SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 1998
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 [X] whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities and
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. 100
-----
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
<S> <C>
Interim Consolidated Balance Sheets as of June 30, 1998
and September 30, 1998 (unaudited).......................................................... 3
Interim Unaudited Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1998.................................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 1997 and 1998................................................... 5
Notes to Interim Unaudited Consolidated Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 13
Item 3. Quantitative and Qualitative Disclosures
About Market Risk........................................................................... 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 23
Item 2. Changes in Securities....................................................................... 23
Item 3. Defaults Upon Senior Securities............................................................. 23
Item 4. Submission of Matters to a Vote of Security Holders......................................... 23
Item 5. Other Information........................................................................... 23
Item 6. Exhibits and Reports on Form 8-K............................................................ 23
</TABLE>
2
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLLAR FINANCIAL GROUP, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(In Thousands except share amounts)
<TABLE>
<CAPTION>
June 30, September 30, 1998
1998
--------------------- ---------------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents................................................... $55,501 $59,948
Accounts receivable......................................................... 5,726 4,575
Prepaid expenses .......................................................... 1,814 1,707
Deferred income taxes....................................................... 1,070 1,070
Note receivable -- officer.................................................. 200 200
Property and equipment, net of accumulated depreciation
of $4,616 and $5,101................................................... 7,820 7,809
Cost assigned to contracts acquired, net of
accumulated amortization of $461 and $496 ............................ 231 196
Cost in excess of net assets acquired, net of accumulated amortization
of $6,559 and $7,637................................................... 87,036 84,947
Covenants not to compete, net of accumulated amortization
of $917 and $1,036...................................................... 786 655
Debt issuance costs, net of accumulated amortization of $885 and $1,041..... 4,856 4,701
Other....................................................................... 810 776
--------------------- ---------------------
$165,850 $166,584
===================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable ......................................................... $12,806 $12,700
Income taxes payable....................................................... 2,002 225
Advance from money transfer agent.......................................... 3,000 3,000
Accrued expenses........................................................... 3,722 3,719
Accrued interest payable................................................... 2,191 5,243
Long-term debt and subordinated notes payable.............................. 2,675 2,659
10-7/8 % Senior Notes due 2006............................................. 110,000 110,000
Shareholder's equity:
Common stock, $1 par value: 20,000 shares
authorized; 100 shares issued and outstanding at
June 30, 1998 and September 30, 1998................................... --- ---
Additional paid-in capital................................................. 40,941 40,941
Accumulated deficit........................................................ (8,875) (8,095)
Accumulated other comprehensive loss....................................... (2,612) (3,808)
--------------------- ---------------------
Total shareholder's equity............................................. 29,454 29,038
--------------------- ---------------------
$165,850 $166,584
===================== =====================
</TABLE>
See notes to interim unaudited consolidated financial statements.
3
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
Three Months Ended
September 30,
--------------------------
1997 1998
---------- ------------
Revenues ..................................... $26,144 $27,091
Store and regional expenses:
Salaries and benefits...................... 8,458 8,499
Occupancy.................................. 2,457 2,389
Depreciation............................... 439 479
Other...................................... 6,507 5,927
---------- -----------
Total store and regional expenses............. 17,861 17,294
Corporate expenses............................ 2,642 3,247
(Gain) loss on store closings and sales....... (40) 25
Other depreciation and amortization........... 1,203 1,411
Interest expense.............................. 3,219 3,227
---------- -----------
Income before income taxes.................... 1,259 1,887
Income tax provision.......................... 641 1,107
---------- -----------
Net income.................................... $618 $780
========== ===========
See notes to interim unaudited consolidated financial statements.
