-----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, UtQMG1ieFnFJmuRXNF/Xf4VZNW389nmY7Q/3ZqNKHYLRLvI1qiGePjMmw3zPhM6B e6Joee0dcu4RsAsDe1N2WQ== 0001028643-02-000020.txt : 20021001 0001028643-02-000020.hdr.sgml : 20021001 20020930214551 ACCESSION NUMBER: 0001028643-02-000020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20021001 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-18221 FILM NUMBER: 02777477 BUSINESS ADDRESS: STREET 1: 1436 LANCASTER AVE 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-K 1 a10k063002.txt JUNE 30, 2002 10K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2002 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 (I.R.S. Employer Incorporation or Organization) Identification No.) 1436 Lancaster Avenue, Suite 210 Berwyn, Pennsylvania 19312-1288 (Address of Principal Executive (Zip Code) Offices) Registrant's telephone number, including area code (610) 296-3400 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO[ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [ ] There is no market for the common stock of Dollar Financial Group, Inc. and all of such stock is held by the registrant's parent, DFG Holdings, Inc. See "Item 12 - Security Ownership of Certain Beneficial Owners and Management." 1 APPLICABLE ONLY TO REGISTRANTS 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 REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of September 30, 2002, 100 shares of the registrant's common stock, par value $1.00 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information required by Part IV is incorporated by reference to the Registrant's Registration Statement on Form S-4 (Registration No. 333-18221) declared effective March 11, 1997, Registrant's Statement on Form 10Q filed February 16, 1999, Registrant's Statement on Form 8K/A filed April 26, 1999, Registrant's Statement on Form 8K/A filed September 30, 1999 and Registrant's Statement on Form 8K/A filed February 28, 2000. 2 DOLLAR FINANCIAL GROUP, INC. Table of Contents 2002 Report on Form 10-K PART I Item 1. Business.................................................................................. 4 Item 2. Properties................................................................................ 21 Item 3. Legal Proceedings......................................................................... 22 Item 4. Submission of Matters to a Vote of Security Holders....................................... 22 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 23 Item 6. Selected Financial Data................................................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 36 Item 8. Financial Statements and Supplementary Data............................................... 37 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 62 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 62 Item 11. Executive Compensation.................................................................... 64 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 67 Item 13. Certain Relationships and Related Transactions............................................ 67 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 70
3 Item 1. BUSINESS General Dollar Financial Group, Inc., a New York corporation (the "Company" or "DFG"), was organized in 1979 under the name Monetary Management Corporation. The Company is a consumer financial services company operating the second largest check cashing store network in the United States and the largest such network in each of Canada and the United Kingdom. The Company provides a diverse range of consumer financial products and services primarily consisting of check cashing, short-term consumer loans, money orders, money transfers and various other related services. As of June 30, 2002, the Company has a total network of 1,018 stores in 17 states, the District of Columbia, Canada and the United Kingdom, including 641 Company-owned stores with revenues for the fiscal year ended June 30, 2002 of $202.0 million, and with earnings before interest, income taxes, depreciation, amortization, loss on store closings and sales, other non-recurring items and establishment of reserves for new consumer lending arrangements ("Adjusted EBITDA") for the fiscal year ended June 30, 2002 of $48.3 million. The Company's primary customers are working, lower-income individuals and families who require basic consumer financial services and who are underserved by traditional retail banking networks. The increased expense and decreased availability of traditional retail banking services have left an increasing number of individuals and families (estimated at 9.5% of U.S. households) without banking relationships. Management believes that growth in the lower-income segment of the population, combined with decreasing availability of traditional retail banking services, provides the Company with significant growth opportunities. The Company's stores currently operate under the following locally established brand names: Money Mart(R), The Money Shop and Loan Mart(R). Through a relationship with a bank, the Company's subsidiary Money Mart(R) Express (formerly known as moneymart.com(TM)) services and originates short-term consumer loans through 656 independent document transmitters in 17 states. Industry Overview United States The check cashing industry in the United States is highly fragmented. A recent independent industry report estimates the current number of check cashing outlets at 13,000 as of March 2002, an increase from the approximately 1,350 national listings in 1986, according to a similar industry survey. The Company believes it is one of only seven U.S. check cashing store networks that have more than 100 locations, the remaining operations being local store networks and single-unit operators. The Company believes that industry growth has been fueled by several demographic and socioeconomic trends, including a decline in the number of households with bank deposit accounts, an increase in the number of low-paying service sector jobs and an overall increase in the lower-income population. A January 2000 Federal Reserve study estimated that 9.5% of families in the U.S. in 1998 did not maintain a banking relationship. The primary reason cited for not maintaining a checking account was that not enough checks are written to make it beneficial. Other reasons include the inability of many families and individuals to maintain the minimum account balances required by many banks and thrifts, high bank service charges and general dislike of banks. Increases in fees charged by banks on deposit accounts over time have contributed to the decline in the number of families and individuals holding such accounts. The U.S. Public Interest Research Group conducted a national study in 2001 which showed that the annual cost to maintain a regular checking account was $228 and the average monthly balance requirements to avoid regular checking fees was $587. In general, the findings indicate that banks have increased their fees significantly on a real and inflation-adjusted basis. Many banks have elected over time to close their less profitable or lower-traffic locations. These closings have tended to occur in lower-income and urban neighborhoods. If, as management of the Company expects, banks continue 4 this trend, wage earners in these lower-income areas will have fewer, if any, convenient alternatives to local check cashing stores to perform basic financial transactions. Lower-income individuals represent a large segment of the U.S. population. Data from the 2000 U.S. Census indicate that nearly 45 million U.S. households have income of less than $35,000 a year. This low-wage population, from which the Company draws most of its customers, is the fastest-growing segment of the workforce. As the low-wage population continues to grow, the Company believes that this population will increasingly rely on the check cashing industry and the other financial services that the Company provides as the primary source of their consumer financial products and services. Canada In Canada, the Company's Money Mart subsidiary is the industry leader with a dominant market share and 90% brand awareness. There is a Money Mart location in every city in Canada with a population of over 50,000 (except Quebec). In contrast to the U.S. market, 97% of Canadian consumers maintain a bank account. Money Mart has developed the industry through convenience and service with locations positioned to serve middle-class Canadians. A 2001 market research report indicates that customers' primary motivation for use is fast service, late hours and convenient location. The typical Money Mart customer is 32 years of age (60/40, male/female), employed in the trades/labor or services sector and earning $22,000 annually. The Canadian business had revenues of $55.4 million and Adjusted EBITDA of $24.0 million for the fiscal year ended June 30, 2002. United Kingdom In the United Kingdom ("UK"), check cashing is a relatively new and highly fragmented business that developed with the passage of the Checks Act in 1992, which prohibits non-financial institutions from cashing checks (a check cashing establishment is considered to be a financial institution for purposes of compliance with the Checks Act). Traditionally, check cashing had been offered as an "add-on" service to certain retail establishments. Management believes that while there are approximately 2,000 listed check cashing locations in the UK, only approximately 400 are free-standing check cashing locations. In addition, management believes the Company's 413 owned and franchised stores account for 40% of the total number of check cashing stores in the UK. A recent study conducted by the New Policy Institute stated that 9 million people in the UK, or approximately 24% of the adult population, are without a bank account. The UK business had revenues of $33.6 million and Adjusted EBITDA of $10.2 million for the fiscal year ended June 30, 2002. Growth and Consolidation Management believes that significant opportunities for growth exist in the check cashing industry as a result of: (i) growth of the lower-income population sector; (ii) failure of commercial banks and other traditional financial service providers to address the needs of lower-income individuals, and; (iii) the trend toward consolidation in the check cashing industry. Management believes that, as the lower-income population segment increases, and as trends within the retail banking industry create a less accessible environment for these members of society, the check cashing industry and other retail financial service providers will realize a significant increase in demand for their products and services. However, despite these growth dynamics, the Company believes that the industry is undergoing a period of consolidation. The Company believes that this consolidation trend has resulted from a number of factors, including; (i) economies of scale available to larger operators; (ii) use of technology as a means to serve customers better and control large store networks; (iii) inability of smaller operators to form the alliances necessary to deliver new products, and (iv) increased licensing and regulatory burdens. This consolidation process should provide the Company, as one of the largest store networks, with opportunities for continued growth through selective acquisitions. 5 Competitive Strengths The Company believes that it has the following competitive strengths: Store locations in favorable demographic areas. The Company has carefully chosen desirable locations near its targeted customer base. Management adheres to a strict set of market survey and location guidelines when selecting acquisition targets and new store sites. The Company's store base is a mix of urban sites, which are located in high-traffic shopping areas, and suburban sites, which are located in strip malls near multi-family housing complexes. High-quality customer service. As part of its retail and customer-driven strategy, the Company focuses on providing friendly customer service in a clean and attractive environment. Operating hours vary by location, but are typically extended and designed to cater to those customers who, due to their work schedules, cannot make use of "normal" banking hours. As part of its employee training program, the Company's customer service representatives are encouraged and instructed to treat customers in a friendly and courteous manner, which management believes results in repeat business. The Company sends anonymous market researchers posing as shoppers to each of its U.S. check cashing stores monthly to measure customer service performance. Over the course of the fiscal year, these stores consistently scored 85% on the quality of the store appearance and customer service provided. Recent scores have been steadily improving and have exceeded 90%. Broad offering of products and services. Company stores offer a wide range of consumer financial products and services to meet the demands of their respective locales, including check cashing, money orders, money transfers and short-term consumer loans. The Company also offers a variety of ancillary products and services, including photo IDs, prepaid local and long distance phone service, lottery tickets, electronic tax filing, bill payment, photocopy and fax services. Economies of scale. As a result of its acquisition strategy in the United States, Canada and the, the Company has reached a size that enables it to benefit from economies of scale and to negotiate favorable contracts with its suppliers. In addition, the Company's market position enables it to enter into favorable relationships with strategic partners like Western Union. Management believes that the Company's size also allows it to gain greater access to capital than its smaller competitors. Management expertise. The regional managers of the Company have extensive experience and expertise in the check cashing industry, as well as other retail industries, which the Company believes provides it with a competitive advantage. Furthermore, the Company has been largely successful in retaining the operational managers formerly employed by the targets of its acquisitions. The Company's senior management has extensive experience in banking, retailing and financial services. In addition, the Company's management has significant experience in acquiring and integrating businesses into the Company, and it employs a disciplined approach to making such acquisitions. Well-diversified credit risk. For the twelve months ended June 30, 2002, the Company cashed 8.7 million checks totaling $3.0 billion, with an average face value of $342. Additionally, through its consumer lending program, the Company originates or makes direct unsecured short-term loans up to $700. The Company actively manages its customer risk profile and collection efforts in order to maximize revenues while maintaining losses within a targeted range. Management has instituted control mechanisms that it believes have been effective in managing risk, including: (i) check verification procedures; (ii) customer identification cards; (iii) customer files, including customer photographs, addresses, employment information and transaction history; (iv) point-of-sale database systems; and (v) background checks, among others. As a result, management believes that the Company is unlikely to sustain a material credit loss from a single transaction or series of transactions. The Company has experienced relatively low net write-offs as a percentage of the face amount of checks cashed. For the fiscal year ended June 30, 2002, in the Company's check cashing business, net write-offs as a percentage of face amount of checks cashed were 0.24%. For the fiscal year ended June 30, 2002, with respect to loans originated by the Company, net writeoffs as a percentage of originations were 2.0%. 6 Although the Company believes that these competitive strengths will enable it to achieve its strategic objectives, it is possible that the Company could not be able to capitalize on them. Changing demographics in areas surrounding the Company's stores could negatively impact the quality of the store base. Regulatory and technological changes could affect the products offered or the prices charged for such products. The Company provides an extensive training program for all of its employees, however; and as the Company continues to grow, inability to attract, train, and recruit talented field personnel and corporate management could negatively impact Company performance. Strategy The Company's business strategy is to capitalize on its competitive strengths by increasing the revenues and profitability of its existing operations, by continuing to grow through acquisition of check cashing store networks and by developing of alternative store formats. Key elements of the Company's business strategy include the following: Maintaining and instilling a customer-driven retail philosophy. The Company has focused on increasing its customer base through a service-oriented approach designed to meet the needs of working, lower-income individuals and families in need of basic consumer financial services. The Company believes it has differentiated itself from its competitors by focusing on customer service. The Company offers extended operating hours in clean, well-lighted and convenient store locations to enhance appeal and stimulate store traffic. The Company's research indicates that, although approximately 49% of its customers have bank accounts, its customers prefer immediate access to cash without waiting for check clearance. In addition, the Company believes that many of its customers find great value in their ability to cash a payroll or government check immediately, for a fee, at a location within close proximity to their home or workplace at nearly any time of day. The Company's surveys indicate that the widespread availability of ATM machines does not alter a customer's decision to perform financial transactions at Company locations. The Company uses locally targeted advertising, including direct mail, outdoor and event sponsorships, to promote awareness of its products and its customer service. The Company plans to continue to develop ways to improve service to its customers. Introducing new products and services. The Company has developed a "one-stop shop" concept to offer many consumer financial products and services to its targeted customer base. The Company believes that its check cashing customers enjoy the convenience of other services offered by the Company, such as the sale of money orders, money transfer services and short-term consumer loans, as well as a variety of related products and services that assist marginally banked or credit-impaired customers to manage their personal finances more effectively. As it has completed acquisitions, the Company has expanded the product and services offerings of its newly acquired check cashing store networks, and it intends to continue this strategy with future acquisitions. In particular, the Company has continued to expand its successful consumer lending program by adding this service to newly acquired or opened stores. Growing through targeted acquisitions. Acquisitions have played an integral role in the Company's growth. Since June 1997, the Company has acquired an aggregate of over 369 owned or franchised stores. As a result of increasing industry consolidation, the Company may be required to shift its acquisition strategy to smaller check cashing store networks. Management will continue to seek opportunistic acquisitions of well-managed check cashing store networks located in areas with favorable demographics, including the southeastern and western parts of the United States, Canada and the UK, as well as profitable check cashing stores in areas that complement the Company's existing geographic markets. Developing alternative retailing platforms. In an effort to capitalize more fully on the success of its consumer lending product, in September 1997 the Company began opening stores under the name Loan Mart(R), which market primarily unsecured short-term loans in a friendly office-like environment. The Company's management believes the Loan Mart stores appeal to a broader market segment than that which currently utilizes the Company's check cashing stores. The Company currently operates 103 Loan Mart stores in the Seattle, Fresno, Sacramento, Tucson, Las Vegas, Denver, Colorado Springs, Oklahoma City, Tulsa, Portland and Phoenix areas and may develop stores in additional geographic areas. In addition, the Company's subsidiary Money Mart(R) Express (formerly known as moneymart.com(TM)) services and originates short-term consumer loans through 656 independent document transmitters in 17 states. Management believes that Loan 7 Mart stores and Money Mart Express allow the Company to access new customers and significantly increase the Company's revenues and profitability. Management believes that this and other platforms being explored by the Company complement the strategy and operations of the existing check cashing stores. Capitalizing on economies of scale. Because of the scale of its operation in an otherwise highly fragmented industry, management of the Company believes it is well positioned to take advantage of the current trend toward consolidation in the check cashing industry. The Company believes it is able to operate more profitably than smaller competitors as a result of its broader product offerings, greater purchasing power, improved operating efficiencies and greater access to capital. Customers Based upon a 2001 consumer survey conducted in several of the Company's markets and the Company's operating experience, the Company believes that its core check cashing customer group is composed of individuals between the ages of 18 and 44. The majority of these individuals rent their homes, are employed and have annual household incomes of between $10,000 and $35,000, with a median income of $22,500. The Company believes that consumers value attention to customer service, and their choice of check cashing stores is influenced by the Company's convenient locations and extended operating hours. At the Company's Loan Mart(R) stores, which primarily market short-term consumer loans, customers are composed of individuals between the ages of 18 and 49. The majority of these individuals rent their homes and are employed in professional/managerial positions. A survey conducted by the Credit Research Center of Georgetown University found that 51.5% of short-term consumer loan customers reported household incomes of between $25,000 and $50,000 with 25.4% in excess of $50,000. The survey also found that these customers choose short-term consumer loans because of easy and fast approval and convenient location. Based on a 2001 market research survey performed for the Company's Canadian subsidiary, the Company believes that the demographics of Canadian customers are similar to those of the Company's existing U.S. customers. The survey found that the typical Canadian customer is 32 years of age, employed in the trades/labor or services sector and earning $22,000 annually. Although 97% of the surveyed customers have a bank account, these consumers continue to use the Company's services due to the fast and courteous service, the stores' extended operating hours and convenient locations. A study was recently conducted showing that 9 million people in the UK, or approximately 24% of the adult population, are without a bank account. The survey also found that 89% of UK customers have annual incomes of below $30,000, and 62% are under the age of 35. The Company believes that many of its customers are workers or independent contractors who receive payment on an irregular basis and generally in the form of a check. The Company's core customer group lacks sufficient income to accumulate assets or to build savings. These customers rely on their current income to cover immediate living expenses and cannot afford the delays inherent in waiting for checks to clear through the commercial banking system. Furthermore, the Company believes that many of its customers use its check cashing services in order to gain immediate access to cash without having to maintain a minimum balance in a checking account and incur the cost of maintaining a checking account. In addition, although research conducted for the Company indicates that approximately 49% of its U.S. customers do have bank accounts, these customers use check cashing stores because they find the locations and extended business hours of the Company's stores more convenient than those of banks and because they value ability to receive cash immediately, without waiting for a check to clear. Products and Services The Company's check cashing stores provide a broad range of consumer financial products and services to its customers at convenient locations with extended operating hours. Customers typically use the Company's stores to cash checks (payroll, government, and personal), obtain short-term consumer loans and utilize one or more of the additional financial services available at most locations. In addition, customers use a variety of ancillary products, including photo ID, prepaid local and long distance phone service, lottery tickets, electronic tax filing, bill payment, photocopy and fax services. 8 Check Cashing Customers may cash all types of checks at DFG check cashing locations, including payroll checks, government checks and personal checks. In exchange for a verified check, customers receive cash immediately and are not required to wait several days for the check to clear. Both the customer's identification and the validity of the check are verified (occasionally employing multiple sources) pursuant to the Company's standard verification procedures before any cash is distributed. Customers are charged a fee for this service (typically a small percentage of the face value of the check), which varies depending upon the type of check cashed and whether or not the customer has a previous record of cashing checks at that location. For the twelve months ended June 30, 2002, check cashing fees averaged approximately 3.53% of the face value of checks cashed. The following charts present summaries by Consolidated Company, Domestic and Foreign Operations of check cashing data for the periods indicated below: CHECK CASHING FEE SUMMARY Consolidated Company: ----------------------------------------------------- For the Years Ended June 30, ----------------------------------------------------- 1998 1999 2000 ----------------------------------------------------- Face amount of checks cashed....................... $2,301,861,000 $2,319,847,000 $2,784,267,000 Number of checks cashed............................ 7,991,128 7,490,406 8,328,176 Average face amount per check...................... $288.05 $309.71 $334.32 Average fee per check.............................. $8.80 $10.14 $11.69 Average fee as a % of face amount.................. 3.05% 3.28% 3.50% For the Years Ended June 30, ------------------------------------- 2001 2002 ------------------------------------- Face amount of checks cashed....................... $3,150,350,000 $2,969,455,000 Number of checks cashed............................ 9,406,749 8,689,819 Average face amount per check...................... $334.90 $341.72 Average fee per check.............................. $11.24 $12.06 Average fee as a % of face amount.................. 3.36% 3.53% Domestic Operations: ----------------------------------------------------- For the Years Ended June 30, ----------------------------------------------------- 1998 1999 2000 ----------------------------------------------------- Face amount of checks cashed....................... $1,764,397,000 $1,723,912,000 $1,712,912,000 Number of checks cashed............................ 5,851,813 5,176,483 4,654,747 Average face amount per check...................... $301.51 $333.03 $367.99 Average fee per check.............................. $8.92 $10.73 $12.17 Average fee as a % of face amount.................. 2.96% 3.22% 3.31% For the Years Ended June 30, ------------------------------------- 2001 2002 ------------------------------------- Face amount of checks cashed....................... $1,728,504,000 $1,636,967,000 Number of checks cashed............................ 4,485,393 4,317,534 Average face amount per check...................... $385.36 $379.14 Average fee per check.............................. $12.19 $12.41 Average fee as a % of face amount.................. 3.16% 3.27% 9 Foreign Operations: ----------------------------------------------------- For the Years Ended June 30, ----------------------------------------------------- 1998 1999 2000 ----------------------------------------------------- Face amount of checks cashed....................... $537,464,000 $595,935,000 $1,071,355,000 Number of checks cashed............................ 2,139,315 2,313,923 3,673,429 Average face amount per check...................... $251.23 $257.54 $291.65 Average fee per check.............................. $8.46 $8.98 $11.08 Average fee as a % of face amount.................. 3.37% 3.49% 3.80% For the Years Ended June 30, ------------------------------------- 2001 2002 ------------------------------------- Face amount of checks cashed....................... $1,421,846,000 $1,332,488,000 Number of checks cashed............................ 4,921,356 4,372,285 Average face amount per check...................... $288.91 $304.76 Average fee per check.............................. $10.37 $11.71 Average fee as a % of face amount.................. 3.59% 3.84%
If a check cashed by the Company is not paid for any reason, the full face value of the check is recorded as a loss in the period during which the check was returned unpaid. The check is then sent to the store for collection; and, if it remains uncollected, it is then sent to the Company's internal collections department, which contacts the maker and/or payee of each returned check and, if necessary, commences legal action. Recoveries on returned items are credited in the period when the recovery is received. During fiscal 2002, approximately 74.7% of the face value of checks returned were ultimately collected by the Company. The following charts present summaries by Consolidated Company, Domestic and Foreign Operations of the Company's returned check experience for the periods indicated below: RETURNED CHECK EXPERIENCE Consolidated Company: -------------------------------------------------- For the Years Ended June 30, -------------------------------------------------- 1998 1999 2000 -------------------------------------------------- Face amount of returned checks..................... $13,823,000 $16,607,000 $22,866,000 Collections on returned checks..................... 9,908,000 12,505,000 17,097,000 Net write-offs of returned checks.................. 3,915,000 4,102,000 5,769,000 Collections as a percentage of returned checks..... 71.7% 75.3% 74.7% Net write-offs as a percentage of check cashing revenues................................ 5.6% 5.4% 5.9% Net write-offs as a percentage of face amount of checks cashed................................ 0.17% 0.18% 0.21% For the Years Ended June 30, --------------------------------- 2001 2002 --------------------------------- Face amount of returned checks..................... $27,938,000 $27,875,000 Collections on returned checks..................... 19,752,000 20,812,000 Net write-offs of returned checks.................. 8,186,000 7,063,000 Collections as a percentage of returned checks..... 70.7% 74.7% Net write-offs as a percentage of check cashing revenues................................ 7.7% 6.7% Net write-offs as a percentage of face amount of checks cashed................................ 0.26% 0.24% 10 Domestic Operations: -------------------------------------------------- For the Years Ended June 30, -------------------------------------------------- 1998 1999 2000 -------------------------------------------------- Face amount of returned checks..................... $10,161,000 $11,246,600 $12,019,000 Collections on returned checks..................... 6,755,000 7,646,040 7,808,000 Net write-offs of returned checks.................. 3,406,000 3,600,560 4,211,000 Collections as a percentage of returned checks..... 66.5% 68.0% 65.0% Net write-offs as a percentage of check cashing revenues................................ 6.5% 6.5% 7.4% Net write-offs as a percentage of face amount of checks cashed................................ 0.19% 0.21% 0.25% For the Years Ended June 30, --------------------------------- 2001 2002 --------------------------------- Face amount of returned checks..................... $14,519,000 $15,412,000 Collections on returned checks..................... 8,872,000 10,560,000 Net write-offs of returned checks.................. 5,647,000 4,852,000 Collections as a percentage of returned checks..... 61.1% 68.5% Net write-offs as a percentage of check cashing revenues................................ 10.3% 9.1% Net write-offs as a percentage of face amount of checks cashed................................ 0.33% 0.30% Foreign Operations: -------------------------------------------------- For the Years Ended June 30, -------------------------------------------------- 1998 1999 2000 -------------------------------------------------- Face amount of returned checks..................... $3,662,000 $5,360,400 $10,847,000 Collections on returned checks..................... 3,153,000 4,858,960 9,289,000 Net write-offs of returned checks.................. 509,000 501,440 1,558,000 Collections as a percentage of returned checks..... 86.1% 90.7% 85.6% Net write-offs as a percentage of check cashing revenues................................ 2.8% 2.4% 3.8% Net write-offs as a percentage of face amount of checks cashed................................ 0.09% 0.08% 0.15% For the Years Ended June 30, --------------------------------- 2001 2002 --------------------------------- Face amount of returned checks..................... $13,419,000 $12,463,000 Collections on returned checks..................... 10,880,000 10,252,000 Net write-offs of returned checks.................. 2,539,000 2,211,000 Collections as a percentage of returned checks..... 81.1% 82.3% Net write-offs as a percentage of check cashing revenues................................ 5.0% 4.3% Net write-offs as a percentage of face amount of checks cashed................................ 0.18% 0.17%
