UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

DOLLAR FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE (State or Other Jurisdiction of Incorporation or Organization)		23-2636866 (I.R.S. Employer Identification No.)

(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 ü 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 þ    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act: (Check one):

Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o   Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by a check mark whether the registrant is a shell company (as defined) in Rule 12b-2 of the Exchange Act) Yes o   No þ

As of January 31, 2008, 24,203,196 shares of the registrant’s common stock, par value $0.001 per share, were outstanding.

 

 

DOLLAR FINANCIAL CORP.

INDEX

				Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
		Interim Consolidated Balance Sheets as of June 30, 2007 and December 31, 2007(unaudited)			3
		Interim Unaudited Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2006 and 2007			4
		Interim Unaudited Consolidated Statements of Shareholders’ Equity as of December 31, 2007			5
		Interim Unaudited Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2007			6
		Notes to Interim Unaudited Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			44
Item 4.		Controls and Procedures			45
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			46
Item 1A.		Risk Factors			46
Item 4.		Submission of Matters to a Vote of Security Holders			46
Item 6.		Exhibits			47
Signature					48
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Rule 13a-14(a)/15d-14(a) Certification of President
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of President
Section 1350 Certification of Chief Financial Officer

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DOLLAR FINANCIAL CORP.

INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)

		June 30,				December 31,
		2007				2007
						(unaudited)
ASSETS
Cash and cash equivalents		$	294,518			$	181,447
Restricted cash			1,014				—
Loans receivable, net:
Loans receivable			90,552				121,432
Less: Allowance for loan losses			(8,623	)			(11,981	)
Loans receivable, net			81,929				109,451
Other consumer lending receivables			1,056				86
Loans in default, net of an allowance of $18,045 and $21,756			10,311				12,142
Other receivables			10,337				9,912
Prepaid expenses			12,146				12,179
Deferred tax asset, net of valuation allowance of $94,018 and $96,105			4,545				11,710
Property and equipment, net of accumulated depreciation of $81,494 and $90,723			55,031				66,197
Goodwill and other intangibles, net of accumulated amortization of $21,778 and $22,199			341,681				474,624
Debt issuance costs, net of accumulated amortization of $1,244 and $3,000			17,747				16,981
Other			3,304				4,989
		$	833,619			$	899,718
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	39,808			$	45,834
Income taxes payable			11,293				10,764
Accrued expenses and other liabilities			28,119				31,759
Fair value of derivatives			18,793				48,469
Deferred tax liability			12,713				19,474
Long-term debt			576,910				576,219
Shareholders’ equity:
Common stock, $0.001 par value: 55,500,000 shares authorized;
24,133,800 shares and 24,203,595 shares issued and outstanding at June 30, 2007 and December 31, 2007, respectively			24				24
Additional paid-in capital			251,460				253,493
Accumulated deficit			(147,123	)			(122,105	)
Accumulated other comprehensive income			41,622				35,787
Total shareholders’ equity			145,983				167,199
		$	833,619			$	899,718

See notes to interim unaudited consolidated financial statements.

DOLLAR FINANCIAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2007				2006				2007
Revenues:
Check cashing		$	41,518			$	48,859			$	79,907			$	94,522
Consumer lending:
Fees from consumer lending			56,799				73,594				105,624				142,103
Provision for loan losses and adjustment to servicing income			(10,532	)			(16,070	)			(20,104	)			(30,876	)
Consumer lending, net			46,267				57,524				85,520				111,227
Money transfer fees			5,437				7,079				10,104				13,039
Franchise fees and royalties			1,571				1,162				4,024				2,503
Other			7,305				11,027				14,256				20,410
Total revenues			102,098				125,651				193,811				241,701
Store and regional expenses:
Salaries and benefits			32,127				38,646				61,095				73,883
Occupancy			7,931				10,157				15,583				19,431
Depreciation			2,157				3,214				4,211				6,023
Returned checks, net and cash shortages			3,765				4,597				7,397				9,253
Telephone and communications			1,473				1,798				3,017				3,450
Advertising			3,196				2,721				5,458				4,824
Bank charges and armored carrier services			2,569				3,287				4,837				6,343
Other			11,307				11,980				20,653				22,452
Total store and regional expenses			64,525				76,400				122,251				145,659
Store and regional margin			37,573				49,251				71,560				96,042
Corporate and other expenses:
Corporate expenses			13,287				17,599				26,237				35,462
Other depreciation and amortization			846				890				1,676				1,809
Interest expense, net			8,687				8,977				14,989				17,066
Loss on extinguishment of debt			23,797				97				31,784				97
Goodwill impairment and other charges			24,464				—				24,464				—
Mark to market — term loans			6,619				—				6,619				—
Proceeds from litigation settlements			(3,256	)			—				(3,256	)			—
Other, net			91				(212	)			179				(802	)
Income (loss) before income taxes			(36,962	)			21,900				(31,132	)			42,410
Income tax provision			15,470				8,936				23,044				17,392
Net income (loss)		$	(52,432	)		$	12,964			$	(54,176	)		$	25,018
Net income (loss) per share:
Basic		$	(2.23	)		$	0.54			$	(2.32	)		$	1.04
Diluted		$	(2.23	)		$	0.52			$	(2.32	)		$	1.01
Weighted average shares outstanding:
Basic			23,470,302				24,087,742				23,385,308				24,071,458
Diluted			23,470,302				24,856,446				23,385,308				24,798,417

See notes to interim unaudited consolidated financial statements.

DOLLAR FINANCIAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except share data)

																		Accumulated
										Additional				Accumulated				Other				Total
		Common Stock								Paid-in				Income				Comprehensive				Shareholders’
		Shares				Amount				Capital				(Deficit)				Income				Equity
Balance, June 30, 2007			24,133,800			$	24			$	251,460			$	(147,123	)		$	41,622			$	145,983
Comprehensive income:
Foreign currency translation																			287				287
Cash flow hedges																			(6,122	)			(6,122	)
Net income															25,018								25,018
Total comprehensive income																							19,183
Secondary stock offering																							—
Restricted stock grants			32,908																				—
Vested portion of granted restricted stock and restricted stock units											628												628
Stock options exercised			52,794								674												674
Retirement of common stock			(15,907	)
Other stock compensation											731												731
Balance, December 31, 2007 (unaudited)			24,203,595			$	24			$	253,493			$	(122,105	)		$	35,787			$	167,199

See notes to interim unaudited consolidated financial statements.

DOLLAR FINANCIAL CORP.

INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

		Six Months Ended December 31,
		2006				2007
Cash flows from operating activities:
Net (loss) income		$	(54,176	)		$	25,018
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization			6,781				9,516
Loss on extinguishment of debt			31,784				97
Provision for loan losses and adjustment to servicing income			20,104				30,876
Non-cash stock compensation			877				1,359
Losses on store closings			494				124
Goodwill impairment			28,482				—
Foreign currency loss on revaluation of debt			6,619				—
Deferred tax provision			240				2,457
Other, net			—				341
Change in assets and liabilities (net of effect of acquisitions):
Increase in loans and other receivables			(37,616	)			(43,745	)
Decrease (increase) in prepaid expenses and other			2,116				(2,859	)
Increase in accounts payable, accrued expenses and other liabilities			2,684				9,873
Net cash provided by operating activities			8,389				33,057
Cash flows from investing activities:
Acquisitions, net of cash acquired			(147,151	)			(135,641	)
Additions to property and equipment			(9,711	)			(14,697	)
Net cash used in investing activities			(156,862	)			(150,338	)
Cash flows from financing activities:
Decrease in restricted cash			78,248				1,014
Proceeds from term loans			375,000				—
Secondary offering costs			(41	)			—
Proceeds from the exercise of stock options			3,139				674
Other debt payments			(919	)			(4,396	)
Prepayment of 9.75% Senior Notes due 2011			(292,424	)			—
Convertible debt refinancing			—				(127	)
Net decrease in revolving credit facilities			(72	)			—
Payment of debt issuance costs			(8,964	)			(305	)
Net cash provided by (used in) financing activities			153,967				(3,140	)
Effect of exchange rate changes on cash and cash equivalents			(1,014	)			7,350
Net increase (decrease) in cash and cash equivalents			4,480				(113,071	)
Cash and cash equivalents at beginning of period			120,221				294,518
Cash and cash equivalents at end of period		$	124,701			$	181,447

See notes to interim unaudited consolidated financial statements.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited interim consolidated financial statements are of Dollar Financial Corp. and its wholly owned subsidiaries (collectively the “Company”). The Company is the parent company of Dollar Financial Group, Inc. (“OPCO”) and its wholly owned subsidiaries. The activities of the Company consist primarily of its investment in OPCO. The Company’s unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements in its annual report on Form 10-K (File No. 000-50866) for the fiscal year ended June 30, 2007 filed with the Securities and Exchange Commission. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results of interim periods are not necessarily indicative of the results that may be expected for a full fiscal year.

The Company is a Delaware corporation incorporated in April 1990 as DFG Holdings, Inc. The Company operates a store network through OPCO. The Company, through its subsidiaries, provides retail financial services and document processing services to the general public through a network of 1,442 locations (of which 1,088 are company owned) operating primarily as Money Mart ^®, The Money Shop, Loan Mart ^® , Insta-Cheques ^®, the Money Corner, The Check Cashing Store and We The People^® in 32 states, the District of Columbia, Canada and the United Kingdom. This network includes 1,340 locations (including 1,088 company-owned) in 20 states, the District of Columbia, Canada and the United Kingdom offering financial services including check cashing, single-payment consumer loans, sale of money orders, money transfer services and various other related services. Also included in this network is the Company’s We The People USA, Inc. (“WTP”) business, acquired in March 2005, which offers retail based legal document processing services through a network of 102 franchised locations in 23 states.

