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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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____ to _____
Commission file number 333-18221
DOLLAR FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
NEW YORK 13-2997911
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1436 LANCASTER AVENUE, 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 May 9, 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 March 31, 2003 (unaudited).............................................................. 3
Interim Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2002 and 2003........................................................ 4
Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 2002 and 2003............................................................... 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 23
Item 4. Controls and Procedures..................................................................... 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 24
Item 2. Changes in Securities and Use of Proceeds................................................... 24
Item 3. Defaults Upon Senior Securities............................................................. 24
Item 4. Submission of Matters to a Vote of Security Holders......................................... 24
Item 5. Other Information........................................................................... 24
Item 6. Exhibits and Reports on Form 8-K............................................................ 24
2
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
June 30, March 31,
2002 2003
---------------- -----------------
ASSETS (unaudited)
Cash and cash equivalents..................................................... $ 86,633 $ 75,856
Loans and other receivables, net of reserve of $2,862 and $2,393.............. 20,542 19,155
Loans receivable pledged...................................................... - 8,000
Income taxes receivable....................................................... - 402
Prepaid expenses ............................................................ 6,745 5,877
Notes receivable - officers................................................... 2,756 2,756
Due from parent ............................................................. 3,606 4,322
Property and equipment, net of accumulated depreciation
of $30,119 and $35,971................................................... 30,510 28,565
Goodwill and other intangibles, net of accumulated
amortization of $21,070 and $21,217....................................... 132,264 138,065
Debt issuance costs, net of accumulated amortization of
$6,153 and $7,507........................................................ 6,292 5,749
Other......................................................................... 1,964 1,677
---------------- -----------------
$ 291,312 $ 290,424
================ =================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable ............................................................ $ 18,249 $ 16,533
Income taxes payable.......................................................... 1,831 -
Accrued expenses............................................................. 7,932 11,201
Accrued interest payable...................................................... 1,539 5,371
Deferred tax liability........................................................ 55 1,510
Revolving credit facilities................................................... 78,936 59,530
10-7/8 % Senior Notes due 2006................................................ 109,190 109,190
Other collateralized borrowings............................................... - 8,000
Subordinated notes payable and other.......................................... 20,065 20,105
Shareholder's equity:
Common stock, $1 par value: 20,000 shares
authorized; 100 shares issued and outstanding at
June 30, 2002 and March 31, 2003.......................................... - -
Additional paid-in capital.................................................... 50,957 50,957
Retained earnings 6,903 8,457
Accumulated other comprehensive loss.......................................... (4,345) (430)
---------------- -----------------
Total shareholder's equity................................................ 53,515 58,984
---------------- -----------------
$ 291,312 $ 290,424
================ =================
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,
---------------------------------------------------------------
2002 2003 2002 2003
------------ ------------ ------------ -------------
Revenues ........................................................ $ 49,755 $ 57,973 $ 150,056 $ 163,916
Store and regional expenses:
Salaries and benefits......................................... 16,716 17,519 48,108 51,947
Occupancy..................................................... 4,442 4,683 13,588 14,155
Depreciation.................................................. 1,823 1,121 4,855 4,364
Other......................................................... 10,822 11,390 35,120 36,408
------------ ------------ ------------ -------------
Total store and regional expenses................................ 33,803 34,713 101,671 106,874
Corporate expenses............................................... 6,564 8,711 17,506 23,697
Loss on store closings and sales and other restructuring......... 917 460 1,096 2,750
Other depreciation and amortization.............................. 683 758 1,762 2,446
Interest expense (net of interest income of $63, $61, $212
and $149)...................................................... 4,628 4,955 14,017 14,779
Establishment of reserve for legal matter........................ - - - 2,500
------------ ------------ ------------ -------------
Income before income taxes....................................... 3,160 8,376 14,004 10,870
Income tax provision............................................. 2,168 7,383 9,000 9,316
------------ ------------ ------------ -------------
Net income....................................................... $ 992 $ 993 $ 5,004 $ 1,554
============ ============ ============ =============
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,
------------------------------------
2002 2003
--------------- --------------
Cash flows from operating activities:
Net income.................................................................... $ 5,004 $ 1,554
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........................................... 7,608 8,165