11 Consumer Lending Effective June 13, 2002, the Company entered into an agreement with County Bank of Rehoboth Beach, Delaware ("County"), a federally insured depository institution. The Company acts as a servicer for County, marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans are made for amounts up to $500, with terms of 7 to 23 days. Under this program, the Company earns servicing fees which are subject to reduction if the related loans are not collected. County originated approximately $15 million of loans through the Company's locations and document transmitters during the fiscal year ended June 30, 2002. During the year ended June 30, 2002 Dollar Financial Group, Inc. entered into a Participation and Termination Agreement ("Eagle Agreement") with Eagle National Bank ("Eagle"), a national banking association, and related entities. Under the Eagle Agreement, Eagle discontinued the business of offering short-term consumer loans through the Company's locations and document transmitters. The Company had previously acted for Eagle marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans were made for amounts up to $500, with terms of 14 or 28, days which could be refinanced a maximum of four times and two times, respectively. Under this program, the Company earned origination and servicing fees. Eagle originated or extended approximately $399 million and $377 million of loans through the Company's locations and document transmitters during the fiscal year ended June 30, 2002 and 2001, respectively. In addition to marketing the credit services of banks, the Company also acts as a direct consumer lender on its own behalf in Canada, the UK and certain U.S. markets. These loans are made for amounts up to $700, with terms of 7 to 28 days, which can be extended a maximum of four times. The Company bears the entire risk of loss related to these loans. The Company made or extended approximately $306 million of loans through the Company's locations and document transmitters during the fiscal year ended June 30, 2002. The Company had approximately $16 million and $10 million of consumer loans on its balance sheet at June 30, 2002 and 2001, respectively, which is reflected in loans and other receivables. Net writeoffs for such loans for the fiscal years ended June 30, 2002 and 2001 were $5.5 million and $4.4 million, respectively, which are reflected in revenue on the Statements of Operations. The Company originates its short-term loans through its check cashing store network, its Money Mart(R) Express document transmitter locations and through 103 stores under the Loan Mart(R) name, which offer primarily unsecured short-term loans. The Company's management believes the Loan Mart stores appeal to a broader market segment than that which currently utilizes the Company's check cashing stores. Unlike many of the Company's check cashing customers, the Company's targeted Loan Mart(R) and Money Mart(R) Express (formerly known as moneymart.com(TM)) customer has, and is required to have, a bank account but experiences temporary shortages in cash from time to time. By offering these services on a variety of platforms, the Company hopes to attract this target customer who might not otherwise utilize check cashing services. The first Loan Mart(R) stores were opened in late September 1997 and since then an additional 98 stores have been opened. These stores are located in Seattle, Fresno, Sacramento, Phoenix, Tucson, Denver, Colorado Springs, Portland, Tulsa, Oklahoma City, and Las Vegas. Other Services and Product Extensions In addition to check cashing and short-term loans, the Company's customers are able to choose from a variety of products and services when conducting business at the Company's check cashing or Loan Mart(R) locations. These services include electronic tax filing, utility bill payment, prepaid local and long distance phone service, photocopy and fax services. A survey of the Company's customers by an independent third party revealed that over 50% of customers use other services in addition to check cashing. Management believes that providing these services helps to implement the Company's customer-driven strategy by creating a convenient "one-stop" shopping atmosphere for its customers' financial service needs. 12 Among the most significant products and services other than check cashing and short-term loans offered by the Company are the following: o Money Transfers--Through a strategic alliance with Western Union, customers can transfer funds to any location providing Western Union money transfer services. Western Union currently has 117,000 agents in more than 185 countries throughout the world. The Company receives a percentage of the fee charged by Western Union for the transfer as its commission. For the twelve months ended June 30, 2002, the Company generated, primarily at its check cashing stores, total money transfer fees of $10.1 million. o Money Orders--The Company's stores exchange money orders for cash and/or checks for a minimal fee, with an average fee and face amount of $1.09 and $133, respectively, for such transactions during the fiscal year ended June 30, 2002. Money orders are typically used as a means of payment of rent and utility bills for customers who do not have checking accounts. For the twelve months ended June 30, 2002, the Company's check cashing stores and certain Loan Mart(R) locations sold a total of 2.7 million money orders, generating total money order revenues of $3.0 million. 13 Store Operations Locations The following chart sets forth the number of stores in operation as of the dates indicated: June 30, ------------------------------------------ Markets 1998 1999 2000 2001 2002 ------- ------------------------------------------ CALIFORNIA Southern................................. 41 41 44 47 47 Northern................................. 77 79 92 95 93 PENNSYLVANIA Philadelphia............................. 11 10 11 8 8 Pittsburgh............................... 10 10 10 11 11 OHIO Cleveland................................ 24 22 21 19 19 Other Ohio cities (1).................... 8 5 7 5 4 ARIZONA Phoenix.................................. 16 25 34 40 45 Tucson................................... 0 0 7 13 16 Texas.................................... 23 3 3 3 4 Virginia................................. 14 14 15 16 16 Washington............................... 15 15 17 21 18 Utah..................................... 3 3 7 5 5 MD/DC.................................... 4 4 4 11 10 New Mexico............................... 4 4 4 3 3 Louisiana................................ 3 3 3 4 4 Hawaii................................... 3 3 3 3 3 Wisconsin................................ 1 1 1 1 1 Colorado................................. 0 0 6 14 15 Oklahoma................................. 0 0 8 13 13 Oregon................................... 0 0 2 5 5 Nevada................................... 0 0 1 11 11 Franchised locations..................... 3 3 0 0 0 UNITED KINGDOM........................... 0 11 107 126 123 Franchised locations and check cashing agents 0 0 264 261 290 CANADA................................... 86 101 139 157 167 Franchised locations..................... 70 80 81 86 87 ------------------------------------------ Total Stores............................. 416 437 891 978 1,018 ==========================================
(1) These other cities include Akron, Canton, Youngstown, and Cincinnati. Management adheres to a strict set of market survey and location guidelines when selecting acquisition targets and new store sites. The Company's store base is a mix of urban sites, which are located in high-traffic shopping areas, and suburban locations, which are in strip malls near multi-family housing complexes. 14 Layout and Facilities As part of its retail and customer-driven strategy, the Company presents a clean and attractive environment and an appealing format for its check cashing stores. Size varies by location, but the stores are generally 1,000 to 1,400 square feet, with approximately half of that space allocated to the teller and back office areas. There are typically three to five windows available for customer transactions. Operating hours vary by location, but are typically extended and designed to cater to those customers who, due to work schedules, cannot make use of "normal" banking hours. A typical store operates from 9:00 A.M. to 9:00 P.M. during weekdays and on Saturdays, and from 10:00 A.M. to 5:00 P.M. on Sundays. In certain locations, the Company operates stores on a 24-hour, seven-days-per-week basis. All of the Company's individual stores are leased, generally under leases providing for an initial multi-year term and renewal terms of from one to five years. The Company generally assumes the responsibility for required leasehold improvements, including signage, customer service representative partitions, alarm systems, computers, time-delayed safes and other office equipment. The leases relating to stores that provide government benefits distribution typically allow for the termination of a store's lease in the event of the loss of the related government contract. Technology The Company currently has an enterprise-wide transaction processing computer network. The Company believes that this system has supported an improvement in customer service by reducing transaction time and has enabled the Company to manage returned-check losses better and to comply with regulatory record keeping and reporting requirements. The Company is continuing to enhance a Point-of-Sale ("POS") transaction processing system composed of a networked hardware and software package with integrated database and reporting capabilities. The POS system provides its stores with instantaneous customer information, thereby reducing transaction time and improving the efficiency of the Company's credit verification process. Additionally, the Company has deployed an enhanced loan management system that provides improved customer service processing and management of loan transactions. The POS system, in conjunction with the enhanced loan management system, has improved the Company's ability to offer new products and services, while contributing to an improvement in customer service. Security The principal security risks which confront the Company's check cashing operations are robbery and defalcation. The Company's management has implemented extensive security systems, dedicated security personnel and management information systems to address both areas of potential loss. Management believes that its systems are among the most effective in the industry. Total net security losses represented less than 1.1% of both total revenues and face value of checks cashed for the twelve months ended June 30, 2002. Most store employees operate behind bullet-resistant glass and steel partitions, and the back office, safe and computer areas are locked and closed to customers. Each store's security measures include safes, electronic alarm systems monitored by third parties, control over entry to teller areas, detection of entry through perimeter openings, walls, and ceilings and the tracking of all employee movement in and out of secured areas. In addition, employees use cellular phones to ensure safety and security of staff whenever they are outside the secure teller area. This centralized system includes the following security measures in addition to those mentioned above: identical alarm systems in all stores, remote control over alarm systems, arming/disarming and changing user codes and mechanically and electronically controlled time-delay safes. Due to the high volumes of cash, food stamps and negotiable instruments handled at the Company's locations, daily monitoring, unannounced audits and immediate responses to irregularities are critical in combating defalcations. The Company has an internal auditing program which includes periodic unannounced store audits and cash counts at randomly selected locations. 15 Advertising and Marketing The Company is continually surveying and researching its customer trends and purchasing patterns in order to place the most effective advertising for each market. The Company's U.S. marketing promotions typically include in-store merchandising materials, advertising support, and store personnel instruction in the use of the materials. Using statistical data from its transaction database, the Company utilizes sophisticated direct marketing strategies to communicate with both existing customers and prospects who have demographic characteristics to existing customers. National television advertising promotes the Money Mart brand in Canada. The Company also arranges cooperative advertising for its products and services; for example, the Company does cooperative advertising with Western Union. Store managers are also provided with local store marketing training that sets standards for promotions and marketing their store on a local grass-roots level including attendance and sponsorship of local community events. A national classified telephone directory company is utilized to place all Yellow Pages advertising as effectively and prominently as possible. The Company does research into directory selection to assure effective communication with its target customers. Competition The check cashing industry in the United States is highly competitive and is expected to become even more so as the industry consolidates. As of March 2002, a total of approximately 13,000 check cashing stores were operating in the United States. DFG, with 1,018 stores, is the second largest check cashing store network in the United States and the largest such network in Canada and the UK. According to an industry survey, the seven largest chains in the U.S. control less than 20% of the total number of U.S. stores, which reflects the fragmented nature of the check cashing industry. In addition to other check cashing stores in the U.S., Canada and UK, DFG competes with banks and other financial services entities, as well as with retail businesses, such as grocery and liquor stores, which will cash checks for their customers. Some competitors, primarily grocery stores, do not charge a fee to cash a check. However, these merchants provide this service to a limited number of customers with superior credit ratings, and will typically only cash "first party" checks, or those written on the customer's account and made payable to the store. The Company also competes with companies that offer automated check cashing machines, and with franchised kiosk units that provide check-cashing and money order services to customers, which can be located at places such as convenience stores, bank lobbies, grocery stores, discount retailers and shopping malls. Regulation The Company is subject to regulation in several of the jurisdictions in which it operates, including jurisdictions that regulate consumer lending, check cashing fees, require prompt remittance of money order proceeds to money order suppliers, or require the registration of check cashing companies. In addition, the Company is subject to federal and state regulation which requires the reporting and recording of certain currency transactions; and certain of the Company's operations are also subject to federal and state regulations governing consumer protection and lending practices. In the majority of the states in which the Company engages in consumer lending activities, it acts as an agent for County, a federally insured financial institution chartered under the laws of the state of Delaware. Pursuant to its contractual relationship, the Company provides County with marketing, servicing and collections services for its unsecured short-term loan product that is offered under the Company's registered service mark Cash 'Til Payday(R). In four states, with appropriate enabling legislation, the Company has opted to offer unsecured short-term loans directly to consumers, also under the Company's registered service mark Cash 'Til Payday(R). Currently, the Company offers Cash 'Til Payday(R) loans directly to consumers in California, Colorado, Oregon and Wisconsin. 16 County is subject to federal and state banking regulations. Legislation has been introduced at both the state and federal levels that could affect the Company's ability to generate origination fees as an agent for a bank, as well as the Company's ability to offer Cash 'Til Payday loans directly to consumers. While the Company does not believe that any federal regulation will be passed, if enacted the Company would not be able to market short-term loans as currently structured. State Regulation To date, the regulation of check cashing fees has been restricted to the state level. The Company is currently subject to fee regulation in seven states: Pennsylvania, Ohio, California, Hawaii, Arizona, Maryland, Louisiana and the District of Columbia, where regulations set maximum fees for cashing various types of checks. The Company's fees comply with all state regulations. The following chart presents a summary of current state fee regulations for check cashing operations in those states where the Company's check cashing stores are currently located: CURRENT CHECK CASHING FEE REGULATIONS California: Maximum of 3.0% fee for government and payroll checks (3.5% without specified identification) or $3.00, whichever is greater. Permits one-time $10.00 fee to issue identification and no more than $5.00 for identification replacement. Ceiling fees set in 1992. Louisiana: Maximum of 2.0% fee for government assistance checks. Ceiling fees set in 2000. Ohio: Maximum of 3.0% fee for government checks. Ceiling fees set in 1993. Washington, D.C.: Maximum of 5.0% fee for government and payroll checks, 7.0% fee for an insurance check, 10.0% fee for personal checks or money orders or $4.00, whichever is greater. Ceiling fees set in 1998. Hawaii: Maximum of 3.0% fee for government assistance checks, 5.0% fee for payroll checks, 10.0% fee for personal checks or money orders or $5.00, whichever is greater. Permits one-time $10.00 fee to issue identification and no more than $5.00 for identification replacement. Ceiling fees set in 1999. Pennsylvania: Maximum of 2.5% for government checks provided that valid ID is presented, 3.0% for payroll checks and 10.0% for personal checks. Permits one-time $10 customer setup fee. Ceiling fees set in 1998. Arizona: Maximum of 3.0% fee for government checks or $5.00, whichever is greater. Ceiling fees set in 2000. Maryland: Maximum of 2.0% fee for government checks or $3.00 whichever is greater, 10.0% fee for personal checks, 4.0% fee for all other checks or $5.00, whichever is greater. Permits one-time $5.00 membership fee. Ceiling fees set in 2000.
17 The Company has determined, primarily for regulatory reasons, that it should make Cash 'Til Payday(R) loans directly to consumers in certain states where advantageous enabling legislation exists. The Company has determined to refrain from participating in the consumer lending business altogether in certain other states where legislation is unfavorable or the service is not likely to be profitable. The Company is currently able to participate in the consumer lending business in all states in which it has a sizable presence, although there is no guarantee that this situation will continue at the federal or state level. The following chart presents a summary of the states where the Company makes the Cash 'Til Payday(R) loans directly to consumers in accordance with state law. The chart also summarizes key aspects of the state law that govern these loans: STATES IN WHICH THE COMPANY MAKES CASH 'TIL PAYDAY(R)LOANS DIRECTLY California: Maximum fee of 15% of the face amount of the check tendered by borrower as security for loan. Oregon: No maximum fee mandated by state. Colorado: Maximum fee of 20% of first $300 borrowed, plus 7.5% fee for amounts over $300, up to $500. Wisconsin: No maximum fee mandated by state.
Other State Requirements The Company operates a total of 148 stores in California and Maryland. These states are among those that have enacted so-called "prompt remittance" statutes. Such statutes specify a maximum time for the payment of proceeds from the sale of money orders to the issuer of such money orders thereby limiting the number of days or "float" which the Company has use of the money from the sale of such money orders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, certain states, including California, Ohio, Utah, Pennsylvania, Washington and the District of Columbia, have enacted licensing requirements for check cashing stores. Other states, including Ohio, require the conspicuous posting of the fees charged by each store. A number of states, including Ohio, also have imposed recordkeeping requirements while others require check cashing stores to file fee schedules with the state. The adoption of check cashing fee regulations and prompt remittance statutes in additional jurisdictions or the reduction of maximum allowable fees in the jurisdictions currently regulating check cashing could have an adverse effect on the Company's business and could restrict the ability of the Company to expand its operations into certain states. As the Company develops new products and services in the consumer finance area, it may become subject to additional federal and state regulations governing those areas. In addition to fee regulations and prompt remittance statutes, certain jurisdictions have also (i) placed limitations on the commingling of money order proceeds and (ii) established minimum bonding or capital requirements. The Company's consumer lending activities are subject to certain state and federal regulations, including, but not limited to, regulations governing lending practices and terms, such as truth in lending and usury laws. There can be no assurance that the Company will not be materially adversely affected by legislation or regulations enacted in the future or that existing regulations will not restrict the ability of the Company to continue its current methods of operations or to expand its operations. 18 Federal Regulation Pursuant to regulations promulgated under the Bank Secrecy Act ("BSA") by the U.S. Treasury Department, transactions involving currency in an amount greater than $10,000, or the purchase of monetary instruments for cash in amounts from $3,000 to $10,000, must be reported. In general, every financial institution, including the Company, must report each deposit, withdrawal, exchange of currency or other payment or transfer, whether by, through, or to the financial institution, that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as a single transaction if the financial institution has knowledge that the transactions are by, or on behalf of, any one person and result in either cash-in or cash-out totaling more than $10,000 during any one business day. Management believes that the Company's POS system and employee training programs are essential to the Company's compliance with these regulatory requirements. Also, pursuant to the BSA, non-bank financial institutions, money services businesses ("MSB's") are required by the Money Laundering Act of 1994 to register with the Department of Treasury. MSB's include check cashers and sellers of money orders. Under the final rule, MSB's must renew their registrations every two years. In addition, MSB's must maintain a list of their agents and update the list annually with the list being made available for examination. In addition to the BSA, a new act was signed into law on October 26, 2001 called the USA PATRIOT Act ("Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001"). The act is designed to "deter and punish terrorist acts in the United States and around the world and enhance law enforcement investigatory tools." Title III of the Act includes numerous anti-money-laundering measures designed to assist in the identification and seizure of terrorist funds, including provisions that will directly impact check cashers and other MSB's. Specifically, Section 352 of the USA PATRIOT Act requires all check cashers to establish their own anti-money laundering programs by July 24, 2002. Such programs must include: (i) development of internal policies, procedures and controls; (ii) designation of an anti-money laundering compliance officer within the company; (iii) implementation of ongoing employee training; (iv) an independent auditing function to test the program; and (v) requirements for responding to law enforcement. The Company believes it is in compliance with the act. In Canada, the federal government does not directly regulate the check cashing or payday-loan industries, nor do provincial governments impose any regulations specific to the industry. The exception is in the Province of Quebec, where check cashing stores are not permitted to charge a fee to cash government checks. In the UK, the Office of Fair Trading ("OFT") is responsible for regulating competition policy and consumer protection. To date, the OFT has not enacted any regulations specific to the check cashing or "payday" loan industries. Proprietary Rights The Company has the rights to a variety of service marks relating to products or services it provides in its stores. In addition, the Company has service marks relating to the various names under which the Company's stores operate. Insurance Coverage The Company maintains insurance coverage against losses, including theft, to protect its earnings and properties. In addition, the Company maintains insurance coverage against criminal acts, which coverage has a deductible of $50,000 per occurrence. 19 Employees As of June 30, 2002, the Company employed 3,343 persons worldwide, composed of: 255 persons employed in the Company's accounting, management information systems, legal, human resources, treasury, finance and administrative departments (including Canada and the UK), and 3,088 persons employed in stores, including customer service representatives, store managers, regional supervisors, operations directors and administrative personnel. None of the Company's employees is represented by labor unions, and management believes that its relations with its employees are good. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 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, regulatory factors and the success of the Company's strategies and other factors detailed from time to time in the Company's annual and other reports filed with the Securities and Exchange Commission. 20 Item 2. PROPERTIES The Company leases all store premises, which typically have initial terms of 5 to 20 years and contain provisions for renewal options; additional rental charges based on revenue, and payment of real estate taxes and common area charges. With respect to leased stores open as of June 30, 2002, the following table shows the number of store leases expiring during the periods indicated, assuming the exercise of the Company's renewal options: Period Ending Number of June 30, Leases Expiring --------- --------------- 2003 76 2004 - 2007 318 2008 - 2012 196 2013 - 2017 42 2018 - 2022 9 ------ 641
21 Item 3. LEGAL PROCEEDINGS The Company is not a party to any material litigation and is not aware of any pending or threatened litigation, other than routine litigation and administrative proceedings arising in the ordinary course of business, that would have a material adverse effect on the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 22 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no established public trading market for the Company's common stock. DFG Holdings, Inc. is the sole record and beneficial owner of all of the Company's outstanding common stock. The Indenture dated November 15, 1996 between the Company and State Street Bank and Trust Company, as trustee (the "Indenture"), relating to the 10 7/8% Senior Notes due 2006, the agreement dated December 18, 1998 relating to the 10 7/8% Senior Subordinated Notes due 2006 as well as the Company's credit agreement, contain restrictions as to the declaration and payment of dividends. See "Item 7 - - Management's Discussion and Analysis of Financial Condition and Results of Operations" and the notes to consolidated financial statements included elsewhere in this report. Item 6. SELECTED FINANCIAL DATA The selected consolidated historical financial information on the following page should be read in conjunction with the consolidated financial statements and notes thereto and the information contained in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The balance sheet and statement of operations data of the Company as of and for the years ended June 30, 1998, 1999, 2000, 2001 and 2002 have been derived from historical consolidated financial statements of the Company. 23 Year ended June 30, --------------------------------------------------------------------------------------- 1998 1999(1), (2) 2000(3) 2001(4) 2002(5) --------------------------------------------------------------------------------------- (dollars in thousands, except check cashing data) Statement of Operations Data: Revenues: Revenues from check cashing........ $ 70,306 $ 76,304 $ 97,350 $ 105,690 $ 104,792 Revenues from consumer lending, net 7,448 18,559 34,787 58,367 69,799 Revenues from money transfer fees.. 5,910 6,687 7,881 9,444 10,098 Revenues from government services.. 14,311 6,753 6,375 4,282 1,734 Other revenues..................... 13,210 12,676 19,360 17,716 15,553 --------------------------------------------------------------------------------------- Total revenues........................ 111,185 120,979 165,753 195,499 201,976 Store and regional expenses: Salaries and benefits.............. 33,670 35,329 47,058 57,453 65,295 Occupancy.......................... 9,656 9,609 12,800 16,881 18,087 Depreciation....................... 2,018 2,227 4,683 5,829 6,522 Other.............................. 24,002 23,764 36,503 45,321 46,238 --------------------------------------------------------------------------------------- Total store and regional expenses..... 69,346 70,929 101,044 125,484 136,142 Establishment of reserves for new consumer lending arrangements...... - - - - 2,244 Corporate expenses.................... 12,462 13,648 20,864 22,500 24,516 Loss on store closings and sales...... 45 103 249 926 1,154 Goodwill amortization................. 3,624 4,686 5,564 4,710 - Other depreciation and amortization... 1,152 1,020 1,620 1,952 2,709 Interest expense...................... 12,945 16,401 17,491 20,361 18,694 Recapitalization costs and other non-recurring items................ - 12,575 1,478 - 281 Writedown of goodwill................. 12,870 - - - - --------------------------------------------------------------------------------------- (Loss) income before income taxes and extraordinary item................. (1,259) 1,617 17,443 19,566 16,236 Income tax provision ................. 5,538 3,881 12,043 12,876 10,199 --------------------------------------------------------------------------------------- (Loss) income before extraordinary item (6,797) (2,264) 5,400 6,690 6,037 Extraordinary loss on debt extinguishment (net of income tax benefit of $45). - 85 - - - --------------------------------------------------------------------------------------- Net (loss) income .................... $ (6,797) $ (2,349) $ 5,400 $ 6,690 $ 6,037 ======================================================================================= Operating and Other Data: Adjusted EBITDA (6)................... $ 31,526 $ 38,619 $ 48,405 $ 53,885 $ 48,314 Adjusted EBITDA margin (6)............ 28.4% 31.9% 29.2% 27.6% 23.9% Net cash provided by (used in): Operating activities............... 18,003 15,951 16,792 16,442 14,453 Investing activities............... (4,237) (23,471) (44,526) (32,365) (10,108) Financing activities............... (12,699) 18,269 35,306 15,602 9,409 Stores in operation at end of period.. 416 437 891 978 1,018 Check Cashing Data: Face amount of checks cashed.......... $2,301,861,000 $2,319,847,000 $2,784,267,000 $3,150,350,000 $2,969,455,000 Number of checks cashed............... 7,991,128 7,490,406 8,328,176 9,406,749 8,689,819 Average face amount per check cashed.. $288.05 $309.71 $334.32 $334.90 $341.72 Average fee per check................. $8.80 $10.14 $11.69 $11.24 $12.06 Average fee as a % of face amount..... 3.05% 3.28% 3.50% 3.36% 3.53% Balance Sheet Data (at end of period): Cash.................................. $ 55,501 $ 65,782 $ 73,288 $ 72,452 $ 86,633 Total assets.......................... 165,850 203,709 259,714 276,172 291,312 Total indebtedness.................... 112,675 142,166 179,146 197,136 208,191 Shareholder's equity.................. 29,454 36,334 39,595 42,624 53,515
