Total revenues increased $18.9 million, or 46%, to $60.2 million in the third quarter of fiscal 2001 from $41.3 million in the third quarter of the last fiscal year. This revenue growth resulted, in part, from an $8.6 million, or 23%, increase in comparable store revenues (775 stores). The balance of the increase came from stores which were opened or acquired after June 30, 1999, and were therefore not open for both of the full periods compared. The number of Company-owned stores increased by 199, or 23%, from 869 stores opened at March 31, 2000, to 1,068 stores opened at March 31, 2001 (though the Company intends to close 85 stores in the fourth quarter of fiscal 2001.) The increase in loan fees and interest accounted for 55% of the total revenue increase; the increase in check cashing fees and tax check fees combined accounted for 40% of the total revenue increase; the increase in money transfer services accounted for 1% of the total revenue increase; and the increase in other fees accounted for 2% of the total revenue increase.
Loan fees and interest for the third quarter of fiscal 2001 reflect the Company's participation interests in Goleta National Bank (GNB) loans, but for the third quarter of the last fiscal year, reflect the Company's so-called "payday loans" to customers. Loan fees and interest increased $10.3 million, or 280%, from $3.7 million in the third quarter of the last fiscal year to $14.0 million in the third quarter of fiscal 2001 due to the increase in the number of stores offering the Company's loan products, which in turn is principally due to the offering of the GNB loan product in 971 stores in the third quarter of fiscal 2001 compared to 355 stores offering the Company's payday loan product in the third quarter of the last fiscal year. Check cashing fees, including tax check fees, increased $7.5 million, or 26%, from $29.0 million in the third quarter of the last fiscal year to $36.5 million in the third quarter of fiscal 2001. This increase resulted from a 19% increase in the total number of checks cashed and a 6% increase in the average fee per check, which is a result of the 7% increase in the average size check. Of the $2.9 million tax check fee increase, $1.0 million was attributable to the 50 self-service machines located in tax preparers' offices. The money transfer revenue increase of $0.3 million, or 11%, to $2.7 million in the third quarter of fiscal 2001 from $2.4 million in the first quarter of the last fiscal year is primarily due to the increased number of stores opened and operating in the current fiscal year. Other fees increased $0.5 million, or 35%, from $1.3 million in the third quarter of the last fiscal year to $1.8 million in the third quarter of fiscal 2001 due to the increase in the number of stores in operation.
Nine Month Comparison
Total revenues increased $41.3 million, or 40%, to $145.5 million in the first nine months of fiscal 2001 from $104.2 million in the first nine months of the last fiscal year. This revenue growth resulted, in part, from a $21.8 million, or 23%, increase in comparable store revenues (775 stores). The balance of the increase came from stores which were opened or acquired after June 30, 1999, and were therefore not open for both of the full periods compared. The increase in loan fees and interest accounted for 63% of the total revenue increase; the increase in check cashing fees and tax check fees combined accounted for 30% of the total revenue increase; the increase in money transfer services accounted for 3% of the total revenue increase; and the increase in other fees accounted for 3% of the total revenue increase.
Loan fees and interest for the first nine months of fiscal 2001 reflect the Company's participation interests in GNB loans, but for the first nine months of the last fiscal year, reflect the Company's so-called "payday loans" to customers. Loan fees and interest increased $26.2 million, or 225%, from $11.7 million in the first nine months of the last fiscal year to $37.9 million in the first nine months of fiscal 2001 due to the increase in the number of stores offering the Company's loan products, which in turn is principally due to the offering of the GNB loan product in 971 stores in the first nine months of fiscal 2001 compared to 355 stores offering the Company's payday loan product in the first nine months of the last fiscal year. Check cashing fees, including tax check fees, increased $12.4 million, or 18%, from $68.1 million in the first nine months of the last fiscal year to $80.5 million in the first nine months of fiscal 2001. This increase resulted from a 12% increase in the total number of checks cashed and a 5% increase in the average fee per check, which is a result of the 6% increase in the average size check. Of the $2.9 million tax check fee increase, $1.0 million was attributable to the 50 self-service machines located in tax preparers' offices. The money transfer revenue increase of $1.3 million, or 21%, to $7.7 million in the first nine months of fiscal 2001 from $6.4 million in the first nine months of the last fiscal year is primarily due to the increased number of stores opened and operating in the current fiscal year. Other fees increased $1.1 million, or 29%, from $3.8 million for the first nine months of fiscal 2000 to $4.9 million for the first nine months of fiscal 2001 due to the increase in the number of stores in operation.