The Company’s common shares are traded on the NASDAQ Global Select Market under the symbol “DLLR”.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, loss reserves, valuation allowance for income taxes and impairment assessment of goodwill and other intangible assets. Management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation. These reclassifications have no effect on net income (loss) or shareholders’ equity.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings Per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding, after adjusting for the dilutive effect of stock options. The following table presents the reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share (in thousands):

		Three Months Ended								Six Months Ended
		December 31,								December 31,
		2006				2007				2006				2007
Net income (loss)		$	(52,432	)		$	12,964			$	(54,176	)		$	25,018
Reconciliation of denominator:
Weighted average of common shares outstanding — basic 1			23,470				24,088				23,385				24,071
Effect of dilutive stock options2							572								531
Effect of unvested restricted stock and restricted stock unit grants			—				196				—				196
Weighted average number of common shares outstanding — diluted			23,470				24,856				23,385				24,798

Stock Based Employee Compensation

The Company’s 1999 Stock Incentive Plan (the “1999 Plan”) states that 784,392 shares of its common stock may be awarded to employees or consultants of the Company. The awards, at the discretion of the Company’s Board of Directors, may be issued as nonqualified stock options or incentive stock options. Stock appreciation rights (“SARs”) may also be granted in tandem with the non-qualified stock options or the incentive stock options. Exercise of the SARs cancels the option for an equal number of shares and exercise of the non-qualified stock options or incentive stock options cancels the SARs for an equal number of shares. The number of shares issued under the 1999 Plan is subject to adjustment as specified in the 1999 Plan provisions. No options may be granted after February 15, 2009. All options granted under the 1999 Plan became 100% exercisable in conjunction with the Company’s Initial Public Offering on January 28, 2005.

The Company’s 2005 Stock Incentive Plan (the “2005 Plan”) states that 1,718,695 shares of its common stock may be awarded to employees or consultants of the Company. The awards, at the discretion of the Company’s Board of Directors, may be issued as nonqualified stock options, incentive stock options or restricted stock awards. The number of shares issued under the 2005 Plan is subject to adjustment as specified in the 2005 Plan provisions. No options may be granted after January 24, 2015.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Employee Compensation (continued)

On November 15, 2007, at the Company’s 2007 Annual Meeting of Stockholders the stockholders adopted the Company’s 2007 Equity Incentive Plan (the “2007 Plan”). The 2007 Plan provides for the grant of stock options, stock appreciation rights, stock awards, restricted stock unit awards and performance awards (collectively, the “Awards”) to officers, employees, non-employee members of the Board, independent consultants and contractors of the Company and any parent or subsidiary of the Company. The maximum aggregate number of shares of the Company’s common stock (the “Common Stock”) that may be issued pursuant to Awards granted under the 2007 Plan is 2,500,000; provided, however, that no more than 1,250,000 shares of Common Stock may be awarded as restricted stock or restricted stock unit Awards. The shares of Common Stock that may be issued under the 2007 Plan may be authorized, but unissued, or reacquired shares of Common Stock. No grantee may receive an Award relating to more than 500,000 shares of Common Stock in the aggregate per fiscal year under the 2007 Plan.

Stock options and stock appreciation rights granted under the aforementioned plans have an exercise price equal to the closing price of the Company’s common stock on the date of grant. To date no stock appreciation rights have been granted.

Compensation expense related to share-based compensation included in the statement of operations for the three months ended December 31, 2006 and 2007 was $0.3 million and $0.3 million, net of related tax effects, respectively and $0.4 million and $0.6 million, net of related tax effects, for the six months ended December 31 2006 and 2007, respectively.

The weighted average fair value of each employee option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in the periods presented:

		Three months Ended								Six months Ended
		December 31,								December 31,
		2006				2007				2006				2007
Expected volatility			49.6	%			49.0	%			48.0	%			49.0	%
Expected life (years)			6.0				6.0				6.0				6.0
Risk-free interest rate			4.66	%			3.96	%			4.71	%			3.96	%
Expected dividends		None				None				None				None
Weighted average fair value		$	14.33			$	15.03			$	11.02			$	15.03

A summary of the status of stock option activity for the six months ended December 31, 2007 follows:

										Weighted Average
						Weighted				Remaining				Aggregate Intrinsic
						Average				Contractual Term				Value ($ in
		Options				Exercise Price				(years)				millions)
Options outstanding at June 30, 2007
(1,020,716 shares exercisable)			1,297,600			$	15.58				8.1			$	16.8
Granted			34,906			$	29.19
Exercised			(52,794	)		$	12.76
Forfeited and expired			(47,656	)		$	17.18
Options outstanding at December 31, 2007			1,232,056			$	16.03				7.7			$	18.1
Exercisable at December 31, 2007			997,353			$	14.46				7.4			$	16.2

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Employee Compensation (continued)

The aggregate intrinsic value in the above table reflects the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the period and the exercise price of the options, multiplied by the number of in-the-money stock options) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. The intrinsic value of the Company’s stock options changes based on the closing price of the Company’s stock. The total intrinsic value of options exercised for the three and six months ended December 31, 2007 was $0.3 million and $0.9 million, respectively and was $5.5 million and $6.1 million for the three and six months ended December 31, 2006, respectively. As of December 31, 2007, the total unrecognized compensation cost over a weighted-average period of 2.3 years, related to stock options, is expected to be $1.8 million. Cash received from stock options exercised for the three and six months ended December 31, 2007 was $0.4 million and $0.7 million, respectively, and was $2.8 million and $3.1 million for the three and six months ended December 31, 2006, respectively.

Restricted stock awards granted under the 2005 Plan and 2007 Plan become vested (i) upon the Company attaining certain annual pre-tax earnings targets (“performance-based”) and, (ii) after a designated period of time (“time-based”), which is generally three years. Compensation expense is recorded ratably over the requisite service period based upon an estimate of the likelihood of achieving the performance goals. Compensation expense related to restricted stock awards is measured based on the fair value using the closing market price of the Company’s common stock on the date of the grant.

Information concerning unvested restricted stock awards is as follows:

						Weighted
						Average
		Restricted				Grant-Date
		Stock Awards				Fair-Value
Outstanding at June 30, 2007			111,151			$	20.02
Granted			12,481				29.42
Vested			(26,769	)			19.67
Forfeited			(8,122	)			18.36
Outstanding at December 31, 2007			88,741			$	21.60

Restricted Stock Unit awards (RSUs) granted under the 2005 Plan and 2007 Plan become vested after a designated period of time (“time-based”), which is generally on a quarterly basis over three years. Compensation expense is recorded ratably over the requisite service period. Compensation expense related to RSUs is measured based on the fair value using the closing market price of the Company’s common stock on the date of the grant.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock Based Employee Compensation (continued)

Information concerning unvested restricted stock unit awards is as follows:

						Weighted
		Restricted				Average
		Stock Unit				Grant-Date
		Awards				Fair-Value
Outstanding at June 30, 2007			124,438			$	28.53
Granted			13,406			$	28.78
Vested			(20,427	)		$	28.53
Forfeited			(9,983	)		$	28.53
Outstanding at December 31, 2007			107,434			$	28.56

As of December 31, 2007, there was $5.0 million of total unrecognized compensation cost related to nonvested restricted share-based compensation arrangements granted under the plan. That cost is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the three and six months ended December 31, 2007 was $0.5 million and $1.1 million, respectively.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (the “FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes (“FIN 48”), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes, by prescribing a minimum recognized threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 requires that a “more-likely-than-not” threshold be met before the benefit of a tax position may be recognized in the financial statements and prescribes how such benefit should be measured. It requires that the new standard be applied to the balances of assets and liabilities as of the beginning of the period of adoption and that a corresponding adjustment, if required, be made to the opening balance of retained earnings for the Company beginning July 1, 2007. The Company adopted the provisions of FIN 48 on July 1, 2007. The implementation of FIN 48 did not result in any adjustment in the Company’s liability for unrecognized income tax benefits. (See Note 8)

In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measurement for recognition or disclosure purposes under generally accepted accounting principles. As a result of SFAS 157, there is now a common definition of fair value to be used throughout U.S. GAAP. This new standard will make the measurement for fair value more consistent and comparable and improve disclosures about those measures. This statement is effective for the Company beginning July 1, 2008. The Company is currently evaluating the impact, if any, that the adoption of this Statement will have on the consolidated financial statements of the Company.

On February 15, 2007, FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in FAS 159 are elective; however, the amendment to Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for the Company beginning July 1, 2008.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 R, Business Combinations (a revision of Statement No. 141 (“SFAS 141R”). This Statement applies to all transactions or other events in which an entity obtains control of one or more businesses, including those combinations achieved without the transfer of consideration. This Statement retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting be used for all business combinations. This Statement expands the scope to include all business combinations and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their fair values as of the acquisition date. Additionally, SFAS 141R changes the way entities account for business combinations achieved in stages by requiring the identifiable assets and liabilities to be measured at their full fair values. Additionally, contractual contingencies and contingent consideration shall be measured at fair value at the acquisition date. This Statement is effective on a prospective basis to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of this Statement will have on the consolidated financial statements of the Company.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No.51 (“SFAS 160”). This Statement amends ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, this Statement requires that consolidated net income include the amounts attributable to both the parent and the noncontrolling interest. SFAS 160 is effective for interim periods beginning on or after December 15, 2008. The Company believes this statement will have no impact on the consolidated financial statements of the Company.