24 (1) On November 13, 1998, Holdings 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.I 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. (2) On February 10, 1999, the Company acquired all of the outstanding shares of Instant Cash Loans Limited ("ICL"), which operated eleven stores in the UK. The initial purchase price for this acquisition was $9.4 million plus initial working capital of approximately $2.0 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, acquired the remaining 86.5% partnership interest in its Calgary Money Mart Partnership ("Calgary"). Calgary operated 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. (3) On July 7, 1999, the Company acquired all of the outstanding shares of Cash A Cheque Holdings Great Britain Limited ("CAC"), which operated 44 company owned stores in the UK. The initial purchase price for this acquisition was $12.5 million and was funded through excess internal cash, the Company's revolving credit facility and the Company's 10 7/8% Senior Subordinated Notes Due 2006. The excess of the purchase price over the fair value of the identifiable net assets acquired was $8.2 million. Additional consideration of $9.7 million was subsequently paid based under the profit-based earn-out agreement. On November 18, 1999, the Company acquired all of the outstanding shares of Cheques R Us, Inc. ("CRU") and Courtenay Money Mart Ltd. ("Courtenay"), which operated six stores in British Columbia. The aggregate purchase price for this acquisition was $1.2 million and was funded through excess internal cash. The excess of the purchase price over the fair value of identifiable net assets acquired was $1.1 million. On December 15, 1999, the Company acquired all of the outstanding shares of Cash Centres Corporation Limited ("CCL"), which operated five company owned stores and 238 franchises in the UK. The aggregate purchase price for this acquisition was $8.4 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of identifiable net assets acquired was $7.7 million. Additional consideration of $2.7 million was subsequently paid based under a profit-based earn-out agreement. On February 10, 2000, the Company acquired substantially all of the assets of CheckStop, Inc. ("CheckStop"), which is a payday-loan business operating through 150 independent document transmitters in 17 states. The aggregate purchase price for this acquisition was $2.6 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of identifiable net assets acquired was $2.4 million. Additional consideration of $250,000 was subsequently paid based upon a future results of operations earn-out agreement. (4) On August 1, 2000, the Company purchased all of the outstanding shares of West Coast Chequing Centres, Ltd ("WCCC"), which operated six stores in British Columbia. The aggregate purchase price for this acquisition was $1.5 million and was funded through excess internal cash. The excess price over the fair value of identifiable net assets acquired was $1.4 million. On August 7, 2000, the Company purchased substantially all of the assets of Fast `n Friendly Check Cashing ("F&F"), which operated 8 stores in Maryland. The aggregate purchase price for this acquisition was $700,000 and was funded through the Company's revolving credit facility. The excess purchase price over fair value of identifiable net assets acquired was $660,000. Additional consideration of $150,000 was subsequently paid based on a revenue earn-out agreement. On August 28, 2000, the Company purchased primarily all of the assets of Ram-Dur Enterprises, Inc. d/b/a AAA Check Cashing Centers ("AAA"), which operated five stores in Tucson, Arizona. The aggregate purchase price for this acquisition was $1.3 million and was funded through the Company's revolving credit facility. The excess purchase price over fair value of identifiable net assets acquired was $1.2 million. On December 5, 2000, the Company purchased all of the outstanding shares of Fastcash Ltd. ("FCL"), which operated 13 company owned stores and 27 franchises in the UK. The aggregate purchase price for this acquisition was $3.1 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of the identifiable assets acquired was $2.7 million. The agreement also includes a maximum potential contingent payment to the sellers of $2.8 million based on levels of profitability. (5) On July 1, 2001 the Company adopted Financial Accounting Standards Board Opinion No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In accordance with the provisions of SFAS No. 142 the Company ceased amortization of goodwill. (6) Adjusted EBITDA is earnings before interest, income taxes, depreciation, amortization, recapitalization costs and other non-recurring items, writedown of goodwill, loss on store closings and sales and establishment of reserves for new consumer lending arrangements. Adjusted EBITDA does not represent cash flows as defined by accounting principles generally accepted in the United States 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 accounting principles generally accepted in the United States. The Adjusted EBITDA margin represents Adjusted 25 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, 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. The table below reconciles net income as reported on the Statement of Operations to Adjusted EBITDA: 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Net (loss) income $ (6,797) $ (2,349) $ 5,400 $ 6,690 $ 6,037 Add: Loss on store closings and sales 45 103 249 926 1,154 Goodwill amortization 3,624 4,686 5,564 4,710 - Other depreciation and amortization 3,170 3,247 6,303 7,781 9,231 Interest expense 12,945 16,401 17,491 20,361 18,694 Other (Foreign currency loss/(gain)) 131 (10) (123) 541 474 Writedown of goodwill 12,870 - - - - Income tax provision 5,538 3,881 12,043 12,876 10,199 Recapitalization costs - 12,575 133 - - Non-recurring charges - - 1,345 - 281 Establishment of reserves for new consumer lending arrangements - - - - 2,244 Extraordinary items - 85 - - - ------------ ------------ ------------- ------------ ---------- Adjusted EBITDA $31,526 $38,619 $48,405 $53,885 $48,314 ============ ============ ============= ============ ==========
26 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company has historically derived its revenues primarily from providing check cashing services and other consumer financial products and services including money orders, money transfers, short-term consumer loans and bill payment. In addition, certain Company stores provide for the distribution of public assistance benefits and food coupons. For the years ended June 30, 2000, 2001 and 2002, check cashing revenues as a percentage of total revenues approximated 58.7%, 54.1% and 51.9% respectively, and consumer lending revenues as a percentage of total revenues approximated 21.0%, 29.9% and 34.6%, respectively. The check cashing industry in the United States is highly fragmented and has experienced considerable growth as store locations have increased from approximately 1,350 in 1986 to approximately 13,000 as of March 2002. The Company believes it is one of only seven domestic check cashing store networks with more than 100 locations. The industry is composed of mostly local chains and single-unit operators. The Company believes that industry growth has been fueled by several demographic and socioeconomic trends, including a decline in the number of households with bank deposit accounts, an increase in low-paying service sector jobs and an overall increase in the lower-income population. All of the Company's acquisitions have been accounted for under the purchase method of accounting. Therefore, the historical consolidated results of operations include the revenues and expenses of all of the acquired companies since their respective dates of acquisition. The comparability of the historical financial data is significantly impacted by the timing of the Company's acquisitions. The following table sets forth information with respect to major acquisitions completed by the Company during the periods discussed below: Company Number of Stores Month Acquired Purchase Price - ------------------------------------------------------------------------------------------------------------- Cash A Cheque Holdings Great Britain Limited............................... 44 July 1999 $ 22.2 million Cheques R Us, Inc......................... 6 November 1999 $ 1.2 million Cash Centres Corporation Limited.......... 243 (1) December 1999 $ 11.1 million CheckStop, Inc............................ N/A (2) February 2000 $ 3.0 million West Coast Chequing Centres............... 6 August 2000 $ 1.5 million Fast `n Friendly Check Cashing............ 8 August 2000 $ 0.9 million Ram-Dur Enterprises....................... 5 August 2000 $ 1.3 million Fastcash Limited.......................... 40 (3) December 2000 $ 3.1 million
(1) Includes 238 franchised stores. (2) Operates through 150 independent document transmitters. (3) Includes 27 franchised stores. This Management's Discussion and Analysis of Financial Condition and Results of Operations solely reflects the historical results of the Company. The aforementioned purchase price for Cash A Cheque Holdings Great Britain Limited ("CAC") and Cash Centres Corporation Limited ("CCL") includes additional amounts paid to the sellers of $9.7 million and $2.7 million, respectively, determined under profit-based earn-out agreements. The aforementioned purchase price for CheckStop, Inc. ("CheckStop") and Fast `n Friendly ("F&F") includes additional amounts paid to the sellers of $250,000 and $150,000, respectively, based upon a future results of operations earn-out agreement and a revenue based earnout agreement, respectively. The aforementioned purchase price for Fastcash Ltd. ("FCL") excludes potential contingent payments to the sellers of $2.8 million based on profitability. Any amounts paid under the earn-out contingencies will be recorded as additional consideration for the acquisition when the contingency is resolved. 27 Due to the rapid growth of the Company, period-to-period comparisons of financial data are not necessarily indicative of the results for subsequent periods and should not be relied upon as an indicator of the future performance of the Company. Critical Accounting Principles and Estimates In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of its financial statements. The preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, the Companyevaluates these estimates, including those related to revenue recognition, loss reserves, intangible assets and income taxes. The Company states these accounting policies in the notes to the financial statements and at relevant sections in this discussion and analysis. The estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. The Company believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its financial statements: Revenue Recognition Revenue generally is recognized when services for the customer have been provided which, in the case of check cashing and other retail products, is at the point of sale. For the Cash 'Til Payday(R) unsecured short-term loan service, all revenues are recognized ratably over the life of the loan offset by net writeoffs. Loss Reserves The Company acts as a servicer for County Bank of Rehoboth Beach, Delaware, marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans are made for amounts up to $500, with terms of 7 to 23 days. Under this program, the Company earns servicing fees which are subject to reduction if the related loans are not collected. The Company maintains a reserve for these estimated reductions. In addition, the Company maintains a reserve for anticipated losses for loans it makes directly. In order to estimate the appropriate level of these reserves, the Company analyzes the amount of outstanding loans owed to the Company, as well as loans owed to banks and serviced by the Company, the historical loans charged-off, current collection patterns and current economic trends. As these conditions change, additional allowances might be required in future periods. Intangible Assets The Company has significant intangible assets on its balance sheet that include goodwill and other intangibles related to acquisitions. The valuation and classification of these assets and the assignment of useful amortization lives involves significant judgments and the use of estimates. The testing of these intangibles under established accounting guidelines for impairment also requires significant use of judgment and assumptions. The Company's assets are tested and reviewed for impairment on an ongoing basis under the established accounting guidelines. Changes in business conditions could potentially require future adjustments to asset valuations. 28 Results of Operations The following table sets forth the Company's results of operations as a percentage of revenues for the indicated periods: Year ended June 30, ---------------------------- 2000 2001 2002 ---------------------------- Statement of Operations Data: Revenues: Revenues from check cashing........................................... 58.7% 54.1% 51.9% Revenues from consumer lending, net................................... 21.0 29.9 34.6 Revenues from money transfer fees..................................... 4.8 4.8 5.0 Revenues from government services..................................... 3.8 2.2 0.9 Other revenues........................................................ 11.7 9.0 7.6 ---------------------------- Total revenues............................................................ 100.0 100.0 100.0 Store and regional expenses: Salaries and benefits................................................. 28.4 29.4 32.3 Occupancy............................................................. 7.7 8.6 9.0 Depreciation.......................................................... 2.8 3.0 3.2 Other................................................................. 22.0 23.2 22.9 ---------------------------- Total store and regional expenses......................................... 60.9 64.2 67.4 Establishment of reserves for new consumer lending arrangements........... - - 1.1 Corporate expenses........................................................ 12.6 11.5 12.1 Loss on store closings and sales.......................................... 0.2 0.5 0.6 Goodwill amortization..................................................... 3.3 2.4 - Other depreciation and amortization....................................... 1.0 1.0 1.3 Interest expense.......................................................... 10.5 10.4 9.3 Other non-recurring items................................................. 0.9 - 0.2 ---------------------------- Income before income taxes................................................ 10.6 10.0 8.0 Income tax provision...................................................... 7.3 6.6 5.0 ---------------------------- Net income................................................................ 3.3% 3.4% 3.0% ============================
The following chart presents a summary of the Company's consumer lending revenues for the periods indicated below: Consumer Lending Revenue ------------------------------------------------------------------- For the Years Ended June 30, ------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------------------------------------------------------------- (in thousands) Servicing revenues........................... $5,489 $13,814 $22,692 $41,920 $44,765 Company originated domestic revenues......... 738 824 905 1,513 2,282 Company originated foreign revenues.......... 1,221 3,921 11,190 14,934 22,752 ------------------------------------------------------------------- Total consumer lending revenues, net......... $7,448 $18,559 $34,787 $58,367 $69,799 ===================================================================
29 Year Ended June 30, 2002 Compared to the Year Ended June 30, 2001 Total revenues were $202.0 million for the year ended June 30, 2002, as compared to $195.5 million for the year ended June 30, 2001, an increase of $6.5 million, or 3.3%. Comparable retail store, franchised store and document transmitter sales increased $2.4 million, or 1.3%. The entities acquired during fiscal 2001 (collectively referred to hereafter as the "Acquisitions") and new store openings accounted for an increase of $10.0 million. Partially offsetting this increase, however, was a decline in revenues from closed stores and the termination of the State of New York government contract during fiscal year 2001, for $3.1 million and $2.8 million, respectively. The increase in total revenues resulted from an increase in consumer lending revenues of $11.4 million, or 19.5%. The increase in consumer lending revenues was primarily a result of a $7.9 million, or 53%, increase in foreign operations and a $2.2 million revenue increase in the Company's subsidiary Money Mart(R) Express (formerly known as moneymart.com(TM)). The balance of the increase in consumer lending revenues, $1.3 million, is attributed to other domestic operations. These increases were partially offset by a $2.5 million decrease in revenues from government services as a result of the termination of the distribution of government benefits in the State of New York and a $2.4 million decrease in other revenues. During fiscal 2002, the Company provided for the establishment of reserves for new consumer lending arrangements of $2.2 million. Effective June 13, 2002, the Company entered into an agreement with County Bank of Rehoboth Beach, Delaware ("County"), a federally insured depository institution. The Company acts as a servicer for County, marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans are made for amounts up to $500, with terms of 7 to 23 days. Under this program, the Company earns servicing fees which are subject to reduction if the related loans are not collected. The bank originated approximately $15 million of loans through the Company's locations and document transmitters during the fiscal year ended June 30, 2002. In addition, the Company provided additional reserves for the loans it originates due to the expansion of the program. Store and regional expenses were $136.1 million for the year ended June 30, 2002 as compared to $125.5 million for the year ended June 30, 2001, an increase of $10.6 million, or 8.4%. The full year effect of the Acquisitions in fiscal year 2001 resulted in an increase in store and regional expenses of $1.0 million and new store openings accounted for an increase of $6.0 million. Also, store and regional expenses increased $1.3 million due to salaries and benefits from the foreign subsidiaries, commensurate with the growth in those operations. In addition, $2.5 million of the increase in store and regional expenses resulted from an increase in salaries and benefits due to the continued growth of the Money Mart(R) Express business and the centralized collection division in fiscal year 2002. Store and regional expenses as a percentage of revenues increased from 64.2% in the year ended June 30, 2001 to 67.4% in the year ended June 30, 2002. Store and regional expenses as a percentage of revenues from the Company's foreign subsidiaries were 57.5% and 55.7% for 2001 and 2002, respectively. Salaries and benefits were $65.3 million for the year ended June 30, 2002 as compared to $57.5 million for the year ended June 30, 2001, an increase of $7.8 million, or 13.6%. The Acquisitions accounted for an increase in salaries and benefits of $500,000 and new store openings accounted for $2.8 million. The Company's foreign subsidiaries accounted for an increase of $1.3 million in salaries and benefits. In addition, Money Mart(R) Express and centralized collection divisions accounted for an increase of $2.5 million due to increased growth. Salaries and benefits expenses as a percentage of revenues increased from 29.4% for the year ended June 30, 2001 to 32.3% for the year ended June 30, 2002. Occupancy expense was $18.1 million for the year ended June 30, 2002 as compared to $16.9 million for the year ended June 30, 2001, an increase of $1.2 million, or 7.1%. The Acquisitions accounted for an increase of $200,000. In addition, occupancy expenses increased $1.1 million from new store openings during the year ended June 30, 2002. Occupancy expense as a percentage of revenues increased from 8.6% for the year ended June 30, 2001 to 9.0% for the year ended June 30, 2002. Depreciation expense was $6.5 million for the year ended June 30, 2002, as compared to $5.8 million for the year ended June 30, 2001 an increase of $700,000, or 12.1%. The Acquisitions accounted for an increase of $100,000 and new store openings accounted for an increase of $500,000. Depreciation expense as a percentage of revenues increased to 3.2% for the year ended June 30, 2002 from 3.0% for the year ended June 30, 2001. 30 Other store and regional expenses were $46.2 million for the year ended June 30, 2002 as compared to $45.3 million for the year ended June 30, 2001, an increase of $900,000, or 2.0%. The Acquisitions and new store openings accounted for an increase in other store and regional expenses of $200,000 and $1.6 million respectively. In addition, costs associated with Money Mart(R) Express's independent document transmitters, increased during the fiscal year, due to the growth in that business. Stores closed during the fiscal year partially offset these increases. Other store and regional expenses consist of bank charges, armored security costs, net returned third party checks, cash shortages, cost of goods sold, advertising and other costs incurred by the stores. Corporate expenses were $24.5 million for the year ended June 30, 2002 as compared to $22.5 million for the year ended June 30, 2001, an increase of $2.0 million, or 8.9%. This increase resulted from additional salaries and benefits associated with the growth of the foreign operations during fiscal year 2002. Corporate expenses as a percentage of revenues increased to 12.1% for the year ended June 30, 2002 from 11.5% for the year ended June 30, 2001. Loss on store closings and sales were $1.2 million for the year ended June 30, 2002 compared to $900,000 for the year ended June 30, 2001. During fiscal year 2002, the Company decided to close certain underperforming stores. The Company anticipates closing certain of its unprofitable stores in fiscal 2003 and is currently evaluating the locations to be closed. In June 2001, the FASB issued Statements of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." Under the new rules, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. The Company applied the new accounting rules beginning July 1, 2001. Other depreciation and amortization expenses were $2.7 million for the year ended June 30, 2002, as compared to $2.0 million for the year ended June 30, 2001, an increase of $700,000, or 35%. This increase is attributable to additional capital expenditures made by the corporate office during fiscal year 2002. Other depreciation and amortization as a percentage of revenues increased to 1.3% for the year ended June 30, 2002 from 1.0% for the year ended June 30, 2001. Interest expense was $18.7 million for the year ended June 30, 2002 as compared to $20.4 million for the year ended June 30, 2001, a decrease of $1.7 million, or 8.3%. This decrease was primarily attributable to the decrease in the average borrowing rates of the Company's revolving credit facilities which fund acquisitions, purchases of property and equipment related to existing stores, recently acquired stores and investments in technology. During fiscal 2002, the Company expensed $0.3 million for planned acquisitions that were not consummated. Year Ended June 30, 2001 Compared to the Year Ended June 30, 2000 Total revenues were $195.5 million for the year ended June 30, 2001 as compared to $165.8 million for the year ended June 30, 2000, an increase of $29.7 million, or 17.9%. Of this increase, $5.8 million resulted from the results of operations from the Acquisitions. In addition, revenues increased $5.7 million as a result of new store openings during fiscal 2001. Also, revenues from acquired stores and new stores opened during fiscal year 2000, which had a full year of revenues in fiscal year 2001, increased $9.3 million and $10.8 million, respectively. The change in foreign exchange rates accounted for a decrease of $5.4 million in total foreign revenue. For stores that were opened and owned by the Company during the entire period from July 1, 1999 through June 30, 2001, revenues increased by 2.8% or $3.6 million. After eliminating the impact in the devaluation of the foreign currencies, the comparable retail store sales increased $6.4 million or 4.9%. As a result of continued expansion of Loan Mart(R) stores, the addition of Money Mart(R) Express (formerly known as moneymart.com(TM)) agency locations and increased originations of Cash `Til Payday(R) loans, Cash `Til Payday(R) revenues, increased as a percentage of total revenues. Store and regional expenses were $125.5 million for the year ended June 30, 2001 as compared to $101.0 million for the year ended June 30, 2000, an increase of $24.5 million, or 24.3%. The Acquisitions resulted in an increase in store and regional expenses of $4.3 million and new store openings accounted for an increase of $8.0 million. Also, store and regional expenses from acquired stores and new stores opened during fiscal year 2000, which incurred a full year of expenses in fiscal year 2001, increased $9.5 million and $6.4 million, respectively. Store and regional expenses as a percentage of revenues increased from 60.9% in the year ended June 30, 2000 to 64.2% in the year ended June 30, 2001 due to increased costs associated with new store openings during the year ended June 30, 2001. 31 Salaries and benefits were $57.5 million for the year ended June 30, 2001 as compared to $47.1 million for the year ended June 30, 2000, an increase of $10.4 million, or 22.1%. The Acquisitions accounted for an increase in salaries and benefits of $1.9 million and new store openings accounted for $3.3 million. Also, salaries and benefits from acquired stores and new stores opened during fiscal year 2000, which incurred a full year of expenses in fiscal year 2001, increased $3.9 million and $2.9 million, respectively. Salaries and benefits expenses as a percentage of revenues increased from 28.4% for the year ended June 30, 2000 to 29.4% for the year ended June 30, 2001 due to increased costs associated with new store openings during the year ended June 30, 2001. Occupancy expense was $16.9 million for the year ended June 30, 2001 as compared to $12.8 million for the year ended June 30, 2000, an increase of $4.1 million, or 32.0%. The Acquisitions accounted for an increase of $600,000. In addition, occupancy expenses increased $1.8 million from new store openings during the year ended June 30, 2000. Also, occupancy expenses from acquired stores and new stores opened during fiscal year 2000, which incurred a full year of expenses in fiscal year 2001, increased $400,000 and $1.5 million, respectively. Occupancy expense as a percentage of revenues increased from 7.7% for the year ended June 30, 2000 to 8.6% for the year ended June 30, 2001 due to increased costs associated with new store openings during the year ended June 30, 2001. Depreciation expense was $5.8 million for the year ended June 30, 2001 as compared to $4.7 million for the year ended June 30, 2000 an increase of $1.1 million, or 23.4%. The Acquisitions accounted for an increase of $100,000 and new store openings accounted for an increase of $500,000. Also, depreciation expenses from acquired stores and new stores opened during fiscal year 2000, which incurred a full year of expenses in fiscal year 2001, increased $100,000 and $500,000, respectively. Depreciation expense as a percentage of revenues increased to 3.0% for the year ended June 30, 2001 from 2.8% for the year ended June 30, 2000. Other store and regional expenses were $45.3 million for the year ended June 30, 2001 as compared to $36.5 million for the year ended June 30, 2000, an increase of $8.8 million, or 24.1%. The Acquisitions and new store openings accounted for an increase in other store and regional expenses of $1.6 million and $2.4 million respectively. Also, other store and regional expenses from acquired stores and new stores opened during fiscal year 2000, which incurred a full year of expenses in fiscal year 2001, increased $5.1 million and $1.5 million, respectively. Other store and regional expenses consist of bank charges, armored security costs, net returned checks, cash shortages, cost of goods sold, insurance, advertising and other costs incurred by the stores. Corporate expenses were $22.5 million for the year ended June 30, 2001 as compared to $20.9 million for the year ended June 30, 2000, an increase of $1.6 million, or 7.7%. This increase resulted from the additional corporate costs associated with the Acquisitions and new store openings during fiscal 2001. Corporate expenses as a percentage of revenues decreased to 11.5% for the year ended June 30, 2001 from 12.6% for the year ended June 30, 2000. Loss on store closings and sales were $900,000 for the year ended June 30, 2001 compared to $200,000 for the year ended June 30, 2000. In the third quarter of fiscal year 2001 the Company closed certain underperforming stores. As a result, $530,000 was accrued for closure costs. Goodwill amortization was $4.7 million for the year ended June 30, 2001 as compared to $5.6 million for the year ended June 30, 2000, a decrease of $900,000, or 16.1%. The decrease is due to the completion of the accelerated amortization of the remaining goodwill associated with the pending expiration of the Company's government services lines of business, partially offset by the goodwill associated with the Acquisitions. Other depreciation and amortization expenses were $2.0 million for the year ended June 30, 2001 as compared to $1.6 million for the year ended June 30, 2000, an increase of $400,000, or 25.0%. Of this increase, the Acquisitions accounted for $100,000. Other depreciation and amortization as a percentage of revenues remained constant at 1.0% for the years ended June 30, 2001 and 2000. Interest expense was $20.4 million for the year ended June 30, 2001 as compared to $17.5 million for the year ended June 30, 2000, an increase of $2.9 million, or 16.6%. This increase was primarily attributable to the increase of borrowings under the Company's credit facilities to fund acquisitions, purchases of property and equipment related to existing stores, recently acquired stores and investments in technology. 32 Liquidity and Capital Resources 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, finance acquisitions, fund Company originated short-term consumer loans and finance loan store expansion. For the years ended June 30, 2000, 2001 and 2002, the Company had net cash provided by operating activities of $16.8 million, $16.4 million and $14.5 million, respectively, for purchases of property and equipment related to existing stores, recently acquired stores, investments in technology and acquisitions. The Company's budgeted capital expenditures, excluding acquisitions, are currently anticipated to aggregate approximately $6.8 million during its fiscal year ending June 30, 2003, for remodeling and relocation of certain existing stores and for opening new stores. The Company has $109.2 million of 10-7/8% senior notes due 2006 ("Notes") outstanding, which are registered under the Securities Act of 1933, as amended. The payment obligations under the Notes are jointly and severally guaranteed, on a full and unconditional basis, by each of the Company's existing subsidiaries (the "Guarantors"). There are no restrictions on the Company's and the guarantor subsidiaries' ability to obtain funds from their subsidiaries by dividend or by loan. Subject to restrictions under the Company's existing credit facility ("Revolving Credit Facility") discussed below, the Notes are redeemable at the option of the Company, in whole or in part, at any time on or after November 15, 2001, at the following redemption prices (plus accrued and unpaid interest thereon, if any, to the date of redemption): during the twelve-month period beginning November 2001 - 105.438%; 2002 - 103.625%; 2003 - 101.813%; and 2004 - 100.000%. Upon the occurrence of a change of control, as defined, each holder of Notes has the right to require the Company to repurchase all or any part of such holder's Notes at 101% of the aggregate principal amount thereof, plus accrued interest. On May 31, 2002, the Company negotiated and executed an amendment and restatement to the Company's Revolving Credit Facility reducing the facility from $85 million to $80 million. The Company's borrowing capacity under the Revolving Credit Facility is limited to the total commitment less the letter of credit of $8 million, which secures the United Kingdom overdraft facility. At June 30, 2002 the Company's borrowing capacity was $72 million. The Company's restated Revolving Credit Facility also contains provisions for further reductions in the facility of $5 million within the earlier of (i) 180 days of the effective date of the agreement or (ii) the sale of certain assets. Additionally, the restated Revolving Credit Facility contains provisions for an additional reduction in the facility of $5 million during the period April 1 to December 14 of any calendar year following the (i) earlier of 180 days of the effective date of the agreement or (ii) the sale of certain assets. The borrowings under the Revolving Credit Facility were $62.3 million and $68.6 million as of June 30, 2001 and 2002, respectively. Issuance costs associated with the Revolving Credit Facility paid during fiscal 2001 and 2002 were $200,000 and $600,000, respectively. At June 30, 2002 the Company's amended Revolving Credit Facility contained other provisions limiting the total outstanding short-term loans made by the Company to $15 million. At June 30, 2002 the Company had short-term loans outstanding in excess of the maximum amount. The Company's lenders waived that requirement as of June 30, 2002 and increased the allowable short-term loans to $19 million through the earlier of (i) November 29, 2002 or (ii) the sale of certain assets. If the sale of these certain assets is consummated prior to November 29, 2002, the total outstanding short-term loans is limited to $12 million for 30 calendar days upon which the limit is lowered to $10 million thereafter. The Company believes that through the sale of loans and management of originations and extensions, it will reduce short-term loans outstanding to the required amounts within the period specified and will remain in compliance with its debt covenants throughout fiscal 2003. Amounts outstanding under the Revolving Credit Facility bear interest at either (i) the higher of (a) the federal funds rate plus 0.50% per annum and (b) the rate publicly announced by Wells Fargo, San Francisco, as its "prime rate," plus 2.25% at June 30, 2002, (ii) the LIBOR Rate (as defined therein) plus 3.50% at June 30, 2002, or (iii) the one day Eurodollar Rate (as defined therein) plus 3.50% at June 30, 2002, determined at the Company's option. Amounts outstanding under the Revolving Credit Facility are secured by a first priority lien on substantially all properties and assets of the Company and its current and future subsidiaries. The Company's obligations under the Revolving Credit Facility are guaranteed by each of the Company's direct and indirect subsidiaries. 33 Also, the Company has $20 million aggregate principal amount of its 10 7/8% Senior Subordinated Notes Due 2006 (the "Senior Subordinated Notes"), which were used to (i) fund the Company's repurchase obligations in connection with its Notes, and (ii) to finance acquisitions of the Company. The Company has a Canadian dollar overdraft credit facility to fund peak working capital needs for its Canadian operations. The overdraft credit facility provides for a commitment of up to approximately $4.8 million, of which $200,000 and $4.8 million were outstanding as of June 30, 2001 and 2002, respectively. Amounts outstanding under the facility bear interest at a rate of Canadian prime plus 0.50% and are secured by the pledge of a cash collateral account of an equivalent balance. For the Company's UK operations, the Company also has a British pound overdraft facility which provides for a commitment of up to approximately $7.7 million, of which $5.3 million and $5.5 million was outstanding as of June 30, 2001 and June 30, 2002, respectively. Amounts outstanding under the facility bear interest at a rate of the LIBOR Rate plus 1.25% and 1.00% at June 30, 2001 and 2002, respectively. The overdraft facility is secured by an $8.0 million letter of credit issued by Wells Fargo Bank under the revolving credit facility. The Senior Notes, Revolving Credit Facility and the Senior Subordinated Notes 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. Contractual Obligations The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and its asset/liability management, to fund acquisitions, and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below (for further information regarding the Company's contractual obligations refer to Footnotes 6 and 9 of the Consolidated Financial Statements, herein.): Payments Due by Period ------------------------------------------------------------------------------- Less than After Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years ------------ ------------- ------------- ------------- ----------- Revolving credit facilities.......... $ 78,936 $ 10,336 $ 68,600 $ - $ - Long-term debt 10 7/8% Senior Notes due November 15, 2006................ 109,190 - - 109,190 - 10 7/8% Senior Subordinated Notes due December 31, 2006...... 20,000 - - 20,000 - Operating Leases..................... 51,397 14,492 20,999 7,800 8,106 Other................................ 65 65 - - - ------------ ------------- ------------- ------------- ----------- Total contractual cash obligations... $ 259,588 $ 24,893 $ 89,599 $ 136,990 $ 8,106 ============ ============= ============= ============= ===========