Establishment of reserve for legal matter............................... - 2,500
Loss on store closings and sales and other restructuring................ 1,096 2,750
Deferred tax provision.................................................. 2,028 1,455
Change in assets and liabilities (net of effect of acquisitions):
Decrease (increase) in loans and other receivables................... 5,341 (6,155)
Increase in income taxes receivable.................................. - (2,547)
Decrease in prepaid expenses and other............................... 809 1,286
(Decrease) increase in accounts payable, income taxes payable,
accrued expenses and accrued interest payable...................... (4,772) 1,067
--------------- --------------
Net cash provided by operating activities..................................... 17,114 10,075
Cash flows from investing activities:
Acquisitions, net of cash acquired.......................................... (206) (3,318)
Additions to property and equipment......................................... (7,048) (5,482)
--------------- --------------
Net cash used in investing activities......................................... (7,254) (8,800)
Cash flows from financing activities:
Other debt (payments) borrowings ........................................... (65) 8,001
Net increase (decrease) in revolving credit facilities...................... 1,648 (19,406)
Payment of debt issuance costs.............................................. - (810)
Net increase in due from parent............................................. (801) (716)
--------------- --------------
Net cash provided by (used in) financing activities........................... 782 (12,931)
Effect of exchange rate changes on cash and cash equivalents.................. (902) 879
--------------- --------------
Net increase (decrease) in cash and cash equivalents.......................... 9,740 (10,777)
Cash and cash equivalents at beginning of period.............................. 72,452 86,633
--------------- --------------
Cash and cash equivalents at end of period.................................... $ 82,192 $ 75,856
=============== ==============
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 March 31, 2003. The Company, through its subsidiaries, provides retail
financial services to the general public through a network of 1,087 locations
(of which 621 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 490 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 March 31, 2003, and the
consolidating statements of operations and cash flows for the nine month period
ended March 31, 2003 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
March 31, 2003
(In thousands)
Dollar Domestic Foreign
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------- ------------- ------------- -------------- --------------
ASSETS
Cash and cash equivalents....................... $ 3,466 $ 37,015 $ 35,375 $ - $ 75,856
Loans and other receivables, net................ 9,812 1,086 8,946 (689) 19,155
Loans receivable pledged........................ - - 8,000 - 8,000
Income taxes receivable......................... 16,462 - - (16,060) 402
Prepaid expenses................................ 1,364 1,253 3,260 - 5,877
Deferred income taxes........................... 936 - - (936) -
Notes receivable-officers....................... 2,756 - - - 2,756
Due from affiliates............................. - 63,470 - (63,470) -
Due from parent................................. 4,322 - - - 4,322
Property and equipment, net..................... 6,303 8,711 13,551 - 28,565
Goodwill and other intangibles, net............. 86 56,328 81,651 - 138,065
Debt issuance costs, net........................ 5,548 - 201 - 5,749
Investment in subsidiaries...................... 206,090 9,801 6,705 (222,596) -
Other........................................... 73 598 1,006 - 1,677
------------ ------------- ------------- --------------- -------------
$ 257,218 $ 178,262 $ 158,695 $ (303,751) $ 290,424
============ ============= ============= =============== =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable................................ $ 838 $ 7,433 $ 8,262 $ - $ 16,533
Income taxes payable............................ - 15,762 298 (16,060) -
Accrued expenses................................ 5,685 709 4,807 - 11,201
Accrued interest payable........................ 4,980 27 1,053 (689) 5,371
Deferred tax liability.......................... - 2,446 - (936) 1,510
Due to affiliates............................... 373 - 63,097 (63,470) -
Revolving credit facilities..................... 58,664 - 866 - 59,530
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 - 105 - 20,105
------------ ------------- ------------- --------------- -------------
199,730 26,377 86,488 (81,155) 231,440
Shareholder's equity:
Common stock.................................... - - - - -
Additional paid-in capital...................... 50,957 85,524 27,304 (112,828) 50,957
Retained earnings............................... 8,457 66,687 43,081 (109,768) 8,457
Accumulated other comprehensive (loss)
income....................................... (1,926) (326) 1,822 - (430)
------------ ------------- ------------- --------------- -------------
Total shareholder's equity...................... 57,488 151,885 72,207 (222,596) 58,984
------------ ------------- ------------- --------------- -------------
$ 257,218 $ 178,262 $ 158,695 $ (303,751) $ 290,424
============ ============= ============= =============== =============
8
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
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
restructuring........................................ 2,235 419 96 - 2,750
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
============ ============ =========== ============ ============
9
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
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) (3,885) (6,155)
Increase in income taxes receivable.......... (8,006) - - 5,459 (2,547)
(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 (4,538) (1,574) 1,067
----------- ----------- ------------ ------------ -----------
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
=========== =========== ============ ============ ===========
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. For the nine months ended March 31, 2003 the Company paid
$2.0 million in additional consideration based upon a future results of
operations earn-out agreement related to one of its United Kingdom acquisitions.
