eCommerce     Other     Total  

For the nine months ended March 31, 2013

              

Sales to unaffiliated customers:

              

Consumer lending

   $ 124.0       $ 144.5      $ 52.2       $ 229.1        —        $ 549.8   

Check cashing

     18.3         53.0        26.1         —          —          97.4   

Pawn service fees and sales

     62.7         0.1        —           —          —          62.8   

Money transfer fees

     8.4         16.1        3.4         —          —          27.9   

Gold sales

     40.7         7.7        2.6         —          —          51.0   

Other

     24.7         23.8        9.9         0.2        5.7        64.3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total sales to unaffiliated customers

     278.8         245.2        94.2         229.3        5.7        853.2   

Operating margin

     76.4         121.8        24.1         45.1        (0.7     266.7   

Provision for loan losses

     25.5         14.3        8.2         80.2        —          128.2   

Depreciation and amortization

     12.0         6.8        1.6         12.3        6.0        38.7   

Interest expense, net

     30.4         54.3        —           (1.6     8.2        91.3   

Goodwill and other intangible assets impairment charge

     —           —          —           —          36.6        36.6   

Unrealized foreign exchange loss (gain)

     0.8         (0.3     —           —          (0.1     0.4   

Provision for litigation settlements

     —           —          2.7         —          —          2.7   

Loss on store closings

     0.4         0.2        0.3         —          —          0.9   

Other expense (income), net

     1.1         (0.5     0.3         2.4        9.0        12.3   

Income (loss) before income taxes

     5.1         31.5        17.1         25.1        (66.5     12.3   

Income tax provision

     2.2         9.9        4.1         4.4        —          20.6   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

(In millions)

 

 
     Europe
Retail
    Canada
Retail
    United States
Retail
     eCommerce     Other     Total  

As of and for the three months ended March 31, 2014

             

Total assets

   $ 581.3      $ 394.8      $ 257.4       $ 288.6      $ 89.5      $ 1,611.6   

Goodwill and other intangibles, net

     169.7        219.4        206.0         160.0        11.5        766.6   

Sales to unaffiliated customers:

             

Consumer lending

     43.9        43.0        16.4         55.9        —          159.2   

Check cashing

     4.4        13.7        10.8         —          —          28.9   

Pawn service fees and sales

     23.8        0.2        —           —          —          24.0   

Money transfer fees

     2.7        4.5        1.0         —          —          8.2   

Gold sales

     7.2        1.1        0.3         —          —          8.6   

Other

     5.2        9.2        3.2         0.1        1.7        19.4   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total sales to unaffiliated customers

     87.2        71.7        31.7         56.0        1.7        248.3   

Operating margin

     6.9        36.8        7.9         0.7        —          52.3   

Provision for loan losses

     16.8        (0.2     2.6         25.0        —          44.2   

Depreciation and amortization

     4.3        2.1        0.5         3.2        1.0        11.1   

Interest expense, net

     12.8        12.8        —           (1.5     3.0        27.1   

Goodwill and other intangible assets impairment charge

     52.7        —          —           52.5        22.1        127.3   

Unrealized foreign exchange (gain) loss

     (4.8     23.3        —           —          0.1        18.6   

Provision for litigation settlements

     —          —          0.1         —          —          0.1   

Loss on store closings

     0.1        0.1        —           —          0.1        0.3   

Other expense (income), net

     0.3        (0.3     —           0.1        1.4        1.5   

(Loss) income before income taxes

     (65.5     (6.7     6.8         (53.9     (33.6     (152.9

Income tax (benefit) provision

     (1.7     1.2        6.0         0.7        —          6.2   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

(In millions)

 

 
     Europe
Retail
    Canada
Retail
    United States
Retail
     eCommerce     Other     Total  

For the nine months ended March 31, 2014

             

Sales to unaffiliated customers:

             

