-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QDCFvPhkM8i7YGow0QdpjaUGYgjoERDKbXZqqKSMq3oye77/xjeRSsGDu8E0MrPQ QWHlOmbRlZb0TqWJ+sMKLQ== 0000898430-99-002150.txt : 19990518 0000898430-99-002150.hdr.sgml : 19990518 ACCESSION NUMBER: 0000898430-99-002150 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOLLAR FINANCIAL GROUP INC CENTRAL INDEX KEY: 0001028643 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 132997911 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-18221 FILM NUMBER: 99627720 BUSINESS ADDRESS: STREET 1: 1436 LANCASTER AVENUE STREET 2: STE 210 CITY: BERWYN STATE: PA ZIP: 19312-1288 BUSINESS PHONE: 6102963400 MAIL ADDRESS: STREET 1: 1436 LANCASTER AVENUE STREET 2: STE 210 CITY: BERWYN STATE: PA ZIP: 19312-1288 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 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, 1999 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 333-18221 DOLLAR FINANCIAL GROUP, INC. (Exact Name of Registrant as Specified in Its Charter) NEW YORK 13-2997911 (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
1436 LANCASTER AVENUE, SUITE 210 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 [x] 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 ---- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ---- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 100 ------ DOLLAR FINANCIAL GROUP, INC. INDEX
PART I. FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Interim Consolidated Balance Sheets as of June 30, 1998 and March 31, 1999 (unaudited)................................................ 3 Interim Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 1998 and 1999.......................................... 4 Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 1998 and 1999................................................. 5 Notes to Interim Unaudited Consolidated Financial Statements.................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................................. 25 PART II. OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities and Use of Proceeds..................................... 26 Item 3. Defaults Upon Senior Securities............................................... 26 Item 4. Submission of Matters to a Vote of Security Holders........................... 26 Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K.............................................. 26
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOLLAR FINANCIAL GROUP, INC. INTERIM CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
June 30, March 31, 1998 1999 --------- --------- ASSETS (unaudited) Cash and cash equivalents..................................... $ 55,501 $ 55,520 Accounts receivable........................................... 5,726 11,540 Income taxes receivable....................................... - 3,996 Prepaid expenses.............................................. 1,814 2,074 Deferred income taxes......................................... 1,070 1,070 Notes receivable - officers................................... 200 2,851 Property and equipment, net of accumulated depreciation of $4,616 and $6,151............................ 7,820 10,326 Cost assigned to contracts acquired, net of accumulated amortization of $461 and $557................................ 231 135 Cost in excess of net assets acquired, net of accumulated amortization of $6,559 and $9,958............................ 87,036 96,727 Covenants not to compete, net of accumulated amortization of $917 and $1,217.......................................... 786 478 Debt issuance costs, net of accumulated amortization of $885 and $1,690............................................. 4,856 10,245 Other......................................................... 810 1,517 --------- --------- $165,850 $196,479 ========= ========= LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable.............................................. $ 12,806 $ 12,547 Income taxes payable.......................................... 2,002 3,030 Advance from money transfer agent............................. 3,000 2,000 Accrued expenses.............................................. 3,722 3,825 Accrued interest payable...................................... 2,191 5,607 Due to parent................................................. - 907 Revolving credit facilities................................... - 4,416 Long-term debt and subordinated notes......................... 2,675 20,831 payable................................ 10-7/8 % Senior Notes due 2006................................ 110,000 109,190 Shareholder's equity: Common stock, $1 par value: 20,000 shares authorized; 100 shares issued and outstanding at June 30, 1998 and March 31, 1999............................ - - Additional paid-in capital.................................... 40,941 50,824 Accumulated deficit........................................... (8,875) (13,144) Accumulated other comprehensive loss.......................... (2,612) (3,554) --------- --------- Total shareholder's equity................................ 29,454 34,126 --------- --------- $165,850 $196,479 ========= =========
See notes to interim unaudited consolidated financial statements. 3 DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Ended Nine Months Ended March 31, March 31, ------------------------- ------------------------- 1998 1999 1998 1999 -------------------------- ------------------------- Revenues.................................. $30,154 $32,309 $83,159 $ 88,329 Store and regional expenses: Salaries and benefits.................. 8,466 8,979 25,190 26,005 Occupancy.............................. 2,386 2,407 7,295 7,069 Depreciation........................... 450 538 1,335 1,543 Other.................................. 5,098 5,182 18,014 17,026 -------- ------- ------- ------- Total store and regional expenses......... 16,400 17,106 51,834 51,643 Corporate expenses........................ 2,612 3,506 8,263 9,852 Loss on store closings and sales.......... 30 25 20 75 Other depreciation and amortization....... 1,184 1,394 3,576 4,217 Recapitalization costs.................... - - - 2,551 Non-cash compensation..................... - - - 10,024 Interest expense.......................... 3,203 5,959 9,595 12,457 -------- ------- ------- ------- Income (loss) before income taxes and extraordinary item........................ 6,725 4,319 9,871 (2,490) Income tax provision...................... 2,751 2,057 4,495 1,694 -------- ------- ------- ------- Income (loss) before extraordinary item 3,974 2,262 5,376 (4,184) Extraordinary loss on debt extinguishment (net of income tax benefit of $45)........ - - - 85 -------- ------- ------- ------- Net income (loss)......................... $ 3,974 $ 2,262 $ 5,376 $(4,269) -------- ------- ------- -------
