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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 December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the transition period from _____ to _____
Commission file number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-2997911
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1436 LANCASTER AVENUE, SUITE 210
BERWYN, PENNSYLVANIA 19312
(Address of Principal Executive Offices) (Zip Code)
610-296-3400
(Registrant's Telephone Number, Including Area Code)
None
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes__X__ No ____
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date. As of February 14, 2003, 100
shares of the Registrant's common stock, par value $1.00 per share, were
outstanding.
1
DOLLAR FINANCIAL GROUP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 2002
and December 31, 2002 (unaudited)........................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three and Six
Months Ended December 31, 2001 and 2002..................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 2001 and 2002............................................................ 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 17
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 25
Item 4. Controls and Procedures..................................................................... 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 26
Item 2. Changes in Securities and Use of Proceeds................................................... 26
Item 3. Defaults Upon Senior Securities............................................................. 26
Item 4. Submission of Matters to a Vote of Security Holders......................................... 26
Item 5. Other Information........................................................................... 26
Item 6. Exhibits and Reports on Form 8-K............................................................ 26
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, December 31,
2002 2002
---------------- -----------------
ASSETS (unaudited)
Cash and cash equivalents................................................... $ 86,633 $ 63,627
Loans and other receivables, net of reserve of $2,862 and $2,388............ 20,542 20,813
Loans receivable pledged.................................................... - 8,000
Income taxes receivable..................................................... - 4,339
Prepaid expenses .......................................................... 6,745 6,185
Notes receivable - officers................................................. 2,756 2,756
Due from parent ........................................................... 3,606 4,139
Property and equipment, net of accumulated depreciation
of $30,119 and $33,819................................................. 30,510 27,614
Goodwill and other intangibles, net of accumulated
amortization of $21,070 and $21,137..................................... 132,264 134,341
Debt issuance costs, net of accumulated amortization of
$6,153 and $7,039...................................................... 6,292 6,099
Other....................................................................... 1,964 1,713
--------------- ---------------
$ 291,312 $ 279,626
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable .......................................................... $ 18,249 $ 11,178
Income taxes payable........................................................ 1,831 -
Accrued expenses............................................................ 7,932 12,443
Accrued interest payable.................................................... 1,539 1,740
Deferred tax liability...................................................... 55 1,101
Revolving credit facilities................................................. 78,936 60,963
10-7/8 % Senior Notes due 2006.............................................. 109,190 109,190
Other collateralized borrowings............................................. - 8,000
Subordinated notes payable and other........................................ 20,065 20,277
Shareholder's equity:
Common stock, $1 par value: 20,000 shares
authorized; 100 shares issued and outstanding at
June 30, 2002 and December 31, 2002..................................... - -
Additional paid-in capital.................................................. 50,957 50,957
Retained earnings........................................................... 6,903 7,464
Accumulated other comprehensive loss........................................ (4,345) (3,687)
----------------- -----------------
Total shareholder's equity.............................................. 53,515 54,734
----------------- -----------------
$ 291,312 $ 279,626
================= =================
See notes to interim unaudited consolidated financial statements.
3
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------------
2001 2002 2001 2002
------------ ------------ ------------ -------------
Revenues ....................................................... $ 51,078 $ 53,290 $ 100,301 $ 105,943
Store and regional expenses:
Salaries and benefits........................................ 16,348 17,281 31,392 34,428
Occupancy.................................................... 4,521 4,673 9,146 9,472
Depreciation................................................. 1,550 1,624 3,032 3,243
Other........................................................ 12,318 12,161 24,298 25,018
------------ ------------ ------------ -------------
Total store and regional expenses............................... 34,737 35,739 67,868 72,161
Corporate expenses.............................................. 5,212 7,738 10,942 14,986
Loss on store closings and sales and other restructuring........ 91 1,802 179 2,290
Other depreciation and amortization............................. 542 845 1,079 1,688
Interest expense (net of interest income of $53, $46, $149
and $88) ..................................................... 4,635 4,893 9,389 9,824
Establishment of reserve for legal matter....................... - 2,500 - 2,500
------------ ------------ ------------ -------------
Income (loss) before income
taxes........................................................... 5,861 (227) 10,844 2,494
Income tax provision............................................ 3,693 23 6,832 1,933
------------ ------------ ------------ -------------
Net income (loss)............................................... $ 2,168 $ (250) $ 4,012 $ 561
============ ============ ============ =============
See notes to interim unaudited consolidated financial statements.
4
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
December 31,
-------------------------------------
2001 2002
---------------- --------------
Cash flows from operating activities:
Net income....................................................................... $ 4,012 $ 561
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization.............................................. 4,843 5,817
Establishment of reserve for legal matter................................... - 2,500
Loss on store closings and sales and other restructuring.................... 179 2,290
Deferred tax provision..................................................... 1,352 1,046
Change in assets and liabilities (net of effect of acquisitions):
Increase in loans and other
receivables........................................................... (3,199) (8,022)
Increase in income taxes receivable..................................... - (6,193)
Decrease in prepaid expenses and other.................................. 348 940
Decrease in accounts payable, income taxes payable,
accrued expenses and accrued interest payable......................... (7,170) (6,031)
---------------- --------------
Net cash provided by (used in) operating activities.............................. 365 (7,092)
Cash flows from investing activities:
Acquisitions, net of cash acquired............................................. (163) (1,261)
Additions to property and equipment............................................ (4,428) (3,130)
---------------- --------------
Net cash used in investing activities............................................ (4,591) (4,391)
Cash flows from financing activities:
Other debt (payments) borrowings .............................................. (53) 8,008
Net increase (decrease) in revolving credit facilities......................... 3,406 (17,973)
Payment of debt issuance costs................................................. - (688)
Net increase in due from parent................................................ (531) (533)
---------------- --------------
Net cash provided by (used in) financing activities.............................. 2,822 (11,186)
Effect of exchange rate changes on cash and cash equivalents..................... (766) (337)
---------------- --------------
Net decrease in cash and cash equivalents........................................ (2,170) (23,006)
Cash and cash equivalents at beginning of period................................. 72,452 86,633
---------------- --------------
Cash and cash equivalents at end of period....................................... $ 70,282 $ 63,627
================ ==============
See notes to interim unaudited consolidated financial statements.