4
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------------------
1997 1998
--------------------- ---------------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 618 $ 780
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization........................................... 1,779 2,046
(Gain) loss on store closings and sales................................. (40) 25
Deferred tax benefit.................................................... (52) 0
Change in assets and liabilities (net of effect of acquisitions):
Decrease in accounts receivable........................................ 2,980 1,107
(Increase) decrease in prepaid expenses and other assets............... (887) 184
Increase in accounts payable, income taxes payable, accrued
expenses and accrued interest payable................................ 2,972 1,494
--------------------- ---------------------
Net cash provided by operating activities..................................... 7,370 5,636
Cash flows from investing activities:
Acquisitions, net of cash acquired.......................................... --- (20)
Gross proceeds from sales of property and equipment......................... 150 ---
Additions to property and equipment......................................... (385) (639)
--------------------- ---------------------
Net cash used in investing activities......................................... (235) (659)
Cash flows from financing activities:
Payments on subordinated notes payable...................................... (124) (6)
Net decrease in revolving credit facilities................................. (12,187) ---
Payments of financed insurance premiums..................................... --- (10)
--------------------- ---------------------
Net cash (used in) provided by financing activities........................... (12,311) (16)
Effect of exchange rate changes on cash and cash equivalents.................. (14) (514)
--------------------- ---------------------
Net increase (decrease) in cash and cash equivalents.......................... (5,190) 4,447
Cash and cash equivalents at beginning of period.............................. 55,205 55,501
--------------------- ---------------------
Cash and cash equivalents at end of period.................................... $ 50,015 $ 59,948
===================== =====================
Supplemental disclosures of cash flow information:
Interest paid................................................................. $ 166 $ 29
===================== =====================
Income taxes paid............................................................. $ 119 $ 2,884
===================== =====================
</TABLE>
See notes to interim unaudited consolidated financial statements.
5
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed unaudited interim consolidated financial statements
of Dollar Financial Group, Inc. (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and the rules and regulations of the Securities and Exchange Commission. They do
not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. Although management
believes that the disclosure is adequate to prevent the information from being
misleading, it is suggested that the interim consolidated financial statements
be read in conjunction with the Company's audited financial statements in its
Annual Report on Form 10-K for the fiscal year ended June 30, 1998 filed with
the Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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
there are no differences between the consolidated results of operations of
Holdings and those of the Company. Holdings has no employees or operating
activities. The Company, through its subsidiaries, provides retail financial and
government contractual services to the general public through a network of 427
(of which 347 are company owned) locations operating as ABC Check Cashing(TM),
Almost-A-Banc(R), Any Kind Check Cashing Centers(R), C&C Check Cashing(TM),
Cash-N-Dash Check Cashing(TM), Check Mart(R), Chex$Cashed(R), Financial Exchange
Company(R), Money Mart, Quikcash, QwiCash(R), The Service Centers and Loan
Mart(TM) in thirteen states, the District of Columbia and Canada. The services
provided at the Company's retail locations include check cashing, sale of money
orders, money transfer services, consumer loans, issuance of food stamps and
other welfare benefits, and various other related services. Additionally, the
Company, through its merchant services division, maintains and services a
network of electronic government benefits distribution to approximately 1200
retail locations throughout the State of New York.
The Company has contracts with various governmental agencies in California, New
York, Ohio and Washington for benefits distribution and retail merchant services
which contributed 5.9% and 15.0% of consolidated gross revenues for the three
months ended September 30, 1998 and 1997, respectively. The Commonwealth of
Pennsylvania initiated the implementation of an Electronic Benefits Transfer
System (sometimes referred to as "EBT") in January 1998 which was fully
implemented during fiscal 1998. As a result, all of the Company's contracts with
the Commonwealth of Pennsylvania were terminated during fiscal 1998. Revenue
from these contracts included in total revenues for the three months ended
September 30, 1997 was $1.6 million. During the fiscal year ended June 30, 1998,
6
<PAGE>
the Company signed an agreement with the Commonwealth of Pennsylvania which
provided for a payment of $2.5 million to compensate the Company for the decline
in transactional revenues during the implementation period and to offset
additional costs incurred by the Company. Management believes the installation
of such systems has not had a material adverse effect on the Company's results
of operations or financial condition.
2. SUBSIDIARY GUARANTOR CONDENSED FINANCIAL INFORMATION
The Company raised approximately $110 million of gross proceeds by issuing 10
7/8% Senior Notes due in November 2006 (the "Notes"). The Company's payment
obligations under the Notes are jointly and severally guaranteed on a full and
unconditional basis by all of the Company's existing and future subsidiaries.
The subsidiaries' guarantees rank pari passu in right of payment with all
existing and future senior indebtedness of the Guarantors, including the
obligations of the Guarantors under the Company's existing credit facilities and
any successor credit facilities. Pursuant to the indenture of the Senior Notes,
every direct and indirect subsidiary of the Company, each of which is wholly
owned, serves as a guarantor of the notes, including the Company's Canadian
subsidiary.