See notes to interim unaudited consolidated financial statements. 4 DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended March 31, ----------------------------- 1998 1999 --------- ---------- Cash flows from operating activities: Net income (loss)....................... $ 5,376 ($4,269) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization......... 5,335 8,351 Loss on store closings and sales...... 20 75 Non-cash compensation................. - 10,024 Extraordinary loss on debt extinguishment (net of income tax benefit of $45)... - 85 Deferred tax benefit.................. 98 - Change in assets and liabilities (net of effect of acquisitions): Decrease (increase) in accounts receivable and income taxes receivable......................... 2,077 (6,793) Increase in prepaid expenses and other............................. (461) (854) Increase in accounts payable, income taxes payable, accrued expenses and accrued interest payable........................... 7,814 3,228 -------- -------- Net cash provided by operating activities............................. 20,259 9,847 Cash flows from investing activities: Acquisitions, net of cash acquired..... (1,751) (15,709) Gross proceeds from sales of property and equipment......................... 202 - Additions to property and equipment.... (1,698) (4,091) -------- -------- Net cash used in investing activities... (3,247) (19,800) Cash flows from financing activities: Extinguishment of long term debt....... - (810) Payments to money transfer agent....... - (1,000) Payments on subordinated notes payable. (132) (16) Net (decrease) increase in revolving credit facilities..................... (12,187) 3,973 Proceeds from long term debt........... - 18,107 Payment of debt issuance costs......... (56) (8,106) Advances to officers................... - (2,651) Payments of financed insurance premiums.............................. (229) (10) Net increase in due to parent.......... - 907 -------- -------- Net cash (used in) provided by financing activities................... (12,604) 10,394 Effect of exchange rate changes on cash and cash equivalents................... (261) (422) -------- -------- Net increase in cash and cash equivalents............................ 4,147 19 -------- -------- Cash and cash equivalents at beginning of period.............................. 55,205 55,501 -------- -------- Cash and cash equivalents at end of period................................. $ 59,352 $ 55,520 ======== ======== Supplemental disclosures of cash flow information: Interest paid........................... $ 6,425 $ 6,484 ======== ======== Income taxes paid....................... $ 1,591 $ 4,662 ======== ======== Supplemental schedule of non-cash investing and financing activities Non-cash compensation................... $ - $ 10,024 ======== ========
See notes to interim unaudited consolidated financial statements. 5 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying condensed unaudited interim consolidated financial statements of Dollar Financial Group, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. They do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. Although management believes that the disclosure is adequate to prevent the information from being misleading, it is suggested that the interim consolidated financial statements be read in conjunction with the Company's audited financial statements in its Annual Report on Form 10-K for the fiscal year ended June 30, 1998 filed with the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Operations Dollar Financial Group, Inc., organized in 1979 under the laws of the State of New York, is a wholly owned subsidiary of DFG Holdings, Inc. ("Holdings"). The activities of Holdings consist primarily of its investment in the Company. Holdings has no employees or operating activities. The Company, through its subsidiaries, provides retail financial and government contractual services to the general public through a network of 428 (of which 349 are company owned) locations operating as ABC Check Cashing, Almost-A-Banc(R), Any Kind Check Cashing Centers(R), C&C Check Cashing, Cash-N-Dash Check Cashing, Check Mart(R), Chex$Cashed(R), Financial Exchange Company(R), Money Mart(R), Quikcash, QwiCash(R), The Money Shop, The Service Centers and Loan Mart in thirteen states, the District of Columbia, Canada and the United Kingdom. The services provided at the Company's retail locations include check cashing, sale of money orders, money transfer services, consumer loans, issuance of food stamps and other welfare benefits, and various other related services. Additionally, the Company, through its merchant services division, maintains and services a network of electronic government benefits distribution to approximately 1,200 retail locations throughout the State of New York. 6 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 2. SUBSIDIARY GUARANTOR CONDENSED FINANCIAL INFORMATION The Company raised approximately $110 million of gross proceeds in 1996 by issuing 10 7/8% Senior Notes due in November 2006 (the "Notes"). The Company's payment obligations under the Notes are jointly and severally guaranteed on a full and unconditional basis by all of the Company's existing and future subsidiaries. The subsidiaries' guarantees rank pari passu in right of payment with all existing and future senior indebtedness of the Guarantors, including the obligations of the Guarantors under the Company's existing credit facilities and any successor credit facilities. Pursuant to the indenture of the Senior Notes, every direct and indirect subsidiary of the Company, each of which is wholly owned, serves as a guarantor of the notes, including the Company's foreign subsidiaries. The Company is a holding company with no assets, independent operations, or cash flows other than its investment in its subsidiaries. There are no restrictions on the Company's and the Guarantors' ability to obtain funds from their subsidiaries by dividend or by loan. Separate financial statements of each Guarantor have not been presented because management has determined that they would not be material to investors. The accompanying tables set forth the consolidating balance sheet at March 31, 1999, and the consolidating statements of operations and cash flows for the nine month period ended March 31, 1999 of the Company (on a parent-company basis), combined domestic Guarantors, combined foreign Guarantors and the consolidated Company. 7 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING BALANCE SHEET (In thousands)
Domestic Foreign Dollar Financial Subsidiary Subsidiary At March 31, 1999: Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------- ---------------- ------------ ------------ ------------ ASSETS Cash and cash equivalents.... $ 3,767 $30,812 $20,941 $ - $ 55,520 Accounts receivable.......... 7,715 4,827 5,197 (6,199) 11,540 Income taxes receivable...... 3,996 - - - 3,996 Prepaid expenses............. 624 1,108 342 - 2,074 Deferred income taxes........ 1,008 62 - - 1,070 Notes receivable-officers.... 2,851 - - - 2,851 Due from affiliates.......... 59,638 - - (59,638) - Property and equipment, net.. 1,556 5,177 3,593 - 10,326 Cost assigned to contracts acquired, net............... - 135 - - 135 Cost in excess of net assets - 56,712 40,015 - 96,727 acquired, net............... Covenants not to compete..... - 404 74 - 478 Debt issuance costs, net..... 10,245 - - - 10,245 Investment in subsidiaries... 79,465 - - (79,465) - Other........................ 621 415 481 - 1,517 -------- ------- ------- --------- -------- $171,486 $99,652 $70,643 $(145,302) $196,479 ======== ======= ======= ========= ======== LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable............. $ 5 $ 9,662 $ 2,880 $ - $ 12,547 Income taxes payable......... - 149 2,881 - 3,030 Advance from money transfer 2,000 - - - 2,000 agent....................... Accrued expenses............. 1,387 1,402 1,036 - 3,825 Accrued interest payable..... 4,728 879 6,199 (6,199) 5,607 Due to parent and affiliates. 907 18,135 41,503 (59,638) 907 Revolving credit facilities.. - - 4,416 - 4,416 Long term debt and 18,107 2,652 72 - 20,831 subordinated notes payable.. 10 7/8% Senior Notes due 2006 109,190 - - - 109,190 -------- ------- ------- --------- -------- 136,324 32,879 58,987 (65,837) 162,353 Shareholder's equity: Common stock................. - - - - - Additional paid-in capital... 50,824 46,614 10,797 (57,411) 50,824 (Accumulated deficit) retained earnings........... (13,144) 20,159 1,895 (22,054) (13,144) Accumulated other comprehensive loss.......... (2,518) - (1,036) - (3,554) -------- ------- ------- --------- -------- Total shareholder's equity... 35,162 66,773 11,656 (79,465) 34,126 -------- ------- ------- --------- -------- $171,486 $99,652 $70,643 $(145,302) $196,479 ======== ======= ======= ========= ========