This amount has been included as goodwill on the Interim Consolidated Balance
Sheet. 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 nine months ended March 31, 2003 was $130,000. 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 for the periods
stated (in thousands):
June 30, 2002 March 31, 2003
--------------------------------------- ---------------------------------------
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 $ 156,884 $ 18,977
Amortized intangible assets:
Covenants not to compete 2,380 2,093 2,398 2,240
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
(in thousands):
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------------- ----------------------------------
2002 2003 2002 2003
-------------- ---------------- ------------- -------------
Net income $ 992 $ 993 $ 5,004 $ 1,554
Foreign currency translation adjustment (828) 3,257 (3,299) 3,915
-------------- ---------------- ------------- -------------
Total comprehensive income $ 164 $ 4,250 $ 1,705 $ 5,469
============== ================ ============= =============
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 March 31, 2002
Identifiable assets $ 144,362 $ 71,037 $ 62,266 $ 277,665
Sales to unaffiliated customers 28,839 13,144 7,772 49,755
(Loss) income before income taxes (1,528) 3,679 1,009 3,160
Income tax (benefit) provision (363) 1,827 704 2,168
Net (loss) income (1,165) 1,852 305 992
For the nine months
ended March 31, 2002
Sales to unaffiliated customers $ 85,123 $ 40,162 $ 24,771 $ 150,056
(Loss) income before income taxes (1,008) 11,640 3,372 14,004
Income tax provision 3,472 4,515 1,013 9,000
Net (loss) income (4,480) 7,125 2,359 5,004
As of and for the three months
ended March 31, 2003
Identifiable assets $ 138,434 $ 79,907 $ 72,083 $ 290,424
Sales to unaffiliated customers 31,699 16,028 10,246 57,973
Income before income taxes 853 5,243 2,280 8,376
Income tax provision 3,512 3,194 677 7,383
Net (loss) income (2,659) 2,049 1,603 993
For the nine months
ended March 31, 2003
Sales to unaffiliated customers $ 84,473 $ 48,487 $ 30,956 $ 163,916
(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
12
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
6. 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 options
expired in fiscal year 2002 and there has been no hedging activity in fiscal
year 2003.
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.
7. 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. As of May 9, 2003, 92% of these settlement offers have been
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 26 other Canadian lenders on
behalf of a purported class of British Columbia residents who, plaintiff claims,
were overcharged in payday-loan transactions. The action, which is pending in
the Supreme Court of British Columbia, alleges violations of laws proscribing
usury and unconscionable trade practices and seeks restitution and damages,
including punitive damages, in an unknown amount. 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)
8. LOSS ON STORE CLOSINGS AND SALES AND OTHER RESTRUCTURING
For the nine months ended March 31, 2003, the Company closed 27 under performing
stores and consolidated and relocated certain non-operating functions to reduce
costs and increase efficiencies. The Company expects the restructuring to be
completed by June 30, 2003. Costs incurred (or to be incurred) with the
restructuring are comprised of severance and other retention benefits to
employees who were involuntarily terminated and store closure costs related to
the locations the Company will no longer utilize. During the three and nine
months ended March 31, 2003, the Company recorded costs for severance and other
retention benefits of $0.4 million and $0.8 million, respectively, and store
closure costs of $0.0 million and $1.3 million, respectively. These charges were
expensed within "Loss on store closings and sales and other restructuring" on
the Interim Unaudited Consolidated Statements of Operations. The Company expects
the aggregate amount of severance and other retention benefits and store closure
costs, upon completion of the restructuring, to be $1.6 million and $1.7
million, respectively, or a total of $3.3 million. For the nine months ended
March 31, 2003, the Company has incurred $2.1 million of the total estimated
costs and expects to incur a substantial portion of the balance in the fourth
quarter of this fiscal year. 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.