Consumer lending

   $ 131.9      $ 139.9      $ 53.0       $ 174.0      $ —        $ 498.8   

Check cashing

     15.2        48.6        25.8         —          —          89.6   

Pawn service fees and sales

     70.3        0.4        0.1         —          —          70.8   

Money transfer fees

     8.2        14.7        3.2         —          —          26.1   

Gold sales

     26.0        4.1        1.2         —          —          31.3   

Other

     20.9        20.8        9.3         0.3        4.3        55.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total sales to unaffiliated customers

     272.5        228.5        92.6         174.3        4.3        772.2   

Operating margin

     22.2        122.2        21.7         10.1        (0.9     175.3   

Provision for loan losses

     65.7        2.8        9.6         70.3        —          148.4   

Depreciation and amortization

     12.7        6.4        1.4         8.8        3.0        32.3   

Interest expense, net

     36.8        43.0        —           (4.0     9.2        85.0   

Goodwill and other intangible assets impairment charge

     52.7        —          —           52.5        22.1        127.3   

Unrealized foreign exchange (gain) loss

     (12.9     21.5        —           —          (0.3     8.3   

Provision for (proceeds from) litigation settlements

     —          0.1        0.1         —          (0.1     0.1   

Loss (gain) on store closings

     0.2        (0.1     0.1         —          0.1        0.3   

Other expense (income), net

     0.4        (1.4     —           —          3.7        2.7   

(Loss) income before income taxes

     (88.8     32.8        19.0         (51.4     (49.8     (138.2

Income tax (benefit) provision

     (5.8     14.0        8.1         3.0        —          19.3   

 

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DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

13. 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, 2013 and March 31, 2014, the condensed consolidating statements of operations and comprehensive income (loss) for the three and nine months ended March 31, 2013 and 2014, and the condensed consolidating statements of cash flows for the nine months ended March 31, 2013 and 2014 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 INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Balance Sheets

June 30, 2013

(In millions)

 

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

Assets

                

Cash and cash equivalents

   $ 0.9       $ 63.9       $ 25.4       $ 106.0         —        $ 196.2   

Consumer loans, net

     —           40.1         25.7         124.4         —          190.2   

Pawn loans

     —           0.9         —           153.5         —          154.4   

Loans in default, net

     —           4.5         —           26.7         —          31.2   

Other receivables

     —           8.4         8.8         13.0         —          30.2   

Prepaid expenses and other current assets

     —           5.0         9.7         46.8         —          61.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     0.9         122.8         69.6         470.4         —          663.7   

Fair value of derivatives

     —           27.5         —           3.7         —          31.2   

Intercompany receivables

     516.7         64.6         —           —           (581.3     —     

Property and equipment, net

     —           29.0         19.7         74.1         —          122.8   

Goodwill and other intangibles, net

     —           231.7         239.7         395.0         —          866.4   

Debt issuance costs, net

     5.9         8.6         1.5         0.6         —          16.6   

Investment in subsidiaries

     241.6         467.2         184.7         —           (893.5     —     

Other

     —           0.9         19.9         0.2         —          21.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 765.1       $ 952.3       $ 535.1       $ 944.0       $ (1,474.8   $ 1,721.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

                

Accounts payable

   $ 0.3       $ 17.7       $ 11.4       $ 23.3         —        $ 52.7   

Income taxes payable

     —           14.3         1.1         2.3         —          17.7   

Accrued expenses and other liabilities

     3.0         37.2         27.1         25.9         —          93.2   

Current portion of long-term debt

     —           25.0         25.0         17.0         —          67.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     3.3         94.2         64.6         68.5         —          230.6   

Long-term deferred tax liability

     —           3.1         37.2         9.5         —          49.8   

Long-term debt

     331.1         597.9         —           46.0         —          975.0   

Intercompany payables

     —           —           187.7         393.6         (581.3     —     

Other non-current liabilities

     —           10.4         20.6         4.6         —          35.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     334.4         705.6         310.1         522.2         (581.3     1,291.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Mandatorily redeemable preferred shares