8 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING STATEMENT OF OPERATIONS (In thousands)
Domestic Foreign Nine Months Ended March 31, Dollar Financial Subsidiary Subsidiary 1999: Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------- ----------- ------------ ------------- -------------- Revenues............................. $ - $66,922 $21,407 $ - $88,329 Store and regional expenses: Salaries and benefits............. - 19,609 6,396 - 26,005 Occupancy......................... - 5,333 1,736 - 7,069 Depreciation...................... - 1,156 387 - 1,543 Other............................. - 13,925 3,101 - 17,026 -------- ------- ------- -------- ------- Total store and regional - 40,023 11,620 - 51,643 expenses............................ Corporate expenses................... 7,533 - 2,319 - 9,852 Loss on store closings and sales..... 75 - - - 75 Other depreciation and amortization........................ 288 3,030 899 - 4,217 Recapitalization costs............... 2,551 - - - 2,551 Non-cash compensation................ 10,024 - - - 10,024 Interest expense..................... 9,636 186 2,635 - 12,457 -------- ------- ------- -------- ------- (Loss) income before income taxes and extraordinary item....... (30,107) 23,683 3,934 (2,490) Income taxes (benefit) provision..... (1,156) 602 2,248 - 1,694 -------- ------- ------- -------- ------- (Loss) income before extraordinary item.................. (28,951) 23,081 1,686 - (4,184) Extraordinary loss on debt extinguishment (net of income tax benefit of $45)............... 85 - - - 85 -------- ------- ------- -------- ------- (Loss) income before equity in net income of subsidiaries.............. (29,036) 23,081 1,686 - (4,269) Equity in net income of subsidiaries: Domestic subsidiary guarantors....... 23,081 - - (23,081) Foreign subsidiary guarantors........ 1,686 - - (1,686) - -------- ------- ------- -------- ------- Net (loss) income.................... ($4,269) $23,081 $ 1,686 $(24,767) ($4,269) ======== ======= ======= ======== =======
9 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING STATEMENT OF CASH FLOWS (In thousands)
Nine Months Ended March 31, Domestic Foreign 1999: Dollar Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ---------- ----------- ----------- ---------- ----------- Cash flows from operating activities: Net (loss) income..................... $ (4,269) $ 23,081 $ 1,686 $(24,767) $(4,269) Adjustments to reconcile net (loss) income to net, cash (used in) provided by operating activities: Undistributed income of subsidiaries...................... (24,767) - - 24,767 - Depreciation and amortization....... 2,895 4,171 1,285 - 8,351 Loss on store closings and sales.... 75 - - - 75 Non-cash compensation............... 10,024 - - - 10,024 Extraordinary loss on debt extinguishment (net of income tax benefit of $45)............... 85 - - - 85 Change in assets and liabilities (net of effect of acquisitions): Increase in accounts receivable and income taxes receivable..... (8,317) (741) (929) 3,194 (6,793) Increase in prepaid expenses and other....................... (709) (24) (121) - (854) Increase (decrease) in accounts payable, income taxes payable, accrued expenses and accrued interest payable................... 4,259 (198) 2,361 (3,194) 3,228 -------- -------- -------- -------- -------- Net cash (used in) provided by operating activities................ (20,724) 26,289 4,282 - 9,847 Cash flows from investing activities: Acquisitions, net of cash acquired......................... - (181) (15,528) - (15,709) Additions to property and equipment........................ (910) (1,957) (1,224) - (4,091) Net decrease in due from affiliates....................... 17,031 - - (17,031) - -------- -------- -------- -------- -------- Net cash provided by (used in) investing activities............. 16,121 (2,138) (16,752) (17,031) (19,800) Cash flows from financing activities: Extinguishment of long term debt.. (810) - - - (810) Payments to money transfer agent.. (1,000) - - - (1,000) Payments on subordinated notes payable.................... - (13) (3) - (16) Net increase in revolving credit facilities....................... - - 3,973 - 3,973 Proceeds from long term debt...... 18,107 - - - 18,107 Payments of debt issuance costs... (8,106) - - - (8,106) Advances to officers............... (2,651) - - - (2,651) Payments of financed insurance premiums......................... (10) - - - (10) Net increase (decrease) in due to affiliates.................... 907 (33,021) 15,990 17,031 907 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities................ 6,437 (33,034) 19,960 17,031 10,394 Effect of exchange rate changes on cash and cash equivalents......... - - (422) - (422) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents................. 1,834 (8,883) 7,068 - 19 Cash and cash equivalents at beginning of period.................. 1,933 39,695 13,873 - 55,501 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period............................... $ 3,767 $ 30,812 $ 20,941 $ - $ 55,520 ======== ======== ======== ======== ========
10 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 3. ACCOUNTS RECEIVABLE Accounts receivable as of March 31, 1999 increased from the comparative period of June 30, 1998 primarily due to post-dated checks acquired from the Company's purchase of Instant Cash Loans, Limited. 4. STORE CLOSINGS AND SALES During the year ended June 30, 1998, the Company sold all of its stores in Michigan, sold or closed five locations in southern California and closed sixteen stores in Pennsylvania whose primary business was to provide services for the distribution of public assistance benefits under existing contracts with state and local municipalities. As a result of declining caseloads, increasing costs and the termination of certain Company government contracts, the Company determined that these locations could not provide acceptable levels of profitability. The Company also closed five kiosks in Texas due to contractual requirements with the Southland Corporation. Included in the accompanying consolidated statements of operations for the nine months ended March 31, 1998 are revenues of $5.4 million and store expenses of $3.2 million related to these stores. The gain recognized related to the sale and closure of these stores was not material. 5. RECENT ACCOUNTING PRONOUNCEMENTS In September 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). The Company adopted SFAS No. 130 on July 1, 1998. The overall objective of SFAS No. 130 is to provide new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's net income or stockholder's equity. SFAS No. 130 requires foreign currency translation adjustments, which prior to adoption were reported separately in stockholder's equity, to be included in other comprehensive income. Prior year financial statements have been restated to conform to the provisions of SFAS No. 130. The following shows the comprehensive income (loss) for the periods stated:
Three Months Ended Nine Months Ended March 31, March 31, 1998 1999 1998 1999 ---------- --------- -------- -------- Net income (loss) $3,974 $2,262 $5,376 $(4,269) Foreign currency translation adjustment 324 473 (912) (942) ------ ------ ------ ------- Total comprehensive income (loss) $4,298 $2,735 $4,464 $(5,211) ====== ====== ====== =======
