Summary of DOLLAR FINANCIAL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, foreign currency exchange, branded debit cards 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.
Most of our retail financial service locations issue single-payment consumer loans on the company-funded consumer loan model. We operate under a credit services organization (CSO) model for single-payment loans at our six Texas stores under the terms of which we guarantee, originate and service loans for a non-bank lender that comply with Texas law. Beginning April 2007, we ceased originating longer-term installment loans under a bank-funded model and transitioned, to the extent possible, those installment loan customers to company-funded short-term single-payment consumer loans. Beginning July 2007, we began offering company-funded CustomCash Ž domestic installment loans in our New Mexico market and began offering this product in our Utah market in January 2008. In August 2007, we launched an internet single-payment loan site for residents of California and, in February 2008, for Arizona residents and plan to expand to other locations over time.
On August 30, 2007, we entered into a purchase agreement to acquire substantially all of the assets of 45 retail financial services stores for $29.3 million in cash, which included $2.0 million in cash to be held in escrow for 24 months to secure certain indemnification claims. The agreement also included a maximum revenue-based earn out of up to $3.0 million which would be 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 acquired the remaining 3 stores, all of which are located in Nebraska, in March 2008. The total aggregate purchase price for the 45 stores that were acquired during fiscal 2008 was $29.3 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, single-payment short term consumer loans and other ancillary products. The total purchase price for the acquisition, including the consumer loan portfolio and cash in stores at closing, was $102.1 million in cash. On May 14, 2008, Ohio legislators passed legislation that would effectively make single-payment lending in the state unprofitable. This legislation will have a minimal impact on our operations. Net fees from consumer lending revenue from our 21 Ohio multi-product stores accounted for less than 1% of our total consumer lending revenue in fiscal 2008. We expect to continue to provide alternative products such as check cashing, bill pay, Western Union services, and pre-paid debit cards to our Ohio customers.
On June 30, 2008 we, as part of a process to rationalize our United States markets, made a determination to close 24 of our unprofitable stores in various United States markets. For all but one of these stores, the cease-use date was July 11, 2008 while one other store had a cease-use date of July 25, 2008. In August 2008, we identified another 29 stores in the United States and 17 stores in Canada that were underperforming and which were closed or merged into a geographically proximate store. The cease-use date for 44 of these stores was in September 2008 with the disposition of the final two U.S. stores completed in the month of October. Customers from these stores were transitioned to other Company stores in close proximity to the stores affected. We recorded costs for severance and other retention benefits of $0.6 million and store closure costs of $4.3 million consisting primarily of lease obligations and leasehold improvement write-offs. The closure of stores in the United States and Canada did not result in any impairment of goodwill since the store closures will be accretive to cash flow.
On July 21, 2008, we announced that our Board of Directors had approved a stock repurchase plan, authorizing us to repurchase in the aggregate up to $7.5 million of our outstanding common stock, which is the maximum amount of common stock we can repurchase

pursuant to the terms of our credit facility. For the three months ended September 30, 2008, we have repurchased 221,400 shares of our common stock at a cost of approximately $3.5 million. In October, we purchased an additional 314,399 shares of our common stock at a cost of approximately $4.0 million, thus completing our stock repurchase plan.
Our expenses primarily relate to the operations of our store network, including the provision for loan losses, 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. 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 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, foreign currency exchange, 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 provide updates to the software, samples of certain advertising and promotional materials and other post-opening assistance that we determine is necessary. Franchise/agent revenues were $1.3 million and $1.2 million for the three months ending September 30, 2007 and 2008, respectively.
For single-payment consumer loans that we make directly (company-funded loans), which have terms ranging from 1 to 45 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." Company-Funded Consumer Loan Loss Reserves Policy We maintain a loan loss reserve for anticipated losses for single-payment and other 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. Despite the recent economic downturn in the U.S. and the foreign markets in which we operate, we have not experienced any material increase in the defaults on outstanding loans. Accordingly, we have not modified our approach to determining our loan loss reserves.
When a loan is originated, the customer receives the cash proceeds in exchange for a post-dated customer 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 additional reserve for this defaulted loan

receivable is established and charged to store and regional expenses 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 to store and regional expenses. If the loans remain in defaulted status for 180 days, a reserve for the entire amount of the loan is recorded and the receivable and corresponding reserve is ultimately removed from the balance sheet. The receivable for defaulted single-payment and other loans, net of the allowance, is reported on our balance sheet in loans in default, net and was $14.6 million at September 30, 2008 and $11.9 million at June 30, 2008. The increase is primarily related to the acquisition in fiscal 2007 for APL and CCS.
Check Cashing Returned Item Policy
We charge operating expense for losses on returned checks during the period in which such checks are returned, which generally is three to five business days after the check is cashed in our store. 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 and Other Intangibles
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 September 30, 2008, 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 our 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.
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 our retained earnings balance beginning July 1, 2007. We adopted the provisions of FIN 48 on July 1, 2007. The implementation of FIN 48 did not result in any adjustment in our liability for unrecognized income tax benefits.

