| DOLLAR FINANCIAL CORP Item 1A RISK FACTORS Our current business and future results may be affected by a number of risks and uncertainties, including those described below |
| The risks and uncertainties described below are not the only risks and uncertainties we face |
| Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations |
| If any of the following risks actually occur, our business, results of operations and financial condition could suffer |
| The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements |
| If we do not generate a sufficient amount of cash, which depends on many factors beyond our control, our liquidity and our ability to service our indebtedness and fund our operations would be harmed |
| We believe that our cash flow from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs |
| However, we have substantial debt service obligations, working capital needs and contractual commitments |
| We cannot assure you that our business will generate sufficient cash flow from operations, that our anticipated revenue growth will be realized or that future borrowings will be available to us under credit facilities in amounts sufficient to enable us to pay our existing indebtedness, fund our expansion efforts or fund our other liquidity needs |
| Changes in applicable laws and regulations governing consumer protection and lending practices, both domestically and abroad, may have a significant negative impact on our business, results of operations and financial condition |
| Our business is subject to numerous state and certain federal and foreign laws and regulations which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business |
| These regulations govern or affect: • check cashing fees; • licensing and posting of fees; • lending practices, such as truth in lending and installment and single-payment lending; • interest rates and usury; • loan amount and fee limitations; • currency reporting; • privacy of personal consumer information; and • prompt remittance of proceeds for the sale of money orders |
| As we develop and introduce new products and services, we may become subject to additional federal and state regulations |
| In addition, future legislation or regulations may restrict our ability to continue our current methods of operation or expand our operations and may have a negative effect on our business, results of operations and financial condition |
| Also, states may also seek to impose new licensing requirements or interpret or enforce existing requirements in new ways |
| Our business is also subject to litigation and regulatory proceedings, which could generate adverse publicity or cause us to incur substantial expenditures or modify the way we conduct our business |
| Currently our check cashing and consumer lending activities are subject to only limited substantive regulation in Canada other than usury laws |
| There is presently activity in the Canadian Parliament to transfer jurisdiction and the development of laws and regulation of our industry’s consumer loan products to the respective provinces |
| If this occurs, there can be no assurance that the new regulations that may be adopted would not have a detrimental effect on our consumer lending business in Canada |
| In the United Kingdom, our consumer lending activities must comply with the Consumer Credit Act of 1974 and related rules and regulations which, among other things, require us to obtain governmental licenses and prescribe the presentation, form and content of loan 22 _________________________________________________________________ [75]Table of Contents agreements |
| The modification of existing laws or regulations in Canada and the United Kingdom, or the adoption of new laws or regulations restricting or imposing more stringent requirements on our international check cashing and consumer lending activities, could increase our operating expenses and significantly limit our international business activities |
| Our results of operations and financial condition may be negatively impacted by future guidance issued by the Federal Deposit Insurance Corporation |
| In the United States, in certain states we engage in consumer lending as a servicer for First Bank |
| We provide First Bank with marketing, servicing and collection services for their unsecured short-term single-payment loan products and their installment loan product |
| On March 2, 2005, the FDIC issued a financial institution letter which, among other things, limits the period during which a borrower may have a short-term single-payment loan outstanding from any FDIC-insured bank to three months during a twelve-month period |
| On June 16, 2005, we announced that, as a result of the FDIC’s letter, we would transition away from bank-funded consumer loans to company-funded loans |
| As of June 30, 2006, all of our retail financial service locations, with the exception of those in Pennsylvania and Texas, have transitioned to the company-funded consumer loan model |
| Historically we marketed and serviced bank-funded short-term single-payment loans at seventeen stores in Pennsylvania and six stores in Texas |
| In February 2006, we were advised by First Bank, which has been the lender in these consumer loans in Pennsylvania and Texas, that First Bank had received a letter from the FDIC communicating certain concerns about its consumer loan products |
| In Pennsylvania, the cessation of bank-funded single-payment loans eliminated this form of lending in the state, since the Legislature did not pass enabling legislation this year |
| All of our seventeen stores in Pennsylvania offer check cashing and other products and we expect they will continue to do so after July 1, 2006 when we cease to market and service single-payment loans in our Pennsylvania locations |
| In regards to our six Texas stores, we implemented a credit services organization model for single-payment loans in June, 2006 |
| If any order, law, rule or regulation by the State of Texas were to have the effect of significantly curtailing the amount or manner in which we may assess fees for credit services, our revenues derived from offering credit services would be adversely affected, unless we could offer, or we could secure an agreement with another party not subject to such limitations, to offer similar or alternate services |