The Company is a holding company with no assets, independent operations, or cash
flows other than its investment in its subsidiaries. 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 September 30, 1998, and the
consolidating statements of operations and cash flows for the three month period
ended September 30, 1998 of the Company (on a parent-company basis), combined
domestic Guarantors, Canadian subsidiary Guarantor, and the consolidated
Company.
7
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
At September 30, 1998: Dollar Domestic Canadian
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantor Eliminations Consolidated
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents......................... $7,367 $39,214 $13,367 $--- $59,948
Accounts receivable............................... 5,977 1,706 1,387 (4,495) 4,575
Prepaid expenses.................................. 405 1,081 221 --- 1,707
Deferred income taxes............................. 1,008 62 --- --- 1,070
Note receivable-Officer........................... 200 --- --- --- 200
Due from affiliates............................... 66,229 --- --- (66,229) ---
Property and equipment, net....................... 1,017 4,678 2,114 --- 7,809
Cost assigned to contracts acquired, net.......... --- 196 --- --- 196
Cost in excess of net assets acquired, net........ --- 58,327 26,620 --- 84,947
Covenants not to compete.......................... --- 527 128 --- 655
Debt issuance costs, net.......................... 4,701 --- --- --- 4,701
Investment in subsidiaries........................ 60,789 --- --- (60,789) ---
Other............................................. 110 441 225 --- 776
----------- ----------- ------------ ------------ ------------
$147,803 $106,232 $44,062 ($131,513) $166,584
=========== =========== ============ ============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable.................................. $55 $10,274 $2,371 $--- $12,700
Income taxes payable.............................. (1,384) 254 1,355 --- 225
Advance from money transfer agent................. 3,000 --- --- --- 3,000
Accrued expenses.................................. 1,406 1,436 877 --- 3,719
Accrued interest payable.......................... 4,486 757 4,495 (4,495) 5,243
Due to affiliates................................. --- 41,884 24,345 (66,229) ---
Long term debt and subordinated notes payable..... --- 2,659 --- --- 2,659
10 7/8% Senior notes due 2006..................... 110,000 --- --- --- 110,000
----------- ----------- ------------ ------------ ------------
117,563 57,264 33,443 (70,724) 137,546
Shareholder's equity:
Common Stock...................................... --- --- --- --- ---
Additional paid-in capital........................ 40,941 46,613 10,797 (57,410) 40,941
Retained earnings (accumulated deficit)........... (8,095) 2,355 1,024 (3,379) (8,095)
Accumulated other comprehensive loss.............. (2,606) --- (1,202) --- (3,808)
----------- ----------- ------------ ------------ ------------
Total shareholder's equity........................ 30,240 48,968 10,619 (60,789) 29,038
----------- ----------- ------------ ------------ ------------
$147,803 $106,232 $44,062 ($131,513) $166,584
=========== =========== ============ ============ ============
</TABLE>
8
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENT OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998: Dollar Domestic Canadian
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantor Eliminations Consolidated
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................. $--- $20,346 $6,745 $--- $27,091
Store and regional expenses:
Salaries and benefits............................. --- 6,503 1,996 --- 8,499
Occupancy......................................... --- 1,823 566 --- 2,389
Depreciation...................................... --- 373 106 --- 479
Other............................................. --- 4,959 968 --- 5,927
------------ ------------ ----------- ------------ ------------
Total store and regional expenses.................... --- 13,658 3,636 --- 17,294
Corporate expenses................................... 2,779 --- 468 --- 3,247
Loss on store closings and sales..................... 25 --- --- --- 25
Other depreciation and amortization.................. 87 1,043 281 --- 1,411
Interest expense..................................... 2,496 64 667 --- 3,227
------------ ------------ ----------- ------------ ------------
Income (loss) before income taxes.................... (5,387) 5,581 1,693 --- 1,887
Income taxes provision (benefit)..................... (111) 302 916 --- 1,107
------------ ------------ ----------- ------------ ------------
Income (loss) before equity in net income of
subsidiaries......................................... (5,276) 5,279 777 --- 780
Equity in net income of subsidiaries:
Domestic subsidiary guarantors....................... 5,279 --- --- (5,279) ---
Canadian subsidiary guarantor........................ 777 --- --- (777) ---
------------ ------------ ----------- ------------ ------------
Net income........................................... $780 $5,279 $777 ($6,056) $780
============ ============ =========== ============ ============
</TABLE>
9
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, 1998: Dollar Domestic Canadian
Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantor Eliminations Consolidated