     —           —           —           58.3         (58.3     —     

Total DFC Global Corp. stockholders’ equity

     430.7         246.7         225.0         363.5         (835.2     430.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     430.7         246.7         225.0         363.5         (835.2     430.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 765.1       $ 952.3       $ 535.1       $ 944.0       $ (1,474.8   $ 1,721.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Operations and Comprehensive Income (Loss)

Three Months ended March 31, 2013

(In millions)

 

 
     DFC
Global
Corp.
    National
Money
Mart

Company
     DFG
and
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

  

Consumer lending

   $ —        $ 48.1       $ 16.6      $ 117.0      $ —        $ 181.7   

Check cashing

     —          15.7         10.7        5.5        —          31.9   

Other

     —          17.4         7.0        45.6        —          70.0   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          81.2         34.3        168.1        —          283.6   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

             

Salaries and benefits

     —          17.3         12.1        31.9        —          61.3   

Provision for loan losses

     —          5.6         2.3        41.8        —          49.7   

Occupancy

     —          5.5         3.1        9.0        —          17.6   

Purchased gold costs

     —          1.4         0.4        13.5        —          15.3   

Depreciation

     —          1.5         0.5        4.5        —          6.5   

Other

     —          11.1         6.0        43.2        —          60.3   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          42.4         24.4        143.9        —          210.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     —          38.8         9.9        24.2        —          72.9   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

             

Corporate expenses

     —          5.4         14.9        7.6        —          27.9   

Intercompany charges

     —          5.0         (13.7     8.7        —          —     

Other depreciation and amortization

     —          0.6         1.7        3.8        —          6.1   

Interest expense (income), net

     2.9        17.2         (0.6     8.9        —          28.4   

Goodwill and other intangible assets impairment charge

     —          —           31.1        —          —          31.1   

Unrealized foreign exchange gain

     —          0.2         (0.1     2.0        —          2.1   

Loss on store closings

     —          0.1         0.1        0.1        —          0.3   

Other expense (income), net

     0.3        1.5         8.1        2.8        —          12.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (3.2     8.8         (31.6     (9.7     —          (35.7

Income tax provision (benefit)

     —          3.1         0.1        (2.5     —          0.7   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (3.2     5.7         (31.7     (7.2     —          (36.4

Equity in net income (loss) of subsidiaries:

             

National Money Mart Company

     5.7        —           —          —          (5.7     —     

Guarantors

     (31.7     —           —          —          31.7        —     

Non-guarantors

     (7.2     —           —          —          7.2        —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to DFC Global Corp.

   $ (36.4   $ 5.7       $ (31.7   $ (7.2   $ 33.2      $ (36.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     —          6.5         (6.0     (17.5     —          (17.0
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (36.4   $ 12.2       $ (37.7   $ (24.7   $ 33.2      $ (53.4
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

47


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Operations and Comprehensive Income (Loss)

Nine Months ended March 31, 2013

(In millions)

 

 
     DFC
Global
Corp.
    National
Money
Mart

Company
    DFG
and
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

Revenues:

            

Consumer lending

   $ —        $ 151.8      $ 52.2      $ 345.8      $ —        $ 549.8   

Check cashing

     —          53.0        26.1        18.3        —        $ 97.4   

Other

     —          47.9        21.6        136.5        —        $ 206.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —          252.7        99.9        500.6        —          853.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Salaries and benefits

     —          51.4        36.4        93.2        —          181.0   

Provision for loan losses

     —          16.7        8.2        103.3        —          128.2   

Occupancy

     —          16.3        9.6        25.5        —          51.4   

Purchased gold costs

     —          4.6        1.5        34.3        —          40.4   

Depreciation

     —          4.9        1.7        13.3        —          19.9   

Other

     —          33.5        18.5        113.6        —          165.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     —          127.4        75.9        383.2        —          586.5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     —          125.3        24.0        117.4        —          266.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and other expenses:

            

