-----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, OBn5A4bR6jtmcqIjIVfh4e5UcKdJoqX87atR35lY0pCuRpJhzrC66xg1je+Z2Unj cv3lLOft0bn4682lX8nKRg== 0001271625-04-000014.txt : 20040423 0001271625-04-000014.hdr.sgml : 20040423 20040423110142 ACCESSION NUMBER: 0001271625-04-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040423 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: 04749702 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 dfg10qmar2004.txt DFG, INC 10Q 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 March 31, 2004 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) THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF DFG HOLDINGS, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTIONS H(2). 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 March 31, 2004, 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 March 31, 2004 (unaudited).............................................................. 3 Interim Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended March 31, 2003 and 2004........................................................ 4 Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2003 and 2004............................................................... 5 Notes to Interim Unaudited Consolidated Financial Statements................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 21 Item 3. Controls and Procedures..................................................................... 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................... 30 Item 6. Exhibits and Reports on Form 8-K............................................................ 32 Signature ........................................................................................... 33
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements DOLLAR FINANCIAL GROUP, INC. INTERIM CONSOLIDATED BALANCE SHEETS (In thousands except share and per share amounts) June 30, March 31, 2003 2004 ---------------- ----------------- ASSETS (unaudited) Cash and cash equivalents.................................................... $ 71,805 $ 79,897 Loans and other consumer lending receivables, net of reserve of $2,437 and $2,611.................................................... 17,465 19,129 Loans receivable pledged..................................................... 8,000 8,000 Other receivables ........................................................... 4,500 5,638 Income taxes receivable...................................................... 1,369 5,783 Prepaid expenses ........................................................... 6,358 8,457 Notes receivable - officers.................................................. 3,468 3,583 Due from parent ............................................................ 4,573 6,607 Property and equipment, net of accumulated depreciation of $39,309 and $47,492................................................... 29,209 27,898 Goodwill and other intangibles, net of accumulated amortization of $22,017 and $22,615...................................... 143,416 150,058 Debt issuance costs, net of accumulated amortization of $7,945 and $564......................................................... 5,200 10,604 Other........................................................................ 1,833 2,011 ----------------- ----------------- $ 297,196 $ 327,665 ================= ================= LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable ........................................................... $ 17,245 $ 12,686 Foreign income taxes payable................................................. 1,380 6,805 Accrued expenses 9,419 11,855 Accrued interest payable..................................................... 1,656 8,499 Deferred tax liability....................................................... 838 1,679 Other collateralized borrowings.............................................. 8,000 8,000 Revolving credit facilities.................................................. 61,699 - Long term debt: 10.875 % Senior Notes due 2006.......................................... 109,190 - 9.75% Senior Notes due 2011............................................. - 220,000 Subordinated notes payable and other.................................... 20,081 206 ----------------- ----------------- Total long term debt......................................................... 129,271 220,206 Shareholder's equity: Common stock, $1 par value: 20,000 shares authorized; 100 shares issued and outstanding at June 30, 2003 and March 31, 2004......................................... - - Additional paid-in capital............................................... 50,957 41,268 Retained earnings (defecit).............................................. 9,034 (214) Accumulated other comprehensive income................................... 7,697 16,881 ----------------- ----------------- Total shareholder's equity................................................... 67,688 57,935 ----------------- ----------------- $ 297,196 $ 327,665 ================= =================
See notes to interim unaudited consolidated financial statements. 3 DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands) Three Months Ended Nine Months Ended March 31, March 31, ---------------------------------------------------------------- 2003 2004 2003 2004 ------------ ------------ ------------ -------------- Revenues: Check cashing................................................ $ 27,897 $ 30,398 $ 80,871 $ 87,939 Consumer lending, net........................................ 22,483 25,795 61,329 70,673 Money transfer fees.......................................... 2,807 3,250 8,271 9,584 Other........................................................ 4,787 6,183 13,445 15,182 ------------ ------------ ------------- ------------- Total revenues.................................................. 57,974 65,626 163,916 183,378 Store and regional expenses: Salaries and benefits........................................ 17,519 19,397 51,947 56,881 Occupancy.................................................... 4,686 5,019 14,155 14,768 Depreciation................................................. 1,122 1,533 4,364 4,471 Returned checks, net and cash shortages...................... 1,762 2,052 6,256 6,938 Telephone and telecommunication.............................. 1,429 1,336 4,225 4,328 Advertising.................................................. 1,571 1,735 5,049 5,277 Bank charges................................................. 736 887 2,344 2,777 Armored carrier expenses..................................... 753 785 2,123 2,266 Other........................................................ 5,139 5,773 16,411 18,615 ------------ ------------ ------------- ------------- Total store and regional expenses............................... 34,717 38,517 106,874 116,321 Corporate expenses.............................................. 8,708 8,360 23,697 22,727 Loss on store closings and sales and other restructuring........ 460 157 2,750 278 Other depreciation and amortization............................. 759 800 2,446 2,672 Interest expense (net of interest income of $61, $40, $149 and $205)..................................................... 4,955 6,498 14,779 18,172 Loss on extinguishment of debt.................................. - - - 7,209 Establishment of reserve for legal matter....................... - - 2,500 - ------------ ------------ ------------- ------------- Income before income taxes...................................... 8,375 11,294 10,870 15,999 Income tax provision............................................ 7,383 9,728 9,316 14,936 ------------ ------------ ------------- ------------- Net income ..................................................... $ 992 1,566 $ 1,554 $ 1,063 ============ ============ ============= =============
See notes to interim unaudited consolidated financial statements. 4 DOLLAR FINANCIAL GROUP, INC. INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine Months Ended March 31, ------------------------------------ 2003 2004 --------------- -------------- Cash flows from operating activities: Net income......................................................................... $ 1,554 $ 1,063 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................................ 8,165 8,523 Establishment of reserve for legal matter.................................... 2,500 - Loss on extinguishment of debt............................................... - 7,209 Loss on store closings and sales and other restructuring..................... 2,750 278 Foreign currency gain on revaluation of other collateralized borrowings................................................... - (899) Deferred tax benefit......................................................... 1,455 841 Change in assets and liabilities (net of effect of acquisitions): Increase in loans and other receivables................................... (6,154) (2,615) Increase in income taxes receivable....................................... (2,031) (4,402) Decrease (increase) in prepaid expenses and other......................... 1,286 (1,737) Increase in accounts payable, income taxes payable, accrued expenses and accrued interest payable........................... 550 7,662 --------------- -------------- Net cash provided by operating activities.......................................... 10,075 15,923 Cash flows from investing activities: Acquisitions, net of cash acquired............................................... (3,318) - Gross proceeds from sale of fixed assets......................................... - 41 Additions to property and equipment.............................................. (5,482) (5,080) --------------- -------------- Net cash used in investing activities.............................................. (8,800) (5,039) Cash flows from financing activities: Redemption of subordinated notes................................................. - (20,734) Other debt borrowings .......................................................... 1 109 Other collateralized borrowings.................................................. 8,000 - Issuance of 9.75% Senior Notes due 2011......................................... - 220,000 Redemption of 10.875% Senior Notes due 2006..................................... - (111,170) Net decrease in revolving credit facilities...................................... (19,406) (61,699) Payment of debt issuance costs................................................... (810) (10,156) Net increase in due from parent ................................................. (716) (2,034) Dividend paid to parent ......................................................... - (20,000) --------------- -------------- Net cash used in financing activities.............................................. (12,931) (5,684) Effect of exchange rate changes on cash and cash equivalents....................... 879 2,892 --------------- -------------- Net (decrease) increase in cash and cash equivalents............................... (10,777) 8,092 Cash and cash equivalents at beginning of period................................... 86,633 71,805 --------------- -------------- Cash and cash equivalents at end of period......................................... $ 75,856 $ 79,897 =============== ==============