------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $780 $5,279 $777 ($6,056) $780
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Undistributed income of subsidiaries............ (6,056) --- --- 6,056 ---
Depreciation and amortization................... 243 1,416 387 --- 2,046
Loss on store closings and sales................ 25 --- --- --- 25
Change in assets and liabilities (net of
effect of acquisitions):
(Increase) decrease in accounts receivable.. (2,583) 2,380 (180) 1,490 1,107
(Increase) decrease in prepaid expenses
and other assets............................ 96 (42) 130 --- 184
Increase in accounts payable, income taxes
payable, accrued expenses and accrued
interest payable........................ 2,837 12 135 (1,490) 1,494
------------ ------------ ----------- ------------ ------------
Net cash (used in) provided by operating activities.. (4,658) 9,045 1,249 --- 5,636
Cash flows from investing activities:
Acquisitions, net of cash acquired.............. --- --- (20) --- (20)
Additions to property and equipment............. (145) (252) (242) --- (639)
Net decrease in due to affiliates............... 10,247 --- --- (10,247) ---
------------ ------------ ----------- ------------ ------------
Net cash (used in) provided by investing activities.. 10,102 (252) (262) (10,247) (659)
Cash flows from financing activities:
Payments on subordinated notes payable.......... --- (6) --- --- (6)
Payments of financed insurance premiums......... (10) --- --- (10)
Net decrease in due to affiliates............... --- (9,268) (979) 10,247 ---
------------ ------------ ----------- ------------ ------------
Net cash used in financing activities................ (10) (9,274) (979) 10,247 (16)
Effect of exchange rate changes on cash and
cash equivalents................................ --- --- (514) --- (514)
------------ ------------ ----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents..................................... 5,434 (481) (506) --- 4,447
Cash and cash equivalents at beginning of period..... 1,933 39,695 13,873 --- 55,501
------------ ------------ ----------- ------------ ------------
Cash and cash equivalents at end of period........... $7,367 $39,214 $13,367 $--- $59,948
============ ============ =========== ============ ============
</TABLE>
10
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
3. STORE CLOSINGS AND SALES
During the year ended June 30, 1998, the Company sold all of its stores in
Michigan, sold or closed five locations in southern California and closed
sixteen stores in Pennsylvania whose primary business was to provide services
for the distribution of public assistance benefits under existing contracts with
state and local municipalities. As a result of declining caseloads, increasing
costs and the termination of the Company's contracts with the Commonwealth of
Pennsylvania, the Company determined that these locations could not provide
acceptable levels of profitability. The Company also closed five kiosks in Texas
due to contractual requirements with the Southland Corporation. Included in the
accompanying consolidated statements of operations for the three months ended
September 30, 1997 are revenues of $2.1 million and store expenses of $1.4
million related to these stores. The gain recognized related to the sale and
closure of these stores was not material.
4. RECENT ACCOUNTING PRONOUCEMENTS
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). The Company adopted SFAS No. 130 on July 1, 1998. The
overall objective of SFAS No. 130 is to provide new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Company's net income or stockholder's
equity. SFAS No. 130 requires foreign currency translation adjustments, which
prior to adoption were reported separately in stockholder's equity, to be
included in other comprehensive income. Prior year financial statements have
been restated to conform to the provisions of SFAS No. 130. The following shows
the comprehensive loss for the periods stated:
Three months ended September 30,
1997 1998
-------------------------------
Net income $ 618 $ 780
Foreign currency translation adjustment (14) (1,196)
------------ ------------
Total comprehensive income (loss) $ 604 $ (416)
============ ============
5. SUBSEQUENT EVENT
On November 13, 1998, DFG Holdings, Inc. ("Holdings"), and a newly-formed and
wholly-owned subsidiary of Green Equity Investors II, LP ("Green"), entered into
an Agreement and Plan of Merger (the "Merger Agreement"). The Merger will be
effected through (i) the issuance of Holdings' common stock to Green, (ii) the
issuance of junior preferred equity securities of Holdings to Green, and (iii)
the issuance of zero-coupon debt by Holdings. The proceeds of these transactions
will be used to acquire Holdings' common stock currently held by non-management
shareholders and to pay fees and expenses associated with the transaction. In
connection with this transaction, the Company expects to record a pre-tax
non-cash charge of approximately $8.3 million associated with the cashless
exercise of options held by management. The consummation of the transaction is
subject to the satisfaction of a number of conditions, including clearance under
the Hart-Scott-Rodino Act. The Company anticipates the transaction will close by
December 31, 1998.