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value. It is effective for financial statements for fiscal years beginning after June 15, 1999 with early adoption permitted. The Company does not plan to adopt SFAS No. 133 for the fiscal year ended June 30, 1999. The Company does not expect the adoption to have a material impact as its use of derivatives is limited. 11 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) The Company has five put option contracts with expiration dates ranging in three month intervals through June 2000. These contracts were purchased to safeguard the Company's earnings before interest, taxes, depreciation, amortization, non cash charges, recapitalization costs and loss on store closings and sales ("EBITDA") from materially significant changes in the exchange rate of the Great Britain Pound for its United Kingdom subsidiary. The net loss associated with the cost of the option contracts recognized in earnings during the nine months ended March 31, 1999 was not material. MERGER AGREEMENT On November 13, 1998, DFG Holdings, Inc. ("Holdings"), a Delaware corporation and parent company of Dollar Financial Group, Inc., a New York corporation (the "Registrant"), entered into an agreement and plan of merger (the "Merger Agreement") with DFG Acquisition, Inc., ("Acquisition") a Delaware corporation, controlled by Green Equity Investors II, L.P., a Delaware limited partnership ("GEI II") and the stockholders of Holdings party thereto, providing for the merger of Acquisition with and into Holdings, with Holdings as the surviving corporation (the "Merger"). Holdings and Acquisition consummated the Merger on December 18, 1998, and in the Merger, the senior members of management of Holdings retained substantially all of their stock in the surviving corporation and the other stockholders received cash in exchange for their shares of Holdings. Immediately prior to the merger between Holdings and Acquisition, management of the Company exercised their options in Holdings which were converted into equivalent amounts of stock and resulted in a non-cash charge of $10.0 million. The Merger was accounted for as a recapitalization of Holdings. The management (other than the employment of Donald F. Gayhardt, Jr. as the President), Board of Directors and equity ownership of the Registrant did not change in the Merger and Holdings continues to own one hundred percent of the voting securities of the Registrant. In connection with the Merger, Holdings, the Registrant and Jeffrey Weiss, the current chief executive officer of Holdings and the Registrant, entered into a new employment agreement, dated November 13, 1998, effective concurrently with the consummation of the Merger, pursuant to which Jeffrey Weiss will continue to serve as the chief executive officer of Holdings and the Registrant. In addition the Registrant, Holdings and Donald F. Gayhardt, Jr., entered into an employment agreement, dated December 18, 1998, pursuant to which Donald F. Gayhardt, Jr. will serve as the President of Holdings and the Registrant. Donald F. Gayhardt, Jr. formerly served as the executive vice president and chief financial officer of the Registrant from 1992 to 1997. In connection with the Merger, the Registrant terminated the Second Amended and Restated Credit Agreement, dated as of November 15, 1996 (as amended and modified) with Bank of America National Trust and Savings Association, as administrative agent, Lehman Commercial Paper, Inc., as documentation agent, and certain lenders party thereto. The Registrant entered into a new Credit Agreement, dated as of December 18, 1998 (the "Credit Agreement"), obtaining a new $160 million credit facility from a syndicate of banks led by Wells Fargo Bank, National Association as administrative agent and co-arranger, First Union Capital Markets, as co-arranger, First Union National Bank, as syndication agent, and U.S. Bank National Association, as documentation agent. On January 8, 1999, Dresdner Bank AG became an additional participant in the Credit Agreement. The Credit Agreement provides for a revolving credit facility in favor of the Registrant of up to $70 million and two term loans aggregating up to $90 million. The $90 million term loans were available to fund the Registrant's repurchase obligations in excess of $20 million, if any, in connection with its 10 7/8% Senior Notes due 2006 (the "Senior Notes"), under the Indenture, dated November 15, 1996 (the "Indenture"), with State Street Bank and Trust Company (successor in interest to Fleet National Bank), as trustee. Repurchase obligations in connection with the Senior Notes were less than $20 million and as a result, the $90 million term loan commitments expired on February 16, 1999. 12 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) In connection with the Merger, the Registrant entered into a Purchase Agreement, dated as of December 18, 1998 (the "Purchase Agreement"), among GS Mezzanine Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone Street Fund 1998, L.P., Bridge Street Fund 1998, L.P., Ares Leveraged Investment Fund, L.P. and Ares Leveraged Investment Fund II, L.P. (collectively, the "Investors"), pursuant to which the Registrant may issue up to $20 million aggregate principal amount of its 10 7/8% Senior Subordinated Notes due 2006 (the "Subordinated Notes"), to (i) fund the Registrant's repurchase obligations, if any, in connection with its Senior Notes, under the Indenture, or (ii) to finance or refinance acquisitions of the Registrant. In connection with the Purchase Agreement, the Registrant entered into an Exchange and Registration Rights Agreement, dated December 18, 1998, with the parties to the Purchase Agreement, pursuant to which the Registrant is obligated under certain circumstances to exchange the Subordinated Notes and register such Subordinated Notes under the Securities Act of 1933. In February 1999, the Company issued $18.1 million of its Subordinated Notes to fund the purchase of Instant Cash Loans Limited, the remaining 86.5% partnership interest in its Calgary Money Mart Partnership, repurchase obligations and related fees under the Senior Notes of $11.4 million, $5.6 million and $1.1 million, respectively. 7. ACQUISITIONS On February 10, 1999, the Company and Dollar Financial UK Limited, an indirect subsidiary of the Company, formerly known as DFG Acquisition Limited, entered into an Agreement for the sale and purchase of shares with Henry Hallam, Rachel Hallam and shareholders signatory thereto, to acquire all of the outstanding shares of Instant Cash Loans Limited ("ICL") which operates eleven stores in the United Kingdom. The aggregate purchase price for this acquisition was $11.4 million and was funded with the issuance of the Company's Subordinated Notes. On February 17, 1999, National Money Mart Company, a subsidiary of the Company, entered into an Asset Purchase Agreement with King Mortgage Limited and Denis Willner, to purchase the remaining 86.5% partnership interest in its Calgary Money Mart Partnership ("Calgary"). Calgary operates six stores in Alberta, Canada. The aggregate purchase price for this acquisition was $5.6 million and was funded with the issuance of the Company's Subordinated Notes. The following unaudited pro forma information for the nine months ended March 31, 1998 and 1999 presents the results of operations as if the acquisitions had occurred as of the beginning of the periods presented. The pro forma operating results include the results of these acquisitions for the indicated period and reflect the amortization of intangible assets arising from the acquisitions, increased interest expense on acquisition debt, the income tax impact and other immaterial activities discontinued as of the respective purchase dates of ICL and Calgary. Pro forma results of operations are not necessarily indicative of the results of operations that would have occurred had the purchase been made on the date above or the results which may occur in the future.