Corporate expenses

     —          17.2        52.2        22.0        —          91.4   

Intercompany charges

     —          17.4        (42.1     24.7        —          —     

Other depreciation and amortization

     —          1.9        5.8        11.1        —          18.8   

Interest expense (income), net

     10.3        58.6        (2.0     24.4        —          91.3   

Goodwill and other intangible assets impairment charge

     —          —          36.6        —          —          36.6   

Unrealized foreign exchange (gain) loss

     —          (0.3     (0.1     0.8        —          0.4   

Provision for litigation settlements

     —          —          2.7        —          —          2.7   

Loss on store closings

     —          0.2        0.3        0.4        —          0.9   

Other expense, net

     0.3        1.7        7.1        3.2        —          12.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (10.6     28.6        (36.5     30.8        —          12.3   

Income tax provision

     —          9.9        4.2        6.5        —          20.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (10.6     18.7        (40.7     24.3        —          (8.3

Less: Net loss attributable to non-controlling interests

     —          —          —          (0.2     —          (0.2

Equity in net (loss) income of subsidiaries:

            

National Money Mart Company

     18.7        —          —          —          (18.7     —     

Guarantors

     (40.7     —          —          —          40.7        —     

Non-guarantors

     24.5        —          —          —          (24.5     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to DFC Global Corp.

   $ (8.1   $ 18.7      $ (40.7   $ 24.5      $ (2.5   $ (8.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     —          6.6        (1.0     (2.7     —          2.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (8.1   $ 25.3      $ (41.7   $ 21.8      $ (2.5   $ (5.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

48


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Cash Flows

Nine Months Ended March 31, 2013

(In millions)

 

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

Cash flows from operating activities:

            

Net (loss) income

   $ (8.1   $ 18.7      $ (40.7   $ 24.3      $ (2.5   $ (8.3

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

            

Undistributed income of subsidiaries

     (2.5     —          —          —          2.5        —     

Depreciation and amortization

     1.3        9.1        8.2        24.8        —          43.4   

Goodwill and other intangible assets impairment charges

     —          —          36.6        —          —          36.6   

Provision for loan losses

     —          16.7        8.2        103.3        —          128.2   

Non-cash stock compensation

     7.9        —          —          —          —          7.9   

Losses on disposal of fixed assets

     —          0.7        0.8        2.5        —          4.0   

Unrealized foreign exchange (gain) loss

     —          (0.3     (0.1     0.8        —          0.4   

Deferred tax provision (benefit)

     —          2.0        3.4        (7.1     —          (1.7

Accretion of debt discount and deferred issuance costs

     13.2        2.6        —          —          —          15.8   

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

            

Increase in pawn loan fees and service charges receivable

     —          (0.1     —          (2.1     —          (2.2

Increase in finance and service charges receivable

     —          (2.6     (1.0     (15.2     —          (18.8

Decrease (increase) in other receivables

     0.3        (6.8     (0.8     6.0        —          (1.3

(Increase) decrease in prepaid expenses and other

     —          (0.1     (2.8     2.7        —          (0.2

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

     3.0        25.1        (3.9     (12.9     —          11.3   

Intercompany advances

     (4.9     (1.5     6.9        (0.5     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     10.2        63.5        14.8        126.6        —          215.1   

Cash flows from investing activities:

            

Net increase in consumer loans

     —          (13.4     (6.2     (100.7     —          (120.3

Originations of pawn loans

     —          (0.7     —          (225.0     —          (225.7

Repayment of pawn loans

     —          0.2        —          219.1        —          219.3   

Acquisitions, net cash acquired

     —          (10.0     —          (15.1     —          (25.1

Additions to property and equipment

     —          (5.4     (4.9     (22.4     —          (32.7

Intercompany advances

     27.6        (47.0     29.0        (2.5     (7.1     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     27.6        (76.3     17.9        (146.6     (7.1     (184.5

Cash flows from financing activities:

            

