-----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, Ni5tJoTtWKBQH8foeofakKE13wVL2N2wBgjNWSCIZbzozi1PO1ynMuzCP4DxAp1b 7klf3ESyZoks90hAEAfBHw== 0001028643-03-000022.txt : 20031105 0001028643-03-000022.hdr.sgml : 20031105 20031105104049 ACCESSION NUMBER: 0001028643-03-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOLLAR FINANCIAL GROUP INC CENTRAL INDEX KEY: 0001028643 STANDARD INDUSTRIAL CLASSIFICATION: FUNCTIONS RELATED TO DEPOSITORY BANKING, NEC [6099] IRS NUMBER: 132997911 STATE OF INCORPORATION: NY FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-18221 FILM NUMBER: 03978123 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-Q 1 a10qseptember2003a.txt 10Q SEPTEMBER 2003 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2003 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, BERWYN, PENNSYLVANIA 19312 (Address of Principal Executive Offices) (Zip Code) 610-296-3400 (Registrant's Telephone Number, Including Area Code) None (Former name, former address and former fiscal year, if changed since last report) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of November 3, 2003, 100 shares of the Registrant's common stock, par value $1.00 per share, were outstanding. 1 DOLLAR FINANCIAL GROUP, INC. INDEX PART I. FINANCIAL INFORMATION Page No. Item 1. Financial Statements Interim Consolidated Balance Sheets as of June 30, 2003 and September 30, 2003 (unaudited).......................................................... 3 Interim Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2002 and 2003.................................................... 4 Interim Unaudited Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2002 and 2003........................................................... 5 Notes to Interim Unaudited Consolidated Financial Statements................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................................... 22 Item 4. Controls and Procedures..................................................................... 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................... 23 Item 2. Changes in Securities and Use of Proceeds................................................... 24 Item 3. Defaults Upon Senior Securities............................................................. 24 Item 4. Submission of Matters to a Vote of Security Holders......................................... 24 Item 5. Other Information........................................................................... 24 Item 6. Exhibits and Reports on Form 8-K............................................................ 24 Signature................................................................................... 25
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DOLLAR FINANCIAL GROUP, INC. INTERIM CONSOLIDATED BALANCE SHEETS (In thousands except share amounts)
June 30, September 30, 2003 2003 ---------------- ---------------- ASSETS (unaudited) Cash and cash equivalents..................................................... $ 71,805 $ 63,915 Loans and other receivables, net of reserve of $2,437 and $2,564.............. 22,677 22,838 Loans receivable pledged...................................................... 8,000 8,000 Prepaid expenses.............................................................. 6,358 6,340 Notes receivable - officers................................................... 2,756 2,756 Due from parent............................................................... 4,573 4,823 Property and equipment, net of accumulated depreciation of $39,309 and $41,784.................................................... 29,209 28,319 Goodwill and other intangibles, net of accumulated amortization of $21,308 and $22,094....................................... 144,125 143,789 Debt issuance costs, net of accumulated amortization of $7,945 and $8,396........................................................ 5,200 4,925 Other......................................................................... 1,833 1,898 ---------------- ---------------- $ 296,536 $ 287,603 ================ ================ LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable ............................................................ $ 17,245 $ 15,657 Income taxes payable.......................................................... 11 90 Accrued expenses 9,419 10,793 Accrued interest payable...................................................... 1,656 5,322 Deferred tax liability........................................................ 838 1,259 Other collateralized borrowings............................................... 8,000 8,000 Revolving credit facilities................................................... 61,699 47,948 10-7/8 % Senior Notes due 2006................................................ 109,190 109,190 Subordinated notes payable and other.......................................... 20,081 20,066 Shareholder's equity: Common stock, $1 par value: 20,000 shares authorized; 100 shares issued and outstanding at June 30, 2003 and September 30, 2003...................................... - - Additional paid-in capital.................................................... 50,957 50,957 Retained earnings............................................................. 9,034 10,176 Accumulated other comprehensive income........................................ 8,406 8,145 ---------------- ---------------- Total shareholder's equity................................................ 68,397 69,278 ---------------- ---------------- $ 296,536 $ 287,603 ================ ================ See notes to interim unaudited consolidated financial statements.
3 DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands)
Three Months Ended September 30, --------------------------------- 2002 2003 -------------- ------------- Revenues .......................................................... $ 52,653 $ 56,990 Store and regional expenses: Salaries and benefits........................................... 17,147 18,777 Occupancy....................................................... 4,799 4,864 Depreciation.................................................... 1,619 1,448 Other........................................................... 12,857 12,965 ------------- ------------- Total store and regional expenses.................................. 36,422 38,054 Corporate expenses................................................. 7,248 7,241 Loss on store closings and sales................................... 488 60 Other depreciation and amortization................................ 843 958 Interest expense (net of interest income of $42 and $39).......... 4,931 5,247 ------------- ------------- Income before income taxes........................................ 2,721 5,430 Income tax provision............................................... 1,910 4,288 ------------- ------------- Net income ........................................................ $ 811 $ 1,142 ============= =============
See notes to interim unaudited consolidated financial statements. 4
DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended September 30, ----------------------------------- 2002 2003 -------------- -------------- Cash flows from operating activities: Net income...................................................................... $ 811 $ 1,142 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................................. 2,902 2,856 Loss on store closings and sales.......................................... 488 60 Deferred tax provision.................................................... 408 421 Change in assets and liabilities: Increase in loans and other receivables and income taxes receivable..................................................... (8,298) (672) Decrease (Increase) in prepaid expenses and other...................... 411 (13) Increase in accounts payable, income taxes payable, accrued expenses and accrued interest payable........................ 576 2,895 -------------- -------------- Net cash (used in) provided by operating activities............................. (2,702) 6,689 Cash flows from investing activities: Additions to property and equipment........................................... (1,092) (1,415) -------------- -------------- Net cash used in investing activities........................................... (1,092) (1,415) Cash flows from financing activities: Other debt payments .......................................................... (45) (63) Net decrease in revolving credit facilities................................... (4,482) (13,751) Payment of debt issuance costs................................................ (64) (175) Net increase in due from parent............................................... (280) (250) -------------- -------------- Net cash used in financing activities........................................... (4,871) (14,239) Effect of exchange rate changes on cash and cash equivalents.................... (680) 1,075 -------------- -------------- Net decrease in cash and cash equivalents....................................... (9,345) (7,890) Cash and cash equivalents at beginning of period................................ 86,633 71,805 -------------- -------------- Cash and cash equivalents at end of period...................................... $ 77,288 $ 63,915 ============== ==============