The Company is highly leveraged, and borrowings under the 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 liquidity and capital expenditure requirements for the foreseeable future is based upon the historical growth rate of the Company, the anticipated benefits it expects from operating efficiencies and sales of certain assets. Additional revenue growth is expected to be generated by increased check cashing revenues, growth in the consumer lending loan business, the maturity of recently opened stores and the continued expansion of new stores. 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. There can be no assurance, however, that 34 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 Senior Notes, or to make anticipated capital expenditures. It may be necessary for the Company to refinance all or a portion of its indebtedness 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. Income Taxes The Company's effective tax rates for fiscal 2000, 2001 and 2002 were 69.0%, 65.8% and 62.8%, respectively. The effective rate differs from the federal statutory rate of 35% due to state taxes, foreign taxes and for fiscal 2000 and 2001 nondeductible goodwill amortization which resulted from the June 30, 1994 acquisition of the Company and several subsequent acquisitions. Seasonality and Quarterly Fluctuations The Company's business is seasonal due to the impact of several 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, results of operations for any fiscal quarter are not necessarily indicative of the results of operations 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 the addition of new stores. Impact of Inflation The Company believes that the results of its operations are not dependent upon the levels of inflation. Pending Accounting Pronouncements In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 will be effective for the Company on July 1, 2002, and management is currently reviewing and evaluating the effects this statement will have, if any, on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections," which updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4 "Reporting Gains and Losses for Extinguishment of Debt. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The effect of this statement on the Company's financial statements would be the reclassification of extraordinary loss on early extinguishment of debt to continuing operations; however, this will have no effect on the Company's net income. The Company will adopt this provision as of July 1, 2003. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, management cannot determine the potential effects that adoption of SFAS No. 146 will have on the Company's consolidated financial statements. 35 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Generally In the operations of its subsidiaries and the reporting of its consolidated financial results, the Company is affected by changes in interest rates and currency exchange rates. The principal risks of loss arising from adverse changes in market rates and prices to which the Company and its subsidiaries are exposed relate to: o interest rates on debt o foreign exchange rates generating translation gains and losses. The Company and its subsidiaries have no market risk sensitive instruments entered into for "trading purposes," as such term is defined by generally accepted accounting principles. Information contained herein relates only to instruments entered into for purposes other than trading. Interest Rates The Company's outstanding indebtedness, and related interest rate risk, is managed centrally by the office of the Chief Financial Officer of the Company by implementing the financing strategies approved by the Company's Board of Directors. The Company's debt consists of fixed-rate senior notes and senior subordinated notes. The Company's revolving credit facility and overdraft credit facilities carry a variable rate of interest. Precautions have been taken should variable rates of interest fluctuate. An interest rate cap with a notional value of $20 million has been purchased to protect the Company against increases in interest rates. As most of the Company's average outstanding indebtedness carries a fixed rate of interest, a change in interest rates is not expected to have a material impact on the consolidated financial position, results of operations or cash flows of the Company. Foreign Exchange Rates Operations in the UK and Canada have exposed the Company to shifts in currency valuations and precautions have been taken should exchange rates shift. For the UK and Canada subsidiaries, put options with a notional value of 8.0 million British Pounds and 36.0 million Canadian Dollars, respectively, were purchased to protect quarterly earnings in the UK and Canada against foreign exchange fluctuations. Each contract had a strike price of initially 5% out of the money at the date of acquisition, and each contract expired at June 28, 2002. Out of the money put options were purchased for the following reasons: (1) lower cost than completely averting risk and (2) maximum downside is limited to the difference between strike price and exchange rate at date of purchase and price of the contracts. The Company has evaluated the effectiveness and suitability of the strategy and has temporarily suspended purchasing additional contracts. The Canadian and the UK operations constitute approximately 108.8% and 31.4%, respectively of the Company's fiscal year 2002 consolidated pre-tax earnings. As currency exchange rates change, translation of the financial results of the Canadian and United Kingdom operations into U.S. dollars will be impacted. Changes in exchange rates have resulted in cumulative translation adjustments decreasing the Company's net assets by $4.3 million. The Company estimated that a 10% change in foreign exchange rates by itself would impact reported pre-tax earnings from continuing operations by approximately $2.3 million and $1.4 million for the years ended June 30, 2002 and 2001, respectively. Such impact represents nearly 14.0% and 7.1% of the Company's consolidated pre-tax earnings for fiscal years 2002 and 2001, respectively. 36 Item 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders DFG Holdings, Inc. We have audited the accompanying consolidated balance sheets of Dollar Financial Group, Inc. as of June 30, 2002 and 2001, and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the three years in the period ended June 30, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14 (a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Dollar Financial Group, Inc. at June 30, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Philadelphia, Pennsylvania September 30, 2002 37 DOLLAR FINANCIAL GROUP, INC. CONSOLIDATED BALANCE SHEETS (In thousands except share amounts) June 30, ------------------------------------------ 2001 2002 ------------------------------------------ Assets Cash and cash equivalents.............................................. $ 72,452 $ 86,633 Loans and other receivables, net....................................... 23,770 20,542 Prepaid expenses....................................................... 6,517 6,745 Notes receivable--officers.............................................. 2,756 2,756 Due from parent........................................................ 2,596 3,606 Property and equipment, net of accumulated depreciation of $21,666 and $30,119 ............................... 29,140 30,510 Goodwill and other intangibles, net of accumulated amortization of $23,863 and $21,070................................ 129,555 132,264 Debt issuance costs, net of accumulated amortization of $4,642 and $6,153.................................. 7,232 6,292 Other.................................................................. 2,154 1,964 ------------------------------------ $ 276,172 $ 291,312 ==================================== Liabilities and shareholder's equity Accounts payable....................................................... $ 18,325 $ 18,249 Income taxes payable................................................... 6,782 1,831 Accrued expenses....................................................... 8,804 7,932 Accrued interest payable............................................... 1,573 1,539 Deferred tax liability................................................. 928 55 Revolving credit facilities............................................ 67,824 78,936 10-7/8% Senior Notes due 2006.......................................... 109,190 109,190 Subordinated notes payable and other................................... 20,122 20,065 Shareholder's equity: Common stock, $1 par value: 20,000 shares authorized; 100 shares issued and outstanding at June 30, 2001 and 2002........................................................ - - Additional paid-in capital......................................... 50,957 50,957 Retained earnings.................................................. 866 6,903 Accumulated other comprehensive loss............................... (9,199) (4,345) ------------------------------------ Total shareholder's equity............................................. 42,624 53,515 ------------------------------------ $ 276,172 $ 291,312 ====================================
See accompanying notes. 38 DOLLAR FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) Year ended June 30, ----------------------------------------------- 2000 2001 2002 ----------------------------------------------- Revenues..................................................... $ 165,753 $ 195,499 $ 201,976 Store and regional expenses: Salaries and benefits.................................... 47,058 57,453 65,295 Occupancy................................................ 12,800 16,881 18,087 Depreciation............................................. 4,683 5,829 6,522 Other.................................................... 36,503 45,321 46,238 ----------------------------------------------- Total store and regional expenses............................ 101,044 125,484 136,142 Establishment of reserves for new consumer lending arrangements............................................ - - 2,244 Corporate expenses........................................... 20,864 22,500 24,516 Loss on store closings and sales............................. 249 926 1,154 Goodwill amortization........................................ 5,564 4,710 - Other depreciation and amortization.......................... 1,620 1,952 2,709 Interest expense, net of interest income of $374, $470 and $254............................................ 17,491 20,361 18,694 Other non-recurring items.................................... 1,478 - 281 ----------------------------------------------- Income before income taxes................................... 17,443 19,566 16,236 Income tax provision......................................... 12,043 12,876 10,199 ----------------------------------------------- Net income................................................... $ 5,400 $ 6,690 $ 6,037 ===============================================
See accompanying notes. 39 DOLLAR FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (In thousands, except share data) (Accumulated Accumulated Common Stock Additional Deficit) Other Total ---------------------- Paid-in Retained Comprehensive Shareholder's Shares Amount Capital Earnings Loss Equity ---------------------------------------------------------------------------------- Balance, June 30, 1999........ 100 $ - $ 50,824 $ (11,224) $ (3,266) $ 36,334 Comprehensive income Translation adjustment for the year ended June 30, 2000........ (2,272) (2,272) Net income for the year ended June 30, 2000...... 5,400 5,400 --------------- Total comprehensive income.... 3,128 Noncash compensation..... 133 133 ---------------------------------------------------------------------------------- Balance, June 30, 2000........ 100 - 50,957 (5,824) (5,538) 39,595 ---------------------------------------------------------------------------------- Comprehensive income.......... Translation adjustment for the year ended June 30, 2001........ (3,661) (3,661) Net income for the year ended June 30, 2001...... 6,690 6,690 --------------- Total comprehensive income.... 3,029 ---------------------------------------------------------------------------------- Balance, June 30, 2001........ 100 - 50,957 866 (9,199) 42,624 ---------------------------------------------------------------------------------- Comprehensive income....... Translation adjustment for the year ended June 30, 2002........ 4,854 4,854 Net income for the year ended June 30, 2002...... 6,037 6,037 --------------- Total comprehensive income.... 10,891 ---------------------------------------------------------------------------------- Balance, June 30, 2002........ 100 $ - $ 50,957 $ 6,903 $ (4,345) $ 53,515 ==================================================================================
See accompanying notes. 40 DOLLAR FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended June 30, ------------------------------------------ 2000 2001 2002 ------------------------------------------ Cash flows from operating activities: Net income............................................................... $ 5,400 $ 6,690 $ 6,037 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization..................................... 13,120 13,948 10,740 Loss on store closings and sales.................................. 249 926 1,154 Establishment of reserves for new consumer lending arrangements... - - 2,244 Noncash recapitalization costs.................................... 133 - - Deferred tax (benefit) provision.................................. (837) 1,687 (873) Change in assets and liabilities (net of effect of acquisitions): (Increase) decrease in loans and other receivables............. (417) (10,665) 1,587 (Increase) decrease in prepaid expenses and other.............. (2,760) (338) 260 Increase (decrease) in accounts payable, income taxes payable, accrued expenses and accrued interest payable............... 1,904 4,194 (6,696) ------------------------------------------ Net cash provided by operating activities................................ 16,792 16,442 14,453 Cash flows from investing activities: Acquisitions, net of cash acquired....................................... (30,586) (20,346) (45) Gross proceeds from sales of property and equipment...................... - 110 - Additions to property and equipment...................................... (13,940) (12,129) (10,063) ------------------------------------------ Net cash used in investing activities.................................... (44,526) (32,365) (10,108) Cash flows from financing activities: Other debt payments...................................................... (1,020) (284) (64) Repayment of advance from money transfer agent........................... (1,000) (1,000) - Net increase in revolving credit facilities.............................. 37,416 18,246 11,112 Proceeds from long-term debt............................................. 1,893 - - Payments of debt issuance costs.......................................... (463) (244) (571) Advances to officers..................................................... (64) - - Net increase in due from parent.......................................... (1,456) (1,116) (1,068) ------------------------------------------ Net cash provided by financing activities................................ 35,306 15,602 9,409 Effect of exchange rate changes on cash and cash equivalents............. (66) (515) 427 ------------------------------------------ Net increase (decrease) in cash and cash equivalents..................... 7,506 (836) 14,181 Cash and cash equivalents at beginning of year........................... 65,782 73,288 72,452 ------------------------------------------ Cash and cash equivalents at end of year................................. $ 73,288 $ 72,452 $ 86,633 ========================================== Supplemental disclosures of cash flow information Interest paid............................................................ $ 18,031 $ 19,410 $ 17,472 Income taxes paid........................................................ $ 12,957 $ 4,800 $ 16,035 Supplemental schedule of noncash investing and financial activities: Noncash recapitalization costs........................................... $ 133 $ - $ -
See accompanying notes. 41 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 1. Organization and Business The accompanying consolidated financial statements are those of Dollar Financial Group, Inc. (the "Company") and its wholly-owned subsidiaries. The Company 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 services to the general public through a network of 1,018 locations (of which 641 are Company-owned) operating as Money Mart(R), The Money Shop and Loan Mart(R) in seventeen states, the District of Columbia, Canada and the United Kingdom. The services provided at the Company's retail locations include check cashing, short-term consumer loans, sale of money orders, money transfer services and various other related services. Also, the Company's subsidiary Money Mart(R) Express (formerly known as moneymart.com(TM)), services and originates short-term consumer loans through 656 independent document transmitters in 17 states. 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue recognition Revenue generally is recognized when services for the customer have been provided which, in the case of check cashing and other retail products, is at the point of sale. For the Cash `Til Payday(R) unsecured short-term loans, origination and servicing fees are recognized ratably over the life of the loan offset by net writeoffs. Property and Equipment Property and equipment are carried at cost less accumulated depreciation. Depreciation is computed using either the straight-line or double declining balance method over the estimated useful lives of the assets, which vary from three to fifteen years. Cash and Cash Equivalents Cash includes cash in stores and demand deposits with financial institutions. Cash equivalents are defined as short-term, highly liquid investments both readily convertible to known amounts of cash and so near maturity that there is insignificant risk of changes in value because of changes in interest rates. 42 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Intangible Assets The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective July 1, 2001 and as a result has not amortized goodwill for the twelve month period ended June 30, 2002. SFAS 142 changes the accounting for certain intangibles, including goodwill, from an amortization method to an impairment-only approach. Under the provisions of SFAS 142, intangible assets, including goodwill, that are not subject to amortization will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, using a two-step impairment assessment. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss if any (see Note 8). The Company has completed the transitional goodwill impairment test and the annual impairment test and determined that a charge was not required. Debt Issuance Costs Debt issuance costs are amortized using the straight-line method over the remaining term of the related debt (see Note 6). Store and Regional Expenses The direct costs incurred in operating the Company's stores have been classified as store expenses. Store expenses include salaries and benefits of store and regional employees, rent and other occupancy costs, depreciation of property and equipment, bank charges, armored security costs, net returned checks, cash shortages, cost of goods sold and other costs incurred by the stores. Excluded from store operations are the corporate expenses of the Company, which include salaries and benefits of corporate employees, professional fees and travel costs. Loss Reserves The Company acts as a servicer for County Bank of Rehoboth Beach, Delaware, marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans are made for amounts up to $500, with terms of 7 to 23 days. Under this program, the Company earns servicing fees which are subject to reduction if the related loans are not collected. The Company maintains a reserve for these estimated reductions. In addition, the Company maintains a reserve for anticipated losses for loans it originates. In order to estimate the appropriate level of these reserves, the Company analyzes the amount of outstanding loans serviced and originated by the Company, the historical loans charged-off, current collection patterns and current economic trends. As these conditions change, additional allowances might be required in future periods. Returned Checks The Company charges operations for losses on returned checks in the period such checks are returned, since ultimate collection of these items is uncertain. Recoveries on returned checks are credited in the period when the recovery is received. The net expense for bad checks included in other store expenses in the accompanying consolidated statements of operations was $5,769,000, $8,186,000 and $7,063,000 for the years ended June 30, 2000, 2001 and 2002, respectively. 43 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Income Taxes The Company uses the liability method to account for income taxes. Accordingly, deferred income taxes have been determined by applying current tax rates to temporary differences between the amount of assets and liabilities determined for income tax and financial reporting purposes. The Company and its subsidiaries file a consolidated federal income tax return with Holdings but calculate its tax provision as if it were on a stand-alone basis. Deferred Acquisition Costs The Company defers certain costs incurred associated with potential acquisitions. In the event that the acquisition is not consummated, these costs are expensed directly. Deferred acquisition costs charged to expense were $1.4 million, $0 and $0.3 million for the years ended June 30, 2000, 2001 and 2002, respectively and are included under the caption other non-recurring items on the Statements of Operations. The costs associated with completed acquisitions are capitalized as part of the purchase price. Employees' Retirement Plan Retirement benefits are provided to substantially all full-time employees who have completed 1,000 hours of service through a defined contribution retirement plan. The Company will match 50% of each employee's contribution, up to 8% of the employee's compensation. In addition, a discretionary contribution may be made if the Company meets its financial objectives. The amount of contributions charged to expense was $420,000, $545,000 and $614,000 for the years ended June 30, 2000, 2001 and 2002, respectively. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs charged to expense were $4,842,000, $6,061,000 and $5,844,000 for the years ended June 30, 2000, 2001 and 2002, respectively. Fair Value of Financial Instruments The carrying values of the revolving credit facilities approximate fair values, as these obligations carry a variable interest rate. The fair value of the Company's Senior Notes is based on quoted market prices and the fair value of the Senior Subordinated Notes is based on the value of the Senior Notes (see Note 6). The Company's other financial instruments consist of cash and cash equivalents, loan and other receivables and notes receivable. Because these are short term in nature, their fair value approximates their carrying value. Foreign Currency Translation and Transactions The Company operates check cashing and financial services outlets in Canada and the United Kingdom. The financial statements of these foreign businesses have been translated into U.S. dollars in accordance with accounting principles generally accepted in the United States. All balance sheet accounts are translated at the current exchange rate and income statement items are translated at the average exchange rate for the period; resulting translation adjustments are made directly to a separate component of shareholder's equity. Gains or losses resulting from foreign currency transactions are included in results of operations. 44 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. Significant Accounting Policies (continued) Franchise Fees and Royalties The Company recognizes initial franchise fees upon fulfillment of all significant obligations to the franchisee. Royalties from franchisees are accrued as earned. The standard franchise agreements grant to the franchisee the right to develop and operate a store and use the associated trade names, trademarks, and service marks within the standards and guidelines established by the Company. Initial franchise fees included in revenues were $195,000, $216,000 and $59,000 for the years ended June 30, 2000, 2001 and 2002, respectively. Pending Accounting Pronouncements In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). This statement supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS 144 became effective for the Company on July 1, 2002, and management is currently reviewing and evaluating the effects this statement will have, if any, on the Company's financial position and results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections" which updates, clarifies and simplifies existing accounting pronouncements. In part, this statement rescinds SFAS No. 4 "Reporting Gains and Losses for Extinguishment of Debt. SFAS No. 145 will be effective for fiscal years beginning after May 15, 2002. The effect of this statement on the Company's financial statements would be the reclassification of extraordinary loss on early extinguishment of debt to continuing operations; however, this will have no effect on the Company's net income. The Company will adopt this provision as of July 1, 2003. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, management cannot determine the potential effects that adoption of SFAS No. 146 will have on the Company's consolidated financial statements. 3. DFG Holdings, Inc. As discussed in Note 1, the Company is a wholly-owned subsidiary of Holdings. The activities of Holdings consist primarily of its investment in the Company and the issuance of $120.6 million aggregate principal amount of 13% Senior Discount Notes. Common Stock Holdings has 100,000 shares authorized; of which 19,864.93 shares were issued and outstanding (106.71 are held in treasury) at June 30, 2002. 45 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. DFG Holdings, Inc. (continued) Dividends Under the terms of the Company's Revolving Credit Facility discussed in Note 6, the Company is permitted to declare, pay, or make cash dividends to Holdings under certain circumstances. The Revolving Credit Facility permits the Company to remit cash to Holdings for the payment of certain of Holdings' expenses. At June 30, 2001 and 2002 Holdings owed the Company $2.6 million and $3.6 million, respectively for such advances. Stock Options Holdings Stock Incentive Plan (the "Plan") states that 1,413.32 shares of Holdings' common stock may be awarded to employees or consultants of the Company. The awards, at the discretion of Holdings' Board of Directors, may be issued as nonqualified stock options or incentive stock options. Stock appreciation rights ("SAR") may also be granted in tandem with the nonqualified stock options or the incentive stock options. Exercise of the SARs cancels the option for an equal number of shares and exercise of the nonqualified stock options or incentive stock options cancels the SARs for an equal number of shares. The number of shares issued under the Plan shall be subject to adjustment as specified in the Plan provisions. No options may be granted after February 15, 2009. No options were granted under the Plan during the year ended June 30, 2000. During the year ended June 30, 2001, 218 nonqualified stock options were granted under the plan at an exercise price of $7,250, the estimated fair market value of the common stock on the date of grant. Forty-five options with an exercise price of $3,225 were forfeited during the year ended June 30, 2001. No options were granted during the fiscal year ended June 30, 2002. The options are exercisable in 20% increments annually on the first, second, third, fourth and fifth anniversary of the grant date and have a term of ten years from the date of issuance. At June 30, 2002 there were 1,082 options outstanding, of which 628.03 were exercisable. Holdings has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the estimated market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement No. 123, however, the effect of applying Statement No. 123 to Holdings' stock-based awards results in net income that is not materially different from amounts reported. 4. Acquisitions The acquired entities described below ("Acquisitions") were accounted for by the purchase method of accounting. The results of operations of the acquired companies are included in the Company's statements of operations for the periods in which they were owned by the Company. The total purchase price for each acquisition has been allocated to assets acquired and liabilities assumed based on estimated fair values. On July 7, 1999, the Company purchased all of the outstanding shares of Cash A Cheque Holdings Great Britain Limited ("CAC"), which operated 44 company owned stores in the United Kingdom. The initial purchase price for this acquisition was approximately $12.5 million and was funded through excess internal cash, the Company's revolving credit facility and $1.9 million of the Company's Senior Subordinated Notes. The excess of the purchase price over the fair value of identifiable net assets acquired was $8.2 million. Additional consideration of $9.7 million was paid in fiscal 2001 based upon a profit-based earn-out agreement. 46 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 4. Acquisitions (continued) On November 18, 1999, the Company purchased all the outstanding shares of Cheques R Us, Inc. ("CRU") and Courtenay Money Mart Ltd. ("Courtenay"), which operated six stores in British Columbia. The aggregate purchase price for this acquisition was $1.2 million and was funded through excess internal cash. The excess of the purchase price over the fair value of identifiable net assets acquired was $1.1 million. On December 15, 1999, the Company purchased all of the outstanding shares of Cash Centres Limited ("CCL"), which operated five company owned stores and 238 franchises in the United Kingdom. The aggregate purchase price for this acquisition was $8.4 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of identifiable net assets acquired was $7.7 million. Additional consideration of $2.7 million was subsequently paid based under a profit-based earn-out agreement. On February 10, 2000, the Company purchased substantially all of the assets of CheckStop, Inc. ("CheckStop"), which was a short-term loan business operating through 150 independent document transmitters in 17 states. The aggregate purchase price for this acquisition was $2.6 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of identifiable net assets acquired was $2.4 million. Additional consideration of $250,000 was subsequently paid based upon a future results of operations earn-out agreement. On August 1, 2000, the Company purchased all of the outstanding shares of West Coast Chequing Centres, LTD ("WCCC") which operated six stores in British Columbia. The aggregate purchase price for this acquisition was $1.5 million and was funded through excess internal cash. The excess of the purchase price over the fair value of identifiable net assets acquired was $1.4 million. On August 7, 2000, the Company purchased substantially all of the assets of Fast `n Friendly Check Cashing ("F&F"), which operated 8 stores in Maryland. The aggregate purchase price for this acquisition was $700,000 and was funded through the Company's revolving credit facility. The excess of the purchase price over fair value of identifiable net assets acquired was $660,000. Additional consideration of $150,000 was subsequently paid based on a revenue based earn-out agreement. On August 28, 2000, the Company purchased substantially all of the assets of Ram-Dur Enterprises, Inc. d/b/a AAA Check Cashing Centers ("AAA"), which operated five stores in Tucson, Arizona. The aggregate purchase price for this acquisition was $1.3 million and was funded through the Company's revolving credit facility. The excess purchase price over fair value of identifiable net assets acquired was $1.2 million. On December 5, 2000, the Company purchased all of the outstanding shares of Fastcash Ltd. ("FCL"), which operated 13 company owned stores and 27 franchises in the United Kingdom. The aggregate purchase price for this acquisition was $3.1 million and was funded through the Company's revolving credit facility. The excess of the purchase price over the fair value of the identifiable assets acquired was $2.7 million. The agreement also includes a maximum potential contingent payment to the sellers of $2.8 million based on levels of profitability. 47 The following unaudited pro forma information for the year ended 2001 presents the results of operations as if the Acquisitions had occurred on July 1, 2000. The pro forma operating results include the results of operations for these acquisitions for the indicated periods and reflect the amortization of intangible assets arising from the acquisitions and increased interest expense on acquisition debt. 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. Year ended June 30, (Unaudited) -------------------------- 2001 -------------------------- (dollars in thousands) Total revenue............................. $ 197,084 Net income................................ $ 6,874 During fiscal year 2000, the Company was in negotiations to acquire Direct General Corporation. Upon receipt of Direct General's June 30, 2000 results, the planned acquisition was terminated. As a result, the Company incurred a charge of $1.4 million for previously deferred costs associated with the acquisition. 5. Property and Equipment Property and equipment at June 30, 2001 and 2002 consist of (in thousands): June 30, -------------------------------- 2001 2002 -------------------------------- Land and buildings....................... $ 135 $ 146 Leasehold improvements................... 14,953 17,874 Equipment and furniture.................. 35,718 42,609 -------------------------------- 50,806 60,629 Less accumulated depreciation............ 21,666 30,119 -------------------------------- Total property and equipment............. $ 29,140 $ 30,510 ================================