2. GOODWILL AND OTHER INTANGIBLES

The changes in the carrying amount of goodwill and other intangibles by reportable segment for the fiscal year ended June 30, 2007 and the six months ended December 31, 2007 are as follows (in thousands):

		United								United
		States				Canada				Kingdom				Total
Balance at June 30, 2006		$	97,860			$	61,092			$	59,614			$	218,566
Amortization of identifiable intangibles			(58	)			—				—				(58	)
Acquisition			25,126				109,406				2,779				137,311
Impairment loss			(28,469	)			—				—				(28,469	)
Foreign currency translation adjustments			—				9,167				5,164				14,331
Balance at June 30, 2007		$	94,459			$	179,665			$	67,557			$	341,681
Acquisition			111,260				654				8,274				120,188
Foreign currency translation adjustments			—				13,727				(972	)			12,755
Balance at December 31, 2007		$	205,719			$	194,046			$	74,859			$	474,624

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

2. GOODWILL AND OTHER INTANGIBLES (continued)

The following table reflects the components of intangible assets (in thousands):

		June 30,				December 31,
		2007				2007
		Gross Carrying				Gross Carrying
		Amount(1)				Amount
Non-amortized intangible assets:
Goodwill		$	293,462			$	421,786
Reacquired franchise rights			48,219				52,838
		$	341,681			$	474,624

The Company accounts for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Goodwill is the excess of cost over the fair value of the net assets of the business acquired. Intangible assets consist of reacquired franchise rights, which are deemed to have an indefinite useful life and are not amortized.

Goodwill is tested for impairment annually as of June 30, or whenever events or changes in business circumstances indicate that an asset might be impaired. As of June 30, 2007, there was no impairment of goodwill. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

The Company performs its impairment tests utilizing the two steps as outlined in SFAS 142. If the carrying amount of a reporting unit exceeds its implied fair value, an impairment loss would be recognized in an amount equal to the excess of the implied fair value of the reporting unit’s goodwill over its carrying value, not to exceed the carrying amount of the goodwill.

Nonamortizable intangibles with indefinite lives are tested for impairment annually as of December 31, or whenever events or changes in business circumstances indicate that an asset may be impaired. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge would be recognized to reduce the asset to its estimated fair value. As of December 31, 2007, there was no impairment of reacquired franchise rights. There can be no assurance that future impairment tests will not result in a charge to earnings.

The fair value of the Company’s goodwill and indefinite-lived intangible assets are estimated based upon a present value technique using discounted future cash flows. The Company uses management business plans and projections as the basis for expected future cash flows. Assumptions in estimating future cash flows are subject to a high degree of judgment. The Company makes every effort to forecast its future cash flows as accurately as possible at the time the forecast is developed. However, changes in assumptions and estimates may affect the implied fair value of goodwill and indefinite-lived intangible assets and could result in additional impairment charges in future periods.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is the change in equity from transactions and other events and circumstances from non-owner sources, which includes foreign currency translation and fair value adjustments for cash flow hedges. The following shows the comprehensive income (loss) for the periods stated (in thousands):

		Three months ended								Six months ended
		December 31,								December 31,
		2006				2007				2006				2007
Net (loss) income		$	(52,432	)		$	12,964			$	(54,176	)		$	25,018
Foreign currency translation adjustment			1,131				(3,006	)			2,254				287
Fair value adjustments for cash flow hedges, net(1)(2)			1,266				(757	)			1,223				(6,122	)
Total comprehensive income (loss)		$	(50,035	)		$	9,201			$	(50,699	)		$	19,183

Accumulated other comprehensive income, net of related tax, consisted of net unrealized gains on put options designated as cash flow hedges of $0.1 million and net unrealized losses on cross-currency interest rate swaps designated as cash flow hedging transactions of $2.2 million at December 31, 2007, compared to net unrealized losses on put options designated as cash flow hedges of $0.2 million and net unrealized gains on cross-currency interest rate swaps designated as cash flow hedging transactions of $1.0 million at December 31, 2006.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. GEOGRAPHIC SEGMENT INFORMATION

All operations for which geographic data is presented below are in one principal industry (check cashing, consumer lending and ancillary services) (in thousands):

		United								United
		States				Canada				Kingdom				Total
As of and for the three months ended December 31, 2006
Identifiable assets		$	102,411			$	365,008			$	151,177			$	618,596
Goodwill and other intangibles, net			94,677				162,437				64,178				321,292
Sales to unaffiliated customers:
Check cashing			11,641				17,016				12,861				41,518
Consumer lending:
Fees from consumer lending			20,004				26,429				10,366				56,799
Provision for loan losses and adjustments to servicing revenue			(6,067	)			(2,248	)			(2,217	)			(10,532	)
Consumer lending, net			13,937				24,181				8,149				46,267
Money transfer fees			1,091				3,023				1,323				5,437
Franchise fees and royalties			778				793				—				1,571
Other			1,431				4,285				1,589				7,305
Total sales to unaffiliated customers			28,878				49,298				23,922				102,098
Interest expense, net			2,584				4,651				1,452				8,687
Depreciation and amortization			1,057				1,008				938				3,003
(Loss) income before income taxes			(48,722	)			7,412				4,348				(36,962	)
Income tax provision			7,275				6,968				1,227				15,470
For the six months ended December 31, 2006
Sales to unaffiliated customers:
Check cashing		$	22,773			$	31,747			$	25,387			$	79,907
Consumer lending:
Fees from consumer lending			38,391				47,280				19,953				105,624
Provision for loan losses and adjustments to servicing revenue			(11,657	)			(4,267	)			(4,180	)			(20,104	)
Consumer lending, net			26,734				43,013				15,773				85,520
Money transfer fees			2,183				5,434				2,487				10,104
Franchise fees and royalties			1,911				2,113				—				4,024
Other			3,052				8,058				3,146				14,256
Total sales to unaffiliated customers			56,653				90,365				46,793				193,811
Interest expense, net			8,367				4,417				2,205				14,989
Depreciation and amortization			2,144				1,975				1,768				5,887
(Loss) income before income taxes			(64,162	)			24,476				8,554				(31,132	)
Income tax provision			7,141				13,324				2,579				23,044

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

4. GEOGRAPHIC SEGMENT INFORMATION (continued)

		United								United
		States				Canada				Kingdom				Total
As of and for the three months ended December 31, 2007
Identifiable assets		$	267,787			$	466,137			$	165,794			$	899,718
Goodwill and other intangibles, net			205,719				194,046				74,859				474,624
Sales to unaffiliated customers:
Check cashing			12,159				21,918				14,782				48,859
Consumer lending:
Fees from consumer lending			19,724				38,455				15,415				73,594
Provision for loan losses and adjustments to servicing revenue			(7,046	)			(7,604	)			(1,420	)			(16,070	)
Consumer lending, net			12,678				30,851				13,995				57,524
Money transfer fees			1,350				4,187				1,542				7,079
Franchise fees and royalties			582				580				—				1,162
Other			1,557				6,897				2,573				11,027
Total sales to unaffiliated customers			28,326				64,433				32,892				125,651
Interest expense, net			1,356				5,638				1,983				8,977
Depreciation and amortization			1,163				1,679				1,262				4,104
(Loss) income before income taxes			(3,630	)			18,427				7,103				21,900
Income tax provision			11				6,822				2,103				8,936
For the six months ended December 31, 2007
Sales to unaffiliated customers:
Check cashing		$	23,200			$	42,033			$	29,289			$	94,522
Consumer lending:
Fees from consumer lending			35,712				76,426				29,965				142,103
Provision for loan losses and adjustments to servicing revenue			(12,688	)			(14,562	)			(3,626	)			(30,876	)
Consumer lending, net			23,024				61,864				26,339				111,227
Money transfer fees			2,322				7,875				2,842				13,039
Franchise fees and royalties			1,306				1,197				—				2,503
Other			2,824				12,812				4,774				20,410
Total sales to unaffiliated customers			52,676				125,781				63,244				241,701
Interest expense, net			2,336				10,870				3,860				17,066
Depreciation and amortization			2,257				3,110				2,465				7,832
(Loss) income before income taxes			(7,258	)			37,736				11,932				42,410
Income tax provision (benefit)			(420	)			14,236				3,576				17,392

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Put Options

Operations in the United Kingdom and Canada have exposed the Company to shifts in currency valuations. From time to time, the Company purchases put options in order to protect aspects of the Company’s operations in the United Kingdom and Canada against foreign currency fluctuations. Out of the money put options are generally used because they cost less than completely averting risk using at the money put options, and the maximum loss is limited to the purchase price of the contracts. At December 31, 2007, the Company held put options with an aggregate notional value of C$36.0 million and GBP 5.4 million to protect the Company’s operations in Canada and the United Kingdom against adverse changes in the CAD-USD and GBP-USD exchange rates, respectively, through June 30, 2008. The Company has designated the purchased put options as cash flow hedges of the foreign exchange risk associated with the forecasted purchases of foreign-currency-denominated investment securities. These cash flow hedges have a duration of less than twelve months. For derivative instruments that are designated and qualify as cash flow hedges, the effective portions of the gain or loss on the derivative instrument are initially recorded in accumulated other comprehensive income as a separate component of shareholders’ equity and are subsequently reclassified into earnings in the period during which the hedged transaction is recognized in earnings. Any ineffective portion of the gain or loss is reported in corporate expenses on the statement of operations. For options designated as hedges, hedge effectiveness is measured by comparing the cumulative change in the hedge contract with the cumulative change in the hedged forecasted transactions, both of which are based on forward rates. There was no ineffectiveness from these cash flow hedges for the three and six months ended December 31, 2007. As of December 31, 2007, amounts related to these derivatives qualifying as cash flow hedges amounted to an increase of shareholders’ equity of $0.1 million, net of tax, all of which is expected to be transferred to earnings in the next six months along with the earnings effects of the related forecasted transactions. The fair market value of the outstanding puts held by the Company at December 31, 2007 was $0.8 million and is included in prepaid expenses on the balance sheet.

