<PAGE>
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, 1999
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)
<TABLE>
<S> <C>
NEW YORK 13-2997911
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
</TABLE>
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 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.
--------
<S> <C> <C>
Item 1. Financial Statements
Interim Consolidated Balance Sheets as of June 30, 1998
and March 31, 1999 (unaudited)................................................ 3
Interim Unaudited Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 1998 and 1999.......................................... 4
Interim Unaudited Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1998 and 1999................................................. 5
Notes to Interim Unaudited Consolidated Financial Statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk............................................................. 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds..................................... 26
Item 3. Defaults Upon Senior Securities............................................... 26
Item 4. Submission of Matters to a Vote of Security Holders........................... 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K.............................................. 26
</TABLE>
<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, March 31,
1998 1999
--------- ---------
<S> <C> <C>
ASSETS (unaudited)
Cash and cash equivalents..................................... $ 55,501 $ 55,520
Accounts receivable........................................... 5,726 11,540
Income taxes receivable....................................... - 3,996
Prepaid expenses.............................................. 1,814 2,074
Deferred income taxes......................................... 1,070 1,070
Notes receivable - officers................................... 200 2,851
Property and equipment, net of accumulated
depreciation of $4,616 and $6,151............................ 7,820 10,326
Cost assigned to contracts acquired, net of accumulated
amortization of $461 and $557................................ 231 135
Cost in excess of net assets acquired, net of accumulated
amortization of $6,559 and $9,958............................ 87,036 96,727
Covenants not to compete, net of accumulated amortization
of $917 and $1,217.......................................... 786 478
Debt issuance costs, net of accumulated amortization of
$885 and $1,690............................................. 4,856 10,245
Other......................................................... 810 1,517
--------- ---------
$165,850 $196,479
========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable.............................................. $ 12,806 $ 12,547
Income taxes payable.......................................... 2,002 3,030
Advance from money transfer agent............................. 3,000 2,000
Accrued expenses.............................................. 3,722 3,825
Accrued interest payable...................................... 2,191 5,607
Due to parent................................................. - 907
Revolving credit facilities................................... - 4,416
Long-term debt and subordinated notes......................... 2,675 20,831
payable................................
10-7/8 % Senior Notes due 2006................................ 110,000 109,190
Shareholder's equity:
Common stock, $1 par value: 20,000
shares authorized; 100 shares issued and outstanding at
June 30, 1998 and March 31, 1999............................ - -
Additional paid-in capital.................................... 40,941 50,824
Accumulated deficit........................................... (8,875) (13,144)
Accumulated other comprehensive loss.......................... (2,612) (3,554)
--------- ---------
Total shareholder's equity................................ 29,454 34,126
--------- ---------
$165,850 $196,479
========= =========
</TABLE>
See notes to interim unaudited consolidated financial statements.
3
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
1998 1999 1998 1999
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues.................................. $30,154 $32,309 $83,159 $ 88,329
Store and regional expenses:
Salaries and benefits.................. 8,466 8,979 25,190 26,005
Occupancy.............................. 2,386 2,407 7,295 7,069
Depreciation........................... 450 538 1,335 1,543
Other.................................. 5,098 5,182 18,014 17,026
-------- ------- ------- -------
Total store and regional expenses......... 16,400 17,106 51,834 51,643
Corporate expenses........................ 2,612 3,506 8,263 9,852
Loss on store closings and sales.......... 30 25 20 75
Other depreciation and amortization....... 1,184 1,394 3,576 4,217
Recapitalization costs.................... - - - 2,551
Non-cash compensation..................... - - - 10,024
Interest expense.......................... 3,203 5,959 9,595 12,457
-------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item........................ 6,725 4,319 9,871 (2,490)
Income tax provision...................... 2,751 2,057 4,495 1,694
-------- ------- ------- -------
Income (loss) before extraordinary item 3,974 2,262 5,376 (4,184)
Extraordinary loss on debt extinguishment
(net of income tax benefit of $45)........ - - - 85
-------- ------- ------- -------
Net income (loss)......................... $ 3,974 $ 2,262 $ 5,376 $(4,269)
-------- ------- ------- -------
</TABLE>
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>
Nine Months Ended
March 31,
-----------------------------
1998 1999
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................... $ 5,376 ($4,269)
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization......... 5,335 8,351
Loss on store closings and sales...... 20 75
Non-cash compensation................. - 10,024
Extraordinary loss on debt extinguishment
(net of income tax benefit of $45)... - 85
Deferred tax benefit.................. 98 -
Change in assets and liabilities (net
of effect of acquisitions):
Decrease (increase) in accounts
receivable and income taxes
receivable......................... 2,077 (6,793)
Increase in prepaid expenses and
other............................. (461) (854)
Increase in accounts payable,
income taxes payable, accrued
expenses and accrued interest
payable........................... 7,814 3,228
-------- --------
Net cash provided by operating
activities............................. 20,259 9,847
Cash flows from investing activities:
Acquisitions, net of cash acquired..... (1,751) (15,709)
Gross proceeds from sales of property
and equipment......................... 202 -
Additions to property and equipment.... (1,698) (4,091)
-------- --------
Net cash used in investing activities... (3,247) (19,800)
Cash flows from financing activities:
Extinguishment of long term debt....... - (810)
Payments to money transfer agent....... - (1,000)
Payments on subordinated notes payable. (132) (16)
Net (decrease) increase in revolving
credit facilities..................... (12,187) 3,973
Proceeds from long term debt........... - 18,107
Payment of debt issuance costs......... (56) (8,106)
Advances to officers................... - (2,651)
Payments of financed insurance
premiums.............................. (229) (10)
Net increase in due to parent.......... - 907
-------- --------
Net cash (used in) provided by
financing activities................... (12,604) 10,394
Effect of exchange rate changes on cash
and cash equivalents................... (261) (422)
-------- --------
Net increase in cash and cash
equivalents............................ 4,147 19
-------- --------
Cash and cash equivalents at beginning
of period.............................. 55,205 55,501
-------- --------
Cash and cash equivalents at end of
period................................. $ 59,352 $ 55,520
======== ========
Supplemental disclosures of cash flow
information:
Interest paid........................... $ 6,425 $ 6,484
======== ========
Income taxes paid....................... $ 1,591 $ 4,662
======== ========
Supplemental schedule of non-cash
investing and financing activities
Non-cash compensation................... $ - $ 10,024
======== ========
</TABLE>
See notes to interim unaudited consolidated financial statements.