5
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of
Dollar Financial Group, Inc. (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements and should be read in conjunction with the
Company's audited consolidated financial statements in its Annual Report on Form
10-K for the fiscal year ended June 30, 2002 filed with the Securities and
Exchange Commission. In the opinion of management, all adjustments, (consisting
of normal recurring adjustments and certain other items described below),
considered necessary for a fair presentation have been included. Operating
results of interim periods are not necessarily indicative of the results that
may be expected for a full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Operations
Dollar Financial Group, Inc., organized in 1979 under the laws of the State
of New York, is a wholly owned subsidiary of DFG Holdings, Inc. ("Holdings").
The activities of Holdings consist primarily of its investment in the Company
and additional third party debt. Holdings has no employees or operating
activities as of December 31, 2002. The Company, through its subsidiaries,
provides retail financial services to the general public through a network of
1,083 locations (of which 619 are Company owned) operating as Money Mart(R), The
Money Shop and Loan Mart(R) in seventeen states, the District of Columbia,
Canada and the United Kingdom. The services provided at the Company's retail
locations include check cashing, short-term consumer loans, sale of money
orders, money transfer services and various other related services. Also, the
Company's subsidiary, Money Mart(R) Express (formerly known as
moneymart.com(TM)), services and originates short-term consumer loans through
329 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 the 10 7/8% Senior Notes due
November 2006 ("Senior Notes") and Senior Subordinated Notes due 2006 ("Senior
Subordinated Notes") are jointly and severally guaranteed on a full and
unconditional basis by all of the Company's existing and future subsidiaries
(the "Guarantors"). The subsidiaries' guarantee rank pari passu in right of
payment with all existing and future senior indebtedness of the Guarantors,
including the obligations of the Guarantors under the Company's Revolving Credit
Facility and any successor credit facilities. Pursuant to the Senior Notes or
Senior Subordinated Notes, every direct and indirect wholly owned subsidiary of
the Company, each of which is wholly-owned, serves as a guarantor of the Senior
Notes and Senior Subordinated Notes.
There are no restrictions on the Company's and the Guarantors' ability to
obtain funds from their subsidiaries by dividend or by loan. Separate financial
statements of each Guarantor have not been presented because management has
determined that they would not be material to investors. The accompanying tables
set forth the condensed consolidating balance sheet at December 31, 2002, and
the consolidating statements of operations and cash flows for the six month
period ended December 31, 2002 of the Company (on a parent-company basis),
combined domestic Guarantors, combined foreign subsidiaries and the consolidated
Company.
7
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING BALANCE SHEETS
December 31, 2002
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------ ------------- ------------- --------------- ------------
ASSETS
Cash and cash equivalents...................... $ 8,123 $ 27,182 $ 28,322 $ - $ 63,627
Loans and other receivables, net............... 9,113 4,310 7,551 (161) 20,813
Loans receivable pledged....................... - - 8,000 - 8,000
Income taxes receivable........................ 13,854 - 647 (10,162) 4,339
Prepaid expenses............................... 944 1,814 3,427 - 6,185
Deferred income taxes.......................... 936 - - (936) -
Notes receivable-officers...................... 2,756 - - - 2,756
Due from affiliates............................ - 63,114 - (63,114) -
Due from parent................................ 4,139 - - - 4,139
Property and equipment, net.................... 6,513 9,281 11,820 - 27,614
Goodwill and other intangibles, net............ 114 56,343 77,884 - 134,341
Debt issuance costs, net....................... 5,894 - 205 - 6,099
Investment in subsidiaries..................... 198,752 9,801 6,705 (215,258) -
Other.......................................... 249 599 865 - 1,713
------------ ------------- ------------- --------------- -------------
$ 251,387 $ 172,444 $ 145,426 $ (289,631) $ 279,626
============ ============= ============= =============== =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable............................... $ 27 $ 6,439 $ 4,712 $ - $ 11,178
Income taxes payable........................... - 10,162 - (10,162) -
Accrued expenses............................... 3,230 4,667 4,546 - 12,443
Accrued interest payable....................... 1,537 - 364 (161) 1,740
Deferred tax liability......................... - 2,037 - (936) 1,101
Due to affiliates.............................. 3,880 - 59,234 (63,114) -
Revolving credit facilities.................... 58,464 - 2,499 - 60,963
10-7/8% Senior Notes due 2006.................. 109,190 - - - 109,190
Other collateralized borrowings................ - - 8,000 - 8,000
Subordinated notes payable and other........... 20,000 - 277 - 20,277
------------ ------------- ------------- ------------- -------------
196,328 23,305 79,632 (74,373) 224,892
Shareholder's equity:
Common stock.................................... - - - - -
Additional paid-in capital...................... 50,957 85,524 27,304 (112,828) 50,597
Retained earnings............................... 7,464 63,001 39,429 (102,430) 7,464
Accumulated other comprehensive (loss)
income....................................... (3,362) 614 (939) - (3,687)
------------ ------------- ------------- --------------- -------------
Total shareholder's equity...................... 55,059 149,139 65,794 (215,258) 54,734
------------ ------------- ------------- --------------- -------------
$ 251,387 $ 172,444 $ 145,426 $ (289,631) $ 279,626
============ ============= ============= =============== =============
8
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF OPERATIONS
Six Months Ended December 31, 2002
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------ ------------ ----------- ----------- ------------
Revenues............................................. $ - $ 52,774 $ 53,169 $ - $ 105,943
Store and regional expenses:
Salaries and benefits............................. - 20,997 13,431 - 34,428
Occupancy......................................... - 5,717 3,755 - 9,472
Depreciation...................................... - 1,650 1,593 - 3,243
Other............................................. - 15,656 9,362 - 25,018
------------ ------------ ----------- ----------- ------------
Total store and regional expenses.................... - 44,020 28,141 - 72,161
Corporate expenses................................... 9,215 67 5,704 - 14,986
Management fees...................................... (4,992) 4,570 422 - -
Loss on store closings and sales and other
restructuring........................................ 100 2,093 97 - 2,290
Other depreciation and amortization.................. 978 31 679 - 1,688
Interest expense (income)............................ 8,398 2,117 (691) - 9,824
Establishment of reserve for legal matter............ - 2,500 - - 2,500
------------ ------------ ----------- ----------- ------------
(Loss) income before income taxes ................... (13,699) (2,624) 18,817 - 2,494