| We cannot assure you that a credit services organization model will achieve market acceptance with our customers |
| First Bank makes installment loans in five states where we market and service these loans |
| First Bank is working to address certain concerns raised by the FDIC with respect to this product |
| While we have been responsive to First Bank’s requests and inquiries, we are uncertain whether First Bank will ultimately continue this line of business |
| If we were unable to market and service this product in the future, it could have a material adverse effect on our business, assuming we could not successfully develop, introduce and manage alternative products in our financial services stores in the United States |
| Public perception and press coverage of single-payment consumer loans as being predatory or abusive could negatively affect our revenues and results of operations |
| Consumer advocacy groups and some legislators have recently advocated governmental action to prohibit or severely restrict certain types of short-term consumer lending |
| Typically the consumer groups, some legislators and press coverage focus on lenders that charge consumers interest rates and fees that are higher than those charged by credit card issuers to more creditworthy consumers |
| This difference in credit cost may become more significant if a consumer does not repay the loan promptly, but renews the loan for one or more additional short-term periods |
| These types of short-term single-payment loans are often characterized by consumer groups, some legislators and press coverage as predatory or abusive toward consumers |
| If consumers accept this negative characterization of certain single-payment consumer loans and believe that the loans we provide to our customers fit this characterization, demand for our loans could significantly decrease, which could negatively affect our revenues and results of operations |
| If our estimates of loan losses are not adequate to absorb losses, our results of operations and financial condition may be adversely affected |
| We maintain an allowance for loan losses for anticipated losses for loans we make directly as well as for fee adjustments for losses on loans we originate and service for others |
| To estimate the appropriate level of loan loss reserves, including the reserve for estimated reductions to loan servicing fees, we consider the amount of outstanding loans owed to us, as well as loans owed to banks and serviced by us, historical loans charged off, current collection patterns and current economic trends |
| Our current allowance for loan losses is based on our charge-offs, expressed as a percentage of loan amounts originated for the last twelve months applied against the total amount of outstanding loans that we make directly and outstanding loans we originate and service for others |
| As of June 30, 2006, our allowance for loan losses on company-funded consumer loans that were not in default was dlra5dtta4 million, our allowance for losses on defaulted loans was dlra11dtta7 million and our reserve for estimated reductions to loan service fees was 23 _________________________________________________________________ [76]Table of Contents dlra0dtta9 million |
| These reserves, however, are estimates, and if actual loan losses or reductions to loan servicing fees are materially greater than our loan loss reserves, our results of operations and financial condition could be adversely affected |
| Legal proceedings may have a material adverse impact on our results of operations or cash flows in future periods |
| We are currently subject to a number of legal proceedings |
| We are vigorously defending these proceedings |
| However, the resolution of one or more of these proceedings could have a material adverse impact on our results of operations or cash flows in future periods |
| Competition in the financial services industry could cause us to lose market share and revenues |
| The industry in which we operate is highly fragmented and very competitive |
| In addition, we believe that the market will become more competitive as the industry consolidates |
| In addition to other check cashing stores and consumer lending stores in the United States, Canada and the United Kingdom, we compete with banks and other financial services entities and retail businesses that cash checks, offer consumer loans, sell money orders, provide money transfer services or offer other products and services offered by us |
| Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have |
| As a result, we could lose market share and our revenues could decline, thereby affecting our ability to generate sufficient cash flow to service our indebtedness and fund our operations |
| Unexpected changes in foreign tax rates and political and economic conditions could negatively impact our operating results |
| We currently conduct significant check cashing and consumer lending activities internationally |
| Our foreign subsidiaries accounted for 65dtta9prca of our total revenues during fiscal 2006 and 59dtta5prca of our total revenues during fiscal 2005 |
| Our financial results may be negatively impacted to the extent tax rates in foreign countries where we operate increase and/or exceed those in the United States and as a result of the imposition of withholding requirements on foreign earnings |
| Moreover, if political, regulatory or economic conditions deteriorate in these countries, our ability to conduct our international operations could be limited and the costs could be increased, which could negatively affect our operating results |
| The international scope of our operations may contribute to increased costs and negatively impact our operations |
| Our operations in Canada and the United Kingdom are significant to our business and present risks which may vary from those we face domestically |
| At June 30, 2006, assets held by our foreign subsidiaries represented 53dtta3prca of our total assets |