5
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED 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 nine-month
period ended March 31, 1999 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.
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 428 (of which 349 are company owned)
locations operating as ABC Check Cashing, Almost-A-Banc(R), Any Kind Check
Cashing Centers(R), C&C Check Cashing, Cash-N-Dash Check Cashing, Check Mart(R),
Chex$Cashed(R), Financial Exchange Company(R), Money Mart(R), Quikcash,
QwiCash(R), The Money Shop, The Service Centers and Loan Mart in thirteen
states, the District of Columbia, Canada and the United Kingdom. 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 1,200
retail locations throughout the State of New York.
6
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
2. SUBSIDIARY GUARANTOR CONDENSED FINANCIAL INFORMATION
The Company raised approximately $110 million of gross proceeds in 1996 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
foreign subsidiaries.
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
consolidating balance sheet at March 31, 1999, and the consolidating statements
of operations and cash flows for the nine month period ended March 31, 1999 of
the Company (on a parent-company basis), combined domestic Guarantors, combined
foreign Guarantors 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>
Domestic Foreign
Dollar Financial Subsidiary Subsidiary
At March 31, 1999: Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents.... $ 3,767 $30,812 $20,941 $ - $ 55,520
Accounts receivable.......... 7,715 4,827 5,197 (6,199) 11,540
Income taxes receivable...... 3,996 - - - 3,996
Prepaid expenses............. 624 1,108 342 - 2,074
Deferred income taxes........ 1,008 62 - - 1,070
Notes receivable-officers.... 2,851 - - - 2,851
Due from affiliates.......... 59,638 - - (59,638) -
Property and equipment, net.. 1,556 5,177 3,593 - 10,326
Cost assigned to contracts
acquired, net............... - 135 - - 135
Cost in excess of net assets - 56,712 40,015 - 96,727
acquired, net...............
Covenants not to compete..... - 404 74 - 478
Debt issuance costs, net..... 10,245 - - - 10,245
Investment in subsidiaries... 79,465 - - (79,465) -
Other........................ 621 415 481 - 1,517
-------- ------- ------- --------- --------
$171,486 $99,652 $70,643 $(145,302) $196,479
======== ======= ======= ========= ========
LIABILITIES AND
SHAREHOLDER'S EQUITY
Accounts payable............. $ 5 $ 9,662 $ 2,880 $ - $ 12,547
Income taxes payable......... - 149 2,881 - 3,030
Advance from money transfer 2,000 - - - 2,000
agent.......................
Accrued expenses............. 1,387 1,402 1,036 - 3,825
Accrued interest payable..... 4,728 879 6,199 (6,199) 5,607
Due to parent and affiliates. 907 18,135 41,503 (59,638) 907
Revolving credit facilities.. - - 4,416 - 4,416
Long term debt and 18,107 2,652 72 - 20,831
subordinated notes payable..
10 7/8% Senior Notes due 2006 109,190 - - - 109,190
-------- ------- ------- --------- --------
136,324 32,879 58,987 (65,837) 162,353
Shareholder's equity:
Common stock................. - - - - -
Additional paid-in capital... 50,824 46,614 10,797 (57,411) 50,824
(Accumulated deficit)
retained earnings........... (13,144) 20,159 1,895 (22,054) (13,144)
Accumulated other
comprehensive loss.......... (2,518) - (1,036) - (3,554)
-------- ------- ------- --------- --------
Total shareholder's equity... 35,162 66,773 11,656 (79,465) 34,126
-------- ------- ------- --------- --------
$171,486 $99,652 $70,643 $(145,302) $196,479
======== ======= ======= ========= ========
</TABLE>
8
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
CONSOLIDATING STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Domestic Foreign
Nine Months Ended March 31, Dollar Financial Subsidiary Subsidiary
1999: Group, Inc. Guarantors Guarantors Eliminations Consolidated
------------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ - $66,922 $21,407 $ - $88,329
Store and regional expenses:
Salaries and benefits............. - 19,609 6,396 - 26,005
Occupancy......................... - 5,333 1,736 - 7,069
Depreciation...................... - 1,156 387 - 1,543
Other............................. - 13,925 3,101 - 17,026
-------- ------- ------- -------- -------
Total store and regional - 40,023 11,620 - 51,643
expenses............................