Income tax (benefit) provision ...................... (5,166) 1,748 5,351 - 1,933
------------ ------------ ----------- ----------- ------------
(Loss) income before equity in net (loss) income
of subsidiaries................................. (8,533) (4,372) 13,466 - 561
Equity in net (loss) income of subsidiaries:
Domestic subsidiary guarantors....................... (4,372) - - 4,372 -
Foreign subsidiary guarantors........................ 13,466 - - (13,466) -
------------ ------------ ----------- ----------- ------------
Net income (loss).................................... $ 561 $ (4,372) $ 13,466 $ (9,094) $ 561
============ ============ =========== =========== ============
9
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENTS OF CASH FLOWS
Six Months Ended December 31, 2002
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group,Inc. Guarantors Guarantors Eliminations Consolidated
----------- ----------- ------------ ------------ -------------
Cash flows from operating activities:
Net income (loss) .................................. $ 561 $ (4,372) $ 13,466 $ (9,094) $ 561
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Undistributed income of subsidiaries.......... (9,094) - - 9,094 -
Depreciation and amortization................. 1,864 1,679 2,274 - 5,817
Establishment of reserve for legal matter.... - 2,500 - - 2,500
Loss on store closings and sales and other
restructuring............................... 100 2,093 97 - 2,290
Deferred tax provision........................ 230 816 - - 1,046
Change in assets and liabilities (net of
effect of
acquisitions):
(Increase) decrease in loans and other
receivables................................. (5,352) 3,080 (1,338) (4,412) (8,022)
Increase in income taxes receivable.......... (5,398) - (647) (148) (6,193)
(Increase) decrease in prepaid expenses and
other....................................... (237) 100 1,077 - 940
(Decrease) increase in accounts payable, income
taxes payable, accrued expenses, accrued
interest payable.............................. (1,816) 59 (8,834) 4,560 (6,031)
----------- ----------- ------------ ------------ -----------
Net cash (used in) provided by operating activities.. (19,142) 5,955 6,095 - (7,092)
Cash flows from investing activities:
Acquisitions, net of cash acquired.............. - - (1,261) - (1,261)
Additions to property and equipment............. (482) (465) (2,183) - (3,130)
Net increase in due from affiliates............. - (19,713) - 19,713 -
----------- ----------- ------------ ------------ ------------
Net cash used in investing activities................ (482) (20,178) (3,444) 19,713 (4,391)
Cash flows from financing activities:
Other debt borrowings........................... - - 8,008 - 8,008
Net decrease in revolving credit facilities..... (10,136) - (7,837) - (17,973)
Payment of debt issuance costs.................. (488) - (200) - (688)
Net increase in due from parent................. (533) - - - (533)
Net increase (decrease) in due to affiliates.... 37,158 - (17,445) (19,713) -
----------- ----------- ------------ ------------ -----------
Net cash provided by (used in) financing activities.. 26,001 - (17,474) (19,713) (11,186)
Effect of exchange rate changes on cash and cash
equivalents..................................... - - (337) - (337)
----------- ----------- ------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents. 6,377 (14,223) (15,160) - (23,006)
Cash and cash equivalents at beginning of period..... 1,746 41,405 43,482 - 86,633
----------- ----------- ------------ ------------ -----------
Cash and cash equivalents at end of period........... $ 8,123 $ 27,182 $ 28,322 $ - $ 63,627
=========== =========== ============ ============ ============
10
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
3. GOODWILL AND OTHER INTANGIBLES
In accordance with the adoption provisions of SFAS No. 142, the Company is
required to perform goodwill impairment tests on at least an annual basis. There
can be no assurance that future goodwill impairment tests will not result in a
charge to earnings. The Company has covenants not to compete, which are deemed
to have a definite life and will continue to be amortized. Amortization for
these intangibles for the six months ended December 31, 2002 was $86,000. The
estimated aggregate amortization expense for each of the five succeeding fiscal
years ending June 30, is:
Year Amount
---- --------
2003 $ 173,000
2004 95,000
2005 19,000
2006 -
2007 -
The following table reflects the components of intangible assets as of
December 31, 2002 (in thousands):
June 30, 2002 December 31, 2002
--------------------------------------- ---------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------------------ ---------------- ------------------ ----------------
Non-amortized intangible assets
Cost in excess of net assets acquired $ 150,954 $ 18,977 $ 153,117 $ 18,977
Amortized intangible assets:
Covenants not to compete 2,380 2,093 2,361 2,160
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 Six Months Ended
December 31, December 31,
---------------------------------- ----------------------------------
2001 2002 2001 2002
-------------- ---------------- ------------- -------------
Net income (loss) $ 2,168 $ (250) $ 4,012 $ 561
Foreign currency translation adjustment (1,360) 2,054 (2,471) 658
-------------- ---------------- ------------- -------------
Total comprehensive income $ 808 $ 1,804 $ 1,541 $ 1,219
============== ================ ============= =============
11
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
5. GEOGRAPHIC SEGMENT INFORMATION
All operations for which geographic data is presented below are in one
principal industry (check cashing and ancillary services) (in thousands):
United United
States Canada Kingdom Total
----------------- ------------- -------------- ---------------
As of and for the three months
ended December 31, 2001
Identifiable assets $ 148,700 $ 68,574 $ 58,858 $ 276,132
Sales to unaffiliated customers 29,020 13,517 8,541 51,078
Income before income taxes 686 3,879 1,296 5,861
Income tax provision 2,238 1,329 126 3,693
Net (loss) income (1,552) 2,550 1,170 2,168
For the six months
ended December 31, 2001
Sales to unaffiliated customers $ 56,284 $ 27,018 $ 16,999 $ 100,301
Income before income taxes 520 7,961 2,363 10,844
Income tax provision 3,835 2,688 309 6,832
Net (loss) income (3,315) 5,273 2,054 4,012
As of and for the three months
ended December 31, 2002
Identifiable assets $ 140,905 $ 69,688 $ 69,033 $ 279,626
Sales to unaffiliated customers 26,694 16,085 10,511 53,290
(Loss) income before income taxes (7,492) 5,156 2,109 (227)
Income tax (benefit) provision (924) 308 639 23
Net (loss) income (6,568) 4,848 1,470 (250)
For the six months
ended December 31, 2002
Sales to unaffiliated customers $ 52,774 $ 32,459 $ 20,710 $ 105,943
(Loss) income before income taxes (16,323) 14,977 3,840 2,494
Income tax (benefit) provision (3,418) 4,190 1,161 1,933
Net (loss) income (12,905) 10,787 2,679 561
12
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
6. PENDING ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. As the provisions of
SFAS No. 146 are required to be applied prospectively after the adoption date,
management cannot determine the potential effects that adoption of SFAS No. 146
will have on the Company's consolidated financial statements.
7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In fiscal year 2002, put options were purchased to protect quarterly
earnings in the United Kingdom and Canada against foreign exchange fluctuations.