| Since international operations increase the complexity of an organization, we may face additional administrative costs in managing our business |
| In addition, most countries typically impose additional burdens on non-domestic companies through the use of local regulations, tariffs and labor controls |
| Unexpected changes to the foregoing could negatively impact our operations |
| Foreign currency fluctuations may adversely affect our results of operations |
| We derive significant revenue, earnings and cash flow from our operations in Canada and the United Kingdom |
| Our results of operations are vulnerable to currency exchange rate fluctuations in the Canadian dollar and the British pound against the United States dollar |
| We estimate that a 10dtta0prca change in foreign exchange rates by itself would have impacted income before income taxes by approximately dlra6dtta8 million for fiscal 2006 and dlra5dtta5 million for fiscal 2005 |
| This impact represents nearly 19dtta7prca of our consolidated income before income taxes for fiscal 2006 and 27dtta9prca of our consolidated income before income taxes for fiscal 2005 |
| Our results of operations will continue to be significantly affected by foreign currency fluctuations, which would cause our results to be below expectations in any period |
| Demand for our products and services is sensitive to the level of transactions effected by our customers, and accordingly, our revenues could be affected negatively by a general economic slowdown |
| A significant portion of our revenues is derived from cashing checks |
| Revenues from check cashing accounted for 43dtta4prca of our total revenues during fiscal 2006 and 44dtta2prca of our total revenues during fiscal 2005 |
| Any changes in economic factors that adversely affect consumer transactions could reduce the volume of transactions that we process and have an adverse effect on our revenues and results of operations |
| 24 _________________________________________________________________ [77]Table of Contents Our business model for our legal document preparation services business is being challenged in the courts, as well as by state legislatures, which could result in our discontinuation of these services in any one or more jurisdictions |
| Our business model for our legal document preparation services business is being challenged in various states and, at the federal level, by various United States Bankruptcy trustees as the unauthorized practice of law |
| A finding in any of these pending lawsuits and proceedings that our legal document preparation services business model constitutes the unauthorized practice of law could result in our discontinuation of these services in any one or more jurisdictions |
| Future legislative and regulatory activities and court orders may restrict our ability to continue our current legal document preparation services business model or expand its use |
| For example, there have been recent efforts by various trade and state bar associations and state legislatures and regulators, such as in Massachusetts, to define the practice of law in a manner which would prohibit the preparation of legal documents by non-attorneys |
| In Illinois, as we have done successfully in both California and Arizona, we have sponsored legislation (presently pending in both the House and the Senate) that would provide a “safe harbor” for franchisees under its business model |
| Changes in local rules and regulations such as local zoning ordinances could negatively impact our business, results of operations and financial condition |
| In addition to state and federal laws and regulations, our business can be subject to various local rules and regulations such as local zoning regulations |
| Any actions taken in the future by local zoning boards or other local governing bodies to require special use permits for, or impose other restrictions on, our ability to provide products and services could have a material adverse effect on our business, results of operations and financial condition |
| Our business and results of operations may be adversely affected if we are unable to manage our growth effectively |
| Our expansion strategy, which contemplates the addition of new stores and franchisees, is subject to significant risks |
| Our continued growth is dependent upon a number of factors, including the ability to hire, train and retain an adequate number of experienced management employees, the availability of adequate financing for our expansion activities, the ability to find qualified franchisees, the ability to obtain any government permits and licenses that may be required and other factors, some of which are beyond our control |
| There can be no assurance that we will be able to successfully grow our business or that our current business, results of operations and financial condition will not suffer if we are unable to do so |
| Expansion beyond the geographic areas where the stores are presently located will increase demands on management and divert their attention |
| In addition, expansion into new products and services will present new challenges to our business and will require additional management time |
| Our check cashing services may become obsolete because of technological advances |
| We derive a significant component of our revenues from fees associated with cashing payroll, government and personal checks |
| Recently, there has been increasing penetration of electronic banking services into the check cashing and money transfer industry, including direct deposit of payroll checks and electronic transfer of government benefits |
| To the extent that checks received by our customer base are replaced with such electronic transfers, demand for our check cashing services could decrease |
| Our business is seasonal due to the impact of several tax-related services, including cashing tax refund checks, making electronic tax filings and processing applications for refund anticipation loans |
| Historically, we have generally experienced our highest revenues and earnings during the third fiscal quarter ending March 31 when revenues from these tax-related services peak |