Corporate expenses................... 7,533 - 2,319 - 9,852
Loss on store closings and sales..... 75 - - - 75
Other depreciation and
amortization........................ 288 3,030 899 - 4,217
Recapitalization costs............... 2,551 - - - 2,551
Non-cash compensation................ 10,024 - - - 10,024
Interest expense..................... 9,636 186 2,635 - 12,457
-------- ------- ------- -------- -------
(Loss) income before income
taxes and extraordinary item....... (30,107) 23,683 3,934 (2,490)
Income taxes (benefit) provision..... (1,156) 602 2,248 - 1,694
-------- ------- ------- -------- -------
(Loss) income before
extraordinary item.................. (28,951) 23,081 1,686 - (4,184)
Extraordinary loss on debt
extinguishment (net of income
tax benefit of $45)............... 85 - - - 85
-------- ------- ------- -------- -------
(Loss) income before equity in net
income of subsidiaries.............. (29,036) 23,081 1,686 - (4,269)
Equity in net income of
subsidiaries:
Domestic subsidiary guarantors....... 23,081 - - (23,081)
Foreign subsidiary guarantors........ 1,686 - - (1,686) -
-------- ------- ------- -------- -------
Net (loss) income.................... ($4,269) $23,081 $ 1,686 $(24,767) ($4,269)
======== ======= ======= ======== =======
</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>
Nine Months Ended March 31, Domestic Foreign
1999: Dollar Financial Subsidiary Subsidiary
Group, Inc. Guarantors Guarantors Eliminations Consolidated
---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net (loss) income..................... $ (4,269) $ 23,081 $ 1,686 $(24,767) $(4,269)
Adjustments to reconcile net
(loss) income to net, cash (used
in) provided by operating
activities:
Undistributed income of
subsidiaries...................... (24,767) - - 24,767 -
Depreciation and amortization....... 2,895 4,171 1,285 - 8,351
Loss on store closings and sales.... 75 - - - 75
Non-cash compensation............... 10,024 - - - 10,024
Extraordinary loss on debt
extinguishment (net of income
tax benefit of $45)............... 85 - - - 85
Change in assets and
liabilities (net of effect of
acquisitions):
Increase in accounts receivable
and income taxes receivable..... (8,317) (741) (929) 3,194 (6,793)
Increase in prepaid expenses
and other....................... (709) (24) (121) - (854)
Increase (decrease) in accounts
payable, income taxes payable,
accrued expenses and accrued
interest payable................... 4,259 (198) 2,361 (3,194) 3,228
-------- -------- -------- -------- --------
Net cash (used in) provided by
operating activities................ (20,724) 26,289 4,282 - 9,847
Cash flows from investing activities:
Acquisitions, net of cash
acquired......................... - (181) (15,528) - (15,709)
Additions to property and
equipment........................ (910) (1,957) (1,224) - (4,091)
Net decrease in due from
affiliates....................... 17,031 - - (17,031) -
-------- -------- -------- -------- --------
Net cash provided by (used in)
investing activities............. 16,121 (2,138) (16,752) (17,031) (19,800)
Cash flows from financing activities:
Extinguishment of long term debt.. (810) - - - (810)
Payments to money transfer agent.. (1,000) - - - (1,000)
Payments on subordinated
notes payable.................... - (13) (3) - (16)
Net increase in revolving credit
facilities....................... - - 3,973 - 3,973
Proceeds from long term debt...... 18,107 - - - 18,107
Payments of debt issuance costs... (8,106) - - - (8,106)
Advances to officers............... (2,651) - - - (2,651)
Payments of financed insurance
premiums......................... (10) - - - (10)
Net increase (decrease) in due
to affiliates.................... 907 (33,021) 15,990 17,031 907
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities................ 6,437 (33,034) 19,960 17,031 10,394
Effect of exchange rate changes on
cash and cash equivalents......... - - (422) - (422)
-------- -------- -------- -------- --------
Net increase (decrease) in cash
and cash equivalents................. 1,834 (8,883) 7,068 - 19
Cash and cash equivalents at
beginning of period.................. 1,933 39,695 13,873 - 55,501
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period............................... $ 3,767 $ 30,812 $ 20,941 $ - $ 55,520
======== ======== ======== ======== ========
</TABLE>
10
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
3. ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 1999 increased from the comparative period
of June 30, 1998 primarily due to post-dated checks acquired from the Company's
purchase of Instant Cash Loans, Limited.
4. 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 certain Company government contracts, 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 nine months ended March 31, 1998
are revenues of $5.4 million and store expenses of $3.2 million related to
these stores. The gain recognized related to the sale and closure of these
stores was not material.
5. RECENT ACCOUNTING PRONOUNCEMENTS
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 income (loss) for the periods stated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $3,974 $2,262 $5,376 $(4,269)
Foreign currency translation adjustment 324 473 (912) (942)
------ ------ ------ -------
Total comprehensive income (loss) $4,298 $2,735 $4,464 $(5,211)
====== ====== ====== =======
</TABLE>
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative and Hedging Activities" ("SFAS No. 133"). SFAS
No. 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 with early adoption permitted. The
Company does not plan to adopt SFAS No. 133 for the fiscal year ended June 30,
1999. The Company does not expect the adoption to have a material impact as its
use of derivatives is limited.