See notes to interim unaudited consolidated financial statements. 5 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited interim consolidated financial statements of Dollar Financial Group, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the Company's audited consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended June 30, 2003 filed with the Securities and Exchange Commission. In the opinion of management, all adjustments, (consisting of normal recurring adjustments), considered necessary for a fair presentation have been included. Operating results of interim periods are not necessarily indicative of the results that may be expected for a full fiscal year. 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. Operations Dollar Financial Group, Inc., organized in 1979 under the laws of the State of New York, is a wholly owned subsidiary of DFG Holdings, Inc. ("Holdings"). The activities of Holdings consist primarily of its investment in the Company and additional third party debt. Holdings has no employees or operating activities as of September 30, 2003. The Company, through its subsidiaries, provides retail financial services to the general public through a network of 1,080 locations (of which 625 are Company owned) operating as Money Mart(R), The Money Shop, Loan Mart(R) and Insta-Cheques 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 450 independent document transmitters in 16 states. 2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION The Company's payment obligations under the 10 7/8% Senior Notes due November 2006 ("Senior Notes") and Senior Subordinated Notes due 2006 ("Senior Subordinated 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 of the Senior Notes rank pari passu in right of payment with all existing and future indebtedness of the Guarantors, including the obligations of the Guarantors under the Company's Revolving Credit Facility and any successor credit facilities. The subsidiaries' guarantees of the Senior Subordinated Notes are subordinated in right of payment to the senior indebtedness of the Guarantors. Pursuant to the Senior Notes or Senior Subordinated Notes, every direct and indirect wholly owned subsidiary of the Company, each of which is wholly-owned, serves as a guarantor of the Senior Notes and Senior Subordinated Notes. 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 September 30, 2003, and the condensed consolidating statements of operations and cash flows for the three month period ended September 30, 2003 of the Company (on a parent-company basis), combined domestic Guarantors, combined foreign subsidiaries and the consolidated Company. 6 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING BALANCE SHEETS September 30, 2003 (In thousands)
Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Assets Cash and cash equivalents............................ $ 9,639 $ 21,936 $ 32,340 $ - $ 63,915 Loans and other receivables, net..................... 8,991 1,959 12,206 (318) 22,838 Loans receivable pledged............................. - - 8,000 - 8,000 Income taxes receivable.............................. 22,036 - - (22,036) - Prepaid expenses..................................... 755 977 4,608 - 6,340 Deferred income taxes................................ 1,064 - - (1,064) - Notes receivable--officers........................... 2,756 - - - 2,756 Due from affiliates.................................. - 93,195 - (93,195) - Due from parent...................................... 4,823 - - - 4,823 Property and equipment, net.......................... 5,429 7,838 15,052 - 28,319 Goodwill and other intangibles, net.................. 29 56,537 87,223 - 143,789 Debt issuance costs, net............................. 4,714 - 211 - 4,925 Investment in subsidiaries........................... 219,165 9,801 6,705 (235,671) - Other................................................ 93 600 1,205 - 1,898 --------------------------------------------------------------------------- $ 279,494 $ 192,843 $ 167,550 $ (352,284) $ 287,603 =========================================================================== Liabilities and shareholder's equity Accounts payable..................................... $ 1,503 $ 5,849 $ 8,305 $ - $ 15,657 Income taxes payable................................. - 20,542 1,584 (22,036) 90 Accrued expenses..................................... 2,554 3,401 4,838 - 10,793 Accrued interest payable............................. 4,984 88 568 (318) 5,322 Deferred tax liability............................... - 2,323 - (1,064) 1,259 Due to affiliates.................................... 32,831 - 60,364 (93,195) - Other collateralized borrowings...................... - - 8,000 - 8,000 Revolving credit facilities.......................... 47,775 - 173 - 47,948 10 7/8% Senior Notes due 2006........................ 109,190 - - - 109,190 Subordinated notes payable and other................. 20,000 - 66 - 20,066 --------------------------------------------------------------------------- 218,837 32,203 83,898 (116,613) 218,325 Shareholder's equity: Common stock...................................... - - - - - Additional paid-in capital........................ 50,957 85,524 27,304 (112,828) 50,957 Retained earnings ................................ 10,176 73,460 49,383 (122,843) 10,176 Accumulated other comprehensive (loss) income..... (476) 1,656 6,965 - 8,145 --------------------------------------------------------------------------- Total shareholder's equity........................... 60,657 160,640 83,652 (235,671) 69,278 --------------------------------------------------------------------------- $ 279,494 $ 192,843 $ 167,550 $ (352,284) $ 287,603 ===========================================================================
7 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING STATEMENTS OF OPERATIONS Three Months Ended September 30, 2003 (In thousands)
Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ----------------------------------------------------------------------------- Revenues $ - $ 26,091 $ 30,899 $ - $ 56,990 Store and regional expenses: Salaries and benefits...................... - 10,623 8,154 - 18,777 Occupancy.................................. - 2,840 2,024 - 4,864 Depreciation............................... - 794 654 - 1,448 Other...................................... - 7,069 5,896 - 12,965 ----------------------------------------------------------------------------- Total store and regional expenses............. - 21,326 16,728 - 38,054 Corporate expenses............................ 3,626 - 3,615 - 7,241 Management fee................................ (542) - 542 - - Loss on store closings and sales and other restructuring.............................. 60 - - - 60 Other depreciation and amortization........... 542 15 401 - 958 Interest expense, net......................... 4,053 (591) 1,785 - 5,247 ----------------------------------------------------------------------------- (Loss) income before income taxes ............ (7,739) 5,341 7,828 - 5,430 Income tax (benefit) provision ............... (2,474) 2,798 3,964 - 4,288 ----------------------------------------------------------------------------- (Loss) income before equity in net income of subsidiaries..................... (5,265) 2,543 3,864 - 1,142 Equity in net income of subsidiaries: Domestic subsidiary guarantors............. 2,543 - - (2,543) - Foreign subsidiary guarantors.............. 3,864 - - (3,864) - ----------------------------------------------------------------------------- Net income .................................. $ 1,142 $ 2,543 $ 3,864 $ (6,407) $ 1,142 =============================================================================