| Store Expense Analysis |
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| Three Months Ended March 31, | Nine Months Ended March 31, |
|---|
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|
|---|
| 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | 2001 | 2000 |
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|
| (in thousands) | (percentage of revenue) | (in thousands) | (percentage of revenue) |
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| Salaries and benefits | $15,129 | $10,154 | 25.1% | 24.6% | $ 37,830 | $27,506 | 26.0% | 26.4% |
| Occupancy | 7,143 | 5,401 | 11.9 | 13.1 | 19,709 | 15,751 | 13.5 | 15.1 |
| Armored and security | 1,974 | 1,548 | 3.3 | 3.8 | 5,488 | 4,361 | 3.8 | 4.2 |
| Returns and cash shorts | 3,070 | 2,614 | 5.1 | 6.3 | 9,411 | 7,446 | 6.5 | 7.1 |
| Loan losses/loss |
| provision | 12,823 | 628 | 21.3 | 1.5 | 18,369 | 2,654 | 12.6 | 2.6 |
| Depreciation | 1,720 | 1,419 | 2.9 | 3.4 | 4,958 | 3,937 | 3.4 | 3.8 |
| Other | 4,105 | 2,736 | 6.8 | 6.6 | 10,990 | 7,522 | 7.6 | 7.2 |
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| Total store expenses | $45,964 | $24,500 | 76.4% | 59.3% | $106,755 | $69,177 | 73.4% | 66.4% |
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| Average per store |
| expense | $43.3 | $29.0 | | | $107.7 | $82.9 |
Quarter Comparison
Total store expenses increased $21.5 million, or 88%, to $46.0 million in the third quarter of fiscal 2001 from $24.5 million in the third quarter of the last fiscal year. Store expenses increased as a percentage of revenues to 76% in the third quarter of fiscal 2001 from 59% in the third quarter of the last fiscal year. Salaries and benefits expenses, occupancy costs, and armored and security expenses, totaling $ 24.2 million in the third quarter of fiscal 2001, increased by a total of $7.1 million, or 42%, in the quarter compared to the third quarter of the last fiscal year, primarily as a result of the increased number of stores in operation. Returned checks (net of collections) and cash shortages increased $0.5 million, or 17%, in the third quarter of fiscal 2001 compared to the third quarter of the last fiscal year primarily as a result of the increased number of stores.
Loan losses and loss provision increased $12.2 million in the third quarter of fiscal 2001 compared to the third quarter of the last fiscal year. In the third quarter of fiscal 2001, the Company maintained an allowance for loan losses established to cover losses anticipated from the GNB loan product, rather than charging off actual losses as incurred, as the Company did in the third quarter of the last fiscal year (regarding the Company's payday loan product). Loan losses are charged to this allowance, which is reviewed for adequacy (and may be adjusted) on a quarterly basis. An additional loan loss provision of $8.5 million was established in the third quarter of fiscal 2001 regarding the Company's participation in loans made by GNB at the Company's stores. The losses resulting from borrowers' nonpayment of loans are expected to exceed the loan-loss allowance previously established by the Company. That allowance was originally established on the assumption that loan losses would be consistent with the Company's loss experience with its "payday loan" product. But the loss experience over the three full fiscal quarters during which the Company has been purchasing participation interests in the GNB loans has been significantly higher. The loss experience has prompted GNB to continually refine its underwriting criteria for the loans and both GNB and the Company to modify the procedures for making the loans and for collections of past-due amounts. The loan loss reserve of $12.4 million as of March 31, 2001 was 46.3% of the gross loans receivable as of that date.
Other store expenses increased $1.4 million, or 50%, primarily as a result of the increased number of stores in operation and an increase in advertising expense related to the GNB loan product.