11
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
The Company has five put option contracts with expiration dates ranging in three
month intervals through June 2000. These contracts were purchased to safeguard
the Company's earnings before interest, taxes, depreciation, amortization, non
cash charges, recapitalization costs and loss on store closings and sales
("EBITDA") from materially significant changes in the exchange rate of the Great
Britain Pound for its United Kingdom subsidiary. The net loss associated with
the cost of the option contracts recognized in earnings during the nine months
ended March 31, 1999 was not material.
MERGER AGREEMENT
On November 13, 1998, DFG Holdings, Inc. ("Holdings"), a Delaware corporation
and parent company of Dollar Financial Group, Inc., a New York corporation (the
"Registrant"), entered into an agreement and plan of merger (the "Merger
Agreement") with DFG Acquisition, Inc., ("Acquisition") a Delaware corporation,
controlled by Green Equity Investors II, L.P., a Delaware limited partnership
("GEI II") and the stockholders of Holdings party thereto, providing for the
merger of Acquisition with and into Holdings, with Holdings as the surviving
corporation (the "Merger"). Holdings and Acquisition consummated the Merger on
December 18, 1998, and in the Merger, the senior members of management of
Holdings retained substantially all of their stock in the surviving corporation
and the other stockholders received cash in exchange for their shares of
Holdings. Immediately prior to the merger between Holdings and Acquisition,
management of the Company exercised their options in Holdings which were
converted into equivalent amounts of stock and resulted in a non-cash charge of
$10.0 million. The Merger was accounted for as a recapitalization of Holdings.
The management (other than the employment of Donald F. Gayhardt, Jr. as the
President), Board of Directors and equity ownership of the Registrant did not
change in the Merger and Holdings continues to own one hundred percent of the
voting securities of the Registrant.
In connection with the Merger, Holdings, the Registrant and Jeffrey Weiss, the
current chief executive officer of Holdings and the Registrant, entered into a
new employment agreement, dated November 13, 1998, effective concurrently with
the consummation of the Merger, pursuant to which Jeffrey Weiss will continue to
serve as the chief executive officer of Holdings and the Registrant. In
addition the Registrant, Holdings and Donald F. Gayhardt, Jr., entered into an
employment agreement, dated December 18, 1998, pursuant to which Donald F.
Gayhardt, Jr. will serve as the President of Holdings and the Registrant.
Donald F. Gayhardt, Jr. formerly served as the executive vice president and
chief financial officer of the Registrant from 1992 to 1997.
In connection with the Merger, the Registrant terminated the Second Amended and
Restated Credit Agreement, dated as of November 15, 1996 (as amended and
modified) with Bank of America National Trust and Savings Association, as
administrative agent, Lehman Commercial Paper, Inc., as documentation agent, and
certain lenders party thereto. The Registrant entered into a new Credit
Agreement, dated as of December 18, 1998 (the "Credit Agreement"), obtaining a
new $160 million credit facility from a syndicate of banks led by Wells Fargo
Bank, National Association as administrative agent and co-arranger, First Union
Capital Markets, as co-arranger, First Union National Bank, as syndication
agent, and U.S. Bank National Association, as documentation agent. On January
8, 1999, Dresdner Bank AG became an additional participant in the Credit
Agreement. The Credit Agreement provides for a revolving credit facility in
favor of the Registrant of up to $70 million and two term loans aggregating up
to $90 million. The $90 million term loans were available to fund the
Registrant's repurchase obligations in excess of $20 million, if any, in
connection with its 10 7/8% Senior Notes due 2006 (the "Senior Notes"), under
the Indenture, dated November 15, 1996 (the "Indenture"), with State Street Bank
and Trust Company (successor in interest to Fleet National Bank), as trustee.
Repurchase obligations in connection with the Senior Notes were less than $20
million and as a result, the $90 million term loan commitments expired on
February 16, 1999.
12
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
In connection with the Merger, the Registrant entered into a Purchase Agreement,
dated as of December 18, 1998 (the "Purchase Agreement"), among GS Mezzanine
Partners, L.P., GS Mezzanine Partners Offshore, L.P., Stone Street Fund 1998,
L.P., Bridge Street Fund 1998, L.P., Ares Leveraged Investment Fund, L.P. and
Ares Leveraged Investment Fund II, L.P. (collectively, the "Investors"),
pursuant to which the Registrant may issue up to $20 million aggregate principal
amount of its 10 7/8% Senior Subordinated Notes due 2006 (the "Subordinated
Notes"), to (i) fund the Registrant's repurchase obligations, if any, in
connection with its Senior Notes, under the Indenture, or (ii) to
finance or refinance acquisitions of the Registrant. In connection with the
Purchase Agreement, the Registrant entered into an Exchange and Registration
Rights Agreement, dated December 18, 1998, with the parties to the Purchase
Agreement, pursuant to which the Registrant is obligated under certain
circumstances to exchange the Subordinated Notes and register such Subordinated
Notes under the Securities Act of 1933. In February 1999, the Company issued
$18.1 million of its Subordinated Notes to fund the purchase of Instant Cash
Loans Limited, the remaining 86.5% partnership interest in its Calgary Money
Mart Partnership, repurchase obligations and related fees under the Senior Notes
of $11.4 million, $5.6 million and $1.1 million, respectively.
7. ACQUISITIONS
On February 10, 1999, the Company and Dollar Financial UK Limited, an indirect
subsidiary of the Company, formerly known as DFG Acquisition Limited, entered
into an Agreement for the sale and purchase of shares with Henry Hallam, Rachel
Hallam and shareholders signatory thereto, to acquire all of the outstanding
shares of Instant Cash Loans Limited ("ICL") which operates eleven stores in the
United Kingdom. The aggregate purchase price for this acquisition was $11.4
million and was funded with the issuance of the Company's Subordinated Notes.