8 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) CONSOLIDATING STATEMENTS OF CASH FLOWS Three Months Ended September 30, 2003 (In thousands)
Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Cash flows from operating activities: Net income ............................................... $ 1,142 $ 2,543 $ 3,864 $ (6,407) $ 1,142 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Undistributed income of subsidiaries................. (6,407) - - 6,407 - Depreciation and amortization........................ 993 807 1,056 - 2,856 Loss on store closings and sales..................... 60 - - - 60 Deferred tax provision............................... - 421 - - 421 Changes in assets and liabilities (net of effect of acquisitions): Decrease (increase) in loans and other receivables.................................... 1,856 (848) (1,998) 318 (672) (Increase) decrease in income taxes receivable... (2,619) - - 2,619 - Decrease (increase) in prepaid expenses and other 13 135 (161) - (13) Increase (decrease) in accounts payable, income taxes payable, accrued expenses and accrued interest payable ...................... 4,456 2,092 (716) (2,937) 2,895 ------------------------------------------------------------------------- Net cash (used in) provided by operating activities....... (506) 5,150 2,045 - 6,689 Cash flows from investing activities: Additions to property and equipment....................... (58) (371) (986) - (1,415) Net increase in due from affiliates....................... - (9,056) - 9,056 - ------------------------------------------------------------------------- Net cash used in investing activities..................... (58) (9,427) (986) 9,056 (1,415) Cash flows from financing activities: Other debt payments....................................... - - (63) - (63) Net decrease in revolving credit facilities............... (12,989) - (762) - (13,751) Payment of debt issuance costs............................ (175) - - - (175) Net increase in due from parent........................... (250) - - - (250) Net increase (decrease) in due to affiliates.............. 15,636 - (6,580) (9,056) - ------------------------------------------------------------------------- Net cash provided by (used in) financing activities....... 2,222 - (7,405) (9,056) (14,239) Effect of exchange rate changes on cash and cash equivalents............................................... - - 1,075 - 1,075 ------------------------------------------------------------------------- Net decrease (increase) in cash and cash equivalents...... 1,658 (4,277) (5,271) - (7,890) Cash and cash equivalents at beginning of period.......... 7,981 26,213 37,611 - 71,805 ------------------------------------------------------------------------- Cash and cash equivalents at end of period................ $ 9,639 $ 21,936 $ 32,340 $ - $ 63,915 =========================================================================
9 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 3. GOODWILL AND OTHER INTANGIBLES In accordance with the adoption provisions of SFAS No. 142, the Company is required to perform goodwill impairment tests on at least an annual basis. The Company performs it's annual impairment test as of June 30. 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 three months ended September 30, 2003 was $43,000. The estimated aggregate amortization expense for each of the five succeeding fiscal years ending June 30, is: Year Amount --------------------------------------- 2004 $ 95,000 2005 20,000 2006 - 2007 - 2008 - The following table reflects the components of intangible assets (in thousands):
June 30, 2003 September 30, 2003 ------------------------------------------ ---------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------------------------------------ ---------------------------------------- Non-amortized intangible assets: Cost in excess of net assets acquired $ 162,987 $ 18,977 $ 163,434 $ 19,717 Amortized intangible assets: Covenants not to compete 2,446 2,331 2,445 2,377
4. COMPREHENSIVE (LOSS) INCOME Comprehensive (loss) income is the change in equity from transactions and other events and circumstances from non-owner sources, which includes foreign currency translation. The following shows the comprehensive (loss) income for the periods stated: Three Months Ended September 30, --------------------------------- 2002 2003 -------------- --------------- Net income $ 811 $ 1,142 Foreign currency translation adjustment (1,396) (261) -------------- -------------- Total comprehensive (loss) income $ (585) $ 881 ============== ============== 10 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 5. LOSS ON STORE CLOSINGS AND SALES AND OTHER RESTRUCTURING During the fiscal year ended June 30, 2003, the Company closed 27 stores and consolidated and relocated certain non-operating functions to reduce costs and increase efficiencies. Costs incurred with that restructuring comprised severance and other retention benefits to employees who were involuntarily terminated and closure costs related to the locations the Company will no longer utilize. The restructuring was completed by June 30, 2003. All of the locations that were closed and for which the workforce was reduced are included in the United States geographic segment. The Company, as required, adopted Financial Accounting Standards Board Statement No. 146, Accounting for Costs Associated with Disposal or Exit Activities, on January 1, 2003. During the first quarter of fiscal 2004, charges previously accrued for severance and other retention benefits were reclassed to store closure costs. Following is a reconciliation of the beginning and ending balances of the restructuring liability (in millions):
Severance and Other Store Closure Retention Benefits Costs Total ------------------ ----------------- ----------------- Balance at June 30, 2003 $ 1.2 $ 0.2 $ 1.4 Charge recorded in earnings - - - Reclassification (0.7) 0.7 - Amounts paid (0.3) (0.3) (0.6) Non-cash charges - - - ------------------ ----------------- ----------------- Balance at September 30, 2003 $ 0.2 $ 0.6 $ 0.8 ================== ================= =================
The Company also expenses costs related to the closure of stores in the normal course of its business. Costs directly expensed for the three months ended September 30, 2003 and 2002 were $60,000 and $488,000, respectively. 6. 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 States Canada Kingdom Total ---------------- ------------- -------------- --------------- As of and for the three months ended September 30, 2002 Identifiable assets $ 143,340 $ 69,093 $ 74,621 $ 287,054 Goodwill and other intangibles, net 56,500 32,287 42,780 131,567 Sales to unaffiliated customers 26,080 16,374 10,199 52,653 (Loss) income before income taxes (8,831) 9,821 1,731 2,721 Income tax (benefit) provision (2,494) 3,882 522 1,910 Net (loss) income (6,337) 5,939 1,209 811 As of and for the three months ended September 30, 2003 Identifiable assets $ 126,238 $ 84,082 $ 77,283 $ 287,603 Goodwill and other intangibles, net 56,566 38,535 48,688 143,789 Sales to unaffiliated customers 26,091 19,340 11,559 56,990 (Loss) income before income taxes (2,398) 5,729 2,099 5,430 Income tax (benefit) provision 324 2,827 1,137 4,288 Net (loss) income (2,722) 2,902 962 1,142