11
<PAGE>
SUPPLEMENTAL STATISTICAL DATA
September 30,
---------------------
Company Operating Data: 1998 1997
---- ----
Stores in operation:
Company-Owned............................ 347 347
Franchised Stores........................ 80 70
-- --
Total....................................... 427 417
=== ===
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------------
Operating Data: 1998 1997
---- ----
Face amount of checks cashed (in millions)......... $ 552 $ 564
Face amount of average check....................... $ 279 $ 275
Face amount of average check (excluding Canada).... $ 292 $ 282
Average fee per check.............................. $8.62 $8.09
Number of checks cashed (in thousands)............. 1,980 2,054
Adjusted EBITDA(1) $7,130 $6,079
Adjusted EBITDA Margin1............................ 26.3% 23.3%
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
-------------------------
Collections Data: 1998 1997
---- ----
Face amount of returned checks (in thousands)...... $4,096 $3,395
Collections (in thousands)......................... 2,990 2,384
--------- ----------
Net write-offs (in thousands)...................... $1,106 $1,011
========= ==========
Collections as a percentage of
returned checks................................. 73.0% 70.2%
Net write-offs as a percentage of
check cashing revenues.......................... 6.5% 6.1%
Net write-offs as a percentage of the
face amount of checks cashed.................... 0.2% 0.2%
- ------------
(1) Adjusted EBITDA is earnings before interest, taxes, depreciation,
amortization, noncash charges to earnings associated with foreign currency
translations, and loss on store closings and sales. Adjusted EBITDA does not
represent cash flows as defined by generally accepted accounting principles and
does not necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. Adjusted EBITDA should not be considered in isolation or
as a substitute for net income (loss), cash flows from operating activities, or
other measures of liquidity determined in accordance with generally accepted
accounting principles. 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, the Company's lenders use them for
the purpose of analyzing the Company's performance with respect to the Company's
new revolving credit facility and the Indenture, 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.
12
<PAGE>
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. The Company provides a diverse range of consumer financial
products and services primarily consisting of check cashing, money orders, money
transfers, consumer loans, bill payment and distribution of public assistance
benefits.
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 September 30, 1998 and the results of operations for the three
months ended September 30, 1998 and 1997. The results for the three months ended
September 30, 1998 are not necessarily indicative of the results for the full
fiscal year.
On November 13, 1998, DFG Holdings, Inc. ("Holdings"), and a newly-formed and
wholly-owned subsidiary of Green Equity Investors II, LP ("Green"), entered into
an Agreement and Plan of Merger (the "Merger Agreement"). The Merger will be
effected through (i) the issuance of Holdings' common stock to Green, (ii) the
issuance of junior preferred equity securities of Holdings to Green, and (iii)
the issuance of zero-coupon debt by Holdings. The proceeds of these transactions
will be used to acquire Holdings' common stock currently held by non-management
shareholders and to pay fees and expenses associated with the transaction. In
connection with this transaction, the Company expects to record a pre-tax
non-cash charge of approximately $8.3 million associated with the cashless
exercise of options held by management. The consummation of the transaction is
subject to the satisfaction of a number of conditions, including clearance under
the Hart-Scott-Rodino Act. The Company anticipates the transaction will close by
December 31, 1998.
The Company's revenues from government services decreased for the three months
ended September 30, 1998 as compared to the three months ended September 30,
1997. The Company expects that its government revenues will continue to decline
due to a number of factors, including a continued reduction in the number of
recipients eligible for public assistance benefits. Additionally, a number of
state and local governmental agencies have initiated processes to install
electronic benefits transfer systems designed to disburse public assistance
benefits directly to individuals (sometimes referred to as "EBT" systems). The
Commonwealth of Pennsylvania initiated an EBT system in January 1998 which was
fully implemented during fiscal 1998. As a result, all of the Company's
contracts with the Commonwealth of Pennsylvania were terminated during fiscal
1998. The Company's contracts with the Commonwealth of Pennsylvania contributed
0.0% and 6.6% of consolidated gross revenues for the three months ended
September 30, 1998 and 1997. Management believes the installation of such
systems has not had a material adverse effect on the Company's results of
operations or financial condition.