Cross-Currency Interest Rate Swaps

In December 2006, the Company’s U.K. subsidiary, Dollar Financial U.K. Limited, entered into a cross-currency interest rate swap with a notional amount of GBP 21.3 million that matures in October 2012 to protect against changes in cash flows attributable to changes in both the benchmark interest rate and foreign exchange rates on its Euro-denominated variable rate term loan borrowing under the Company’s credit agreement. Under the terms of this swap, Dollar Financial U.K. Limited pays GBP at a rate of 8.45% per annum and receives a rate of the three-month EURIBOR plus 3.00% per annum on EUR 31.5 million. In December 2006, Dollar Financial U.K. Limited also entered into a cross-currency interest rate swap with a notional amount of GBP 20.4 million that matures in October 2012 to protect against changes in cash flows attributable to changes in both the benchmark interest rate and foreign exchange rates on its USD-denominated variable rate term loan borrowing under the Company’s credit agreement. Under the terms of this cross-currency interest rate swap, Dollar Financial U.K. Limited pays GBP at a rate of 8.36% per annum and it receives a rate of the three-month LIBOR plus 3.00% per annum on US$40.0 million.

In December 2006, the Company’s Canadian subsidiary, National Money Mart Company, entered into cross-currency interest rate swaps with aggregate notional amounts of C$339.9 million that mature in October 2012 to protect against changes in cash flows attributable to changes in both the benchmark interest rate and foreign exchange rates on its USD-denominated variable rate term loan borrowing under the Company’s credit agreement. Under the terms of the swaps, National Money Mart Company pays Canadian dollars at a blended rate of 7.12% per annum and receives a rate of the three-month LIBOR plus 2.75% per annum on $295.0 million.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)

On a quarterly basis, all of the cross-currency interest rate swap agreements call for the exchange of 0.25% of the original notional amounts. Upon maturity, these cross-currency interest rate swap agreements call for the exchange of the remaining notional amounts. The Company has designated these derivative contracts as cash flow hedges for accounting purposes. The Company records foreign exchange remeasurement gains and losses related to the term loans and also records the changes in fair value of the cross-currency swaps each period in corporate expenses in the Company’s consolidated statements of operations. Because these derivatives are designated as cash flow hedges, the Company records the effective portion of the after-tax gain or loss in other comprehensive income, which is subsequently reclassified to earnings in the same period that the hedged transactions affect earnings. As of December 31, 2007, amounts related to cross-currency interest rate swaps amounted to a decrease in shareholders’ equity of $39.8 million, net of tax. The aggregate fair market value of the cross-currency interest rate swaps at December 31, 2007 is a payable of $48.5 million and is included in fair value of derivatives on the balance sheet. There was no hedge ineffectiveness during the three months ended December 31, 2007. During the six months ended December 31, 2007, the Company recorded $0.2 million in earnings related to the ineffective portion of these cash flow hedges.

6. CONTINGENT LIABILITIES

In addition to the legal proceedings discussed below, which the Company is defending vigorously, the Company is involved in routine litigation and administrative proceedings arising in the ordinary course of business. Although the Company believes that the resolution of these proceedings will not materially adversely impact its business, there can be no assurances in that regard.

Canadian Legal Proceedings

On August 19, 2003, a former customer in Ontario, Canada, Margaret Smith, commenced an action against OPCO and the Company’s Canadian subsidiary on behalf of a purported class of Ontario borrowers who, Smith claims, were subjected to usurious charges in payday-loan transactions. The action, which is pending in the Ontario Superior Court of Justice, alleges violations of a Canadian federal law proscribing usury, seeks restitution and damages, including punitive damages, and seeks injunctive relief prohibiting further alleged usurious charges. The Company’s Canadian subsidiary’s motion to stay the action on grounds of arbitrability was denied. The Company’s motion to stay the action for lack of jurisdiction was denied and the related appeal was dismissed. The plaintiff’s motion for class certification was granted on January 5, 2007 and leave to appeal from the decision was refused. In July 2007, the Supreme Court of Canada released two decisions regarding arbitrability in the class action context. As a result, the Company’s Canadian subsidiary has brought a new application to stay the action and to decertify it. The plaintiff has responded by bringing a cross-motion for summary judgment on selected issues. These motions will likely be heard in the first half of calendar year 2008. The action is presently in the discovery phase and a trial, while not yet scheduled, is not expected before late calendar year 2008.

On October 21, 2003, another former customer, Kenneth D. Mortillaro, commenced a similar action against the Company’s Canadian subsidiary, but this action has since been stayed on consent because it is a duplicate action. The allegations, putative class and relief sought in the Mortillaro action are substantially the same as those in the Smith action.

On November 6, 2003, Gareth Young, a former customer, commenced a purported class action in the Court of Queen’s Bench of Alberta, Canada on behalf of a class of consumers who obtained short-term loans from the Company’s Canadian subsidiary in Alberta, alleging, among other things, that the charge to borrowers in connection with such loans is usurious. The action seeks restitution and damages, including punitive damages. On December 9, 2005, the Company’s Canadian subsidiary settled this action, subject to court approval. On March 3, 2006 just prior to the date scheduled for final court approval of the settlement the plaintiff’s lawyers advised that they would not proceed with the settlement and indicated their intention to join a purported national class action. No steps have been taken in the action since March 2006. Subsequently, the Company’s Canadian subsidiary commenced an action against the plaintiff and the plaintiff’s lawyer for breach of contract. That action has not proceeded past the pleadings stage.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. CONTINGENT LIABILITIES (continued)

Canadian Legal Proceedings (continued)

On March 5, 2007, a former customer, H. Craig Day, commenced an action against OPCO, the Company’s Canadian subsidiary and several of the Company’s franchisees in the Court of Queen’s Bench of Alberta, Canada on behalf of a putative class of consumers who obtained short-term loans from the Company’s Canadian subsidiary in Alberta. The allegations, putative class and relief sought in the Day action are substantially the same as those in the Young action but relate to a claim period that commences before and ends after the claim period in the Young action and excludes the claim period described in that action.

On January 29, 2003, a former customer, Kurt MacKinnon, commenced an action against the Company’s Canadian subsidiary and 26 other Canadian lenders on behalf of a purported class of British Columbia residents who, MacKinnon claims, were overcharged in payday-loan transactions. The action, which is pending in the Supreme Court of British Columbia, alleges violations of laws proscribing usury and unconscionable trade practices and seeks restitution and damages, including punitive damages, in an unknown amount. Following initial denial, MacKinnon obtained an order permitting him to re-apply for class certification which was appealed. The Court of Appeal granted MacKinnon the right to apply to the original judge to have her amend her order denying certification. On June 14, 2006, the original judge granted the requested order and the Company’s Canadian subsidiary’s request for leave to appeal the order was dismissed. The certification motion in this action proceeded in conjunction with the certification motion in the Parsons action described below.

On April 15, 2005, the solicitor acting for MacKinnon commenced a proposed class action against the Company’s Canadian subsidiary on behalf of another former customer, Louise Parsons. Class certification was granted on March 14, 2007. An appeal from this certification decision will be argued on February 8, 2008. The action is presently in the discovery phase and a trial, while not yet scheduled, is expected in 2008. In December 2007 the plaintiffs delivered a motion in which they are seeking to add OPCO as a defendant to this action. The motion will be argued sometime after May 2008. OPCO intends to oppose the motion vigorously.

Similar purported class actions have been commenced against the Company’s Canadian subsidiary in Manitoba, New Brunswick, Nova Scotia and Newfoundland. OPCO is named as a defendant in the actions commenced in Nova Scotia and Newfoundland. The claims in these additional actions are substantially similar to those of the Ontario actions referred to above.

On April 26, and August 3, 2006, two former employees, Peggy White and Kelly Arseneau commenced companion actions against the Company’s Canadian subsidiary and OPCO. The actions, which are pending in the Superior Court of Ontario, allege negligence on the part of the defendants in security training procedures and breach of fiduciary duty to employees in violation of applicable statutes. The companion lawsuits seek combined damages of C$5.0 million plus interest and costs. These claims have been submitted to the respective insurance carriers. The Company intends to defend these actions vigorously.

At this time it is too early to determine the likelihood of an unfavorable outcome or the ultimate liability, if any, of these matters.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. CONTINGENT LIABILITIES (continued)

California Legal Proceedings

The Company was the defendant in four lawsuits commenced by the same law firm. Each lawsuit was pled as a class action, and each lawsuit alleged violations of California’s wage-and-hour laws. The named plaintiffs were the Company’s former employees Vernell Woods (commenced August 22, 2000), Juan Castillo (commenced May 1, 2003), Stanley Chin (commenced May 7, 2003) and Kenneth Williams (commenced June 3, 2003). Each of these suits sought an unspecified amount of damages and other relief in connection with allegations that the Company misclassified California store (Woods) and area (Castillo) managers as “exempt” from a state law requiring the payment of overtime compensation, that the Company failed to provide non-management employees with meal and rest breaks required under state law (Chin) and that the Company computed bonuses payable to our store managers using an impermissible profit-sharing formula (Williams). The trial court in Chin denied plaintiff’s motion for class certification and that decision was upheld on appeal. The Company reached a settlement with Chin, resolving all issues for a nominal amount.