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 (File No. 333-18221) 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. On November 13, 2003, the Company issued $220.0 million principal amount of 9.75% Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933. The Company's senior notes are guaranteed by the Company's parent company, Dollar Financial Corp. ("Holdings"), and every direct and indirect wholly owned domestic subsidiary of the Company. The proceeds from the issuance of the Company's senior notes were used, among other things, to redeem the Company's 10.875% Senior Notes due 2006, which were not guaranteed by Holdings. On January 20, 2004, the Company commenced an offer to exchange its senior notes for 9.75% Senior Notes due 2011 registered under the Securities Act of 1933. On January 20, 2004, the Registration Statement on Form S-4 (File No. 333-111473-02) with respect to the Company's registered senior notes and Holdings' guarantee of such notes became effective. Prior to the effective date, Holdings did not file periodic reports under the Securities Exchange Act of 1934. Subsequent to the effective date, Holdings will file such reports, including its quarterly report on Form 10-Q (File No. 333-111473-02) for the quarter ended March 31, 2004. 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. Certain prior period amounts have been reclassified to conform to the current period presentation. Operations The Company, organized in 1979 under the laws of the State of New York, is a wholly owned subsidiary of Holdings. The Company, through its subsidiaries, provides retail financial services to the general public through a network of 1,016 locations (of which 630 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 471 independent document transmitters in 15 states. 6 DOLLAR FINANCIAL GROUP, INC. NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D) 2. SUBSIDIARY GUARANTOR UNAUDITED FINANCIAL INFORMATION The Company's payment obligations under its 9.75% Senior Notes due 2011 are jointly and severally guaranteed (such guarantees, the "Guarantees") on a full and unconditional basis by Holdings and by the Company's existing and future domestic subsidiaries (the "Guarantors"). Guarantees of the notes by Guarantors directly owning, now or in the future, capital stock of foreign subsidiaries will be secured by second priority liens on 65% of the capital stock of such foreign subsidiaries. In the event the Company directly owns a foreign subsidiary in the future, the notes will be secured by a second priority lien on 65% of the capital stock of any such foreign subsidiary (such capital stock of foreign subsidiaries referenced in this paragraph collectively, the "Collateral"). The Guarantees of the notes: o rank equal in right of payment with all existing and future unsubordinated indebtedness of the Guarantors; o rank senior in right of payment to all existing and future subordinated indebtedness of the Guarantors; and o are effectively junior to any indebtedness of the Company, including indebtedness under the Company's senior secured reducing revolving credit facility, that is either (1) secured by a lien on the Collateral that is senior or prior to the second priority liens securing the Guarantees of the notes or (2) secured by assets that are not part of the Collateral to the extent of the value of the assets securing such indebtedness. Separate financial statements of each Guarantor that is a subsidiary of the Company 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 sheets at March 31, 2004 and June 30, 2003, and the condensed consolidating statements of operations and cash flows for the nine month periods ended March 31, 2004 and 2003 of the Company, the combined Guarantor subsidiaries, the combined non-Guarantor subsidiaries and the consolidated Company. 7 CONSOLIDATING BALANCE SHEETS March 31, 2004 (In thousands) Dollar Subsidiary Financial Subsidiary Non- Group, Inc. Guarantors Guarantors Eliminations Consolidated ---------------------------------------------------------------------------- Assets Cash and cash equivalents............................ $ 18,660 $ 22,750 $ 38,487 $ - $ 79,897 Loans and other consumer lending receivables, net.... 6,063 2,200 10,866 - 19,129 Loans receivable pledged............................. - - 8,000 - 8,000 Other receivables.................................... 1,273 1,050 3,623 (308) 5,638 Income taxes receivable.............................. 31,094 - 6,206 (31,517) 5,783 Prepaid expenses..................................... 1,940 821 5,696 - 8,457 Deferred income taxes................................ 1,064 - - (1,064) - Notes and interest receivable--officers.............. 3,583 - - - 3,583 Due from affiliates.................................. (49,797) 110,698 - (60,901) - Due from parent...................................... 6,607 - - - 6,607 Property and equipment, net.......................... 4,713 6,808 16,377 - 27,898 Goodwill and other intangibles, net.................. - 56,522 93,536 - 150,058 Debt issuance costs, net............................. 10,604 - - - 10,604 Investment in subsidiaries........................... 235,508 9,801 6,705 (252,014) - Other................................................ 97 582 1,332 - 2,011 ---------------------------------------------------------------------------- $ 271,409 $ 211,232 $ 190,828 $ (345,804) $ 327,665 ============================================================================ Liabilities and shareholder's equity Accounts payable..................................... $ 125 $ 6,345 $ 6,216 $ - $ 12,686 Income taxes payable................................. - 31,517 - (31,517) - Foreign income taxes payable......................... - - 6,805 - 6,805 Accrued expenses..................................... 1,922 2,448 7,485 - 11,855 Accrued interest payable............................. 8,162 146 499 (308) 8,499 Deferred tax liability............................... - 2,743 - (1,064) 1,679 Due to affiliates.................................... - - 60,901 (60,901) - Other collateralized borrowings...................... - - 8,000 - 8,000 9.75% Senior Notes due 2011.......................... 220,000 - - - 220,000 Subordinated notes payable and other................. 128 - 78 - 206 ---------------------------------------------------------------------------- 230,337 43,199 89,984 (93,790) 269,730 Shareholder's equity: Common stock...................................... - - - - - Additional paid-in capital........................ 41,268 85,524 27,304 (112,828) 41,268 Retained earnings (defecit)....................... (214) 76,667 62,519 (139,186) (214) Accumulated other comprehensive income............ 18 5,842 11,021 - 16,881 ---------------------------------------------------------------------------- Total shareholder's equity........................... 41,072 168,033 100,844 (252,014) 57,935 ---------------------------------------------------------------------------- $ 271,409 $ 211,232 $ 190,828 $ (345,804) $ 327,665 ============================================================================
8 CONSOLIDATING STATEMENTS OF OPERATIONS Nine Months Ended March 31, 2004 (In thousands) Dollar Subsidiary Financial Subsidiary Non- Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------------ Revenues...................................... $ - $ 83,657 $ 99,721 $ - $ 183,378 Store and regional expenses: Salaries and benefits...................... - 31,320 25,561 - 56,881 Occupancy.................................. - 8,280 6,488 - 14,768 Depreciation............................... - 2,382 2,089 - 4,471 Other...................................... - 21,153 19,048 - 40,201 ------------------------------------------------------------------------------ Total store and regional expenses............. - 63,135 53,186 - 116,321 Corporate expenses............................ 11,149 (6) 11,584 - 22,727 Management fee................................ (1,739) - 1,739 - - Loss on store closings and sales and other restructuring.............................. 212 29 37 - 278 Other depreciation and amortization........... 1,595 30 1,047 - 2,672 Interest expense (income)..................... 14,796 (1,491) 4,867 - 18,172 Loss on extinguishment of debt................ 7,209 - - - 7,209 ------------------------------------------------------------------------------ (Loss) income before income taxes ............ (33,222) 21,960 27,261 - 15,999 Income tax (benefit) provision ............... (11,533) 16,208 10,261 - 14,936 ------------------------------------------------------------------------------ (Loss) income before equity in net income of subsidiaries..................... (21,689) 5,752 17,000 - 1,063 Equity in net income of subsidiaries: Domestic subsidiary guarantors............. 5,752 - - (5,752) - Foreign subsidiary guarantors.............. 17,000 - - (17,000) - ------------------------------------------------------------------------------ Net income.................................... $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063 ==============================================================================