Nine Month Comparison
Total store expenses increased $37.6 million, or 54%, to $106.8 million in the first nine months of fiscal 2001 from the $69.2 million in the first nine months of the last fiscal year. Store expenses increased as a percentage of revenues to 73% for the first nine months of fiscal 2001 from 66% for the first nine months of the last fiscal year. Salaries and benefits expenses, occupancy costs, and armored and security expenses, totaling $63.0 million for the first nine months of fiscal 2001, increased by a total of $15.4 million, or 32%, in the nine months compared to the first nine months of the last fiscal year, primarily as a result of the increased number of stores in operation. Returned checks (net of collections) and cash shortages increased $2.0 million, or 26%, in the first nine months of fiscal 2001 compared to the first nine months of fiscal 2000, primarily because of the increased number of stores in operation.
Loan losses and loss provision increased $15.7 million in the first nine months of fiscal 2001 from the first nine months of the last fiscal year. In the first nine months of fiscal 2001, the Company established an allowance for loan losses to cover losses anticipated from the GNB loan product, rather than charging off actual losses as incurred, as the Company did in the first nine months of the last fiscal year (regarding the Company's payday loan product). Loan losses are charged to this allowance, which is reviewed for adequacy (and may be adjusted) on a quarterly basis. During the third quarter of fiscal 2001, an additional loan loss provision of $8.5 million was established, as described in the second paragraph of the Quarter Comparison of the Store Expense Analysis above.
Other store expenses increased $3.5 million, or 46%, primarily as a result of the increased number of stores in operation and an increase in advertising expense related to the GNB loan product.
| Other Expenses Analysis |
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| Three Months Ended March 31, | Nine Months Ended March 31, |
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| 2001 | 2000 | 2001 | 2000 | 2001 | 2000 | 2001 | 2000 |
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| (in thousands) | (percentage of revenue) | (in thousands) | (percentage of revenue) |
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| Region expenses | $3,755 | $2,777 | 6.2% | 6.7% | $ 10,220 | $7,781 | 7.0% | 7.5% |
| Headquarters expense | 3,015 | 2,364 | 5.0 | 5.7 | 7,778 | 6,021 | 5.3 | 5.8 |
| Franchise expenses | 283 | 286 | 0.5 | 0.7 | 777 | 797 | 0.5 | 0.8 |
| Other depreciation and |
| amortization | 1,464 | 952 | 2.4 | 2.3 | 3,653 | 2,756 | 2.5 | 2.6 |
| Interest expense, net | 3,898 | 1,942 | 6.5 | 4.7 | 9,017 | 4,771 | 6.2 | 4.6 |
| Other expenses | 8,740 | - | 14.5 | - | 8,618 | 346 | 5.9 | 0.3 |
|
Quarter Comparison
Region Expenses
Region expenses increased $1.0 million, or 35%, in the third quarter of fiscal 2001 over the third quarter of the last fiscal year, primarily as a result of the increase in personnel (i.e., collections and customer support) to support the Company's offering of the loan product from GNB. Region expenses decreased as a percentage of revenues to 6.2% in the third quarter of fiscal 2001 from 6.7% in the third quarter of the last fiscal year.
Headquarters Expenses
Headquarters expenses increased $0.7 million, or 28%, in the third quarter of fiscal 2001 from the third quarter of the last fiscal year, principally as a result of additional personnel and the corresponding salaries and benefits. Headquarters expenses decreased as a percentage of revenues to 5.0% in the third quarter of fiscal 2001 from 5.7% in the third quarter of the last fiscal year.
Franchise Expenses
Franchise expenses remained consistent at $0.3 million in the third quarter of fiscal 2001 from the third quarter of the last fiscal year.
Other Depreciation and Amortization
Other depreciation and amortization increased $0.5 million, or 54%, in the third quarter of fiscal 2001 from the third quarter of the last fiscal year, due primarily to increased acquisitions of stores.