Nine Months Ended March 31, (Unaudited) ------------------------------- 1998 1999 -------- --------- (dollars in thousands) Revenues $87,881 $ 93,268 Income (loss) before extraordinary item $ 5,220 ($4,207) Net (loss) income $ 5,220 ($4,292)
13 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) SUPPLEMENTAL STATISTICAL DATA
March 31, Company Operating Data: 1998 1999 -------- -------- Stores in operation: Company-Owned.......................... 352 349 Franchised Stores...................... 70 79 ---- ---- Total................................... ==== ==== 422 428 ==== ====
Three Months Ended Nine Months Ended March 31 March 31 ------------------ ------------------ Operating Data: 1998 1999 1998 1999 -------- ------- ------- ------- Face amount of checks cashed (in $ 587 $ 606 $ 1,720 $ 1,722 millions).............................. Face amount of average check............ $ 345 $ 337 $ 319 $ 303 Face amount of average check (excluding $ 383 $ 382 $ 345 $ 327 Canada)................................ Average fee per check................... $11.11 $11.61 $ 9.74 $ 9.84 Number of checks cashed (in thousands).. 1,700 1,797 5,400 5,686 Adjusted EBITDA/1/...................... $11,570 $12,154 $24,424 $28,464 Adjusted EBITDA Margin/1/............... 38.4% 37.6% 29.4% 32.2% Three Months Ended Nine Months Ended March 31 March 31 ------------------ ------------------ Collections Data: 1998 1999 1998 1999 -------- ------- ------- ------- Face amount of returned checks (in $ 3,325 $ 3,960 $10,315 $12,374 thousands)............................. Collections (in thousands).............. 2,550 3,153 7,378 9,280 ------- ------- ------- ------- Net write-offs (in thousands)........... $ 775 $ 807 $ 2,937 $ 3,094 ======= ======= ======= ======= Collections as a percentage of returned checks........................ 76.7% 79.6% 71.5% 75.0% Net write-offs as a percentage of check cashing revenues................ 4.1% 3.9% 5.6% 5.5% Net write-offs as a percentage of the face amount of checks cashed........... .13% .13% .17% .18%
- ------------------------ /1/ Adjusted EBITDA is earnings before interest, taxes, depreciation, amortization, noncash charges, recapitalization costs and loss on store closings and sales. Adjusted EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all of the Company's cash needs. Adjusted EBITDA should not be considered in isolation or as a substitute for net income (loss), cash flows from operating activities, or other measures of liquidity determined in accordance with generally accepted accounting principles. The Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of revenues. Management believes that these ratios should be reviewed by prospective investors because the Company uses them as one means of analyzing its ability to service its debt, the Company's lenders use them for the purpose of analyzing the Company's performance with respect to the Company's new revolving credit facility and the Indenture, and the Company understands that they are used by certain investors as one measure of a company's historical ability to service its debt. Not all companies calculate EBITDA in the same fashion and therefore these ratios as presented may not be comparable to other similarly titled measures of other companies. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company is a consumer financial services company operating the second largest check cashing store network in the United States, the largest such network in Canada and recently acquired stores in the United Kingdom. The Company provides a diverse range of consumer financial products and services primarily consisting of check cashing, money orders, money transfers, consumer loans, bill payment and distribution of public assistance benefits. The Company, in its opinion, has included all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of its financial position at March 31, 1999 and the results of operations for the three and nine months ended March 31, 1999 and 1998. The results for the three and nine months ended March 31, 1999 are not necessarily indicative of the results for the full fiscal year. On November 13, 1998, DFG Holdings Inc. ("Holdings"), entered into an agreement and plan of merger (the "Merger Agreement") with DFG Acquisition, Inc., ("Acquisition") controlled by Green Equity Investors II, L.P., and the stockholders of Holdings party thereto, providing for the merger of Acquisition with and into Holdings, with Holdings as the surviving corporation (the "Merger"). Holdings and Acquisition consummated the Merger on December 18, 1998, and in the Merger, the senior members of management of Holdings retained substantially all of their stock in the surviving corporation and the other stockholders received cash in exchange for their shares of Holdings. The Merger was accounted for as a recapitalization of Holdings. The management (other than the employment of Donald F. Gayhardt, Jr. as the President), Board of Directors and equity ownership of the Company did not change in the Merger and Holdings continues to own one hundred percent of the voting securities of the Company. In connection with the Merger, Holdings, the Company and Jeffrey Weiss, the current chief executive officer of Holdings and the Company, entered into a new employment agreement, dated November 13, 1998, effective concurrently with the consummation of the Merger, pursuant to which Jeffrey Weiss will continue to serve as the chief executive officer of Holdings and the Company. In addition the Company, Holdings and Donald F. Gayhardt, Jr., entered into an employment agreement, dated December 18, 1998, pursuant to which Donald F. Gayhardt, Jr. will serve as the President of Holdings and the Company. Donald F. Gayhardt, Jr. formerly served as the executive vice president and chief financial officer of the Company from 1992 to 1997. On February 10, 1999, the Company and Dollar Financial UK Limited, an indirect subsidiary of the Company, formerly known as DFG Acquisition Limited, entered into an Agreement for the sale and purchase of shares with Henry Hallam, Rachel Hallam and shareholders signatory thereto, to acquire all of the outstanding shares of Instant Cash Loans Limited ("ICL") which operates eleven stores in the United Kingdom. The aggregate purchase price for this acquisition was $11.4 million and was funded with the issuance of the Company's 10 7/8% Senior Subordinated Notes due 2006. On February 17, 1999, National Money Mart Company, a subsidiary of the Company, entered into an Asset Purchase Agreement with King Mortgage Limited and Denis Willner, to purchase the remaining 86.5% partnership interest in its Calgary Money Mart Partnership ("Calgary"). Calgary operates six stores in Alberta, Canada. The aggregate purchase price for this acquisition was $5.6 million and was funded with the issuance of the Company's 10 7/8% Senior Subordinated Notes due 2006. 15 The Company's revenues from government services decreased for the three and nine months ended March 31, 1999 as compared to the three and nine months ended March 31, 1998. The Company expects that its government revenues will continue to decline due to a number of factors, including a continued reduction in the number of recipients eligible for public assistance benefits. Additionally, a number of state and local governmental agencies have initiated processes to install electronic benefits transfer systems designed to disburse public assistance benefits directly to individuals (sometimes referred to as "EBT" systems). The Commonwealth of Pennsylvania initiated an EBT system in January 1998 which was fully implemented during fiscal 1998. As a result, all of the Company's contracts with the Commonwealth of Pennsylvania were terminated during fiscal 1998. The Company's contracts with the Commonwealth of Pennsylvania contributed 0.0% and 7.5% of consolidated gross revenues for the three months ended March 31, 1999 and 1998 and 0.0% and 6.8% of consolidated gross revenues for the nine months ended March 31, 1999 and 1998, respectively. The installation of such systems has not had a material adverse effect on the Company's results of operations or financial condition. 16 RESULTS OF OPERATIONS Revenue Analysis