9 CONSOLIDATING STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 2004 (In thousands) Dollar Subsidiary Financial Subsidiary Non- Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Cash flows from operating activities: Net income .............................................. $ 1,063 $ 5,752 $ 17,000 $ (22,752) $ 1,063 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Undistributed income of subsidiaries................ (22,752) - - 22,752 - Depreciation and amortization....................... 2,745 2,410 3,368 - 8,523 Loss on extinguishment of debt...................... 7,209 - - - 7,209 Loss on store closings and sales and other restructuring..................................... 212 29 37 - 278 Foreign currency gain on revaluation of other collateralized borrowings................... - - (899) - (899) Deferred tax provision.............................. - 841 - - 841 Changes in assets and liabilities: Decrease (increase) in loans and other receivables................................... 2,684 (2,139) (3,144) (16) (2,615) Increase in income taxes receivable............. (11,677) - (5,924) 13,199 (4,402) (Increase) decrease in prepaid expenses and other (1,175) 307 (869) - (1,737) Increase in accounts payable, income taxes payable, accrued expenses and accrued interest payable ..................... 4,372 12,678 3,795 (13,183) 7,662 ------------------------------------------------------------------------- Net cash (used in) provided by operating activities...... (17,319) 19,878 13,364 - 15,923 Cash flows from investing activities: Gross proceeds from sale of fixed assets................. - - 41 - 41 Additions to property and equipment...................... (368) (958) (3,754) - (5,080) Net increase in due from affiliates...................... - (22,383) - 22,383 - ------------------------------------------------------------------------- Net cash used in investing activities.................... (368) (23,341) (3,713) 22,383 (5,039) Cash flows from financing activities: Redemption of 10.875% Senior Subordinated notes due 2006. (20,734) - - - (20,734) Other debt borrowings (payments)......................... 128 - (19) - 109 Issuance of 9.75% Senior Notes due 2011.................. 220,000 - - - 220,000 Redemption of 10.875% Senior Notes due 2006.............. (111,170) - - - (111,170) Net decrease in revolving credit facilities.............. (60,764) - (935) - (61,699) Payment of debt issuance costs........................... (10,156) - - - (10,156) Net increase in due from parent ......................... (2,034) - - - (2,034) Net increase (decrease) in due to affiliates............. 33,096 - (10,713) (22,383) - Dividend paid to parent.................................. (20,000) - - - (20,000) ------------------------------------------------------------------------- Net cash provided by (used in) financing activities...... 28,366 - (11,667) (22,383) (5,684) Effect of exchange rate changes on cash and cash equivalents.............................................. - - 2,892 - 2,892 ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents..... 10,679 (3,463) 876 - 8,092 Cash and cash equivalents at beginning of period......... 7,981 26,213 37,611 - 71,805 ------------------------------------------------------------------------- Cash and cash equivalents at end of period............... $ 18,660 $ 22,750 $ 38,487 $ - $ 79,897 =========================================================================
10 CONSOLIDATING BALANCE SHEETS June 30, 2003 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------ ------------- ------------- --------------- ------------- ASSETS Cash and cash equivalents.........................$ 7,981 $ 26,213 $ 37,611 $ - $ 71,805 Loans and other consumer lending receivables, net. 7,095 808 9,562 - 17,465 Loans receivable pledged.......................... - - 8,000 - 8,000 Other receivables................................. 3,042 303 1,479 (324) 4,500 Income taxes receivable........................... 19,417 - 281 (18,329) 1,369 Prepaid expenses.................................. 804 1,111 4,443 - 6,358 Deferred income taxes............................. 1,064 - - (1,064) - Notes and interest receivable-officers............ 3,466 - 2 - 3,468 Due from affiliates............................... - 83,738 - (83,738) - Due from parent................................... 4,573 - - - 4,573 Property and equipment, net....................... 5,884 8,260 15,065 - 29,209 Goodwill and other intangibles, net............... 58 56,551 86,807 - 143,416 Debt issuance costs, net.......................... 4,990 - 210 - 5,200 Investment in subsidiaries........................ 212,757 9,801 6,705 (229,263) - Other............................................. 58 599 1,176 - 1,833 ------------ ------------- ------------- --------------- ------------- $ 271,189 $ 187,384 $ 171,341 $ (332,718) $ 297,196 ============ ============= ============= =============== ============= LIABILITIES AND SHAREHOLDER'S EQUITY Accounts payable................................. $ 148 $ 7,225 $ 9,872 $ - $ 17,245 Income taxes payable............................. - 18,329 - (18,329) - Foreign income taxes payable..................... - - 1,380 - 1,380 Accrued expenses................................. 2,886 2,161 4,372 - 9,419 Accrued interest payable......................... 1,491 57 432 (324) 1,656 Deferred tax liability........................... - 1,902 - (1,064) 838 Due to affiliates................................ 17,215 - 66,523 (83,738) - Revolving credit facilities...................... 60,764 - 935 - 61,699 10-7/8% Senior Notes due 2006.................... 109,190 - 0 - 109,190 Other collateralized borrowings.................. - - 8,000 - 8,000 Subordinated notes payable and other............. 20,000 - 81 - 20,081 ------------ ------------- ------------- --------------- ------------- 211,694 29,674 91,595 (103,455) 229,508 Shareholder's equity: Common stock..................................... - - - - - Additional paid-in capital....................... 50,957 88,380 27,304 (115,684) 50,957 Retained earnings................................ 9,034 68,059 45,520 (113,579) 9,034 Accumulated other comprehensive (loss) income........................................ (496) 1,271 6,922 - 7,697 ------------ ------------- ------------- --------------- ------------- Total shareholder's equity....................... 59,495 157,710 79,746 (229,263) 67,688 ------------ ------------- ------------- --------------- ------------- $ 271,189 $ 187,384 $ 171,341 $ (332,718) $ 297,196 ============ ============= ============= =============== =============
11 CONSOLIDATING STATEMENTS OF OPERATIONS Nine Months Ended March 31, 2003 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group, Inc. Guarantors Guarantors Eliminations Consolidated ------------ ------------ ----------- ----------- ------------ Revenues............................................. $ - $ 84,473 $ 79,443 $ - $ 163,916 Store and regional expenses: Salaries and benefits............................. - 31,386 20,561 - 51,947 Occupancy......................................... - 8,409 5,746 - 14,155 Depreciation...................................... - 2,467 1,897 - 4,364 Other............................................. - 22,682 13,726 - 36,408 ------------ ------------ ----------- ----------- ------------ Total store and regional expenses.................... - 64,944 41,930 - 106,874 Corporate expenses................................... 14,539 43 9,115 - 23,697 Management fees...................................... (8,633) 7,779 854 - - Loss on store closings and sales and other 2,235 419 96 - 2,750 restructuring...................................... Other depreciation and amortization.................. 1,520 43 883 - 2,446 Interest expense .................................... 12,996 1,558 225 - 14,779 Establishment of reserve for legal matter............ - 2,500 - - 2,500 ------------ ------------ ----------- ----------- ------------ (Loss) income before income taxes ................... (22,657) 7,187 26,340 - 10,870 Income tax (benefit) provision ...................... (7,776) 7,870 9,222 - 9,316 ------------ ------------ ----------- ----------- ------------ (Loss) income before equity in net (loss) income of subsidiaries................................. (14,881) (683) 17,118 - 1,554 Equity in net (loss) income of subsidiaries: Domestic subsidiary guarantors....................... (683) - - 683 - Foreign subsidiary guarantors........................ 17,118 - - (17,118) - ------------ ------------ ----------- ----------- ------------ Net income (loss).................................... $ 1,554 $ (683) $ 17,118 $ (16,435) $ 1,554 ============ ============ =========== =========== ============
12 CONSOLIDATING STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 2003 (In thousands) Dollar Domestic Foreign Financial Subsidiary Subsidiary Group,Inc. Guarantors Guarantors Eliminations Consolidated ----------- ----------- ------------ ------------ ------------ Cash flows from operating activities: Net income (loss) .................................. $ 1,554 $ (683) $ 17,118 $ (16,435) $ 1,554 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Undistributed income of subsidiaries.......... (16,435) - - 16,435 - Depreciation and amortization................. 2,874 2,511 2,780 - 8,165 Establishment of reserves for legal matter.... - 2,500 - - 2,500 Loss on store closings and sales and other restructuring.............................. 2,235 419 96 - 2,750 Deferred tax provision........................ 230 1,225 - - 1,455 Change in assets and liabilities (net of effect of acquisitions): (Increase) decrease in loans and other receivables............................... (6,051) 6,304 (2,523) (3,884) (6,154) Increase in income taxes receivable.......... (8,006) - (1,073) 7,048 (2,031) (Increase) decrease in prepaid expenses and other..................................... (480) 658 1,108 - 1,286 Increase (decrease) in accounts payable, income taxes payable, accrued expenses and accrued interest payable.................. 2,759 4,420 (3,465) (3,164) 550 ----------- ----------- ------------ ------------ ----------- Net cash (used in) provided by operating activities.. (21,320) 17,354 14,041 - 10,075 Cash flows from investing activities: Acquisitions, net of cash acquired.............. - - (3,318) - (3,318) Additions to property and equipment............. (780) (740) (3,962) - (5,482) Net increase in due from affiliates............. - (21,004) - 21,004 - ----------- ----------- ------------ ------------ ----------- Net cash used in investing activities................ (780) (21,744) (7,280) 21,004 (8,800) Cash flows from financing activities: Other debt borrowings........................... - - 8,001 - 8,001 Net decrease in revolving credit facilities..... (9,936) - (9,470) - (19,406) Payment of debt issuance costs.................. (610) - (200) - (810) Net increase in due from parent................. (716) - - - (716) Net increase (decrease) in due to affiliates.... 35,082 - (14,078) (21,004) ----------- ----------- ------------ ------------ ----------- Net cash provided by (used in) financing activities.. 23,820 - (15,747) (21,004) (12,931) Effect of exchange rate changes on cash and cash equivalents..................................... - - 879 - 879 ----------- ----------- ------------ ------------ ----------- Net increase (decrease) in cash and cash equivalents. 1,720 (4,390) (8,107) - (10,777) Cash and cash equivalents at beginning of period..... 1,746 41,405 43,482 - 86,633 ----------- ----------- ------------ ------------ ----------- Cash and cash equivalents at end of period........... $ 3,466 $ 37,015 $ 35,375 $ - $ 75,856 =========== =========== ============ ============ ===========