In March, 2006, the Company reached a settlement in the Woods, Castillo and Williams actions, and the court granted approval of that settlement in October of 2006. The Company agreed to settle these cases for $5.8 million and a settlement distribution, including payment to the attorneys for fees and costs occurred on January 11, 2007. On October 2, 2007, the court held a final accounting hearing regarding the distribution of the settlement funds. At that hearing, the court dismissed the consolidated cases.

On September 11, 2006, plaintiff Caren Bufil commenced a lawsuit against the Company; the claims in Bufil are substantially similar to the claims in Chin. Bufil seeks class certification of the action against the Company for failure to provide meal and rest periods, failure to provide accurate wage statements and unlawful, unfair and fraudulent business practices under California law. The suit seeks an unspecified amount of damages and other relief. The Company filed a motion for judgment on the pleadings, arguing that the Bufil case is duplicative of the Chin case and should be dismissed. Plaintiff filed her motion for class certification. The Company’s motion was granted, and Bufil’s motion was denied. Bufil has appealed both rulings and her appellate brief is expected to be filed shortly. The Company expected briefing to be completed by the end of October 2007 with a decision on the issues in early 2008, However, Bufil obtained a continuance, and is now expected to file her opening brief in the next two weeks. A decision on the merits should be reached by mid 2008.

At this time, it is too early to determine the likelihood of an unfavorable outcome or the ultimate liability, if any, resulting from the Bufil case.

On April 26, 2007, San Francisco City Attorney filed a complaint in the name of the People of the State of California in the Superior Court of the State of California, County of San Francisco, against two subsidiaries of OPCO. The complaint alleges that the Company’s subsidiaries have engaged in unlawful and deceptive business practices in violation of California Business and Professions Code section 17200 by either making or brokering installment loans in California in violation of the prohibition on usury contained in the California Constitution and the California Finance Lenders Law and that they have otherwise violated the California Finance Lenders Law and the California Deferred Deposit Transaction Law. The complaint seeks broad injunctive relief as well as civil penalties. The Company denies the allegations of the complaint. The Company’s businesses answered the complaint on May 25, 2007. On May 29, 2007, all defendants removed the case to the United States Court for the Northern District of California. On August 20, 2007, that Court issued an order remanding the case to state court. The Company is unable to state whether an outcome unfavorable to us is either probable or remote, nor are we able to estimate the amount or range of loss in the event of an unfavorable outcome.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. CONTINGENT LIABILITIES (continued)

We The People Legal Proceedings

The Company’s business model for its legal document processing services business is being challenged in certain courts, as described below, which could result in the Company’s discontinuation of these services in any one or more jurisdictions. The principal litigation for the WTP business unit is as follows:

The company from which the Company bought the assets of its WTP business, We The People Forms and Service Centers USA, Inc. (the “Former WTP”), certain of its franchisees and/or WTP are defendants in various lawsuits. These actions, which are pending in Ohio, Missouri, and Idaho allege violations of the unauthorized practice of law (“UPL”) statutes and various consumer protection statutes of those states. There are presently four stores operated by franchisees in these three states. These cases seek damages and/or injunctive relief, which could prevent the Company and/or its franchisees from processing legal documents in accordance with the Company’s present business model. The Ohio State Bar Association case has been pending since February 2006; in April 2007, WTP reached a settlement by agreeing to pay $20 thousand in civil penalties for two counts of UPL by its franchisee. Prosecution costs could be assessed against WTP. The Ohio stipulation must be reviewed and accepted by the Ohio Supreme Court and that review is expected in 2008. The U.S. Bankruptcy Trustee for the District of Idaho commenced against WTP’s local franchisee and WTP in December 2007 alleging that the franchisee and WTP violated certain bankruptcy petition preparation rules and committed UPL. In Missouri, the U.S. Bankruptcy Trustee for the Eastern District filed a lawsuit in May 2007 alleging that WTP and its local franchisee violated certain bankruptcy petition preparation rules and committed UPL. WTP is engaged in settlement discussions to resolve these cases, and anticipates a settlement with the Missouri Trustee that will formalize WTP to offer bankruptcy petition services in at a fee lower than in many other states.

On July 6, 2006, New Millennium Corporation (“NMC”) filed a complaint against the Company and certain of its subsidiaries, including WTP, and others, including the Former WTP. This case involves a franchise agreement between the Former WTP and NMC dated April 7, 2004 and certain addenda to the agreement. NMC alleged numerous acts of wrongdoing by the Former WTP and persons associated with the Former WTP, including breach of agreement, fraud and violation of the California Franchise Investment Law and essentially alleged that the Company and its subsidiaries were liable as successors in interest. NMC sought unspecified restitution, compensatory damages and exemplary damages. In response, the Company filed a petition to compel arbitration, which has been granted, and the parties are in the process of preparing for an arbitration scheduled for June 2008. The Company believes the material allegations in the complaint with respect to the Company and its subsidiaries are without merit and intends to defend the matter vigorously.

On July 24, 2006, Glen Tiorum Moors (“GTM”) filed a complaint against WTP, the Former WTP, and others. The case involved an agreement between GTM and the Former WTP relating to the ownership and management of a WTP location in Orange County, California. The complaint asserted a number of claims against all the defendants, including breach of contract and contractual interference claims against WTP. GTM sought various forms of relief from all defendants, including compensatory damages of $0.3 million thousand and unspecified punitive damages. In November 2007, the Company settled with the plaintiffs for the sum of $0.1 million.

On January 17, 2007, a lawsuit was filed in the Los Angeles County Superior Court in California by six We The People franchisees against the Company, WTP, the Former WTP, and certain other defendants. The complaint alleges, among other causes of action, that defendants breached their franchise agreements with plaintiffs, engaged in fraud and conspiracy to defeat plaintiff’s rights, violated certain statutes relating to antitrust, securities and unfair competition, breached fiduciary duties owed to plaintiffs, and engaged in conduct which resulted in the intentional and negligent infliction of emotional distress on plaintiffs. The lawsuit seeks an unspecified amount of compensatory and punitive damages. In response, the Company removed the case to the United States District Court for the Central District of California. The Company also filed a petition to compel arbitration, which has been granted, and the parties are in the process of preparing for an arbitration which is scheduled for September 2008. The Company believes the material allegations in the complaint with respect to the Company and its subsidiaries are without merit and intends to defend the matter vigorously.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. CONTINGENT LIABILITIES (continued)

We The People Legal Proceedings (continued)

On or about February 8, 2007, a lawsuit was filed by We The People of Mecklenburg County, LLC, George Hunt and Mary Hunt in the Superior Court of Mecklenburg County, North Carolina against Ira and Linda Distenfield and We The People Forms and Service Centers USA, Inc. (the “IDLD Parties”), as well as the Company and WTP, as successors in interest. The complaint alleges, among other causes of action, that defendants breached the Franchise Agreement and that the IDLD Parties committed fraud and violated the North Carolina business opportunity statute. The complaint seeks unspecified compensatory and punitive damages and recovery of legal fees. The Company removed the case to the Federal Court and was granted an order compelling arbitration of the dispute. The Company believes the material allegations in the complaint with respect to the Company and WTP are without merit and intends to defend the matter vigorously.

On or about March 27, 2007 Daryl Buchanan, Daniel Buchanan and Paul Lieberman filed a complaint against WTP in the United States District Court in Connecticut alleging that WTP breached their franchise agreement by failing to refund their franchise fee of approximately $0.2 million. The parties have agreed to submit this dispute to arbitration. The Company believes the material allegations in the complaint to be without merit and intends to defend the matter vigorously.

On or about April 6, 2007, a lawsuit was filed by Martha and Marty Wasserman, former WTP franchisees, in the U.S. District Court for the Northern District of Texas against the IDLD Parties, as well as the Company and WTP, as successors in interest. The complaint alleges, among other causes of action, that defendants breached the franchise agreement and that the IDLD Parties committed fraud and deceptive trade practices and violated the Texas business opportunity statute. The Court granted WTP’s motion to compel arbitration. The complaint seeks unspecified compensatory and punitive damages, restitution and recovery of legal fees. The plaintiffs have yet to file their arbitration demand. The Company believes the material allegations in the Complaint with respect to the Company and WTP are without merit and intends to defend the matter vigorously.

On May 8, 2007, WTP’s legal department met with the New York State Attorney General’s Office, Consumer Affairs Division, which had been investigating WTP operation in the New York City area for over three years. The AG’s Office alleged that WTP engaged in unfair business practices, including deceptive advertising, that harmed New York consumers. The Attorney General’s Office demanded that WTP enter into an Agreed Order of Discontinuance (“AOD”) and demanded WTP pay a fine of approximately $0.3 million, plus investigation costs. WTP denied the allegations and requested that the AG’s Office hold the former New York City WTP owners liable for the alleged misconduct. The parties are presently negotiating the final terms of the AOD.

On May 10, 2007, WTP franchisee Roseann Pennisi and her company, We The People of Westchester Square, New York, Inc., sued the Company, Ira and Linda Distenfield, IDLD, and WTP in the Supreme Court of the State of New York, Bronx County. The complaint alleges breach of franchise agreement, tortious interference with franchise agreement, breach of the covenant of good faith and fair dealing, unfair competition against defendants and breach of contract and deception and misrepresentation, unjust enrichment, fraudulent concealment of material facts against the Distenfields and IDLD, Inc. and seeks over $9.0 million in damages. WTP and the Company deny the allegations and have filed a motion with the court to compel arbitration. The court has yet to rule on the Company’s motion.