Proceeds from exercise of stock options

     1.1        —          —          —          —          1.1   

Net (decrease) increase in revolving credit facilities

     —          —          (8.5     3.5        —          (5.0

Other debt payments

     —          —          —          —          —          —     

Purchase of 2.875% Senior Convertible Notes due 2027

     (8.6     —          —          —          —          (8.6

Repurchase of common stock

     (30.1     —          —          —          —          (30.1

Payment of contingent consideration and acquisition installment payments

     —          —          —          (3.9     —          (3.9

Payment of debt issuance and other costs

     (0.2     —          —          —          —          (0.2

Intercompany advances

     —          (4.9     (27.7     25.5        7.1        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (37.8     (4.9     (36.2     25.1        7.1        (46.7

Effect of exchange rate changes on cash and cash equivalents

     —          1.2        —          (1.8     —          (0.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     —          (16.5     (3.5     3.3        —          (16.7

Cash and cash equivalents balance-beginning of period

     0.3        96.2        35.2        92.3        —          224.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents balance-end of period

   $ 0.3      $ 79.7      $ 31.7      $ 95.6      $ —        $ 207.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

49


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Balance Sheets

March 31, 2014

(In millions)

 

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

Assets

                

Cash and cash equivalents

   $ 0.9       $ 81.4       $ 47.8       $ 106.8       $ —        $ 236.9   

Consumer loans, net

     —           36.7         22.5         115.6         —          174.8   

Pawn loans, net

     —           1.5         —           151.9         —          153.4   

Loans in default, net

     —           4.7         0.1         20.7         —          25.5   

Other receivables

     —           12.7         3.2         19.5         —          35.4   

Prepaid expenses and other current assets

     —           5.2         7.6         39.7         —          52.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     0.9         142.2         81.2         454.2         —          678.5   

Intercompany receivables

     504.9         103.4         —           —           (608.3     —     

Property and equipment, net

     —           26.2         19.5         81.9         —          127.6   

Goodwill and other intangibles, net

     —           219.4         217.5         329.7         —          766.6   

Debt issuance costs, net

     4.7         7.6         1.0         2.0         —          15.3   

Investment in subsidiaries

     151.3         401.0         109.2         —           (661.5     —     

Other

     —           0.9         22.2         0.5         —          23.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Assets

   $ 661.8       $ 900.7       $ 450.6       $ 868.3       $ (1,269.8   $ 1,611.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

                

Accounts payable

   $ 0.3       $ 16.2       $ 12.1       $ 10.8       $ —        $ 39.4   

Income taxes payable

     —           14.4         5.2         5.1         —          24.7   

Accrued expenses and other liabilities

     5.5         38.7         22.4         34.5         —          101.1   

Current portion of long-term debt

     36.2         9.1         27.0         20.4         —          92.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     42.0         78.4         66.7         70.8         —          257.9   

Fair value of derivatives

     —           —           —           12.5         —          12.5   

Long-term deferred tax liability

     —           0.4         38.4         8.2         —          47.0   

Long-term debt

     308.0         598.2         —           45.5         —          951.7   

Intercompany payables

     —           —           195.8         412.5         (608.3     —     

Other non-current liabilities

     —           4.4         18.8         7.5         —          30.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     350.0         681.4         319.7         557.0         (608.3     1,299.8   

Total DFC Global Corp. stockholders’ equity

     311.8         219.3         130.9         311.3         (661.5     311.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     311.8         219.3         130.9         311.3         (661.5     311.8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 661.8       $ 900.7       $ 450.6       $ 868.3       $ (1,269.8   $ 1,611.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

50


Table of Contents

DFC GLOBAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Consolidating Condensed Statements Of Operations and Comprehensive Income (Loss)

Three Months ended March 31, 2014

(In millions)

 

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

Revenues:

             

Consumer lending

   $ —        $ 46.2      $ 16.5      $ 96.5      $ —         $ 159.2   

Check cashing

     —          13.8        10.7