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, 2002 $ - $ - $ -
Charge recorded in earnings 0.8 1.3 2.1
Amounts paid (0.3) (0.2) (0.5)
Non-cash charges - (0.6) (0.6)
----------- --------- ----------
Balance at March 31, 2003 $ 0.5 $ 0.5 $ 1.0
=========== ========= ==========
9. 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 March
31, 2003. 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
March 31,
Company Operating Data: 2002 2003
------------- ------------
Stores in operation:
Company-Owned................................. 646 621
Franchised Stores and Check Cashing Merchants. 372 466
--- ---
Total............................................ 1,018 1,087
===== =====
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
Operating Data: 2002 2003 2002 2003
------------ ----------- ----------- -------------
Face amount of checks cashed (in millions).................... $ 769 $ 750 $ 2,213 $ 2,265
Face amount of average check.................................. $ 354 $ 361 $ 340 $ 358
Face amount of average check (excluding Canada and the United
Kingdom)................................................... $ 422 $ 410 $ 376 $ 408
Average fee per check......................................... $ 12.96 $ 13.43 $ 12.07 $ 12.77
Number of checks cashed (in thousands)........................ 2,170 2,077 6,514 6,331
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
Collections Data: 2002 2003 2002 2003
------------ ----------- ----------- -------------
Face amount of returned checks (in thousands)................. $ 6,297 $ 5,756 $ 21,755 $ 19,033
Collections (in thousands).................................... 5,319 4,420 16,265 14,234
------------ ----------- ----------- -------------
Net write-offs (in thousands)................................. $ 978 $ 1,336 $ 5,490 $ 4,799
============ =========== =========== =============
Collections as a percentage of
returned checks............................................ 84.5% 76.6% 74.8% 74.6%
Net write-offs as a percentage of
check cashing revenues..................................... 3.5% 4.8% 7.0% 5.9%
Net write-offs as a percentage of the
face amount of checks cashed............................... 0.13% 0.18% 0.25% 0.21%
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 Nine Months Ended
March 31, March 31,
----------------------------- -----------------------------
2002 2003 2002 2003
------------- ------------ ------------ -------------
Servicing revenues.......................................... $ 8,439 $ 11,825 $ 33,424 $ 28,833
Company originated domestic revenues........................ 442 3,386 1,307 10,721
Company originated foreign revenues......................... 5,685 7,891 16,035 22,396
------------- ------------ ------------ -------------
Total consumer lending revenues, net........................ $ 14,566 $ 23,102 $ 50,766 $ 61,950
============= ============ ============ =============
15
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 March 31, 2003 and the results of operations for the three and nine
months ended March 31, 2003 and 2002. The results for the three and nine months
ended March 31, 2003 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
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.
16
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 March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------------- -------------------- ----------------------- --------------------
2002 2003 2002 2003 2002 2003 2002 2003
---------- ----------- ------- -------- --------- ---------- -------- --------
Check cashing................ $ 28,133 $ 27,897 56.5% 48.1% $ 78,645 $ 80,871 52.4% 49.3%
Consumer lending revenues,
net.......................... 14,566 23,102 29.3 38.8 50,766 61,950 33.8 37.4
Money transfer fees.......... 2,455 2,807 4.9 4.8 7,409 8,271 4.9 5.0
Government services.......... 433 437 0.9 0.8 1,295 1,285 0.9 0.8
Other revenue................ 4,168 3,730 8.4 7.5 11,941 11,539 8.0 7.5
---------- ----------- ------- -------- --------- ---------- -------- --------
Total revenues............... $ 49,755 $ 57,973 100.0% 100.0% $150,056 $163,916 100.0% 100.0%
========== =========== ======= ======== ========= ========== ======== ========
QUARTER COMPARISON
Total revenues were $58.0 million for the three months ended March 31, 2003
compared to $49.8 million for the three months ended March 31, 2002, an increase
of $8.2 million or 16.5%. Comparable retail store, franchised store and document
transmitter sales for the entire period increased $8.6 million or 17.6%. The
increase is primarily due to a reduction in the loan portfolio in fiscal 2002 as
a result of growth limitations imposed by the Company's bank partner and
increased efficiencies and effectiveness of the Company's centralized collection
department in fiscal year 2003. New store openings accounted for an increase of
$500,000 while closed stores accounted for a decrease of $900,000.
NINE MONTH COMPARISON
Total revenues were $163.9 million for the nine months ended March 31, 2003
compared to $150.1 million for the nine months ended March 31, 2002, an increase
of $13.8 million or 9.2%. Comparable store, franchised store and document
transmitter sales for the entire period increased $12.5 million or 8.6%. The
increase is primarily due to a reduction in the loan portfolio in fiscal 2002 as
a result of growth limitations imposed by the Company's bank partner and
increased efficiencies and effectiveness of the Company's centralized collection
department. New store openings accounted for an increase of $3.3 million while
closed stores accounted for a decrease of $2.0 million.