On September 19, 2007, Jacqueline Fitzgibbons, who claims to be a former customer of a WTP store, commenced a lawsuit against the Company and others in California Superior Court for Alameda County. The suit alleges on behalf of a putative class of consumers that, from 2003 to 2007, We The People violated California law by advertising and selling living trusts and wills to certain California residents. Fitzgibbons claims, among other things, that the Company and others improperly conspired to provide her with legal advice, misled her as to what, if any, legitimate service We The People provided in preparing documents, and misled her regarding the supervising attorneys’ role in preparing documents. The Plaintiff is seeking class certification, prohibition on the Company’s unlawful business practices, and damages on behalf of the class in the form of disgorgement of all monies and profits obtained from unlawful business practices, general and special damages according to law and proof, attorneys’ fees and costs of the suit, statutory and tremble damages pursuant to various California business and consumer protection codes. The Company intends to defend these allegations vigorously and believes that Fitzgibbons’ claims and her assertion of class status are without merit. It is too early to determine the likelihood of a favorable or unfavorable outcome or the ultimate liability, if any, with respect to this matter.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6. CONTINGENT LIABILITIES (continued)

We The People Legal Proceedings (continued)

It is the Company’s opinion that many of the WTP related litigation matters relate to actions undertaken by the Distenfields, IDLD, Inc. and the Former WTP during the period of time when they owned or managed We The People Forms and Service Centers USA, Inc.; this period of time was prior to the acquisition of the assets of the Former WTP by the Company. However, in many of these actions, the Company and WTP have been included as defendants in these cases as well. At this time, it is too early to determine the likelihood of an unfavorable outcome or the ultimate liability, if any, of any of the aforementioned matters against WTP or the Company or any other Company litigation as well.

In addition to the matters described above, the Company continues to respond to inquiries it receives from state bar associations and state regulatory authorities from time to time as a routine part of its business regarding its legal document processing services business and its WTP franchisees.

While the Company believes there is no legal basis for liability in any of the aforementioned cases, due to the uncertainty surrounding the litigation process, the Company is unable to reasonably estimate a range of loss, if any, at this time. While the outcome of these matters is currently not determinable, the Company does not expect that the ultimate cost to resolve these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

7. ACQUISITIONS

The following acquisitions have been accounted for under the purchase method of accounting.

On August 30, 2007, the Company entered into a purchase agreement to acquire substantially all of the assets of 45 retail stores, operating as Check Casher, American Check Casher, Cash Advance, American Payday Loans, Cash Advance USA and Payday Loans (collectively, “American Payday Loans” or “APL”). The aggregate purchase price was approximately $27.0 million in cash of which $2.0 million in cash will be held in escrow for 24 months to secure certain indemnification claims. The agreement also includes a maximum revenue-based earn out of up to $3.0 million which is payable in February 2009. On August 30, 2007, the Company consummated the acquisition of 22 of the stores, which are located in Missouri, Oklahoma, Arizona and Hawaii. On September 19, 2007, the Company consummated the acquisition of an additional four of the aforementioned 45 stores, all of which are located in Iowa. On October 17, 2007, the Company consummated the acquisition of an additional 16 of the aforementioned stores, which are located in Kansas and South Carolina. The Company intends to complete the acquisition of the remaining 3 stores in Nebraska upon obtaining certain business licenses in the respective jurisdictions. The total aggregate purchase price for the 42 stores that were acquired during the six months ended December 31, 2007 was $28.7 million in cash, including $1.9 million to be held in escrow for indemnification claims. The Company allocated a portion of the purchase price to loans receivable for $4.6 million and other assets for $2.5 million. A portion of the proceeds from the $200.0 million senior convertible note offering on June 27, 2007 were utilized to pay for the acquisition. The excess purchase price over the preliminary fair value of identifiable assets acquired was $21.6 million and was recorded to goodwill.

On December 15, 2007, the Company consummated the acquisition of substantially all of the assets of 81 financial services stores and one corporate office in the southeast Florida (the “CCS Acquisition”) from CCS Financial Services, Inc., d/b/a/ The Check Cashing Store (“CCS”). The acquisition was effected pursuant to the terms of an asset purchase agreement dated October 11, 2007. The aggregate purchase price for the acquisition was approximately $101.9 million in cash, including $6.0 million in cash to be held in escrow for 24 months to secure certain indemnification claims. The Company allocated a portion of the purchase price to loans receivable for $7.1 million, cash in stores for $2.1 million, fixed assets for $2.5 million, and other assets for $0.5 million. A portion of the proceeds from the $200 million senior convertible note offering on June 27, 2007 was utilized to pay for the acquisition. The excess of the purchase price over the preliminary fair value of the identifiable assets acquired was $89.7 million and was recorded to goodwill.

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

7. ACQUISITIONS (continued)

On December 19, 2007, the Company entered into a share purchase agreement to acquire all of the shares of Cash Your Cheque, Ltd, a United Kingdom entity, which operates seven check cashing and payday lending stores. The aggregate purchase price for the acquisition was approximately $4.1 million in cash, including $0.4 million to be held in escrow for 12 months to secure certain indemnification claims. The Company used excess cash to fund the acquisition. The preliminary fair value of assets acquired was approximately $0.6 million. The excess purchase price over the preliminary fair value of the identifiable assets acquired was $3.5 million and was recorded to goodwill.

During the six months ended December 31, 2007, the Company completed various smaller acquisitions in Canada and the United Kingdom resulting in an aggregate increase in goodwill of $4.3 million.

The following reflects the change in goodwill during the periods presented (in millions):

Balance at June 30, 2007		$	293.5
Acquisitions:
APL — U.S.			21.6
CCS — U.S.			89.7
Cash Your Cheque — U.K.			3.5
Other			4.3
Purchase adjustments:
82 Store Canadian Acquisition			(0.1	)
Foreign currency adjustment			9.3
Balance at December 31, 2007		$	421.8

The following unaudited pro forma information for the three and six months ended December 31, 2006 and 2007 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 periods and reflect the increased interest expense on acquisition debt and the income tax impact as of the respective purchase dates of the APL and CCS acquisitions. 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.

		Three months ended								Six months ended
		December 31,								December 31,
		2006				2007				2006				2007
		(Unaudited in thousands								(Unaudited in thousands
		except per share amounts)								except per share amounts)
Revenue		$	117,069			$	135,392			$	223,661			$	265,661
Net income (loss)		$	(49,246	)		$	13,918			$	(47,804	)		$	25,232
Net income (loss) per common share — basic		$	(2.10	)		$	0.58			$	(2.04	)		$	1.05
Net income (loss) per common share — diluted		$	(2.10	)		$	0.56			$	(2.04	)		$	1.02

DOLLAR FINANCIAL CORP.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8. ADOPTION OF FASB INTERPRETATION NO. 48

The Company adopted the provisions of FIN 48 on July 1, 2007. The implementation of FIN 48 did not result in any adjustment in the Company’s liability for unrecognized income tax benefits. At the adoption date of July 1, 2007, the Company had unrecognized tax benefit reserves related to uncertain tax positions of $7.6 million. Of this amount, $7.6 million represents the total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. At December 31, 2007 the Company had $9.6 million of unrecognized tax benefits related primarily to transfer pricing matters, which if recognized, would affect the effective tax rate.

The tax years ending June 30, 2004 through 2007 remain open to examination by the taxing authorities in the United States, United Kingdom and Canada.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2007, the Company had approximately $1.0 million of accrued interest related to uncertain tax positions of which $0.2 million was accrued during the three months ended December 31, 2007. The provision for unrecognized tax benefits including accrued interest is included in income taxes payable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of the financial condition and results of operations for Dollar Financial Corp. for the three and six months ended December 31, 2007 and 2006. References in this section to “we,” “our,” “ours,” or “us” are to Dollar Financial Corp. and its wholly owned subsidiaries, except as the context otherwise requires. References to “OPCO” are to our wholly owned operating subsidiary, Dollar Financial Group, Inc.

Executive Summary

We are the parent company of Dollar Financial Group, Inc., which, together with its wholly owned subsidiaries, is collectively referred to as OPCO. Historically, we have derived our revenues primarily from providing check cashing services, consumer lending and other consumer financial products and services, including money orders, money transfers and bill payment. For our check cashing services, we charge our customers fees that are usually equal to a percentage of the amount of the check being cashed and are deducted from the cash provided to the customer. For our consumer loans, we have historically received origination and servicing fees from the institutions providing the loans or, where we fund our consumer loans directly, interest and fees on the loans. With respect to our We The People (“WTP”) franchised locations, we receive initial franchise fees upon the initial sale of a franchise. Processing fees from our franchisees are earned for processing customers’ legal documents.

All of our retail financial service locations, with the exception of those in Pennsylvania and Texas, issue single-payment consumer loans on the company-funded consumer loan model. We no longer offer any consumer lending products in our 15 Pennsylvania financial services stores and we have implemented a credit services organization model for single-payment loans at our six Texas stores under the terms of which, beginning in June 2006, we guarantee, originate and service loans for a non-bank lender that comply with Texas law. In Pennsylvania, the cessation of consumer loan products has not had a material effect on our operations. The lender in our bank-funded CustomCash ^® domestic installment loan program, First Bank of Delaware (“First Bank”), had been working to address certain concerns raised by the FDIC with respect to this program. First Bank advised us that, effective April 2007, it would no longer distribute our longer-term CustomCash^® installment loans through third-party retail locations and instead would distribute such loans only through its own branch offices and the Internet. Accordingly, we have successfully transitioned our CustomCash^® installment loan product customers to our company-funded short-term single payment loan. Beginning July 2007, we began offering company-funded CustomCash^® domestic installment loans in our New Mexico market and began offering this product in our Utah market in January 2008.