The Company's revolving credit facility and overdraft credit facilities
carry a variable rate of interest. Precautions have been taken should variable
rates of interest fluctuate. An interest rate cap with a notional value of $20
million has been purchased to protect the Company against increases in interest
rates. As most of the Company's average outstanding indebtedness carries a fixed
rate of interest, a change in interest rates is not expected to have a material
impact on the consolidated financial position, results of operations or cash
flows of the Company.
8. CONTINGENT LIABILITIES
In August 2000, a former employee instituted an action against the Company
in the Superior Court of California, purportedly on behalf of a class of current
and former salaried managers of the Company's California stores. The complaint
alleges that the putative class was misclassified as "exempt" for wage-and-hour
purposes and that they worked uncompensated hours since 1996 for which they were
entitled to receive overtime compensation. The relief sought includes damages,
interest and attorneys' fees. The Company's motion to compel arbitration of the
claim was granted, and the Company has been defending the arbitration of the
claim. No class has been certified in the arbitration, and the determination of
whether the claim may proceed on a class basis is not expected to be made until
fiscal 2004. In mid-January 2003, the Company offered to each individual member
of the putative class an amount intended in good faith to settle the claims of
such individuals. The Company accrued $2.5 million at December 31, 2002 related
to this matter. Management of the Company believes that a substantial majority
of these settlement offers will be accepted. It is presently undetermined
whether the unsettled claims of any remaining putative class members will
proceed in class form or otherwise. The Company believes it has meritorious
defenses to such unsettled claims and plans to defend them vigorously. The
Company believes it has adequately provided for the costs associated with this
matter.
On January 29, 2003, an action was commenced by a former customer of the
Company against the Company's Canadian subsidiary and 24 other Canadian lenders
on behalf of a purported class of British Columbia residents who, plaintiff
claims, were overcharged in payday-loan transactions. The action, which is
pending in the Supreme Court of British Columbia, alleges violations of laws
proscribing usury and unconscionable trade practices and seeks restitution and
damages, including punitive damages, in an unknown amount. The Company believes
it has meritorious defenses to the action and has engaged counsel to defend the
action, which it intends to do vigorously. The action is at its earliest stages,
and management of the Company is presently unable to evaluate the likelihood of
any particular outcome at this date.
The Company is involved in routine litigation and administrative
proceedings arising in the ordinary course of business. In the opinion of
management, the outcome of such litigation and proceedings will not materially
affect the Company's Consolidated Financial Statements.
13
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
9. LOSS ON STORE CLOSINGS AND SALES AND OTHER RESTRUCTURING
For the six months ended December 31, 2002, the Company provided $1.3
million for the closure costs associated with the shut down of 27
underperforming stores. In addition, the Company provided $400,000, consisting
primarily of severance and retention bonus costs, for the consolidation and
relocation of certain non-operating functions.
10. DEBT OBLIGATIONS
On November 15, 2002 the Company entered into a Participation and Servicing
Agreement ("Agreement") with a third party to sell, without recourse subject to
certain obligations, a participation interest in a portion of short-term
consumer loans originated by the Company in the United Kingdom. The transfer of
assets is treated as a financing under FAS 140 and is included in Other
Collateralized Borrowings on the balance sheet. The Agreement gives the third
party a first priority lien, charge, and security interest in the assets
pledged. The Agreement provides for collateralized borrowings up to $10.0
million of which $8.0 million of the loans receivable had been pledged at
December 31, 2002. Under the Agreement, the third party retains the right to
reduce the amount of borrowings to no less than $4.0 million. The Company pays
an annual interest rate of 15.6% on the amount borrowed which is subject to loss
rates on the related loans and can increase to a maximum of 32.4% per annum. The
Agreement expires on September 30, 2003, however the term of the Agreement is
automatically renewed each year for a term of twelve months, unless either party
terminates it.
14
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
SUPPLEMENTAL STATISTICAL DATA
December 31,
Company Operating Data: 2001 2002
------------- -------------
Stores in operation:
Company-Owned................................. 648 619
Franchised Stores and Check Cashing Merchants. 356 464
--- ---
Total............................................ 1,004 1,083
===== =====
- ---------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
Operating Data: 2001 2002 2001 2002
------------ ----------- ----------- -------------
Face amount of checks cashed (in millions).................... $ 723 $ 752 $ 1,444 $ 1,515
Face amount of average check.................................. $ 333 $ 352 $ 332 $ 356
Face amount of average check (excluding Canada and the United
Kingdom)................................................... $ 354 $ 413 $ 353 $ 407
Average fee per check......................................... $ 11.71 $ 12.40 $ 11.63 $ 12.45
Number of checks cashed (in thousands)........................ 2,168 2,138 4,344 4,253
Adjusted EBITDA (in thousands)1............................... $ 12,837 $ 11,431 $ 25,184 $ 22,135
Adjusted EBITDA Margin1....................................... 25.1% 21.5% 25.1% 20.9%
- --------------------------------------------------------------- ---------------------------- -- ----------------------------
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
Collections Data: 2001 2002 2001 2002
------------ ----------- ----------- -------------
Face amount of returned checks (in thousands)................. $ 7,630 $ 6,408 $ 15,459 $ 13,277
Collections (in thousands).................................... 5,162 4,871 10,946 9,814
----------- ----------- ----------- ------------
Net write-offs (in thousands)................................. $ 2,468 $ 1,537 $ 4,513 $ 3,463
=========== =========== =========== ============
Collections as a percentage of
returned checks............................................ 67.6% 75.9% 70.8% 73.8%
Net write-offs as a percentage of
check cashing revenues..................................... 9.7% 5.8% 8.9% 6.5%
Net write-offs as a percentage of the
face amount of checks cashed............................... 0.34% 0.20% 0.31% 0.23%
- ------------------------------------------------------------------------------------------------------------------------------
The following chart presents a summary of the Company's consumer lending
revenues for the periods indicated below:
Consumer Lending Revenue
(In thousands)
--------------------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- -----------------------------
2001 2002 2001 2002
------------- ------------ ------------ -------------
Servicing revenues.......................................... $ 13,163 $ 8,825 $ 24,985 $ 17,008
Company originated domestic revenues........................ 545 3,855 865 7,335
Company originated foreign revenues......................... 5,274 7,231 10,350 14,503
------------- ------------ ------------ -------------
Total consumer lending revenues, net........................ $ 18,982 $ 19,911 $ 36,200 $ 38,846
============= ============ ============ =============
15
1Adjusted EBITDA is earnings before interest, income taxes, depreciation,
amortization, establishment of reserve for legal matter, foreign currency loss
(gain), and loss on store closings and sales and other restructuring. Adjusted
EBITDA does not represent cash flows as defined by accounting principles
generally accepted in the United States and does not necessarily indicate that
cash flows are sufficient to fund all of the Company's cash needs. Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
cash flows from operating activities, or other measures of liquidity determined
in accordance with accounting principles generally accepted in the United
States. The Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of
revenues. Management believes that these ratios should be reviewed by
prospective investors because the Company uses them as one means of analyzing
its ability to service its debt, and the Company understands that they are used
by certain investors as one measure of a company's historical ability to service
its debt. Not all companies calculate EBITDA in the same fashion, and therefore
these ratios as presented may not be comparable to other similarly titled
measures of other companies. The table below reconciles net income (loss) as
reported on the Statement of Operations to Adjusted EBITDA:
Three months ended Six Months Ended
December 31, December 31,
---------------------------- ---------------------------
2001 2002 2001 2002
------------ ----------- ----------- ------------
Net income (loss) $ 2,168 $ (250) $ 4,012 $ 561
Add:
Loss on store closings and sales and other
restructuring 91 1,802 179 2,290
Depreciation and amortization 2,093 2,469 4,112 4,931
Interest expense 4,635 4,893 9,389 9,824
Foreign currency loss (gain) 157 (6) 660 96
Income tax provision 3,693 23 6,832 1,933
Establishment of reserve for legal matter - 2,500 - 2,500
---------------------------- ---------------------------
Adjusted EBITDA $ 12,837 $ 11,431 $ 25,184 $ 22,135
============================ ===========================
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company is a consumer financial services company operating the second
largest check cashing store network in the United States and the largest such
network in Canada and the United Kingdom. The Company provides a diverse range
of consumer financial products and services primarily consisting of check
cashing, short-term consumer loans, money orders, money transfers and various
other related services.