13
<PAGE>
RESULTS OF OPERATIONS
Revenue Analysis
<TABLE>
<CAPTION>
Three Months Ended September 30,
- -----------------------------------------------------------------------------------------------------------
(In thousands) (Percentage of total
revenue)
------------------------- ---------------------------
1998 1997 1998 1997
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Check cashing................................. $17,063 $16,611 63.0% 63.5%
Cash `Til Payday(R) origination fees.......... 3,500 864 12.9 3.3
Government services........................... 1,592 3,933 5.9 15.0
Other revenue................................. 4,936 4,736 18.2 18.2
---------- ---------- ---------- ------------
Total revenue................................. $27,091 $26,144 100.0% 100.0%
========== ========== ========== ============
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Total revenues were $27.1 million for the three months ended September 30, 1998
compared to $26.1 million for the three months ended September 30, 1997, an
increase of $1.0 million or 3.8%.
Comparable retail store sales at those locations owned by the Company for the
entire period increased $2.2 million or 9.8%. Check cashing revenue increased
3.2%, Cash `Til Payday(R) origination fees increased 267.2% and other revenues
increased 0.1%. The increase in Cash `Til Payday(R) origination fees resulted
from the full roll-out of the Cash `Til Payday(R) loan product. Partially
offsetting this increase, however, was a 48.0% decline in revenues from
government services resulting from a decrease in the volume of benefits
distributed by the Company and the termination of all of the Company's contracts
with the Commonwealth of Pennsylvania in fiscal year 1998. Government services
revenues accounted for 5.9% of total revenues for the three months ended
September 30, 1998, a decrease from 15.0% of total revenues for the three months
ended September 30, 1997.
14
<PAGE>
Store and Regional Expense Analysis
<TABLE>
<CAPTION>
Three Months Ended September 30,
- ----------------------------------------------------------------------------------------------------
(Percentage of
(In thousands) total revenue)
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Salaries and benefits................. $8,499 $8,458 31.4% 32.3%
Occupancy............................. 2,389 2,457 8.8 9.4
Depreciation.......................... 479 439 1.8 1.7
Other................................. 5,927 6,507 21.8 24.9
--------- --------- --------- ---------
Total store and regional
expenses........................... $17,294 $17,861 63.8% 68.3%
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------
</TABLE>
Store and regional expenses were $17.3 million for the three months ended
September 30, 1998 compared to $17.9 million for the three months ended
September 30, 1997, a decrease of $600,000 or 3.4%. Total store and regional
expenses associated with stores closed during fiscal 1998 were $1.4 million for
the three months ended September 30, 1997. For the three months ended September
30, 1998 total store and regional expenses declined to 63.8% of total revenue
compared to 68.3% of total revenue for the three months ended September 30, 1997
due to an improvement in store level profitability and increased revenues.
15
<PAGE>
Other Expense Analysis
<TABLE>
<CAPTION>
Three Months Ended September 30,
- -------------------------------------------------------------------------------------------------------
(Percentage of
(In thousands) total revenue)
------------------------ ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Corporate expenses.............................. $3,247 $2,642 12.0% 10.1%
(Gain) loss on store closings and sales......... 25 (40) .1 (.2)
Other depreciation and amortization............. 1,411 1,203 5.2 4.6
Interest expense................................ 3,227 3,219 11.9 12.3
Income taxes.................................... 1,107 641 4.1 .2
- -------------------------------------------------------------------------------------------------------
</TABLE>
Corporate Expense
Corporate expenses were $3.2 million for the three months ended September 30,
1998 compared to $2.6 million for the three months ended September 30, 1997, an
increase of $600,000 or 23.1%. Additional costs, primarily salaries and
benefits, have been incurred as a result of the implementation of various
strategic initiatives including full roll-out of the Cash `Til Payday(R) loan
product and the opening of Loan Mart(TM) stores, which offer only Cash `Til
Payday(R) unsecured short-term loans.
(Gain) Loss on Store Closings and Sales
During the three months ended September 30, 1997 the Company sold all of its
stores in Michigan and sold or closed five locations in southern California
whose primary business was to provide services for the distribution of public
assistance benefits under existing contracts with state and local
municipalities. There were no significant closings during the three months ended
September 30, 1998.