Other Expenses
Other expenses increased by $8.7 million in the third quarter of fiscal 2001 from the third quarter of the last fiscal year due to the $8.7 million expense for the costs associated with closing 85 unprofitable or underperforming stores owned and operated by the Company. The store-closing expense consists primarily of costs associated with goodwill and non-compete write-offs, fixed asset and inventory disposals, lease terminations, and employee severance related to the store closings, which is expected to be complete by June 30, 2001. Additional information about the store-closing expense is presented below under "--Restructuring Charges-- Accelerated Store Closings."
Interest Expense
Interest expense, net of interest income, increased $2.0 million, or 101%, in the third quarter of fiscal 2001 as compared to the third quarter of the last fiscal year. This increase was the result of an increase in borrowings used to finance store openings and acquisitions and the growth in the GNB loan product.
Income Taxes
A credit of $2.8 million was recorded for income taxes in the third quarter of fiscal 2001, compared to a $3.3 million provision for the third quarter of the last fiscal year. The provision for income taxes was calculated based on a statutory federal income tax rate of 34%, plus a provision for state income taxes and non-deductible goodwill resulting from acquisitions.
Nine Month Comparison
Region Expenses
Region expenses increased $2.4 million, or 31%, in the first nine months of fiscal 2001 over the first nine months of the last fiscal year, primarily as a result of the increase in personnel (i.e., collections and customer support) to support the Company's offering of the loan product from GNB. Region expenses decreased as a percentage of revenues to 7.0% in the first nine months of fiscal 2001 from 7.5% in the first nine months of the last fiscal year.
Headquarters Expenses
Headquarters expenses increased $1.8 million, or 29%, in the first nine months of fiscal 2001 over the first nine months of the last fiscal year, principally as a result of additional personnel and the corresponding salaries and benefits. Headquarters expenses decreased as a percentage of revenues to 5.3% in the first nine months of fiscal 2001 from 5.8% in the first nine months of the last fiscal year.
Franchise Expenses
Franchise expenses remained consistent at $0.8 million for the first nine months of fiscal 2001 compared to the first nine months of the last fiscal year.
Other Depreciation and Amortization
Other depreciation and amortization increased $0.9 million, or 33%, in the first nine months of fiscal 2001 from the first nine months of the last fiscal year, primarily due to increased acquisitions of stores.
Other Expenses
Other expenses increased by $8.3 million in the first nine months of fiscal 2001 from the first nine months of the last fiscal year due primarily to the $8.7 million expense in the third quarter of fiscal 2001 for the costs associated with closing 85 unprofitable or underperforming stores owned and operated by the Company. The store-closing expense consists primarily of costs associated with goodwill and non-compete write-offs, fixed asset and inventory disposals, lease terminations, and employee severance related to the store closings, which is expected to be complete by June 30, 2001. Additional information about the store-closing expense is presented below under "--Restructuring Charges-- Accelerated Store Closings."
Interest Expense
Interest expense, net of interest income, increased $4.2 million, or 89%, in the first nine months of fiscal 2001 as compared to the first nine months of the last fiscal year. This increase was principally the result of an increase in borrowings used to finance store openings and acquisitions and the growth in the GNB loan product.
Income Taxes
A credit of $0.5 million was recorded for income taxes in the first nine months of fiscal 2001, compared to a $5.0 million provision in the first nine months of the last fiscal year. The provision for income taxes was calculated based on a statutory federal income tax rate of 34%, plus a provision for state income taxes and non-deductible goodwill resulting from acquisitions.
Cumulative Effect of Accounting Change
Effective July 1, 1999, the Company adopted the new accounting standard, AICPA Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," resulting in a cumulative effect on net income of $0.6 million net of an income tax benefit of $0.4 million.