Depreciation expense amounted to $5,898,000, $7,497,000 and $8,835,000 for the years ended June 30, 2000, 2001 and 2002, respectively. 48 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Debt The Company has debt obligations at June 30, 2001 and 2002 as follows (in thousands): June 30, --------------------------- 2001 2002 --------------------------- Revolving credit facility; interest at one-day Eurodollar, as defined, plus 2.75% and 3.50% at June 30, 2001 and 2002, respectively (6.56% and 5.31% at June 30, 2001 and 2002, respectively) of the outstanding daily balances payable monthly; principal due in full on June 30, 2004; weighted average interest rate of 8.55% and 5.14% for the years ended June 30, 2001 and 2002, respectively........................ $ 62,300 $ 68,600 Canadian overdraft credit facility; interest at Canadian prime, as defined, plus 0.50% (6.25% and 4.25% at June 30, 2001 and 2002, respectively) of the outstanding daily balances payable monthly; weighted average interest rate of 7.18% and 4.56% for the years ended June 30, 2001 and 2002, respectively.... 249 4,791 United Kingdom overdraft facility; interest at the LIBOR Rate, as defined, plus 1.25% and 1.00% at June 30, 2001 and 2002, respectively (7.25% and 5.00% at June 30, 2001 and 2002, respectively) of the outstanding daily balances payable quarterly; weighted average interest rate of 6.82% and 5.32% for the years ended June 30, 2001 and 2002, respectively.... 5,275 5,545 10-7/8% Senior Notes due November 15, 2006; interest payable semiannually on May 15 and November 15, commencing May 15, 1997........................................................ 109,190 109,190 10-7/8% Senior Subordinated Notes due December 31, 2006; interest payable semiannually on June 30 and December 30, commencing June 30, 1999................................... 20,000 20,000 Other.......................................................... 122 65 ---------------------------- $ 197,136 $ 208,191 ============================
49 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Debt (continued) The Company has $109.2 million of 10-7/8% senior notes due 2006 (the "Notes"), which are registered under the Securities Act of 1933, as amended. The payment obligations under the Notes are jointly and severally guaranteed, on a full and unconditional basis, by each of the Company's existing subsidiaries (the "Guarantors"). There are no restrictions on the Company's and the guarantor subsidiaries' ability to obtain funds from their subsidiaries by dividend or by loan. Separate financial statements of each guarantor subsidiary have not been presented because management has determined that they would not be material to investors. Subject to restrictions under the Company's existing credit facility ("Revolving Credit Facility") discussed below, the Notes are redeemable at the option of the Company, in whole or in part, at any time on or after November 15, 2001, at the following redemption prices (plus accrued and unpaid interest thereon, if any, to the date of redemption): during the twelve-month period beginning November 2001 - 105.438%; 2002 - 103.625%; 2003 - 101.813%; and 2004 - 100.000%. Upon the occurrence of a change of control, as defined, each holder of Notes has the right to require the Company to repurchase all or any part of such holder's Notes at an offer price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of purchase. On May 31, 2002, the Company negotiated and executed an amendment and restatement to the Company's Revolving Credit Facility reducing the facility from $85 million to $80 million. The Company's borrowing capacity under the Revolving Credit Facility is limited to the total commitment less the letter of credit of $8 million, which secures the United Kingdom overdraft facility. At June 30, 2002 the Company's borrowing capacity was $72 million. The Company's restated Revolving Credit Facility also contains provisions for further reductions in the facility of $5 million within the earlier of (i) 180 days of the effective date of the agreement or (ii) the sale of certain assets. Additionally, the restated Revolving Credit Facility contains provisions for an additional reduction in the facility of $5 million during the period April 1 to December 14 of any calendar year following the (i) earlier of 180 days of the effective date of the agreement or (ii) the sale of certain assets. The borrowings under the Revolving Credit Facility were $62.3 million and $68.6 million as of June 30, 2001 and 2002, respectively. Issuance costs associated with the Revolving Credit Facility paid during fiscal 2001 and 2002 were $200,000 and $600,000, respectively. At June 30, 2002 the Company's amended Revolving Credit Facility contained other provisions limiting the total outstanding short-term loans made by the Company to $15 million. At June 30, 2002 the Company had short-term loans outstanding in excess of the maximum amount. The Company's lenders waived that requirement as of June 30, 2002 and increased the allowable short-term loans to $19 million through the earlier of (i) November 29, 2002 or (ii) the sale of certain assets. If the sale of these certain assets is consummated prior to November 29, 2002, the total outstanding short-term loans is limited to $12 million for 30 calendar days upon which the limit is lowered to $10 million thereafter. The Company believes that through the sale of loans and management of originations and extensions, it will reduce short-term loans outstanding to the required amounts within the period specified and will remain in compliance with its debt covenants throughout fiscal 2003. Amounts outstanding under the Revolving Credit Facility bear interest at either (i) the higher of (a) the federal funds rate plus 0.50% per annum and (b) the rate publicly announced by Wells Fargo, San Francisco, as its "prime rate," plus 2.25% at June 30, 2002, (ii) the LIBOR Rate (as defined therein) plus 3.50% at June 30, 2002, or (iii) the one day Eurodollar Rate (as defined therein) plus 3.50% at June 30, 2002, determined at the Company's option. Amounts outstanding under the Revolving Credit Facility are secured by a first priority lien on substantially all properties and assets of the Company and its current and future subsidiaries. The Company's obligations under the Revolving Credit Facility are guaranteed by each of the Company's direct and indirect subsidiaries. Also, the Company has $20 million aggregate principal amount of its 10 7/8% Senior Subordinated Notes Due 2006 (the "Senior Subordinated Notes"). 50 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 6. Debt (continued) The Notes, the Revolving Credit Facility and the Senior Subordinated Notes 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. In connection with the Company's Canadian subsidiary, the Company established a Canadian dollar overdraft credit facility to fund peak working capital needs for its Canadian operations. The overdraft credit facility, which has no stated maturity date, provides for a commitment of up to approximately $4.8 million of which $200,000 and $4.8 million were outstanding as of June 30, 2001 and 2002, respectively. Amounts outstanding under the facility bear interest at Canadian prime plus 0.50% and are secured by the pledge of a cash collateral account of an equivalent balance. The Company's United Kingdom operations also has a British pound overdraft facility that bears interest at 1.25% and 1.00% for the years ended June 30, 2001 an 2002, respectively, over the LIBOR Rate and which provides for a commitment of approximately $7.7 million of which $5.3 million and $5.5 million was outstanding as of June 30, 2001 and June 30, 2002, respectively. The overdraft facility is secured by an $8.0 million letter of credit issued by Wells Fargo Bank under the Revolving Credit Facility. The fair market value of the Company's 10 7/8% Senior Notes and the Company's 10 7/8% Senior Subordinated Notes due 2006 at June 30, 2001 and 2002 was approximately $125,314,300 and $113,687,200 based on quoted market prices. Interest of $19,410,000 and $17,472,000 was paid for the years ended June 30, 2001 and 2002, respectively. 51 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Income Taxes The provision for income taxes for the years ended June 30, 2000, 2001 and 2002 consists of the following (in thousands): Year ended June 30, -------------------------------------------------- 2000 2001 2002 -------------------------------------------------- Federal: Current......................... $ 7,048 $ 3,620 $ 694 Deferred........................ (540) 1,125 (430) -------------------------------------------------- 6,508 4,745 264 Foreign taxes: Current......................... 4,797 7,557 9,550 Deferred........................ - (192) (74) -------------------------------------------------- 4,797 7,365 9,476 State: Current......................... 833 721 386 Deferred........................ (95) 45 73 -------------------------------------------------- 738 766 459 -------------------------------------------------- $ 12,043 $ 12,876 $ 10,199 ==================================================
The significant components of the Company's deferred tax assets and liabilities at June 30, 2001 and 2002 are as follows (in thousands): June 30, ----------------------------------- 2001 2002 ------------------------------------ Deferred tax assets: Loss reserves....................................... $ - $ 995 Foreign withholding taxes........................... 605 94 Depreciation........................................ 1,243 1,914 Accrued compensation................................ 361 328 Reserve for store closings.......................... 299 122 Foreign tax credits................................. 230 230 Other accrued expenses.............................. 180 535 Other............................................... 179 36 ---------------------------------- 3,097 4,254 Deferred tax liabilities: Amortization and other temporary differences........ 4,025 4,309 ---------------------------------- Net deferred tax asset (liability)..................... $ (928) $ (55) ==================================
52 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Income Taxes (continued) The Company did not record any valuation allowances against deferred tax assets at June 30, 2001 or June 30, 2002. Although realization is not assured, management has determined, based on the Company's history of earnings and its expectation for the future, that taxable income of the Company will more likely than not be sufficient to fully utilize its deferred tax assets. A reconciliation of the provision for income taxes with amounts determined by applying the federal statutory tax rate to income (loss) before income taxes is as follows (in thousands): Year ended June 30, ------------------------------------------ 2000 2001 2002 ------------------------------------------ Tax provision at federal statutory rate............... $ 6,105 $ 6,848 $ 5,682 Add (deduct): State tax provision, net of federal tax benefit... 655 498 299 Foreign taxes..................................... 2,304 2,323 1,673 US tax on foreign earnings........................ 1,745 3,189 2,370 Amortization of nondeductible intangible assets... 1,062 93 - Other permanent differences....................... 172 (75) 175 ------------------------------------------ Tax provision at effective tax rate................... $ 12,043 $12,876 $10,199 ==========================================
Foreign, federal and state income taxes of approximately $12,957,000, $4,800,000 and $16,035,000 were paid during the years ended June 30, 2000, 2001 and 2002, respectively. 53 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. GOODWILL AND OTHER INTANGIBLES The Company has adopted SFAS No. 142 effective July 1, 2001. Under SFAS No. 142, goodwill is no longer amortized but is reviewed annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. In accordance with the adoption provisions of SFAS No. 142, the Company has completed the transitional and annual impairment tests in fiscal 2002 and no impairment was noted. The Company will be required to perform goodwill impairment tests on at least an annual basis. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings. The Company has covenants not to compete, which are deemed to have a definite life and will continue to be amortized. Amortization for these intangibles for the year ended June 30, 2002 was $221,000. The estimated aggregate amortization expense for each of the five succeeding fiscal years ending June 30, is: Year Amount ------------------- ---------------- 2003 173,000 2004 95,000 2005 19,000 2006 - 2007 -
The following table reflects the components of intangible assets (in thousands): June 30, 2001 June 30, 2002 ------------------------------ --------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------- ---------------- --------------- ------------------ Non-amortized intangible assets: Cost in excess of net assets acquired $ 150,574 $ 21,303 $ 150,954 $ 18,977 Amortized intangible assets: Covenants not to compete 2,152 1,872 2,380 2,093 Costs of contracts acquired 692 688 - -
The following table reflects the results of operations as if SFAS No. 142 had been adopted as of July 1, 1999 (in thousands): Year Ended Year Ended June 30, 2000 June 30, 2001 --------------------- ------------------ Reported net income $ 5,400 $ 6,690 Goodwill amortization, net of tax 5,027 3,947 --------------- ----------------- Adjusted net income $ 10,427 $ 10,637 =============== =================
54 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. Commitments The Company occupies office and retail space and uses certain equipment under operating lease agreements. Rent expense amounted to $11,034,000, $14,320,000 and $15,265,000 for the years ended June 30, 2000, 2001 and 2002, respectively. Most leases contain standard renewal clauses. Minimum obligations under noncancellable operating leases for the year ended June 30 are as follows (in thousands): Year Amount --------------- 2003............................. $ 14,492 2004............................. 12,225 2005............................. 8,774 2006............................. 4,817 2007............................. 2,983 Thereafter....................... 8,106 --------------- $ 51,397 ===============
The Company anticipates closing certain of its unprofitable stores in fiscal 2003 and is currently evaluating the locations to be closed. 10. Contingent Liabilities The Company is involved in routine litigation and administrative proceedings arising in the ordinary course of business. In the opinion of management, the outcome of such litigation and proceedings will not materially affect the Company's Consolidated Financial Statements. 11. Contractual Agreements The Company has contracts with various governmental agencies for benefits distribution and retail merchant services which contributed 4%, 2% and 1% of consolidated gross revenues for the years ended June 30, 2000, 2001 and 2002, respectively. The Company's contract with the State of New York contributed 3% and 1% of revenues for the years ended June 30, 2000 and 2001, respectively. During the year ended June 30, 2001, the State of New York completed a statewide implementation of an Electronic Benefit Transfer System ("EBT"). As a result, the Company's contract was terminated. The Company's contracts for governmental benefits distribution and merchant services distribution with state and local governments generally have initial terms of five years and currently expire on various dates through December 31, 2004. The contracts provide the governmental agencies the opportunity to extend the contract for additional periods and contain clauses which allow the governmental agencies to cancel the contract at any time, subject to 30 to 60 days' written advance notice. 55 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 12. Credit Risk At June 30, 2001 and 2002, the Company had twenty-two bank accounts in major U.S. financial institutions in the aggregate amount of $7,091,000 and $5,652,000, respectively, which exceeded Federal Deposit Insurance Corporation deposit protection limits. The Canadian Federal Banking system provides customers with similar deposit insurance through the Canadian Deposit Insurance Corporation ("CDIC"). At June 30, 2001 and 2002, the Company's Canadian subsidiary had thirteen bank accounts totaling $20,070,000 and $22,545,000, respectively, which exceeded CDIC limits. At June 30, 2001 and 2002 the Company's United Kingdom operations had eighty four and thirty six bank accounts, respectively, totaling $5,702,000 and $6,251,000. These financial institutions have strong credit ratings, and management believes credit risk relating to these deposits is minimal. Effective June 13, 2002, the Company entered into an agreement with County Bank of Rehoboth Beach, Delaware ("County"), a federally insured institution. The Company acts as a servicer for County, marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans are made for amounts up to $500, with terms of 7 to 23 days. Under this program, the Company earns servicing fees which are subject to adjustment if the related loans are not collected. The Company maintains a reserve for these estimated adjustments. County originated approximately $15 million of loans through the Company's locations and document transmitters during the fiscal year ended June 30, 2002. During the year ended June 30, 2002 Dollar Financial Group, Inc. entered into a Participation and Termination Agreement ("Eagle Agreement") with Eagle National Bank ("Eagle"), a national banking association and certain of its related entities. Under the agreement, Eagle discontinued the business of offering short-term consumer loans through the Company's locations and document transmitters. The Company had previously acted for Eagle marketing unsecured short-term loans to customers with established bank accounts and verifiable employment. Loans were made for amounts up to $500, with terms of 14 or 28 days which could be refinanced a maximum of four times and two times, respectively. Under this program, the Company earned origination and servicing fees. Eagle originated or extended approximately $377 million and $399 million of loans through the Company's locations and document transmitters during the fiscal years ended June 30, 2001 and 2002. The Company also originates unsecured short-term loans to customers on its own behalf in Canada, the United Kingdom and certain U.S. markets. These loans are made for amounts up to $700, with terms of 7 to 28 days which can be extended a maximum of four times. The Company bears the entire risk of loss related to these loans. The Company originated or extended approximately $306 million of the loans through the Company's locations and document transmitters during fiscal year ended June 30, 2002. The Company had approximately $16 million and $10 million of loans on its balance sheet at June 30, 2002 and 2001, respectively, which is reflected in loans and other receivables. Net writeoffs for Company originated loans which are netted against revenues on the Statements of Operations for the fiscal years ended June 30, 2002, 2001 and 2000 were $5.5 million, $4.4 million and $2.3 million, respectively. As a result of the changes in its lending program, the Company recorded a charge of $2.2 million to increase its loss reserves. Loans and other receivables at June 30, 2002 are reported net of a reserve of $2.9 million related to consumer lending. 56 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. Geographic Segment Information All operations for which geographic data is presented below are in one principal industry (check cashing and ancillary services) (in thousands): United United 2000 States Canada Kingdom Total ------------------------------------------------------------ Identifiable assets $ 133,887 $ 70,477 $ 55,350 $ 259,714 Sales to unaffiliated customers 102,073 39,897 23,783 165,753 Interest revenue 287 54 33 374 Interest expense 11,717 3,913 2,235 17,865 Depreciation and amortization 6,983 2,392 2,492 11,867 Income before income taxes 9,796 6,738 909 17,443 Income tax provision 7,246 4,103 694 12,043 Other non-recurring items 1,345 133 - 1,478 2001 Identifiable assets 140,024 74,054 62,094 276,172 Sales to unaffiliated customers 116,504 49,635 29,360 195,499 Interest revenue 398 69 3 470 Interest expense 13,994 3,922 2,915 20,831 Depreciation and amortization 6,707 2,867 2,917 12,491 Income before income taxes 5,636 12,927 1,003 19,566 Income tax provision 6,016 6,258 602 12,876 2002 Identifiable assets 140,813 82,860 67,639 291,312 Sales to unaffiliated customers 112,934 55,469 33,573 201,976 Establishment of reserves for new consumer lending arrangements 2,244 - - 2,244 Interest revenue 168 83 3 254 Interest expense 13,808 2,552 2,588 18,948 Depreciation and amortization 5,330 1,874 2,027 9,231 Other non-recurring items 281 - - 281 (Loss) income before income taxes (6,537) 17,672 5,101 16,236 Income tax provision 353 8,105 1,741 10,199
14. Related Party Transactions During fiscal 1999, certain members of management received loans aggregating $2.9 million, of which $200,000 was repaid during the fiscal year ended June 30, 2001, which are secured by shares of Holdings stock. The loans accrue interest at a rate of 6% per year and are due and payable in full on December 18, 2004 and December 31, 2005. In addition, as part of an employment agreement, the Chief Executive Officer was issued a loan in the amount of $4.3 million to purchase additional shares of Holdings stock. The loan accrues interest at a rate of 6% per year and is due and payable in full on December 18, 2004. The loan is secured by a pledge of shares in Holdings stock. 57 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Subsidiary Guarantor Financial Information As discussed in Note 6, the Company's payment obligations under the Senior Notes are jointly and severally guaranteed on a full and unconditional basis by all of the Company's existing and future subsidiaries (the "Guarantors"). 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 Revolving Credit Facility and any successor credit facility. Pursuant to the Senior Notes or Senior Subordinated Notes, every direct and indirect subsidiary of the Company, each of which is wholly owned, serves as a guarantor of the Senior Notes. 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 condensed consolidating balance sheet at June 30, 2002, and the consolidating statements of operations and cash flows for the fiscal year ended June 30, 2002 of the Company (on a parent-company basis), combined domestic Guarantors, combined foreign subsidiaries and the consolidated Company. 58 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Subsidiary Guarantor Financial Information (continued) Consolidating Balance Sheets June 30, 2002 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------------ Assets Cash and cash equivalents................... $ 1,746 $ 41,405 $ 43,482 $ - $ 86,633 Loans and other receivables, net............ 3,761 7,389 13,965 (4,573) 20,542 Income taxes receivable..................... 8,456 1 - (8,457) - Prepaid expenses............................ 850 1,898 3,997 - 6,745 Deferred income taxes....................... 1,166 - - (1,166) - Notes receivable--officers................... 2,756 - - - 2,756 Due from affiliates......................... 51,323 23,990 - (75,313) - Due from parent............................. 3,606 - - - 3,606 Property and equipment, net................. 6,867 11,554 12,089 - 30,510 Goodwill and other intangibles, net......... 172 56,372 75,720 - 132,264 Debt issuance costs, net.................... 6,292 - - - 6,292 Investment in subsidiaries.................. 172,581 9,801 6,705 (189,087) - Other....................................... 106 612 1,246 - 1,964 ------------------------------------------------------------------------------ $ 259,682 $ 153,022 $ 157,204 $ (278,596) $ 291,312 ============================================================================== Liabilities and shareholder's equity Accounts payable............................ $ 2,234 $ 7,752 $ 8,263 $ - $ 18,249 Income taxes payable........................ - 8,714 1,574 (8,457) 1,831 Accrued expenses............................ 2,764 1,152 4,016 - 7,932 Accrued interest payable.................... 1,511 - 4,601 (4,573) 1,539 Deferred tax liability...................... - 1,221 - (1,166) 55 Due to affiliates........................... - - 75,313 (75,313) - Revolving credit facilities................. 68,600 - 10,336 - 78,936 10 7/8% Senior Notes due 2006............... 109,190 - - - 109,190 Subordinated notes payable and other........ 20,000 - 65 - 20,065 ------------------------------------------------------------------------------ 204,299 18,839 104,168 (89,509) 237,797 Shareholder's equity: Common stock............................. - - - - - Additional paid-in capital............... 50,957 71,305 27,304 (98,609) 50,957 Retained earnings ....................... 6,903 64,515 25,963 (90,478) 6,903 Accumulated other comprehensive loss..... (2,477) (1,637) (231) - (4,345) ------------------------------------------------------------------------------ Total shareholder's equity.................. 55,383 134,183 53,036 (189,087) 53,515 ------------------------------------------------------------------------------ $ 259,682 $ 153,022 $ 157,204 $ (278,596) $ 291,312 ==============================================================================
59 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Subsidiary Guarantor Financial Information (continued) Consolidating Statements of Operations Year ended June 30, 2002 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------------ Revenues.................................. $ - $ 112,934 $ 89,042 $ - $ 201,976 Store and regional expenses: Salaries and benefits.................. - 40,985 24,310 - 65,295 Occupancy.............................. - 11,540 6,547 - 18,087 Depreciation........................... - 3,431 3,091 - 6,522 Other.................................. - 30,549 15,689 - 46,238 ------------------------------------------------------------------------------ Total store and regional expenses......... - 86,505 49,637 - 136,142 Establishment of reserves for new consumer lending arrangements................... - 2,244 - - 2,244 Corporate expenses........................ 15,952 226 8,338 - 24,516 Management fee............................ (12,226) 9,855 2,371 - - Loss on store closings and sales.......... 125 970 59 - 1,154 Other depreciation and amortization....... 1,601 298 810 - 2,709 Interest expense (income)................. 16,167 (2,527) 5,054 - 18,694 Other non-recurring items................. 281 - - - 281 ------------------------------------------------------------------------------ (Loss) income before income taxes ........ (21,900) 15,363 22,773 - 16,236 Income tax (benefit) provision ........... (7,846) 8,199 9,846 - 10,199 ------------------------------------------------------------------------------ (Loss) income before equity in net income of subsidiaries.......................... (14,054) 7,164 12,927 - 6,037 Equity in net income of subsidiaries: Domestic subsidiary guarantors......... 7,164 - - (7,164) - Foreign subsidiary guarantors.......... 12,927 - - (12,927) - ------------------------------------------------------------------------------ Net income .............................. $ 6,037 $ 7,164 $ 12,927 $ (20,091) $ 6,037 ==============================================================================
60 DOLLAR FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. Subsidiary Guarantor Financial Information (continued) Consolidating Statements of Cash Flows Year ended June 30, 2002 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ----------------------------------------------------------------------------- Cash flows from operating activities Net income........................................... $ 6,037 $ 7,164 $ 12,927 $ (20,091) $ 6,037 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Undistributed income of subsidiaries............ (20,091) - - 20,091 - Depreciation and amortization................... 3,111 3,727 3,902 - 10,740 Loss on store closings and sales................ 125 970 59 - 1,154 Establishment of reserves for new consumer lending arrangements.......................... - 2,244 - - 2,244 Deferred tax provision (benefit).............. 413 (1,286) - - (873) Changes in assets and liabilities (net of effect of acquisitions): Decrease (increase) in loans and other receivables and income taxes receivable......................... 4,658 2,790 (1,146) (4,715) 1,587 Decrease in prepaid expenses and other................................. 87 108 65 - 260 Increase (decrease) in accounts payable, income taxes payable, accrued expenses and accrued interest payable ......................... 1,251 (6,452) (6,210) 4,715 (6,696) ----------------------------------------------------------------------------- Net cash (used in) provided by operating activities....................................... (4,409) 9,265 9,597 - 14,453 Cash flows from investing activities: Acquisitions, net of cash acquired................... - (59) 14 - (45) Additions to property and equipment.................. (3,203) (2,499) (4,361) - (10,063) Net decrease (increase) in due from affiliates....... 3,248 (1,650) - (1,598) - ----------------------------------------------------------------------------- Net cash provided by (used in) investing activities. 45 (4,208) (4,347) (1,598) (10,108) Cash flows from financing activities Other debt payments.................................. - - (64) - (64) Net increase in revolving credit facilities.......... 6,300 - 4,812 - 11,112 Payment of debt issuance costs....................... (571) - - - (571) Net increase in due from parent...................... (1,068) - - - (1,068) Net decrease in due to affiliates.................... - - (1,598) 1,598 - ----------------------------------------------------------------------------- Net cash provided by financing activities............ 4,661 - 3,150 1,598 9,409 Effect of exchange rate changes on cash and cash equivalents.............................. - - 427 - 427 ----------------------------------------------------------------------------- Net increase in cash and cash equivalents............ 297 5,057 8,827 - 14,181 Cash and cash equivalents at beginning of year....... 1,449 36,348 34,655 - 72,452 ----------------------------------------------------------------------------- Cash and cash equivalents at end of year............. $ 1,746 $ 41,405 $ 43,482 $ - $ 86,633 =============================================================================
61 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors and Officers The directors and officers of Holdings and their respective ages and positions with Holdings are set forth below: Name Age Position Jeffrey Weiss...................... 59 Chairman of the Board of Directors and Chief Executive Officer Donald Gayhardt.................... 38 President, Chief Financial Officer and Director Leonard Green...................... 68 Director Jonathan Sokoloff.................. 45 Director Muneer Satter...................... 41 Director Jonathan Seiffer................... 30 Director
The directors and officers of DFG and their respective ages and positions with DFG are set forth below: Name Age Position Jeffrey Weiss...................... 59 Chairman of the Board of Directors and Chief Executive Officer Donald Gayhardt.................... 38 President and Chief Financial Officer Dennis Roberts..................... 53 Executive Vice President and Chief Operating Officer Peter Sokolowski................... 41 Vice President Finance