Other Depreciation and Amortization
Other depreciation and amortization expenses were $1.4 million and $1.2 million
for the three months ended September 30, 1998 and 1997, respectively, an
increase of $200,000. The increase was mainly due to the accelerated
amortization of the remaining goodwill associated with the Company's government
services line of business which is being amortized over the estimated remaining
life of the future undiscounted cash flows of the government services business.
This increased amortization expense was offset in part by the reduced
amortization related to the writedown of goodwill of $12.9 million in June 1998.
Interest Expense
Interest expense was $3.2 million for the three months ended September 30, 1998
as well as for the three months ended September 30, 1997. Interest expense has
remained constant due to the average outstanding indebtedness remaining
constant.
16
<PAGE>
Income Taxes
The provision for income taxes was $1.1 million for the three months ended
September 30, 1998 compared to $600,000 for the three months ended September 30,
1997, an increase of $500,000. The Company's effective tax rate is significantly
greater than the federal statutory rate of 34% due to non-deductible goodwill
amortization, state taxes and foreign taxes. For the three months ended
September 30, 1998, the Company's effective tax rate was 59.7% compared to 50.9%
for the three months ended September 30, 1997. This increase is primarily
attributable to the acceleration of amortization associated with the Company's
government services line of business.
17
<PAGE>
Changes in Financial Condition
Cash and cash equivalent balances and the revolving credit facilities balance
fluctuate significantly as a result of seasonal, monthly and day-to-day
requirements for funding check cashing and other operating activities. For the
three months ended September 30, 1998, cash and cash equivalents increased by
$4.4 million.
Accrued interest increased due to the timing of the semi-annual interest payment
on the senior notes.
Liquidity and Capital Resources
The Company raised approximately $110 million of gross proceeds by issuing 10
7/8% Senior Notes due in November 2006 (the "Notes"). The Notes require
semi-annual cash interest payments due in November and May. Simultaneously with
the offering of the Notes (the "Offering"), the Company entered into a revolving
credit facility (the "New Revolving Credit Facility") which allows borrowings in
an amount not to exceed the lesser of $25.0 million or a borrowing base as set
forth in the new revolving credit facility agreement. There were no borrowings
under the New Credit Facility as of September 30, 1998. The Company also
established an overdraft credit facility to fund peak working capital needs for
its Canadian operation, which provides for borrowings up to $4.6 million.
The Senior Notes and the New Revolving Credit Facility contain certain financial
and other restrictive covenants, which, among other things, require the Company
to maintain minimum amounts of net worth, 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. As a result
of the writedown of goodwill associated with the Company's government services
line of business recorded in the fourth quarter of fiscal 1998, the Company did
not meet the net worth covenant in the New Revolving Credit Facility. This
condition was waived through December 31, 1998 and an amendment to the New
Revolving Credit Facility related to the net worth covenant was obtained on
November 13, 1998 to give effect to the goodwill writedown.
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 and finance
acquisitions. For the three months ended September 30, 1998 and 1997, the
Company had net cash provided by operating activities of $5.6 million and $7.4
million, respectively, which cash was used for purchases of equipment related to
existing stores, recently acquired stores and investments in technology. The
Company's total budgeted capital expenditures are currently anticipated to
aggregate approximately $2.7 million during its fiscal year ending June 30,
1999. As of September 30, 1998, the Company had made capital expenditures of
$600,000. The actual amount of capital expenditures will depend in part upon the
number of new stores acquired and the number of stores remodeled. In addition,
the Company intends to spend up to $2.4 million during fiscal 1999 to purchase
the equipment necessary to implement a point-of-sale system.
The Company is highly leveraged, and borrowings under the new revolving credit
facility and the overdraft facility 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 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 resulting from operating
efficiencies. Additional revenue growth is expected to be generated by increased
check cashing revenues (consistent with historical growth), and an expansion of
the Cash 'Til Payday Loan(R) Program. 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. As discussed earlier within
this Management's Discussion and Analysis, the Commonwealth of Pennsylvania
initiated an EBT system in January 1998 which was fully implemented during
fiscal 1998. As a result, all of the Company's contracts with the Commonwealth
18
<PAGE>
of Pennsylvania were terminated during fiscal 1998. The Company believes the
termination of these contracts will not have a material impact on the Company's
liquidity or capital resources. As a result of the foregoing assumptions, which
the Company believes to be reasonable, the Company expects to be able to fund
its liquidity and capital expenditure requirements for the foreseeable future,
including scheduled payments on the Notes and payments of interest and principal
on other indebtedness. 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 new revolving credit facility in an
amount sufficient to enable the Company to service its indebtedness, including
the Notes, or to make anticipated capital expenditures. It may be necessary for
the Company to refinance all or a portion of the principal of the Notes 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.