The Company, in its opinion, has included all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of its financial
position at December 31, 2002 and the results of operations for the three and
six months ended December 31, 2002 and 2001. The results for the three and six
months ended December 31, 2002 are not necessarily indicative of the results for
the full fiscal year and should be read in conjunction with the Company's
unaudited financial statements and its Annual Report on Form 10-K for the fiscal
year ended June 30, 2002.
Critical Accounting Principles and Estimates
In response to the SEC's Release numbers 33-8040 "Cautionary Advice
Regarding Disclosure About Critical Accounting Policies" and 33-8056,
"Commission Statement about Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company has identified the following
critical accounting policies that affect the more significant judgments and
estimates used in the preparation of its financial statements. The preparation
of the Company's financial statements in conformity with accounting principles
generally accepted in the United States of America requires the Company to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets
and liabilities. On an ongoing basis, the Company evaluates these estimates,
including those related to revenue recognition, loss reserves, intangible assets
and income taxes. The Company states these accounting policies in the notes to
the financial statements and at relevant sections in this discussion and
analysis. The estimates are based on the information that is currently available
to the Company and on various other assumptions that management believes to be
reasonable under the circumstances. Actual results could vary from those
estimates under different assumptions or conditions.
The Company believes that the following critical accounting policies affect
the more significant judgments and estimates used in the preparation of its
financial statements:
Revenue Recognition
Revenue generally is recognized when services for the customer have been
provided which, in the case of check cashing and other retail products, is at
the point of sale. For the Cash 'Til Payday(R) unsecured short-term loan
service, all revenues are recognized ratably over the life of the loan offset by
net writeoffs.
Loss Reserves
The Company acts as a servicer for County Bank of Rehoboth Beach, Delaware
("County Bank") and effective October 18, 2002, First Bank of Delaware ("First
Bank"), marketing unsecured short-term loans to customers with established bank
accounts and verifiable employment. Loans are made for amounts up to $500, with
terms of 7 to 23 days. Under this program, the Company earns servicing fees
which are subject to reduction if the related loans are not collected. The
Company maintains a reserve for these estimated reductions. In addition, the
Company maintains a reserve for anticipated losses for loans it makes directly.
In order to estimate the appropriate level of these reserves, the Company
analyzes the amount of outstanding loans owed to the Company, as well as loans
owed to banks and serviced by the Company, the historical loans charged-off,
current collection patterns and current economic trends. As these conditions
change, additional allowances might be required in future periods.
Intangible Assets
The Company has significant intangible assets on its balance sheet that
include goodwill and other intangibles related to acquisitions. The valuation
and classification of these assets and the assignment of useful amortization
lives involves significant judgments and the use of estimates. The testing of
these intangibles under established accounting guidelines for impairment also
requires significant use of judgment and assumptions. The Company's assets are
tested and reviewed for impairment on an ongoing basis under the established
accounting guidelines. Changes in business conditions could potentially require
future adjustments to asset valuations.
17
Income Taxes
As part of the process of preparing its consolidated financial statements
the Company is required to estimate its income taxes in each of the
jurisdictions in which it operates. 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 the Company believes that recovery is not likely, it
must establish a valuation allowance.
RESULTS OF OPERATIONS
Revenue Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------------- -------------------- ----------------------- --------------------
2001 2002 2001 2002 2001 2002 2001 2002
---------- ----------- ------- -------- --------- ---------- -------- --------
Check cashing............... $ 25,388 $ 26,520 49.7% 49.8% $ 50,512 $ 52,974 50.4% 50.0%
Consumer lending revenues,net 18,982 19,911 37.2 37.4 36,200 38,846 36.1 36.7
Money transfer fees......... 2,494 2,676 4.9 5.0 4,954 5,464 4.9 5.1
Government services......... 455 413 0.9 0.8 862 848 0.9 0.8
Other revenue............... 3,759 3,770 7.3 7.0 7,773 7,811 7.7 7.4
---------- ----------- ------- -------- --------- ---------- -------- --------
Total revenue............... $ 51,078 $ 53,290 100.0% 100.0% $100,301 $ 105,943 100.0% 100.0%
========== =========== ======= ======== ========= ========== ======== ========
QUARTER COMPARISON
Total revenues were $53.3 million for the three months ended December 31,
2002 compared to $51.1 million for the three months ended December 31, 2001, an
increase of $2.2 million or 4.3%. Comparable retail store, franchised store and
document transmitter sales for the entire period increased $2.3 million or 4.6%
New store openings accounted for an increase of $700,000 while closed stores
accounted for a decrease of $800,000.