Restructuring Charges - Accelerated Store Closings
In the third quarter of fiscal 2001, the Company recorded charges for the costs associated with closing 85 unprofitable and underperforming stores. The store-closing expense of $8.7 million consists primarily of costs associated with goodwill and non-compete write-offs, fixed asset and inventory disposals, lease terminations, and employee severance related to the store closings. The following table reflects the components of the significant items reported as restructuring charges for the quarter ended March 31, 2001 and the accrual balance as of March 31, 2001:
| | | |
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| Original | Write-offs | Accrual Balance |
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| Restructuring | through | as of |
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| Charge | March 31, 2001 | March 31, 2001 |
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| (dollars in millions) |
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| Net book value of assets | $2.5 | ($2.5) | $ - |
| Goodwill and non-compete | 2.6 | (2.6) | - |
| Remaining lease obligations | 2.8 | - | 2.8 |
| Other including severance costs and store clean-up | 0.8 | (0.4) | 0.4 |
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|
| Total | $8.7 | ($5.5) | $3.2 |
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|
The decision to close these unprofitable or underperforming stores was made in order to benefit future operations. Typically, these stores would be closed at various times over the next two or three years depending on the circumstances of each store and its local market. Frequently, the Company's decision to close a store is made to coincide with the expiration of the store lease. The Company determined, however, that closing these stores in this manner would permit better use of its capital and other resources, which (the Company believes) would improve the profitability of its overall operations. As of May 10, 2001, 80 of the 85 stores have already been closed, and the remainder are expected to be closed before June 30, 2001. The 85 stores planned for closing constitute approximately 8 percent of the Company's owned locations.
The following table presents the unaudited pro forma results of operations of the 85 stores scheduled for closing for the three months and nine months ended March 31.
| Actual Unaudited Results of |
|---|
| 85 Stores to be Closed |
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| Three Months Ended | Nine Months Ended |
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| March 31, 2001 | March 31, 2001 |
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| (dollars in thousands, except per share data) |
| Revenues | $1,898 | $4,720 |
| Income (loss) before taxes | (578) | (2,462) |
| Net income (loss) | (347) | (1,477) |
|
|
|
| Basic earnings (loss) per share | (0.03) | (0.15) |
| Diluted earnings (loss) per share | (0.03) | (0.14) |
Balance Sheet Variations
Cash and cash equivalents, the money order principal payable, and the revolving advances vary because of seasonal and day-to-day requirements resulting from maintaining cash for cashing checks and purchasing loan participations, receipts of cash from the sale of money orders and from participation interests in loans, and remittances for money orders sold. For the nine months ended March 31, 2001 and 2000, cash and cash equivalents increased $52.7 million compared to an increase of $35.2 million for the nine months ended March 31, 2000.
Property and equipment, net, increased by $1.1 million due to the 36 stores opened and 131 stores acquired during the nine months ended March 31, 2001, offset by the related depreciation and the $2.5 million write-off of fixed assets as part of the restructuring charges for the closing of 85 unprofitable or underperforming stores. The excess purchase price over the fair value of net assets acquired, net, increased $30.6 million, as a result of the 131 stores acquired, including the 107-store acquisition described in Note 5 to the Interim Unaudited Consolidated Financial Statements above, during the nine months ended March 31, 2001, offset by the related amortization and $2.6 million goodwill write-off as part of the restructuring charges related to the closing of the 85 unprofitable or underperforming stores.
Liquidity and Capital Resources
Cash Flows from Operating Activities
During the nine months ended March 31, 2001 and 2000, the Company had net cash provided by operating activities of $32.4 million and $16.1 million, respectively. The increase in cash flows provided from operating activities in the nine months ended March 31, 2001 was the result of the timing of daily remittances to product or service providers (such as MoneyGram Payment Systems, Inc., Travelers Express Company Inc., and Goleta National Bank), and the collection of MoneyGram receivables outstanding at June 30, 2000.)
Cash Flows from Investing Activities
During the nine months ended March 31, 2001 and 2000, the Company used $9.5 million and $9.6 million, respectively, for purchases of property and equipment related principally to new store openings and remodeling existing stores. Capital expenditures for acquisitions were $36.1 million and $7.1 million, respectively, for the nine months ended March 31, 2001 and 2000, related to the 131 stores acquired during the nine months ended March 31, 2001 and the 23 stores acquired during the nine months ended March 31, 2000.