11 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Operations in the United Kingdom and Canada have exposed the Company to shifts in currency valuations. From time to time, the Company may elect to purchase put options in order to protect earnings in the United Kingdom and Canada against foreign currency fluctuations. Out of the money put options may be purchased because they cost less than completely averting risk, and the maximum downside is limited to the difference between the strike price and exchange rate at the date of purchase and the price of the contracts. At September 30, 2003, the Company held put options with an aggregate notional value of 3.0 million British pounds to protect the currency exposure in the United Kingdom throughout the remainder of the calendar year. The Company also held put options with an aggregate notional value of $(CAN) 36.0 million to protect the currency exposure in Canada throughout the remainder of the fiscal year. All put options for the quarter ended September 30, 2003 expired out of the money at a cost of $13,000 which is included in corporate expenses in the consolidated statement of earnings. There was no such hedging activity for the same period in fiscal 2003. The Company's revolving credit facility and overdraft credit facilities carry a variable rate of interest. 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. 8. CONTINGENT LIABILITIES On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an action against the Company's Canadian subsidiary on behalf of a purported class of Canadian borrowers (except those residing in British Columbia and Quebec) who, Mortillaro claims, were subjected to usurious charges in payday-loan transactions. The action, which is pending in the Ontario Superior Court of Justice, alleges violations of a Canadian federal law proscribing usury and seeks restitution and damages in an unspecified amount, including punitive damages. Like the plaintiff in the MacKinnon action referred to below, Mortillaro has agreed to arbitrate all disputes with the Company; and, assuming the Company is served, it will seek to enforce the arbitration agreement. The Company believes that it has meritorious procedural and substantive defenses to Mortillaro's claims, and it intends to defend those claims vigorously. The Company is a defendant in four putative class-action lawsuits, all of which were commenced by the same plaintiffs' law firm, alleging violations of California's wage-and-hour laws. The named plaintiffs in these suits, which are pending in the Superior Court of the State of California, are the Company's former employees Vernell Woods (commenced August 22, 2000), Juan Castillo (commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth Williams (commenced June 3, 2003). Each of these suits seeks an unspecified amount of damages and other relief in connection with allegations that the Company misclassified California store (Woods) and regional (Castillo) managers as "exempt" from a state law requiring the payment of overtime compensation, that the Company failed to provide employees with meal and rest breaks required under a new state law (Chin) and that the Company computed bonuses payable to store managers using an impermissible profit-sharing formula (Williams). In January 2003, without admitting liability, the Company sought to settle the Woods case, which the Company believes to be the most significant of these suits, by offering each individual putative class member an amount intended in good faith to settle his or her claim. As of September 30, 2003, 92% of these settlement offers had been accepted. Plaintiffs' counsel is presently disputing through arbitration the validity of the settlements accepted by the individual putative class members. The Company believes that it has meritorious defenses to the challenge and to the claims of the non-settling putative Woods class members and plan to defend them vigorously. The Company believes that it has adequately provided for the costs associated with this matter. The Company is vigorously defending the Castillo, Chin and Williams lawsuits and believes it has meritorious defenses to the claims asserted in those matters. The Company believes the outcome of such litigation will not significantly affect its financial results. On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against the Company's Canadian subsidiary and 26 other Canadian lenders on behalf of a purported class of British Columbia residents who, plaintiff claims, were overcharged in payday-loan transactions. The action, which is pending in the Supreme Court of British Columbia, alleges violations of laws proscribing usury and unconscionable trade practices and seeks restitution and damages, including punitive damages, in an unknown amount. On March 25, 2003, the Company moved to stay the action as against it and to compel arbitration of plaintiff's claims as required by his agreement with the Company. The Company is presently awaiting a decision on that motion. The Company believes it has meritorious defenses to the action and intends to defend it vigorously. The Company believes the outcome of such litigation will not significantly affect its financial results. On October 30, 2002, the Oklahoma Administrator of Consumer Credit issued an administrative order revoking the supervised-lending license of the Company's Oklahoma subsidiary on the ground that certain loans marketed by the subsidiary and made by County Bank did not conform with Oklahoma usury laws. The Administrator's order also requires the subsidiary to refund certain purportedly 12 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 8. CONTINGENT LIABILITIES (continued) excess finance charges collected by County Bank. The Administrator's order is presently on appeal to the Oklahoma District Court. On August 20, 2003, that court denied the Administrator's motion to require the subsidiary to desist from further loan-origination activities pending appeal. The subsidiary is also appealing a federal court's abstention from ruling on this matter to the United States Court of Appeals for the Tenth Circuit. The Company is presently unable to evaluate the likelihood of any particular outcome of this matter but, in the Company's opinion, the outcome of such litigation will not significantly affect the Company's financial results. In addition to the litigation discussed above, 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 significantly affect the Company's consolidated financial statements. 9. SUBSEQUENT EVENTS On October 28, 2003 the Company announced that it intends to offer $200 million principal amount of senior notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933, as amended. The Company currently anticipates that it will use the proceeds from this offering to redeem its outstanding senior notes and its outstanding senior subordinated notes, to repay its existing credit facility, which it anticipates will be replaced with a new credit facility, and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving its parent company's senior discount notes. The senior notes will not be registered under the Securities Act or any state securities laws. Thus, the senior notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. 13 SUPPLEMENTAL STATISTICAL DATA
September 30, Company Operating Data: 2002 2003 ------------- ------------- Number of stores: Company-owned................................. 639 625 Franchised stores and check cashing merchants. 418 455 ------------- ------------- Total............................................ 1,057 1,080 ============= =============
- ------------------------------------------------------------------------------------------------------ Three Months Ended September 30, ----------------------------------- Operating Data: 2002 2003 ------------- -------------- Face amount of checks cashed (in millions) $ 762 $ 791 Face amount of average check $ 360 $ 366 Face amount of average check (excluding Canada & UK) $ 402 $ 376 Average fee per check $ 12.51 $ 13.00 Number of checks cashed (in thousands) 2,115 2,164 - ------------------------------------------------------------------ -----------------------------------
Three Months Ended September 30, ----------------------------------- Collections Data: 2002 2003 ------------- -------------- Face amount of returned checks (in thousands) $ 6,869 $ 7,635 Collections (in thousands) 4,943 5,496 ------------- ------------- Net write-offs (in thousands) $ 1,926 $ 2,139 ============= ============== Collections as a percentage of returned checks 72.0% 72.0% Net write-offs as a percentage of check cashing revenues 7.3% 7.6% Net write-offs as a percentage of the face amount of checks cashed 0.25% 0.27%
14 The following chart presents a summary of our consumer lending originations, which includes loan extensions and revenues for the following periods:
Three Months Ended September 30, ---------------------------------------- 2002 2003 ---------------------------------------- (in thousands) U.S. company funded originations.................... $ 25,988 $ 14,268 Canadian company funded originations................ 57,831 75,574 U.K. company funded originations.................... 23,758 26,508 ---------------------------------------- Total company funded originations................ $ 107,577 $ 116,350 ======================================== Servicing revenues, net............................. $ 10,576 $ 11,413 Company funded domestic loan revenues............... 4,656 2,155 Company funded foreign loan revenues................ 8,449 10,495 Net write-offs on company funded loans.............. (4,746) (2,666) ---------------------------------------- Total consumer lending revenues, net............. $ 18,935 $ 21,397 ======================================== Net write-offs as a percentage of total company funded originations................................. 4.4% 2.3%
15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General We are a leading international financial services company serving under-banked consumers. Our customers are typically lower- and middle-income working-class individuals who require basic financial services but, for reasons of convenience and accessibility, purchase some or all of their financial services from us rather than banks and other financial institutions. To serve this market, we have a network of 1,080 stores, including 625 company-operated stores, in 17 states, the District of Columbia, Canada and the United Kingdom. Our store network represents the second-largest network of its kind in the United States and the largest network of its kind in each of Canada and the United Kingdom. We provide a diverse range of consumer financial products and services primarily consisting of check cashing, short-term consumer loans, money orders and money transfers. For the three-months ended September 30, 2003, we generated revenue of $57.0 million, an increase of 8.2% over the same period in the prior year. In our opinion, we have included all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of our financial position at September 30, 2003 and the results of operations for the three months ended September 30, 2003 and 2002. The results for the three months ended September 30, 2003 are not necessarily indicative of the results for the full fiscal year and should be read in conjunction with our unaudited financial statements and our Annual Report on Form 10-K for the fiscal year ended June 30, 2003. Discussion of Critical Accounting Policies In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. We evaluate these estimates on an ongoing basis, including those related to revenue recognition, loss reserves and intangible assets. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements: Revenue Recognition Generally, we recognize revenue when services for the customer have been provided which, in the case of check cashing and other retail products, is at the time of sale. For our unsecured short-term loan service, all revenues are recognized ratably over the life of the loan, offset by net write-offs. Consumer Loan Loss Reserves and Check Cashing Returned Item Policy We maintain a loan loss reserve for anticipated losses for loans we make directly as well as for fee adjustments for losses on loans we originate and service for others. To estimate the appropriate level of loan loss reserves, we consider the amount of outstanding loans owed to us, as well as loans owed to banks and serviced by us, historical loans charged off, current collection patterns and current economic trends. As these conditions change, we may need to make additional allowances in future periods. A loss on consumer loans is charged against revenues during the period in which the loss occurred. A recovery is credited to revenues during the period in which the recovery is made. These net losses and changes in the loan loss reserve are charged to revenues in the consolidated statements of operations. We charge operating expense for losses on returned checks during the period in which such checks are returned. Recoveries on returned checks are credited to operating expense in the period during which recovery occurs. These net losses are charged to other store and regional expenses in the consolidated statements of operations. 16 Goodwill We have significant goodwill on our balance sheet. The testing of goodwill for impairment under established accounting guidelines also requires significant use of judgment and assumptions. In accordance with accounting guidelines, we determine the fair value of our goodwill using multiples of earnings of other companies. Goodwill is tested and reviewed for impairment on an ongoing basis under established accounting guidelines. However, changes in business conditions may require future adjustments to asset valuations. Income Taxes As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. An assessment is then made of the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. RESULTS OF OPERATIONS Revenue Analysis
Three Months Ended September 30, - ---------------------------------------------------------------------------------------------------- (Percentage of ($ in thousands) total revenue) ---------------------------- ------------------------- 2002 2003 2002 2003 ------------ ------------ ---------- ---------- Check cashing......................... $ 26,454 $ 28,123 50.2% 49.3% Consumer lending revenues, net........ 18,935 21,397 36.0 37.5 Money transfer fees................... 2,788 3,082 5.3 5.4 Other revenue......................... 4,476 4,388 8.5 7.8 ------------ ------------ ---------- ---------- Total revenue......................... $ 52,653 $ 56,990 100.0% 100.0% ============ ============ ========== ========== - ----------------------------------------------------------------------------------------------------
QUARTER COMPARISON Total revenues were $57.0 million for the three months ended September 30, 2003 compared to $52.7 million for the three months ended September 30, 2002, an increase of $4.3 million or 8.2%. Comparable retail store, franchised store and document transmitter sales for the entire period increased $4.6 million or 8.9%. New store openings accounted for an increase of $721,000, which was partially offset by a decrease of $952,000 in revenues from closed stores. The increase in total revenues resulted primarily from a $2.5 million, or 13.0% increase in consumer lending revenues and a $1.7 million, or 6.3% increase in check cashing revenues. A 31% increase in loans originated in our Canadian locations accounted for approximately $1.3 million of the increase in consumer lending revenues. The balance of the increase was primarily related to lower U.S. net write-offs of company funded originations, partially offset by lower company funded domestic loan revenues. The increase in check cashing fees is primarily related to our Canadian locations as a result of an increase in the face amount of checks cashed. 17 Store and Regional Expense Analysis
Three Months Ended September 30, - ---------------------------------------------------------------------------------------------------------- (Percentage of ($ in thousands) total revenue) ----------------------------- --------------------------- 2002 2003 2002 2003 ------------ ------------ ----------- ----------- Salaries and benefits.................. $ 17,147 $ 18,777 32.6% 32.9% Occupancy.............................. 4,799 4,864 9.1 8.6 Depreciation........................... 1,619 1,448 3.1 2.5 Other.................................. 12,857 12,965 24.4 22.8 ------------ ------------ ----------- ----------- Total store and regional expenses...... $ 36,422 $ 38,054 69.2% 66.8% ============ ============ =========== =========== - ----------------------------------------------------------------------------------------------------------