| This seasonality requires us to manage our cash flows over the course of the year |
| If our revenues were to fall substantially below what we would normally expect during certain periods, our financial results would be adversely impacted and our ability to service our debt, including our ability to make interest payments on our debt, may also be adversely affected |
| Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to robbery, employee error and theft |
| Since our business requires us to maintain a significant supply of cash in each of our stores, we are subject to the risk of cash shortages resulting from robberies as well as employee errors and theft |
| Although we have implemented various programs to reduce these risks, maintain insurance coverage for theft and provide security, systems and processes for our employees and facilities, we cannot assure you that robberies, employee error and theft will not occur and lead to cash shortages that could adversely affect our results of operations |
| 25 _________________________________________________________________ [78]Table of Contents If we lose key management or are unable to attract and retain the talent required for our business, our operating results could suffer |
| Our future success depends to a significant degree upon the members of our senior management team, particularly Jeffrey Weiss, our Chairman and Chief Executive Officer, and Donald Gayhardt, our President |
| Weiss and Gayhardt have been instrumental in procuring capital to assist us in executing our growth strategies, identifying and negotiating domestic and international acquisitions and providing expertise in managing our developing international operations |
| The loss of the services of one or more members of senior management could harm our business and development |
| Our continued growth also will depend upon our ability to attract and retain additional skilled management personnel |
| If we are unable to attract and retain personnel as needed in the future, our operating results and growth could suffer |
| A catastrophic event at our corporate or international headquarters or our centralized call-center facility in the United States could significantly disrupt our operations and adversely affect our business, results of operations and financial condition |
| Our global management processes are primarily provided from our corporate headquarters in Berwyn, Pennsylvania, and our international headquarters in Victoria, British Columbia and Nottingham, England |
| We also maintain a centralized call-center facility in Salt Lake City, Utah that performs customer service, collection and loan-servicing functions for our consumer lending business |
| We have in place disaster recovery plans for each of these sites, including data redundancy and remote information back-up systems, but if any of these locations were severely damaged by a catastrophic event, such as a flood, significant power outage or act of terror, our operations could be significantly disrupted and our business, results of operations and financial condition could be adversely impacted |
| Future sales of shares of our common stock in the public market could depress our stock price and make it difficult for you to recover the full value of your investment |
| We cannot predict the effect, if any, that market sales of shares of common stock or the availability of shares of common stock for sale will have on the market price of our common stock prevailing from time to time |
| If our existing stockholders sell substantial amounts of our common stock in the public market following this offering or if there is a perception that these sales may occur, the market price of our common stock could decline |
| Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change of control would be beneficial to our stockholders |
| Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders |
| These provisions include: • a board of directors that is classified such that only one-third of directors are elected each year; • authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; • limitations on the ability of stockholders to call special meetings of stockholders; • prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders; and • establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings |
| In addition, Section 203 of the Delaware General Corporations Law limits business combination transactions with 15prca stockholders that have not been approved by the board of directors |
| These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation |
| These provisions may apply even if the transaction may be considered beneficial by some stockholders |
| We do not intend to pay dividends for the foreseeable future |
| We have never declared or paid any dividends on our common stock |
| We intend to retain all of our earnings for the foreseeable future to finance the operation and expansion of our business, and we do not anticipate paying any cash dividends in the future |
| Our executive officers, directors and principal stockholders may be able to exert significant control over our future direction |
| Our executive officers, directors and principal stockholders together control approximately 39dtta4prca of our outstanding common stock |
| As a result, these stockholders, if they act together, may be able to exert significant influence, as a practical matter, on all matters requiring our stockholders’ approval, including the election of directors and approval of significant corporate transactions |
| We are also a party to employment agreements with Jeffrey Weiss and Donald Gayhardt that require us to use our commercially reasonable efforts to ensure that they continue to be members of our board of directors as long as they are our Chief Executive Officer and President, respectively |
| As a result, this concentration of ownership and representation on our board of directors may delay, prevent or deter a change in control, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the company or its assets and might reduce the market price of our common stock |