Jeffrey Weiss has served as the Chairman and Chief Executive Officer of DFG and Holdings since the Company's acquisition by an affiliate of Bear Stearns & Co., Inc. ("Bear Stearns") in May 1990. Until June 1992, Mr. Weiss was also a Managing Director at Bear Stearns with primary responsibility for the firm's investments in small to mid-sized companies, in addition to serving as Chairman and Chief Executive Officer for several of these companies. Mr. Weiss is the author of several popular financial guides. Donald Gayhardt has served as President of DFG and Holdings since December 1998 and Chief Financial Officer since April 2001. He also served as Executive Vice President and Chief Financial Officer of DFG and Holdings from 1992 to 1997. Prior to joining the company, Mr. Gayhardt was employed by Bear Stearns from 1988 to 1993, most recently as an Associate Director in the Principal Activities Group, where he had oversight responsibility for the financial and accounting functions at a number of manufacturing, distribution and retailing firms, including DFG. Prior to joining Bear Stearns, Mr. Gayhardt held positions in the mergers and acquisitions advisory and accounting fields. Dennis Roberts' background encompasses 35 years of retail operations experience, formerly holding the positions of Executive Vice President and Chief Operating Officer for Uno Restaurant Corporation and Senior Vice President - Restaurant and Franchise Operations, for Friendly Ice Cream Corporation. Peter Sokolowski has been Vice President--Finance of DFG since June 1991 and has overall responsibility for the Company's accounting systems and controls, as well as financial management. Prior to joining the Company, Mr. Sokolowski worked in various financial positions in the commercial banking industry. 62 Leonard Green has been a director of Holdings since December 1998. He has been an executive officer of Leonard Green & Partners, L.P. ("LGP"), a merchant banking firm that manages Green Equity Investors II, L.P. ("GEI"), since the formation of LGP and GEI in 1994. Since 1989, Mr. Green has been, individually or through a corporation, a partner in a merchant banking firm affiliated with LGP. Prior to 1989, Mr. Green had been a partner of Gibbons, Green, van Amerongen for more than five years. Mr. Green is also a director of several private companies. Jonathan Sokoloff has been a director of Holdings since December 1998. Mr. Sokoloff has been an executive officer of LGP since its formation in 1994. Since 1990, Mr. Sokoloff has been a partner in a merchant banking firm affiliated with LGP. Mr. Sokoloff was previously a Managing Director at Drexel Burnham Lambert Incorporated. Mr. Sokoloff is also a director of Twinlab Corporation, Gart Sports Company and several private companies. Muneer Satter has been a director of Holdings since December 1998. He is a Managing Director in Goldman Sachs' Principal Investment Area (PIA) in New York. Prior to this assignment, he was head of PIA in Europe and was based in London. He joined the firm in 1988 and became a managing director in 1996. Jonathan Seiffer has been a director of Holdings since October 2001. He has been a partner of Leonard Green & Partners, L.P. since January 1999. From December 1997 to January 1999 he was a vice president of Leonard Green & Partners, L.P. From October 1994 until December 1997, Mr. Seiffer was an associate of Leonard Green & Partners, L.P. Prior to October 1994, Mr. Seiffer was a member of the corporate finance department of Donaldson, Lufkin & Jenrette Securities Corporation. He is also a director of Diamond Triumph Glass, Inc., Gart Sports Company, Liberty Group Publishing, Inc. and several private companies. 63 Item 11. EXECUTIVE COMPENSATION The following table sets forth information with respect to the compensation of the Chief Executive Officer and each of the other executive officers of the Company who had annual compensation in fiscal year 2002 in excess of $100,000 (the "Named Executive Officers"): Summary Compensation Table Long-Term Compensation Annual Compensation Awards -------------------------------------------------------------- Other Annual Securities Name and Compensation Underlying All Other Principal Position Year Salary Bonus Options (#) Compensation - --------------------------------------------------------------------------------------------------------------------- Jeffrey Weiss............ 2002 650,000 - 122,417(1) - 5,625 Chairman and 2001 600,000 100,000 162,873(1) - 6,000 Chief Executive Officer 2000 500,000 700,000 170,601(1) - 5,288 Donald Gayhardt.......... 2002 350,000 - - - 3,990 President and Chief 2001 300,000 50,000 - - 6,187 Financial Officer 2000 225,000 270,000 - - 4,327 Dennis Roberts (2)....... 2002 121,000 - - - - Executive Vice President and Chief Operating Officer
(1) During the years ended June 30, 2002, 2001 and 2000, amounts include $62,314, $70,581 and $64,618, respectively, paid for life insurance premiums on policies where the Company was not the named beneficiary. Perquisites and other personal benefits provided to each other Named Executive Officer did not exceed the lesser of $50,000 or 10% of the total salary and bonus for such Named Executive Officer. (2) Mr. Roberts joined the Company in December 2001. The following table sets forth information concerning options to purchase Holdings' common stock held by each of the Named Executive Officers as of the fiscal year ended June 30, 2002. 64 Option/SAR Grants in Last Fiscal Year (1) (1) No options or SARs were granted in the last fiscal year. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values Shares Number of Securities Value of Unexercised Acquired Value Underlying Unexercised In-the-Money Options at Name on Exercise Realized Options at Fiscal Year End Fiscal Year End (1) - ---- --------------------------------------------------------------------------------------- Exercisable/Unexercisable Exercisable/Unexercisable Jeffrey Weiss...... 0 $ 0 0/0 $0/$0 Donald Gayhardt.... 0 0 283/116 $1,139,075/$466,900
(1) An assumed fair market value of $7,250 per share was used to calculate the value of the options. As the shares are not traded in an established public market, the value assigned is based on the last strike price options were granted. 65 Employment Agreements Jeffrey Weiss Mr. Weiss, Chairman and Chief Executive Officer of Holdings and DFG, is employed pursuant to an Employment Agreement (the "Weiss Agreement") dated as of November 13, 1998 among Mr. Weiss, DFG and Holdings (DFG and Holdings being collectively referred to herein as the "Employer"). The Weiss Agreement provides for an annual base salary of $500,000, to be reviewed bi-annually and may be increased at the discretion of the Board of Directors of Holdings. In addition, Mr. Weiss is eligible to receive an annual bonus and incentive compensation, contingent upon the Employer achieving 100% of its targeted results (with certain adjustments to the extent the Employer achieves results short of or in excess of its targeted results). The total compensation paid or caused to be paid to Mr. Weiss with respect to any fiscal year, including salary, bonuses and annual incentive compensation shall not exceed $1,200,000. Under certain circumstances, Mr. Weiss is entitled to the payment of a severance benefit equal to the discounted value of any unpaid base salary for the term of the agreement. The Weiss Agreement also provides for a five-year term, commencing on December 19, 1998, unless it is otherwise terminated pursuant to its terms. Mr. Weiss is eligible to participate in all fringe benefit programs of the Employer offered from time to time to its senior management employees. Pursuant to the Weiss Agreement, Mr. Weiss has agreed that effective upon termination, and in consideration of the payment of the compensation and other benefits paid pursuant to the agreement, he will not compete with the Employer within the United States, Canada or any other country in which the Company now or hereafter conducts business for a period of two years. 66 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT All of the issued and outstanding shares of capital stock of the Company are owned by Holdings. The following table sets forth as of June 30, 2002 the number of shares of Holdings' common stock owned beneficially by (a) each person that is the beneficial owner of more than 5% of Holdings' common stock, (b) all directors and nominees, (c) the Named Executive Officers, and (d) all directors and executive officers as a group. The address of each officer and director is c/o the Company unless otherwise indicated. As of such date, there were a total of 19,864.93 shares of Holdings' common stock issued (106.71 are held in treasury). Beneficial Owner Number Percent Green Equity Investors II, L.P. ............................. 13,014.94 63.84% 11111 Santa Monica Boulevard Los Angeles, California 90025 Jeffrey Weiss................................................ 3,058.99 15.01 GS Mezzanine Partners, L.P. and GS Mezzanine Partners Offshore, L.P. and associates..... 2,150.46 10.55 85 Broad Street New York, New York 10004 Donald Gayhardt (1) ......................................... 447.19 2.19 All directors and officers as a group (3 persons) (2)........ 3,574.53 17.54
(1) Includes options to purchase 282.63 shares of Holdings' common stock which are currently exercisable. (2) Includes options to purchase 297.63 shares of Holdings' common stock which are currently exercisable. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Stockholders Agreement Holdings entered into a Stockholders Agreement dated November 13, 1998 (the "Stockholders Agreement") with certain stockholders signatory thereto (the "Stockholders"), including Green Equity Investors II, L.P. (the "Purchaser"), certain Executives of the Company (individually, the "Executive Stockholder", and collectively, the "Executive Stockholders"), GS Mezzanine Partners, L.P. and GS Mezzanine Partners Offshore, L.P (collectively, "GS Mezzanine"). Subsequent to November 13, 1998 certain additional stockholders including Ares Leveraged Investment Fund, L.P. and Ares Leveraged Investment Fund II, L.P. (collectively "Ares"), C.L. and Sheila Jeffrey, Bridge Street Fund 1998, L.P. and Stone Street Fund 1998, L.P. (collectively the "Additional Stockholders") agreed to be bound by the terms of the Stockholders Agreement. The Stockholders Agreement shall terminate ten (10) years from the date of the Stockholders Agreement (the "Termination Date") with certain provisions terminating on the date of a Public Offering Event which occurs prior to the Termination Date. Transfer Restrictions The Stockholders Agreement provides, among other things, for certain restrictions on the disposition of Holdings' common stock. Unless a transfer of Holdings' common stock which is subject to the Stockholders Agreement is made in accordance with the terms of such agreement, such transfer will be void and of no force or effect. Holdings' common stock may be transferred subject to the terms and conditions of the Stockholders Agreement. Any shares of Holdings' common stock which are subsequently transferred to a non-Stockholder transferee will remain subject to the terms and conditions of the Stockholders Agreement. 67 Tag-Along and First Option Rights If, at any time, the Purchaser proposes to enter into an agreement to sell or otherwise dispose of for value shares of Holdings in excess of at least twenty percent (20%) of the then outstanding shares (the "Tag-Along Sale") then the Executives shall be afforded the opportunity to participate proportionately in such Tag-Along Sale. This provision does not apply to certain transactions as defined in the Stockholders Agreement. If, at any time, any Executive desires to sell for cash all or any part of such shares held by such Executive, the Selling Executive shall provide notice to each of (i) the Purchaser or its assigns and (ii) Holdings (the "Potential Buyer") of the desire to sell for cash such shares. Upon receiving notice, each Potential Buyer shall have the option to purchase all, but not less than all, of such shares on the same terms and conditions. If more than one Potential Buyer has exercised their option, the priority shall first fall to the Purchaser. Repurchase of Shares Upon the termination of employment of an Executive Stockholder by reason of his death or permanent disability (an "Option Event"), Holdings and the Purchaser (with priority to Holdings) shall have the right and option to repurchase all of the shares then owned by the Executive Shareholder. The price shall be at the fair market value of the shares at the time of the Option Event as determined pursuant to the terms of the Stockholders Agreement. Registration Rights The Stockholders Agreement also provides for demand and incidental (or "piggyback") registration rights. The Purchaser has demand registration rights pursuant to which on the earlier of (i) the date that is 90 days after the first registration of shares of Holdings' common stock under the Securities Act and (ii) the second anniversary of the Stockholders Agreement the Purchaser may make a written request of Holdings to register all or part of such Purchaser's Holdings' common stock. Each remaining Stockholder may then elect to include its shares of Holdings' common stock in the demand registration. The Purchaser is entitled to three demand registrations. If Holdings proposes to register any equity securities under the Securities Act, it must include in such registration all shares of Holdings' common stock which the Stockholders request to have registered, subject to the condition that not all of the shares may be registered if only a reduced number can be sold without having a material adverse effect on the offering. Additional Shareholder Rights If the Purchaser agrees to sell all or substantially all of its shares to a third party, then the Purchaser may demand that the Executive Stockholders sell all, but not less than all, of Holdings' shares held by them at the same price and on the same terms and conditions. Grant of Proxy Each Stockholder has agreed to vote their shares so that (1) so long as Jeffrey Weiss is the Chief Executive Officer of Holdings , he is elected to the board of directors of Holdings and (2) so long as Purchaser owns, directly or indirectly, twenty percent (20%) or more of the then outstanding stock of Holdings, the Purchaser shall be entitled to elect the remaining members of the boards of directors. Loan to an Officer/Director During fiscal 1999, certain members of management received loans aggregating $2.9 million (of which, during the fiscal year ended June 30, 2001, $200,000 was repaid), which are secured by shares of Holdings stock. The loans accrue interest at a rate of 6% per year and are due and payable in full on December 18, 2004 and December 31, 2005. In addition, as part of an employment agreement, Jeffrey Weiss was issued a loan in the amount of $4.3 million to purchase additional shares of Holdings stock. The loan accrues interest at a rate of 6% per year and is due and payable in full on December 18, 2004. The loan is secured by a pledge of shares in Holdings stock. 68 Management Agreement Pursuant to the terms of a Management Services Agreement among the Purchaser, Holdings and the Company, Holdings has agreed to pay the Purchaser an annual management fee equal to 2.4% of the total sum invested by the Purchaser in Holdings and reimbursement of any out-of-pocket expenses incurred. 69 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2)....List of Financial Statements and Schedules Financial Statements: The following consolidated financial statements are submitted in response to Item 14(a)(1) and (2): Dollar Financial Group, Inc. Page --------- Report of Independent Auditors................................................................ 37 Consolidated Balance Sheets, June 30, 2001 and 2002........................................... 38 Consolidated Statements of Operations, years ended June 30, 2000, 2001 and 2002............... 39 Consolidated Statements of Shareholder's Equity, years ended June 30, 2000, 2001 and 2002..... 40 Consolidated Statements of Cash Flows, years ended June 30, 2000, 2001 and 2002............... 41 Notes to Consolidated Financial Statements.................................................... 42 Schedule II - Valuation and Qualifying Accounts............................................... 80
All other Financial Statement Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are omitted because such schedules are not required under the related instructions, are inapplicable, or the required information is given in the financial statements. [The remainder of this page intentionally left blank.] 70 (a)(3) Exhibits Exhibit No. Description of Document 3.1 (a)(i) Certificate of Incorporation of Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (a)(ii) Certificate of Change of Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (a)(iii) Certificate of Change of Certificate of Incorporation of Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (a)(iv) Certificate of Amendment of the Certificate of Incorporation of Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (b)(i) Articles of Incorporation of Albuquerque Investments, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (c)(i) Articles of Incorporation of Any Kind Check Cashing Centers, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (c)(ii) Articles of Amendment to the Articles of Incorporation of Any Kind Check Cashing Centers, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (d)(i) Articles of Incorporation of Check Mart of Louisiana, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (e)(i) Certificate of Incorporation of Check Mart of New Jersey, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (f)(i) Articles of Incorporation of Check Mart of New Mexico, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (f)(ii) Articles of Amendment to the Articles of Incorporation of Check Mart of New Mexico, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (g)(i) Articles of Incorporation of Check Mart of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (h)(i) Articles of Incorporation of Check Mart of Texas, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (i)(i) Articles of Incorporation of Check Mart of Utah, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (i)(ii) Articles of Amendment to the Articles of Incorporation of Check Mart of Utah, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (j)(i) Articles of Incorporation of Check Mart of Washington, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (j)(ii) Articles of Amendment of Check Mart of Washington, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 71 (a)(3) Exhibits Exhibit No. Description of Document (k)(i) Articles of Incorporation of Check Mart of Washington, D.C., Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (l)(i) Articles of Incorporation of Check Mart of Wisconsin, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (m)(I) Certificate of Incorporation of DFG Warehousing Co., Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (n)(i) Articles of Incorporation of Dollar Financial Insurance Corp. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (o)(i) Certificate of Incorporation of Dollar Insurance Administration Corp. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (p)(i) Articles of Incorporation of Financial Exchange Company of Michigan, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (p)(ii) Certificate of Amendment to the Articles of Incorporation of Financial Exchange Company of Michigan, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (q)(i) Articles of Incorporation of Financial Exchange Company of Ohio, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (q)(ii) Certificate of Amendment by Incorporator (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (q)(iii) Certificate of Amendment (by Shareholders) (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (r)(i) Certificate of Incorporation of Financial Exchange Company of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (r)(ii) Amendment "1" to Certificate of Incorporation of Financial Exchange Company of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (r)(iii) Amendment "2" to Certificate of Incorporation of Financial Exchange Company of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (s)(i) Certificate of Incorporation of Financial Exchange Company of Pittsburgh, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (t)(i) Certificate of Incorporation of Financial Exchange Company of Virginia, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (u)(i) Articles of Incorporation of L.M.S. Development Corporation (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (v)(i) Articles of Incorporation of Monetary Management Corp. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 72 (a)(3) Exhibits Exhibit No. Description of Document (w)(I) Certificate of Incorporation of Monetary Management Corporation of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (x)(i) Articles of Incorporation of Monetary Management of California, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (y)(i) Articles of Incorporation of Monetary Management of Maryland, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (z)(i) Certificate of Incorporation of Monetary Management of New York, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (aa)(I) Articles of Incorporation of Pacific Ring Enterprises, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (bb)(i) Limited Partnership Certificate and Agreement of U.S. Check Exchange Limited Partnership (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (bb)(ii) First Amendment to Certificate and Agreement of Limited Partnership of U.S. Check Exchange Limited Partnership (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (bb)(iii) Second Amendment Certificate of Limited Partnership (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (cc)(I) Articles of Incorporation of QTV Holdings, Inc. (Incorporated by reference to Exhibit 3.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 3.2 (a)(i) Bylaws of Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (b)(i) Bylaws of Albuquerque Investments, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (c)(i) Bylaws of Any Kind Check Cashing Centers, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (d)(i) Bylaws of Check Mart of Louisiana, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (e)(i) Bylaws of Check Mart of New Jersey, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (f)(i) Bylaws of Check Mart of New Mexico, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (g)(i) Bylaws of Check Mart of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (h)(i) Bylaws of Check Mart of Texas, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (i)(i) Bylaws of Check Mart of Utah, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (j)(i) Bylaws of Check Mart of Washington, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (k)(i) Bylaws of Check Mart of Washington, D.C., Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (l)(i) Bylaws of Check Mart of Wisconsin, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 73 (a)(3) Exhibits Exhibit No. Description of Document (m)(i) Bylaws of DFG Warehousing Co., Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (n)(i) Bylaws of Dollar Financial Insurance Corp. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (o)(i) Bylaws of Dollar Insurance Administration Corp. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (p)(i) Bylaws of Financial Exchange Company of Michigan, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (q)(i) Code of Regulations of Financial Exchange Company of Ohio, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (r)(i) Bylaws of Financial Exchange Company of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (s)(i) Bylaws of Financial Exchange Company of Pittsburgh, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (t)(i) Bylaws of Financial Exchange Company of Virginia, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (u)(i) Bylaws of L.M.S. Development Corporation (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (v)(i) Bylaws of Monetary Management Corp. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (w)(i) Bylaws of Monetary Management Corporation of Pennsylvania, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (x)(i) Bylaws of Monetary Management of California, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (y)(i) Bylaws of Monetary Management of Maryland, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (y)(ii) Amended and Restated Bylaws of Monetary Management of Maryland, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (z)(i) Bylaws of Monetary Management of New York, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (aa)(i) Bylaws of Pacific Ring Enterprises, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (bb)(i) Bylaws of QTV Holdings, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 4.1 Indenture, dated as of November 15, 1996, among the Company, the Guarantors, and Fleet National Bank, as Trustee (Incorporated by reference to Exhibit 4.1 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 4.2 Form of Notes (included in Exhibit 4.1) (Incorporated by reference to Exhibit 4.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 4.3 A/B Exchange Registration Rights Agreement, dated as of November 15, 1996, by and among the Company, the Guarantors, and the Initial Purchasers (Incorporated by reference to Exhibit 4.3 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 74 (a)(3) Exhibits Exhibit No. Description of Document 10.1 (a) Asset Purchase Agreement, dated January 9, 1995, by and among the Company, Happy's Check Cashing, and Adrian Rubin (Incorporated by reference to Exhibit 10.1(a) to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (b) Amendment No. 1 to the Asset Purchase Agreement, dated February 20, 1995, by and among the Company, Happy's Check Cashing, Chase Money Loan, Inc., and Adrian Rubin (Incorporated by reference to Exhibit 10.1(b) to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.2 Purchase Agreement, dated July 28, 1995, by and among Monetary Management Corporation, NCCI Corporation, Larry M. Senderhauf, E. Rick Safford, and Fred T. Kampo, Jr. (Incorporated by reference to Exhibit 10.2 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.3 (a) Site License and Services Agreement, dated April 30, 1996, by and between the Company and The Southland Corporation (Incorporated by reference to Exhibit 10.3(a) to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) (b) Asset Purchase Agreement, dated April 30, 1996, by and between the Company and The Southland Corporation (Incorporated by reference to Exhibit 10.3(b) to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.4 Employment Agreement, dated as of November 13, 1998, between the Company, DFG Holdings, Inc., and Jeffrey Weiss (Incorporated by reference to Exhibit 10.4 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.5 Employment Agreement, dated as of December 18, 1998, between the Company, DFG Holdings, Inc., and Donald F. Gayhardt (Incorporated by reference to Exhibit 10.5 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.6* Employment Agreement, dated as of July 21, 1997 between the Company, DFG Holdings, Inc., and Richard S. Dorfman 10.7 Amended and Restated Shareholders Agreement, dated August 8, 1996, among WPG Corporate Development Associates IV, L.P., WPG Corporate Development Associates IV (Overseas), L.P., the individual fund shareholders signatory thereto, the GHB Charitable Trust #1, Jeffrey Weiss, Donald F. Gayhardt, Pegasus Partners L.P., PAG Dollar Investors, the warrant holders signatory thereto, General Electric Capital Corporation, and DFG Holdings, Inc. (Incorporated by reference to Exhibit 10.7 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.8 Purchase Agreement, dated as of August 8, 1996, by and among the Company, DFG Holdings, Inc., Any Kind Check Cashing Centers, Inc., the shareholders signatory thereto, U.S. Check Exchange Limited Partnership, the limited partners signatory thereto, and George H. Brimhall (Incorporated by reference to Exhibit 10.8 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.9 Asset Purchase Agreement, dated August 28, 1996, by and among Financial Exchange Company of Ohio, Inc., ABC Check Cashing, Inc., and the shareholder signatory thereto (Incorporated by reference to Exhibit 10.9 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.10 Asset Purchase Agreement, dated as of October 22, 1996, by and among the Company, Cash-N-Dash Check Cashing, Inc., and the shareholders signatory thereto (Incorporated by reference to Exhibit 10.10 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.11 Stock Purchase Agreement, dated as of October 22, 1996, by and among the Company, Manor Investment Co. Inc., and the shareholders signatory thereto (Incorporated by reference to Exhibit 10.11 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 75 (a)(3) Exhibits Exhibit No. Description of Document 10.12 Amended and Restated Purchase Agreement, dated as of October 23, 1996, by and among Dollar Financial Canada Ltd., DFG Holdings, Inc., National Money Mart, Inc., and the shareholders signatory thereto (Incorporated by reference to Exhibit 10.12 to the Registrant's Statement on Form S-4 (Registration #333-18221) declared effective March 11, 1997) 10.13 Credit Agreement, dated as of December 18, 1998, among the Company, DFG Holdings, Inc. the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, First Union Capital Markets and Wells Fargo as arrangers, First Union National Bank, as syndication agent, and U.S. Bank National Association, as documentation agent (Incorporated by reference to Exhibit 10.13 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.14 Purchase Agreement, dated as of March 31, 1997, among Dollar Financial Group, Inc., Dollar Financial Canada, LTD., Canadian Capital Corporation, Dollar Ontario LTD. And Gus E. Baril, Leslie A. Baril and the Baril Family Trust. The schedules to the Purchase Agreement and the exhibits thereto have been omitted. The Company will furnish supplementally to the Commission any of the schedules or exhibits upon request 10.15 DFG Holdings, Inc. Stock Incentive Plan 10.16 Termination Agreement, dated June 30, 1997 re: Donald F. Gayhardt, Jr. 10.17 Pledge and Security Agreement, dated as of December 18, 1998, among the Company, Wells Fargo Bank, National Association, as administrative agent for itself and the Lenders under the Credit Agreement (Incorporated by reference to Exhibit 10.17 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.18 Subordination Agreement, dated as of December 18, 1998, among the Company, DFG Holdings, Inc., and Wells Fargo Bank, National Association, as administrative agent for itself and the Lenders under the Credit Agreement (Incorporated by reference to Exhibit 10.18 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.19 Supplemental Security Agreement (Trademarks), dated as of December 18, 1998, among the Company and Wells Fargo Bank, National Association, as administrative agent for itself and the Lenders under the Credit Agreement (Incorporated by reference to Exhibit 10.19 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.20 Purchase Agreement, dated as of December 18, 1998, among the Company, 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., relating the the $20,000,000 aggregate principal amount of 10 7/8% Senior Subordinated Notes Due 2006 (Incorporated by reference to Exhibit 10.20 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.21 Exchange and Registration Rights Agreement, dated as of December 18, 1998, among the Company, GS Mezzanine Partners, L.P., 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., relating to the $20,000,000 aggregate principal amount of 10 7/8% Senior Subordinated Notes Due 2006 (Incorporated by reference to Exhibit 10.21 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.22 Secured Note, dated December 18, 1998, made by Jeffrey Weiss in favor of the Company (Incorporated by reference to Exhibit 10.22 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 10.23 Pledge Agreement, dated December 18, 1998, between the Company and Jeffrey Weiss (Incorporated by reference to Exhibit 10.23 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 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) 76 (a)(3) Exhibits Exhibit No. Description of Document 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 Wilner 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) 10.26 Agreement for the sale and purchase of shares in Cash A Cheque Holdings Great Britain Limited between Luke Johnson and others, Dollar Financial UK Limited and Dollar Financial Group, Inc. (Incorporated by referenced to Exhibit 10.26 of the Registrant's Form 8K/A filed September 20, 1999, declared effective July 22, 1999) 10.27 Agreement for the sale and purchase of shares in Cash Centres Corporation Limited between Edward Ford and others, Dollar Financial UK Limited and Dollar Financial Group, Inc. (Incorporated by reference to Exhibit 10.27 of the Registrant's Form 8K/A filed February 28, 2000, declared effective December 30, 1999) 10.28 Amended and Restated Nonexclusive Servicing and Indemnification Agreement between County Bank and Dollar Financial Group, Inc.** 21.1 Subsidiaries of the Registrant (Incorporated by reference to Exhibit 21.1 to the Registrant's Statement on Form 10Q (Registration #333-18221) declared effective December 31, 1998) 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Title 18, United States Code, Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
77 * Management contracts or compensatory plans or arrangements required to be filed as exhibits to this Form 10-K by Item 601 of Regulation S-K. ** Confidential treatment has been requested for certain confidential portions of this exhibit; these confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission. (b) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts 78 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant named below has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Berwyn, Commonwealth of Pennsylvania on September 30, 2002. DOLLAR FINANCIAL GROUP, INC. By: /s/ DONALD GAYHARDT ----------------------------------------- Donald Gayhardt President and Chief Financial Officer DOLLAR FINANCIAL GROUP, INC. Signature Title Date /s/ JEFFREY A. WEISS Chairman of the Board of Directors September 30, 2002 - ------------------------------------- and Chief Executive Officer Jeffrey A. Weiss (principal executive officer) /s/ DONALD GAYHARDT President and Chief Financial Officer September 30, 2002 - -------------------------------------(principal financial and accounting officer) Donald Gayhardt
79 DOLLAR FINANCIAL GROUP, INC. (a) Schedule II - Valuation and Qualifying Accounts Additions ---------------------------------------------- Balance Charged at to costs Foreign Charged beginning and currency to other Balance at Description of period expenses translation accounts Deductions end of period ------------------------- ------------ -------------- ----------- ---------------- ------------ --------------- Year ended June 30, 2002: Loan loss provision $ 600 $2,244 $ 18 $ - $ - $ 2,862 (a) This schedule should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto.