17
Store and Regional Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------------ -------------------- ------------------------- ------------------
2002 2003 2002 2003 2002 2003 2002 2003
---------- ---------- ------- -------- ----------- ---------- -------- -------
Salaries and benefits......... $ 16,716 $ 17,519 33.6% 30.2% $ 48,108 $ 51,947 32.1% 31.7%
Occupancy..................... 4,442 4,683 8.9 8.1 13,588 14,155 9.1 8.6
Depreciation.................. 1,823 1,121 3.7 1.9 4,855 4,364 3.2 2.7
Other ........................ 10,822 11,390 21.8 19.6 35,120 36,408 23.4 22.2
---------- ---------- ------- -------- ----------- ---------- -------- -------
Total store and regional
expenses...................... $ 33,803 $ 34,713 68.0% 59.8% $ 101,671 $ 106,874 67.8% 65.2%
========== ========== ======= ======== =========== ========== ======== =======
QUARTER COMPARISON
Store and regional expenses were $34.7 million for the three months ended March
31, 2003 compared to $33.8 million for the three months ended March 31, 2002, an
increase of $0.9 million or 2.7%. New store openings accounted for an increase
of $400,000 while closed stores accounted for a decrease of $900,000. Comparable
retail store and franchised store expenses for the entire period increased $1.4
million. For the three months ended March 31, 2003 total store and regional
expenses decreased to 59.8% of total revenue compared to 68.0% of total revenue
for the three months ended March 31, 2002.
NINE MONTH COMPARISON
Store and regional expenses were $106.9 million for the nine months ended March
31, 2003 compared to $101.7 million for the nine months ended March 31, 2002, an
increase of $5.2 million or 5.1%. New store openings accounted for an increase
of $1.4 million while closed stores accounted for a decrease of $2.0 million.
Comparable retail store and franchised store expenses for the entire period
increased $5.1 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 $700,000 due to growth in
that business. For the nine months ended March 31, 2003 total store and regional
expenses decreased to 65.2% of total revenue compared to 67.8% of total revenue
for the nine months ended March 31, 2002.
18
Other Expense Analysis
Three Months Ended March 31, Nine Months Ended March 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
---------------------- ------------------- ----------------------- ------------------
2002 2003 2002 2003 2002 2003 2002 2003
-------- --------- ------- -------- --------- ---------- ------- -------
Corporate expenses.................. $ 6,564 $ 8,711 13.2% 15.0% $ 17,506 $ 23,697 11.7% 14.5%
Loss on store closings and sales
and other restructuring............ 917 460 1.8 0.8 1,096 2,750 0.7 1.7
Other depreciation and amortization. 683 758 1.4 1.3 1,762 2,446 1.2 1.5
Interest expense ................... 4,628 4,955 9.3 8.5 14,017 14,779 9.3 9.0
Establishment of reserve for legal
matter.............................. - - - - - 2,500 - 1.5
Income tax provision................ 2,168 7,383 4.4 12.7 9,000 9,316 6.0 5.7
QUARTER COMPARISON
Corporate Expenses
Corporate expenses were $8.7 million for the three months ended March 31, 2003
compared to $6.6 million for the three months ended March 31, 2002, an increase
of $2.1 million or 31.8%. 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 $500,000 for the
three months ended March 31, 2003 compared to $900,000 for the three months
ended March 31, 2002, a decrease of $400,000. 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 $5.0 million for the three months ended March 31, 2003 and
was $4.6 million for the three months ended March 31, 2002, an increase of
$400,000 or 8.7%. 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 the November 2002 amendment of the Company's Revolving Credit
Facility.
Income Taxes
The provision for income taxes increased $5.2 million for the three months ended
March 31, 2003 compared to the three months ended March 31, 2002. The Company's
effective tax rate does not reflect a normal relationship to the federal
statutory rate of 35% for the three months ended March 31, 2003 due to state and
foreign taxes.
NINE MONTH COMPARISON
Corporate Expenses
Corporate expenses were $23.7 million for the nine months ended March 31, 2003
compared to $17.5 million for the nine months ended March 31, 2002, an increase
of $6.2 million or 35.4%. 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.