On July 21, 2006, we used the $80.8 million net proceeds from the June 2006 follow-on offering of common stock to redeem $70.0 million principal amount of OPCO’s 9.75% senior notes due 2011, which we refer to as the Notes, pay $6.8 million in redemption premium, pay $1.3 million in accrued interest and used the remaining $2.6 million for working capital and general corporate purposes. On October 30, 2006, we announced the completion of the refinancing of OPCO’s existing credit facilities and entered into a new $475.0 million credit facility, which consists of $375.0 million six year term loans held by our foreign subsidiaries, a $75.0 million credit facility in the U.S. and a $25.0 million revolving credit facility in Canada. We refer to this credit facility as the New Credit Agreement. On October 30, 2006, we also completed our cash tender offer and consent solicitation by OPCO for the Notes. We redeemed $198.0 million principal of the Notes and wrote off $7.2 million of unamortized deferred issuance costs related to this redemption. We also incurred a loss on the extinguishment of debt of $31.8 million for the year ended June 30, 2007.

On October 30, 2006, we completed the acquisition of substantially all of the assets of 82 retail stores owned and operated by five existing National Money Mart Company franchisees, which we refer to as the Canadian Acquisition. The Canadian Acquisition was effected pursuant to five purchase agreements each dated October 31, 2006 by and among National Money Mart Company and the five existing National Money Mart Company franchisees, which we refer to as the Purchase Agreements. The total purchase price for the Canadian Acquisition was approximately $124.2 million in cash.

On November 12, 2006, we completed the acquisition of 23 financial services stores, predominantly located in Southwest Florida. The total purchase price for the acquisition was $28.6 million in cash.

In December 2006, we completed cross-currency interest rate swap transactions which synthetically converted the $375.0 million U.S. dollar and Euro denominated foreign term loans into local currency denominated loans. These swap transactions also lowered the combined interest rate on the aggregate $375.0 million six year term loans held by our foreign subsidiaries to a blended fixed rate of 7.4% compared to the previously held Notes at a rate of 9.75%.

In December 2006, we announced our restructuring plan for our WTP business. Under the plan, we have closed our remaining twelve company-operated WTP stores. As a result of the restructuring initiatives, in the quarter ended December 31, 2006, we incurred $1.2 million for cash expenses related to the closure of the company-operated stores and other initiatives, $0.4 million of which is included in accrued expenses and other liabilities at December 31, 2007. In addition, we have incurred $23.2 million in one-time non-cash charges, including the write-off of $22.5 million of goodwill and $0.7 million in other tangible and intangible assets, and the write-off of deferred fees.

On June 21, 2007, we entered into a purchase agreement relating to the sale of $175.0 million aggregate principal amount of 2.875% Senior Convertible Notes (“Convertible Notes”). Under the terms of the purchase agreement we also granted an option to purchase up to $25.0 million aggregate principal amount of the Convertible Notes to cover over-allotments. At closing on June 27, 2007, the initial purchasers exercised the over-allotment option in full.

On August 30, 2007, we entered into a purchase agreement to acquire substantially all of the assets of 45 retail financial services stores for approximately $27.0 million in cash, which includes $2.0 million in cash to be held in escrow for 24 months to secure certain indemnification claims. The agreement also includes a maximum revenue-based earn out of up to $3.0 million which is payable in February 2009. On August 30, 2007, we consummated the acquisition of 22 of the stores, which are located in Missouri, Oklahoma, Arizona and Hawaii. On September 19, 2007, we consummated the acquisition of an additional four of the stores, all of which are located in Iowa. During October 2007, we consummated the acquisition of an additional 16 of the stores, 15 of which are located in Kansas, and one which is located in South Carolina. We will acquire the remaining 3 stores, all of which are located in Nebraska, upon obtaining certain business licenses in the respective jurisdictions. The total aggregate purchase price for the 42 stores that were acquired during the six months ended December 31, 2007 was $28.7 million in cash.

On November 15, 2007, we redeemed the remaining $2.0 million principal amount of our 9.75% Senior Notes at a redemption price of 104.875%, plus accrued and unpaid interest.

On December 15, 2007, we consummated the purchase of substantially all of the assets of CCS Financial Services, Inc., d/b/a The Check Cashing Store, which operated 81 financial services stores in southeast Florida offering check cashing, payday loans and other ancillary products. The total purchase price for the acquisition, including the consumer loan portfolio and cash in stores at closing, was approximately $101.9 million in cash.

Our expenses primarily relate to the operations of our store network, including salaries and benefits for our employees, occupancy expense for our leased real estate, depreciation of our assets and corporate and other expenses, including costs related to opening and closing stores.

In each foreign country in which we operate, local currency is used for both revenues and expenses. Therefore, we record the impact of foreign currency exchange rate fluctuations related to our foreign net income.

In our discussion of our financial condition and results of operations, we refer to financial service stores and financial service franchises that were open for 18 consecutive months ending December 31, 2007 as comparable stores and franchises.

Discussion of Critical Accounting Policies

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with U.S. generally accepted accounting principles. We evaluate these estimates on an ongoing basis, including those related to revenue recognition, loss reserves, income taxes and intangible assets. We base these estimates on the information currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary from these estimates under different assumptions or conditions.

We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements:

Revenue Recognition

With respect to company-operated stores, revenues from our check cashing, money order sales, money transfer, bill payment services and other miscellaneous services reported in other revenues on our statement of operations are all recognized when the transactions are completed at the point-of-sale in the store.

With respect to our franchised locations, we recognize initial franchise fees upon fulfillment of all significant obligations to the franchisee. Royalties from franchisees are recognized as earned. The standard franchise agreements grant to the franchisee the right to develop and operate a store and use the associated trade names, trademarks, and service marks within the standards and guidelines that we established. As part of the franchise agreement, we provide certain pre-opening assistance including site selection and evaluation, design plans, operating manuals, software and training. After the franchised location has opened, we must also provide updates to the software, samples of certain advertising and promotional materials and other post-opening assistance that we determine is necessary. Franchise revenue for the three months ended December 31, 2007 and 2006 were $1.2 million and $1.6 million, respectively. Franchise revenues were $4.0 million and $2.5 million for the six months ending December 31, 2006 and 2007, respectively.

For single-payment consumer loans that we make directly (company-funded loans), which have terms ranging from 1 to 37 days, revenues are recognized using the interest method. Loan origination fees are recognized as an adjustment to the yield on the related loan. Our reserve policy regarding these loans is summarized below in “Company-Funded Consumer Loan Loss Reserves Policy.”

During fiscal 2006, we began to market and service bank-funded consumer installment loans in the United States with terms of four months made by First Bank. We refer to this product as CustomCash^®. First Bank was responsible for the application review process and for determining whether to approve an application and fund a loan. As a result, loans were not recorded on our balance sheet. We earned a marketing and servicing fee for each loan that was paid by a borrower to First Bank. The servicing fee was recognized ratably using the effective interest rate method. This fee was reduced by losses incurred by First Bank on such loans. We maintained a reserve for future servicing fee adjustments based on First Bank’s outstanding loan balance. This liability was $0.1 million at June 30, 2007 which is included in accrued expenses and other liabilities and $0 at December 31, 2007 since we no longer service any loans for First Bank. We discontinued offering the bank-funded CustomCash^® product in April 2007. Beginning July 2007, we began offering company-funded CustomCash^® domestic installment loans in our New Mexico market and in January 2008, began offering this product in our Utah market.

Company-Funded Consumer Loan Loss Reserves Policy

We maintain a loan loss reserve for anticipated losses for single-payment consumer loans we make directly through our company-operated locations. To estimate the appropriate level of loan loss reserves, we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns and current economic trends. Our current loan loss reserve is based on our net charge-offs, typically expressed as a percentage of loan amounts originated for the last twelve months applied against the total amount of outstanding loans that we make directly. As these conditions change, we may need to make additional allowances in future periods.

When a loan is originated, the customer receives the cash proceeds in exchange for a post-dated check or a written authorization to initiate a charge to the customer’s bank account on the stated maturity date of the loan. If the check or the debit to the customer’s account is returned from the bank unpaid, the loan is placed in default status and an allowance for this defaulted loan receivable is established and charged against revenue in the period that the loan is placed in default status. This reserve is reviewed monthly and any additional provision to the loan loss reserve as a result of historical loan performance, current and expected collection patterns and current economic trends is charged against revenues. The receivable for defaulted single-payment loans, net of the allowance, is reported on our balance sheet in loans in default, net and was $12.1 million at December 31, 2007 and $10.3 million at June 30, 2007.

Check Cashing Returned Item Policy

We charge operating expense for losses on returned checks during the period in which such checks are returned. Recoveries on returned checks are credited to operating expense during the period in which recovery is made. This direct method for recording returned check losses and recoveries eliminates the need for an allowance for returned checks. These net losses are charged to other store and regional expenses in the consolidated statements of operations.

Goodwill

We account for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). Goodwill is the excess of cost over the fair value of the net assets of the business acquired. Intangible assets consist of reacquired franchise rights, which are deemed to have an indefinite useful life and are not amortized.