On February 17, 1999, National Money Mart Company, a subsidiary of the Company,
entered into an Asset Purchase Agreement with King Mortgage Limited and Denis
Willner, to purchase the remaining 86.5% partnership interest in its Calgary
Money Mart Partnership ("Calgary"). Calgary operates six stores in Alberta,
Canada. The aggregate purchase price for this acquisition was $5.6 million and
was funded with the issuance of the Company's Subordinated Notes.
The following unaudited pro forma information for the nine months ended March
31, 1998 and 1999 presents the results of operations as if the acquisitions had
occurred as of the beginning of the periods presented. The pro forma operating
results include the results of these acquisitions for the indicated period and
reflect the amortization of intangible assets arising from the acquisitions,
increased interest expense on acquisition debt, the income tax impact and other
immaterial activities discontinued as of the respective purchase dates of ICL
and Calgary. Pro forma results of operations are not necessarily indicative of
the results of operations that would have occurred had the purchase been made on
the date above or the results which may occur in the future.
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
(Unaudited)
-------------------------------
1998 1999
-------- ---------
(dollars in thousands)
<S> <C> <C>
Revenues $87,881 $ 93,268
Income (loss) before extraordinary item $ 5,220 ($4,207)
Net (loss) income $ 5,220 ($4,292)
</TABLE>
13
<PAGE>
DOLLAR FINANCIAL GROUP, INC.
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONT'D)
SUPPLEMENTAL STATISTICAL DATA
<TABLE>
<CAPTION>
March 31,
Company Operating Data: 1998 1999
-------- --------
<S> <C> <C>
Stores in operation:
Company-Owned.......................... 352 349
Franchised Stores...................... 70 79
---- ----
Total................................... ==== ====
422 428
==== ====
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31 March 31
------------------ ------------------
Operating Data: 1998 1999 1998 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Face amount of checks cashed (in $ 587 $ 606 $ 1,720 $ 1,722
millions)..............................
Face amount of average check............ $ 345 $ 337 $ 319 $ 303
Face amount of average check (excluding $ 383 $ 382 $ 345 $ 327
Canada)................................
Average fee per check................... $11.11 $11.61 $ 9.74 $ 9.84
Number of checks cashed (in thousands).. 1,700 1,797 5,400 5,686
Adjusted EBITDA/1/...................... $11,570 $12,154 $24,424 $28,464
Adjusted EBITDA Margin/1/............... 38.4% 37.6% 29.4% 32.2%
Three Months Ended Nine Months Ended
March 31 March 31
------------------ ------------------
Collections Data: 1998 1999 1998 1999
-------- ------- ------- -------
Face amount of returned checks (in $ 3,325 $ 3,960 $10,315 $12,374
thousands).............................
Collections (in thousands).............. 2,550 3,153 7,378 9,280
------- ------- ------- -------
Net write-offs (in thousands)........... $ 775 $ 807 $ 2,937 $ 3,094
======= ======= ======= =======
Collections as a percentage of
returned checks........................ 76.7% 79.6% 71.5% 75.0%
Net write-offs as a percentage of
check cashing revenues................ 4.1% 3.9% 5.6% 5.5%
Net write-offs as a percentage of the
face amount of checks cashed........... .13% .13% .17% .18%
</TABLE>
- ------------------------
/1/ Adjusted EBITDA is earnings before interest, taxes, depreciation,
amortization, noncash charges, recapitalization costs 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.
14
<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, the largest such
network in Canada and recently acquired stores in the United Kingdom. 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 March 31, 1999 and the results of operations for the three and nine
months ended March 31, 1999 and 1998. The results for the three and nine months
ended March 31, 1999 are not necessarily indicative of the results for the full
fiscal year.
On November 13, 1998, DFG Holdings Inc. ("Holdings"), entered into an agreement
and plan of merger (the "Merger Agreement") with DFG Acquisition, Inc.,
("Acquisition") controlled by Green Equity Investors II, L.P., and the
stockholders of Holdings party thereto, providing for the merger of Acquisition
with and into Holdings, with Holdings as the surviving corporation (the
"Merger"). Holdings and Acquisition consummated the Merger on December 18,
1998, and in the Merger, the senior members of management of Holdings retained
substantially all of their stock in the surviving corporation and the other
stockholders received cash in exchange for their shares of Holdings. The Merger
was accounted for as a recapitalization of Holdings.
The management (other than the employment of Donald F. Gayhardt, Jr. as the
President), Board of Directors and equity ownership of the Company did not
change in the Merger and Holdings continues to own one hundred percent of the
voting securities of the Company.
In connection with the Merger, Holdings, the Company and Jeffrey Weiss, the
current chief executive officer of Holdings and the Company, entered into a new
employment agreement, dated November 13, 1998, effective concurrently with the
consummation of the Merger, pursuant to which Jeffrey Weiss will continue to
serve as the chief executive officer of Holdings and the Company. In addition
the Company, Holdings and Donald F. Gayhardt, Jr., entered into an employment
agreement, dated December 18, 1998, pursuant to which Donald F. Gayhardt, Jr.
will serve as the President of Holdings and the Company. Donald F. Gayhardt,
Jr. formerly served as the executive vice president and chief financial officer
of the Company from 1992 to 1997.