QUARTER COMPARISON Store and regional expenses were $38.1 million for the three months ended September 30, 2003 compared to $36.4 million for the three months ended September 30, 2002, an increase of $1.7 million or 4.5%. New store openings accounted for an increase of $500,000 while closed stores accounted for a decrease of $900,000. Comparable retail store and franchised store expenses for the entire period increased $2.0 million. For the three months ended September 30, 2003 total store and regional expenses decreased to 66.8% of total revenue compared to 69.2% of total revenue for the three months ended September 30, 2002. As a percent of revenues, other store and regional expenses were 22.8% for the three months ended September 30, 2003 compared to 24.4% for the three months ended September 30, 2002, a decrease of 1.6%. A decrease in direct costs associated with short-term consumer loans we service through our direct-to-customer operation accounted for 1.0% of the decline. In addition, a continued decline in net security losses accounted for 0.3% of the decrease. Other Expense Analysis
Three Months Ended September 30, - ---------------------------------------------------------------------------------------------------------- (Percentage of ($ in thousands) total revenue) ----------------------------- --------------------------- 2002 2003 2002 2003 ------------ ------------ ----------- ----------- Corporate expenses..................... $ 7,248 $ 7,241 13.8% 12.7% Loss on store closings and sales....... 488 60 0.9 0.1 Other depreciation and amortization.... 843 958 1.6 1.7 Interest expense....................... 4,931 5,247 9.4 9.2 Income tax provision................... 1,910 4,288 3.6 7.5 - ----------------------------------------------------------------------------------------------------------
QUARTER COMPARISON Corporate Expenses Corporate expenses were $7.2 million for the three months ended September 30, 2003 and for the three months ended September 30, 2002. For the three months ended September 30, 2003, corporate expenses decreased to 12.7% of total revenue compared to 13.8% of total revenue for the three months ended September 30, 2002. The decline reflects the first full quarter of cost reductions related to the recent rationalization of our store support functions for our North American operations. 18 Loss on Store Closings and Sales Loss on store closings and sales was $60,000 for the three months ended September 30, 2003 compared to $488,000 for the three months ended September 30, 2002. These costs consist primarily of lease obligations and leasehold improvement write-offs. Interest Expense Interest expense was $5.2 million for the three months ended September 30, 2003 compared to $4.9 million for the three months ended September 30, 2002, an increase of $316,000 or 6.4%. This increase is primarily attributable to the increase in the average borrowing rates of our revolving credit facilities as a result of a November 2002 amendment to our credit facility and the impact of the higher effective interest rate on our collateralized borrowings. Income Tax Provision The provision for income taxes was $4.3 million for the three months ended September 30, 2003 compared to $1.9 million for the three months ended September 30, 2002, an increase of $2.4 million. Our effective tax rate differs from the federal statutory rate of 35% due to state taxes, foreign taxes and U.S. taxes on foreign earnings primarily resulting from the guarantees of our credit facility and Senior Notes by our foreign subsidiaries. Changes in Financial Condition Cash and cash equivalent balances and the revolving credit facilities balances fluctuate significantly as a result of seasonal, monthly and day-to-day requirements for funding check cashing and other operating activities. For the three months ended September 30, 2003, cash and cash equivalents decreased $7.9 million as a result of a decrease in borrowings under our revolving credit facilities. Net cash provided by operations was $6.7 million. The increase in net cash provided by operations was primarily the result of increases in loans and other receivables due to the timing of settlement payments related to our consumer lending product and a decline in company funded unsecured short-term loans in the first quarter of fiscal 2004. Accrued interest increased due to the timing of the semi-annual interest payment on the Senior and the Senior Subordinated Notes. Liquidity and Capital Resources Our principal sources of cash are from operations and borrowings under our credit facilities. We anticipate that our primary uses of cash will be to provide working capital, finance capital expenditures, meet debt service requirements, finance acquisitions, and finance store expansion. Net cash provided by operating activities was $6.7 million for the three months ended September 30, 2003 compared to a usage of $2.7 million for the three months ended September 30, 2002. The increase in net cash provided by operations was primarily the result of increases in loans and other receivables due to the timing of settlement payments related to our consumer lending product and a decline in company funded unsecured short-term loans in the first quarter of fiscal 2004. For the three months ended September 30, 2003, we made capital expenditures of $1.4 million. The actual amount of capital expenditures for the year will depend in part upon the number of new stores acquired or opened and the number of stores remodeled. Our budgeted capital expenditures, excluding acquisitions, are currently anticipated to aggregate approximately $7.0 million during our fiscal year ending June 30, 2004, for remodeling and relocation of certain existing stores and for opening new stores. Revolving Credit Facilities. We have three revolving credit facilities: a domestic revolving credit facility, a Canadian overdraft facility and a United Kingdom overdraft facility. Domestic Revolving Credit Facility. Our borrowing capacity under our domestic revolving credit facility is limited to the total commitment of $70.5 million less letters of credit totaling $9.0 million issued by Wells Fargo Bank, which guarantee the performance of certain of our contractual obligations. At September 30, 2003, our borrowing capacity was $61.5 million. The existing credit facility contains a provision for a reduction of $1.5 million by December 31, 2003. Borrowings under the domestic revolving credit facility as of September 30, 2003 were $47.8 million. Canadian Overdraft Facility. We have a Canadian overdraft facility to fund peak working capital needs for our Canadian operations. The Canadian overdraft facility provides for a commitment of up to approximately $4.8 million, of which there was no outstanding balance 19 on September 30, 2003. Amounts outstanding under the Canadian overdraft 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. United Kingdom Overdraft Facility. For our U.K. operations, we have a United Kingdom overdraft facility which provides for a commitment of up to approximately $6.2 million, of which $173,000 was outstanding on September 30, 2003. Amounts outstanding under the United Kingdom overdraft facility bear interest at a rate of LIBOR plus 1.00%. The United Kingdom overdraft facility is secured by a $6.0 million letter of credit issued by Wells Fargo Bank under our domestic revolving credit facility. Long-Term Debt. Long-term debt consists of our Senior Notes that mature on November 15, 2006, and our Senior Subordinated Notes that mature on December 31, 2006. Subsequent Event. On October 28, 2003 we announced that we intend to offer $200 million principal amount of senior notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933, as amended. We currently anticipate that we will use the proceeds from this offering to redeem our outstanding Senior Notes and our outstanding Senior Subordinated Notes, to repay our existing credit facility, which we anticipate will be replaced with a new credit facility, and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving our parent company's senior discount notes. Operating Leases. Operating leases are scheduled payments on existing store and other administrative leases. These leases typically have initial terms of 5 years and may contain provisions for renewal options, additional rental charges based on revenue and payment of real estate taxes and common area charges. Other Collateralized Borrowings. On November 15, 2002, we entered into an agreement with a third party to sell, without recourse subject to certain obligations, a participation interest in a portion of the short-term consumer loans originated by us in the United Kingdom. Pursuant to the agreement, we will retain servicing responsibilities and earn servicing fees, which are subject to reduction if the related loans are not collected. At September 30, 2003, we had $8.0 million of loans receivable pledged under this agreement. We entered into the commitments described above and other contractual obligations in the normal course of business as a source of funds for asset growth and asset/liability management and to meet required capital needs. Our principal future obligations and commitments as of September 30, 2003, excluding periodic interest payments, include the following:
Payments Due by Period (in thousands) ------------------------------------------------------------------------------- Total Less than 1 - 3 4 - 5 After 5 1 Year Years Years Years -------------- ------------- ------------ ------------ ------------ Domestic revolving credit facility... $ 47,775 $ 47,775 $ - $ - $ - United Kingdom overdraft facility.... 173 173 - - - Long-term debt Senior notes.................... 109,190 - - 109,190 - Senior subordinated notes........ 20,000 - - 20,000 - Operating leases..................... 46,314 15,060 18,169 8,027 5,058 Other collateralized borrowings...... 8,000 8,000 - - - Other................................ 66 66 - - - ------------- ------------- ------------ ------------ ------------ Total contractual cash obligations... $ 231,518 $ 71,074 $ 18,169 $ 137,217 $ 5,058 ============= ============= ============ ============ ============ - ------------------------------------------------------------------------------------------------------------------------
We are highly leveraged, and borrowings under the credit facilities will increase our debt service requirements. We believe that, based on current levels of operations and anticipated improvements in operating results, cash flows from operations and borrowings available under our credit facilities will allow us to fund our liquidity and capital expenditure requirements for the foreseeable future, including payment of interest and principal on our indebtedness. This belief is based upon our historical growth rate and the anticipated benefits we expect from operating efficiencies. We expect additional revenue growth to be generated by increased check cashing revenues, growth in the consumer lending business, the maturity of recently opened stores and the continued expansion of new stores. We also expect operating expenses to increase, although the rate of increase is expected to be less than the rate of revenue growth. Furthermore, we do not believe that additional acquisitions or expansion are necessary to cover our fixed expenses, including debt service. However, we cannot assure you that we will generate sufficient cash flow from operations or that future borrowings will be available under our credit facilities in an amount sufficient to meet our debt service requirements or to make anticipated capital expenditures. We may need to refinance all or a portion of our indebtedness on or prior to maturity, under certain circumstances, and we cannot assure you that we will be able to effect such refinancing on commercially reasonable terms or at all. 20 Seasonality and Quarterly Fluctuations Our business is seasonal due to the impact of tax-related services, including cashing tax refund checks, making electronic tax filings and processing applications for refund anticipation loans. Historically, we have generally experienced our highest revenues and earnings during our third fiscal quarter ending March 31, when revenues from these tax-related services peak. Due to the seasonality of our business, results of operations for any fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and expenses associated with acquisitions and the addition of new stores. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 This report contains certain forward-looking statements regarding our 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 in which we operate, weakening consumer demand and other factors detailed from time to time in our annual and other reports filed with the Securities and Exchange Commission. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Generally In the operations of our subsidiaries and the reporting of our consolidated financial results, we are 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 we and our subsidiaries are exposed relate to: o interest rates on debt; and o foreign exchange rates generating translation gains and losses. We and our subsidiaries have no market risk sensitive instruments entered into for trading purposes, as defined by GAAP. Information contained in this section relates only to instruments entered into for purposes other than trading. Interest Rates Our outstanding indebtedness, and related interest rate risk, is managed centrally by our finance department by implementing the financing strategies approved by our board of directors. Our debt consists of fixed-rate Senior Notes and Senior Subordinated Notes. Our revolving credit facilities carry variable rates of interest. As most of our average outstanding indebtedness carries a fixed rate of interest, a change in interest rates is not expected to have a significant impact on our consolidated financial position, results of operations or cash flows. Foreign Exchange Rates Operations in the United Kingdom and Canada have exposed us to shifts in currency valuations. From time to time we may elect to purchase put options in order to protect earnings in the United Kingdom and Canada against foreign exchange fluctuations. Out of the money put options may be purchased because they cost less than completely averting risk, and the maximum downside is limited to the difference between the strike price and exchange rate at the date of purchase and the price of the contracts. At September 30, 2003 we held put options with an aggregate notional value of 3.0 million British pounds to protect the currency exposure in the United Kingdom throughout the remainder of the calendar year. We also held put options with an aggregate notional value of $(CAN) 36.0 million to protect the currency exposure in Canada throughout the remainder of the fiscal year. All put options for the quarter ended September 30, 2003 expired out of the money at a cost of $13,000 which is included in corporate expenses in the consolidated statement of earnings. There was no such hedging activity for the same period in fiscal 2003. Canadian operations accounted for approximately 105.3% of consolidated pre-tax earnings for the three months ended September 30, 2003, and U.K. operations accounted for approximately 38.7% of consolidated pre-tax earnings for the three months ended September 30, 2003. Canadian operations accounted for approximately 360.9% of consolidated pre-tax earnings for the three months ended September 30, 2002, and U.K. operations accounted for approximately 63.6% of consolidated pre-tax earnings for the three months ended September 30, 2002. As currency exchange rates change, translation of the financial results of the Canadian and U.K. operations into U.S. dollars will be impacted. Changes in exchange rates have resulted in cumulative translation adjustments increasing our net assets by $8.1 million. Our U.K. subsidiaries have collateralized borrowings denominated in U.S. dollars that are subject to foreign currency transaction gains and losses. These gains and losses are included in corporate expenses. We estimate that a 10.0% change in foreign exchange rates by itself would have impacted reported pre-tax earnings from continuing operations by approximately $800,000 for the three months ended September 30, 2003 and $1.2 million for the three months ended September 30, 2002. This impact represents nearly 14.4% of our consolidated pre-tax earnings for the three months ended September 30, 2003 and 42.5% of our consolidated pre-tax earnings for the three months ended September 30, 2002. 