Goodwill is tested for impairment annually as of June 30, or whenever events or changes in business circumstances indicate that an asset might be impaired. As of June 30, 2007, there was no impairment of goodwill. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

We perform our impairment tests utilizing the two steps as outlined in SFAS 142. If the carrying amount of a reporting unit exceeds its implied fair value, an impairment loss would be recognized in an amount equal to the excess of the implied fair value of the reporting unit’s goodwill over its carrying value, not to exceed the carrying amount of the goodwill.

Nonamortizable intangibles with indefinite lives are tested for impairment annually as of December 31, or whenever events or changes in business circumstances indicate that an asset may be impaired. If the estimated fair value is less than the carrying amount of the intangible assets with indefinite lives, then an impairment charge would be recognized to reduce the asset to its estimated fair value. As of December 31, 2007, there was no impairment of reacquired franchise rights. There can be no assurance that future impairment tests will not result in a charge to earnings.

Income Taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. An assessment is then made of the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance.

Results of Operations

Revenue Analysis

		Three Months Ended December 31,																Six Months Ended December 31,
										(Percentage of total																(Percentage of total
		($ in thousands)								revenue)								($ in thousands)								revenue)
		2006				2007				2006				2007				2006				2007				2006				2007
Check cashing		$	41,518			$	48,859				40.7	%			38.9	%		$	79,907			$	94,522				41.2	%			39.1	%
Consumer lending, net			46,267				57,524				45.3	%			45.8	%			85,520				111,227				44.1	%			46.0	%
Money transfer fees			5,437				7,079				5.3	%			5.6	%			10,104				13,039				5.2	%			5.4	%
Franchise fees and royalties			1,571				1,162				1.5	%			0.9	%			4,024				2,503				2.1	%			1.0	%
Other revenue			7,305				11,027				7.2	%			8.8	%			14,256				20,410				7.4	%			8.5	%
Total revenue		$	102,098			$	125,651				100.0	%			100.0	%		$	193,811			$	241,701				100.0	%			100.0	%

The Three Months Ended December 31, 2007 compared to the Three Months Ended December 31, 2006

Total revenues were $125.7 million for the three months ended December 31, 2007 compared to $102.1 million for the three months ended December 31, 2006, an increase of $23.6 million or 23.1%. Comparable store and franchise store revenues for the entire period increased $8.1 million or 8.9%. New store openings accounted for an increase of $3.8 million and new store acquisitions accounted for $12.9 million. Theses increases were partially offset by a decrease of $0.3 million in revenues related to the We The People business and $1.0 million in revenues from closed stores.

Relative to our products, consolidated check cashing revenue increased by 17.7%, or $7.3 million, year-over-year. Our Canadian business segment grew by 28.8%, while our U.K. business realized growth of 14.9%. On a consolidated basis, the face amount of the average check cashed increased 14.2% to $538 for the second quarter of fiscal 2008 compared to $471 for the prior year period resulting in the average fee per check cashed increasing by 15.3% to $20.63. Consolidated net consumer lending revenue, net was $57.5 million for the second quarter of fiscal 2008, representing an increase of 24.3% or $11.3 million compared to the prior year period. The increase was primarily driven by strong performance in the international businesses as the Canadian market grew 27.6%, while the U.K. business realized growth of 71.7% over the prior year’s quarter. The consolidated loan loss provision for the second quarter, as a percentage of gross consumer lending revenue, was in line with our expectations at 21.8% compared to 18.5% for the second quarter of fiscal 2007. Money transfer fees for the quarter increased 30.2% year-over-year, driven by continued strong growth in our international markets. Other revenue, increased by 51.0% for the quarter, principally due to the success of our MasterCard^® and Visa^® branded debit-card sales across our three key markets, as well as growth in the foreign currency product in Canada and the U.K.

Currency rate changes in Canada and the United Kingdom contributed $7.9 million and $1.6 million, respectively, of the revenue increase for the quarter. On a constant currency basis, revenues in Canada and the United Kingdom for the quarter increased $7.3 million and $7.4 million, respectively primarily due to revenues from our consumer loan products and check cashing. Revenues from franchise fees and royalties decreased by $0.4 million primarily due to the acquisitions of franchise stores.

The Six Months Ended December 31, 2007 compared to the Six Months Ended December 31, 2006

Total revenues were $241.7 million for the six months ended December 31, 2007 compared to $193.8 million for the six months ended December 31, 2006, an increase of $47.9 million or 24.7%. Comparable store and franchise store revenues for the entire period increased $13.7 million or 7.7%. New store openings accounted for an increase of $7.7 million and new store acquisitions accounted for $28.8 million. Theses increases were partially offset by a decrease of $1.0 million in revenues related to the We The People business and $1.4 million in revenues from closed stores.

Relative to our products, consolidated check cashing revenue increased by 18.3%, or $14.6 million, year-over-year. Our Canadian business segment grew by 32.4%, while our U.K. business realized growth of 15.4%. On a consolidated basis, the face amount of the average check cashed increased 12.2% to $532 for the six months ended December 31, 2007 compared to $474 for the prior year period, resulting in the average fee per check cashed increasing by 13.3% to $20.39. Consolidated net consumer lending revenue was $111.2 million for the six months ended December 31, 2007, representing an increase of 30.1% or $25.7 million compared to the prior year period. The increase was primarily driven by strong performance in the international businesses as the Canadian market grew 43.8%, while the U.K. business realized growth of 67.0% over the prior year’s period. The consolidated loan loss provision for the six months ended December 31, 2007, as a percentage of gross consumer lending revenue, was in line with our expectations at 21.7% and 19.0% for the six months ended December 31, 2006. Money transfer fees for the quarter increased 29.0% year-over-year, driven by continued strong growth in our international markets. Other revenue, increased by 43.2% for the quarter, principally due to the success of our MasterCard^® and Visa^® branded debit-card sales across our three key markets, as well as growth in the foreign currency product in Canada and the U.K.

Currency rate changes in Canada and the United Kingdom contributed $10.5 million and $3.4 million, respectively, of the increase for the period. On a constant currency basis, revenues in Canada and the United Kingdom for the period increased $25.0 million and $13.0 million, respectively primarily due to revenues from our consumer loan products and check cashing. Revenues from franchise fees and royalties decreased by $1.5 million primarily due to the acquisitions of franchise stores.

Store and Regional Expense Analysis

		Three Months Ended December 31,																Six Months Ended December 31,
										(Percentage of																(Percentage of
		($ in thousands)								total revenue)								($ in thousands)								total revenue)
		2006				2007				2006				2007				2006				2007				2006				2007
Salaries and benefits		$	32,127			$	38,646				31.5	%			30.8	%		$	61,095			$	73,883				31.5	%			30.6	%
Occupancy			7,931				10,157				7.8	%			8.1	%			15,583				19,431				8.0	%			8.0	%
Depreciation			2,157				3,214				2.1	%			2.6	%			4,211				6,023				2.2	%			2.5	%
Returned checks, net and cash shortages			3,765				4,597				3.7	%			3.7	%			7,397				9,253				3.8	%			3.8	%
Telephone and telecommunication			1,473				1,798				1.4	%			1.4	%			3,017				3,450				1.6	%			1.4	%
Advertising			3,196				2,721				3.1	%			2.2	%			5,458				4,824				2.8	%			2.0	%
Bank charges and armored carrier services			2,569				3,287				2.5	%			2.6	%			4,837				6,343				2.5	%			2.6	%
Other			11,307				11,980				11.1	%			9.4	%			20,653				22,452				10.7	%			9.4	%
Total store and regional expenses		$	64,525			$	76,400				63.2	%			60.8	%		$	122,251			$	145,659				63.1	%			60.3	%

The Three Months Ended December 31, 2007 compared to the Three Months Ended December 31, 2006

Store and regional expenses were $76.4 million for the three months ended December 31, 2007 compared to $64.5 million for the three months ended December 31, 2006, an increase of $11.9 million or 18.4%. The impact of foreign currency accounted for $4.9 million of the increase. For the three months ended December 31, 2007 total store and regional expenses decreased to 60.8% of total revenue compared to 63.2% of total revenue for the three months ended December 31, 2006. On a constant currency basis, store and regional expenses increased $3.9 million in Canada, $1.9 million in the United Kingdom and $1.1 million in the United States. The increase in Canada was primarily due to increases in salaries, occupancy expenses and other costs which are commensurate with the overall growth in Canadian revenues. Similarly, in the United Kingdom, the increase is primarily related to increases in salaries, occupancy and other costs commensurate with the growth in that country. In the United States, the increase is primarily due to salaries and occupancy as a result of the incremental costs associated with the two acquisitions recently completed.

The Six Months Ended December 31, 2007 compared to the Six Months Ended December 31, 2006

Store and regional expenses were $145.7 million for the six months ended December 31, 2007 compared to $122.3 million for the six months ended December 31, 2006, an increase of $23.4 million or 19.1%. The impact of foreign currencies accounted for $7.2 million of the increase. For the six months ended December 31, 2007 total store and regional expenses decreased to 60.3% of total revenue compared to 63.1% of total revenue for the six months ended December 31, 2006. On a constant currency basis, store and regional expenses increased $12.2 million in Canada, $4.5 million in the United Kingdom, partially offset by a decrease in the United States of $0.6 million. The increase in Canada was primarily due to increases in salaries, returned checks and cash shortages and occupancy expenses as a result of the incremental costs associated with the Canadian acquisitions and which are commensurate with the overall growth in Canada. Similarly, in the United Kingdom, the increase is primarily related to increases in salaries, advertising, occupancy and other costs commensurate with the growth in that country.