13 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 its 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 a covenant not to compete, which is deemed to have a definite life of two years and will continue to be amortized through January 2005. Amortization for this covenant not to compete for the nine months ended March 31, 2004 was $86,000. The amortization expense for the covenant not to compete will be as follows: Year Amount (in thousands) -------------------------------------------- 2004 $ 95.0 2005 20.0 The following table reflects the components of intangible assets (in thousands): June 30, 2003 March 31, 2004 ------------------------------------------ ---------------------------------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization ------------------------------------------ ---------------------------------------- Non-amortized intangible assets: Cost in excess of net assets acquired $ 162,987 $ 19,686 $ 170,207 $ 20,176 Amortized intangible assets: Covenants not to compete 2,446 2,331 2,466 2,439
4. COMPREHENSIVE INCOME Comprehensive 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 income for the periods stated: Three Months Ended Nine Months Ended March 31, March 31, ---------------------------------- ---------------------------------- 2003 2004 2003 2004 -------------- --------------- ------------- ------------- Net income $ 992 $ 1,566 $ 1,554 $ 1,063 Foreign currency translation adjustment 3,257 1,017 3,915 9,184 -------------- --------------- ------------- ------------- Total comprehensive income $ 4,249 $ 2,583 $ 5,469 $ 10,247 ============== =============== ============= =============
14 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 were comprised of 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 Reclassification (0.7) 0.7 - Amounts paid (0.5) (0.5) (1.0) ----------- --------- ---------- Balance at March 31, 2004 $ - $ 0.4 $ 0.4 =========== ========= ==========
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 March 31, 2004 and 2003 were $157,000 and $60,000, respectively and for the nine months ended March 31, 2004 and 2003 were $278,000 and $675,000, respectively. 6. LOSS ON EXTINGUISHMENT OF DEBT On November 13, 2003, the Company issued $220 million principal amount of 9.75% Senior Notes due 2011. The proceeds from this offering were used to redeem all of the Company's outstanding senior notes and the Company's outstanding senior subordinated notes, to refinance its credit facility, to distribute a portion of the proceeds to Holdings to redeem an equal amount of Holdings' senior discount notes and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving Holdings' senior discount notes. The loss incurred on the extinguishment of debt is as follows (in millions): Call Premium: 10.875% Senior notes $ 1.98 10.875% Senior Subordinated notes 0.73 Write-off of previously capitalized deferred issuance costs, net 4.50 ---------- Loss on extinguishment of debt $ 7.21 ========== 15 7. GEOGRAPHIC SEGMENT INFORMATION All operations for which geographic data is presented below are in one principal industry (check cashing and ancillary services) (in thousands): As of and for the three months United ended March 31, 2003 United States Canada Kingdom Total ----------------- ------------- -------------- --------------- Identifiable assets $ 139,805 $ 79,907 $ 72,083 $ 291,795 Goodwill and other intangibles, net 56,414 35,517 46,134 138,065 Sales to unaffiliated customers Check cashing 14,159 7,686 6,052 27,897 Consumer lending, net 14,591 4,838 3,054 22,483 Money transfer fees 1,107 1,216 484 2,807 Other 1,843 2,288 656 4,787 Income before income taxes 852 5,243 2,280 8,375 Income tax provision 3,512 3,194 677 7,383 Net (loss) income (2,660) 2,049 1,603 992 For the nine months ended March 31, 2003 Sales to unaffiliated customers Check cashing $ 37,633 $ 24,157 $ 19,081 $ 80,871 Consumer lending, net 38,932 13,706 8,691 61,329 Money transfer fees 3,439 3,584 1,248 8,271 Other 4,469 7,040 1,936 13,445 (Loss) income before income taxes (15,470) 20,220 6,120 10,870 Income tax provision 94 7,384 1,838 9,316 Net (loss) income (15,564) 12,836 4,282 1,554 As of and for the three months ended March 31, 2004 Identifiable assets $ 143,542 $ 93,426 $ 90,697 $ 327,665 Goodwill and other intangibles, net 56,522 39,711 53,825 150,058 Sales to unaffiliated customers Check cashing 13,824 8,913 7,661 30,398 Consumer lending, net 14,855 7,502 3,438 25,795 Money transfer fees 1,147 1,418 685 3,250 Other 1,070 3,912 1,201 6,183 Income before income taxes 1,530 7,117 2,647 11,294 Income tax provision 7,329 1,811 588 9,728 Net (loss) income (5,799) 5,306 2,059 1,566 For the nine months ended March 31, 2004 Sales to unaffiliated customers Check cashing $ 36,632 $ 28,726 $ 22,581 $ 87,939 Consumer lending, net 40,811 20,291 9,571 70,673 Money transfer fees 3,362 4,288 1,934 9,584 Other 2,852 8,995 3,335 15,182 (Loss) income before income taxes (11,261) 18,992 8,268 15,999 Income tax provision 4,674 7,223 3,039 14,936 Net (loss) income (15,935) 11,769 5,229 1,063
16 8. 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 March 31, 2004, the Company held put options with an aggregate notional value of $(CAN) 36.0 million and (GBP) 9.0 million to protect the currency exposure in Canada and the United Kingdom throughout the remainder of the fiscal year and the first half of fiscal 2005. The cost of these put options is included in prepaid expenses on the consolidated balance sheet. The cost of the options are amortized over the period in which the options are exercisable. Changes in the fair value of the put options are recorded through the statement of operations in corporate expenses and were not significant. All put options for the three and nine months ended March 31, 2004 expired out of the money at a cost of $69,000 and $190,000, respectively, which is included in corporate expenses in the consolidated statement of earnings. There were no put options held for the same period in fiscal 2003. Although the Company's revolving credit facility and overdraft credit facilities carry variable rates of interest, most of the Company's and Holdings' 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. 9. CONTINGENT LIABILITIES 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. On November 6, 2003, we learned of substantially similar claims asserted on behalf of a purported class of Alberta borrowers by Gareth Young, a former customer of our Canadian subsidiary. The Young action is pending in the Court of Queens Bench of Alberta and seeks an unspecified amount of damages and other relief. On December 23, 2003, we were served with the statement of claim in an action brought in the Ontario Superior Court of Justice by another former customer, Margaret Smith. The allegations and putative class in the Smith action are substantially the same as those in the Mortillaro action. Like the plaintiff in the MacKinnon action referred to below, Mortillaro, Smith and Young have agreed to arbitrate all disputes with us. On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against our Canadian subsidiary and 26 other Canadian lenders on behalf of a purported class of British Columbia residents who, MacKinnon 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 February 3, 2004, our motion to stay the action and to compel arbitration of MacKinnon's claims, as required by his agreement with us, was denied; we are appealing this ruling. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Similar class actions have been threatened against us in other provinces of Canada, but we have not been served with the statements of claim in any such actions to date. We believe that any possible claims in these actions, if they are served, will likely be substantially similar to those of the Ontario actions referred to above. 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 our 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. These settlement offers have been accepted by 92% of the members of the putative class. We recorded a charge of $2.8 million related to this matter during fiscal 2003. Woods' 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. 17 In addition to the litigation discussed above, we are involved in routine litigation and administrative proceedings arising in the ordinary course of business. We do not believe that the outcome of any of the matters referred to in the preceding paragraphs will materially affect our financial condition, results of operations or cash flows in future periods. 