Cash Flows from Financing Activities
Net cash provided by financing activities for the nine months ended March 31, 2001 was $65.9 million. The balance of daily remittances due to the money order supplier increased $8.5 million from June 30, 2000 due to the timing of remittances. The Company increased its net borrowings under its revolving line-of-credit facility from the bank lenders (as described below) by $23.5 million from June 30, 2000 due to the increased number of stores and daily fluctuations in cash requirements. The Company increased its borrowings under the reducing revolving (formerly term-loan) facility from the bank lenders (as described below) by $37.5 million since June 30, 2000, primarily to fund the acquisitions of a total of 131 stores through March 31, 2001. Acquisition-related notes payable to sellers increased by $0.1 million during the nine months ended March 31, 2001. Senior secured notes payable of $12.0 million decreased $3.8 million for the nine months ended March 31, 2001, as a result of the Company's payment of the second annual installment of principal of $4.0 million in November 2000. The Company purchased $0.3 million of treasury stock since June 30, 2000. Net cash provided by financing activities for the nine months ended March 31, 2000, was $35.9 million.
The Company has two credit facilities available under its existing amended and restated credit agreement with a syndicate of banks led by Wells Fargo Bank Texas, National Association. The Company's revolving line-of-credit facility of $155 million is available until November 8, 2001. Borrowings under this revolving line-of-credit facility may be used for working capital and general corporate purposes. The Company's other facility is a reducing revolving facility that allows the Company to borrow (and repay and reborrow) amounts until November 9, 2003. The maximum amount of credit available to the Company under this reducing revolving facility is $65 million, but is subject to reduction on October 1, 2001, and each quarter thereafter, by $4.375 million. This reducing revolving facility replaced the term-loan facility under the preceding credit agreement (which permitted borrowing only on a one-time, non-revolving basis). Borrowings under this reducing revolving facility may be used for store construction and relocation and other capital expenditures, including acquisitions, and refinancing other indebtedness of the Company. The Company had borrowed $118.5 million under its revolving line-of-credit facility and $56.0 million under its reducing revolving facility as of March 31, 2001.
The Company's borrowings under the revolving line-of-credit facility bear interest at a variable annual rate equal to, at the Company's discretion, either the prime rate publicly announced by Wells Fargo Bank from time to time or the London InterBank Offered Rate (LIBOR) plus 0.75%. The Company's borrowings under the reducing revolving facility bear interest at a variable annual rate equal to, at the Company's discretion, either the prime rate publicly announced by Wells Fargo Bank from time to time plus 0.25% or LIBOR plus 2.375% (but subject to adjustment quarterly, beginning March 31, 2001, within a range of 2.125% to 2.625% above LIBOR, depending on the Company's debt-to-cash flow ratio). Interest is generally payable monthly, except on LIBOR-rate borrowings; interest on LIBOR-rate borrowings is payable every 30, 60, or 90 days, depending on the period selected by the Company. The Company must also pay a commitment fee for each of the credit facilities. The commitment fee for the revolving line-of-credit facility is equal to 0.25% per annum of the average daily unused portion of that facility; and the commitment fee for the reducing revolving facility is equal to 0.375% per annum of the average daily unused portion of that facility through March 31, 2001, but thereafter varies within a range of 0.3% to 0.5% per annum of the average daily unused portion of that facility, depending on the Company's debt-to-cash flow ratio after March 31, 2001.
To reduce its risk of greater interest expense because of interest-rate fluctuations, the Company has entered into interest-rate swap agreements, which effectively converted a portion of its floating-rate interest obligations to fixed-rate interest obligations, as described in Notes 2 and 3 to Interim Unaudited Consolidated Financial Statements above.
Stock Repurchase Program
In August 1999, the Company's Board of Directors authorized the repurchase from time to time of up to approximately $4 million of the Company's Common Stock in the open market or in negotiated transactions. In August 2000, the Company's Board of Directors authorized the repurchase from time to time of an additional $1 million of the Company's Common Stock. This stock repurchase program will remain in effect unless discontinued by the Board of Directors. As of March 31, 2001, the Company had repurchased 211,400 shares at an average price of $12.80 per share.
Operating Trends
Seasonality
The Company's business is seasonal to the extent of the impact of cashing tax refund checks and tax refund anticipation loan checks. The impact of these services is in the third and fourth quarters of the Company's fiscal year.
Impact of Inflation
Management believes the Company's results of operations are not dependent upon the levels of inflation.