On February 10, 1999, the Company and Dollar Financial UK Limited, an indirect
subsidiary of the Company, formerly known as DFG Acquisition Limited, entered
into an Agreement for the sale and purchase of shares with Henry Hallam, Rachel
Hallam and shareholders signatory thereto, to acquire all of the outstanding
shares of Instant Cash Loans Limited ("ICL") which operates eleven stores in the
United Kingdom. The aggregate purchase price for this acquisition was $11.4
million and was funded with the issuance of the Company's 10 7/8% Senior
Subordinated Notes due 2006.
On February 17, 1999, National Money Mart Company, a subsidiary of the Company,
entered into an Asset Purchase Agreement with King Mortgage Limited and Denis
Willner, to purchase the remaining 86.5% partnership interest in its Calgary
Money Mart Partnership ("Calgary"). Calgary operates six stores in Alberta,
Canada. The aggregate purchase price for this acquisition was $5.6 million and
was funded with the issuance of the Company's 10 7/8% Senior Subordinated Notes
due 2006.
15
<PAGE>
The Company's revenues from government services decreased for the three and nine
months ended March 31, 1999 as compared to the three and nine months ended March
31, 1998. The Company expects that its government revenues will continue to
decline due to a number of factors, including a continued reduction in the
number of recipients eligible for public assistance benefits. Additionally, a
number of state and local governmental agencies have initiated processes to
install electronic benefits transfer systems designed to disburse public
assistance benefits directly to individuals (sometimes referred to as "EBT"
systems). The Commonwealth of Pennsylvania initiated an EBT system in January
1998 which was fully implemented during fiscal 1998. As a result, all of the
Company's contracts with the Commonwealth of Pennsylvania were terminated during
fiscal 1998. The Company's contracts with the Commonwealth of Pennsylvania
contributed 0.0% and 7.5% of consolidated gross revenues for the three months
ended March 31, 1999 and 1998 and 0.0% and 6.8% of consolidated gross revenues
for the nine months ended March 31, 1999 and 1998, respectively. The
installation of such systems has not had a material adverse effect on the
Company's results of operations or financial condition.
16
<PAGE>
RESULTS OF OPERATIONS
Revenue Analysis
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
--------------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) Total Revenue) ($ in thousands) Total Revenue)
------------------------ ------------------ ----------------- --------------
1998 1999 1998 1999 1998 1999 1998 1999
-------- -------- ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Check cashing................ $18,879 $20,866 62.6% 64.6% $52,612 $56,300 63.3% 63.7%
Cash 'Til Payday(R)
origination fees............. 2,241 4,975 7.4 15.4 4,669 12,964 5.6 14.7
Government services.......... 3,757 1,776 12.5 5.5 10,685 4,861 12.8 5.5
Other revenue................ 5,277 4,692 17.5 14.5 15,193 14,204 18.3 16.1
Total revenue................ $30,154 $32,309 100.0% 100.0% $83,159 $88,329 100.0% 100.0%
</TABLE>
QUARTER COMPARISON
Total revenues were $32.3 million for the three months ended March 31, 1999
compared to $30.2 million for the three months ended March 31, 1998, an increase
of $2.1 million or 7.0%.
Comparable retail store sales at those locations owned by the Company for the
entire period increased $2.9 million or 11.2%. Check cashing revenue increased
8.2%, Cash 'Til Payday(R) origination fees increased 92.0% and other revenues
increased 4.5%. 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 58.3% 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 5.5% of total revenues for the three months ended March
31, 1999, a decrease from 12.5% of total revenues for the three months ended
March 31, 1998.
NINE MONTH COMPARISON
Total revenues were $88.3 million for the nine months ended March 31, 1999
compared to $83.2 million for the nine months ended March 31, 1998, an increase
of $5.1 million or 6.1%.
Comparable retail store sales at those locations owned by the Company for the
entire period increased $7.3 million or 10.2%. Check cashing revenue increased
8.9%, Cash 'Til Payday(R) origination fees increased 143.2% and other revenues
increased 2.5%. The increase in Cash 'Til Payday(R) origination fees resulted
from the full roll-out of the Cash 'Til Payday(R) loan product. Partially
offsetting this increase, however, was a 52.3% decline in revenues from
government services resulting from a decrease in the volume of benefits
distributed by the Company and the termination of all of the Company's contracts
with the Commonwealth of Pennsylvania in fiscal year 1998. Government services
revenues accounted for 5.5% of total revenues for the nine months ended March
31, 1999, a decrease from 12.8% of total revenues for the nine months ended
March 31, 1998.
17
<PAGE>
Store and Regional Expense Analysis
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
-------------------- --------------- ----------------- -----------------
1998 1999 1998 1999 1998 1999 1998 1999
------- ------- ------ ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits.................... $ 8,466 $ 8,979 28.1% 27.8% $25,190 $26,005 30.3% 29.4%
Occupancy................................ 2,386 2,407 7.9 7.4 7,295 7,069 8.8 8.0
Depreciation............................. 450 538 1.5 1.7 1,335 1,543 1.6 1.8
Other.................................... 5,098 5,182 16.9 16.0 18,014 17,026 21.6 19.3
------- ------- ---- ---- ------- ------- ---- ----
Total store and regional
expenses............................ $16,400 $17,106 54.4% 52.9% $51,834 $51,643 62.3% 58.5%
======= ======= ==== ==== ======= ======= ==== ====
</TABLE>
QUARTER COMPARISON
Store and regional expenses were $17.1 million for the three months ended March
31, 1999 compared to $16.4 million for the three months ended March 31, 1998, an
increase of $700,000 or 4.3%. Total store and regional expenses associated with
stores closed during fiscal 1998 were $900,000 for the three months ended March
31, 1998. For the three months ended March 31, 1999 total store and regional
expenses decreased to 52.9% of total revenue compared to 54.4% of total revenue
for the three months ended March 31, 1998 due to an improvement in store level
profitability and increased revenues.