SIX MONTH COMPARISON
Total revenues were $105.9 million for the six months ended December 31,
2002 compared to $100.3 million for the six months ended December 31, 2001, an
increase of $5.6 million or 5.6%. Comparable store, franchised store and
document transmitter sales for the entire period increased $4.5 million or 4.6%
New store openings accounted for an increase of $2.2 million while closed stores
accounted for a decrease of $1.1 million.
18
Store and Regional Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------------ -------------------- ------------------------ ------------------
2001 2002 2001 2002 2001 2002 2001 2002
---------- ---------- ------- -------- ---------- ---------- -------- ------
Salaries and benefits......... $ 16,348 $ 17,281 32.0% 32.4% $ 31,392 $ 34,428 31.3% 32.5%
Occupancy..................... 4,521 4,673 8.9 8.8 9,146 9,472 9.1 8.9
Depreciation.................. 1,550 1,624 3.0 3.0 3,032 3,243 3.0 3.1
Other ........................ 12,318 12,161 24.1 22.8 24,298 25,018 24.2 23.6
---------- ---------- ------- -------- ---------- ---------- -------- ------
Total store and regional
expenses $ 34,737 $ 35,739 68.0% 67.0% $ 67,868 $ 72,161 67.6% 68.1%
========== ========== ======= ======== ========== ========== ======== ======
QUARTER COMPARISON
Store and regional expenses were $35.7 million for the three months ended
December 31, 2002 compared to $34.7 million for the three months ended December
31, 2001, an increase of $1.0 million or 2.9%. New store openings accounted for
an increase of $400,000 while closed stores accounted for a decrease of
$700,000. Comparable retail store and franchised store expenses for the entire
period increased $1.2 million. For the three months ended December 31, 2002
total store and regional expenses decreased to 67.0% of total revenue compared
to 68.0% of total revenue for the three months ended December 31, 2001.
SIX MONTH COMPARISON
Store and regional expenses were $72.2 million for the six months ended
December 31, 2002 compared to $67.9 million for the six months ended December
31, 2001, an increase of $4.3 million or 6.3%. New store openings accounted for
an increase of $900,000 while closed stores accounted for a decrease of $1.1
million. Comparable retail store and franchised store expenses for the entire
period increased $3.1 million primarily related to foreign operations
commensurate with the increase in foreign revenues. In addition, costs
associated with Money Mart(R) Express' independent transmitters increased $1.4
million due to growth in that business. For the six months ended December 31,
2002 total store and regional expenses increased to 68.1% of total revenue
compared to 67.6% of total revenue for the six months ended December 31, 2001.
19
Other Expense Analysis
Three Months Ended December 31, Six Months Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
---------------------- ------------------- ----------------------- -----------------
2001 2002 2001 2002 2001 2002 2001 2002
------- ------- ------- ------- ------- ------- ------- ------
Corporate expenses................ $ 5,212 $ 7,738 10.2% 14.5% $ 10,942 $ 14,986 10.9% 14.1%
Loss on store closings and sales
and other restructuring............. 91 1,802 0.2 3.4 179 2,290 0.2 2.2
Other depreciation and amortization 542 845 1.1 1.6 1,079 1,688 1.1 1.6
Interest expense .................. 4,635 4,893 9.1 9.2 9,389 9,824 9.4 9.3
Establishment of reserve for legal
matter............................. - 2,500 0.0 4.7 - 2,500 0.0 2.4
Income tax provision............... 3,693 23 7.2 0.0 6,832 1,933 6.8 1.8
QUARTER COMPARISON
Corporate Expenses
Corporate expenses were $7.7 million for the three months ended December
31, 2002 compared to $5.2 million for the three months ended December 31, 2001,
an increase of $2.5 million or 48.1%. The increase was due to costs associated
with the implementation of enhanced transaction processing systems, the
establishment of new business development strategies, professional fees
associated with the Company's new banking relationship for its consumer lending
product and increased salaries and benefits associated with the growth of
foreign operations.
Loss on store closings and sales and other restructuring
Loss on store closings and sales and other restructuring was $1.8 million
for the three months ended December 31, 2002 compared to $100,000 for the three
months ended December 31, 2001, and increase of $1.3 million. For the three
months ended December 31, 2002, the Company provided for the closure costs
associated with the shutdown of 27 underperforming stores. In addition, the
Company provided $400,000, consisting primarily of severance and retention bonus
costs, for the consolidation and relocation of certain non-operating functions.
Interest Expense
Interest expense was $4.9 million for the three months ended December 31,
2002 and was $4.6 million for the three months ended December 31, 2001, an
increase of $300,000 or 6.5%. This increase is attributable to the increase in
the average borrowings of the Company's revolving credit facilities which fund
acquisitions, purchases of property and equipment related to existing stores,
recently acquired stores and investments in technology and an increase in
interest rate as a result of November 2002 amendment of the Company's Revolving
Credit Facility.
Establishment of reserve for legal matter
In August 2000, a former employee instituted an action against the Company
in the Superior Court of California, purportedly on behalf of a class of current
and former salaried managers of the Company's California stores. The complaint
alleges that the putative class was misclassified as "exempt" for wage-and-hour
purposes and that they worked uncompensated hours since 1996 for which they were
entitled to receive overtime compensation. The relief sought includes damages,
interest and attorneys' fees. The Company's motion to compel arbitration of the
claim was granted, and the Company has been defending the arbitration of the
claim. No class has been certified in the arbitration, and the determination of
whether the claim may proceed on a class basis is not expected to be made until
fiscal 2004. In mid-January 2003, the Company offered to each individual member
of the putative class an amount intended in good faith to settle the claims of
such individuals. The Company accrued $2.5 million at December 31, 2002 related
to this matter. Management of the Company believes that a substantial majority
of these settlement offers will be accepted. It is presently undetermined
whether the unsettled claims of any remaining putative class members will
proceed in class form or otherwise. The Company believes it has meritorious
defenses to such unsettled claims and plans to defend them vigorously.
20
Income Taxes
The provision for income taxes decreased $3.7 million for the three months
ended December 31, 2002 compared to the three months ended December 31, 2001.
The Company's effective tax rate does not reflect a normal relationship to the
federal statutory rate of 35% for the three months ended December 31, 2002 due
to state and foreign taxes.
SIX MONTH COMPARISON
Corporate Expenses
Corporate expenses were $15.0 million for the six months ended December 31,
2002 compared to $10.9 million for the six months ended December 31, 2001, an
increase of $4.1 million or 37.6%. The increase was due to costs associated with
the implementation of enhanced transaction processing systems, the establishment
of new business development strategies, professional fees associated with the
Company's new banking relationship for its consumer lending product and
increased salaries and benefits associated with the growth of foreign
operations.