10. DEBT On November 13, 2003, the Company issued $220.0 million principal amount of 9.75% Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933 and entered into a new $55.0 million Senior Secured Reducing Revolving Credit Facility ("New Credit Facility"). The proceeds from these transactions were used to repay, in full, all borrowings outstanding under the Company's existing credit facility, redeem the entire $109.2 million principal amount of the Company's 10.875% Senior Notes due 2006, redeem the entire $20.0 million principal amount of the Company's 10.875% Senior Subordinated Notes due 2006, distribute to Holdings $20.0 million to redeem an equal amount of its 13.0% Senior Discount Notes due 2006, and pay all related fees, expenses and redemption premiums with respect to these transactions. The New Credit Facility consists of a $55.0 million senior secured reducing revolving credit facility. The commitment under the New Credit Facility was reduced by $750,000 on January 2, 2004 and on the first business day of each calendar quarter thereafter, and is subject to additional reductions based on excess cash flow up to a maximum reduction, including quarterly reductions, of $15.0 million. The commitment may be subject to further reductions in the event we engage in certain issuances of securities or asset disposals. Under the New Credit Facility, up to $20.0 million may be used in connection with letters of credit. Amounts outstanding under the New Credit Facility bear interest at either (i) the higher of (a) the federal funds rate plus 0.50% per annum or (b) the rate publicly announced by Wells Fargo, San Francisco, as its "prime rate," plus 3.25% at March 31, 2004, (ii) the LIBOR Rate (as defined therein) plus 4.50% at March 31, 2004, or (iii) the one day Eurodollar Rate (as defined therein) plus 4.50% at March 31, 2004, determined at the Company's option. 18 SUPPLEMENTAL STATISTICAL DATA March 31, Company Operating Data: 2003 2004 ------------- ------------- Stores in operation: Company-Owned................................. 621 630 Franchised Stores and Check Cashing Merchants. 466 476 --- --- Total............................................ 1,087 1,106 ===== =====
- ---------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended March 31, March 31, ---------------------------- ---------------------------- Operating Data: 2003 2004 2003 2004 ------------ ----------- ----------- ------------- Face amount of checks cashed (in millions)..................... $ 731 $ 801 $ 2,190 $ 2,375 Face amount of average check................................... $ 354 $ 388 $ 339 $ 376 Face amount of average check (excluding Canada and the United Kingdom).................................................... $ 398 $ 414 $ 360 $ 375 Average fee per check.......................................... $ 13.52 $ 14.73 $ 12.53 $ 13.91 Number of checks cashed (in thousands)......................... 2,063 2,064 6,453 6,323 - ---------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended March 31, March 31, ---------------------------- ---------------------------- Collections Data: 2003 2004 2003 2004 ------------ ----------- ----------- ------------- Face amount of returned checks (in thousands).................. $ 5,756 $ 7,208 $ 19,033 $ 22,159 Collections (in thousands)..................................... 4,420 5,562 14,234 16,383 ------------ ----------- ----------- ------------- Net write-offs (in thousands).................................. $ 1,336 $ 1,646 $ 4,799 $ 5,776 ============ =========== =========== ============= Collections as a percentage of returned checks............................................. 76.8% 77.2% 74.8% 73.9% Net write-offs as a percentage of check cashing revenues...................................... 4.8% 5.4% 5.9% 6.6% Net write-offs as a percentage of the face amount of checks cashed................................ 0.18% 0.21% 0.22% 0.24%
19 The following table presents a summary of the Company's consumer lending originations, which includes loan extensions, and revenues for the following periods (in thousands): Three Months Ended Nine Months Ended March 31, March 31, --------------------------------- ------------------------------- 2003 2004 2003 2004 --------------------------------- ------------------------------- U.S. company funded originations.................... $ 14,714 $ 17,443 $ 68,051 $ 47,638 Canadian company funded originations................ 60,053 75,791 177,519 231,729 U.K. company funded originations.................... 25,606 28,675 73,451 80,279 --------------------------------- ------------------------------- Total company funded originations................ $ 100,373 $ 121,909 $ 319,021 $ 359,646 ================================= =============================== Servicing revenues, net............................. $ 11,507 $ 12,094 $ 32,019 $ 35,413 Company funded domestic loan revenues............... 2,616 2,666 11,884 7,137 Company funded foreign loan revenues................ 8,951 12,161 25,984 34,423 Net write-offs on company funded loans.............. (591) (1,126) (8,558) (6,300) --------------------------------- ------------------------------- Total consumer lending revenues, net............. $ 22,483 $ 25,795 $ 61,329 $ 70,673 ================================= =============================== Net write-offs as a percentage of total company funded originations....................... 0.6% 0.9% 2.7% 1.8%
20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is a discussion and analysis of the financial condition and results of operations for Dollar Financial Group, Inc. for the three month and nine month periods ended March 31, 2003 and 2004. References in this section to "we," "our," "ours," or "us" are to Dollar Financial Group, Inc. and its wholly owned subsidiaries, except as the context otherwise requires. References to "Holdings" are to our parent company, Dollar Financial Corp. For a separate discussion and analysis of the financial condition and results of operations of Holdings, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Holdings' quarterly report on Form 10-Q (File No. 333-111473-02) for the period ended March 31, 2004. 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 1,106 stores, including 630 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 March 31, 2004, we generated revenue of $65.6 million, an increase of 13.2% over the same period in the prior year. For the nine-months ended March 31, 2004, we generated revenue of $183.4 million, an increase of 11.9% 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 March 31, 2004 and the results of operations for the three and nine months ended March 31, 2004 and 2003. The results for the three and nine months ended March 31, 2004 are not necessarily indicative of the results for the full fiscal year and should be read in conjunction with our unaudited financial statements included in this filing and our audited consolidated financial statements included in our Annual Report on Form 10-K (File No. 333-111473) 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, revenue is recognized when services for the customer have been provided which, in the case of check cashing, money order sales, money transfer services, bill payment services and other miscellaneous services, is at the point-of-sale in our company-owned locations. The Company originates unsecured short-term loans on its own behalf or acts as a servicer for two banks marketing unsecured short-term loans for which the Company earns a fee. Revenues from loan fees and interest are recognized ratably over the life of each loan. In our franchised locations, we recognize initial franchise fees upon fulfillment of all significant obligations to the franchisee. In addition, royalties from the franchisees are accrued as earned. 21 Consumer Loan Loss Reserves 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, including the reserve for estimated reductions to loan servicing fees, we consider the amount of outstanding loans owed to us, as well as loans owed to banks and serviced by us, historical loans charged off, current collection patterns and current economic trends. Our current loan loss reserve is based on our net loss rate, expressed as a percentage of loans originated for the last twelve months, applied against the total amount of outstanding loans that we make directly and outstanding loans we originate and service for others. As these conditions change, we may need to make additional allowances in future periods. A loss on consumer loans is charged against the reserve during the period in which the loss occurred. A recovery is credited to the reserve during the period in which the recovery is made. Any additional provisions to the loan loss reserve as a result of the calculation in the preceding paragraph are charged against revenues. Check Cashing Returned Item Policy 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 during the period in which recovery is made. This direct method for recording returned check losses and recoveries eliminates the need for an allowance for returned checks. These net losses are charged to other store and regional expenses in the consolidated statements of operations. 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 March 31, Nine Months Ended March 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Percentage of (Percentage of ($ in thousands) total revenue) ($ in thousands) total revenue) -------------------------- ----------------- --------------------------- -------------- 2003 2004 2003 2004 2003 2004 2003 2004 ----------- ----------- ------ ------ ----------- ------------ ----- ----- Check cashing.....................$ 27,897 $ 30,398 48.1% 46.3% $ 80,871 $ 87,939 49.3% 48.0% Consumer lending revenues, net.. 22,483 25,795 38.8 39.3 61,329 70,673 37.5 38.5 Money transfer fees............... 2,807 3,250 4.8 5.0 8,271 9,584 5.0 5.2 Other revenue..................... 4,787 6,183 8.3 9.4 13,445 15,182 8.2 8.3 -------- ------- ------ ------ -------- -------- ------ ------ Total revenue.....................$ 57,974 $ 65,626 100.0% 100.0% $ 163,916 $ 183,378 100.0% 100.0% ======== ======= ====== ====== ======== ======== ====== ======