Results of Operations
Revenue Analysis

                                              Three Months Ended September 30,
                                                                  (Percentage of total
                                       ($ in thousands)                 revenue)
                                      2007          2008           2007            2008
     Check cashing                  $  45,663     $  48,532            34.9 %        31.7 %
     Consumer lending, net             68,509        81,498            52.4 %        53.2 %
     Money transfer fees                5,960         7,610             4.6 %         5.0 %
     Franchise fees and royalties       1,341         1,177             1.0 %         0.8 %
     Other revenue                      9,383        14,259             7.1 %         9.3 %

     Total revenue                  $ 130,856     $ 153,076           100.0 %       100.0 %

The Three Months Ended September 30, 2008 compared to the Three Months Ended September 30, 2007
Total revenues were $ 153.1 million for the three months ended September 30, 2008 compared to $130.9 million for the three months ended September 30, 2007, an increase of $ 22.2 million or 17.0%. Comparable store and franchise store revenues for the entire period increased $2.5 million or 2.0%. New store openings accounted for an increase of $3.9 million and new store acquisitions accounted for $17.6 million. Theses increases were partially offset by a decrease of $0.2 million in revenues related to the We The People business and $1.7 million in revenues from closed stores.
Relative to our products, consolidated check cashing revenue increased by 6.3%, or $2.9 million, year-over-year. Check cashing revenues from our U.S. business segment, which includes the contributions from the recent acquisitions in Southeast Florida and the Midwestern states, realized growth of 30.8%. On a consolidated basis, the face amount of checks cashed increased 10.7% and the number of checks cashed increased 11.6%. Consolidated consumer lending revenue was $81.5 million for the first quarter of fiscal 2009, representing an increase of 19.0% or $13.0 million compared to the prior year period. Consumer lending revenue in the United Kingdom increased by 47.8% while the U.S. consumer lending business increased by 42.7%. Money transfer fees for the quarter increased 27.7% year-over-year, driven by continued strong growth in our international markets. Other revenue, increased by 52.0% for the quarter, principally due to the success of the foreign exchange product, pawn merchandise sales, the debit card business and other ancillary products.
Currency rate changes in Canada contributed $0.3 million of the revenue increase for the quarter, while currency rate changes in the United Kingdom caused a decrease of $2.1 million for the quarter. On a constant currency basis, revenues in Canada and the United Kingdom for the quarter increased $1.8 million and $10.1 million, respectively primarily due to revenues from our consumer loan products as well as VISAŽ and Master CardŽ brand debit card and foreign currency sales. Revenues from franchise fees and royalties decreased by $ 0.2 million primarily due to the acquisitions of franchise stores.

Store and Regional Expense Analysis

                                                              Three Months Ended September 30, 2008
                                                                                          (Percentage of total
                                                      ($ in thousands)                          revenue)
                                                  2007                2008               2007               2008
Salaries and benefits                          $    35,237         $    40,803              26.9 %             26.7 %
Provision for Loan Losses                           14,806              15,251              11.3 %             10.0 %
Occupancy                                            9,274              11,324               7.1 %              7.4 %
Depreciation                                         2,809               3,592               2.1 %              2.3 %
Returned checks, net and cash shortages              4,656               6,135               3.6 %              4.0 %
Telephone and communications                         1,652               2,079               1.3 %              1.4 %
Advertising                                          2,103               2,812               1.6 %              1.8 %
Bank Charges and armored carrier expenses            3,056               3,633               2.3 %              2.4 %
Other                                               10,472              13,637               8.0 %              8.8 %

Total store and regional expenses              $    84,065         $    99,266              64.2 %             64.8 %

The Three Months Ended September 30, 2008 compared to the Three Months Ended September 30, 2007
Store and regional expenses were $99.3 million for the three months ended September 30, 2008 compared to $84.1 million for the three months ended September 30, 2007, an increase of $15.2 million or 18.1%. The impact of foreign currency accounted for a decrease of $1.1 million. For the three months ended September 30, 2008 total store and regional expenses increased to 64.8% of total revenue compared to 64.2% of total revenue for the three months ended September 30, 2007. On a constant currency basis, store and regional expenses increased $1.3 million in Canada, $5.1 million in the United Kingdom and $9.9 million in the United States. The increase in Canada was primarily due to increases in provision for loan losses, 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 provision for loan losses, 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.