19
Loss on store closings and sales and other restructuring
Loss on store closings and sales and other restructuring was $2.8 million for
the nine months ended March 31, 2003 compared to $1.1 million for the nine
months ended March 31, 2002, an increase of $1.7 million. For the nine months
ended March 31, 2003, the Company provided $1.3 million for the closure costs
associated with the shutdown of 27 underperforming stores. In addition, the
Company provided $0.8 million, consisting primarily of severance and retention
bonus costs, for the consolidation and relocation of certain non-operating
functions.
Interest Expense
Interest expense was $14.8 million for the nine months ended March 31, 2003 and
was $14.0 million for the nine months ended March 31, 2002, an increase of
$800,000 or 5.7%. 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 the 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. As of May 9, 2003, 92% of these settlement offers have been
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 $9.3 million for the nine months ended March
31, 2003 compared to $9.0 million for the nine months ended March 31, 2002, an
increase of $300,000. The Company's effective tax rate does not reflect a normal
relationship to the federal statutory rate of 35% for the nine months ended
March 31, 2003 due to state and foreign taxes.
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, 2003, cash and cash equivalents decreased $10.8
million. Net cash provided by operations was $10.1 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. Accounts payable decreased
due to a result of timing of settlement payments with the Company's retail
vendors.
20
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 nine months ended March 31,
2003 and 2002, the Company had net cash provided by operating activities of
$10.1 million and $17.1 million, 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. For the nine months ended March 31, 2003, the Company
had made capital expenditures of $5.5 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 increased 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 letters of credit totaling $9.0
million issued by Wells Fargo Bank, which secures certain of the Company's
contractual obligations. At March 31, 2003 the Company's borrowing capacity was
$66 million. The restated Revolving Credit Facility also contains a provision
for further reductions of $3.0 million by June 30, 2003, $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 $5.0 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 March 31, 2003 were $58.7 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 March 31, 2003 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 $4.8 million, of
which there was a $0.3 million outstanding balance as of March 31, 2003. 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 $0.6 million outstanding at March 31, 2003.
The Company is highly leveraged, and borrowings under the Revolving Credit
Facility and the overdraft facilities will increase the Company's debt service
requirements. Management believes that, based on current levels of operations
and anticipated improvements in operating results, cash flows from operations
and borrowings available under the Revolving Credit Facility will enable the
Company to fund its liquidity and capital expenditure requirements for the
foreseeable future, including scheduled payments of interest on the Senior Notes
and payment of interest and principal on the Company's other indebtedness. The
Company's belief that it will be able to fund its liquidity and capital
expenditure requirements for the foreseeable future is based upon the historical
growth rate of the Company and 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.
21
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.......... $ 59,530 $ 866 $ 58,664 $ - $ -
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..................... 41,062 3,500 21,279 7,957 8,326
Other Collateralized Borrowings[1]... 8,000 8,000 - - -
Other................................ 105 105 - - -
------------ ------------- ------------- ------------- -----------
Total contractual cash obligations... $ 237,887 $ 12,471 $ 79,943 $ 137,147 $ 8,326
============ ============= ============= ============= ===========
[1] While the other collateralized borrowings contractually expires on September
30, 2003, it is subject to automatic one-year renewals.
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.
22
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.
23
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. As of May 9, 2003, 92% of these settlement offers have been
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 26 other Canadian lenders on
behalf of a purported class of British Columbia residents who, plaintiff claims,
were overcharged in payday-loan transactions. The action, which is pending in
the Supreme Court of British Columbia, alleges violations of laws proscribing
usury and unconscionable trade practices and seeks restitution and damages,
including punitive damages, in an unknown amount. 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
99.1 Certification 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 Certification 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.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DOLLAR FINANCIAL GROUP, INC.
Dated: May 9, 2003 *By: /s/ DONALD GAYHARDT
--------------------------------
Name: Donald Gayhardt
Title: President and Chief Financial Officer
(principal financial and
chief accounting officer)
* The signatory hereto is the principal financial and chief accounting officer
and has been duly authorized to sign on behalf of the registrant.
25
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 officer 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 officer 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: May 9, 2003
------------------------
/s/ Jeffrey A. Weiss
-----------------------------------------
Jeffrey A. Weiss
Chairman of the Board of Directors and
Chief Executive Officer
26
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 officer 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 officer 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: May 9, 2003
-------------------------
/s/ Donald Gayhardt
-------------------------------------
Donald Gayhardt
President and Chief Financial Officer