22 THREE MONTH COMPARISON Total revenues were $65.6 million for the three months ended March 31, 2004 compared to $58.0 million for the three months ended March 31, 2003, an increase of $7.6 million or 13.2%. Comparable retail store, franchised store and document transmitter sales for the entire period increased $7.1 million or 12.4%. New store openings accounted for an increase of $733,000 while closed stores accounted for a decrease of $241,000. A stronger British pound and Canadian dollar positively impacted revenue by $3.9 million for the quarter. In addition to the currency benefit, revenues in the United Kingdom for the quarter increased by $1.2 million primarily related to revenues from check cashing and the impact of the new installment loan product. Revenues from our Canadian subsidiary for the quarter increased $3.4 million after adjusting for the favorable exchange rate. Higher short term consumer loan volume and pricing, slightly offset by lower check cashing revenues, accounted for the increase. For the three months ended March 31, 2004, our Canadian subsidiary rolled out, to all its locations, a new tax product offering rapid access loans and electronic Canadian tax filing. This product, which was only tested in a limited number of locations in the prior year, added $521,000 in revenue for the current quarter which is included in other revenues. In the U.S., food stamp revenues declined $773,000 for the three months ended March 31, 2004, primarily due to the decline in our distribution of government assistance food coupons. California, the last state in which we offer food coupons, is implementing an electronic benefits transfer system designed to disburse public assistance benefits directly to individuals. We expect to generate only minimal revenues from this product for the remainder of the fiscal year. NINE MONTH COMPARISON Total revenues were $183.4 million for the nine months ended March 31, 2004 compared to $163.9 million for the nine months ended March 31, 2003, an increase of $19.5 million or 11.9%. Comparable store, franchised store and document transmitter sales for the entire period increased $18.4 million or 11.4%. New store openings accounted for an increase of $2.4 million while closed stores accounted for a decrease of $1.5 million. Favorable foreign currency rates attributed to $10.5 million of the increase for the nine months. In addition to the currency benefit, revenues in the United Kingdom for the nine months increased by $3.6 million primarily related to revenues from check cashing and the impact of the new installment loan product. Revenues from our Canadian subsidiary for the nine months increased $6.2 million after adjusting for the favorable exchange rate. Higher short term consumer loan volume and pricing, slightly offset by lower check cashing revenues, accounted for the increase. In addition, our Canadian subsidiary rolled out, to all its locations, a new tax product offering rapid access loans and electronic Canadian tax filing. This product, which was only tested in a limited number of locations in the third quarter of the prior year, added $521,000 in revenue for the current quarter which is included in other revenues. In the U.S., food stamp revenues declined $1.6 million for the nine months ended March 31, 2004, primarily due to the decline in our distribution of government assistance food coupons. California, the last state in which we offer food coupons, is implementing an electronic benefits transfer system designed to disburse public assistance benefits directly to individuals. We expect to generate only minimal revenues from this product for the remainder of the fiscal year. Store and Regional Expense Analysis Three Months Ended March 31, Nine Months Ended March 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Percentage of (Percentage of ($ in thousands) total revenue) ($ in thousands) total revenue) --------------------------- ------------------ -------------------------- ---------------- 2003 2004 2003 2004 2003 2004 2003 2004 ----------- ------------ ------- ------- ----------- ----------- ------ ------ Salaries and benefits.......... $ 17,519 $ 19,397 30.2% 29.6% $ 51,947 $ 56,881 31.7% 31.0% Occupancy...................... 4,686 5,019 8.1 7.6 14,155 14,768 8.6 8.1 Depreciation................... 1,122 1,533 1.9 2.3 4,364 4,471 2.7 2.4 Returned checks, net and cash shortages.............. 1,762 2,052 3.0 3.1 6,256 6,938 3.8 3.8 Telephone and telecommunications.......... 1,429 1,336 2.5 2.0 4,225 4,328 2.6 2.4 Advertising.................... 1,571 1,735 2.7 2.6 5,049 5,277 3.1 2.9 Bank charges................... 736 887 1.3 1.4 2,344 2,777 1.4 1.5 Armored carrier service........ 753 785 1.3 1.2 2,123 2,266 1.3 1.2 Other.......................... 5,139 5,773 8.9 8.8 16,411 18,615 10.0 10.2 ----------- ------------ ------- ------- ----------- ----------- ------ ------ Total store and regional expenses ................... $ 34,717 $ 38,517 59.9% 58.6% $ 106,874 $ 116,321 65.2% 63.5% =========== ============ ======= ======= =========== =========== ====== ======
23 THREE MONTH COMPARISON Store and regional expenses were $38.5 million for the three months ended March 31, 2004 compared to $34.7 million for the three months ended March 31, 2003, an increase of $3.8 million or 11.0%. The impact of foreign currencies accounted for $2.0 million of this increase. New store openings accounted for an increase of $434,000 while closed stores accounted for a decrease of $135,000. Comparable retail store and franchised store expenses for the entire period increased $4.3 million. For the three months ended March 31, 2004 total store and regional expenses decreased to 58.6% of total revenue compared to 59.9% of total revenue for the three months ended March 31, 2003. After adjusting for the impact of the changes in exchange rates, store and regional expenses increased $1.7 million in Canada, $358,000 in the U.K. and declined $270,000 in the U.S. The increase in Canada was primarily due to increases of $362,000 in salaries, $245,000 in returned checks, net and cash shortages and $181,000 in advertising, all of which are commensurate with the overall growth in Canadian revenues. NINE MONTH COMPARISON Store and regional expenses were $116.3 million for the nine months ended March 31, 2004 compared to $106.9 million for the nine months ended March 31, 2003, an increase of $9.4 million or 8.8%. The impact of foreign currencies accounted for $5.5 million of this increase. New store openings accounted for an increase of $1.3 million while closed stores accounted for a decrease of $1.4 million. Comparable retail store and franchised store expenses for the entire period increased $12.4 million. For the nine months ended March 31, 2004 total store and regional expenses decreased to 63.5% of total revenue compared to 65.2% of total revenue for the nine months ended March 31, 2003. After adjusting for the impact of the changes in exchange rates, store and regional expenses increased $4.4 million in Canada, $1.3 million in the U.K. and declined $1.8 million in the U.S. The increase in Canada was primarily due to increases of $737,000 in salaries, $600,000 in returned checks, net and cash shortages, $335,000 in advertising and $273,000 in occupancy costs. These costs in addition to the aggregate of other operating costs are commensurate with overall growth in Canadian revenues. The increase in the U.K. is almost entirely associated with increased salary expense which is also commensurate with the revenue growth in that business segment. The decline in store and regional expenses in the U.S. is primarily due to the impact of stores closed in the second quarter of fiscal 2003. Other Expense Analysis Three Months Ended March 31, Nine Months Ended March 31, - ------------------------------------------------------------------------------------------------------------------------------------ (Percentage of (Percentage of ($ in thousands) total revenue) ($ in thousands) total revenue) ---------------------- ------------------- ----------------------- ------------------ 2003 2004 2003 2004 2003 2004 2003 2004 -------- --------- ------- -------- --------- ---------- ------- ------- Corporate expenses.................. $ 8,708 $ 8,360 15.0% 12.7% $ 23,697 $ 22,727 14.5% 12.4% Loss on store closings and sales.... 460 157 0.8 0.2 2,750 278 1.7 0.2 Other depreciation and amortization. 759 800 1.3 1.2 2,446 2,672 1.5 1.5 Interest expense.................... 4,955 6,498 8.5 9.9 14,779 18,172 9.0 9.9 Loss on extinguishment of debt...... - - - - - 7,209 - 3.9 Establishment of reserve for legal matter...................... - - - - 2,500 - 1.5 - Income tax provision................ 7,383 9,728 12.7 14.8 9,316 14,936 5.7 8.1
THREE MONTH COMPARISON Corporate Expenses Corporate expenses were $8.4 million for the three months ended March 31, 2004 compared to $8.7 million for the three months ended March 31, 2003. For the three months ended March 31, 2004, corporate expenses decreased to 12.7% of total revenue compared to 15.0% of total revenue for the three months ended March 31, 2003. The decline reflects the cost reductions related to the rationalization of our store support functions for our North American operations offset somewhat by increased accrued expenses for incentive compensation and legal and professional fees. 24 Loss on Store Closings and Sales Loss on store closings and sales was $157,000 for the three months ended March 31, 2004 compared to $460,000 for the three months ended March 31, 2003. For the three months ended March 31, 2003, we provided $400,000 of severance and retention bonus costs for the consolidation and relocation of certain non-operating functions. Interest Expense Interest expense was $6.5 million for the three months ended March 31, 2004 compared to $5.0 million for the three months ended March 31, 2003, an increase of $1.5 million or 30%. The increased interest on the incremental long-term debt outstanding after the refinancing accounted for $1.9 million of the increase in total interest expense. Offsetting these increases was a decline of $800,000 in interest on our revolving credit facility. This decline is a result of using a portion of the proceeds from the issuance of the new notes to pay down the entire outstanding revolving credit balance on November 13, 2003. As a result of the refinancing, our effective annual interest rate has declined. Loss on Extinguishment of Debt On November 13, 2003, we issued $220 million principal amount of 9.75% Senior Notes due 2011. The proceeds from