NINE MONTH COMPARISON
Store and regional expenses were $51.6 million for the nine months ended March
31, 1999 compared to $51.8 million for the nine months ended March 31, 1998, a
decrease of $200,000 or 0.4%. Total store and regional expenses associated with
stores closed during fiscal 1998 were $3.2 million for the nine months ended
March 31, 1998. For the nine months ended March 31, 1999 total store and
regional expenses declined to 58.5% of total revenue compared to 62.3% of total
revenue for the nine months ended March 31, 1998 due to an improvement in store
level profitability and increased revenues.
18
<PAGE>
Other Expense Analysis
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
------------------------------------------------------------------------
(Percentage of (Percentage of
($ in thousands) total revenue) ($ in thousands) total revenue)
------------------- -------------- ---------------- -----------------
1998 1999 1998 1999 1998 1999 1998 1999
------- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate expenses......................... $2,612 $3,506 8.7% 10.9% $8,263 $ 9,852 9.9% 11.2%
Loss on store closings
and sales............................... 30 25 .1 .1 20 75 - .1
Other depreciation and..................... 1,184 1,394 3.9 4.3 3,576 4,217 4.3 4.8
amortization..............................
Recapitalization costs..................... - - - - - 2,551 - 2.9
Non-cash compensation...................... - - - - - 10,024 - 11.3
Interest expense........................... 3,203 5,959 10.6 18.4 9,595 12,457 11.5 14.1
Income taxes............................... 2,751 2,057 9.1 6.4 4,495 1,694 5.4 1.9
</TABLE>
QUARTER COMPARISON
Corporate Expenses
Corporate expenses were $3.5 million for the three months ended March 31, 1999
compared to $2.6 million for the three months ended March 31, 1998, an increase
of $900,000. 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.
Other Depreciation and Amortization
Other depreciation and amortization expenses were $1.4 million and $1.2 million
for the three months ended March 31, 1999 and 1998, 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 $6.0 million for the three months ended March 31, 1999 and
was $3.2 million for the three months ended March 31, 1998, an increase of $2.8
million or 87.5%. This increase is primarily attributable to the merger and
recapitalization of Holdings and the issuance of debt to fund current
acquisitions.
Income Taxes
The provision for income taxes was $2.1 million for the three months ended March
31, 1999 compared to $2.8 million for the three months ended March 31, 1998, a
decrease of $700,000. 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. This decrease is primarily
attributable to the expenses related to the merger and recapitalization of
Holdings.
19
<PAGE>
NINE MONTH COMPARISON
Corporate Expenses
Corporate expenses were $9.9 million for the nine months ended March 31, 1999
compared to $8.3 million for the nine months ended March 31, 1998, an increase
of $1.6 million or 19.3%. 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.
Loss on Store Closings and Sales
During the nine months ended March 31, 1998 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.
Other Depreciation and Amortization
Other depreciation and amortization expenses were $4.2 million and $3.6 million
for the nine months ended March 31, 1999 and 1998, respectively, an increase of
$600,000. 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.
Recapitalization Costs
During the nine months ended March 31, 1999, the Company incurred $2.6 million
of expenses associated with the consummation of the merger between Holdings and
Acquisition which was accounted for as a recapitalization of Holdings.
Non-Cash Compensation
Immediately prior to the merger between Holdings and Acquisition, management of
the Company exercised their options in Holdings which were converted into
equivalent amounts of stock and resulted in a non-cash charge of $10.0 million.
Interest Expense
Interest expense was $12.5 million for the nine months ended March 31, 1999 and
was $9.6 million for the nine months ended March 31, 1998. This increase is
primarily attributable to the merger and recapitalization of Holdings and the
issuance of debt to fund current acquisitions.
Income Taxes
The provision for income taxes was $1.7 million for the nine months ended March
31, 1999 compared to $4.5 million for the nine months ended March 31, 1998, a
decrease of $2.8 million. 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. This decrease is primarily
attributable to the expenses related to the merger and recapitalization of
Holdings.
20
<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
nine months ended March 31, 1999, cash and cash equivalents remained constant
due to the net activity of cash generated by operations of $9.8 million,
acquisitions and the expenses related to the merger and recapitalization of
Holdings.
Income taxes receivable and notes receivable-officers increased due to the
merger and recapitalization of Holdings.
Liquidity and Capital Resources
The Company raised approximately $110 million of gross proceeds in 1996 by
issuing 10 7/8% Senior Notes due in November 2006 (the "Senior Notes"). The
Notes require semi-annual cash interest payments due in November and May. In
connection with the Merger, the Company terminated the Second Amended and
Restated Credit Agreement, dated as of November 15, 1996. The Company entered
into a new Credit Agreement, dated as of December 18, 1998 obtaining a new $160
million credit facility. The Credit Agreement provides for a revolving credit
facility of up to $70 million and two term loans aggregating up to $90 million.