80 EX-99 3 e991exhib.txt SARBANES-OXLEY CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Dollar Financial Group, Inc. (the "Company") on Form 10-K for the period ended June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JEFFREY A. WEISS - ------------------------------- Jeffrey A. Weiss Chairman of the Board of Directors and Chief Executive Officer September 30, 2002 /s/ DONALD GAYHARDT - ------------------------------- Donald Gayhardt President and Chief Financial Officer September 30, 2002 EX-10 4 e1028exib.txt COUNTY AGREEMENT AMENDED AND RESTATED NONEXCLUSIVE SERVICING AND INDEMNIFICATION AGREEMENT This AMENDED AND RESTATED NONEXCLUSIVE SERVICING AND INDEMNIFICATION AGREEMENT (the "Agreement"), dated June 14, 2002, is by and between County Bank, a Delaware banking corporation (the "Lender"), with its principal office at 4299 Highway One, Rehoboth Beach, Delaware 19971, and Dollar Financial Group, Inc., a corporation organized and existing under the laws of the State of New York, with its principal office at 1436 Lancaster Avenue, Berwyn, Pennsylvania 19312-1288 (the "Servicer"). RECITALS WHEREAS, The parties previously entered into a Nonexclusive Servicing and Indemnification Agreement dated as of June 10, 2002; and WHEREAS, The parties desire to amend and restate their agreement in its entirety, with retroactive effect to June 10, 2002; and WHEREAS, Servicer has the established capability to provide loan marketing, processing, servicing, administrative, collection and related services; and WHEREAS, Servicer has an established business presence and customer base in the markets in which it operates; and WHEREAS, Lender desires to make the short term loans for personal, family or household purposes to consumers referred to it by Servicer(each a "Loan and collectively "Loans"); and WHEREAS, Lender has an established program for the making of Loans; and WHEREAS, Lender wishes to obtain from Servicer marketing, processing, servicing, administrative, collection and related services upon the terms and conditions hereinafter set forth; and WHEREAS, Lender and Servicer have entered into the [****] and a backup servicing agreement for their mutual benefit; NOW THEREFORE, in consideration for the mutual covenants, agreements and promises herein contained, IT IS HEREBY AGREED BY THE PARTIES HERETO AS FOLLOWS: Article I DEFINITIONS Section 1.01 Definitions. Unless otherwise defined herein, terms herein shall have the following meanings: - ----------------------------- (a) "Borrower" means the debtor on any Loan. 1 (b) "Business Day" means any day on which Lender is open to the general public for the conduct of the general business of banking. (c) "[****] Bonus" has the meaning ascribed to it in Section 2.04(a)of this Agreement. (d) "Disbursement Account" has the meaning ascribed to it in Section 2.06(b) of this Agreement. (e) "Effective Date" has the meaning ascribed to it in Section 4.05 of the Agreement. (f) "[****] Bonus" has the meaning ascribed to it in Section 2.03(j)of this Agreement. (g) "Finance Charge(s)" means the finance charge, exclusive of other costs, penalties and charges, which is charged to a Borrower in connection with a Loan. (h) "[****] Account" has the meaning ascribed to it in Section 2.03(c) of this Agreement. (i) "Lender's Money Market Rate" means an amount equal to the amount paid by Lender on sums held in its standard money market account, available to the general public. (j) "[****]" means the agreement of the same title by and between Lender and Servicer of even date, which is attached as Exhibit B hereto and which is deemed to be a part of this Agreement. (k) "Loan" has the meaning ascribed to it in the third recital above. (l) "Loan Documents" means all documents and instruments evidencing the Loans, including, but not limited to, the application and any disclosures made in connection with the application or the Loan. (m) "NSF Fees" means fees charged to a Borrower in connection with any payment item dishonored and returned to Servicer or Lender for reason of insufficient funds in the account drawn upon. (n) "Operating Account" has the meaning ascribed to it in Section 2.01(e)of this Agreement. (o) [****]. (p) "Servicer's Compensation" has the meaning ascribed to it in Section 2.02(a) of this Agreement. (q) "Servicing Fee" has the meaning ascribed to it in Section 2.02(a) of this Agreement. (r) "Servicing Month" means a period from and including the 11th calendar day of any month through and including the 10th calendar day of the succeeding month. 2 (s) "Software License" means the Non-Exclusive License by and between Lender and Servicer to be hereafter entered into by the parties as set forth in Section 3.04(c). (t) "Survival Date" means the date one year from the termination of this Agreement. Article II SERVICING AND ADMINISTRATION Section 2.01 Duties of the Servicer. ---------------------------------------- (a) Servicer agrees to market, process, service, administer and collect Loans in accordance with Lender's written Loan policies and procedures. In addition, to the extent not otherwise provided by such written Loan policies and procedures or this Agreement, Servicer agrees to market, process, service, administer and collect Loans in accordance with [****], exactly in the form attached hereto as Exhibit A, except that the number and terms of Loan refinancing shall be governed by [****]. Servicer agrees to perform all of its activities for or on behalf of Lender contemplated by this Agreement in a fiduciary capacity. Servicer may, without being relieved of any of its obligations hereunder, delegate any of its duties hereunder to a direct or indirect subsidiary of Servicer. In addition, Servicer shall cause each direct and indirect subsidiary of Servicer to perform the duties and obligations of Servicer under this Agreement, including without limitation the indemnification obligations of Servicer. (b) [****]. (c) Pursuant to credit granting standards, policies and procedures adopted by Lender and provided to Servicer, all applications for Loans shall be processed by Servicer for Lender, as described hereunder. Servicer shall accept all applications from customers for transmission to Lender. Servicer shall advise Lender of its belief as to whether or not an application is complete, as required under Lender's credit granting standards. The application, as well as Servicer's preliminary assessment of completeness, shall be communicated electronically by Servicer to Lender by any means acceptable to Lender. (d) Pursuant to policies and procedures adopted by Lender and provided to Servicer, Servicer shall market the Loans on behalf of Lender, as described hereunder. Servicer shall undertake, through such means as it reasonably deems necessary and advisable and at its own expense, to make the public aware of the availability of the Loans and the pertinent aspects thereof. Notwithstanding the above, Servicer agrees that it shall not market Loans in any manner or by any media directed to [****]. All marketing or solicitation materials, including commercials or advertisements for use in both broadcast and print media, signage and the like, in which Lender's name or trade names shall be used in conjunction with the Loans, shall be submitted to and approved by Lender prior to use of such marketing or solicitation materials; Servicer's submission to Lender shall include a statement of the proposed geographic distribution of such materials. Lender agrees not unreasonably to withhold or delay such approval; such approval shall be deemed to have been granted if Lender retains any such materials without objection for five (5) Business Days following receipt thereof by Lender, and any objection by Lender shall set forth with particularity the basis of Lender's refusal to approve such material along with Lender's requests for changes to such material in order to render it compliant with Lender's requirements. Servicer shall ensure that all such marketing and administrative 3 efforts shall be in full compliance with applicable law and applicable policies of Lender. In connection with its marketing and administrative activities, Servicer shall make available to potential customers all such forms and documents as are necessary to make application for a Loan, in such form and manner as are prescribed under the policies and procedures adopted by Lender. (e) Pursuant to policies and procedures adopted by Lender and provided to Servicer, all Loans shall be serviced by Servicer for Lender, as described hereunder. Servicer shall open one or more deposit accounts (collectively, the "Operating Account") with Lender (or one or more other financial institutions reasonably acceptable to Lender and in Lender's name and for which all periodic statements are to be mailed directly to Lender), into which all payments on the Loans are to be deposited. Servicer shall receive or deposit into the Operating Account all amounts as the same are paid in connection with or arising out of the Loans and Loan Documents whether as principal, interest, fees or otherwise and on a daily basis shall transfer to Lender from the Operating Account such amounts as are due in accordance with this Agreement. (f) Pursuant to policies and procedures adopted by Lender and provided to Servicer, Servicer shall provide administrative services with respect to the Loans on behalf of Lender, as described hereunder. Servicer shall retain possession of all Loan Documents, which shall remain the sole property of Lender, on behalf of Lender or as directed by Lender. True and complete copies of all Loan Documents shall be delivered by Servicer to Lender promptly on request of Lender at Servicer's expense. Servicer shall keep full and complete records and accounts of all transactions with respect to the Loans, including, but not limited to, disbursements from and payments into the Operating Account and all collections received on account of the Loans. At Lender's request, Servicer shall provide to Lender all information in connection with the disbursements of Loan proceeds, the receipt of Loan payments, and such other information maintained by Servicer pursuant to this Agreement as Lender may request. In addition, Servicer shall maintain all such other administrative and record-keeping services as are necessary to carry out the purposes of this Agreement and as are prescribed under the policies and procedures adopted by the Lender. (g) In the event a Borrower fails to pay any sums in accordance with the terms of a Loan and the Loan Documents, Servicer, as servicer of the Loans, shall attempt to collect such sums in Lender's name in accordance with Lender's written collection policy and procedures, unless Lender has determined to have collections conducted by a third party. All amounts collected shall be held by Servicer as fiduciary for Lender. Should Lender enter into one or more agreements with debt collection agencies for the collection of delinquent Loans, Servicer shall cooperate with Lender and such debt collection agencies to effect the prompt collection of such delinquent Loans. (h) Servicer, on behalf of Lender and in Lender's name, place and stead, as servicer of the Loans, [****], may institute such arbitration proceedings as are authorized by the Loan Documents and Lender's collection policy and procedures and reasonably deemed by Servicer to be necessary or appropriate to collect the 4 Loans, to enforce the Loan Documents and to protect the rights of Lender. Lender agrees reasonably to cooperate with Servicer in such collection and enforcement proceedings; provided, however, [****]. (i) Upon any failure to meet the condition imposed by Section 2.08 of this Agreement, Lender may immediately terminate its obligation to fund new Loans pursuant to this Agreement and shall provide prompt notice of such termination to Servicer. Servicer shall continue to service all outstanding Loans as provided in this Agreement and, when all such Loans have been repaid or charged off, upon request of Lender, forward all Loan Documents relating to such Loans in its possession to Lender. Lender agrees that upon delivery of such Loan Documents to Lender or Lender's designee, Servicer shall be released from and have no further rights or duties with regard to the servicing of such Loans pursuant to this Section 2.01 of this Agreement. (j) Lender shall not be liable for any error of judgment by Servicer or for any action taken or omitted to be taken by Servicer in connection with the services provided by Servicer under this Agreement. (k) Lender authorizes Servicer to use the name and trade names of Lender in connection with the performance of its duties under this Agreement and in the marketing of the Loans. Lender acknowledges that Servicer may use the CASH 'TIL PAYDAY(R) mark in connection with the marketing of Loans and that Servicer may also use such mark in connection with the marketing extensions of credit by Servicer and third parties. As a condition of use of such mark, Servicer has delivered to Lender [****], receipt and acceptance of which [****] are hereby acknowledged. (l) Servicer, when performing its duties hereunder, shall be acting as a fiduciary for and on account of the interests of Lender. Section 2.02 Compensation. (a) As sole compensation for its activities under this Agreement, Servicer shall receive the Servicing Fee, the [****] Bonus and the [****] Bonus, calculated in accordance with the terms and conditions of this Agreement (the "Servicer's Compensation"). Servicer's servicing fee shall equal the sum of (i) [****] and (ii) all [****] (together, the "Servicing Fee") and shall be remitted to Servicer on a daily basis. (b) Except as otherwise specifically agreed to in writing by the parties hereto, Servicer shall pay all expenses incurred in connection with its activities hereunder, including any fees or expense reimbursement payable to any subcontractor or subservicer under any agreement entered into by Servicer, and shall not be entitled hereunder to any payment or reimbursement therefor other than the Servicer's Compensation. (c) Lender shall generate a report of payments due to Servicer within five (5) Business Days of the last Business Day of each Servicing Month and shall submit such report electronically, via e-mail, facsimile, or similar means, to Servicer. Servicer shall review such report and shall notify Lender, electronically or in writing, of its agreement with the accuracy of the contents of such report or its disagreement thereto. Lender and Servicer shall make all reasonable efforts to resolve any disagreement as to the accuracy of the 5 contents of the report of payments due to Servicer. The resolution of any such disagreement shall not be a condition of Lender's obligation to pay the undisputed amounts due Servicer hereunder. (d) Payment of the Servicing Fee and all other sums due Servicer shall be made on the due date thereof by credit of immediately available funds to a deposit account of Servicer maintained with Lender. (e) Notwithstanding any contrary provision of this Agreement, any Borrower introduced by Servicer who is identified by Servicer as being entitled to an "Account Credit" (as defined in the Stipulation of Settlement dated December 28, 1999, as amended by the Corrigenda dated May 30, 2000, in a certain action in the United States District Court for the Central District of California entitled Phanco v. Dollar Financial Group, Inc., Docket No. CV 99-01281 GHK [RZx]), shall be entitled to receive such Account Credit by a direct payment from Servicer to the Borrower. There shall be no adjustment to Servicer's compensation hereunder as a result of any such payment made by Servicer, nor shall there be any reduction of the Finance Charge received by Lender as a result of any such payment. Section 2.03 [****] and ExpenseReimbursement. (a) [****]. (b) Servicer's liability [****], shall be limited to [****]. (c) [****]. (d) Servicer hereby grants Lender a security interest in the [****], including any interest that accrues thereon, as security for [****]. In connection with the foregoing grant, Servicer acknowledges that Lender shall be deemed to have control of, and a perfected security interest in, the [****] pursuant to Sections 9-314(a) and 9-104 of the Delaware Uniform Commercial Code. (e) [****]. (f) Lender shall properly document all amounts [****] and provide copies thereof to Servicer within five (5) Business Days of the last day of each month. (g) [****]. (h) [****]. (i) [****]. (j) [****] Lender shall, on a monthly basis, release to Servicer all amounts [****] as determined on the 25th day of each month, [****] (as so computed, the "[****] Bonus"), which payment shall be made by the fifth (5th) Business Day of the following month. (k) [****]. (l) The [****] obligation provided hereunder shall be indefinite in term and shall survive the termination of this Agreement pursuant to Article IV hereof. 6 Section 2.04 [****]Bonus. (a) In respect of any Servicing Month, Servicer's "[****]Bonus" shall be an amount equal to [****]. (b) Notwithstanding that such [****]Bonus shall be fully earned, Lender may elect to defer payment of a portion of such earned and accrued [****]Bonus in respect of any Servicing Month so that, after giving effect to such deferral, the cumulative deferred [****] Bonus equals [****]. To the extent not so deferred by Lender, Lender shall pay the [****] Bonus to Servicer on the fifth Business Day of the following Servicing Month. The obligation of Lender to make such payment shall survive the termination of this Agreement for any reason, and Lender may continue to defer payment to Servicer to the extent herein provided notwithstanding any termination of this Agreement for any reason. (c) Notwithstanding anything herein to the contrary, any amount deferred by Lender and not paid to Servicer pursuant to Section 2.04(b) shall be held by Lender [****]. 7 (d) The deferred portion of the [****] Bonus shall bear interest at Lender's Money Market Rate, compounded monthly, but shall not be deemed a bank deposit for any purpose. (e) It shall be a condition to Lender's obligation to enter into and fund any Loan that, as of the last Business Day of the prior Servicing Month, [****]. In the event that the condition set forth in the preceding sentence is not satisfied, then Servicer, at its sole election, may [****] cause the condition to be satisfied; [****]. [****]. Nothing contained in this Section 2.04 shall be deemed, regardless of the collection performance of the Loan portfolio: (i) to require Servicer to make any payment to Lender nor (ii) to permit Lender to apply the unpaid portion of the [****] Bonus to any prior credit losses. (f) Lender may, in its reasonable discretion, and on reasonable notice to Servicer, increase or decrease the percentage set forth in paragraphs (b) and (e) of this Section 2.04 based on its analysis of [****]. Section 2.05 Duties of Lender. (a) Lender shall timely make all payments to Servicer required under this Agreement subject to the terms and conditions hereof. (b) Lender shall provide to Servicer such information as is reasonably necessary for Servicer to perform its duties hereunder. (c) Lender, in its sole discretion, shall determine all of the conditions, terms, services and features offered to Borrowers, including, but not limited to, Finance Charge rate and other charges, credit limits, credit standards, collection procedures and asset quality of the Loans, and shall communicate same to Servicer. Copies of Lender's policies and procedures governing the Loans and documents evidencing the conditions, terms services and features offered to Borrowers, including sample Loan Documents, have been provided to Servicer and will be updated and amended by Lender, as necessary and appropriate. (d) During the term of this Agreement and any renewal term or terms of this Agreement, Lender shall make Loans to Borrowers referred by Servicer which meet Lender's credit standards for approval of such Loans and conform to Lender's criteria and terms for Loans, subject to terms and conditions of this Agreement, including, but not limited to, the conditions imposed under Section 2.08 of this Agreement. Lender has provided to Servicer the criteria and terms of the Loans acceptable to Lender, which Lender may amend in its sole discretion at any time and from time to time. Section 2.06 Approval and Funding of Loans. (a) Lender shall, whether or not an application forwarded by Servicer conforms in any respect with Lender's credit standards, review each application for a Loan forwarded by Servicer electronically and advise Servicer of its decision to approve or reject the application within [****] of receiving the application; provided, however that Lender shall not be responsible for any delay in rendering or communicating to Servicer its decision to approve or reject an application by reason of any technological delay or failure, including but not limited to any connectivity or transmission delay or failure, or any software performance failure, and subject to the provisions of Section 6.11 of this Agreement. Lender's review shall include such provisions for compliance with the requirements of the Office of Foreign Assets Control of the U.S. Department of the Treasury as Lender from time to time deems necessary. (b) Upon approval of an application by Lender, Lender shall advance the entire proceeds of the Loan, via ACH directly to the checking account of the Borrower for ACH credit to the Borrower's account or at the option of the Servicer and with Lender's reasonable consent, from a dedicated disbursement account to be maintained in Lender's name at Lender (the "Disbursement Account") for disbursement by check, [****], or other means acceptable to Lender and Servicer. Only Lender's (and none of Servicer's) funds shall be deposited or maintained in any Disbursement Account. [****]. (c) [****]. (d) Servicer shall, on behalf of Lender, deliver an adverse action notice to all rejected applicants for Loans as required by law and the policies and procedures of Lender. (e) Servicer agrees that Servicer's employees shall be ineligible for Loans from Lender. (f) Notwithstanding eligibility under Lender's criteria otherwise applicable, to the extent that the parties may lawfully employ such information, Lender shall not knowingly extend a Loan to any person determined by Servicer to have an unpaid or defaulted loan outstanding with any other financial institution (including Servicer and its subsidiaries and affiliates) for whom Servicer has previously originated consumer loans. Servicer shall forthwith and from time to time advise Lender of the identities of all such persons, to the extent that it may lawfully do so. [****]. Section 2.07 Receipts and Collections. 8 (a) Servicer, as servicer of the Loans, shall receive and deposit into the Operating Account all amounts as the same are paid in connection with or arising out of the Loans and the Loan Documents, whether as principal, finance charges, fees, or otherwise, and on a daily basis shall remit to Lender all such sums. (b) Lender shall, upon receipt of the amounts remitted, make such payments into the [****] Account as are required pursuant to Section 2.03(f). (c) Lender and Servicer agree that all payments received on current Loans shall be applied first to Finance Charges, then to NSF Fees and then to principal, and on delinquent Loans (more than five [5] days past due in payment) first to principal, then to Finance Charges and then to NSF Fees. Section 2.08 Lender's Performance Made Expressly Conditional. It shall be a condition to Lender's duty to make any Loan under this Agreement that, after giving effect to such Loan, Lender's aggregate retained interest in Loans referred by Servicer shall not exceed [****]. The parties acknowledge that, as of the date of this Agreement, the application of the foregoing formula results in a limitation of Lender's obligation to an aggregate retained interest of not more than [****]. Lender shall forthwith give notice to Servicer of any change of more than [****] in such limitation. Section 2.09 Compliance with Law and Regulation. (a) The performance of each of the parties under this Agreement is subject to all applicable laws and regulations and each party hereby covenants to comply with all applicable laws and regulations and the lawful and reasonable actions or requests of duly authorized state and federal regulatory authorities in connection with the matters contemplated by this Agreement. If either party becomes aware of any change in a law or regulation affecting the performance of obligations by any party under this Agreement, it shall promptly thereafter provide written notice of the same to the other, provided that the failure to provide such notice shall not relieve any party of its obligation to comply with applicable laws and regulations as they may change from time to time. Lender shall have sole authority to determine the manner and content of any communication made to any bank regulatory authority. Nothing in this Agreement shall be construed as compelling either party to act in violation of applicable laws or regulations. (b) During the term of this Agreement, upon reasonable notice to Servicer and at the request of Lender or any federal or state agency having supervisory authority over Lender, Servicer shall make available for review and examination by Lender, its auditors and regulatory agency authorities, its premises, facilities, staff and such books and records of Servicer relating to the Loan as Lender, its auditors or its regulators may reasonably request for purposes of Lender's, its auditors' or such agency's financial accounting or regulatory examination purposes. Any such review, inspection or examination shall take place during Servicer's normal business hours. Lender shall have the right, at least annually during the term of this Agreement, [****], to conduct audits and/or compliance reviews of the services provided hereunder, and the records generated thereunder, including, but not limited to, on-site examinations or 9 audits at any location at or through which Servicer, directly or indirectly, performs any activity contemplated by this Agreement; provided that such audits and reviews shall be conducted during normal business hours in a manner which does not unreasonably interfere with Servicer's normal business operations. Upon termination of this Agreement Servicer, at its sole cost and expense, shall deliver to Lender the originals or copies of all Loan Documents and Borrower records in its possession in forms reasonably acceptable to Lender and shall purge all Borrower information from its records and systems. Section 2.10 Confidentiality. (a) Servicer acknowledges that Borrowers referred by Servicer to Lender for Loans are customers of Lender. Servicer agrees that it will neither (i) utilize for its own purposes any nonpublic personal information provided by Borrowers or other applicants for Loans from Lender or obtained by Servicer in connection with servicing of such Loans or in connection with a solicitation by Servicer or a third party with respect to such Loans or any other solicitation for any product or service offered by Servicer or others, nor (ii) divulge such information, except in accordance with applicable law or regulation and as necessary to properly perform its obligations as marketer, servicer, processor and collector of Loans pursuant to this Agreement, the names or other identification information regarding the Borrowers to others except in accordance with Lender's Privacy Policy. These restrictions shall apply during the term and after termination of this Agreement. On termination of this Agreement, Servicer shall promptly deliver to Lender all