this offering were used to redeem all of our outstanding senior notes and our outstanding senior subordinated notes, to refinance our credit facility, to distribute a portion of the proceeds to Holdings to redeem an equal amount of Holdings' senior discount notes and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving Holdings' senior discount notes. The loss incurred on the extinguishment of debt is as follows (in millions): Call Premium: 10.875% Senior notes $ 1.98 10.875% Senior Subordinated notes 0.73 Write-off of previously capitalized deferred issuance costs, net 4.50 ---------- Loss on extinguishment of debt $ 7.21 ========== Income Tax Provision The provision for income taxes was $9.7 million for the three months ended March 31, 2004 compared to a provision of $7.4 million for the three months ended March 31, 2003, an increase of $2.3 million. Our effective tax rate differs from the federal statutory rate of 35% due to state taxes and foreign taxes and a one-time charge related to the debt restructuring. Our effective income tax rate was 86.1% for the three months ended March 31, 2004 and 88.2% for the three months ended March 31,2003. NINE MONTH COMPARISON Corporate Expenses Corporate expenses were $22.7 million for the nine months ended March 31, 2004 compared to $23.7 million for the nine months ended March 31, 2003, a decrease of $1.0 million or 4.2%. The decline reflects the cost reductions related to the rationalization of our store support functions for our North American operations offset somewhat by increased accrued expenses for incentive compensation, legal and professional fees and the impact of foreign exchange rates. Loss on store closings and sales and other restructuring Loss on store closings and sales and other restructuring was $278,000 for the nine months ended March 31, 2004 compared to $2.8 million for the nine months ended March 31, 2003, a decrease of $2.5 million. For the nine months ended March 31, 2003, we provided $1.3 million for the closure costs associated with the shutdown of 27 underperforming stores. In addition, we provided $800,000, consisting primarily of severance and retention bonus costs, for the consolidation and relocation of certain non-operating functions. 25 Interest Expense Interest expense was $18.2 million for the nine months ended March 31, 2004 and was $14.8 million for the nine months ended March 31, 2003, an increase of $3.4 million, or 23.0%. A portion of the increase is attributable to $990,000 of interest paid on our old 10.875% senior notes for the 30 day period subsequent to our issuance on November 13, 2003 of $220 million principal amount of new 9.75% Senior Notes due 2011. We elected to effect covenant defeasance on the old notes by depositing with the trustee funds sufficient to satisfy the old notes together with the call premium and accrued interest to the December 13, 2003 redemption date. Additionally, the increased interest on the incremental long-term debt outstanding after the refinancing accounted for $3.2 million of the increase in total interest expense. Offsetting these increases was a decline of $1.4 million in interest on our revolving credit facility. This decline is a result of using a portion of the proceeds from the issuance of the new notes to pay down the entire outstanding revolving credit balance on November 13, 2003. As a result of the refinancing, our effective annual interest rate has declined. Loss on Extinguishment of Debt On November 13, 2003, we issued $220 million principal amount of 9.75% Senior Notes due 2011. The proceeds from this offering were used to redeem all of our outstanding senior notes and our outstanding senior subordinated notes, to refinance our credit facility, to distribute a portion of the proceeds to Holdings to redeem an equal amount of Holdings' senior discount notes and to pay fees and expenses with respect to these transactions and a related note exchange transaction involving Holdings' senior discount notes. The loss incurred on the extinguishment of debt is as follows (in millions): Call Premium: 10.875% Senior notes $ 1.98 10.875% Senior Subordinated notes 0.73 Write-off of previously capitalized deferred issuance costs, net 4.50 ---------- Loss on extinguishment of debt $ 7.21 ========== Establishment of reserve for legal matter In August 2000, a former employee instituted an action against us in the Superior Court of California, purportedly on behalf of a class of current and former salaried managers of our California stores. In January 2003, without admitting liability, we sought to settle the case by offering each individual putative class member an amount intended in good faith to settle his or her claim. As of December 31, 2003, 92% of these settlement offers had been accepted. We believe we have meritorious defenses to the unsettled claims and plan to defend them vigorously. We accrued $2.5 million at December 31, 2002 related to this matter. This matter is described in more detail in Item 1 of Part II of this filing, "Legal Proceedings". Income Taxes The provision for income taxes was $14.9 million for the nine months ended March 31, 2004 compared to $9.3 million for the nine months ended March 31, 2003, an increase of $5.6 million. Our effective tax rate differs from the federal statutory rate of 35% due to state and foreign taxes and a one-time charge related to the debt restructuring. Our effective income tax rate was 93.4% for the nine months ended March 31,2004 and 85.7% for the nine months ended March 31, 2003. 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 nine months ended March 31, 2004, cash and cash equivalents increased $8.1 million. Net cash provided by operations was $15.9 million. The increase in net cash provided by operations was primarily the result of improved operating results and the impact of the timing of settlements in fiscal 2003 related to our loan servicing arrangements with County Bank and First Bank of Delaware. Accrued interest increased due to the timing of the semi-annual interest payments on our 9.75% Senior Notes due 2011. 26 Liquidity and Capital Resources On November 13, 2003, we issued $220.0 million principal amount of 9.75% Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933. The proceeds of this offering were used to redeem the entire $109.2 million principal amount of our 10.875% Senior Notes due 2006, to redeem the entire $20 million principal amount of our 10.875% Senior Subordinated Notes due 2006, to repay in full $40.6 million outstanding under our revolving credit facility, to distribute $20 million to Holdings to redeem an equal amount of its 13.0% Senior Discount Notes and to pay all related fees, expenses, accrued interest and redemption premiums with respect to these transactions and a related note exchange transaction involving Holdings' senior discount notes. Simultaneously with the issuance of our 9.75% senior notes, we entered into a new $55.0 million Senior Secured Reducing Revolving Credit Facility. 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 $15.9 million for the nine months ended March 31, 2004 compared to cash provided of $10.1 million for the nine months ended March 31, 2003. The increase in net cash provided by operations was primarily the result of improved operating results and the impact of the timing of settlements in fiscal 2003 related to our loan servicing arrangements with County Bank and First Bank of Delaware. Net cash used for investing activities for the nine months ended March 31, 2004 was $5.0 million compared to a usage of $8.8 million for the nine months ended March 31, 2003. The decrease of $3.8 million is attributable to an earn-out payment made in the first nine months of fiscal 2003 on acquisitions completed during a previous year. For the nine months ended March 31, 2004 we made capital expenditures of $5.1 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 $8.0 million during our fiscal year ending June 30, 2004, for remodeling and relocation of certain existing stores and for opening new stores. Net cash used for financing activities for the nine months ended March 31, 2004 was $5.7 million compared to a usage of $12.9 million for the nine months ended March 31, 2003. The decline in the nine months ended was a result of a decrease in the borrowings under our bank facilities of $61.7 million from $61.7 million at June 30, 2003 to $0.0 at March 31, 2004 offset somewhat by net cash from the refinancing activities discussed above. 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. On November 13, 2003, we repaid in full all borrowings outstanding under our previously existing credit facility using a portion of the proceeds from the issuance of $220.0 million principal amount of 9.75% Senior Notes due 2011 and simultaneously entered into a new $55.0 million Senior Secured Reducing Revolving Credit Facility. The commitment under the new facility was reduced by $750,000 on January 2, 2004 and on the first business day of each calendar quarter thereafter, and is subject to additional reductions based on excess cash flow up to a maximum reduction, including quarterly reductions, of $15.0 million. The commitment may be subject to further reductions in the event we engage in certain issuances of securities or asset disposals. Under the new facility, up to $20.0 million may be used in connection with letters of credit. Our borrowing capacity under the new facility is limited to the total commitment of $54.25 million less letters of credit totaling $19.0 million, issued by Wells Fargo Bank, which guarantee the performance of certain of our contractual obligations. At March 31, 2004, our borrowing capacity was $35.25 million and the amount outstanding was $0.0. Consequently, we had $16.7 million cash in excess of our short-term borrowing needs. Canadian Overdraft Facility. Our Canadian operating subsidiary has 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 $10.0 million, of which there was no outstanding balance on March 31, 2004. Amounts outstanding under the Canadian overdraft facility bear interest at a rate of Canadian prime and are secured by the pledge of a cash collateral account of an equivalent balance. United Kingdom Overdraft Facility. For our U.K. operations, our U.K operating subsidiary has an overdraft facility which provides for a commitment of up to approximately $6.9 million, of which there was no outstanding balance on March 31, 2004. Amounts outstanding under the United Kingdom overdraft facility bear interest of the bank base rate 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. The U.K. overdraft facility expired on March 31, 2004 and we elected not to extend. 