22 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Control and Procedures As of the end of the period covered by this report, our management conducted an evaluation, with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting during our fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II - OTHER INFORMATION Item 1. Legal Proceedings On October 21, 2003, a former customer, Kenneth D. Mortillaro, commenced an action against our Canadian subsidiary on behalf of a purported class of Canadian borrowers (except those residing in British Columbia and Quebec) who, Mortillaro claims, were subjected to usurious charges in payday-loan transactions. The action, which is pending in the Ontario Superior Court of Justice, alleges violations of a Canadian federal law proscribing usury and seeks restitution and damages in an unspecified amount, including punitive damages. Like the plaintiff in the MacKinnon action referred to below, Mortillaro has agreed to arbitrate all disputes with us. We believe that we have meritorious procedural and substantive defenses to Mortillaro's claims, and we intend to defend those claims vigorously. We are a defendant in four putative class-action lawsuits, all of which were commenced by the same plaintiffs' law firm, alleging violations of California's wage-and-hour laws. The named plaintiffs in these suits, which are pending in the Superior Court of the State of California, are our former employees Vernell Woods (commenced August 22, 2000), Juan Castillo (commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth Williams (commenced June 3, 2003). Each of these suits seeks an unspecified amount of damages and other relief in connection with allegations that we misclassified California store (Woods) and regional (Castillo) managers as "exempt" from a state law requiring the payment of overtime compensation, that we failed to provide employees with meal and rest breaks required under a new state law (Chin) and that we computed bonuses payable to store managers using an impermissible profit-sharing formula (Williams). In January 2003, without admitting liability, we sought to settle the Woods case, which we believe to be the most significant of these suits, by offering each individual putative class member an amount intended in good faith to settle his or her claim. As of September 30, 2003, 92% of these settlement offers had been accepted. Plaintiffs' counsel is presently disputing through arbitration the validity of the settlements accepted by the individual putative class members. We believe we have meritorious defenses to the challenge and to the claims of the non-settling putative Woods class members and plan to defend them vigorously. We believe we have adequately provided for the costs associated with this matter. We are vigorously defending the Castillo, Chin and Williams lawsuits and believe we have meritorious defenses to the claims asserted in those matters. We believe the outcome of such litigation will not significantly affect our financial results. On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against the our Canadian subsidiary and 26 other Canadian lenders on behalf of a purported class of British Columbia residents who, plaintiff claims, were overcharged in payday-loan transactions. The action, which is pending in the Supreme Court of British Columbia, alleges violations of laws proscribing usury and unconscionable trade practices and seeks restitution and damages, including punitive damages, in an unknown amount. On March 25, 2003, we moved to stay the action as against us and to compel arbitration of plaintiff's claims as required by his agreement with us. We are presently awaiting a decision on that motion. We believe we have meritorious defenses to the action and intends to defend it vigorously. We believe the outcome of such litigation will not significantly affect our financial results. On October 30, 2002, the Oklahoma Administrator of Consumer Credit issued an administrative order revoking the supervised-lending license of our Oklahoma subsidiary on the ground that certain loans we marketed that were made by County Bank did not conform with Oklahoma usury laws. The Administrator's order also requires us to refund certain purportedly excess finance charges collected by County Bank. The Administrator's order is presently on appeal to the Oklahoma District Court. On August 20, 2003, that court denied the Administrator's motion 23 to require us to desist from further loan-origination activities pending appeal. We are also appealing a federal court's abstention from ruling on this matter to the United States Court of Appeals for the Tenth Circuit. We are presently unable to evaluate the likelihood of any particular outcome of this matter but, in our opinion, the outcome of such litigation will not significantly affect our financial results. In addition to the litigation discussed above, we are involved in routine litigation and administrative proceedings arising in the ordinary course of business. In our opinion, the outcome of such litigation and proceedings will not significantly affect our financial results. Item 2. Changes in Securities and Use of Proceeds Not Applicable Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information On October 28, 2003 we announced that we intend to offer $200 million principal amount of senior notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933, as amended. We currently anticipate that we will use the proceeds from this offering to redeem our outstanding senior notes and our outstanding senior subordinated notes, to repay our existing credit facility, which we anticipate will be replaced with a new credit facility, and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving our parent company's senior discount notes. The senior notes will not be registered under the Securities Act or any state securities laws. Thus, the senior notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and any applicable state securities laws. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description of Document 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer 32.1 Section 1350 Certification of Chief Executive Officer 32.2 Section 1350 Certification of Chief Financial Officer (b) Reports on Form 8-K None 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DOLLAR FINANCIAL GROUP, INC. Date: November 4, 2003 *By: /s/ DONALD GAYHARDT -------------------------- Name: Donald Gayhardt Title: President and Chief Financial Officer (principal financial and chief accounting officer) * The signatory hereto is the principal financial and chief accounting officer and has been duly authorized to sign on behalf of the registrant. 25 EX-31 3 sep2003exhibit311.txt EXHIBIT 31.1 - JEFF WEISS CERTIFICATION Exhibit 31.1 CERTIFICATIONS I, Jeffrey A. Weiss, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Dollar Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2003 ------------------------- /s/ Jeffrey A. Weiss ----------------------------------- Jeffrey A. Weiss Chairman of the Board of Directors and Chief Executive Officer EX-31 4 sep2003exhibit312.txt EXHIBIT 31.2 - DON GAYHARDT CERTIFICATION Exhibit 31.2 CERTIFICATIONS I, Donald Gayhardt, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Dollar Financial Group, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 4, 2003 ------------------------- /s/ Donald Gayhardt ----------------------------------- Donald Gayhardt Chairman of the Board of Directors and Chief Executive Officer EX-32 5 sep2003exhibit321.txt EXHIBIT 32.1 JEFF WEISS CERT. Exhibit 32.1 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 Quarterly Report of Dollar Financial Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the date 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, to my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; 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 November 4, 2003 EX-32 6 sep2003exhibit322.txt EXHIBIT 32.2 DON GAYHARDT CERT. Exhibit 32.2 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 Quarterly Report of Dollar Financial Group, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the date 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, to my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; 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/ Donald Gayhardt - ------------------------------------- Donald Gayhardt President and Chief Financial Officer November 4, 2003 -----END PRIVACY-ENHANCED MESSAGE-----