Loss on store closings and sales and other restructuring
Loss on store closings and sales and other restructuring was $2.3 million
for the six months ended December 31, 2002 compared to $200,000 for the six
months ended December 31, 2001, an increase of $2.1 million. For the six months
ended December 31, 2002, the Company provided $1.3 million for the closure costs
associated with the shutdown of 27 underperforming stores. In addition, the
Company provided $400,000, consisting primarily of severance and retention bonus
costs, for the consolidation and relocation of certain non-operating functions.
Interest Expense
Interest expense was $9.8 million for the six months ended December 31,
2002 and was $9.4 million for the six months ended December 31, 2001, an
increase of $400,000 or 4.3%. This increase is attributable to the increase in
the average borrowings of the Company's revolving credit facilities which fund
acquisitions, purchases of property and equipment related to existing stores,
recently acquired or opened stores and investments in technology and an increase
in interest rate as a result of November 2002 amendment of the Company's
Revolving Credit Facility.
Establishment of reserve for legal matter
In August 2000, a former employee instituted an action against the Company
in the Superior Court of California, purportedly on behalf of a class of current
and former salaried managers of the Company's California stores. The complaint
alleges that the putative class was misclassified as "exempt" for wage-and-hour
purposes and that they worked uncompensated hours since 1996 for which they were
entitled to receive overtime compensation. The relief sought includes damages,
interest and attorneys' fees. The Company's motion to compel arbitration of the
claim was granted, and the Company has been defending the arbitration of the
claim. No class has been certified in the arbitration, and the determination of
whether the claim may proceed on a class basis is not expected to be made until
fiscal 2004. In mid-January 2003, the Company offered to each individual member
of the putative class an amount intended in good faith to settle the claims of
such individuals. The Company accrued $2.5 million at December 31, 2002 related
to this matter. Management of the Company believes that a substantial majority
of these settlement offers will be accepted. It is presently undetermined
whether the unsettled claims of any remaining putative class members will
proceed in class form or otherwise. The Company believes it has meritorious
defenses to such unsettled claims and plans to defend them vigorously.
Income Taxes
The provision for income taxes was $1.9 million for the six months ended
December 31, 2002 compared to $6.8 million for the six months ended December 31,
2001, a decrease of $4.9 million. The Company's effective tax rate does not
reflect a normal relationship to the federal statutory rate of 35% for the six
months ended December 31, 2002 due to state and foreign taxes.
21
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
six months ended December 31, 2002, cash and cash equivalents decreased $23.0
million. Net cash used in operations was $7.1 million which was primarily a
result of the timing of settlement payments related to the Company's consumer
lending product and an increase in the loans the Company makes directly.
Loans and other receivables increased due to the timing of settlement
payments related to the Company's consumer lending product and an increase in
Company funded unsecured short-term loans, primarily in California. Accounts
payable decreased due to a result of timing of settlement payments with the
Company's retail vendors.
Liquidity and Capital Resources
The Company's principal sources of cash are from operations, borrowings
under its credit facilities and sales of Holdings common stock. The Company
anticipates its principal uses of cash will be to provide working capital,
finance capital expenditures, meet debt service requirements, finance
acquisitions, and finance store expansion. For the six months ended December 31,
2002 and 2001, the Company had net cash (used in) provided by operating
activities of ($7.1) million and $400,000, respectively. The decrease in net
cash provided by operations was primarily the result of increases in loans and
other receivables due to the timing of settlement payments related to the
Company's consumer lending product and an increase in Company funded unsecured
short-term loans, primarily in California. For the six months ended December 31,
2002, the Company had made capital expenditures of $3.1 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. The
Company's budgeted capital expenditures, excluding acquisitions, are currently
anticipated to aggregate approximately $6.8 million during its fiscal year
ending June 30, 2003, for remodeling and relocation of certain existing stores
and for opening new stores.
On November 15, 2002, the Company negotiated and executed the Second
Amendment to the Amended and Restated Credit Agreement and Waiver ("Revolving
Credit Facility"). This agreement modified one of its financial covenants and
modified the pricing of the credit facility. The modified pricing structure
increases the Company's borrowing rate under the facility from interest at
one-day Eurodollar, as defined, plus 3.50% to interest at one-day Eurodollar, as
defined, plus 4.00%.
The Company's borrowing capacity under the Revolving Credit Facility is
limited to the total commitment of $75 million less a letter of credit of $6.0
million issued by Wells Fargo Bank, which secures the United Kingdom overdraft
facility. At December 31, 2002 the Company's borrowing capacity was $69 million.
The restated Revolving Credit Facility also contains a provision for further
reductions of $1.5 million by September 30, 2003 and an additional $1.5 million
by December 31, 2003. Additionally, the restated Revolving Credit Facility
contains provisions for an additional reduction in the facility of $5 million
during the period April 1 to December 14 of any calendar year following November
15, 2002. The borrowings under the Revolving Credit Facility as of December 31,
2002 were $58.5 million. On November 15, 2002, the Company entered into a
Participation and Servicing Agreement with a third party to sell, without
recourse subject to certain obligations, a participation interest in a portion
of short-term consumer loans originated by the Company in the United Kingdom.
Pursuant to the agreement, the Company will retain servicing responsibilities
and earn servicing fees which are subject to reduction if the related loans are
not collected. The transfer of assets is treated as a financing under FAS 140
and is included in "Other collateralized borrowings " on the balance sheet. At
December 31, 2002 the company pledged $8.0 million of loans receivable under
this agreement. The Senior Notes, Senior Subordinated Notes and the Revolving
Credit Facility contain certain financial and other restrictive covenants,
which, among other things, require the Company to achieve certain financial
ratios, limit capital expenditures, restrict payment of dividends, and require
certain approvals in the event the Company wants to increase the borrowings. The
Company also has a Canadian dollar overdraft credit facility to fund peak
working capital needs for its Canadian operation. The overdraft facility
provides for borrowings up to $4.5 million, of which there was a $200,000
outstanding balance as of December 31, 2002. For the Company's United Kingdom
operations, the Company also has a British pound overdraft facility which
provides for a commitment of up to approximately $6.0 million of which there was
$2.3 million outstanding at December 31, 2002.