Borrowers' and "consumer" information with regard to the Loans then in the possession of the Servicer and shall not maintain a copy thereof in any form or for any purpose. (A "consumer" is an individual who has applied for a Loan from Lender, whether or not such Loan was approved by Lender, as well as a person whose Loan has been repaid or became delinquent and who is not then currently a Borrower.) Servicer shall also purge its computer records and systems of all Borrower and consumer information upon termination of this Agreement and, on request of Lender provide a certification, signed by a duly authorized officer or agent of Servicer, that no Borrower or consumer information has been retained by Servicer for purposes other than as contemplated by this Agreement and that the falsity of such certification or improper use of such information may involve the violation of federal and state privacy law and expose Servicer and Lender to civil and criminal liability. (b) Servicer acknowledges that Lender's Privacy Policy provides that nonpublic personal information regarding Borrowers and consumers will not be provided to third parties except as necessary to service, administer, process and enforce a transaction a consumer or Borrower requests or authorizes. Servicer, in consultation with Lender, shall implement an effective security program to protect the Lender's Borrower and consumer information and its own consumer and Borrower information systems so as to ensure that the Lender does not violate that Privacy Policy and applicable law. (c) Notwithstanding the above, Lender recognizes that Servicer has an interest in information relating to customers of Lender generated through the efforts of Servicer, including lists thereof, and Lender therefore agrees that any use of such information for purposes other than the servicing, refinancing or workout 10 of existing loans, either by the Lender or a third party to whom Lender may communicate such information, may occur upon consent of Lender evidenced in writing, which consent shall not be unreasonably withheld by either party Section 2.11 Opinion of Counsel. Should Servicer desire to refer Loans to Lender through retail locations, Servicer shall obtain an opinion of counsel, licensed to practice in [****] and on which Lender may rely, that [****]. Article III REPRESENTATIONS AND WARRANTIES Section 3.01 Representations and Warranties of the Servicer. Servicer hereby makes the following representations and warranties: (a) Organization and Good Standing. Servicer is a corporation duly organized, validly existing and in good standing under the laws of the State of New York and has full power, authority and the legal right to own its properties and conduct its business as now conducted, and to execute, deliver and perform its obligations under this Agreement. (b) Due Qualification. Servicer (i) is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where such qualification is necessary in order to perform its duties hereunder, (ii) has all licenses and approvals as required under federal and state law that are necessary to conduct its business as now being conducted and to perform its duties hereunder, (iii) is in compliance with its organizational documents, and (iv) is in compliance with the laws of any such state to the extent necessary to ensure the enforceability of each Loan and to collect and service the Loan in accordance with the terms of this Agreement. (c) Due Authorization. The execution, delivery and performance of this Agreement by Servicer have been duly and validly authorized by all necessary corporate action on its part and do not and will not contravene any provision of its articles of association or bylaws. (d) Binding Obligation. This Agreement constitutes the legal, valid and binding obligation of Servicer, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency or other similar laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding in equity or at law). (e) All Consents Required. All approvals, authorizations, consents, orders, licenses or other actions of all persons or of any governmental authority required in connection with the execution and delivery by Servicer of this Agreement, the performance by Servicer of the transactions contemplated by this Agreement and the fulfillment by Servicer of the terms hereof have been obtained and are in full force and effect. (f) No Conflicts. Neither the execution and delivery of this Agreement, the servicing of the Loans by Servicer, or the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of Servicer's certificate of incorporation or bylaws or 11 any legal restriction or any agreement or instrument to which Servicer is now a party of by which it is bound, or constitute a default or result in an acceleration under any of the foregoing, or result in the violation of any law, rule, regulation, order, judgment or decree to which Servicer or its property is subject, or impair the ability of Lender to realize on the Loans, or impair the value of the Loans. (g) No Litigation Pending. There is no action, suit, proceeding or investigation pending or, to the knowledge of Servicer's management, threatened against Servicer which: (i) either in any one instance or in the aggregate, may result in (A) any material adverse change in the business, operations, financial condition, properties or assets of Servicer, (B) any material impairment of the right or ability of Servicer to carry on its business substantially as now conducted, or (C) any material liability on the part of Servicer, (ii) would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of Servicer contemplated herein, or (iii) would be likely to impair materially the ability of Servicer to perform under the terms of this Agreement. (h) Collection Practices. The collection practices with respect to the Loans have been and are in accordance with all applicable laws and regulations in all material respects. (i) No Untrue Information. Neither this Agreement nor any statement, report or other document furnished or to be furnished pursuant to this Agreement by Servicer or in connection with the transactions contemplated hereby contains any untrue statement of a material fact or omits to state a fact necessary in order to make the statement contained herein or therein not misleading. (j) No Default. Neither Servicer nor any of its subsidiaries is in material default under any agreement, contract, instrument or indenture of any nature whatsoever to which Servicer or any of its subsidiaries is a party or by which it is bound, nor has any event occurred which with notice or lapse of time or both would constitute a material default under any such agreement, contract, instrument or indenture and which default would have a material adverse effect on its ability to perform its obligations under this Agreement. (k) Absence of Material Adverse Change. There has been no change in the business, operations, financial condition, properties or assets of Servicer since March 31, 2002 which would have a material adverse effect on its ability to perform its obligations under this Agreement. (l) Delinquencies. Servicer has delivered to Lender information as to the delinquency experience for the twelve months preceding the Effective Date with respect to consumer loans originated by Servicer during such period. Section 3.02 Representations and Warranties of Lender. Lender hereby makes the following representations and warranties: (a) Organization and Good Standing. Lender is a Delaware banking corporation organized, validly existing and in good standing under the laws of the State of Delaware and has full power, authority and the legal right to own its properties and conduct its business as now conducted, and to execute, deliver and perform 12 its obligations under this Servicing Agreement. (b) Due Qualification. Lender has obtained all licenses and approvals as required under federal and state law that are necessary to perform its duties hereunder and is in compliance with its organizational documents. (c) Due Authorization. The execution, delivery and performance of this Agreement by Lender has been duly authorized by all necessary corporate action on its part and do not and will not contravene any provision of its articles of association or bylaws. (d) Binding Obligation. This Agreement constitutes the legal, valid and binding obligation of Lender, enforceable against it in accordance with its terms, subject to bankruptcy, insolvency or other similar laws affecting creditors' rights generally and to general principles of equity (whether considered in a proceeding in equity or at law). (e) No Conflict. The execution and delivery of this Agreement by Lender, the performance by Lender of the transactions contemplated by this Agreement and the fulfillment of the terms hereof applicable to Lender do not and will not conflict in any material respect with, violate, result in any breach of any of the terms or provisions of, or constitute (with or without notice or lapse of time or both) a default under, any requirement of law applicable to Lender or any indenture, contract, agreement, mortgage, deed of trust or other instrument to which it is a party or by which it or any of its properties is bound. (f) All Consents Required. All approvals, authorizations, consents, orders, licenses or other actions of all persons or of any governmental authority required in connection with the execution and delivery by Lender of this Agreement, the performance by Lender of the transactions contemplated by this Agreement and the fulfillment by Lender of the terms hereof have been obtained and are in full force and effect. Section 3.03 Further Assurances of Servicer. ------------------------------------------------ (a) Servicer shall provide such assurances of financial ability to perform under this Agreement, including, but not limited to, performance under Section 2.03 and Section 2.04 of this Agreement and under the [****], as Lender may from time to time reasonably request in writing. If Lender, in its sole discretion, determines that Servicer has failed to provide adequate assurance under this subparagraph, Lender may require that Servicer provide such assurance through the acquisition of a third party guarantee of Servicer's performance, including, but not limited to, the acquisition of insurance or a standby letter of credit for the benefit of Lender, or Lender may exercise its rights to terminate this Agreement pursuant to Section 4.02 of this Agreement. Lender acknowledges that Servicer's present resources, as disclosed in Servicer's Form 10-Q filed with the Securities and Exchange Commission in respect of the quarter ending December 31, 2001, are sufficient for the purposes of the foregoing assurances and that, absent a material adverse change in Servicer's financial condition from that disclosed as of December 31, 2001, no further assurances shall be required by Lender. 13 (b) Servicer shall provide Lender, on an annual basis, accountant prepared financial statements, including company balance sheet and income statement, in a form acceptable to Lender within 15 business days following the receipt thereof by Servicer. Section 3.04 Mutual Covenants. From and after the Closing Date until this Agreement is terminated the parties hereto mutually covenant and agree to the following: (a) Protection of Rights. Neither party shall take any action, or omit to take any action, which would materially impair the rights of each other party under this Agreement or the ability of each other party to fulfill its obligations under this Agreement. (b) Cooperation. Each party shall cooperate fully with each other party and provide each other party with all reasonable assistance with respect to any transactions, promises and performances contemplated herein. (c) Negotiation of Software License. The parties shall hereafter negotiate in good faith with respect to the Software License (and related data processing services agreement) and shall use their respective best efforts to enter into the Software License (and related data processing services agreement) not later than June 21, 2002. In the event that no such Software License and related services agreement shall have been entered into by such date, either party may thereupon elect to terminate this Agreement on five (5) days' notice. (d) Roles of Parties. Servicer and Lender each acknowledge and agree that it is the intention of the parties that Lender is the sole lender of the Loans. Servicer agrees, for the benefit of the Lender and its transferees of, and participants in, the Loans, that Servicer shall not assert that Servicer is the lender or that Lender is not the lender for purposes of the Loans in connection with any litigation, regulatory purpose or any other purpose. Section 3.05 Survival Date. The representations, warranties, assurances and covenants of this Article III of the Agreement shall survive until the Survival Date, and thereafter neither party may claim any loss in relation to a breach thereof. No claim based on any breach of any representation or warranty shall be valid or made unless written notice with respect thereto is given to the other party to this Agreement in accordance with this Agreement on or before Survival Date. Article IV TERMINATION/EFFECTIVE DATE Section 4.01 Termination. Notwithstanding anything herein, to the contrary, either Lender or Servicer may terminate this Agreement upon [****]. Section 4.02 Termination With Cause. Either Lender or Servicer may terminate this Agreement on the material breach by the other of the terms hereof if the nonbreaching party gives the breaching party written notice of and describing the breach and the breaching party fails to cure such breach within thirty (30) days after the notice is sent. Servicer's failure to provide adequate assurance of financial ability to perform under Section 3.03(a) of this Agreement shall constitute a material breach for the purpose of this Section. 14 Section 4.03 [****] in Lieu of Termination. Notwithstanding anything in this Agreement to the contrary, should Servicer be in material breach of its duties as marketer, servicer, processor and collector with regard to the Loans, in lieu of terminating this Agreement and without regard to Servicer's indemnification obligations which otherwise apply in the circumstances, Lender may [***]. Servicer may contest [****], by requesting the Board of Directors of Lender or a duly constituted committee thereof, to reconsider and rule on the appropriateness and/or [****]. Lender and Servicer agree that any dispute arising out of a finding by such body under this Section 4.03 of this Agreement shall be resolved by binding arbitration by and under the Code of Procedure of the National Arbitration Forum in effect at the time the claim is filed. This arbitration agreement is made pursuant to a transaction involving interstate commerce. It shall be governed by the Federal Arbitration Act, 9 U.S.C. ss.ss. 1-16. Judgment upon the award may be entered by any party in any court having jurisdiction. Section 4.04 Continuation of [****] Account. On termination of this Agreement, whether or not for cause, Lender may continue to charge the [****] Account as provided in Section 2.03 and Servicer shall remain obligated to maintain the [****] as provided in Section 2.03(c) of this Agreement. Upon satisfaction of Servicer's obligations under Section 2.03(c) and this Section 4.04, unless[****], in whole or in part, pursuant to this Agreement[****], all sums remaining on deposit in the [****] Account shall be released to Servicer. Section 4.05 Effective Date. It is the intention of Lender and Servicer that this Agreement have an effective date mutually selected by them not later than June 15, 2002 (the "Effective Date"). Section 4.06 Term of Agreement. This Agreement shall have an indefinite term. Article V MODIFICATION AND WAIVER Section 5.01 Modification of Agreement. Lender and Servicer may, by mutual consent evidenced in writing and signed by both parties, amend and modify this Agreement and change the rights and obligations of the parties hereunder. Section 5.02 Modifications of Loans and Loan Documents. Notwithstanding anything in this Agreement or the Loan Documents to the contrary, Lender may in good faith in its sole discretion, with notice as soon as practicable thereafter to Servicer: (i) release, modify or waive the liability of or any claim against any Borrower liable for the payment or performance of any of the Loans under the Loan Documents; (ii) determine when a default under the Loan Documents shall have occurred and the action to be taken as a result of such default; (iii) commence any action or proceeding with respect to the Loans or the Loan Documents; (iv) grant any waiver of a default; and (v) modify Credit Standards, credit criteria and terms, and Collection Policy and Procedures (subject to the provisions of Section 5.04). Section 5.03 Effective Date of Modification of Policies, Procedures and Loan Criteria. Notwithstanding anything in this Agreement to the contrary, any modification of 15 any policy, procedure or loan criteria which has a material adverse economic effect on Servicer shall not become effective until [***] after Servicer receives notice of such modification unless such change is consented to by Servicer or Lender agrees to reimburse Servicer for all reasonable costs incurred by Servicer in complying with such modification incurred within the [****] notice period, except that modifications which are mandated by or required as a result of any change in applicable laws or regulations (including any change in interpretation) or any lawful and reasonable actions or requests of duly authorized state and federal regulatory authorities which are required to be implemented with less than [****] notice to Servicer, either in connection with the matters contemplated by this Agreement or in connection with similar loan programs conducted by other financial institutions, licensed lenders or financial service providers, shall not be subject to the provisions of this Section 5.03 of this Agreement. Article VI MISCELLANEOUS Section 6.01 Transfer and Assignment by Servicer Prohibited. Servicer shall provide to Lender sixty (60) days' prior written notice of its intent to sell, assign or transfer its rights or obligations under this Agreement, whether voluntarily or involuntarily, to any other person. A change of control of Servicer, including, but not limited to, the purchase of a majority interest in Servicer, a merger or consolidation in which Servicer is not the surviving entity, or the like, shall be deemed by Lender to be a sale, assignment or transfer of Servicer's rights and obligations under this Agreement. Lender is authorized to make such investigation of any proposed transferee or assignee as it deems necessary and may submit the identity of such proposed transferee or assignee and any other pertinent material to the regulatory agencies having jurisdiction over it. Any written statement from such agencies that the proposed sale, assignment or transfer is unacceptable (or, if such written statement is unavailable, a certificate by an officer of Lender under the penalty of perjury setting forth the details of any oral statement to the same effect) shall entitle Lender to terminate this Agreement concurrently with the closing of such sale, assignment or transfer; a copy of any such statement or certificate shall be forthwith delivered to Servicer. Section 6.02 Relationship of Parties. Neither the execution of this Agreement, nor the agreement to pay fees for the services provided by Servicer hereunder, is intended to be, nor shall it be construed to be, the formation of an agency, partnership or joint venture between Lender and Servicer. Servicer is performing as an independent contractor when performing its duties as marketer, servicer, processor and collector of Loans pursuant to this Agreement and Lender's written Loan policies and procedures, and does not otherwise have the right or authority to act for or on behalf of or to otherwise bind Lender. Section 6.03 Complete Agreement. Concurrently with the execution hereof, Servicer and Lender have separately executed and entered into the [****] and a backup servicing letter agreement. This Agreement, the [****] and backup servicing letter agreement, including the exhibits thereto, supersede any negotiations, discussions or communications between Lender and Servicer and constitute the entire agreement of Lender and Servicer. 16 Section 6.04 Notices. Any written notice or demand to be given under this Agreement shall be duly and properly given if delivered personally and a receipt evidencing delivery thereof is obtained, if sent by private delivery service and a receipt evidencing delivery thereof is obtained, if sent by United States certified or registered mail and a receipt evidencing delivery thereof is obtained, or if sent by confirmed facsimile transmission, to the party entitled to such notice or demand at the address set forth above, or at such other address as such party may, from time to time, specify in writing or if sent by confirmed facsimile transmission to the recipient's then current facsimile transmission number and shall be effective when actually received by such party. A copy of each notice or demand shall be sent or delivered by a means set forth above to respective counsel for the Lender and the Servicer at the following address, or at such other address as may, from time to time, be specified in writing: If to Counsel for Servicer: to Counsel for Lender: Hilary B. Miller, Esq. Keith H. Ellis, Esq. 112 Parsonage Road Duane Morris LLP Greenwich, CT 06830-3942 1667 K Street, N.W., #700 Fax: (203) 622-6264 Washington, DC 20006 Fax: (202) 776-7801 Section 6.05 Time Calculation. All time references contained in this Agreement shall be based upon the prevailing time calculation (e.g., Eastern Standard, Eastern Daylight) in the time zone of the United States in which Lender is located on the relevant day. Section 6.06 Separate Counsel. Although Servicer and Lender may use the same counsel when appropriate, nothing in this Agreement shall be deemed to prevent Servicer and Lender from using separate counsel. In all events the responsibility of the Servicer for the fees of counsel for the Lender shall be as set forth in Section 2.03 of this Agreement. Section 6.07 Governing Law. This Agreement and the rights and duties described herein shall be governed by, and interpreted in accordance with, the laws of the State of Delaware without regard to its law on conflicts of law. Section 6.08 Waiver. None of the undertakings, agreements, warranties, covenants or representations of either party contained in this Agreement shall be deemed to have been suspended or waived unless such suspension or waiver is by an instrument in writing signed by an officer of the party claimed to have waived and consented. Any failure by Lender at any time or times to require strict performance by the Servicer of any provision of this Agreement shall not waive, affect or diminish Lender's respective right thereafter to demand strict compliance and performance therewith. Section 6.09 Severability. Any provisions of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 17 Section 6.10 Headings. The Article and Section headings used in this Agreement are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. As used in this Agreement, the singular number shall include the plural and the plural shall include the singular. Section 6.11 Force Majeure. No party shall in any event be liable for any loss, damage or delay arising from any failure to perform properly its respective duties hereunder if such failure is the result of circumstances beyond that party's control, including but not limited to: fire, inclement weather, flood, earthquake or other natural disasters, war, declared or undeclared, loss of utilities, interruption of transportation, embargo, accident, explosion, equipment malfunctions, shortages of equipment, governmental orders, regulations, restrictions, or changes of law or regulations, riot, strike or other labor difficulties, errors in the United States Mail or third-party delivery or courier service. If any such event, other than changes of law or regulation precluding such loss, damage or delay shall occur, the disabled party shall use its best efforts to meet its obligations as set forth in this Agreement. Further, the disabled party shall promptly advise the other party in writing if it is unable to perform due to any of the above-stated reasons, the expected duration of such inability to perform, and of any developments (or changes therein) that appear likely to affect the ability of that party to perform any of its obligations in whole or in part. Section 6.12 Bankruptcy of Servicer. If Servicer shall file for relief under Title 11 of the United States Code ("Bankruptcy Code") or if an involuntary petition for relief is filed against Servicer and relief is granted, Servicer, whether as debtor or debtor-in-possession agrees that: (1) all moneys held in the Indemnity Account are subject to the Lender's duly perfected security interest and may not be used for any purpose without the consent of Lender, and Servicer agrees not to seek an order for the use of any monies held in such account under ss. 363 of the Bankruptcy Code; (2) Servicer will agree and consent to the immediate entry of an order by the applicable Court to grant Lender full and complete relief from the stay of ss. 362 of the Bankruptcy Code or similar provision, to enable Lender to enforce any and all rights or interest provided to Lender under this Agreement because Servicer hereby acknowledges and agrees that Servicer will be unable to adequately protect Lender's interest in the Indemnity Account under this Agreement in such event; and (3) Servicer acknowledges that this Agreement is not assignable or assumable by Servicer without Lender's reasonable consent, because it is an agreement to provide financial accommodations, and consents to the entry of an order upon Lender's request immediately terminating and rejecting this Agreement under ss. 365 of the Bankruptcy Code. Section 6.13 Further Assurances. Each of the parties hereto agrees to do such further acts and things and to execute and deliver such additional assignments, agreements, powers and instruments as are reasonably required to carry into effect the purposes of this Agreement or to better assure and confirm unto each other party its rights, powers and remedies hereunder. Section 6.14 Counterparts. This Agreement may be executed by the parties hereto on separate counterparts, each of which is an original but all of which together shall constitute one and 18 the same document. A photocopy or electronic facsimile of this Agreement or any signature hereon shall be valid as an original and admissible in evidence for all purposes. IN WITNESS WHEREOF, Lender and Servicer, each intending to be legally bound hereby, have caused this Agreement to be executed by its duly authorized officer as of the day and year first set forth above. SERVICER: LENDER: DOLLAR FINANCIAL GROUP, INC. COUNTY BANK By: By: - ---------------------------------- ---------------------------------------- Donald F. Gayhardt, President Harold L. Slatcher, President 19 SCHEDULE 2.03 REIMBURSABLE OPERATING EXPENSES OF LENDER 1. [****] 2. [****] 3. [****] 4. [****] 5. [****] 6. [****] THIS DOCUMENT HAS BEEN REDACTED IN ACCORDANCE WITH A REQUEST FOR CONFIDENTIAL TREATMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE REDACTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION PURSUANT TO RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. 20 -----END PRIVACY-ENHANCED MESSAGE-----