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, therefore, 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.
Impact of Year 2000
General Description of the Year 2000 Issue and the Nature and Effect of the
Year 2000 on Information Technology (IT) and Non-IT Systems
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operation, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
Based on recent assessments, the Company determined that it would be required to
modify or replace portions of its software and certain hardware so that those
systems will properly utilize dates beyond December 31, 1999. The Company
presently believes that with modifications or replacements of existing software
and certain hardware, the Year 2000 Issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 Issue will not have a material impact on the operations of the
Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date the Company
has fully completed its assessment of all systems that could be significantly
affected by the Year 2000. The completed assessment indicated that hardware
systems could be affected. However, the Company has determined that these
systems will not present a material exposure as it related to the Company's
service to its customers.
Timetable for Completion of Each Remaining Phase Progress in Becoming Year 2000
Compliant
The remediation of hardware systems is expected to complete by April 1999. The
testing of the hardware is expected to be completed by May 1999 with full
implementation by June 1999.
19
<PAGE>
Nature and Level of Importance of Third Parties and their Exposure to the Year
2000
To date, the Company is not aware of any external agent that would materially
impact the Company's results of operations, liquidity, or capital resources.
However, the Company has no means of ensuring that external agents will be Year
2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion would not materially impact the Company.
Costs
The Company does not expect the costs to be material and does not expect the
projects to have a significant effect on operations.
Risks
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete the remaining phases, there would not be a
material impact on the Company's results of operations, liquidity, or capital
resources, since the Company is not significantly dependent on technology.
Contingency Plans
The Company has contingency plans for maintaining its store operations. These
plans do not involve any technological tools because the Company is not
significantly dependent on technology.
Recent Accounting Pronouncements
The Company has adopted the Financial Accounting Standards Board, "FASB"
Statement No. 130, "Reporting Comprehensive Income" for the fiscal year ended
June 30, 1999. The adoption of this standard has not had a material effect on
the Company's results of operations, financial position, capital resources, or
liquidity.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt its
requirements in connection with its annual reporting for the fiscal year ending
June 30, 1999.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative and Hedging Activities" ("SFAS 133"). SFAS 133
requires companies to record derivatives on the balance sheet as assets or
liabilities at fair value. It is effective for financial statements for fiscal
years beginning after June 15, 1999. The Company believes that SFAS 133 will
have no impact on the Company's future earnings and financial position, as the
Company does not currently engage in any derivative or hedging activities.
20
<PAGE>
Forward-Looking Statements
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.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in quantitative and qualitative disclosures
in fiscal year 1999. Reference is made to Item 7A in the Annual Report on Form
10-K for the year ended June 30, 1998.
22
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Item 3. Legal Proceedings in the Company's audited financial
statements in its Annual Report of Form 10-K for the fiscal year ended
June 30, 1998.
Item 2. Changes in Securities
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
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
23
<PAGE>
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: November 16, 1998 *By: /s/ Richard S. Dorfman
------------------------------------
Name: Richard S. Dorfman
Title: Executive Vice 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.
24
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 59,948
<SECURITIES> 0
<RECEIVABLES> 4,575
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,230
<PP&E> 12,910
<DEPRECIATION> 5,101
<TOTAL-ASSETS> 166,584
<CURRENT-LIABILITIES> 21,887
<BONDS> 115,659
0
0
<COMMON> 0
<OTHER-SE> 29,038
<TOTAL-LIABILITY-AND-EQUITY> 166,584
<SALES> 0
<TOTAL-REVENUES> 27,091
<CGS> 0
<TOTAL-COSTS> 17,294
<OTHER-EXPENSES> 4,683
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,227
<INCOME-PRETAX> 1,887
<INCOME-TAX> 1,107
<INCOME-CONTINUING> 780
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 780
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