The Company is highly leveraged, and borrowings under the Revolving Credit
Facility and the overdraft facilities will increase the Company's debt service
requirements. Management believes that, based on current levels of operations
and anticipated improvements in operating results, cash flows from operations
and borrowings available under the Revolving Credit Facility will enable the
Company to fund its liquidity and capital expenditure requirements for the
foreseeable future, including scheduled payments of interest on the Senior Notes
and payment of interest and principal on the Company's other indebtedness. The
Company's belief that it will be able to fund its liquidity and capital
expenditure requirements for the foreseeable future is based
22
upon the historical growth rate of the Company, the anticipated benefits it
expects from operating efficiencies. Additional revenue growth is expected to be
generated by increased check cashing revenues, growth in the consumer lending
loan business, the maturity of recently opened stores and the continued
expansion of new stores. The Company also expects operating expenses to
increase, although the rate of increase is expected to be less than the rate of
revenue growth. Furthermore, the Company does not believe that additional
acquisitions or expansion are necessary in order for it to be able to cover its
fixed expenses, including debt service. There can be no assurance, however, that
the Company's business will generate sufficient cash flow from operations or
that future borrowings will be available under the Revolving Credit Facility in
an amount sufficient to enable the Company to service its indebtedness,
including the Senior Notes, or to make anticipated capital expenditures. It may
be necessary for the Company to refinance all or a portion of its indebtedness
on or prior to maturity, under certain circumstances, but there can be no
assurance that the Company will be able to effect such refinancing on
commercially reasonable terms or at all.
Controls and Procedures
As of December 31, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of December 31, 2002. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to December 31,
2002.
Contractual Obligations
The Company enters into contractual obligations in the normal course of
business as a source of funds for its asset growth and its asset/liability
management, to fund acquisitions, and to meet required capital needs. These
obligations require the Company to make cash payments over time as detailed in
the table below:
Payments Due by Period
-------------------------------------------------------------------------------
Less than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
------------ ------------- ------------- ------------- -----------
Revolving credit facilities.......... $ 60,963 $ 2,499 $ 58,464 $ - $ -
Long-term debt
10 7/8% Senior Notes due
November 15, 2006................ 109,190 - - 109,190 -
10 7/8% Senior Subordinated
Notes due December 31, 2006...... 20,000 - - 20,000 -
Operating Leases..................... 44,365 7,047 21,033 7,865 8,420
Other Collateralized Borrowings(1)..... 8,000 8,000 - - -
Other................................ 277 277 - - -
------------ ------------- ------------- ------------- -----------
Total contractual cash obligations... $ 242,795 $ 17,823 $ 79,497 $ 137,055 $ 8,420
============ ============= ============= ============= ===========
1 While the other collateralized borrowings contractually expires on
September 30, 2003, it is subject to automatic one-year renewals.
23
Seasonality and Quarterly Fluctuations
The Company's business is seasonal due to the impact of tax-related
services, including cashing tax refund checks. Historically, the Company has
generally experienced its highest revenues and earnings during its third fiscal
quarter ending March 31 when revenues from these tax-related services peak. Due
to the seasonality of the Company's business, 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 may contain certain forward-looking statements regarding the
Company's expected performance for future periods, and actual results for such
periods may materially differ. Such forward-looking statements involve risks and
uncertainties, including risks of changing market conditions in the overall
economy and the industry, consumer demand, the success of the Company's
acquisition strategy and other factors detailed from time to time in the
Company's annual and other reports filed with the Securities and Exchange
Commission.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes for Quantitative and Qualitative Disclosures
About Market Risk from the Company's audited financial statements in its Annual
Report on Form 10-K for the fiscal year ended June 30, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this report, an evaluation was
performed under the supervision and the participation of the Company's
management, including the principal executive officer and principal financial
officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15. Based on that
evaluation, the Company's principal executive officer and principal financial
officer concluded that the Company's disclosure controls and procedures were
effective as of the date the Company completed its evaluation. There have been
no significant changes in the Company's internal controls or in other factors
that could significantly affect internal controls subsequent to the date the
Company completed its evaluation.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In August 2000, a former employee instituted an action against the Company
in the Superior Court of California, purportedly on behalf of a class of current
and former salaried managers of the Company's California stores. The complaint
alleges that the putative class was misclassified as "exempt" for wage-and-hour
purposes and that they worked uncompensated hours since 1996 for which they were
entitled to receive overtime compensation. The relief sought includes damages,
interest and attorneys' fees. The Company's motion to compel arbitration of the
claim was granted, and the Company has been defending the arbitration of the
claim. No class has been certified in the arbitration, and the determination of
whether the claim may proceed on a class basis is not expected to be made until
fiscal 2004. In mid-January 2003, the Company offered to each individual member
of the putative class an amount intended in good faith to settle the claims of
such individuals. The Company accrued $2.5 million at December 31, 2002 related
to this matter. Management of the Company believes that a substantial majority
of these settlement offers will be accepted. It is presently undetermined
whether the unsettled claims of any remaining putative class members will
proceed in class form or otherwise. The Company believes it has meritorious
defenses to such unsettled claims and plans to defend them vigorously. The
Company believes it has adequately provided for the costs associated with this
matter.
On January 29, 2003, an action was commenced by a former customer of the
Company against the Company's Canadian subsidiary and 24 other Canadian lenders
on behalf of a purported class of British Columbia residents who, plaintiff
claims, were overcharged in payday-loan transactions. The action, which is
pending in the Supreme Court of British Columbia, alleges violations of laws
proscribing usury and unconscionable trade practices and seeks restitution and
damages, including punitive damages, in an unknown amount. The Company believes
it has meritorious defenses to the action and has engaged counsel to defend the
action, which it intends to do vigorously. The action is at its earliest stages,
and management of the Company is presently unable to evaluate the likelihood of
any particular outcome at this date.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
10.29 Marketing and Servicing Agreement between First Bank of Delaware and
Dollar Financial Group, Inc.*
99.1 Certifications of Chief Executive Officer Pursuant to Title 18, United
States Code, Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
99.2 Certifications of Chief Financial Officer Pursuant to Title 18, United
States Code, Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
* Confidential treatment has been requested for certain confidential
portions of this exhibit; these confidential portions have been omitted from
this exhibit and filed separately with the Securities and Exchange Commission.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL GROUP, INC.
Dated: February 14, 2003 *By: /s/ DONALD GAYHARDT
_____________________
Name: Donald Gayhardt
Title: President and Chief
Financial Officer
(principal financial and chief
accounting officer)
* The signatory hereto is the principal financial and chief accounting
officer and has been duly authorized to sign on behalf of the registrant.
27
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
_________________
/s/ Jeffrey A. Weiss
____________________________
Jeffrey A. Weiss
Chairman of the Board of Directors
and Chief Executive Officer
28
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Donald Gayhardt
___________________
Donald Gayhardt
President and Chief Financial Officer
29