Forward-Looking Statements
This Report contains, and from time to time the Company or certain of its representatives may make, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of words such as "anticipate," "expect," "estimate," "believe," "intend," "plan," "should," "would," and terms with similar meanings. Although the Company believes that the current views and expectations reflected in these forward-looking statements are reasonable, those views and expectations, and the related statements, are inherently subject to risks, uncertainties, and other factors, many of which are not under the Company's control and may not even be predictable. Those risks, uncertainties, and other factors could cause the actual results to differ materially from these in the forward-looking statements. Those risks, uncertainties, and factors include, but are not limited to, many of the matters described in the Company's Annual Report on Form 10-K for its fiscal year ended June 30, 2000, this Report, and its other filings with the Securities and Exchange Commission: the Company's relationships with Travelers Express and its affiliates, with Goleta National Bank, and with the Company's secured lenders; governmental regulation of check-cashing, short-term consumer lending, and related financial services businesses; theft and employee errors; the availability of suitable locations, acquisition opportunities, adequate financing, and experienced management employees to implement the Company's growth strategy; the fragmentation of the check-cashing industry and competition from various other sources, such as banks, savings and loans, short-term consumer lenders, and other similar financial services entities, as well as retail businesses that offer products and services offered by the Company; the terms and performance of third-party products and services, offered at the Company's locations; and customer demand and response to products and services offered by the Company. The Company does not assume, but expressly disclaims, any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. The Company makes no prediction or statement about the performance of its Common Stock.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, particularly including changes in interest rates that might affect the costs of its financing under its credit agreement with a syndicate of bank lenders. To mitigate the risks of changes in interest rates, the Company utilizes derivative financial instruments. The Company does not use derivative financial instruments for speculative or trading purposes.
To reduce its risk of greater interest expense upon a rise in the prime rate or LIBOR, upon which the Company's floating-rate interest obligations under its credit agreement are based, the Company has entered into three interest-rate swap agreements with Bank of America and one interest-rate swap agreement with Wells Fargo Bank. Those agreements effectively converted a portion of the Company's floating-rate interest obligations to fixed-rate interest obligations, as described in Notes 2 and 3 to Interim Unaudited Consolidated Financial Statements above in this Report. As of March 31, 2001, only one of the interest-rate swaps remained in effect.
The fair value of the Company's existing interest-rate swap was ($2.1) million as of March 31, 2001.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the lawsuit Wendy Betts, John Cardegna and Donna Reuter v. Ace Cash Express, Inc., et al., filed against the Company in the Florida state Circuit Court in Orange County, Florida, the court denied the motion to intervene filed by the Attorney General of the State of Florida. A hearing on the Company's Motion to Dismiss with prejudice is scheduled for May 29, 2001.
On March 28, 2001, in the consolidated lawsuit filed against the Company, now in the Florida state Circuit Court in Hillsborough County, Florida, Eugene R. Clement v. Ace Cash Express, Inc. and Neil Gillespie v. Ace Cash Express, Inc., the court granted the motion to intervene filed by the Attorney General of the State of Florida. Accordingly, in mid-April 2001, the Florida Attorney General filed an intervenor complaint, adding as a plaintiff the State of Florida, Office of the Attorney General, Department of Legal Affairs. The complaint also names as defendants, in addition to the Company, the Company's Chairman of the Board, Raymond C. Hemmig, the Company's Chief Executive Officer, Donald H. Neustadt, and two other current or former employees of the Company. Like the other plaintiffs' pending consolidated complaint, the intervenor complaint alleges violations of the Florida usury laws and the Florida Deceptive and Unfair Trade Practices Act. In addition, the intervenor complaint alleges violations of the Florida Racketeering Influenced and Corrupt Organization (RICO) Act by the Company and the other named defendants. The complaint seeks all remedies available under the Florida RICO Act, including the civil forfeiture of all money and other property of the Company used in, derived from, or realized through the Company's deferred-deposit activities in Florida, the revocation of each license or permit of the Company granted by any Florida state agency, and an injunction against future violations of usury laws or the Florida RICO Act. The complaint also seeks, because of other alleged violations of Florida laws, the payment to Florida consumers of actual damages caused by the Company's illegal activities, the payment to the State of Florida of certain civil penalties, the divestiture of any interest of the Company in Florida real property, and the payment of attorneys' fees and costs. The Company denies all of the Florida Attorney General's material allegations in the intervenor complaint and intends to continue to vigorously defend this lawsuit.