27 Long-Term Debt. As of March 31, 2004, long term debt consisted of $220 million principal amount of our 9.75% Senior Notes due November 15, 2011. 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 March 31, 2004, we had $8.0 million of loans receivable pledged under this agreement. The agreement expires on September 30, 2004; however the term of the agreement is automatically renewed each year for a term of twelve months, unless either party terminates it. We entered into the commitments described above and other contractual obligations in the ordinary 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 March 31, 2004, excluding periodic interest payments, include the following: Payments Due by Period (in thousands) ---------------------------------------------------------------------------------- Total Less than 1 1 - 3 Years 4 - 5 Years After 5 Years Year -------------- ------------- ------------ ------------- -------------- Long-term debt: Senior notes due 2011........... $ 220,000 $ - $ - $ - $ 220,000 Operating leases..................... 52,384 16,153 20,373 9,798 6,060 Other collateralized borrowings...... 8,000 8,000 - - - Other................................ 206 206 - - - ---------- --------- --------- --------- ---------- Total contractual cash obligations... $ 280,590 $ 24,359 $ 20,373 $ 9,798 $ 226,060 ========== ========= ========= ========= ==========
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. Balance Sheet Variations March 31, 2004 compared to June 30, 2003 Cash and cash equivalents increased to $79.9 million at March 31, 2004 from $71.8 million at June 30, 2003. Cash and cash equivalent balances fluctuate significantly as a result of seasonal, monthly and day-to-day requirements for funding check cashing and other operating activities. Income taxes receivable increased to $5.8 million at March 31, 2004 from $1.4 million related primarily to U.S. carryback losses and the prepayment of taxes in our Canadian subsidiary. 28 Goodwill and other intangibles increased $6.7 million from $143.4 million at June 30, 2003 to $150.1 million at March 31, 2004 due to foreign currency translation adjustments. Debt issuance costs increased from $5.2 million at June 30, 2003 to $10.6 million at March 31, 2004 due to the refinancing of our debt. Accounts payable decreased $4.5 million from $17.2 million at June 30, 2003 to $12.7 million at March 31, 2004 due to the timing of settlements with third party vendors and our franchisees. Foreign income taxes payable increased from $1.4 million at June 30, 2003 to $6.8 million at March 31, 2004 due primarily to accrued Canadian taxes for the current fiscal year. Accrued expenses increased to $11.9 million at March 31, 2004 from $9.4 million at June 30, 2003 due to professional fees associated with legal matters associated with our Canadian subsidiary and the timing of our salary accrual. Revolving credit facilities and long-term debt increased $29.2 million from $191.0 million at June 30, 2003 to $220.2 million at March 31, 2004. On November 13, 2003, we issued $220.0 million principal amount of $9.75% Senior Notes due 2011 under Rule 144A and Regulation S of the Securities Act of 1933 and entered into a new $55.0 million Senior Secured Reducing Revolving Credit Facility. The proceeds from these transactions were used to repay, in full, all borrowings outstanding under our existing credit facility, redeem the entire $109.2 million principal amount of our 10.875% Senior Notes due 2006, redeem the entire $20.0 million principal amount of our 10.875% Senior Subordinated Notes due 2006, redeem $20.0 million of our parent's 13.0% Senior Discount Notes due 2006, and pay all related fees, expenses and redemption premiums with respect to these transactions. Total shareholder's equity decreased $9.8 million to $57.9 million from $67.7 million due to our $20 million dividend payment to our parent company associated with the redemption of $20.0 million of our parent's 13.0% Senior Discount Notes due 2006 on November 13, 2003, offset by net income for the nine months ended March 31, 2004 and foreign translation adjustments. Our parent company, Dollar Financial Corp., has filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of common stock. In addition to the proposed sale of common stock by the company, certain stockholders intend to sell common stock in the offering and intend to grant the underwriters an option to purchase common stock to cover over-allotments. The company will not receive any proceeds from the sale of shares by the selling stockholders. A copy of the prospectus relating to these securities may be obtained when available from Citigroup, Brooklyn Army Terminal, 140 58th Street, 8th floor, Brooklyn, NY 11220 (tel: 718-765-6732). A registration statement relating to these securities has been filed with the Securities and Exchange Commission but has not yet become effective. These securities may not be sold and offers to buy may not be accepted prior to the time the registration statement becomes effective. This Form 10-Q shall not constitute an offer to sell or a solicitation of an offer to buy, and there shall not be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. 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. 29 Item 3. 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 March 31, 2004 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. On November 6, 2003, we learned of substantially similar claims asserted on behalf of a purported class of Alberta borrowers by Gareth Young, a former customer of our Canadian subsidiary. The Young action is pending in the Court of Queens Bench of Alberta and seeks an unspecified amount of damages and other relief. On December 23, 2003, we were served with the statement of claim in an action brought in the Ontario Superior Court of Justice by another former customer, Margaret Smith. The allegations and putative class in the Smith action are substantially the same as those in the Mortillaro action. Like the plaintiff in the MacKinnon action referred to below, Mortillaro, Smith and Young have agreed to arbitrate all disputes with us. On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against our Canadian subsidiary and 26 other Canadian lenders on behalf of a purported class of British Columbia residents who, MacKinnon 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 February 3, 2004, our motion to stay the action and to compel arbitration of MacKinnon's claims, as required by his agreement with us, was denied; we are appealing this ruling. We believe we have meritorious defenses to each of these actions and intend to defend them vigorously. Similar class actions have been threatened against us in other provinces of Canada, but we have not been served with the statements of claim in any such actions to date. We believe that any possible claims in these actions, if they are served, will likely be substantially similar to those of the Ontario actions referred to above. 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 our 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. These settlement offers have been accepted by 92% of the members of the putative class. We recorded a charge of $2.8 million related to this matter during fiscal 2003. Woods' 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. 30 In addition to the litigation discussed above, we are involved in routine litigation and administrative proceedings arising in the ordinary course of business. We do not believe that the outcome of any of the matters referred to in the preceding paragraphs will materially affect our financial condition, results of operations or cash flows in future periods. 31 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description of Document 10.1 Employment Agreement, dated as of December 13, 2003, by and among Dollar Financial Group, Inc., Dollar Financial Corp. and Jeffrey Weiss.(1) 10.2 Employment Agreement, dated as of December 13, 2003, by and among Dollar Financial Group, Inc., Dollar Financial Corp. and Donald Gayhardt.(1) 10.3 Employment Agreement, dated as of April 30, 2002, by and between Dollar Financial Group, Inc. and Cameron Hetherington.(2) 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 (1) Incorporated by reference to the amended Registration Statement on Form S-4 filed the Company on January 14, 2004 (File No. 333-111473-02). (2) Incorporated by reference to the Quarterly Report on Form 10-Q filed by Dollar Financial Corp. on April 23, 2004 (File No. 333-111473-02). (b) Reports on Form 8-K On February 4, 2004, we furnished on Form 8-K a press release announcing our earnings for the fiscal quarter ended December 31, 2003. On February 12, 2004, we furnished on Form 8-K a transcript of our February 12, 2004 investor conference call. 32 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: April 23, 2004 *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. EX-31 3 mar04exhibit311.txt EXHIBIT 31.1 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: April 23, 2004 ------------------------- /s/ Jeffrey A. Weiss ----------------------------------- Jeffrey A. Weiss Chairman of the Board of Directors and Chief Executive Officer EX-31 4 mar04exhibit312.txt EXHIBIT 31.2 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: April 23, 2004 ------------------------- /s/ Donald Gayhardt ----------------------------------- Donald Gayhardt President and Chief Financial Officer EX-32 5 mar04exhibit321.txt EXHIBIT 32.1 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 March 31, 2004 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 April 23, 2004 EX-32 6 mar04exhibit322.txt EXHIBIT 32.2 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 March 31, 2004 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 April 23, 2004 -----END PRIVACY-ENHANCED MESSAGE-----