There were no borrowings under the revolving credit facility as of March 31,
1999. The $90 million term loans were available to fund the Company's
repurchase obligations in excess of $20 million, if any, in connection with its
10 7/8% Senior Notes due 2006. Repurchase obligations in connection with the
Senior Notes were less than $20 million and as a result, the $90 million term
loan commitments expired on February 16, 1999. Also, in connection with the
Merger, the Company entered into a Purchase Agreement dated December 18, 1998,
to which the Company may issue up to $20 million aggregate principal amount of
its 10 7/8% Senior Subordinated Notes Due 2006 (the "Subordinated Notes"), to
(i) fund the Company's repurchase obligations, if any, in connection with its
Senior Notes or (ii) to finance or refinance acquisitions of the Company. In
February 1999, the Company issued $18.1 million of its Subordinated Notes to
fund the purchase of ICL, Calgary, repurchase obligations and related fees under
the Senior Notes of $11.4 million, $5.6 million and $1.1 million, respectively.
The Senior Notes and the New 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 established an overdraft
credit facility to fund peak working capital needs for its Canadian operation.
The overdraft facility provides for borrowings up to $4.6 million, of which $3.1
million was outstanding as of March 31, 1999. In conjunction with the purchase
of ICL, the Company established an overdraft credit facility to fund working
capital needs for its United Kingdom operations. The overdraft facility provides
for up to $1.6 million and had $1.3 million outstanding as of March 31, 1999.
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 nine months ended March 31, 1999 and 1998, the Company had
net cash provided by operating activities of $9.8 million and $20.3 million,
respectively, which cash was used for purchases of equipment related to existing
stores, recently acquired stores and investments in technology. As of March 31,
1999, the Company had made capital expenditures of $4.1 million. The actual
amount of capital expenditures will depend in part upon the number of new stores
acquired and the number of stores remodeled.
The Company is highly leveraged, and borrowings under the new 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
21
<PAGE>
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 of Pennsylvania were terminated during fiscal
1998. The termination of these contracts did 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 Senior 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.
22
<PAGE>
Timetable for Completion of Each Remaining Phase Progress in Becoming Year 2000
Compliant
The remediation of hardware systems is expected to be completed by April 1999.
The testing of the hardware is expected to be completed by May 1999 with full
implementation by June 1999.
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 impact 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 No. 131"). SFAS No. 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 No. 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.
23
<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.
24
<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 with the exception of exposure to the foreign currency rate
of the Great Britain Pound relating to Dollar Financial Group, Inc.'s
("Company's") acquisition of Instant Cash Loans Limited. The Company has
purchased five put option contracts with expiration dates ranging in three month
intervals through June 2000. These contracts were purchased to safeguard the
Company's earnings before interest, taxes, depreciation, amortization, non cash
charges, recapitalization costs and loss on store closings and sales ("EBITDA")
from materially significant changes in the exchange rate of the Great Britain
Pound for its United Kingdom subsidiary. The cost of these contracts was not
significant.
Reference is made to Item 7A in the Annual Report on Form 10-K for the year
ended June 30, 1998.
25
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 8, 1999, an action was commenced in the United States
District Court for the Central District of California by a consumer
who had borrowed from Eagle National Bank (the "Bank") in a payday-
loan transaction. The defendants in the action are the Company, its
affiliates, the Bank and ten other unnamed defendants, plaintiff sues
on behalf of an alleged class of borrowers who, plaintiff claims, have
been overcharged in loan transactions originated and serviced for the
Bank by the Company. Plaintiff alleges violations of state and federal
usury and consumer-protection laws and seeks damages, including treble
damages under the federal racketeering statute, in an unknown amount
plaintiff alleges to be in excess of $75 million. The Company believes
that it has meritorious defenses to the action, under both federal and
state law and it intends to defend the lawsuit vigorously.
Reference is made to 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 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
(a) Exhibit
10.24 Agreement for the sale and purchase of shares of Instant
Cash Loans, LTD. dated February 10, 1999 with Dollar
Financial Group, Inc., DFG Acquisition, LTD., Henry Hallam,
Rachel Hallam and shareholders signatory thereto.
(Incorporated by reference to exhibit 10.24 of the
Registrant's Form 8K/A filed April 26, 1999, declared
effective February 25, 1999).
10.25 Purchase Agreement dated February 17, 1999 by and among
National Money Mart Company (a subsidiary of Dollar
Financial Group, Inc.), King Mortgage LTD. And Denis
Willner to purchase the remaining 86.5% partnership
interest in Calgary Money Mart Partnership. (Incorporated
by reference to exhibit 10.25 of the Registrant's Form 8K/A
filed April 26, 1999, declared effective February 25,
1999).
27.1 Financial Data Schedule
(b) Reports on Form 8-K
During the three month period ending March 31, 1999, the
Registrant filed a report on Form 8K dated February 25,
1999 with an amended Form 8K filed on April 26, 1999,
reporting an Item 2 event (Acquisition or Disposition of
Assets) and an Item 7 event (Financial Statements and
Exhibits).
26
<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: May 17, 1999 *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.
27
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1999
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<RECEIVABLES> 11,540
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<PP&E> 16,477
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0
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<INTEREST-EXPENSE> 12,457
<INCOME-PRETAX> (2,490)
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