Three Months Ended March 31, Nine Months Ended March 31, -------------------------------------------------------------------------------- (Percentage of (Percentage of ($ in thousands) Total Revenue) ($ in thousands) Total Revenue) ------------------------ ------------------ ----------------- -------------- 1998 1999 1998 1999 1998 1999 1998 1999 -------- -------- ------ ------- ------- ------- ------ ------ Check cashing................ $18,879 $20,866 62.6% 64.6% $52,612 $56,300 63.3% 63.7% Cash 'Til Payday(R) origination fees............. 2,241 4,975 7.4 15.4 4,669 12,964 5.6 14.7 Government services.......... 3,757 1,776 12.5 5.5 10,685 4,861 12.8 5.5 Other revenue................ 5,277 4,692 17.5 14.5 15,193 14,204 18.3 16.1 Total revenue................ $30,154 $32,309 100.0% 100.0% $83,159 $88,329 100.0% 100.0%
QUARTER COMPARISON Total revenues were $32.3 million for the three months ended March 31, 1999 compared to $30.2 million for the three months ended March 31, 1998, an increase of $2.1 million or 7.0%. Comparable retail store sales at those locations owned by the Company for the entire period increased $2.9 million or 11.2%. Check cashing revenue increased 8.2%, Cash 'Til Payday(R) origination fees increased 92.0% and other revenues increased 4.5%. The increase in Cash 'Til Payday(R) origination fees resulted from the full roll-out of the Cash 'Til Payday(R) loan product. Partially offsetting this increase, however, was a 58.3% decline in revenues from government services resulting from a decrease in the volume of benefits distributed by the Company and the termination of all of the Company's contracts with the Commonwealth of Pennsylvania in fiscal year 1998. Government services revenues accounted for 5.5% of total revenues for the three months ended March 31, 1999, a decrease from 12.5% of total revenues for the three months ended March 31, 1998. NINE MONTH COMPARISON Total revenues were $88.3 million for the nine months ended March 31, 1999 compared to $83.2 million for the nine months ended March 31, 1998, an increase of $5.1 million or 6.1%. Comparable retail store sales at those locations owned by the Company for the entire period increased $7.3 million or 10.2%. Check cashing revenue increased 8.9%, Cash 'Til Payday(R) origination fees increased 143.2% and other revenues increased 2.5%. The increase in Cash 'Til Payday(R) origination fees resulted from the full roll-out of the Cash 'Til Payday(R) loan product. Partially offsetting this increase, however, was a 52.3% decline in revenues from government services resulting from a decrease in the volume of benefits distributed by the Company and the termination of all of the Company's contracts with the Commonwealth of Pennsylvania in fiscal year 1998. Government services revenues accounted for 5.5% of total revenues for the nine months ended March 31, 1999, a decrease from 12.8% of total revenues for the nine months ended March 31, 1998. 17 Store and Regional Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31, ------------------------------------------------------------------------ (Percentage of (Percentage of ($ in thousands) total revenue) ($ in thousands) total revenue) -------------------- --------------- ----------------- ----------------- 1998 1999 1998 1999 1998 1999 1998 1999 ------- ------- ------ ------- -------- ------- ------- -------- Salaries and benefits.................... $ 8,466 $ 8,979 28.1% 27.8% $25,190 $26,005 30.3% 29.4% Occupancy................................ 2,386 2,407 7.9 7.4 7,295 7,069 8.8 8.0 Depreciation............................. 450 538 1.5 1.7 1,335 1,543 1.6 1.8 Other.................................... 5,098 5,182 16.9 16.0 18,014 17,026 21.6 19.3 ------- ------- ---- ---- ------- ------- ---- ---- Total store and regional expenses............................ $16,400 $17,106 54.4% 52.9% $51,834 $51,643 62.3% 58.5% ======= ======= ==== ==== ======= ======= ==== ====
QUARTER COMPARISON Store and regional expenses were $17.1 million for the three months ended March 31, 1999 compared to $16.4 million for the three months ended March 31, 1998, an increase of $700,000 or 4.3%. Total store and regional expenses associated with stores closed during fiscal 1998 were $900,000 for the three months ended March 31, 1998. For the three months ended March 31, 1999 total store and regional expenses decreased to 52.9% of total revenue compared to 54.4% of total revenue for the three months ended March 31, 1998 due to an improvement in store level profitability and increased revenues. NINE MONTH COMPARISON Store and regional expenses were $51.6 million for the nine months ended March 31, 1999 compared to $51.8 million for the nine months ended March 31, 1998, a decrease of $200,000 or 0.4%. Total store and regional expenses associated with stores closed during fiscal 1998 were $3.2 million for the nine months ended March 31, 1998. For the nine months ended March 31, 1999 total store and regional expenses declined to 58.5% of total revenue compared to 62.3% of total revenue for the nine months ended March 31, 1998 due to an improvement in store level profitability and increased revenues. 18 Other Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31, ------------------------------------------------------------------------ (Percentage of (Percentage of ($ in thousands) total revenue) ($ in thousands) total revenue) ------------------- -------------- ---------------- ----------------- 1998 1999 1998 1999 1998 1999 1998 1999 ------- ------- ------ ------ ------- ------- ------- ------- Corporate expenses......................... $2,612 $3,506 8.7% 10.9% $8,263 $ 9,852 9.9% 11.2% Loss on store closings and sales............................... 30 25 .1 .1 20 75 - .1 Other depreciation and..................... 1,184 1,394 3.9 4.3 3,576 4,217 4.3 4.8 amortization.............................. Recapitalization costs..................... - - - - - 2,551 - 2.9 Non-cash compensation...................... - - - - - 10,024 - 11.3 Interest expense........................... 3,203 5,959 10.6 18.4 9,595 12,457 11.5 14.1 Income taxes............................... 2,751 2,057 9.1 6.4 4,495 1,694 5.4 1.9
QUARTER COMPARISON Corporate Expenses Corporate expenses were $3.5 million for the three months ended March 31, 1999 compared to $2.6 million for the three months ended March 31, 1998, an increase of $900,000. Additional costs, primarily salaries and benefits, have been incurred as a result of the implementation of various strategic initiatives including full roll-out of the Cash 'Til Payday(R) loan product and the opening of Loan Mart(TM) stores, which offer only Cash 'Til Payday(R) unsecured short- term loans. Other Depreciation and Amortization Other depreciation and amortization expenses were $1.4 million and $1.2 million for the three months ended March 31, 1999 and 1998, respectively, an increase of $200,000. The increase was mainly due to the accelerated amortization of the remaining goodwill associated with the Company's government services line of business which is being amortized over the estimated remaining life of the future undiscounted cash flows of the government services business. This increased amortization expense was offset in part by the reduced amortization related to the writedown of goodwill of $12.9 million in June 1998. Interest Expense Interest expense was $6.0 million for the three months ended March 31, 1999 and was $3.2 million for the three months ended March 31, 1998, an increase of $2.8 million or 87.5%. This increase is primarily attributable to the merger and recapitalization of Holdings and the issuance of debt to fund current acquisitions. Income Taxes The provision for income taxes was $2.1 million for the three months ended March 31, 1999 compared to $2.8 million for the three months ended March 31, 1998, a decrease of $700,000. The Company's effective tax rate is significantly greater than the federal statutory rate of 34% due to non-deductible goodwill amortization, state taxes and foreign taxes. This decrease is primarily attributable to the expenses related to the merger and recapitalization of Holdings. 