Corporate and Other Expense Analysis

                                                              Three Months Ended September 30, 2008
                                                                                         (Percentage of total
                                                      ($ in thousands)                         revenue)
                                                   2007               2008               2007              2008
Corporate expenses                              $  17,863          $ 19,734                13.7 %          12.9 %
Other depreciation and amortization                   919             1,040                 0.7 %           0.7 %
Interest expense, net                               8,089             9,449                 6.2 %           6.2 %
Loss on Store Closings and Other, net                (590 )           4,976               (0.5) %           3.3 %
Income tax provision                                8,456             5,226                 6.5 %           3.4 %

The Three Months Ended September 30, 2008 compared to the Three Months Ended September 30, 2007
Corporate Expenses
Corporate expenses as a percentage of total revenue increased to $19.7 million as compared to the previous year's quarter of $17.9 million, reflecting the previously announced increased investment in global management capabilities and infrastructure to support our enhanced global store expansion and product development strategies, and the continuation of our active global acquisitions initiative.
Other Depreciation and Amortization
Other depreciation and amortization expenses remained relatively unchanged, $1.0 million for the three months ended September 30, 2008 and $0.9 million for the three months ended September 30, 2007. Interest Expense
Interest expense, net was $9.4 million for the three months ended September 30, 2008 compared to $8.1 million for the same period in the prior year. On June 27, 2007, we issued $200.0 million aggregate principal amount the Convertible Notes in a private offering for resale to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the Convertible Notes were initially invested until approximately $131.4 million was utilized during fiscal 2008 for the American Payday Loans and The Check Cashing Store acquisitions. Approximately $1.4 million of the increase in interest expense, net is associated with a decrease in interest income related to the lower amount of short-term invested cash for the three months ended September 30, 2008 compared to the same period in the prior year due to the aforementioned fiscal 2008 acquisitions. Loss on store closings
We incurred a $4.9 million charge in the three months ended September 30, 2008 related to the closure of 53 underperforming stores in the United States and 17 underperforming stores in Canada. We recorded costs for severance and other retention benefits of $0.6 million and store closure costs of $4.3 million consisting primarily of lease obligations and leasehold improvement write-offs. Income Tax Provision
The provision for income taxes was $5.2 million for the three months ended September 30, 2008 compared to a provision of $8.5 million for the three months ended September 30, 2007. Our effective tax rate was 28.1% for the three months ended September 30, 2008 and was 41.2% for the three months ended September 30, 2007. Our effective tax rate for the quarter ended September 30, 2008 is a combination of an effective rate of 47.0% on continuing operations reduced by the impact of a favorable settlement granted in a competent authority tax proceeding between the United States and Canadian tax authorities related to transfer pricing matters for years 2000 through 2003 combined with an adjustment to our reserve for uncertain tax benefits related to years for which a settlement has not yet been received. The impact to our first quarter 2009 provision for income taxes related to these two items was $3.5 million. Our effective tax rate differs from the federal statutory rate of 35% due to foreign taxes, permanent differences and a valuation allowance on U.S. and foreign deferred tax assets and the aforementioned changes to our reserve for uncertain tax positions. Prior to the global debt restructuring in our fiscal year ended June 30, 2007, interest expense in the U.S. resulted in U.S. tax losses, thus generating deferred tax assets. At September 30, 2008 we maintained a deferred tax asset of $107.9 million which is offset by a valuation allowance of $98.7 million of which $1.0 million was provided for in the quarter. The change for the quarter in our deferred tax assets and valuation allowances is presented in the table below and more fully described in the paragraphs that follow. Change in Deferred Tax Assets ("DTA") and Valuation Allowances ("VA") (in millions):

                                               DTA         VA        Net DTA
             Balance at June 30, 2008        $ 109.9     $ 97.7     $    12.2
             Increase in US DTA/VA               1.1        1.1             -
             Decrease in Foreign DTA/VA         (3.1 )     (0.1 )        (3.0 )

             Balance at September 30, 2008   $ 107.9     $ 98.7     $     9.2

The specific changes to the DTA and VA components are discussed below.

The $107.9 million in deferred tax assets consists of $51.6 million related to net operating losses and the reversal of temporary differences, $45.7 million related to foreign tax credits and $10.6 million in foreign deferred tax assets. At September 30, 2008, U.S. deferred tax assets related to net operating losses and the reversal of temporary differences were reduced by a valuation allowance of $51.6 million, which reflects an increase of $1.1 million during the quarter. The net operating loss carry forward at September 30, 2008 was $86.2 million. We believe that our ability to utilize net operating losses in a given year will be limited to $9.0 million under Section 382 of the Internal Revenue Code (the "Code") because of changes of ownership resulting from our June 2006 follow-on equity offering. In addition, any future debt or equity transactions may reduce . . .