On March 22, 2001, the Company was served with a class-action complaint, which was filed in the state Circuit Court of Pulaski County, Arkansas in December 2000, in a lawsuit entitled Mayella Veasey, et al. v. Ace Cash Express, Inc. The plaintiff, for herself and others similarly situated, alleges that the Company's deferred-presentment (also commonly known as "payday loan") transactions in Arkansas from June 15, 1999 to May 1, 2000 violated the usury laws of Arkansas. The plaintiff is represented by the same counsel that represented the plaintiffs in the previous lawsuit against the Company in Arkansas regarding deferred-presentment transactions. That previous lawsuit, which was settled by the Company in October 2000, related to the Company's deferred-presentment transactions in Arkansas through June 15, 1999, when a statute that expressly authorized such transactions, the Check Cashers Act, became effective in Arkansas. The Company believes that this new lawsuit was prompted by the recent decision of the Arkansas Supreme Court to the effect that a portion of the Check Cashers Act was unconstitutional insofar as it may purport to construe or define the usury provisions of the Arkansas Constitution. That decision did not, however, address the legality of any deferred-presentment transaction effected under the Check Cashers Act. Because the Company became able to offer at its locations short-term loans made by Goleta National Bank, the Company has not entered into any deferred-presentment transactions at its locations in Arkansas since May 1, 2000. The complaint seeks damages in an amount equal to twice the amount paid by customers of deferred-presentment transactions in Arkansas during the specified 10 1/2-month period as well as reasonable attorneys' fees and costs. Because this lawsuit purports to be a class action, the amount of damages for which the Company might be responsible, even if the plaintiffs' allegations are upheld by the court, is necessarily uncertain. But the Company has determined that, if the court were to certify this lawsuit as a class action and if all of the plaintiff's allegations on behalf of the class were proven at trial, the damages requested from the Company (apart from attorneys' fees and costs would be less than $1 million. Nevertheless, there has been no court hearing regarding class certification, and the Company denies all of the plaintiff's allegations. There has been no court hearing regarding class certification, and the Company denies all of the plaintiff's allegations. The Company believes that the deferred-presentment transactions complied with the Check Cashers Act, including the limitations on fees described in the Check Cashers Act, and that the fees received by the Company did not constitute usurious interest that would violate the Arkansas Constitution. The Company intends to vigorously defend this lawsuit.
In the lawsuit, Shirley Porter and Joyce Davis v. Ace Cash Express, Inc., the United States District Court for the Eastern District of Louisiana dismissed all of the plaintiffs' claims with prejudice on October 27, 2000. The plaintiffs have filed a notice of appeal with the federal Court of Appeals for the Fifth Circuit. The plaintiffs' appellant brief was filed on May 2, 2001, and the Company will file a reply brief by early June 2001.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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| Exhibit Number | Exhibit |
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| 10.51 | Form of Amendment to Change-in-Control Executive Severance Agreement between the Company and each of its four senior executive officers (Donald H. Neustadt, Jay B. Shipowitz, Raymond E. McCarty, and Debra A. Bradford) dated as of January 3, 2001. |
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| 10.52 | Amendment Number 1 to Master Loan Agency Agreement, with the corresponding Amendment Number 1 to Master Loan Participation Agreement and Amendment Number 1 to Schedule of Interest and Fees, dated as of March 29, 2001, between the Company and Goleta National Bank. (Application for confidential treatment for a portion of this document has been submitted to the Securities and Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange Act of 1934.) |
(b) Reports on form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACE CASH EXPRESS, INC.
May 14, 2001
/s/ CONNIE S. ANGELOT
Connie S. Angelot
Vice President and Controller
(Chief accounting officer)
/s/ JAY B. SHIPOWITZ
Jay B. Shipowitz
President and Chief
Operating Officer
(Duly authorized officer)