19 NINE MONTH COMPARISON Corporate Expenses Corporate expenses were $9.9 million for the nine months ended March 31, 1999 compared to $8.3 million for the nine months ended March 31, 1998, an increase of $1.6 million or 19.3%. Additional costs, primarily salaries and benefits, have been incurred as a result of the implementation of various strategic initiatives including full roll-out of the Cash 'Til Payday(R) loan product and the opening of Loan Mart(TM) stores, which offer only Cash 'Til Payday(R) unsecured short-term loans. Loss on Store Closings and Sales During the nine months ended March 31, 1998 the Company sold all of its stores in Michigan and sold or closed five locations in southern California whose primary business was to provide services for the distribution of public assistance benefits under existing contracts with state and local municipalities. Other Depreciation and Amortization Other depreciation and amortization expenses were $4.2 million and $3.6 million for the nine months ended March 31, 1999 and 1998, respectively, an increase of $600,000. The increase was mainly due to the accelerated amortization of the remaining goodwill associated with the Company's government services line of business which is being amortized over the estimated remaining life of the future undiscounted cash flows of the government services business. This increased amortization expense was offset in part by the reduced amortization related to the writedown of goodwill of $12.9 million in June 1998. Recapitalization Costs During the nine months ended March 31, 1999, the Company incurred $2.6 million of expenses associated with the consummation of the merger between Holdings and Acquisition which was accounted for as a recapitalization of Holdings. Non-Cash Compensation Immediately prior to the merger between Holdings and Acquisition, management of the Company exercised their options in Holdings which were converted into equivalent amounts of stock and resulted in a non-cash charge of $10.0 million. Interest Expense Interest expense was $12.5 million for the nine months ended March 31, 1999 and was $9.6 million for the nine months ended March 31, 1998. This increase is primarily attributable to the merger and recapitalization of Holdings and the issuance of debt to fund current acquisitions. Income Taxes The provision for income taxes was $1.7 million for the nine months ended March 31, 1999 compared to $4.5 million for the nine months ended March 31, 1998, a decrease of $2.8 million. The Company's effective tax rate is significantly greater than the federal statutory rate of 34% due to non-deductible goodwill amortization, state taxes and foreign taxes. This decrease is primarily attributable to the expenses related to the merger and recapitalization of Holdings. 20 Changes in Financial Condition Cash and cash equivalent balances and the revolving credit facilities balance fluctuate significantly as a result of seasonal, monthly and day-to-day requirements for funding check cashing and other operating activities. For the nine months ended March 31, 1999, cash and cash equivalents remained constant due to the net activity of cash generated by operations of $9.8 million, acquisitions and the expenses related to the merger and recapitalization of Holdings. Income taxes receivable and notes receivable-officers increased due to the merger and recapitalization of Holdings. Liquidity and Capital Resources The Company raised approximately $110 million of gross proceeds in 1996 by issuing 10 7/8% Senior Notes due in November 2006 (the "Senior Notes"). The Notes require semi-annual cash interest payments due in November and May. In connection with the Merger, the Company terminated the Second Amended and Restated Credit Agreement, dated as of November 15, 1996. The Company entered into a new Credit Agreement, dated as of December 18, 1998 obtaining a new $160 million credit facility. The Credit Agreement provides for a revolving credit facility of up to $70 million and two term loans aggregating up to $90 million. There were no borrowings under the revolving credit facility as of March 31, 1999. The $90 million term loans were available to fund the Company's repurchase obligations in excess of $20 million, if any, in connection with its 10 7/8% Senior Notes due 2006. Repurchase obligations in connection with the Senior Notes were less than $20 million and as a result, the $90 million term loan commitments expired on February 16, 1999. Also, in connection with the Merger, the Company entered into a Purchase Agreement dated December 18, 1998, to which the Company may issue up to $20 million aggregate principal amount of its 10 7/8% Senior Subordinated Notes Due 2006 (the "Subordinated Notes"), to (i) fund the Company's repurchase obligations, if any, in connection with its Senior Notes or (ii) to finance or refinance acquisitions of the Company. In February 1999, the Company issued $18.1 million of its Subordinated Notes to fund the purchase of ICL, Calgary, repurchase obligations and related fees under the Senior Notes of $11.4 million, $5.6 million and $1.1 million, respectively. The Senior Notes and the New Revolving Credit Facility contain certain financial and other restrictive covenants, which, among other things, require the Company to achieve certain financial ratios, limit capital expenditures, restrict payment of dividends, and require certain approvals in the event the Company wants to increase the borrowings. The Company also established an overdraft credit facility to fund peak working capital needs for its Canadian operation. The overdraft facility provides for borrowings up to $4.6 million, of which $3.1 million was outstanding as of March 31, 1999. In conjunction with the purchase of ICL, the Company established an overdraft credit facility to fund working capital needs for its United Kingdom operations. The overdraft facility provides for up to $1.6 million and had $1.3 million outstanding as of March 31, 1999. The Company's principal sources of cash are from operations, borrowings under its credit facilities and sales of Holdings Common Stock. The Company anticipates its principal uses of cash will be to provide working capital, finance capital expenditures, meet debt service requirements and finance acquisitions. For the nine months ended March 31, 1999 and 1998, the Company had net cash provided by operating activities of $9.8 million and $20.3 million, respectively, which cash was used for purchases of equipment related to existing stores, recently acquired stores and investments in technology. As of March 31, 1999, the Company had made capital expenditures of $4.1 million. The actual amount of capital expenditures will depend in part upon the number of new stores acquired and the number of stores remodeled. The Company is highly leveraged, and borrowings under the new revolving credit facility and the overdraft facilities will increase the Company's debt service requirements. Management believes that, based on current levels of operations and anticipated improvements in operating results, cash flows from operations and borrowings available under the revolving credit facility will enable the Company to fund its liquidity and capital expenditure requirements for the foreseeable future, including scheduled payments of interest on the Senior Notes and payment of interest and principal on the Company's other indebtedness. The Company's belief that it will be able to fund its 21 liquidity and capital expenditure requirements for the foreseeable future is based upon the historical growth rate of the Company and the anticipated benefits resulting from operating efficiencies. Additional revenue growth is expected to be generated by increased check cashing revenues (consistent with historical growth), and an expansion of the Cash 'Til Payday Loan(R) Program. The Company also expects operating expenses to increase, although the rate of increase is expected to be less than the rate of revenue growth. Furthermore, the Company does not believe that additional acquisitions or expansion are necessary in order for it to be able to cover its fixed expenses, including debt service. As discussed earlier within this Management's Discussion and Analysis, the Commonwealth of Pennsylvania initiated an EBT system in January 1998 which was fully implemented during fiscal 1998. As a result, all of the Company's contracts with the Commonwealth of Pennsylvania were terminated during fiscal 1998. The termination of these contracts did not have a material impact on the Company's liquidity or capital resources. As a result of the foregoing assumptions, which the Company believes to be reasonable, the Company expects to be able to fund its liquidity and capital expenditure requirements for the foreseeable future, including scheduled payments on the Senior Notes and payments of interest and principal on other indebtedness. There can be no assurance, however, that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available under the new revolving credit facility in an amount sufficient to enable the Company to service its indebtedness, including the Notes, or to make anticipated capital expenditures. It may be necessary for the Company to refinance all or a portion of the principal of the Notes on or prior to maturity, under certain circumstances, but there can be no assurance that the Company will be able to effect such refinancing on commercially reasonable terms or at all. Seasonality and Quarterly Fluctuations The Company's business is seasonal due to the impact of tax-related services, including cashing tax refund checks. Historically, the Company has generally experienced its highest revenues and earnings during its third fiscal quarter ending March 31 when revenues from these tax-related services peak. Due to the seasonality of the Company's business, therefore, results of operations for any fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and expenses associated with acquisitions and the addition of new stores. Impact of Year 2000 General Description of the Year 2000 Issue and the Nature and Effect of the Year 2000 on Information Technology (IT) and Non-IT Systems The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operation, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. Based on recent assessments, the Company determined that it would be required to modify or replace portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 Issue can be mitigated. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue will not have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing and implementation. To date the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicated that hardware systems could be affected. However, the Company has determined that these systems will not present a material exposure as it related to the Company's service to its customers. 22 Timetable for Completion of Each Remaining Phase Progress in Becoming Year 2000 Compliant The remediation of hardware systems is expected to be completed by April 1999. The testing of the hardware is expected to be completed by May 1999 with full implementation by June 1999. Nature and Level of Importance of Third Parties and their Exposure to the Year 2000 To date, the Company is not aware of any external agent that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion would not materially impact the Company. Costs The Company does not expect the costs to be material and does not expect the projects to have a significant impact on operations. Risks Management of the Company believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete the remaining phases, there would not be a material impact on the Company's results of operations, liquidity, or capital resources, since the Company is not significantly dependent on technology. Contingency Plans The Company has contingency plans for maintaining its store operations. These plans do not involve any technological tools because the Company is not significantly dependent on technology. Recent Accounting Pronouncements The Company has adopted the Financial Accounting Standards Board, "FASB" Statement No. 130, "Reporting Comprehensive Income" for the fiscal year ended June 30, 1999. The adoption of this standard has not had a material effect on the Company's results of operations, financial position, capital resources, or liquidity. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt its requirements in connection with its annual reporting for the fiscal year ending June 30, 1999. 23 Forward-Looking Statements This report may contain certain forward-looking statements regarding the Company's expected performance for future periods, and actual results for such periods may materially differ. Such forward-looking statements involve risks and uncertainties, including risks of changing market conditions in the overall economy and the industry, consumer demand, the success of the Company's acquisition strategy and other factors detailed from time to time in the Company's annual and other reports filed with the Securities and Exchange Commission. 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in quantitative and qualitative disclosures in fiscal year 1999 with the exception of exposure to the foreign currency rate of the Great Britain Pound relating to Dollar Financial Group, Inc.'s ("Company's") acquisition of Instant Cash Loans Limited. The Company has purchased five put option contracts with expiration dates ranging in three month intervals through June 2000. These contracts were purchased to safeguard the Company's earnings before interest, taxes, depreciation, amortization, non cash charges, recapitalization costs and loss on store closings and sales ("EBITDA") from materially significant changes in the exchange rate of the Great Britain Pound for its United Kingdom subsidiary. The cost of these contracts was not significant. Reference is made to Item 7A in the Annual Report on Form 10-K for the year ended June 30, 1998. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings On February 8, 1999, an action was commenced in the United States District Court for the Central District of California by a consumer who had borrowed from Eagle National Bank (the "Bank") in a payday- loan transaction. The defendants in the action are the Company, its affiliates, the Bank and ten other unnamed defendants, plaintiff sues on behalf of an alleged class of borrowers who, plaintiff claims, have been overcharged in loan transactions originated and serviced for the Bank by the Company. Plaintiff alleges violations of state and federal usury and consumer-protection laws and seeks damages, including treble damages under the federal racketeering statute, in an unknown amount plaintiff alleges to be in excess of $75 million. The Company believes that it has meritorious defenses to the action, under both federal and state law and it intends to defend the lawsuit vigorously. Reference is made to Item 3, Legal Proceedings in the Company's audited financial statements in its Annual Report of Form 10-K for the fiscal year ended June 30, 1998. Item 2. Changes in Securities and Use of Proceeds Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 10.24 Agreement for the sale and purchase of shares of Instant Cash Loans, LTD. dated February 10, 1999 with Dollar Financial Group, Inc., DFG Acquisition, LTD., Henry Hallam, Rachel Hallam and shareholders signatory thereto. (Incorporated by reference to exhibit 10.24 of the Registrant's Form 8K/A filed April 26, 1999, declared effective February 25, 1999). 10.25 Purchase Agreement dated February 17, 1999 by and among National Money Mart Company (a subsidiary of Dollar Financial Group, Inc.), King Mortgage LTD. And Denis Willner to purchase the remaining 86.5% partnership interest in Calgary Money Mart Partnership. (Incorporated by reference to exhibit 10.25 of the Registrant's Form 8K/A filed April 26, 1999, declared effective February 25, 1999). 27.1 Financial Data Schedule (b) Reports on Form 8-K During the three month period ending March 31, 1999, the Registrant filed a report on Form 8K dated February 25, 1999 with an amended Form 8K filed on April 26, 1999, reporting an Item 2 event (Acquisition or Disposition of Assets) and an Item 7 event (Financial Statements and Exhibits). 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOLLAR FINANCIAL GROUP, INC. Dated: May 17, 1999 *By: /s/ Richard S. Dorfman -------------------------------------- Name: Richard S. Dorfman Title: Executive Vice President and Chief Financial Officer, (principal financial and chief accounting officer) * The signatory hereto is the principal financial and chief accounting officer and has been duly authorized to sign on behalf of the registrant. 27 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JUN-30-1998 MAR-31-1999 55,520 0 11,540 0 0 73,130 16,477 6,151 196,479 25,009 130,021 0 0 0 34,126 196,479 0 88,329 0 51,643 26,719 0 12,457 (2,490) 1,694 (4,184) 0 85 0 (4,269) 0 0
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